Flying Taxis: Cleared for Takeoff?

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00:05 Paul Matzko: Welcome to Building Tomorrow, a show dedicated to the ways that tech and innovation are making us happier, healthier, and more prosperous. With me today is Matthew Feeney, Director of Emerging Technology here at Cato. As usual, I’m your host, Paul Matzko. And joining us is special guest Brent Skorup, the Senior Research Fellow for kind of all things tech at Mercatus. Welcome to the show, Brent.

00:29 Brent Skorup: Thank you for having me.

00:31 Paul Matzko: So today we’re going to discuss your plan for new drone… A new kind of drone and lite aircraft. But I think before we get into the details of what your plan calls for in terms of regulation, let’s lay a little bit out about where are we at with lite aircraft, the drone airspace use? Where is this tech pushing us as consumers in America?

01:00 Brent Skorup: Because of various technology advancements over the last few years, what most people would call flying car technology, I try to avoid that term ’cause people roll their eyes and there’s stigma. But when you’re… In newspapers, you have to say this so people kind of understand what it is. But flying car technology, air taxi technology, it goes by various names, vertical take-​off and landing, VTOL. So all these are somewhat interchangeable. And because of various technology advancements, as I mentioned, things like battery improvements, ride-​sharing software, autonomy improvements in the last 10 years, many companies around the world, and governments, are starting to think of air-​taxi service as a viable commercial service and… But there is… No one’s quite sure how this regulation will work out and I saw room for a paper on the subject and about air traffic management, and these so-​called passenger drones, and VTOL aircraft.

02:06 Paul Matzko: So whether we call it vertical take off and landing, or flying car, or air taxi tech, where are we seeing this being implemented? My understanding is here in the US it’s all… There’s the promise of it taking place, but we’re actually seeing experimentation elsewhere in the world.

02:28 Brent Skorup: It seems like most of this is going on in other countries. New Zealand pops up frequently. The government is fairly accommodating to companies in New Zealand. I think it’s Sergey Brin of Google has a company called Kitty Hawk that’s doing a lot in New Zealand. China is a major player and they seem to be doing a lot of work in China, but also Dubai. There have been some test flights of autonomous, VTOL autonomous air taxis. The European regulators recently, a few weeks ago, put out proposed regulations. I mean they’re starting to think about this commercial service and the US seems to be lagging a little bit. The US, I should say has a very commendable safety record, but that also means they’re very cautious about this.

03:25 Matthew Feeney: So maybe give us a sense of the actual capabilities of the technology as it is. Are we talking about a technology that is really in development or something that’s being kept grounded? So if today there were no regulatory barriers could you and I get in one of these on the roof at Cato and fly to Dulles airport or would we crash on the White House lawn? How far would we get going?

03:49 Brent Skorup: We could fly today in one of these battery powered. And I should say that there are what’s called eVTOL, electric VTOL, which are battery powered of course. And the range seems pretty substantial, 50 miles perhaps. And they can carry multiple people. And should say that capacity for these, typically one to six passengers. Six is about the highest I’ve seen, and that’s eVTOL. There’s another related technology, hybrid VTOL, which is battery fuel hybrid, and those can do several hundred miles and similar to commercial aviation. And these have different issues. I think the eVTOL is more exciting because that’s an entirely new market. Just intercity, getting across city, getting to the airport. And getting to the airport is what folks think will be the immediate market, because going from downtown areas out to the outskirts where the airports are, and you just have business customers. So all that to say, yeah, you could hop into one of these today. I’m not sure I would do it today. There’s only been a few flights that I’m aware of, but yeah, you could do this today.

05:09 Paul Matzko: Who wants to be the guinea pig for… Yeah. Someone will.

05:13 Matthew Feeney: Some brave soul.

05:14 Paul Matzko: But you can imagine the attraction, which is, we live in a congested city, here in DC, or if you live in New York or any kind of urban center where if you can do just a hop, a 15-​mile hop, from the suburb into the center city. It might take you 20, 25 minutes in one of these air taxis. But that’s an hour, two hours in bad traffic into the city, that’s a significant savings in time if you can just go as the crow flies. As you’re describing this, I’m just thinking, well, that’s a helicopter. So how does this differ from a helicopter? Is it just a helicopter? So as we think about this, why is this such a big deal since we already have things that vertically take-​off, move, and land somewhere else?

