I have great news. I have found
the free lunch that economists are always looking for. A policy that
will spur capital spending, increase growth, create jobs, reduce inflation,
and help us remain the dominant economy in the world. It will even shrink
the budget deficit. All we have to do is deregulate the telephone sitting
right by your elbow.
High speed communications technology has produced huge
productivity gains for the American economy in recent years by making
large American companies much more efficient producers. Making high
speed communications available to small and medium sized businesses
and households, by replacing copper wire with fiber optic cable, will
produce even larger gains in the future. But invasive regulations, price
controls, and a dysfunctional policy process have created a state of
confusion in which no responsible business manager can see far enough
into the future to approve the almost $90 billion in capital projects
needed to make it happen. Unless someone replaces policy confusion with
clarity those investments will never take place.
The telecom industry today is frozen in a state of nuclear
winter. Investment in telecommunications infrastructure has collapsed
from $118 billion in 2000 to just $45 billion in 2003. The eye of the
hurricane is wireline investment—the lines that bring phone service
to your home or business—where capital spending fell by almost
two-thirds over the same period, from $85 billion to just $30 billion.
One half the nation’s fiber optic plants are closed, 75% of fiber
optic workers have been laid off. R&D budgets at Lucent and Nortel
have been slashed by a third. Equipment manufacturers like HP and Dell
and software companies like Microsoft are shifting operations to China,
India, and Malaysia. Market capitalization in the telecom industry fell
$2 trillion. 500,000 people lost their jobs.
It’s no surprise, in light of this telecom capital
spending depression, that growth is weak for the overall economy. The
Commerce Department reported last Friday that GDP grew by 3.3% growth
in the second quarter, about half the normal growth we see in the first
year of a recovery. Worse still, defense spending was responsible for
1.7% of that growth—ex-defense the economy grew at a meager 1.6%
annual rate. There are bright spots—the dividend tax cut has pushed
stock prices up 20% since Spring. But the incredible American job machine
just isn’t working.
This is a big problem for President Bush and the congressional
class of 2004. Three million workers have lost their jobs in the 30
months President Bush has been in office. Weak growth has undermined
tax collections which, along with the politically contentious costs
of policing the gulf, have pushed the budget deficit to nearly $500
billion. The President has responded with a growth program and has appointed
a manufacturing czar. Treasury Secretary Snow has been traveling the
world talking the dollar down in an attempt to spur exports. Congress
has passed laws cutting the number of skilled foreign work visas in
half. None of these will do the job.
We need a policy that will increase capital spending,
spur R&D efforts, boost growth, and generate enough tax revenues
to decrease the deficit. That policy is telecom deregulation. Not the
phony deregulation we have experienced during the seven years since
the 1996 Telecom Act; real deregulation.
The productivity and growth boom of the 1990’s
was driven by the increasing speed and reliability of the telecom and
technology networks. That productivity boom is still going on—the
most recent figure is 6.8% per year. As American workers found out,
productivity growth has a dark side too, at least in the short run.
If the Federal reserve fails to create sufficient demand to take the
extra product off the shelves the result is job losses and deflating
prices. But productivity is the engine of growth and rising living standards
and the source of our dominance in the global economy. We need all we
can get.
The future of telecom is high-speed communications—broadband
in industry jargon. Last week the New Millennium Research Council released
a study by Robert Crandall, Charles Jackson, and Hal Singer that showed
broadband deployment to households alone would generate $140 billion
in new investment, increase GDP by $414 billion, add $500 billion to
consumer welfare, and create 2.7M new jobs over the next decade. All
these things—growth, jobs, the profits from increased capital
spending, and the dividends and capital gains earned by investors—mean
increased tax collections and smaller budget deficits. These numbers
would be still higher if they included the benefits of broadband deployment
to businesses.
These estimates show what a wonderful world it would
be if we had the policies in place to allow the broadband rollout to
proceed. Alas, that is not the case. Instead, we have an almost Orwellian
policy which forces some companies (the regional bell operating companies,
or RBOCs) to build and maintain the network, then forces them to provide
access to essentially all the elements of their business to other companies
(AT&T, MCI and others) at discount prices set by local political
authorities. The result, according to a Merrill Lynch report, is that
RBOC earnings this year will be $2.3 billion lower than they would be
in the absence of the FCC’s forced sharing policy. This corresponds
to more than $20 billion of lost market value.
These policies undermine capital spending—the capital
spending we need to restore economic growth--by reducing the after-tax
return on capital invested in future projects. The gridlocked FCC makes
the problem worse. In February, the FCC released a four page preliminary
summary of the rules it would impose on telecom companies regarding
the forced sharing of network elements described above. Details were
to follow shortly. The final order was not released until August 28,
six months and one day later. Policy uncertainty of that sort erodes
market value and stifles capital spending by causing investors to increase
the risk premium they demand to offset the risk of having their capital
appropriated by the regulators.
Policies which lower the return on capital invested in
US telecom assets have an even worse impact in a global economy. There
is an intense global competition for capital underway. The US and China
are the two main contestants. Where US growth has slowed, China’s
has accelerated. Industrial production in china grew 17% in the most
recent year. China is cooperating with Japan and Korea to develop new
high-tech standards. They are taking steps every day to make China a
destination resort for capital. They are succeeding. In recent weeks
Nortel announced a new $200 million R&D facility at the Beijing
campus, Lucent announced a $230 million contract with china United Telecommunications,
and Intel announced their new high speed Itanium 2 chip will be used
to network 100 Chinese universities.
It doesn’t have
to be this way. In a matter of weeks, the President and the Congress
could direct the FCC to take the steps to clarify policy and turn telecom
investment in broadband around. The resulting increases in capital spending
and growth would fuel a second major wave of productivity gains over
the next decade which, in turn, would help to keep inflation and interest
rates in check, support higher stock prices, and generate the tax revenues
we need to close the budget deficit. With the election just over a year
away, this is one free lunch the Administration and Congress should
eat quickly before it gets cold.
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