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Report

A focused federal agency is necessary to oversee Big Tech

Editor's Note:

This brief is part of the Brookings Blueprints for American Renewal & Prosperity project.

Blueprints for American Renewal & Prosperity

Contents


Summary

Online services have become a national lifeline during the COVID-19 pandemic. Experts in economic policy commonly believe that major digital companies are “systemically important” to the social and economic fabric of our nation. Yet, there is little public-interest oversight of the companies that provide such critical services.

Exemplified by the mantra “move fast and break things,” digital companies have exercised a consequence-free attitude to bypass the rules that historically protected consumers and a competitive marketplace. This reality is a product of the federal government’s painfully slow response to America’s transformation from an industrial economy to a digital economy. While leaders of digital companies recognized and embraced the change imposed by new technology, federal policy remains rooted in the structures and assumptions of the industrial era.

Taking advantage of policymakers’ inaction, digital companies assumed a pseudo-government role to impose their own will on the digital marketplace. The result failed to adequately protect both the rights of consumers and the benefits of competition.

Oversight of the dominant digital platforms’ broad effects on society is not possible within the existing federal regulatory structure. Agencies such as the Federal Trade Commission (FTC) and Department of Justice (DOJ) are filled with good and dedicated professionals, yet they are constrained in what they can do. Such limitations are perversely demonstrated by the recent headline-grabbing antitrust actions by both agencies. Antitrust enforcement, while important, is targeted against specific circumstances and cannot protect against general consumer abuses. Similarly, while the FTC also has authority over unfair and deceptive acts, many abuses in the digital marketplace are harmful but not considered deceptive and unfair. The FTC is further hampered by limited power to promulgate broad rules, thus constraining most of its activities to one-off proceedings against a singular company for a specific type of abuse rather than establishing broad behavioral rules across the consumer-facing digital economy.

“Reprioritizing digital policy to reflect the public interest requires focused attention on the broad sweep of corporate behaviors by the dominant digital companies.”

Reprioritizing digital policy to reflect the public interest requires focused attention on the broad sweep of corporate behaviors by the dominant digital companies. This is best achieved by establishing a new federal agency staffed with digital expertise and the focused responsibility to oversee protection of consumers and promotion of competition in the services that are critical to our lives and livelihoods.

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Challenge

Our daily lives—from work and school, to shopping and a multitude of other activities—are built around the services provided by the dominant digital companies. Similarly, the country’s economic growth is pinned to a digital economy that grew over four times faster than the overall economy. Those services and this economic expansion are largely the provenience of a handful of tech companies that began as struggling startups and became corporate behemoths with systemic importance. These companies are broadly referred to as “platform companies” because it is on the platform of their computer farms that the critical services reside.

The companies’ systemic importance has been financially rewarding. During the first eight months of the pandemic, Facebook’s market value increased 47%; Alphabet/Google by 26%; Amazon soared up 64%; Apple went up 63%; and Microsoft up 29%.1 All but Facebook were valued at over $1 trillion. Together, these companies are five of the six most valuable companies in the world—Alibaba, a Chinese digital company, ranks number five.

Multiple marketplace studies2—including a landmark investigation by the House Subcommittee on Antitrust—demonstrated a litany of substantial abuses and harms resulting from the unsupervised exploitation of the dominant digital companies. Such abuse falls into three categories: the dissemination of misinformation and hate; the distortion of markets to become non-competitive; and the violation of consumers’ rights.

“Misinformation is the logical result of a revenue model that rewards the volume of information over its veracity.”

Misinformation is the logical result of a revenue model that rewards the volume of information over its veracity. When lies pay as well as truth, there is little incentive to only tell the truth.

Market distortion results when companies assume the role of gatekeepers to the new economy. Unrivaled network effects result in consumers having only one practical choice for service.3 Such a dominant position is then used to stifle competition and the innovation it drives.