06:05 Brent Skorup: So some of the benefits relative to helicopters, one is noise. It’s expected these will be, not quiet, but significantly quieter than helicopters. In urban areas, particularly in the US, one reason we don’t have many helipads and helicopter infrastructure is because of the noise, inevitable complaints and disruption. I live in Arlington, Virginia, seems there’s frequent helicopters. It’s pretty disruptive. So noise is one benefit, lesser noise. The other is that helicopters… The single rotor means if something does go wrong, it goes seriously wrong. And so with multi-​rotor VTOLs, which might have between four, 16, maybe 32 rotors, and they can all be independently controlled. If there is a problem, these can still stay in the air and still land safely. Maintenance on helicopters, similar, just there’s a… Particularly with the engines, there’s a lot of maintenance and it’s a huge ongoing cost for helicopters, is maintenance. And it’s expected with these electric motors, the maintenance will be much less.

07:28 Matthew Feeney: When we’re discussing this issue in particular, I suppose it would be worth plugging the actual paper. So anyone listening can go to the Mercatus Center’s website and take a look at Auctioning Airspace. And the title is, I guess revealing the conclusion. But why are you taking the approach of auctioning airspace? People listening who don’t follow aviation policy might be thinking, “Well, who owns the air now? And how would this change things for me just a homeowner on the ground?”

08:01 Brent Skorup: Yeah so this paper comes from… I’ve done a lot of telecom history, telecom history and policy. And as I was learning more about this technology, I thought there’s a lot of analogs with Spectrum Policy in particular. And in this paper, I look at analogs of federal property that is owned nominally by the people, it’s managed by federal governments, and we have many examples of the federal government auctioning federal assets off for commercial use and spectrum is a big one. The FCC has done spectrum auctions for 20 years now, gained a lot of revenue. Companies have a semblance of property rights to make the investments needed in these capital intensive industries. Offshore oil leases in the Gulf of Mexico in particular, this is federal property. It’s auctioned off on a geographic basis, like spectrum, and companies, again, have the investment incentives necessary to build and to operate oil extraction.

09:10 Brent Skorup: A newer example of this is offshore wind energy, offshore windmill sites. These are auctioned by the federal government as well. So we have all these examples. And I think airspace resembles these much more than say a roadway, which is a traditional open access. It’s just an ancient tradition that roadways and rivers are open access and open to the public. And I think that’s the wrong model. I think an exclusive use model works better. And the difference of airspace, an airspace is, has been, it’s owned by the American public, it’s owned by you and me, but it’s managed by the federal government exclusively, all navigable airspace.

10:05 Brent Skorup: And so, anyway, this proposal, I think this looks much more like spectrum or offshore wind energy, where you need large investments. And, unlike roads and rivers, there is no history of mass use of this. And people might say, “Well, why don’t we auction roads or rivers off?” And I think one answer is that we don’t have millennia of practice of humans actually accessing this. It would be hugely disruptive and… And the other thing is, our roadways, we have 30,000-40,000 deaths a year on roadways, and part of that is because it’s open access. No one would tolerate that in airspace. You need much safer airspace. And so, for all these reasons, I think an exclusive use model, and I made clear in the paper, I’m not saying air taxi companies should have fee simple, complete private property to this. For various reasons, I don’t think that’s the right model. I think, much like spectrum, these are conditional, multi-​year licenses with many of the attributes of property rights, but not fee simple.

11:14 Paul Matzko: Let’s dig into some of those bits here in a second. We’ll talk about fee simple property and auctions in a little more detail. But I think some of our listeners are going to wonder, “Well, why do we need to change anything?” And to understand that question, they need to know how does it currently work. Like, if you want… If you were a part of a start-​up that’s creating a next gen VTOL, what does low altitude airspace look like for you? Who gets to use it? How is it defined? I know there’s different classes of airspace. There’s restrictions on how the airspace is used. So, dig into that a little bit for our listeners. How is that airspace currently used?

11:58 Brent Skorup: Yeah, it’s great. It’s important to back up and say what my paper covers. So, my paper, and I kind of draw these lines arbitrarily, but there is some thought behind them, is airspace above 200 feet altitude all the way up to 5,000 feet altitude. And that’s…

12:16 Paul Matzko: So that’s below where planes fly or helicopters?

