Wednesday, June 23, 2004

Last week, the Bush White House declined to seek Supreme Court review of a major telecommunications case. In the telecom, tech and media sectors, President Bush’s act of restraint came with all the punch of Ronald Reagan’s firing of the air traffic controllers, or Bill Clinton’s declaration the era of big government is over. A seemingly eternal cycle had been broken, the way cleared for something new to begin.

This decision emerged from a growing conviction market competition and strong property rights can better regulate the ever-changing wireless and wireline markets than inflexible bureaucratic micromanagement.

In this recent action, the Bush administration decided to scrap the regulatory scheme that governs wireline telephone and broadband service. Under the FCC scheme, regulators forced local phone companies to share their facilities with their competitors at government-set, below-market prices. They “kinda” owned their facilities and “kinda didn’t.”

The result has been neither the local phone companies nor their competitors had an incentive to build or improve facilities. In the opinion of many experts, this regulatory disincentive deepened a savage telecom and tech depression that has cost America 900,000 jobs and $2 trillion in stock valuation.

This approach is so contrary to what Congress intended in the 1996 Telecommunications Act that the U.S. Court of Appeals in Washington, D.C., vacated the FCC’s regulations. Though this was the third time the FCC rules were declared illegal by a federal court, bureaucratic pressure was exerted on the Bush administration to file an appeal that would have tied up the issue in the courts — and delayed regulatory certainty for the telecom sector — for as long as another two years. Theodore Olson, President Bush’s solicitor general, earned the gratitude of the nation’s consumers and investors when he swept that away.

Once the FCC finally rationalizes telecom rules and cleans up some disturbingly unclear regulatory language, investment to the sector should flow, jobs should ramp up and new industries should emerge.

Now that the regulatory overkill is being strained out in the wireline sector, it is time for federal regulators to next focus this same power of market competition and property rights to the wireless sector.

The airwaves used by the wireless industry constitute what economists call a “commons” — often likened to a pasture shared by many farmers. In allocating wireless spectrum, U.S. regulators have made two classic economic mistakes. One is the “tragedy of the commons.” Imagine that no one owns the hypothetical pasture, leaving it open to cattle from any local farmer. With a free resource and no responsibility for stewardship, that pasture will quickly be overgrazed. With spectrum rights and obligations poorly spelled out, we run the risk of allowing competing companies to interfere with one another, degrading the whole spectrum itself.

In other parts of the spectrum, regulators have also made a second classic mistake, the “tragedy of the anticommons.” Imagine that pasture again, but this time a handful of farmers can exclude outsiders and impose very burdensome rules on each other. If restrictions on spectrum use and transfer are too severe, the result is a grossly underutilized resource. Vast sections of the spectrum “lay fallow,” allowing petty struggles to effectively restrict access to wireless services in the U.S.

The only way to fix both problems is to allow companies to buy licenses to spectrum that they clearly own, and can flexibly trade with others. In short, only a genuine market for spectrum can allocate it in a way that allows new technologies to flourish.

President Bush says new telecom markets, like high-speed Internet or broadband, will spread “so long as the regulatory burden is reduced.” As if to round out the pasture metaphor, our rancher-president promised to “clear out the underbrush of regulation.” The FCC must follow the clear signals of the market, and the Bush administration’s lead — or accept blame if the telecom and technology sectors suffer another bad year.

Jay Lefkowitz is the former head of the White House Domestic Policy Council. John O’Quinn is a former law clerk to Supreme Court Justice Antonin Scalia.

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