Consumer rights are trammeled in the process. The forced acceptance of take-it-or-leave-it terms and conditions at the outset of the relationship with many services continues throughout the user’s relationship with that service. Particularly offensive is the virtually unconstrained siphoning of consumers’ personal data and its conversion from private information into a corporate asset.

As the digital economy and the critical services of these companies exploded, however, public-interest oversight atrophied. A federal government proficient in doing again what it did yesterday was ambushed by digital technology that allowed companies to behave in unprecedented ways.

To date, these companies have been called to answer to the public interest in only two narrow ways. On limited occasions, they faced prosecution for their deceptive acts—such as when Facebook did not adhere to the privacy practices it represented to its users. The other public-interest effort is antitrust prosecution. This type of prosecution is a recent development that faces an uncertain future against prevailing jurisprudential interpretations. Because there will not be a definitive answer on its certainty until years later, the offending practice can continue to operate during this time.

While policing deceptive and/or anticompetitive acts is important and laudable, it is insufficient. Prosecuting unfair and deceptive acts about privacy policies does not improve the protection of Americans’ privacy rights. Bringing antitrust suits does not protect against the broad social and economic implications of consequence-free digital company behavior.

The scale of digital marketplace challenges simply exceeds the scope of existing regulatory agencies. Challenges such as the portability of personal data, shared access to data, interconnection and interoperability among services, self-preferencing practices, privacy protection, data security, open access to markets, oppressive contract terms, and a transparent description of what the companies do with personal information are beyond the scope of an antitrust lawsuit or an unfair and deceptive practices action. As a result, the rules pertaining to such actions were made not by policies established to protect the public interest, but by the digital companies themselves to benefit their own best interests.

In the following sections, this paper discusses why there is a need for a new digital oversight agency and its historical predicates. It then explores how the differences between the digital economy and the industrial economy made industrial-era statutes and regulations less relevant. Finally, the paper concludes with policy recommendations, including those for a new regulatory model.

Why a new agency?

We live amid the contradiction of digital companies harnessing new technology to innovate and deliver wonderous new products while the results simultaneously harm consumers and thwart competition.

Such a lack of focused digital technology expertise leaves society and the economy at risk. Amid the effects of vast technological change, policymakers and the statutes and regulatory models adopted for the industrial era have not kept pace.

The policy con

One reason public-interest protection has not kept pace with the expanding power of the dominant digital companies is the lobbying imagery the companies created for themselves. Even as these digital entrepreneurs built their ideas into economic powerhouses, they continued to cultivate the image of scrappy visionaries whose innovative genius would be harmed by regulatory oversight. The success of this lobbying effort allowed companies to maximize benefits to investors at a cost to the public interest.

Digital companies’ ability to keep government oversight at bay was predicated on three factors. First, policymakers do not fully understand the operation and effects of digital technology. Second, by playing off the prevailing anti-regulation orthodoxy, the companies successfully sold the myth that what they were doing bordered on magic that would be destroyed by governmental oversight. Finally, there is currently an insufficient focused regulatory authority and expertise to demonstrate and implement how appropriate oversight could be accomplished.

Among the catchphrases harnessed to block regulation is the assertion that the wonderful new developments were the result of “permissionless innovation” that would be undermined by regulation. Such an assertion, of course, ignores the reality that no one has proposed forcing companies to petition the government for permission to innovate. Nonetheless, it became the go-to mantra used by big companies to keep regulation at bay.

Recently, another high-sounding—but equally flawed—soundbite appeared in opposition to regulation: the China card. Opponents argue that oversight of Big Tech by the U.S. government would threaten national security and the nation’s ability to compete with China. Google CEO Sundar Pichai told CNN, “I worry that if you regulate for the sake of regulating, it has a lot of unintended consequences … [including] implications for our national security.” Such statements, of course, conveniently ignore how dominant tech companies are already working in China and sharing activities with Chinese companies.