12:17 Brent Skorup: Yeah, yeah. So, and planes, I think 30,000 feet, 35,000 feet altitude. So, this is fairly clean federal resource. There’s not many users. There are some helicopters, hang-​gliders, some generally small aircraft, but this is a fairly clean federal asset. So, I wanna make clear in the paper it’s not talking about drone airspace. I think there are entirely different issues with very low altitude, below 200 feet. You have property rights issues and other things. So, it’s 200 feet, all the way up to 5,000 feet. And this is where people expect VTOLs and air taxis will occur.

13:01 Paul Matzko: And so, right now, that relatively low altitude space is just kind of a free for all? Anyone can use it. So, if you’re a hang glider, you don’t have to go get permission from the FAA to fly your hang glider in that space, right? Or, helicopters are though, regulated by the FAA flying within that space. So, how does that… Why couldn’t VTOL operators… Why do they need to do what you’re proposing? Why can’t they just keep operating like helicopters, or hang gliders, or small aircraft that fly in that current space?

13:37 Brent Skorup: Well, right now, a big obstacle is the federal government hasn’t quite figured out how to classify these. And there’s various ways. Are these fixed wing aircraft, are these helicopters? So, they need a regulatory classification. And the FAA does tremendous amounts of pre-​approval certification of airworthiness. And so, right now, these have not been classified by the federal government, and therefore, can’t fly. There is a waiver process, but that’s not… That’s ad hoc, and you can’t really develop an industry that way.

14:18 Paul Matzko: So, you could do it, but not… You’re in a legal gray area, and that’s trouble. That’s…

14:24 Brent Skorup: Right. And it should be said, none of these companies are looking to move fast and break things as you might with software and internet-​based things. So, these companies, they want this industry to be safe, they wanna cooperate with the federal government. And to NASA and the FAA’s credit, they have been fairly accommodating. They wanna see this develop and they’re working closely with companies about how to make this safe, primarily, but also efficient in a commercial market.

15:03 Matthew Feeney: So, when people say… Or, when you say, more accurately, an auction of airspace, are you talking about auctioning layers of airspace or someone could auction 1,000 feet to 1,100? Or are you talking about auctioning, for lack of a better analogy, roads in the sky, certain specific geographic lanes? Or is it a mixture of both?

15:27 Brent Skorup: A mixture, a mixture. And it’s hard to say at the outset what the best model is. You gain flexibility if you kind of auction off cubes of airspace. I say in the paper maybe about neighborhood-​sized and a few hundred meters tall. On the plus side, there’s a bunch of modularity. Companies can… If they acquire a bunch of these, they can change routes as time goes on, they can put these verti-​ports, basically huge helipads, at various parts in the city as demands change, as new customers come online. I think the fixed route auctions, I suspect… Well, it should be said, companies are already expecting there’ll be fixed routes for safety reasons. What they envision though is much like traditional aviation where these routes are shared by competitors like commercial aviation, they share terminals, they share routes. And my paper is trying to avoid the sharing of routes and terminals. I think all sorts of… You create all sorts of problems and many of the things we hate about traditional aviation, I think, arises from the fact that competitors have to share terminals and routes.

16:55 Matthew Feeney: What about the issue that will inevitably arise? You mentioned, Arlington Virginia, where I live too. I can imagine a lot of my neighbors not being particularly happy if suddenly there were dozens of these things buzzing overhead, even if they were at 1,000 feet or 1,100. Do you envision some kind of mechanism for firms to deal with the privacy and noise pollution complaints that people will inevitably have?

17:25 Brent Skorup: I think the noise issue is possibly the biggest… One of the biggest obstacles. Aside from… Yeah, I think the technology is advancing fairly predictably and we’ll be there soon, if it’s not already there. The regulatory system, it will eventually happen. What scale will these be commercial? Eventually, these will be permitted. The noise, the public acceptance, I think, could trip this industry up. And I think a lot of it is education, and particularly with officials at the local level. But in traditional aviation, Mercatus put out a paper a few years ago, I can’t remember the exact numbers. But you see a power law of noise complaints. Basically in DC for instance, I think there was a handful of people, maybe five people, who make up a massive amount of the noise complaints. And I think data analytics, just showing that there is this power law. It’s a few people who, for whatever reason, are sensitive to these noises. So I think there needs to be research about how loud are these. And there’s studies going on, if you follow this industry, about noise profiles and ways of what people can handle and kind of baseline noise. I think it’s a fruitful area, I hope the companies and federal government will continue to study this. And, yeah, maybe some day it’ll be kind of a safe harbor. If you’re below this decimal level, at this height, then you’re presumptive-​ly approved. But yeah, the noise is a serious, serious concern.

