Internet in the Balance

George Gilder
The Wall Street Journal
October 20, 2000
Print ArticleA few weeks back, Al Gore, mocking his own penchant for hyperbole, bantered with David Letterman's "Late Show" audience: "I gave you the Internet--and I can take it away." This is no joke. While Republicans waste time with captious critiques of the straight-arrow Gore's credibility and character, the real threat posed by the Democratic candidate is utterly ignored. Mr. Gore's policies would impose an energy, tax and regulatory garrote on the Internet.

The Kyoto Treaty alone would be devastating to the Net. At a time when global temperatures are significantly lower than they were 1,000 or 3,000 years ago, Mr. Gore would impose an energy clamp on the U.S. economy over the next decade. Yet billions of new Web servers and Web devices are scheduled to come onto the Net during this period, while billions of now-poor Asians will also be drastically increasing their energy usage.

With each Web device draining as much as a megawatt-hour a year, a billion always-on Internet computers--together with the factories that build them and scores of billions of watt-hungry embedded processors--will account for an estimated total of four thousand trillion watt-hours, or close to half of the world's current electricity use. With the restrictions negotiated in Kyoto, a global broadband Internet cannot happen.

Tax Gouges

On the tax front most attention focuses on direct sales taxation, but the key taxes imposed on Internet expansion are income taxes. Mr. Gore's most passionate commitment is to bar all tax reforms that reverse the Clinton era income-tax gouges. Mitigated by the one-time effect of the collapse of inflation and thus of real capital-gains tax rates, the Clinton tax hikes have so far had a mild impact.

But inflation cannot collapse twice. Mr. Gore's adamant hostility to tax-rate reductions is already inhibiting Internet growth by halting stock market expansion. With new sieges of taxation and spending, Mr. Gore would create not a delusory "lock-box" for Social Security, but a "lock-out" of the entrepreneurial economy on which the Internet subsists.

Perhaps most menacing is the threat of Gore regulatory policies and attitudes on the advance of wireless technology. Wireless access will fuel the next phase of Internet growth.

But the environmental and regulatory passions central to Mr. Gore's entire career are now driving wireless innovation overseas.

As Eli Noam of Columbia has said, "If we can agree to oppose government industrial policies to subsidize telecom, cannot we also agree to oppose the levying of huge special taxes on the industry?" Yet the proudest achievement of Mr. Gore's favorite agency, the Federal Communications Commission, is a vast new tax on the wireless Internet.

That tax is the spectrum auction process, and it is already driving wireless development out of the U.S. and to countries, such as Japan, Korea and Finland, that lack the tax. Spectrum auctions are scheduled to collect a cumulative total of some $50 billion (more than twice the industry's total annual wireless investment) and to compound the existing controls on the industry's spectrum use with ever more encompassing financial regulation.

In replacing the previous political assignment of spectrum, Congress was attempting to limit the power of FCC bureaucrats and introduce market discipline. But under Mr. Gore and his friends, any regulatory opportunity becomes an arena of endless meddling and industrial policy. The auctions manage a "market" in which most spectrum is free, governed by capricious rules, and devoid of effective aftermarkets. When some small proportion is auctioned off at exorbitant prices because the government has made scarce what is naturally abundant, the result has nothing in common with free enterprise. Predictably the auctions have become a briar patch in which only bureaucrats and telopolies can thrive.

Recognizing that start-ups are the font of much technological innovation, however, Congress specifically told the FCC to reserve some spectrum for new entrants, chiefly to what came to be known as "C-block" companies. Embroiled in endless politics, the C-block auction became a disaster. Between the end of the bidding and the agency's actual award of licenses the revenue-proud and pettifogging FCC flooded the market with spectrum and constantly changed the rules. Prices predictably plummeted, making it impossible for the C-block companies to attract financing and consummate their bids.

By now, though, some of the original "winners" are ready to emerge from bankruptcy, pay their obligations in full, and move forward toward deployment. The FCC has flatly refused to accept payment. Instead--to the cheers of incumbent carriers fearful of new competitors (and finagling for the spectrum for themselves)--the agency said it would confiscate the new entrants' spectrum and give it to the incumbent carriers. Undeterred by adverse rulings--including a U.S. Bankruptcy Court decision that caustically termed the FCC's actions "repossession by ambush"--the agency is litigating this issue in U.S. courts of appeal in the 2nd, 4th, 5th, 7th, 10th and District of Columbia circuits.

As with all forays into industrial policy, the predictable result is to subsidize the past in the name of progress, enlisting government firmly on the side of the largest and most moribund companies and thwarting innovation and entrepreneurial energy. The danger of Mr. Gore is not the quasi-populist hostility to big business he pretends. It is his technical conceit and his all too real lust to control--and take credit for--what he did not create.

Cock-a-doodle-doo

In the new economy as in the old, property rights are indispensable for the investment-intensive development of any technology. But when the government's guiding ethic is "what's mine is mine and what's yours is negotiable," companies cannot summon the massive investment required to bring new technology to life. Regarding property rights as everywhere subservient to regulatory caprice, Mr. Gore and his associates live and breathe in the regulatory state. Thus, like the cock crowing at the sunrise, Mr. Gore imagines that his legislative incantations about "information superhighways" were crucial to the creation of the Net in the first place. A cock-a-doodle-doo policy cannot bring innovation, but capricious regulation can bring Internet growth to a halt.

Yet another area where the Gore mentality is menacing to Internet growth is the issue of the health impact of cellphones. There is no evidence that users of cellphones suffer any damage from them. But cellphones inexorably use microwave radiation and antenna towers opposed by Mr. Gore's followers and implicitly condemned by Mr. Gore's book, "Earth in the Balance." Microwave chip factories are dense with poisonous chemicals, and nearly all Internet devices are manufactured with materials deemed unacceptably toxic by some. A Gore administration will be filled to the brim by people who regard an occasional Erin Brockovich anecdote as more persuasive than global statistics of longevity and epidemiology improving everywhere that the new economy spreads.

With Silicon Valley already suffering power brown-outs as a result of the energy fears and chemo-phobias promoted by Mr. Gore, a Gore presidency will be predictably deadly for the American electronics, energy and chemical industries that enable the Net. While foreign countries move rapidly forward with nuclear power and breeder reactors, the U.S. will remain mired in Luddite loathing of radiation and industrial technology. Mr. Gore's policies put the Internet in the balance.


By George Gilder. Mr. Gilder, author of Telecosm: How Infinite Bandwidth Will Revolutionize Your World (Free Press, 2000), is an investor in Internet and wireless stocks.