- The Washington Times - Friday, November 1, 2002

As the Bush administration turns its attention to the flagging economy, one of its biggest challenges iscleaning up the mess the Clinton administration made of telecom deregulation. For inspiration, it ought to take a lesson from another recent policy failure: Forest management.
Simply put, Bill Clinton's Federal Communications Commission tried to regulate its way to a competitive telecom market by subsidizing the creation of lots of competitors. The result of this industrial policy approach was to create too many companies competing for too few customers. Some of those companies have already fallen. Others are, in effect, standing deadwood, waiting to come down.
The policy choice is whether to prune the deadwood or prop it up. And whether you're talking about dead telecom companies or dead trees, the right answer is the same: For the sake of the forest, the deadwood has to go.
The place to start pruning is with Worldcom. As much as any other company, Worldcom was a creation of the policies implemented by Clinton FCC Chairmen Reed Hundt and Bill Kennard. For this, we have as our source Mr. Hundt himself, who writes in his autobiography that he successfully pushed for a telecom law that would "give the FCC the power to create actual competition," and so guarantee "a share of the $100 billion local telephone market for AT&T;, MCI [now part of Worldcom] and other new entrants." Key support for Mr. Hundt's wish list came from then-Senate Majority Leader Trent Lott of Mississippi, he says, because Worldcom Chairman "Bernie Ebbers had his headquarters in Jackson, Miss.," and Mr. Lott was "bent on serving" Mr. Ebbers' interests.
The end result of Mr. Hundt's experiment are now well known: 500,000 jobs lost in the telecom sector in the last two years, dozens of companies in bankruptcy, hundreds of billions of dollars lost to investors forever. And then there's Worldcom, whose management, when it came time to face up to reality, decided instead to cover up the problems by cooking the books to the tune of nearly $10 billion.
Now in bankruptcy, Worldcom still has not faced up to reality. Indeed, it has a plan. As CEO John Sidgmore told the Wall Street Journal, "If we can emerge from bankruptcy without the debt load, we can have a strong position in the industry. We might emerge with the strongest balance sheet."
What a concept. Mismanage a company into bankruptcy, commit arguably the biggest accounting fraud of all time, write off your debt, and go forward as though nothing had happened. And, by the way, the senior executives at least the ones who don't go to jail get to keep tens of millions of dollars in profits from well-timed stock sales.
The unfairness of all this is multiplied when one considers the companies that took a more honorable course companies that eschewed fraud and bankruptcy in favor of honest accounting and tough business decisions, and which now face the prospect of competing with a debt-free Worldcom. Sprint CEO Bill Esrey spoke for many of them when he said in a recent speech that "you cannot overestimate the impact of Worldcom's malfeasance on the telecom industry. At Sprint, we kept asking ourselves what we were doing wrong because we couldn't generate the numbers Worldcom claimed."
Last week, Worldcom released its first post-bankruptcy report based on honest numbers. The results: $4.9 billion in revenues, $429 million in losses, all in just the last two months. What does it mean? Two words: Standing deadwood.
What are policymakers to do? The main decision whether Worldcom will be allowed to reorganize through Chapter 11 or be forced to liquidate through Chapter 7 will be made in federal court. But the FCC and other government agencies will have a big say in the outcome, mainly through regulatory decisions now before the FCC, and through decisions on whether to continue procuring Worldcom's services.
In speeches, Bush FCC Chairman Michael Powell has criticized the Clinton administration's "pro-competitor industrial policy" for "promising that all competitors could be salvaged and sustained in the name of competition. We must not confuse change that adversely impacts a particular competitor as synonymous with hurting competition. It is exactly that kind of thinking that invites political power struggles to compel policy to choose sides between competing supplicants rather than advance sound economic structures." These are the words of a pruner.
But when it comes to Worldcom, the Powell-the-pruner has been mysteriously replaced by Powell-the-proper-upper. "We continue to be focused on what policy can do and regulatory authorities can do to ensure the economic viability of competitors," Mr. Powell said in a recent briefing on Worldcom. Government agencies, he went on, should be "conscious of the importance of a carrier like Worldcom," and not "inadvertently contribute to a self-fulfilling prophecy in which the company is harmed." In other words, don't even think about switching critical telecom business to other carriers just because, among other things, they obey the law.
Which Michael Powell is running the FCC, the one who would prune the deadwood or the one who wants to prop it up? The answer will determine whether the worst of the telecom meltdown is behind us or whether there are still hotter and more destructive fires ahead.
In resolving all this, Mr. Powell ought to heed some advice offered to Mr. Hundt, who candidly reports on page 179 of his book he was advised by FCC economists in 1996 that his policies might "bring the Dow crashing down, shake consumer confidence, and even threaten the president's re-election." It was true then, and it's still true today.

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

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