End 'World Wide Wait' and Reboot the Economy

John Wohlstetter
Seattle Times
April 17, 2002
Print ArticleThe latest numbers show U.S. economic growth at 1.7 percent in 2001, about the same as during former President Clinton's first three years in office and half the rate during the tech boom of the late 1990s. That sure beats recession, but today's pace is well under the growth rate needed to fully fund Social Security, Medicare and other obligations for the aging baby boomers. And it's nowhere near reviving the tech-dependent Northwest economy.

The conventional wisdom is that Congress will stall any economic stimulus bill until 2003. The Bush administration has its hands tied with the Middle East and terrorism. And opposition to telecommunications deregulation is piling up in the Senate, just as mid-term elections approach.

But the Federal Communications Commission, under chairman Michael Powell, is beginning to re-evaluate its baffling interpretation of the 1996 Telecom Act. Powell proposes to liberalize existing rules that have held up investment in broadband infrastructure, and there's a good chance that companies won't be forced to share or under-price their precious new investments with competitors, as they do now.

The precise shape of the rules, though, remains unclear, and lawsuits are sure to slow the process. That hasn't stopped one state from jumping into the broadband breach, hoping to jump-start new network deployment. Michigan Gov. John Engler recently signed a trio of bills offering state tax credits for broadband investment. The state anticipates 500,000 new jobs and $440 billion of gross domestic product from the legislation, although those estimates may prove a bit rosy.

None of these positive signs points to the ultimate goal, which is recovery of the telecom sector itself. Since March 2000, not only has the Internet bubble burst, but leading telecom firms have seen their shares plummet. Stock in the long-distance sector is selling 70 percent below March 2000 values, top wireless firms are more than 50 percent off, and telephone-equipment firms and new optical-fiber carriers sell at over 90-percent discounts. Bankruptcy looks imminent for more than a few.

There are several reasons for this. Telephone companies suffered unfair regulation that subsidized new and untested firms with no real business plans. The collapse of the Internet bubble — as well as Enron's ignominious implosion — pushed investors toward companies with solid, quality earnings, which many telecom firms did not have.

The recession, combined with a contractionary monetary policy, didn't help. And let's not forget several scandals in the telecom companies themselves, including too-clever-by-half accounting and executives cashing in while their company pension plans tanked, victimizing shareholder-employees.

In all, telecom encountered a "perfect storm" of bad news that engulfed the sector. Things are getting better. The economic slowdown appears to have ended and monetary policy has eased considerably. Firms that survive "Enron audits" will find their share prices rewarded.

But it all falls short without broadband growth. This will require a fundamental restructuring of the telecom industry.

Put simply, long distance is no longer a viable stand-alone business. The artificial division between local and long-distance service that was forced on AT&T two decades ago was based on economic assumptions that were dubious even then.

Today, the consequences are clear: Every major long-distance carrier is watching as its core business contracts. Vertical mergers between local and long-distance firms, creating several combined local/long-distance carriers, should be accepted as the best way to re-ignite the tech economy.

Broadband needs this especially. Today's so-called fiber glut in long-distance service is actually neutralized by slow local networks at the receiving end. The torrent of bits between provider and customer crawls through the marginal broadband connections that exist at the local level today. Without greater local network capacity, the World Wide Web will remain the World Wide Wait.

Without vibrant broadband expansion to spur economic growth, the U.S. will be hard-pressed to meet its mushrooming financial obligations. And the public will have to wait longer for the services that follow broadband's lead.

John Wohlstetter is senior technology fellow at the Seattle-based Discovery Institute. He'll join Discovery Institute senior fellow George Gilder, Craig Mundie of Microsoft and John Stanton of Western Wireless at a "Re-Igniting the Tech Economy" conference in Seattle today. For information call 206-292-0401, Ext. 111.