The Issue in Brief

By most measures, the economic boom of the 1990s was led by the tremendous growth in the Internet and related fields. For the past two years, however, that engine of economic growth has slowed drastically. Some parts of the technology sector, notably telecommunications, have faced a virtual meltdown, with bankruptcies rampant and rollout of new services slowed. Faced with massive overcapacity and misguided regulatory regimes, telecommunications and Internet firms are looking at an uncertain future, which hobbles prospects for a strong rebound of the U.S. economy.

It is not government's role to support this sector or to prop up any failing enterprises. Many of the problems in technology, in fact, are part of the natural evolution of new markets. When a new industry is born, it is not uncommon to see a vast flowering of new services and firms followed by a rapid downturn, during which the least efficient competitors and least valuable products are weeded out. This process is ultimately good for consumers and should not be short-circuited by the government. Policymakers should avoid "industrial policy" intervention, whether through subsidies, tax credits, or other forms of favoritism. At the same time, government should not maintain artificial constraints on technology markets that may limit recovery and growth. Thus, policymakers should seek out and eliminate regulations and taxes that interfere with the functioning of technology markets.

For example, Federal Communications Commission (FCC) regulations impede the growth of broadband telecommunications. High-speed, or broadband, communication lines vastly increase the usefulness of the Internet for consumers and businesses--making sound, video, and other features much more practical. Many see broadband leading to a surge of growth for the Internet, increasing the quality of life for consumers and potentially snapping the economy back into robust health.

The growing use of broadband is nevertheless hobbled by FCC regulations that require telephone companies to share facilities, such as lines and switching equipment, with potential competitors. Telephone companies have less incentive to make investments in new broadband facilities, since the returns would be shared by their competition. Moreover, the rationale for these rules--that telephone companies monopolized "bottleneck" facilities--does not apply to today's broadband market. Far from being a monopoly, telephone companies face intense competition from cable firms, which currently hold some two-thirds of this market.

Telecommunications is one of America's most heavily taxed industries, subject to dozens of levies imposed by local, state, and federal authorities. One particularly egregious fee is the 3 percent federal Telecommunications Excise Tax on telecommunications service. Originally imposed as a luxury tax to help pay for the Spanish-American War, this tax serves no purpose today except to raise money for the federal Treasury.

Some of the most promising new communications technologies involve no wires or cables. Instead, they use the radio frequency spectrum to provide service on a wireless basis. Despite significant improvements in recent years, the federal government limits the use and availability of spectrum. Not only do FCC rules constrain new applications, but a large portion of frequencies is held for use by federal agencies, precluding private-sector use. Policymakers should make licenses more flexible and allocate more frequencies for private, rather than federal, use.

Developing new Internet services involves much more than building a deploying hardware. For the new information pipelines to be valuable to consumers, there has to be something worthwhile filling those pipelines. Many content producers, however--notably, movie and music producers--view digital technologies more as a threat than as an opportunity, since digital technologies and the Internet make it possible for nearly infinite numbers of copies of a work to be made and distributed without any payment to the creator. Content creators warn that unless their intellectual property can be better protected, their ability to provide content will be diminished.

Policymakers must tread a delicate line in this area. While protecting intellectual property rights is important, too much "protection" could be detrimental. In particular, proposals to protect content by regulating the technical capabilities of personal computers and other appliances could distort and limit the growth of the Internet in the United States. The goal for policymakers should be to allow for better enforcement of property rights--both in the courts and through private self-help mechanisms--while not imposing new regulations on the technology.