Are We Really Deregulating Telecom?

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Five years ago today -- with fanfare and an unusual degree of bipartisansupport -- the Telecommunications Act of 1996 was signed into law.Ever since, politicians and the media have been asking a simple question: Isderegulation working?

Regrettably, there's one big problem with that question. Simply stated, thenotion that the telecom industry has been deregulated is a fairy tale.Asking how well telecom deregulation has worked makes as much sense asasking how well Social Security privatization or post office privatizationhave worked. We don't know because none of these sensible ideas has beentried.

Instead, we've seen what might be called "Deregulation Lite," with someminor rules and restrictions relaxed by the Telecom Act. Policy makers givea great deal of lip service to the benefits of free markets, but they refuseto allow a truly free market in telecom services to develop. Prices andmarket entry are micro-managed, and powerful state, federal andinternational bureaucracies sit in judgment of this sector. Consider threepost-Telecom Act developments:

  • In August 1996, the Federal Communications Commission (FCC) issued itsmammoth 737-page, 3,200-footnote "Interconnection Order." The edict, whichranks as one of the longest and most convoluted rules in the history ofregulatory policy making, produced a stream of litigation. In fact, theSupreme Court recently decided to hear another round of cases dealing withambiguous and controversial Telecom Act regulations.

  • In May 1997, the agency created the "E-Rate" program (known in mostcircles as the "Gore tax"), which unilaterally established a new governmentbureaucracy to help wire schools and libraries to the Internet. The FCC thendecided the American people would pick up the $2.25 billion per year tab forthe program by imposing a hidden tax on everyone's phone bills.

  • Finally, since the Telecom Act became law, FCC spending and staffing grewto all-time highs. Last year, the FCC requested a gross budget of almost$280 million and total staffing of 1,975 people. By comparison, 10 years agoFCC spending stood at $108 million and staffing at 1,734 people. In otherwords, the FCC's budget has doubled over the past decade and the agency hashired roughly 250 additional bureaucrats.

In sum, the era of "deregulation" has seen the FCC issue one of the biggestregulatory edicts in U.S. history; create an unconstitutional new federalprogram plus a hidden tax to pay for it; and grow to become bigger and morepowerful than ever.

Deregulation should mean the removal of regulations -- not the imposition ofnew forms of regulation to replace old ones. And deregulation should alsomean the eventual "sunsetting" of the agency that oversees the sector thatlegislators hope to deregulate.

Ironically, Republicans, who have controlled Congress during and afterpassage of the Telecom Act, should have learned this lesson from Democrats.In the late 1970s the Democrats almost completely deregulated the airlineindustry and simultaneously put a plan in motion to shut down the agencythat oversaw that sector. By the mid-1980s, the Civil Aeronautics Board,which had once micro-managed almost every facet of the cartel-ridden airlinesector, was phased out. As a result, more people fly today because the costof air travel fell and service options multiplied.

Why has true telecom deregulation been derailed? Because policy makers havedeveloped a bad case of "Chicken Little complex": a persistent fear that thesky will fall on telecom companies and consumers if regulators let go of thereins of power. As a result, legislators, regulators and the courts continueto treat the industry as a plaything. Exhibiting regulatory hubris, thesebureaucrats think they can "create competition" if they try hard enough -- andtrying hard means regulating a lot.

Hence, the situation five years after passage of the Telecom Act is slightlyrosier than it was in 1996 -- not because regulation helped improve matters,but rather because technology continues to evolve in spite of regulation.Perhaps the next time Congress takes a stab at "deregulating" this industrysomeone will take the time to look up the word and understand what it meansso we can get this job done.

Adam D. Thierer

Adam D. Thierer is director of telecommunications studies at the Cato Institute and served as a Bush-Cheney FCC Transition Advisory Committee member.