Are We Strangling the Digital Economy?

Published September 27, 2005

Advances in information technology, particularly involving the Internet and microprocessor design, have made the creation and transmission of text, sounds, and video in digital form extraordinarily fast, inexpensive, reliable, and flexible. This in turn has caused the convergence of technologies that previously delivered each type of information: printing (text), telephone and radio (sound), television and cable (video).

This convergence affects virtually all industries and institutions. E-commerce allows manufacturers to become retailers and retailers to become value-added consultants. Electronic Data Interchange (EDI) has allowed companies to radically reduce their inventories and engage in customized production.

Convergence demands similarly dramatic changes in public policy, yet many state and national regulations still follow a “command and control” model reflecting the Progressive Era’s faith in central planning and well-trained elites. This top-down model doesn’t work well when applied to the Internet, with its millions of users and trillions of transactions taking place each year.

Small Steps in the Right Direction

At the national level, Congress has recognized that the separate communications markets defined by regulations are swiftly being made obsolete by the Internet and other technologies of convergence. The Communications Act of 1996, though itself a flawed law, lifted many of the restrictions on entry into the telecommunications industry, sparking significant new investment, intense competition in some markets, and a wave of mergers and acquisitions.

While federal regulators loosened their grip on these entities, most states failed to follow suit. Only a few states, such as Texas just a month or so ago, are aggressively deregulating local monopoly cable franchises and welcoming new competitors into formerly protected markets. Most states are placing roadblocks in the path of industries seeking to compete successfully against companies armed with the latest digital technologies.

Bizarrely, local governments seem to be moving in the opposite direction, away from empowering consumers and encouraging competition and toward government-owned and -operated broadband utilities. Cities ranging in size from hamlets in Iowa to Philadelphia and San Francisco either operate municipal broadband networks or have proposals on the table to create them.

What Needs to be Done

The Heartland Institute has been leading the battle against municipal broadband, publishing policy studies and shorter commentaries and speaking at conferences and seminars around the country. Our efforts are getting noticed. In May and again in June, an attorney for the trade association for municipally owned utilities issued blistering attacks on our work. While the criticism was largely rhetorical, it was flattering to be singled out by the industry’s leading defender.

More generally, we need regulatory reform to avoid strangling the digital economy in its cradle. Six principles put forward by the Secretariat on Electronic Commerce at the U.S. Department of Commerce back in 1999 are still sound guides to public policy:

1. Governments must allow electronic commerce to grow up in an environment driven by markets, not burdened with extensive regulation, taxation, or censorship.

2. Where possible, rules for the Internet and electronic commerce should result from private collective action, not government regulation.

3. Governments do have a role to play in supporting the creation of a predictable legal environment globally for doing business on the Internet, but must exercise this role in a non-bureaucratic fashion.

4. Greater competition in telecommunications and broadcast industries should be encouraged so that high-bandwidth services are brought to homes and offices around the world and so that the new converged marketplace of broadcast, telephony, and the Internet operate based on laws of competition and consumer choice rather than those of government regulation.

5. There should be no discriminatory taxation against Internet commerce.

6. The Internet should function as a seamless global marketplace with no artificial barriers erected by governments.

To this list I would add the following two principles:

7. Protection of private property rights is an essential condition for effective planning and the long-term growth of the digital economy.

8. Effective public policy advocacy and education are required to overcome opposition to change by special interest groups if the public is to benefit from the many opportunities and efficiencies made possible by the digital revolution.

Each delay and barrier raised to the deployment of a national broadband infrastructure translates into lost opportunities for economic growth and wider access to markets. Policymakers need to act quickly to help the new converged digital economy reach its full potential.

Joseph L. Bast ([email protected]) is president of The Heartland Institute, publisher of IT&T News, and author of a policy study on municipal broadband published by The Heartland Institute in 2004.