Leave Telecommunications to the Marketplace

July 5, 2004 • Commentary

Americans believe that the United States should rank No. 1. But it is a pitiful No. 11 in telecommunications. When it comes to broadband technology, America lags behind even Canada and South Korea.

The Bush administration has rightly decided not to appeal a recent federal appeals court decision tossing out Uncle Sam’s heavy‐​handed regulatory scheme. The Federal Communications Commission now needs to get out of the way.

The United States is the global leader in computers and software. These industries are driven by entrepreneurs facing only light government regulation.

Wireless communication, too, is sprinting ahead. By the end of 2004, there likely will be more wireless than land‐​line phone numbers. Not coincidentally, government does far less to “manage” wireless communication than traditional phone services.

Even cable, more lightly regulated than telephone land lines, is moving ahead. It has become the biggest provider of high‐​speed Internet access, now enjoyed by some 48 million American adults. Cable companies also are jumping into the phone market.

Yet broadband Internet access, which transforms service possibilities, seems to be crawling rather than galloping. So both President George W. Bush and presumptive Democratic presidential nominee Sen. John Kerry, D‐​Mass., have promised to invest in broadband.

The problem is not inadequate federal attention, however. It is misguided regulation — for 70 years and counting — that has slowed the development of broadband.

Telecommunications policy remains bound by the 1996 Telecommunications Act. Alas, observes my Cato Institute colleague Adam Thierer, “Congress wanted market competition, but did not trust the free market enough to tell regulators to step aside and allow markets to function on their own.”

Flawed when it was passed, the law now is outmoded as well. Eight years ago, the divide between cable and telephone companies was obvious. No longer.

Unfortunately, the FCC has spent the last eight years attempting to micro‐​manage telecommunications. In particular, firms seeking to enter the industry pushed for mandated access at subsidized prices from the existing telephone networks.

Three times the FCC drafted regulatory schemes, only to see the District of Columbia Circuit Court of Appeals thrice strike them down. Most recently the court noted the agency’s “apparent unwillingness to adhere to prior judicial rulings.”

Efforts to preserve and even expand state regulatory authority are equally misguided. Federalism generally decentralizes authority and promotes experimentation, which are good things.

However, the telecommunications market is national. States should not create barriers at their borders to deregulation. Even restrictions promulgated in the name of “transparency” and consumer protection usually slow reform.

Washington should limit state interference to purely local issues, such as taxing citizens to guarantee “lifeline” rates and service. Indeed, Congress should kill off the wastrel Universal Service Fund, supported by a 9.5 percent levy on interstate calls, leaving the issue to states.

Unfortunately, the current system of political interference, legal wrangling, and persistent uncertainty discourages investment and penalizes innovation. Why spend money if your competitors can ride free on your efforts?

Now the FCC is sensibly urging the providers (the Baby Bells) and the resellers (such as ATT, MCI, and Sprint) to engage in normal commercial negotiations to set rates. This should be genuinely private, arms‐​length bargaining, with no federal or state regulators attempting to manipulate the results. Let the companies concentrate on satisfying consumers rather than politicians.

Some analysts advocate continued regulation for historical reasons — arguing that the Baby Bells retain advantages from their many years as local monopolies. Economist Laurence Kotlikoff has contended: “The local phone system is not only a public good, as defined by economists, it’s also a public good as in who paid for it — the definition by everyday folk.”

Actually, states regulated phone rates in return for the companies’ monopoly status. Moreover, the firms lost that protection years ago.

The companies have spent the intervening years investing in new infrastructure. Observe James Gattuso and Norbert Michel of the Heritage Foundation: “For the most part, yesterday’s network no longer exists.”

In any case, the focus today should not be on the past. Instead, the question policy‐​makers should ask is: What is the best means of building the finest possible telecommunications network for the future? Continued government micro‐​management will not do the trick.

It’s time to engage in real deregulation. Admittedly, no one knows exactly what will result. But we will almost certainly get more and better services, new and more efficient devices, and an improved and expanded infrastructure more quickly and at lower cost.

There’s no reason the United States shouldn’t be No. 1 in telecommunications. But as FCC Chairman Michael Powell observed, Uncle Sam must “clear away the regulatory underbrush.” The United States will become No. 1 in telecommunications only when Washington demonstrates that deregulation really means deregulation.

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