- The Washington Times - Wednesday, July 10, 2002

President Bush traveled to Wall Street yesterday to call for stricter penalties for corporate scofflaws. It's surely good politics, and may even be good policy. But corporate bad guys aren't the cause of our dismal economic performance. More fundamental forces are at work, and economic recovery won't start until the administration addresses them.

The collapse of the information-technology sector is the leading cause of the U.S. economic downturn, and its recovery will undoubtedly play a crucial role in an eventual rebound. Both will happen a lot sooner if the administration abandons its "no policy is good policy" approach to the IT sector and takes some definitive steps to get things moving again.

The illusion, widely shared in Silicon Valley as well as in the corridors at the White House, is that the tech sector is largely unregulated and unsubsidized, and the best thing government can do is to continue "leaving tech alone." Whatever problems are there, the story goes, are the result of the excesses of the dot.com boom and "excessive exuberance" in the stock market. The second factor is partly true, but the rest of the truth is that a tech-sector recovery depends on creation of a predictable, market-driven policy environment.

The Bush administration's actions will determine how quickly the tech sector gets back on its feet, and four areas are key: broadband, intellectual property, spectrum and privacy. Each is complex, but the principles are simple: markets, property rights and regulatory restraint.

It's no secret that the leading policy issue for the tech sector is broadband deployment, and no mystery why: Without broadband, next-generation services like on-line music and movies, Web-delivered software and Voice Over IP telephony can't reach consumers. Building out a broadband infrastructure initially cable modems and DSL, but soon to be followed by fiber will spur hundreds of billions in new investment and drive demand for a new generation of PCs and other information appliances.

But the buildup is being slowed by FCC rules limiting the profits that telecom companies can make on new investments by requiring them to share facilities with their competitors at cost. Those rules need to be removed sooner rather than later, and the administration should tell the FCC to stop studying the issue and start deregulating.

At least as important as the broadband infrastructure is the content that will move over it. Napster proved there's a demand for on-line music, and KaZaa and other imitators are now demonstrating the same proposition with respect to movies. (The demand for both services, not surprisingly, is highest on college campuses, where broadband is ubiquitous.) The Napster model isn't sustainable for a simple reason: It's based on theft of copyrighted content. For a sustainable model to emerge, a system needs to be devised for restoring a reasonable degree of property protection for on-line content. Content providers, hardware manufacturers, ISPs and communication companies all need to be involved in creating such a system, but their incentives are so incompatible they'll never do it by themselves: Government needs to actively broker a compromise, and the Bush administration needs to call the first meeting.

Nowhere is the tech sector more dependent on government than when it comes to spectrum: Spectrum is government property, and virtually every aspect of its use is intensely regulated. From the digital TV fiasco to the NextWave auction disaster, spectrum policies have crippled progress on the next-generation wireless services that would otherwise be driving demand for everything from broadband-enabled wireless laptops to fixed-wireless alternatives to wireline telephony and cable TV.

The Department of Commerce and the FCC seem to understand it's time to move to a more market-driven approach on spectrum, but just as with the wireline business, the FCC seems to be more interested in studying the problem than fixing it.

In the short run, the administration needs to make more spectrum available for next-generation services; equally important, it needs to signal clearly that it's going reform the current system on an expedited schedule.

Last but not least, the administration needs to make clear its opposition to growth-killing regulation of the Web, especially on the privacy front. Last month, South Carolina Democratic Sen. Ernest F. Hollings' Commerce Committee passed privacy legislation that would slow the growth of e-commerce and hamstring all retailers who rely on information to target their marketing efforts. The FTC, under chairman Tim Muris, has indicated its opposition to such rules, but when the Commerce Committee passed the bill the White House was missing in action. The specter of a huge new regulatory burden won't help IT sector recovery, and the Bush administration needs to make clear it would veto anything resembling the Hollings bill.

There's more to IT policy than these four issues. State taxes and foreign tariffs on on-line commerce, new mandates associated with homeland security, high taxes on telecommunications services, and increasing regulation of the Internet by states and localities are just a few of the other growth killers slowing the tech sector's recovery. On all of these issues, it's time for the administration to take a stand in favor of markets, lower taxes and less regulation.

Technological progress has not lost its ability to deliver higher productivity and valued new products and services for consumers, and sooner or later the tech sector will recover. But timing is everything, and the timing will be heavily influenced by policy. For the Bush administration, the clock is ticking.

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

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