As documented in the brisk book A Manifesto for Media Freedom, this cornucopia of media options has led not to celebration of the marvelous diversity that free choices and technology have brought us. Rather, it has prompted forces from both sides of the conventional ideological spectrum to agitate for regulation and restriction of the ownership and delivery of information and entertainment.

The Manifesto, by Brian C. Anderson of the Manhattan Institute and Adam D. Thierer of the Progress and Freedom Foundation, is a quick and useful survey of various media regulation realities and proposals, and of cogent explanations of why such regulations range from unnecessary to powerfully damaging to American media users.

The book’s greatest virtue is how thoroughly and compactly it delivers the good news about the scope and availability of media. Many antimarket liberals in America are obsessed with fears of too few owners controlling too many different kinds of media outlets, and thus plump to further tighten federal rules about media ownership concentration. (Earlier attempts by the FCC to liberalize those rules were knocked out by a federal appeals court back in 2004, and this year Congress squashed a new attempt by the FCC to loosen them.) Obsession with ownership rules is based on the same misunderstanding that allows for government regulation of broadcast media of a sort that would never be tolerated for other media: that an inherent scarcity requires government to manage distribution and ownership, despite the First Amendment.

As Anderson and Thierer point out, scarcity is far from an issue when it comes to how Americans get their information and entertainment nowadays. America has nearly 14,000 terrestrial radio stations, twice the number in 1970. (And we now have satellite radio as well.) Cable and satellite TV reach 86 percent of American households. And they are not all controlled by a small cabal of sinister megaconsortiums. As they note, a “2002 FCC survey of ten media markets–from the largest (New York City) to the smallest (Altoona, Pennsylvania)–showed that each had more outlets and owners in 2000 than in 1960.”

New means of consuming, storing, and using media are spreading with wildly increasing speed. It took telephones 70 years to go from introduction to 50 percent household saturation; it took Internet access around 15, and MP3 players (which allow portable listening of not only music but all sorts of news and information “podcasts” available for free) even fewer. And the average price for every variety of contemporary electronic media device has fallen anywhere from 17 to 41 percent in the last five years.

All that good news misses the best and most important aspect of our media present and future–the uncountably huge number of websites where everyone everywhere is able to communicate with everyone else. Such a world of free media plenitude doesn’t seem to need much in the way of managing.

But such wondrous profusion of cultural richness–and no one person is going to value or approve of all of it, but that’s exactly the point–means nothing to elites who lament that everyone isn’t consuming the media that they think people should be consuming. This manifests itself in all sorts of regulatory moves, from attempts to censor or hobble innovations such as video games and social-networking sites, to the desire to force us all to pay for “public” broadcasting that can’t survive in the marketplace. As Anderson and Thierer note, the political world is rife with people who “won’t rest until all of us are watching, reading, and listening to the content that they prefer.”

They are savvy in pointing out the most dangerous “media regulation” of all, masquerading as “campaign finance reform,” which restricts all except the owners of officially approved media from speaking out freely on candidates and issues within an arbitrary period before an election–and trace the dangerous moves to enforce such tyranny on websites and radio.

The authors are, I think, alarmist in insisting that the Obama administration or the current Democratic Congress will move to reinstate the clearly damaging and unconstitutional Fairness Doctrine (though the Supreme Court unconscionably upheld it in the 1969 case Red Lion v. FCC). But they are dead on about how it crippled, and would cripple again, lively discussion by enforcing “equal time” on broadcast media in political controversies.

The overall message of this book is optimistic: “The new media abundance will improve democracy, fire creativity, and expand individual and communal knowledge and know-how.” But the authors know this will only remain true if citizens make sure those who would regulate away the advantages of free-flowing new media are kept in line.

You’re sitting in an airliner that has just landed and is taxiing to the gate. The flight attendant comes on the public-address system to say, “Welcome to New York’s LaGuardia Airport. Please remain seated until the captain has turned off the seat-belt sign. You may now use your cell phones. All other portable electronic devices [as though you would be carrying nonportable devices] must remain turned off.”

What is perplexing about this announcement is that the one and only electronic device you are now permitted to use is the one you were not allowed to use throughout the flight, and the devices you were allowed to use in flight may not be used now. That makes no sense.

If cell phones, as we’re told, pose a threat to airliner communications, why isn’t that the case while the plane is on the ground? And if Gameboys, iPods, and portable DVD players don’t interfere with communications at 30,000 feet, why do they do so at zero feet? Are we being told the whole truth?

Another thing that makes no sense is why a rule—the one banning cell-phone use in flight—that is described as an aviation safety precaution was promulgated by the Federal Communications Commission (FCC), not the Federal Aviation Administration (FAA). The FAA oversees safety in the air. The FCC governs the broadcast spectrum. To be sure, the FAA supports the ban, but it is nonetheless an FCC rule. And it is the FCC that has invited public comment on the proposal to eliminate that rule.