19:11 Paul Matzko: So, I mean, which puts me in mind of something else, which is that one of the early complaints about the beginning of vehicular transportation on the roads, the cars, was that they were loud. Cars are louder than… I guess you have the clop, clop of a horses hooves. But especially those early pre-​muffler engines, vehicular traffic was really loud too, and people were concerned about the externality created by loud cars going through residential neighborhoods and we found the way to solve that, and it was a long conversation. To some extent people just got used to it. We have cars go outside of our houses, and there are… In a sense we price that noise into the price of our houses. So houses right along highways are usually cheaper than houses that are in a little cul-​de-​sacs. We recognize that it creates an externality, we manage it through education, we manage it through different regulatory means, but it wasn’t something that… We were able to overcome that barrier. This brings me to mind of something Matthew, you mentioned before the show, which was… So for thinking about roads, road lines as a way of directing traffic and among other reasons, to keep the noise in kind of defined corridors. Flesh that, how might that apply to airspace?

20:38 Matthew Feeney: Oh well, I’ve been working on drone issues for a while, mostly in the law enforcement context right. But of course, we’re having to consider commercial use of drones, and everyone’s very excited about delivery drones, and talking to people in the building. Yeah I haven’t published anything on this, but there is an ongoing debate about what would a rule look like if we just said, “You can fly drones, they just have to go above current public space,” so as long as you stick to the roads and you’re flying above them, then you’re fine, just as a way to avoid the inevitable problems of people complaining about privacy issues, people shooting them down with shotguns. [chuckle] All these problems that you can imagine having. But I think this technology raises different kinds of issues. I think people are gonna be less likely to take a shotgun on to something that there are human beings inside of, and…

21:30 Paul Matzko: One hopes.

21:30 Matthew Feeney: Yeah, one hopes. And there’s obviously probably in virtue of the fact that they will be bigger less chance of them actually flying above a lot of roads depending on the altitude, right? But this is of course a difficult conversation because of current regulation which is why I think we need proposals… Like Brent’s that are talking about, “Well, how can we think about our space differently?” And this… The road analogy, I agree with you, I think there are serious issues with that, but something that did occur to me when looking over some of the material is, how do we stop a monopoly emerging here? What’s to stop if we had an auction system and it’s a tract system where you have these air-​lanes, how do we ensure that a little startup is able to actually get in the air, if Google, for example, or some other big company has come in and bought all of the air-​lanes.

22:38 Brent Skorup: So I think we can learn some lessons from spectrum policy, and again off-​shore or at least… So typically to prevent the monopolization problem, there is a cap to what one company can control in a market. And I don’t… I haven’t looked at this too closely, but intuitively, that seems to make sense for me. If the government is auctioning this off, they shouldn’t… They should avoid auction off monopolies. And so, you could imagine some kind of a cap on what you could control. The other thing is just, what’s the size of the air tract that you’re auctioning off? And just how those auctions are carried out, you can prevent monopolization problems. I say in the paper, for instance, one… Auctioning off one tract in Washington DC would clearly create a monopoly problem. On the other side, you don’t want to auction off a cubic foot everywhere, that would be an excessive… Everyone could afford a piece but you would have a fragmentation problem.

23:49 Brent Skorup: In the paper I say… Again, it’s hard to say at the outset what the optimal… What the optimal competitive size is, but I would say somewhere around neighborhood size, so that you could have multiple providers per city. And what the government does with other auctions is they consult with industry about what size is practical and they also need to ensure that there is competition.

24:21 Paul Matzko: And just a second for our listeners [24:23] ____ think about this in 3D, right? So you’re not getting all the air in that whole range, it’s layers. Do you have an estimate of how thick those layers should be? So between 200 and 5,000 feet, how many layers are we talking about? Are they 100-​foot-​wide or tall, I suppose, I should say?

24:43 Brent Skorup: Yeah, I haven’t even… I haven’t even gotten that detailed yet. I would expect a few hundred meters tall, just to give plenty of buffer and allowance but…

24:55 Paul Matzko: But we’re talking about potentially dozens of layers in this space.

