Telecom Policies Outdated

Published February 1, 2004

The World Bank recently released a study concluding that the least regulation fosters the strongest economic growth. The study was a yawner in much of the United States, where policymakers generally understand that regulation stifles innovation and growth. Indeed, the study was targeted at Third World countries.

But there is one sector of the U.S. economy where we do business like a Third World country or, more accurately, like the central planners of the former Soviet Union, and that is in the telecommunications industry. Central planning and price controls have become the official telecommunications policy of the United States. Yes, you heard that right. In the home of free markets and limited government, telecommunications prices are set not by markets but by bureaucrats at both the state and federal levels.

At the state level, public utility commissions set prices, determine entry and exit into the marketplace, control service levels, levy fines, and generally control the industry. At the federal level, the Federal Communications Commission determines prices with a formula and decides what products can be sold.

Because bureaucrats rather than the marketplace determine so much of success and failure in telecommunications, companies have been forced to spend their energy on lawsuits, lobbying, and political wrangling rather than on new products and customer services.

We all recognize competition is good. But in the telecommunications lexicon, the word “competition” has become distorted to mean “equilibrium.”

Telecommunications regulation attempts to keep everything just as it is–to prevent any one company from gaining too much market share and to make sure that even undercapitalized businesses and those with unworkable or outdated business models remain viable.

So, if a particular company is doing well or shows signs of gaining market share, the regulators make a decision that favors their competitors. Innovative technologies are, by definition, busters of equilibrium. When government regulators see their mission as “preserving a level playing field,” they are working against economic dynamism and growth.

The costs of that failed telecommunications policy are real: Job losses among telecommunications providers and equipment manufacturers and the loss of new and innovative products and customer services.

There is a way out of this mess. Telecommunications policy should move toward deregulation, with prices being set by markets, not by bureaucrats, and with consumers, not regulators, driving service levels.

States that want to enter this new century with telecommunications policies designed for the future, rather than policies designed for the pre-World War II era, should recognize the new telecommunications reality and narrowly redefine the missions of their public utility commissions.

Those agencies should be protecting consumers from real and demonstrable harm–and not from some imagined or potential harm. Our telecommunications policies are out of sync with economic and technological reality, and the cost has been a telecommunications depression that has rippled throughout the overall economy.

It is time for elected bodies at both the state and federal levels to rein in their regulators, learn from their mistakes, and put an end to telecommunications price controls and central planning.

Tom Giovanetti ([email protected]) is president of the Institute for Policy Innovation, a Dallas-based public policy research organization. This essay originally appeared in the November 28, 2003 edition of The Dallas Morning News.