March 18, 2004, 9:08 a.m.
Telecom Troubles
The rule of law, not regulations, will revive the telecom industry.

By Harold Furchtgott-Roth

The telecommunications sector in the United States is deeply troubled, both financially and legally. Technology advances, but markets are slow to respond — with good reason. Telecommunications executives do not know the boundaries of telecom regulations today — much less a year from now, to say nothing of five or ten years from now — and regulatory uncertainty hinders telecommunications technologies and investments. How can this troubled sector be revived?

To an economist the solution is simple: The telecommunications sector needs clearer rules with predictable enforcement. Milton Friedman and Ronald Coase reach the same conclusion: Property and contracts are the foundation of meaningful economic activity.

To many in the federal government, however, the solution is industrial policy — namely, to focus the enormous power of government regulation to promote a single technology, broadband, at the expense of all else. At best, any residual property and contract rights under this industrial policy would have two distinct classes: broadband and second-class.

The broadband industrial-policy advocates often point in alarm to the rapid adoption of broadband by consumers in Korea and Japan. Fifteen years ago, many thought Japan would economically leapfrog the United States because Japan was the first to develop an analog high-definition television standard. Instead, mostly due to inflexible industrial policies, the Japanese economy is years behind the United States and is growing at a slower rate.

Industrial policy is a euphemism for the government telling businesses how to make investments in their own businesses. A government agency, such as NASA, can legitimately dictate to private businesses the technological requirements for public investments — using public funds — in America's space program. It is a far different matter when a government agency, such as the Federal Communications Commission, imposes on businesses the government's views of the specific technological requirements for private investments with private funds.

The sad reality is that industrial policy hinders economic activity rather than helps it. Industrial policy can and does change with political leadership. Property and contract rights do not. It is only with the latter that businesses can make economically rational long-term investments.

Practically all that ails the American telecommunications sector can be cured with stronger property and contract rights, not with industrial policy. These rights can be secured only through the careful application of law with rules and practices that can withstand court review. The responsibility of the FCC should be to secure these rights under the law, rather than promoting the industrial policy du jour.

Broadband policy has become a solution in search of a problem. Practically every business in America can choose from multiple vendors offering access to all of the high-speed data services they want. Most American homes have choices of more than one broadband provider, and residential broadband services are growing at double-digit rates, far more rapidly than the rest of the economy.

In addition, broadband is only a small portion of a telecommunications sector that is less than 3 percent of the U.S. economy. Investors in telecommunications can attest to an excess capacity of broadband rather than an excess demand. So where is the broadband problem that requires an industrial-policy solution?

No widespread problem exists, yet well-intentioned Washington politicians, many citing Japan and Korea, vie with one another to promote broadband at the expense of the rest of the economy. Some suggest that American broadband is not "big" enough and requires direct government investment or subsidies. Some suggest tax credits for broadband. Some suggest less regulation for broadband than other forms of telecommunications — never mind that broadband is already subject to fewer regulations than other technologies in the sector. Some suggest more regulation to require firms to deploy broadband. Some suggest jobs programs to train workers for broadband.

Few simply suggest clearer and enforceable property and contract rights for all telecommunications services.

Industrial policy advocates have intensively lobbied the administration to adopt a highly visible broadband policy. The advocates have promised everything that industrial policy is least likely to deliver, particularly jobs and economic growth. The White House has yet to jump fully on board the industrial policy bandwagon. More important, it supports the rule of law, even in the complex world of telecommunications.

The courts have begun to bless a differentiated broadband policy. Earlier this month, a perturbed D.C. circuit court of appeals reversed a large part of an FCC rule on local competition for telecommunications services other than broadband. But the same court let stand, with no apparent skepticism about statutory foundation, new rules providing for regulatory treatment of broadband telecommunications services. In this instance, federal rules for just broadband services apply, but parallel federal rules for other telecommunications services are vacated.

The Telecommunications Act of 1996 was supposed to provide clear legal rules for competitive telecommunications markets. Expecting that those clear legal rules would be in place, investors in the late 1990s made enormous investments in the telecommunications sector.

But the fate of the rules to implement the 1996 act was unexpected. They were frequently reversed by courts, often as the result of poor legal foundation at the FCC, and occasionally as the result of inconsistent standards from courts. When the FCC was not reversed in court, regulators themselves would change their minds. Thus, implementation of the act has not led to predictable and enforceable property and contract rules. Part of the subsequent financial failure in the sector after March 2000 can be attributed to legal uncertainty. The spate of broadband industrial policy proposals in the past four years has corresponded both to the consistent court defeats of the FCC on telecommunications rules and to the financial collapse in the telecommunications sector.

Broadband industrial policy is inextricably linked to fatuous claims of promised economic revival of the telecommunications sector. Real economic progress, however, will come only with clear and predictable legal rights rather than industrial policy fantasies.

— Harold Furchtgott-Roth is a former FCC commissioner and author of A Tough Act to Follow: The Failure to Follow the Telecommunications Act of 1996 .