May 18, 2018

How the FOSTA Rules Create a “Bootleggers and Baptists” Scenario for the 21st Century

In a parallel to Prohibition, the Fight Online Sex Trafficking Act will backfire by boosting demand for black market sex trafficking.

The recent passage of the Fight Online Sex Trafficking Act (FOSTA) by Congress has elicited much well-merited criticism from advocates for an open internet. Among other problems, the legislation punctures a hole in Section 230 of the Communication Decency Act, which protected digital platforms from legal liability for unsolicited content posted on their sites by their users. You could not, for example, sue Facebook for sexual harassment simply because one of its users posted misogynistic memes. Now that Section 230 has been weakened, companies like Reddit and Craigslist have stepped up efforts to censor their own users and thus avoid that liability risk. Backpage, which was the most popular site for prostitution ads, has been shut down entirely and its founders are headed to prison in what is widely seen as a harbinger of what is to come under the new rules (although the court case was decided prior to the passage of FOSTA). 

It is unlikely that FOSTA will accomplish its nominal purpose, which is to hinder sex trafficking by making it harder for traffickers to advertise their victims online. Rather than attempting to hide in plain sight as before, traffickers will move their operations onto the Dark Web. That will make it harder for law enforcement to track down and prosecute offenders. Furthermore, the law penalizes consensual sex workers who use online personal ads websites as a safer alternative to finding clients on the street.

The motives of anti-sex trafficking activists supporting FOSTA are obvious and well-intentioned (albeit misguided). Yet the legislation also attracted the support of major internet content providers, including Facebook and Amazon. That might seem strange given that regulatory compliance will likely require hiring additional employees. Why would these companies support legislation that could decrease their profit margins and might alienate customers?

In part, it is because the burden of regulatory compliance will fall more heavily on newer, smaller companies than it will on larger, more established ones. A company like Facebook, with billions in annual profit and a workforce of more than 25,000, can more readily afford the costs of compliance. Need someone to double-check the content flagged by the anti-sexual trafficking algorithm? Here’s a few hundred new hires. Worried about when the flagging algorithm misses something? Here’s a dedicated team of lawyers to defend the company. But the equation is very different for an internet startup with only a handful of employees. They simply cannot afford to throw hundreds of bodies and millions of dollars at the problem.

Economists call this “rent seeking” behavior, as private interests push for regulations that benefit market incumbents at the expense of market entrants. As a result, the cost of entry into various corners of the internet will rise. Rising barriers to entry means fewer entrants. Fewer entrants means less competition. Less competition means that established firms can avoid downward pressure on their profit margins. In the short term, companies like Facebook and Amazon will face increased costs as a result of FOSTA, but it is a small price to pay for a regulatory moat that protects them from potential competitors who will now be priced out of the market.

Furthermore, by supporting regulatory enhancement rather than fighting it, companies buy themselves a seat at the table as regulators determine how the rules are shaped, applied, and enforced. Indeed, by changing position on FOSTA last year, the major internet content providers appear to have been rewarded with amendments weakening several provisions in the original version of the bill.

The pro-regulation alliance between activists motivated by an altruistic desire for social betterment and industry groups with an economic incentive is nothing new. Economist Bruce Yandle coined the phrase “Bootleggers and Baptists” to describe the phenomenon. Yandle’s metaphor described the surprising coalition that supported Prohibition-era blue laws limiting the sale of alcohol. The “Baptists” supported the temperance movement out of an altruistic sense of moral obligation to their fellow man. Since excessive consumption of alcohol led to domestic abuse, sloth, and poverty, Prohibition would, the Baptists reasoned, protect spouses while promoting thrift and hard work. Anti-alcohol Protestants at the turn of the twentieth century wielded immense political power, playing a key role in securing women’s suffrage—with the idea that female voters would favor Prohibition—and pushing through America’s first national income tax in 1913 in order to find a way of replacing federal alcohol tax revenues.

Yandle’s “bootleggers,” despite operating from a very different ethic than that of the Baptists, also supported Prohibition laws. At first blush that may seem surprising given that bootleggers manufactured alcohol, something that could be done more cheaply and easily if it were a legal activity. Yet while Prohibition made the manufacture and distribution of alcohol more expensive, it also fattened producer’s profit margins. Legal liquor meant centralized production in large factories; it was a competitive volume business with slim margins. On the other hand, in order to avoid detection bootlegged liquor was mostly produced in small stills in the hills and hollers. The bootlegger was a boutique producer who existed only because of the wider profit margins created by criminalization of alcohol production. They would be driven out of the market by large-scale factory production should liquor be legalized. Bootleggers, in other words, secured an extreme competitive advantage as long as Prohibition remained in force.

Sometimes the two groups overlapped. The Volstead Act (1919) carved out a loophole for clergy who used sacramental wine in their religious services. Very quickly, ministers began abusing this clerical privilege to sell wine to their parishioners as an end run around the regulations. The wineries which supplied the wine also benefited as a growing number of Americans replaced beer consumption with wine consumption. Doctors did something similar with alcohol for medicinal purposes as, rather suddenly, millions of Americans developed illnesses that could only be treated with alcohol-based pharmaceuticals. (It was a legal fiction quite similar to that of medicinal marijuana today.)

There is a large body of social science literature on both the intended and unintended consequences of Prohibition. The higher transaction costs do appear to have slightly decreased per capita consumption of alcohol. However, that minor decrease came at a high price. Criminalizing almost an entire industry creates black market opportunity. Alcohol production became the major source of revenue for a wave of organized crime unlike anything preceding it in American history. Hollywood owes Prohibition a debt for giving them fodder for hundreds of mob movies, but the surge in the murder rate during Prohibition wiped out any gains in median life expectancy from decreased alcohol consumption. In addition, bootleggers—now regulated neither by the state nor by open market competition—started producing dangerous “rotgut” spirits that poisoned thousands of consumers.

Despite ever-growing public dissatisfaction with Prohibition, the tacit alliance between bootleggers and Baptists prevented the repeal of the 18th Amendment until 1933. And even once Prohibition was repealed on the national level, thousands of local temperance ordinances persisted. This is why many states today require the sale of liquor in special government-run ABC stores or prohibit the sale of alcohol in grocery stores or on Sundays. The long tail of temperance regulation is a testament to the power of a political coalition that combined the zeal of altruistic reformers with the financial incentives of a regulated industry.

The conditions are ripe for a new version of the “bootleggers and Baptists” paradigm on the internet. Anti-sex trafficking activists play the “Baptist” role, earnestly contending for reforms that they believe will help women and children enmeshed in a web of sexual exploitation. While internet content providers like Facebook and Amazon are not “bootleggers” themselves, since they operate within the law, they are roughly equivalent to the licit producers of alcohol during Prohibition, who benefited from a competitive moat created by the new rules.

But over the next several years, we should begin to see a surge in internet-age sexual “bootlegging.” New illicit organizations will explicitly peddle children and sex slaves online—a rough equivalent to the production of “rotgut” liquor during Prohibition—and, rather than hiding stills in the Appalachians and relying on hard-to-trace cash sales, this new generation of bootleggers will hide from regulators on the Dark Web using encrypted channels and cryptocurrency to cover transactions. If, in the future, attempts to roll back FOSTA are introduced, it is to be expected that all three groups will oppose the reforms.

FOSTA advocates may learn the hard way, as Prohibition supporters did a century ago, that this kind of regulation not only fails to accomplish its intended purposes but simultaneously creates serious, unintended consequences for both the regulated industry and for the public as a whole.