Beyond the alleged threat to national security, regulation is also characterized as harmful to the United States’ ability to compete with China. Sheryl Sandberg, Facebook’s chief operations officer, told CNBC, “While people are concerned with the size and power of tech companies, there’s also a concern in the United States with the size and power of Chinese companies, and the realization that these companies are not going to be broken up.” Such a position conveniently overlooks the advantage of a marketplace economy over a managed economy: that competition drives innovation.

Big Tech’s final lobbying argument is to beneficently stand as the protector of smaller companies they otherwise work to vanquish. Big Tech argues that regulation will hit particularly hard on these upstarts. To be clear, the plan espoused herein is limited to oversight of companies with a dominant market impact that are systemically important by virtue of their economic and societal significance.

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Limits of historic and existing policies

New economic activities have historically required new federal oversight. The first federal regulatory agency, the Interstate Commerce Commission (ICC), was created in 1887 as a countervailing force to the first high-speed network, the railroad, and the railroad companies’ abusive exercise of their economic power. Congress frequently determined that important oversight activities require a specialized agency populated with subject matter experts.

The creation of the FTC was, in its time, an example of the need for such specialized expertise. In 1903, Congress created the Bureau of Corporations in the Department of Commerce and Labor. By 1914, however, it saw the need for an agency that was not subsumed within another body and created the FTC with the power to prevent “persons, partnerships, or corporations, except banks and common carriers … from using unfair methods of competition in commerce.” That authority was subsequently expanded to include “unfair or deceptive acts or practices.”

It was a similar need for a focused agency rather than bolting on responsibility to an existing agency that resulted in the creation of the Federal Communications Commission (FCC). Back in 1912, when radio broadcasting technology was new, Congress assigned its oversight to the Department of Commerce and Labor. As the technology grew in importance and complexity, however, it became clear there was a need for a specialized agency with specific oversight expectations and authority. Thus, in 1927, broadcasting oversight was moved to a specialized Federal Radio Commission. Ultimately, in 1934, the FCC was created. As a further example of the need for an expert agency as opposed to repurposing an existing agency, the oversight of common carriers such as telephone and telegraph companies was transferred from its previous home in the ICC into the specialized communications agency, the FCC.

Because of the vast scope of its market oversight, the FTC has often been the agency to which Congress looked first for solutions. It is not unusual, however, for Congress to subsequently recognize the need for a new specialized agency. In 1934, for instance, FTC’s oversight of the securities market was transferred to the Securities and Exchange Commission (SEC). In the mid-1990s, amidst a concern about auto safety, Congress looked beyond the FTC to create a new National Highway Traffic Safety Administration. In response to the 2008 financial crash, Congress moved what had been the FTC’s authority in consumer financial markets to a newly created Consumer Financial Protection Bureau.

The proposal to create a new digital agency is a continuation of such precedents. The vast scope of the FTC’s present responsibilities—as diverse as funeral director practices, robocalls, and labeling hockey pucks—means that the oversight of digital platform regulation must compete with the agency’s existing diverse responsibilities and limited resources.4 A new digital agency would also help assure that resources would not be withdrawn from the FTC’s traditional activities.5

“A new digital agency would not eliminate the FTC’s current activities, but rather augment them with regulatory oversight beyond the capabilities of the agency.”

A new digital agency would not eliminate the FTC’s current activities, but rather augment them with regulatory oversight beyond the capabilities of the agency. One example of the need for new powers is the constraints on its competition authority that effectively limit the FTC to ex post enforcement against a specific company for a specific violation rather than ex ante rulemaking authority that is more widely applicable.6

Another reason for the creation of a new agency is the inherent muscle memory that has developed since the FTC’s industrial era creation. Every institution has its cultural commitments: a collection of thoughts, procedures, the results of formal and informal congressional interventions, and judicial decisions developed in the analog era to resolve the demands of an analog economy. The digital economy requires departure from such a hidebound precedent to create an all-digital-all-the-time agency staffed by specialists with digital DNA.

The new digital reality

The rationale for a focused specialized agency to oversee the dominant digital companies is rooted in how the forces that drive the digital economy differ from those of the industrial economy.

