- The Washington Times - Tuesday, December 12, 2000

Dick Cheney’s recent warnings about an economic recession deserve more attention than they received. Indeed, the high-tech sector of the economy already is experiencing a virtual meltdown. If not reversed, the high-tech meltdown poses big problems for the new administration.

They key to renewed growth lies in reversing the tax-and-regulate policies now hurting high-tech. Most of the needed changes can be made without legislation, and the rest have bipartisan support on Capitol Hill. A high-tech agenda would thus be a high-payoff item in early 2001.

The problems in the high-tech sector are real. Computer and software companies, content providers, telecommunications carriers and telecom equipment manufacturers are all seeing slower growth and big drops in market valuations. The drop in stock prices is stunning. Widely held, large-cap companies like AT&T, Dell, Hewlett-Packard, IBM, Intel, Lucent, Motorola and Worldcom are down more than 25 percent since August. The Nasdaq has fallen nearly 50 percent since spring, more than a third in since Sept. 1.

Virtually every major company in the tech sector has missed earnings or growth projections. From bankruptcies and restructurings in the telecom sector to growth shortfalls among PC makers, from cash shortages at Xerox to excess microprocessor inventories, the high-tech meltdown is more than a stock-market phenomenon.

What’s bad for high tech is bad for the American economy: The sector accounts for more than a third of real economic growth. Thus, the meltdown is already showing up in real GDP, and the effect of lower stock prices can only be to slow consumer spending. Some tech-heavy states are already seeing lower tax revenues, and reduced CBO and OMB projections of the federal budget surplus are soon to follow.

Lower surpluses will hurt efforts to move the new administration’s agenda through Congress, including new spending on programs like education and proposed tax cuts. As for Social Security reform, the Nasdaq meltdown will surely be used as evidence that relying on private investments is “too risky.”

The big part of the problem in the high-tech sector lies in bad public policy. The communications companies at the heart of the meltdown (like AT&T, Cisco, Lucent, Motorola and Worldcom) are suffering from Federal Communications Commission (FCC) failure to implement the Telecommunications Act of 1996. Rather than deregulating, the FCC has imposed complex new regulations, stopped or delayed key mergers, balked at making spectrum available for next-generation wireless and even threatened to impose telephone-style regulation on cable-based Internet services.

The Federal Trade Commission is nearly as bad. When it hasn’t been stopping or delaying mergers (like AOL-Time Warner) or filing questionable antitrust cases, it has, in the name of privacy, been pushing for new broad new regulations on information use.

High taxes are also part of the problem. Since 1990, tax rates on telecommunications services have gone up by nearly 50 percent.

Not all causes of our current economic problems can be cured, but the regulatory recession already under way in the high-tech sector can be. To do so, the new administration should quickly advance a bipartisan high-tech agenda that focuses on deregulation and lower taxes:

• Get telecommunications deregulation back on track by appointing a deregulatory majority at the FCC and advancing a limited but crucial slate of deregulatory legislation.

• Eliminate the short-run threat of privacy regulation by pre-empting new rules from either the FTC or the states pending completion of a new study of the issue.

• Repeal the 3 percent excise tax on telecommunications, which was put in place originally in 1898 to fund the Spanish American War.

• Extend the moratorium on the imposition of discriminatory state and local taxes on on-line commerce.

Every one of these steps will find strong bipartisan support in Congress, an especially crucial ingredient for success in the new administration’s early days. That’s why a tech-friendly agenda is likely to be high on the list once we are able to say, finally, the words “President Bush.”

Jeffrey A. Eisenach is president of the Progress and Freedom Foundation.

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