24:58 Brent Skorup: Yeah and also… Also if they are on a cubic basis, not on a route basis that opens up because this is 3D even if a company… Let’s say if you’re in DC, a company has a Foggy Bottom for the port station and they’re flying to Dulles and another company has a Capitol Hill Station, Foggy Bottom gets in the way on the way to Dulles. But with 3D you could acquire parcels that would go around and still go out to Dulles. So yeah, the 3D nature of this opens up more competitive options. It might not be a perfectly direct route but you could… It improves the competitive potential for this market.

25:46 Matthew Feeney: One imagines that innovators in this space would want to have entry as frictionless as possible, right? So that they… It seems unlikely that a firm would say, “Yeah, well, we’re just gonna fly these 300 feet over people’s homes and then we’ll deal with issues as they arise.” Presumably they are aware that there will be growing pains and concerns and will take steps. But that’s just a guess, who knows what will end up happening.

26:13 Paul Matzko: Yeah. Never underestimate the willingness of an uncaring corporation to be like, “Yeah, it’s their fault”

26:22 Matthew Feeney: Figure it out.

26:24 Paul Matzko: We’ll figure it out. Yeah.

26:24 Matthew Feeney: This made me think of something that [26:28] ____. Have there been any preemptive discussions about the potential environmental impact on these? Are these gonna kill a lot of birds, are they gonna freak out animals? Is there any kind of discussion about that yet?

26:44 Brent Skorup: I haven’t seen anything about that, no.

26:45 Matthew Feeney: Okay, I guess that’s a when not an if question, right?

[chuckle]

26:49 Paul Matzko: And functionally that seems like it’s a non-​unique problem to your plan. You put more stuff up in the sky, it’s gonna run into more birds, it’s just the nature of it, no matter how you end up managing the airspace, it’s just a question of filling that volume with more objects.

27:08 Matthew Feeney: But I suppose the reason I’m asking you about birds specifically is not just the potential environmental impact, but a few birds can bring down a commercial airliner. And I don’t know what the safety issues are with this technology in particular Brent might… Obviously he knows more than both of us, but if a bird flew into one of these things or got sucked in above my house, and it fell on my house, that’s something people would worry about.

27:35 Brent Skorup: Yeah. I haven’t looked at this issue too closely. I do think the multi-​rotor, independent rotors, is a big safety benefit whereas a twin jet engine if one or two goes down it’s pretty catastrophic. But yeah, I haven’t looked into it too closely.

27:56 Paul Matzko: I do think it’s interesting. So I know folks, this is not an original thought to me, in fact, I think I’ve heard it brought up at some of our gatherings before, which is this tech can be kind of geo-​tagged. I’m talking here more about drones, but I think this can also be applied to air taxies or the VTOLs, which is that you can tell the drone not to go within so many yards of a military base, of other sensitive… Or airports, other sensitive locations, now that can be hacked. There are concerns about exactly how effective that is, but for 99% of ordinary users it’s pretty effective at keeping drones… Or potentially effective at keeping drones away from sensitive places. So, in theory, you can program those drones to stick to their lanes. I think that’s quite interesting. Or if you only auction off the airspace over roads, over already public land, you can make sure they stick to their lanes which helps mitigate some of the problem we’re describing, which is that if a bird does hit one of these things, well, it’s flying over… You’re flying over a highway and the thing comes down, [chuckle] not that much better, but it’s not come down on a house then. So the externality is a little bit different.

29:18 Paul Matzko: I mean, at some point, one of these things is gonna come down at some point. If it lands on a car, well cars have accidents. It’s gonna generate some externality, just because things moving run into other things eventually and injury and death, and torts are generated by that. But there’s a way of making sure that it falls in areas where we currently expect death, injury, and torts to take place, which is on highways, or you know…

29:46 Matthew Feeney: Yeah. Yeah, no you could take that approach, for sure.

29:49 Brent Skorup: Yeah, I’ll just say on that topic, this geo-​fencing is going on today with commercial drones and I know DJI, which I believe is the biggest drone manufacturer in the world. I think every drone now, they have this geo-​fencing capability and the FAA even has the beginnings of a real-​time geo-​fenced system where a drone operator can get real-​time permission from air traffic control and the FAA to fly. It’s fairly rudimentary, but you see the possibilities and the idea of geo-​fencing areas off. And talking about drone operate the altitude is a little trickier just… But the geo-​fencing, yeah, that’s fairly well understood.