Assets behaving differently

The policies and practices of the industrial era were based on business activity that utilized hard assets such as coal, iron, and manufactured goods. The digital era is built around the soft assets of digital information. While data assets enjoy industrial-like scope and scale economies, they are different in many other ways. Those differences create such strong proclivities to market failure that a new kind of regulatory oversight is required.

As compared to industrial assets, information assets are incrementally inexpensive, inexhaustible, iterative, and non-rivalrous. Computers perform calculations and networks distribute the results at very low incremental costs. In the industrial economy, a ton of coal was exhausted by usage; in the digital economy, a file of data can be used repeatedly. The use of that data, in turn, creates new data that produce new products. Finally, data is non-rivalrous in that usage by one party does not preclude usage by another.

Added to these basic differences in the root assets of the digital economy are three additional factors: network effects, low marginal cost distribution, and “free” end user goods and services. Network effects are the ground zero of internet economics, increasing the value of a product or service as it connects with more people. This creates a propensity to “tip” toward a monopoly. Thanks to the internet, this phenomenon is reinforced as the marginal cost of delivering that product or service to an additional user approaches zero. Together, these forces permit the product or service to be given away, thus triggering further network effects that create barriers to new entrants while allowing monopoly pricing to those seeking access to users of the “free” service.

The economic model of the industrial era was constrained by assets that ultimately confronted diminishing marginal returns as costs rose and markets became saturated. The economic model of the internet era knows no such constraints, but rather is driven by an endless supply of data feeding boundless demands. At the heart of machine learning and artificial intelligence, for instance, is an unquenchable demand for more data. That demand is met by digital perpetual motion where data use begets data products that beget more data that beget more products. Such perpetual motion further tips the market to dominance by companies that, by controlling data, can feed its constant reproduction.

The difference between digital demand-driven economics and industrial economics is expressed in the following illustration by Harvard business professors Marco Iansiti and Karim Lakhani:

How AI-driven companies can outstrip traditional firms

Inexpensive, inexhaustible, iterative, and non-rivalrous assets that take advantage of low-margin, network effect-driven digital capabilities mean that there is even greater mass production in the information economy than there was in the industrial economy. This produces the next challenge: how the self-perpetuating, never-ending process in which data produces new products, which produce new data, speeds the pace of change far beyond anything experienced in the industrial economy—and beyond the capacity of industrial-era regulatory concepts.

The pace of change drives the demand for agility

Digital technology sped up the pace of change, removing the time buffer that policymakers once relied upon for identifying oversight needs. The existing regulatory approach was developed in a period where stable technology produced stable markets. As a result, the government was able to wait until market failures reached a certain scale before stepping in. Today, however, when a platform such as Facebook can grow from zero to 100 million users in under five years (and one billion users only four years later), the speed of change exerts unprecedented pressure on policymakers to keep pace.

The digital companies responded to this pace of change by walking away from rigid industrial-era product and management concepts. Digital products and digital management are based on the principle of agility. The products are designed in anticipation of technology and market changes. Every time your smartphone updates its software is an example of such agility. Digital company management, similarly, became agile and less hierarchical in order to keep up with the pace of change.

“A new digital agency with new agile procedures is necessary to bring public-interest oversight up to speed.”

The agile response to the pace of technological change permits dominant digital companies to maintain their dominance and fend off competition within their markets. The federal government’s oversight, based on bureaucratic and legal precedent, however, remains encased in the cement boots of industrial-era management. Rigid, slow-paced bureaucracies built to mirror the rules-based bureaucracies of industrial corporations are no match for the agility of digital companies.

Precisely at the time when the speed of change should be an impetus for the creation of broad, yet agile, ex ante behavioral rules, the existing governmental agencies are typically constrained to act through slow and arduous procedures on a limited ex post basis. A new digital agency with new agile procedures is necessary to bring public-interest oversight up to speed.

American leadership?

