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U.S. semiconductor sales dropped 45% in 2001. The best venture-capital portfolios have lost between 90% and 99% of their value. And, of course, the Internet infrastructure business continues to deteriorate with at least 35 bankruptcies totaling more than $100 billion in corporate defaults in the last 18 months. Twenty-three more bankruptcies are expected.
The telecom and technology meltdowns are the result of two key policy blunders. First, an overly tight Federal Reserve drained a fast-growing economy of crucial liquidity between 1997 and 2001. Prices and corporate profits plunged, credit crunched, and debtors had to pay back loans in dollars 30% to 40% more expensive than the ones they borrowed. Highly leveraged telecom companies who were building expensive new broadband networks across the globe were the hardest hit by this deflation. Monetary deflation, however, is a rare phenomenon. Only a few economists like David Malpass of Bear Stearns and the early supply-sider Jude Wanniski warned of its consequences. What should have been much more obvious to policymakers, and conservatives in particular, was the second cause of the telechasm: heavy-handed regulation by the Clinton-Gore Federal Communications Commission. Instead of letting the local Bell telephone companies (Verizon, SBC, BellSouth, and Qwest) compete with cable, satellite, wireless, and new fiber-optic service providers for broadband Internet customers, the Clinton FCC bizarrely singled out the Bells as broadband monopolies. It empowered 50 overzealous public utility commissions to watch the Bells' every move and constructed a massive web of price controls, asset-sharing mandates, and litigation booby traps in every telco switching station. Fly-by-night service providers were encouraged to "compete" with the Bells by offering Internet access and voice services over the Bells' own wires. "Open access" proved a huge disincentive for the Bells to upgrade their copper networks with fiber that would stretch closer to homes and businesses. Investment and risk were decoupled from any hope of reward or profit. When the Bells refused to make investments with guaranteed negative rates of return, the government continually fined them. In Reed Hundt's now famous phrase, the Clinton FCC was going to "decide the winners and losers" in the last-mile broadband arena. Meanwhile, after turning back several similar judicial and legislative threats of forced sharing, the cable TV companies were mostly allowed to build new high-speed infrastructure free of poaching by rivals. Not surprisingly, the cable companies have consistently signed up twice as many broadband Internet subscribers and now have two-thirds of the market. If the Clinton FCC wanted to prevent the Bells from monopolizing the Internet — imagine! — it got its wish. The turmoil, litigation, and uncertainty in the last-mile, however, doomed the entire telecommunications expansion. The number and speed of last-mile connections to homes and businesses has been far below the expectations upon which the investments of the mid- to late-1990s were based. Annual Internet traffic growth, a key measure of industry health, is down from 1,000% in the mid-1990s to about 100% today. Instead of seeing the 1996 Telecommunications Act for what it was — re-regulation of the industry — most Republicans bought the "deregulatory" tag line. Much the same thing happened when California called the re-regulation of its energy industry "deregulation." Even when FCC chairmen Reed Hundt and William Kennard made the Telecom Act worse in practice than it was on paper, conservative politicians were mostly silent. That Republicans in Congress — and, until recently, the Bush White House — fell for this big-government micro-management of the world's most dynamic industry is puzzling, but not without explanation. To see how Republican thinking on this issue was confounded, one must look no further than James K. Glassman's July 19 column on the subject (published on NRO). His simple mantra — competition, good; monopoly, bad — is appealing to casual observers. When you dig in, however, it all falls apart. Glassman, a fellow at the American Enterprise Institute and former advocate of free-markets, has trumpeted the Clinton FCC position for years. He believes that if the current FCC chairman, Michael Powell, relieves the Internet industry of the Clinton regulations, the Bells will suddenly monopolize the Internet. This in the face of cable's two-thirds residential market-share (and its 80,000-fold bandwidth advantage over the Bells' copper), hard-charging competitors like satellite, mobile phone, and broadband wireless, and players like Cogent building direct fiber-optic connections to urban businesses. Though Glassman cloaks his arguments in the rhetoric of competition, he completely ignores these real, entrepreneurial competitors. When Glassman talks of competition, he means the artificial competition created by the government within one sliver of the market — the copper wires of the Bells. It is a competition in which there are an infinite number of players, no differentiation of products, prices drop to (or below) the marginal cost, and all profit exits the system. In other words, Glassman falls for the perfect competition trap. Perfect competition has long been a stumbling block for economists across the political spectrum. Even Adam Smith dabbled. It is an abstract, demand-side construct whose opposite is monopoly. In technology, temporary monopolies are abundant. They are the definition of innovation. Competition, meanwhile, is rampant, if not perfect. Permanent monopoly, however, like perfect competition, almost never occurs freely in the real world. Like monopoly, perfect competition only results from government action. The reason is obvious: both are inconsistent with capitalism. Imagine that the U.S. government, early last century, had proclaimed Henry Ford's auto factories a monopoly and, in the name of competition, forced Ford to open up his facilities to rivals wishing to make their own cars with his production lines and workers. How many new lines would Ford have built? How much innovation would take place? Would Ford be known today for his advances in mass production? And most importantly, would Buick, Oldsmobile, Pontiac, and Chrysler have built their own facilities and brands and contributed innovations in substance and style had they been able to expropriate Ford's production capabilities, without any of the investment, risk, or upside? Even if desirable, perfect competition is only possible in mature markets devoid of innovation (like long-distance voice in 1984). That's exactly the opposite of today's young and volatile world of broadband technology. Glassman and the Clinton FCC acolytes seem worried President Bush and current FCC Chairman Michael Powell might actually deregulate the last-mile to get the technology economy moving again. In his column on the subject, Glassman resorted to low-blows against George Gilder, an advocate of deregulation (and my boss), suggesting Gilder's views on broadband have been "colored" by his personal financial situation. For the record, Gilder blasted the FCC's broadband noose right from the start — calling the 1996 Telecommunications Act "780,000 words of 'deregulation'" in a 1997 Wall Street Journal article, offering detailed critiques in speeches across the globe in the good times of 1999 and 2000, and publishing numerous alerts in the Wall Street Journal, The American Spectator, and the Gilder Technology Report throughout 2000, 2001, and 2002. "Mr. Gore's policies put the Internet in the balance," he wrote in the Journal, days before the 2000 election. There is a largely untold story of high-profile Republicans being hired by AT&T to promote the socialist telecom policies of the Clinton administration. Jeffrey Eisenach, president of the Progress and Freedom Foundation, superbly summarized the problem in a July 22 Washington Times letter to the editor. Responding to a previous letter by well-known Republican and AT&T lobbyist Charlie Black, Eisenach wrote: "In blatantly Orwellian fashion, Mr. Black tells us that deregulation is really 'federal meddling' and that eliminating the Clinton-Gore industrial policy is 'industrial policy.' As a political consultant, Mr. Black can be forgiven for not understanding telecom policy; as hired help for AT&T, he can be forgiven for doing his client's bidding. But it's hard to understand how, as a Republican, he can feel comfortable wrapping former President Bill Clinton's disastrous telecom policies around President Bush's neck." — Bret Swanson is executive editor of the Gilder Technology Report. |
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of the biggest obstacles standing in the way of the American economy is
the depression in high technology. 