30:38 Matthew Feeney: Do you see these competing with logistics or delivery companies? So we’ve been using the word taxi. So the idea I suppose being that these kind of devices will be competing with Uber or traditional taxies. After doing research, do you think it’s actually feasible that they could be used for short haul Amazon deliveries or things like that?

31:03 Brent Skorup: I’m not sure, I expect drone deliveries will cover most of this. And thinking about this, it would have to be fairly heavy that you would need a larger… Larger than a drone. Yeah I expect there would be some, particularly maybe with large medical shipments. And I met at the Uber Elevate conference, which is kind of devoted to this air taxi industry, a few months ago, I heard of an entrepreneur who wanted to do this for, I believe it was pig heart valves, and just the immediacy, just organ donations. So there’s all kinds of ideas out there. I don’t know if human organs…

31:51 Paul Matzko: If pigs could fly.

31:51 Brent Skorup: Or animal organ and that sort of thing. But I think it matters in particularly… This is just drone delivery, particularly in Rwanda. I saw recently Rwanda, 35% of blood to hospitals, blood donation to hospitals, delivered via drone in Rwanda. And there’s a company called Zipline that does this. And yeah, medicine seems, with drone delivery, seems like a useful application for this.

32:21 Paul Matzko: A few other concerns that I think folks, particularly our listeners who tend to skew a little more libertarian, a little more skeptical of government regulation in general. I think one of the things that’s going to pop up in some of our listeners’ minds is, “Well, why should we have a one-​size-​fits-​all FCC federal government agency policy?” Why… Are there federalism concerns here? Shouldn’t this be left to the experimental laboratories of the states or of municipalities to determine how they want to regulate drone airspace in their town or in their state? So your whole model is predicated on a federal model. The FAA, sorry, auctioning off airspace, why is that? So what’s your answer to people who are concerned about federalism issues?

33:14 Brent Skorup: Yeah there are important federalism issues and in short, my paper tries to avoid all that. And the airspace I’m talking about, 200 feet and above, I don’t know where that line will be drawn. I expect the federal government will need to draw a line at some point and say what is covered by the jurisdiction of the state and what is federal. Right now, all navigable airspace is federal and according to the FAA’s current interpretation that means two inches off the ground outside is navigable airspace. The model I think we’ll eventually see is much… Again, like offshore oil where in the 1950s, I think it was the Submerged Lands Act, the federal government said three miles out is controlled by the state and the state controls how that property is managed, but beyond three miles, generally is federal property. I think because of these new… We haven’t had this issue before of multiple parties at different layers in the airspace. My next paper, I think will talk more about these federalism issues. And that deals with below 200 feet, above 200 feet though, it’s my belief and assumption that this should remain federally controlled.

34:38 Paul Matzko: In a sense though, this paper is kind of agnostic to the question of, “Who should be controlling the air? Which regulator should have oversight?” It’s just this is the way it’s currently done and… But in theory, the real model is the auction model, not which regulator gets to, in a sense, run the auctions. It’s just you’re dealing with the lay of the lands here. One more question that came to mind on kind of the same theme. You’re gonna have folks who look at this, and for those of us, I also come from a telecom history background. You’ve referred a couple of times to spectrum auctions, so like radio, television, wireless spectrum. Back in the 1920s there was a debate over how should… Essentially it was the same kind of debate, we have this new technology that’s allowing us to access electromagnetic waves and turn them into commercially useful endeavors, radio at the time. Who gets to regulate it? How do we determine who gets a hold of it?

35:49 Paul Matzko: And there were a couple of models that were proposed, one of which was a British style, a national monopoly, the BBC, the British Broadcasting Channel, would just run it themselves. It was a national monopoly. So that’d be like the FAA, we keep this airspace, we control it. In fact, everything that flies in it, we essentially get to determine where it goes, we may even own it ourselves. A very command and control model. Then there was a, “Well, we’ll issue licenses.” A license model, which we did here in the United States, you get a radio station license to operate on a particular wavelength. Later on, a kind of libertarian leaning economist proposed an auction system, Coase, Cuase, Coase?

36:35 Brent Skorup: Coase.