A less obvious challenge presented by the federal government’s failure to effectively oversee the dominant digital companies is how it has left American companies unprotected in regard to the policies of other nations, and even individual American states. The United States is a worldwide leader in digital products and services for many reasons, but most notably because of its uniform market of 325 million consumers in which to develop products, products that are then widely available to an interconnected world. Such an advantage is threatened when the absence of federal government policy leadership opens the door for policies to be determined by others.

In an interconnected world, the absence of national oversight and leadership leaves U.S. companies exposed to rules made by other nations. Because of this absence, there is little American input. Similarly, the absence of a national policy encourages state governments to develop their own answers to pressing digital economy questions—answers that run the risk of diminishing the advantage of a uniform national marketplace.

States as diverse as California and Vermont are adopting their own approaches to internet governance, while foreign nations are filling the leadership void internationally. The European Union  proposed a Digital Services Act to regulate the behavior of online companies. The United Kingdom  proposed the creation of a new digital watchdog. Italy  announced an investigation into Google’s advertising market activities. Germany is investigating Amazon’s relationships with third-party sellers. China went so far as to attempt to push a new internet architecture through the U.N.’s International Telecommunications Union.

American market oversight policies have traditionally been the North Star in the development of international technology policy.7 Where there is no policy, however, there can be no pole star. By being absent from the field, the federal government has walked away from a history of American leadership.

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Policy recommendations

Too often, 21st-century tech policy issues are discussed in 20th-century terms and conclude with 19th-century solutions.8 It is time to get out of that rut. The regulatory model established in the 19th century to oversee the industrial revolution needs updating. Congress should establish a 21st-century results-focused independent federal agency responsible for protecting consumer well-being and effective competition in the digital economy.

“Too often, 21st-century tech policy issues are discussed in 20th-century terms and conclude with 19th-century solutions.”

Such an agency should be built on three pillars:

  • Oversight based on the common-law-derived duty of care and duty to deal.
  • Risk management that is focused on accomplishing risk-mitigating tasks rather than imposing a rigid set of rules.
  • Government instigated, supervised, approved, and enforced behavioral standards utilizing a development process similar to the technology standards process.

Reasserting common-law-derived principles

The principles upon which marketplace governance has traditionally rested originated hundreds of years ago as England emerged from the Dark Ages. Expressed as common law, such concepts endured as economic activity evolved from feudalism, to mercantilism, to industrialization. The same principles remain relevant today in the digital economy. For too long, however, these basic standards have been ignored as Big Tech made the rules for the new economy.

The new agency does not need to invent new constructions for marketplace behavior. A pair of centuries-old common-law-derived principles should be at the heart of digital governance: the duty to care and the duty to deal.

The common-law duty of care establishes the expectation that a provider of goods and services has the responsibility to attempt to identify and mitigate the adverse consequences of that activity. From this principle flow basic consumer protections and legal concepts such as negligence and fiduciary duty. Unfortunately, in the digital economy, the duty of care is recognized more for its absence than its application.

Duty-of-care expectations such as transparency, forethought, and mitigation are not revolutionary. How the concept was applied to the network revolution of the 19th century is illustrative of how it could be applied to the network revolution of the 21st century. As railroad lines cut through farmers’ fields in the mid-1800s, the speeding locomotives belched hot cinders that set ablaze homes, barns, and hayricks. Applying the duty of care meant the railroads had to put screens on their smokestacks to catch the cinders. As digital networks speed past our lives, we do not have a screen to stop harmful digital cinders from doing their damage. Digital platforms, for instance, are under no obligation to protect consumers from the adverse effects of their wholesale collection and subsequent monetization of users’ private information.

A duty of care, as it relates to privacy protection, could encompass topics such as transparent disclosure of what is being collected and consumer control over the collection and use of that information. A duty of care would end the coercive collection of personal information as a condition for use of the service and establish that product design anticipates its effect on privacy. Similarly, a duty of care would protect consumer data after it has been collected and assure consumer-activated portability of their own data.

Common law’s duty to deal establishes that the quasi-monopoly provider of an essential service has the obligation to provide impartial access to that activity. Applied to the digital economy, a duty to deal would open the bottlenecks that have allowed digital companies to gain and maintain a dominant market position to thwart competition and innovation.

