It’s high time to regulate the tech giants | Michael Boskin

As the regulators respond to recent controversies, five issues loom large for the firms

Technology and the largest tech firms are becoming increasingly controversial. Today, there are growing concerns about third parties accessing and manipulating Facebook user data; and before that, there was a raging debate about whether the government should be able to unlock devices belonging to suspects of terrorism or other crimes. More broadly, technology-driven job dislocation has become a source of constant anxiety.

For all of these reasons, technology policy has taken centre stage, as I predicted it would exactly one year ago. The Facebook chairman and CEO, Mark Zuckerberg, recently conceded in congressional testimony that some regulation of his industry is necessary, and there is now an open window of opportunity to pursue new policies for the sector. In formulating such policies whether through legislation, regulatory rule-setting, international agreements, or measures addressing related issues such as tax and trade the goal should be to limit the downsides of technology without stifling innovation. To that end, five interrelated issues should be kept in mind.

The first is privacy. Although the European Unions far-reaching general data protection regulation (GDPR) goes into force on 25 May, it will not offer any protection for non-Europeans. In the case of Facebook, that translates into 1.5 billion users, almost all of whom have clicked to agree to the companys terms of service without having read them.

There are proposals to require tech companies to obtain an affirmative opt-in from users before collecting their data and to allow users to retrieve or erase their data easily. How customers and companies, including new entrants, would react to such rules remains to be seen. To collect more data, firms might offer users inducements beyond the putatively free services they already provide and that may or may not slow down the pace at which they can enhance services or add new features.

The second issue is market power. In the early years of the internet, an infant tech industry pleaded for a hands-off approach to regulation and taxation. But now, the four largest US firms by market capitalisation Apple, Google, Microsoft, and Amazon are all tech companies (as of this writing, Berkshire Hathaway had edged out Facebook for fifth place). Devising sensible policies on this front will require that we first define the market and then decide what level of concentration, and over what time frame, constitutes a threat to competition.

The tech sector seems to follow a classic pattern of Schumpeterian creative destruction, whereby successive waves of monopoly ascension give way to displacement: mobile phones replaced landlines; email displaced postal mail; and social media and texting are supplanting phone calls.

Apple and Google hold a duopoly on smartphone operating systems, yet they compete vigorously to improve their features and roll out new products. Meanwhile, the iOS and Android app stores have become a point of entry for many small businesses and a barrier to entry for new smartphone providers. Likewise, Facebook and Google dominate the digital advertising market but their profits allow them to offer ostensibly free email and social-media services that benefit consumers.

Elsewhere, the US government is trying to block a merger between the telecom giants AT&T and Time Warner, which owns a movie studio, cable television stations and print publications. Whereas regulators worry that the merger would lead to higher prices, AT&T argues that it is facing direct competition from tech giants such as Netflix and Amazon, which offer online video streaming and original programming. Amazon is also dominant in online retail and data-centre infrastructure. The issue, then, is whether the current competition among the behemoths more than offsets their market power.

A third issue concerns the control of information. Owing to the convenience and addictiveness of smartphones and social media, many people now get news exclusively from online platforms such as Facebook. Yet the microtargeted advertising model used by Google and Facebook has disrupted print journalisms traditional source of revenue, along with coverage of state and local governments.

Even worse, social-media algorithms tend to amplify the most extreme material at the expense of more credible sources. But efforts to eliminate material viewed as extreme by some will raise the spectre of censorship. Conservatives, especially, fear that left-leaning companies in Silicon Valley will be allowed to decide what counts as acceptable debate.

The fourth issue is the concentration of wealth. The founders of todays tech giants are among the worlds wealthiest people, with Amazons Jeff Bezos topping the list. But their growing fortunes stand in stark contrast to decades of slow wage growth, which is creating a political backlash.

Still, the creative destruction of the digital era has also enriched many tech workers and investors, while reducing the fortunes of previous incumbents. It has destroyed and created well-paying jobs. And, most important, it has produced goods and services that make virtually all of us better off.

Policies to address distributional concerns should not suppress entrepreneurship or discourage work, saving and investment, especially for new market entrants. For example, a capital gains tax, whatever its distributional intent, amounts to a tax on becoming rich. Yet creating incentives for people to improve their lot is what drives broad-based prosperity.

The last issue concerns national security and national economic interests. This month, a number of tech firms, including Microsoft and Facebook, declared that they will not assist any government in conducting offensive cyberwarfare operations, and that they will defend unconditionally any countries or individuals targeted by a cyber-attack. Does that really include a cyber-attack against North Korea or Iran to preempt a nuclear event?

With respect to economic interests, all governments look for ways to help their countries own industries, whether through regulation, subsidies, or trade barriers. But China has been playing a different game with its alleged theft of intellectual property and forced technology transfers.

With China expanding its cyberwarfare capabilities and investing in vital telecom infrastructure, the US government recently saw fit to bar US firms from selling components to the Chinese telecom giant ZTE. In response, China is now holding up the US chip maker Qualcomms acquisition of the Dutch semiconductor firm NXP.

All of these issues will shape the future of tech policy, and thus future innovations and the benefits they bring to society.

Michael J Boskin is professor of economics at Stanford University and senior fellow at the Hoover Institution

Project Syndicate

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