36:36 Paul Matzko: Coase. Coase proposed an auction system, kind of like what you’re proposing. But I think there’s folks who are gonna say, “Well, why should we do this auction system? Why can’t we just do command and control? Why can’t we… ” What are the problems with these other models of running what we do with VTOLs?

37:00 Brent Skorup: So the auction system for spectrum has… Part of the model for this is spectrum auctions. So in the allocation via auction, on exclusive basis, for multi-​year periods, serves a few benefits. One is, the government is basically auctioning off a commodity. It can be used for anything. So spectrum could be used for broadcast TV, it could be used for cellular, it could be used for satellite, all these things. And with auction, the government is auctioning off a commodity that’s flexible use, companies can use it in whatever manner they wish. And this has helped make the US a leader in wireless technologies. Companies can change those technologies without government permission, unlike in the… That started in the 1980s.

37:56 Paul Matzko: In the 90s. The 80s.

37:57 Brent Skorup: Yeah, the actions in the 90s, but the flexible use… Yeah, so this has all been fairly recent and, as you’re familiar, the FCC used to be… They would dictate what the service had to be, where it could be, and they would give away for free on… [chuckle] Based on some imaginary public interest evaluation.

38:17 Paul Matzko: Which was bad for innovation, I mean…

38:21 Brent Skorup: Right. Terrible for innovation. And basically the politically connected got access to this federal asset. And that’s been much improved. It’s night and day. Once auctions started, companies could make their investments, they could transfer something valuable to a newcomer if they designed a better mouse trap, and you didn’t have that in the past.

38:45 Paul Matzko: So the same thing with the airspace here, potentially, which is that we want to avoid under-​utilization of the airspace, because folks… We don’t wanna stymie the innovations going on, the competition between these operators.

38:58 Brent Skorup: Yeah. So what I fear with low-​altitude airspace that we’re talking about with VTOL and air taxis, is that if this technology does succeed and there is a commercial demand, how do you allocate it? And my fear is they’ll allocate it for free to whoever’s in the market at the time. And this is basically what happened with traditional aviation, where, once the jet age came, you had tremendous congestion problems, you had… For the first time, you had to figure out, “How do we allocate this federal asset?” In the paper, I point to in New York City in the late 1960s, much of US aviation delays were based in New York City in the three airports there. The air traffic control, they raised landing fees $20 in 1968 on all small aircraft, small… Called general aviation. General aviation traffic plummeted 30% with that $20 fee, and delays fell over 50%. That’s a remarkable change with a very small fee, $20 per landing, and that’s because… So that just suggests there was tremendous amounts of low-​value flights going on, because it was unpriced and…

40:22 Paul Matzko: Clogging up the airspace further. More efficient uses.

40:26 Brent Skorup: And so that’s why I’m worried, particularly in a fast-​moving sector like VTOL, where there will be… We know there will be advancements, and companies will design better systems. If it’s allocated by agencies or in cooperation with the incumbents who are already in the marketplace, which is what happened with traditional aviation, you harm the innovations, you harm the innovators who wanna enter the market, the incumbents have nothing to transfer, because they’re sharing this resource with regulators, with competitors, and so that’s what I wanna avoid. I want companies to have something to transfer if someone better comes along, and so you need exclusivity for that. And on the congestion, how do you allocate in times of congestion? A few months ago NASA put out a report on this very topic. NASA and the FAA are doing regulation of this sector, and they say, “Our plans right now,” which is basically a centralized allocation mechanism which might be some kind of public/​private allocation of airspace, say that this will work for modest amounts of traffic.

41:37 Brent Skorup: Which raises the question, what if there’s not modest amounts and they answer, they say, “Well, we as regulators will step in and allocate it on an as-​needed basis.” And so that is not… I see all kinds of problems with regulators doing that and it gets back, again, to spectrum where basically the politically powerful and the incumbents I think will control it and I think that would be especially damaging in this sector, again, as I said where this is moving very rapidly and we don’t wanna bias the regulatory system towards today’s companies.