“Applied to the digital economy, a duty to deal would open the bottlenecks that have allowed digital companies to gain and maintain a dominant market position to thwart competition and innovation.”

For 600 years, the simple yet irrefutable concept that the proprietor of a fundamental service has a duty to make it available to all comers has withstood the test of time as well as changes in technology. One of its earliest applications was toward ferries across waterways; the ferryman could charge for his service but had to provide it on a non-discriminatory basis. The concept was statutorily applied in 1862 toward the original electronic network, the telegraph, and continued its application toward the telephone. Later, it was applied toward the internet with the FCC’s net neutrality decision, and now it should be similarly applied toward systemically important services that utilize the internet.9

The ferrymen of the digital era are the platform companies that collect, aggregate, and allocate digital information to create a critical service. Like their analog predecessors, the platforms are free to profit from their services, but the services cannot be allowed to become anti-competitive bottlenecks. Examples of this would include the inability of platforms to hoard the necessary digital assets or deny the interconnection necessary for others to compete.

That these concepts are absent from the digital economy is the result of the federal government being a spectator to the new economy for far too long. Now, two decades into the 21st century, the absence of regulatory oversight is felt by consumers and the competitive marketplace while the ground rules for behavior in the digital market—a duty to care and a duty to deal—are in plain sight.

Fill a void, don’t duplicate or replace

The new agency should be additive to the activities of existing agencies such as the FTC and Justice Department. The limitations these agencies face when dealing with the digital economy are matter of agency design, not desire or dedication. The 21st-century need is for a 21st-century agency, not the repurposing of an agency designed in another era for another goal.

Nothing, for instance, should interfere with or supersede the antitrust authority of the DOJ or FTC. Rather, activities of the new agency should deal with the issues that cannot be reached by those limited authorities.

Not only is the direct protection of many consumer rights beyond the scope of current antitrust laws, but also of equal importance is how effective antitrust remedies may be beyond the capacity of federal courts and prosecutors.

The success of the Justice Department’s suit to break up AT&T hinged on FCC-established regulations. The creation of rules for network interconnection and other behaviors, for instance, were well beyond the normal antitrust experience, requiring both technical expertise and ongoing oversight. Should the pending antitrust suits against Google and Facebook prove successful, the question will become: And then what? The courts will need the expertise and bandwidth of a focused expert agency to meaningfully implement a judicial decision.

Beyond antitrust enforcement, the FTC’s power to act against unfair or deceptive acts or practices proved insufficient for developing broad-based, industrywide requirements. The FTC may be able to levy a penalty on Facebook for deceiving its consumers about the use of their information, but such targeted enforcement against an individual company only reinforces the need for broad rules applicable to all companies to mitigate such behavior in the first place. While, for instance, the FTC should continue to prosecute an e-commerce company for tainted products or false advertising, the new digital agency could promulgate a general rule that allows consumers to have control over their digital information.

The new agency can fill the void created by current statutes and procedures. In addition, the new agency’s focused attention on digital marketplace behavior would overcome the risk that such oversight gets lost in having to compete for attention and resources with other oversight activities in the broader economy.

Risk management replacing micromanagement: Tasks vs. tools

In the industrial era, corporate management operated through rules-based bureaucracies. In a classic example of “you look like your pet,” the regulatory agencies created to oversee industrial capitalism adopted the management techniques used by the corporations themselves. The result was regulatory oversight conducted through top-down, bureaucratic, rules-based policies.

Traditional regulation focused more on the tools rather than the tasks. Often characterized as “utility-style regulation,” oversight was driven by the available tools and led to micromanagement such as detailed involvement in commercial decisions, often requiring prior approval of actions and the ability to order specific activities. To this day, such rules-based approaches remain the primary legal structure of many varieties of government oversight.

