Are We Really Deregulating Telecom?

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

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

Instead, we’ve seen what might be called “Deregulation Lite,” with some minor rules and restrictions relaxed by the Telecom Act. Policy makers give a great deal of lip service to the benefits of free markets, but they refuse to allow a truly free market in telecom services to develop. Prices and market entry are micro‐​managed, and powerful state, federal and international bureaucracies sit in judgment of this sector. Consider three post‐​Telecom Act developments:

  • In August 1996, the Federal Communications Commission (FCC) issued its mammoth 737‐​page, 3,200-footnote “Interconnection Order.” The edict, which ranks as one of the longest and most convoluted rules in the history of regulatory policy making, produced a stream of litigation. In fact, the Supreme Court recently decided to hear another round of cases dealing with ambiguous and controversial Telecom Act regulations.

  • In May 1997, the agency created the “E‐​Rate” program (known in most circles as the “Gore tax”), which unilaterally established a new government bureaucracy to help wire schools and libraries to the Internet. The FCC then decided the American people would pick up the $2.25 billion per year tab for the program by imposing a hidden tax on everyone’s phone bills.

  • Finally, since the Telecom Act became law, FCC spending and staffing grew to 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 ago FCC spending stood at $108 million and staffing at 1,734 people. In other words, the FCC’s budget has doubled over the past decade and the agency has hired roughly 250 additional bureaucrats.

In sum, the era of “deregulation” has seen the FCC issue one of the biggest regulatory edicts in U.S. history; create an unconstitutional new federal program plus a hidden tax to pay for it; and grow to become bigger and more powerful than ever.

Deregulation should mean the removal of regulations — not the imposition of new forms of regulation to replace old ones. And deregulation should also mean the eventual “sunsetting” of the agency that oversees the sector that legislators hope to deregulate.

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

Why has true telecom deregulation been derailed? Because policy makers have developed a bad case of “Chicken Little complex”: a persistent fear that the sky will fall on telecom companies and consumers if regulators let go of the reins of power. As a result, legislators, regulators and the courts continue to treat the industry as a plaything. Exhibiting regulatory hubris, these bureaucrats think they can “create competition” if they try hard enough — and trying hard means regulating a lot.

Hence, the situation five years after passage of the Telecom Act is slightly rosier 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 industry someone will take the time to look up the word and understand what it means so 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.