42:14 Paul Matzko: There is kind of a perverse unintended consequence which is that in theory… This happened for radio which is that there were always concerns that dominant players in the market place, the big networks would gain, essentially, monopoly control and therefore there was pressure on the FCC to implement regulations to make sure that wouldn’t take place to take a heavier hand, a more involved hand. But it actually played into the interest of the major… Of the incumbents because they were better able to lobby the regulators to tweak those rules in ways that favored them to… So there’s a lot more kind of corruption regulatory capture, they’re also better able to just comply, they’re big they have lots of capital investment, they can comply, they can make better more convincing bids for the licenses. So you end up with this whole system meant to, in a sense, diminish incumbent control that actually ends up increasing incumbent control. Whereas if you auction it off well the folks who own that property… There’s a natural competitive element baked into the system. You can’t buy off the regulator to tweak the rules because someone else owns that chunk of airspace. So I find that quite interesting.

43:39 Paul Matzko: So Brent, one last question here. So again some of our listeners are going to hear this and say, “Okay, so I get why we don’t want this to be like traditional aviation, that we want to avoid the problems that came with the congestion, that came with the way general aviation was handled. I get why an auction is, attractive.” Why though… And you say this in your plan, and you’ve referenced it here in the interview, why cant we just make this fee simple property? Why can’t we completely deregulate the airspace. Why do we need any kind of regulatory oversight of this at all? And that is gonna be a default position I think a lot of our listeners are gonna be attracted to.

44:21 Brent Skorup: And I should say this was a tempting idea to me initially, and I found in the course of doing my research I don’t think that would work well and this cuts against some libertarian tendencies and free market tendencies. But I came across… And to shore up my libertarian cred, I came across a bunch of Richard Epstein essays about… And he’s a prominent free market and libertarian law professor who writes a lot about property dating back to Roman… The history of property all the way back to Roman times, and there’s this idea that you find and it’s a fairly ancient idea. There’s some property that is collectively held by the public and Epstein points out when there is congestion it’s not unheard of, and actually it’s pretty useful, occasionally. You have to be careful not to take this too far, of course. And there’s more in my paper.

45:32 Brent Skorup: But occasionally when there is congestion it makes sense to have a single owner and sometimes that single owner, it makes sense, it’s the government. He points out the example of in England, in the 17th century navigable rivers had via the common law acquired basically state ownership and management of the rivers because it was impossible… The holdout problem is one factor and also the free-​riding problem is another. So with navigable rivers you couldn’t coordinate all the owners on the rivers to do things like dredge the river and make it commercially viable for those upstream and so you have all these… Particularly in transportation networks. And transportation networks, I think are special. Even Milton Freedman conceded in a paper a few decades ago that downtown road networks are always gonna be controlled by the government and it is because this holdout problem and free-​riding problem they’re just intractable problems it makes sense to have a single public user. Now there’s all sorts of debates about once you… Once we set that out, how do you do it and that is where my paper contributes. But so I think…

46:51 Brent Skorup: I don’t think fee simple makes much sense and even in… I trace this in the common law there was this old doctrine that a home owner owned property all the way up to the sky down to the center of the earth and even common law courts started eroding that once you had airplanes, the beginning of airplanes and blimps and other things. But I won’t go in the history too much, but it’s in the paper, I think, I hope it’s persuasive to people. And Richard Epstein has done tremendous work on this idea of public trusteeship and when it makes sense for a single owner, a single government owner.

47:34 Paul Matzko: Well, Brent, thanks for coming on. I think all three of us… Whether or not the exact particulars of this plan make sense. And even, as you said there’s… Yeah there’s room for tweaking within how many layers and how large the units, the cubes, being auctioned, and exactly who’s running the auction, how… So there’s a lot of room for maneuver within this plan, but it does… I’m fairly convinced it’s an upgrade over what’s currently being proposed, which is just that hold over from traditional aviation that I can see the advantages of some kind of auction system, bringing the power of markets to bear on the issue of what to do with this airspace. And I should encourage our listeners, we’ll have a link to Brent’s Mercatus White Paper up on the show notes. So take a look at that if you wanna dig into some of the more nitty-​gritty details. If you are compelled by the example of 17th century riverine and water rights in Tudor England. Is it still Tudor? Yeah I think so. In Tudor England, you can find the link in Brent’s paper. So thank you, thank you Brent for coming on and until next week, be well.

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48:49 Paul Matzko: Building Tomorrow, is produced by Tess Terrible. If you enjoy our show, please rate, review and subscribe to us on iTunes, or wherever you get your podcasts. To learn about Building Tomorrow or to discover other great podcasts, visit us on the web at lib​er​tar​i​an​ism​.org.