In contrast, risk-based regulation focuses on the tasks to be achieved. What are the adverse effects resulting from specific behaviors, and what is necessary to craft a solution to solve those harms in which the benefits outweigh the harms? Such risk-based regulation requires agility, not only in crafting a mitigation strategy, but also in its ongoing implementation amidst technological change.

In such task-vs.-tools management, government has not kept pace with the companies themselves. While digital companies abandoned rules-based management hierarchies in favor of agile management that utilizes the empowerment created by a distributed network, such a concept is antithetical to the legal framework and bureaucratic regulatory culture that developed over decades of industrial oversight. Few policymakers, however, understand how to escape such outdated and counterproductive legal requirements and make the transition to the new agility in a regulatory context.

Policymakers are not the only ones to be blamed for this situation. The agile-managed companies themselves have done little to help government improve its procedures. Instead, the companies use the lack of updated procedures and resulting regulatory rigidity as an argument against any regulation.

While companies complain the current regulatory system is too rigid for the rapid-paced change of digital technology and markets, attempts to introduce agile regulation built on general behavioral conduct are also opposed. One approach is too rigid, while the other is “regulatory uncertainty.” Arguing both sides, of course, perpetuates the desired absence of any regulation.

Not only is there a need for an agency with focused digital oversight responsibilities, but that new agency also must adopt a 21st-century task-focused approach to regulation. The operation of the new agency should be designed to identify, attack, and mitigate adverse effects utilizing task-oriented regulatory craftsmanship that focuses on the specific harms and target policies to address those behaviors.10

Addressing behaviors rather than dictating operations is responsive to the need to protect consumers and competition, while at the same time being responsive to the concern that old-style regulation prioritizes the dictation of detailed procedures over boundary-expanding innovation.

This evolution to agile, task-oriented regulation requires a new regulatory model.

A new regulatory model: Learning from the success of technology standards

The new agency is first and foremost a regulatory agency charged with protecting consumers and competition. Consistent with the underlying risk management, Congress should anchor the agency’s authority around enforcing the duty-of-care and duty-to-deal principles.

The implementation of such authority should be as general and flexible as circumstances permit. The new agency should be empowered to act on its own, pursuant to the Administrative Procedure Act processes. To maximize effectiveness, however, the agency should embrace, as a new regulatory model, the kind of standards-setting activities that the digital industry itself utilizes to define technical codes.

The development of standards and codes is a well-established process that has been utilized by industry and government since the first fire code was adopted in 1895. Throughout the American economy, industry-developed standards—from fire codes, electric codes, and building codes, to the standards for safety matches—are supervised and enforced by governments. What is different about the new digital era regulatory model is its expansion out of industry-only development to include government oversight and public participation to achieve behaviors derived from common-law principles.

In the digital economy, the standardization process produced successes as diverse as the TCP/IP language that underpins the internet, to Wi-Fi, 5G, and the internet. One of the hallmarks of the process—which would bring agility to the regulatory process—is the ability to keep up with technological advancements. An example of such agility is the advances in mobile technology as standards evolved from 3G to 4G to 5G to take advantage of new capabilities.

Typically, however, the industry-run standards process does not cover non-technical issues such as the impact of the resulting standard on consumers and competition. The new digital agency’s use of the standards process would repair that shortcoming through the creation of behavioral standards to address identified marketplace risks.

To accomplish this, the new agency would assume oversight and ultimate review of the behavioral standards process. As a backstop, and to assure a focus on meaningful results in the standards process, the digital agency would retain the traditional rulemaking and enforcement powers. If after a specified period for the cooperative development of agency stipulated standards, the industry-involved process is not successful, the agency would revert to promulgating standards on its own via a notice and comment rulemaking.

The first effort, however, would be through the development of behavioral standards. This process would begin with the new agency identifying the standard to be developed, a base set of principles to be included, a timeframe for resolution, and the industry and public members of the standards development group. The agency would be responsible for the oversight of and input to the process. Upon completion of a proposed standard, it would be put out for public comment, and ultimately, the agency’s commissioners would vote to approve, reject, or amend the proposal. Upon adoption, the agency would then be responsible for the enforcement of the standard.

