Capitalism Can Cure Telecommunications

This week at the annual Telecosm conference at Lake Tahoe, Steve Forbes argued that many regulations, which mainly expand the power of government officials, are like a cancer that eats away at the benefits of capitalism. He’s right, and that’s exactly why the Telecom Act of 1996 needs to be revised.

Competition among capitalists results in innovative ideas and better ways to serve customers. But in America’s telecom sector, the rules of the game have been skewed so that real competition is limited and the protection of property rights, a key element of capitalism, is weakened.

Consumers Hurt

One of the most cancerous provisions of the 1996 act forces telephone companies like the Bells to share their networks with rivals at regulated rates. That is, Congress gave officials at the Federal Communications Commission (FCC) authority to declare when telecommunication property, such as switches and other network elements, should be shared and at what price.

This significant power that regulators hold over telecommunications providers stymies growth because it directs the efforts of business away from the marketplace and toward the courts and lobbyists. And it’s not just some faceless “business” that suffers the consequences of government power-grabs. Consumers are hurt in terms of lost innovation, economic growth and jobs.

According to a recent study — by economist Tom Hazlett of the Manhattan Institute, Coleman Bazelon of Analysis Group, John Rutledge of Rutledge Capital Research, and Deborah Allen Hewitt of the College of William and Mary — the over-regulated telecommunications industry lost 380,500 jobs between March 2001 and May 2004. That’s a 29 percent drop, even as employment increased in other areas.

The Cure

The study also warns that “misguided U.S. regulatory policy jeopardizes the nation’s telecom industry, and this, in turn, could jeopardize the United States’ role as the world’s leader in technology.” This is not an exaggeration. Future technologies will depend on an always-on network, and if America can’t provide fast, efficient service in this respect, its economy will fall behind. Fortunately, the study also outlines a specific plan to cure the nation’s telecommunications ills.

First is a call to phase out mandatory network-sharing rules and immediately end regulated wholesale rates set at theoretical costs. This would go a long way toward restoring property rights in the telecommunications sector. Another recommendation is to exempt high-speed cable modem and digital subscriber lines from common carrier regulations in order to boost competition among various methods of accessing broadband.

And because regulatory power-grabs are not limited to the federal government, the plan to save America’s communications infrastructure also recommends exempting Internet services from state telephone service regulations. If these and other regulatory reforms are followed, the carefully researched study predicts a healthy telecommunications recovery.

Investor uncertainty would start to fade and $58 billion in new capital would be invested over five years. Increased productivity would add an additional $467 billion to the GDP and average employment levels would go up more than 212,000 jobs over five years. Given these numbers, it will be disappointing if policy makers don’t jump to implement reforms immediately. Of course, if history is any indication, Americans should brace for the worst.

Slow Reform

“It took 23 years to get the last telecom reforms through Congress,” lamented co-author Tom Hazlett.

Indeed, and it should not be forgotten that misguided lobbying on the part of interested companies has fed regulators’ desire to power-broker in the marketplace. Businesses should be very careful not to play both sides of the fence by supporting deregulation but also seeking advantages over competitors by leveraging special favors from legislators.

Today technology changes faster than ever and wields major impact on a nation’s success. The way to ensure that America stays on top is to remove cancer-like regulatory policies that eat away at the positive effects of capitalism. Real jobs and people depend on it.


Sonia Arrison, a TechNewsWorld columnist, is director of Technology Studies at the California-based Pacific Research Institute.


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