This article appeared in Upside (March 1993)
Above all, Mr. Clinton needs a coherent vision of government's proper economic role in the Information Age. Just as the steam engine and the Industrial Revolution massively enlarged the federal government's economic role, the microprocessor and the Information Revolution are shrinking it. If you doubt this, just ask a Treasury official how much direct control the government still has over exchange rates, international investment flows or interest rates. In the decade ahead, as rapid advances in telecommunications make capital and technology even more mobile, the economic power exercised by national governments will shrivel. Governments can slow this historical juggernaut, but they cannot stop it.
Bill Clinton seems to understand this, but like any leader who takes charge in a time of radical social and economic transformation, he will be sorely tempted to use the old policy prescriptions one more time. Even if he believes the traditional solutions won't work, it's politically safer to fail with the familiar than it is to try a fundamentally new approach.
Consider, for example, one of the key technology policy choices discussed in Little Rock. Robert Allen, chairman of AT&T, said, "A focus on infrastructure including information networks, commercial networks which are interconnected, interoperable, national and global, needs to be encouraged." Allen argued for increased government investment in civilian research, transfer of that technology to the private sector, and cooperation in establishing network standards. But he also said, "I think the government should not build and/or operate such networks. I believe the private sector can be incented to build these networks."
Hearing this, Al Gore countered, "But with the advanced high-capacity network like the National Research and Education Network (NREN), it does seem to me that government ought to play a role in putting in place that backbone. Just as no private investor was willing to build the Interstate highway system but once it was built, then a lot of other roads connected to it, this new very broad band high capacity network, most people think ought to be built by the federal government and then transitioned into private industry."
Clinton duly noted the conflict between Allen and Gore and switched to another subject. But soon the President will have to decide. What's the best way to create a nationwide fiber network that will spawn a new generation of video-based information industries? If the network is technically botched, too expensive, or finished long after those being built in Japan and Europe, the chances for an American head start in these new industries will be squandered. Should Clinton take Al Gore's advice and have the federal government build a "fiber optic superhighway," or should he pursue Robert Allen's strategy of having government create an economic climate that will encourage business to build it? It all depends on your view of government's role in the Information Age economy.
Ironically, though Gore was the Senate's leading spokesman for high-technology, his advice is classic Machine Age thinking. Gore simply cannot conceive how anything as vast and complex as the gigabit network could come into existence without the active control of the central government. Like so many others, he does not comprehend that modern markets will provide anything that is both technically feasible and valuable to customers.
Gore forgets that it took nearly forty years to complete the Interstate and that too much of it links great urban centers like Starkville and Columbus, Mississippi, just because some Congressional committee chairman wanted a juicy slab of pork. Hailing the Interstate as an example of what the federal government does best, Gore overlooks the system's appalling state of disrepair and its nightmarish traffic congestion.
More important, Gore's advocacy of a federally owned and operated NREN focuses the telecommunications policy debate on the wrong problem. Building a high-capacity backbone for the national fiber network is relatively easy. Any of several private firms can build and install the NREN for the supercomputing centers that want to be on it. The technology is already here, and since a few strands of fiber take up considerably less acreage than six lanes of concrete, the government's power of eminent domain is not needed.
America's fiber optic future is blocked not by the absence of a gigabit backbone, but by the lack of local access. To make any superhighway worth building, it must connect to a web of local roads and driveways. But nearly twenty years after the invention of optical fiber, virtually no fiber reaches into American homes, schools, and offices. Is this because the federal government hasn't done enough? No, it's because the government has done too much -- of the wrong thing.
Under powers granted by the Federal Communications Act of 1934, public utilities commissions (PUCs) in all fifty states regulate every aspect of local telecommunications. Though most local phone systems are owned and operated by the seven regional Bell operating companies, PUCs control the services offered and how much they cost.
Since the prime objective of the 1934 Communications Act was to assure universal access to phone service, the whole regulatory system is designed to minimize the basic monthly phone bill. To reach this goal, the pricing system uses revenues from high volume business customers to subsidize low volume household customers. Overall, phone service prices are set just high enough to offset the cost of invested capital.
The consequences of this regulatory system are entirely predictable. Like subsidized farmers, phone customers use their voting power and the PUCs to defend their cheap phone rates. And whenever possible, high volume business customers switch to independents, like Teleport Communications Group, which cater exclusively to overcharged users.
For their part, the phone companies naturally try to minimize the capital investment that goes under the control of the PUCs. Instead, they channel their profits into services like cellular and telecommunications systems in foreign countries. Pacific Telesis, for example, recently spun off its cellular business and has made major investments in Germany.
The damage done by our regulatory system was recently documented in a new study by the University of Southern California's Center for Telecommunications Management. Comparing the performance of 24 countries, the study found that in areas like digital switching, network intelligence, as well as fiber optics, the U.S. lags far behind its competitors. For the past five years, U.S. investment in public network infrastructure ranks 10th of the 15 nations reporting figures. Even worse, in a time of stunning technological progress and rapid obsolescence, asset lives for equipment on U.S. local networks are increasing. Japan, Great Britain, and Singapore are now writing off and replacing equipment twice as fast as most U.S. phone companies.
In short, the price control system mandated back in 1934, when copper-wire telephones and AT&T were true monopolies, now makes it unprofitable for phone companies to invest in state-of-the-art networks. The lack of local fiber is but one symptom of this command-and-control scheme.
Only by letting the market work will we create a viable 21st century information infrastructure. With the new options of cellular, wireless, coaxial, and fiber, the "natural monopoly" rationale for price-fixing PUCs has vanished. Phone access for the poor can be more efficiently provided by phone stamps (like food stamps) than by suppressing rates for everyone. Besides, as the history of long distance deregulation shows, vigorous competition would transform today's lumbering phone company bureaucracies, drive rates down at least 30%, and unleash a tidal wave of network investment.
If Bill Clinton chooses a technology policy that stacks new layers government intervention atop the wreckage created by the existing regulatory system, we are headed for competitive disaster. Rather than wasting taxpayer money on Al Gore's techno-pork dream, Clinton should follow Robert Allen's advice by discarding what has become the "anti-technology policy" inherited from Franklin Roosevelt. But finding the courage to do so will require Clinton to abandon Machine Age solutions for a new vision of government's economic role in the Information Age.