Such a government-supervised process has been used in other areas of federal responsibility. The Energy Policy Act of 2005, for instance, mandated the creation of an industry-based Energy Reliability Organization to develop and enforce mandatory standards to prevent blackouts and assure the flow of electric power. The Financial Industry Regulatory Authority (FINRA) is an industry-based regulator of brokerage firms and financial markets. The SEC oversees FINRA’s application of the statutes and creation of rules, including the authority to disapprove a rule or institute proceedings about a new rule.

The standards process has been an effective governing mechanism for over a century. With oversight goals defined by common-law-derived concepts, a risk-management approach focusing on tasks rather than tools, and the public-interest implementation of the successful industry standards process, regulation can move from its industrial-era confines to deal with the new digital economy.

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Conclusion

There is an “old pattern in American economic history,” observed historian John Steele Gordon:

“Whenever a major new force—whether a product, technology, or organizational form—enters the economic arena, two things happen. First, enormous fortunes are created by entrepreneurs who successfully exploit the new, largely unregulated economic niches that have opened up. Second, the effects of the new force run up against the public interest and the rights of others.”

The successes of the dominant digital companies have indeed infringed on the public interest and individual rights. Unfortunately, the federal government has been unable to adequately respond.

The market realities of the 21st century require a new regulatory structure of nimble oversight tools unpossessed by the agencies of today. That shortcoming can be resolved with the creation of a purpose-built federal digital oversight agency.

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Footnotes

  1. Prices compared as of March 3, 2020 and December 11, 2020, https://ycharts.com/companies
  2. See, among others, George J. Stigler Center for the Study of the Economy and the State, The University of Chicago Booth School of Business Committee for the Study of Digital Platforms, Market Structure and Antitrust Subcommittee Report 21 (Jul. 1, 2019); United Kingdom Competition and Markets Authority, Online Platforms and Digital Advertising, (2020); Jason Furman, Unlocking Digital Competition, Report of the Digital Competition Expert Panel, (Mar. 2019); For an account of other domestic and foreign initiatives addressing major platform issues included in a broad and critical review of the major platforms, see Dipayan Ghosh, Terms of Disservice: How Silicon Valley Is Destructive by Design, Brookings Institution Press (Jun. 16, 2020).
  3. “Network effects,” sometimes called “network externalities,” describes how the value of a service increases as its users increase. Consumers, for instance, want to use the social media platform with the most users; thus, each additional user increases the power of the platform to attract other users while also decreasing the possibility of a successful competitor.
  4. “Getting lost at the FTC,” for instance, was one of the benefits to digital networks when the Trump FCC repealed the 2015 net neutrality rules and turned responsibility over to the FTC to monitor for deceptive acts rather than anticompetitive, anti-consumer behavior.
  5. “FTC Suffering a Cash Crunch,” Politico headlined, reporting it has had to freeze pay, cut staff, and take other actions in order to pay for the Facebook antitrust lawsuit.
  6. One FTC commissioner has urged the agency to broaden its rulemaking through its authority over “unfair methods of competition,” but there has been no movement in that direction.
  7. Shortly after the 2015 enactment of the FCC’s net neutrality rules (itself an aberration in the history of avoiding digital policy that was subsequently repealed by the Trump FCC), I went to Europe to meet with my European counterparts as they drafted their net neutrality policy. American policy leadership thus had an effect on the resulting policy in Europe.
  8. This is a variation on a comment I once heard former Secretary of State Madeline Albright made to describe 21st-century foreign policy.
  9. It is relevant to observe that the platform services lobbied heavily in favor of net neutrality rules to prevent internet service providers from bottleneck behavior that could limit their livelihood. As systemically significant services, these platforms should also be subject to bottleneck protections against their ability to limit the livelihood of others.
  10. For a discussion of regulatory craftsmanship see, Malcolm K. Sparrow, Fundamentals of Regulatory Design, 2020.
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