A theory that makes sense of at least some of these puzzling facts is that the ban is not about safety at all. Perusing the newspapers and magazines, I find that no evidence supports the charge that cell phones pose any threat to communications. According to a 1999 Wall Street Journal story: “In 1995, [Boeing] engineers at the aircraft maker conducted a four-hour test on a 737, setting up about 20 cell phones throughout the jet and monitoring the plane’s radios, navigational equipment and other controls. A variety of flight conditions were simulated. The results: ‘Absolutely nothing,’ says [Boeing senior electromagnetics engineer Bruce] Donham.” One writer wonders why risky phones would be permitted in airport terminals and parking lots. USA Today reported last year that American Airlines and the phone maker QualComm performed a successful FCC/FAA-approved test over west Texas.

If the ban is not about safety, what then? Money, perhaps. Various articles report that using cell phones in airliners can, with current technology, disrupt cellular service on the ground. I also read that it would be hard, again with current technology, to bill cell-phone customers who are moving between towers at 300 miles per hour. Then there are those pricey AirFones installed in the seats that the airlines want us to use. Why pay a minimum $2 a minute if you can use your own phone? (Apparently most people prefer no phone at all to one at that price.) Is the FCC ban a safety cover for financial interest?

Which brings us to the question: should passengers be allowed to use cell phones on airliners? At least that’s the question people are asking as they divide themselves into productivity and can’t-we-have-peace-anywhere? blocs. But it’s the wrong question. The appropriate question is: who should decide? That’s the right one to ask all the way down the line. If the airlines and plane manufacturers can’t determine if cell phones pose a danger to their equipment and customers, then the FAA is nothing but a fig leaf. It would be powerless to protect us from such incompetence. But in fact those private companies can decide the safety issue. As noted, they already have.

As for letting passengers use their phones, why assume there is only one answer? Here in living color is the presumptuousness of the regulatory state. It arrogates the authority to determine the Right Answer and then to impose it on everyone.

The controversy over cell phones on airliners arises from a clash of preferences. Some people want to talk on the phone while flying. Others don’t what to hear telephone chatter. (One wonders if chatter between two seatmates is so different—but I digress.) No one knows the full business implications of permitting passengers to use cell phones. So why not let the airlines, individually, find out? Some will stick with prohibition. Others will permit open use. Still others will set up cell-phone sections. All will cater to anticipated passenger tastes, and the consequences will play themselves out in the competitive marketplace, which is a great teacher.

Imagine that! Freedom leads to the best combination of outcomes.

• • •

The lion’s share of this issue of The Freeman focuses on the notorious case Kelo v. City of New London, in which the U.S. Supreme Court explicitly gave local governments the green light to revitalize their economies by transferring property, under the power of eminent domain, from one private party to another. Eminent domain, a vestige of absolute monarchy, under which the king owned his realm, violates individual rights. The problem is not that it has been abused. It is an abuse in itself.

Our contributors examine the ruling, and other forms of property deprivation, from several angles.

Richard Epstein points out that the outrageous decision grew out of an equally outrageous local redevelopment plan that didn’t even require the taking of private homes.

George Leef challenges the Supreme Court’s assumption that economic revitalization is a proper function of government.

Steven Greenhut surveys the public reaction around the country to the decision and the heartening determination to prevent such takings from occurring in other states.

Eminent domain isn’t the only way that government can interfere with a landowner’s property rights.

As Gardner Goldsmith points out, local governments are fond o f using their borrowing power to acquire open land in order to prevent development.

And Paul Messino tells the story of a man whose property rights fell victim to North Carolina’s municipal-incorporation laws.

This special issue culminates with an article by Andrew Morriss on why the rule of law is important— and so badly misunderstood. From our columnists we have the following: Richard Ebeling urges private reconstruction of New Orleans. Donald Boudreaux adds his own take on Kelo. Stephen Davies contrasts the reputations of warriors and merchants. Russell Roberts revisits supply and demand. And Arthur Foulkes, seeing charges o f market failure leveled at capitalism, responds, “It Just Ain’t So!”

Our book reviewers pass judgment on tomes about the Austrian and Chicago schools of economics, capitalism’s record, the ominous expansion of the criminal law, and intergenerational rivalry.

Which brings up a question that hardly anyone seems interested in: Whose airwaves are they? The standard answer is that they belong to the public. Throughout the debate over what can and cannot be broadcast, no one has questioned that premise. Even people who ordinarily extol private property as a pillar of Western civilization are strangely enthusiastic about collectivism when it comes to the broadcast spectrum. In a statement typical of those battling indecency, L. Brent Bozell III, president of the Parents Television Council, asks, “Why does the FCC ignore its Congressionally mandated role to enforce broadcast decency standards over the publicly owned airways?”

Isn’t something out of kilter when the world’s reputedly paradigmatic capitalist country has public ownership of this resource? There is nothing peculiar about the broadcast spectrum to justify collectivization. The spectrum was not a resource until particular individuals discovered its usefulness. That required scientific and entrepreneurial insights: namely, that sounds and later pictures could be delivered through the air, and that people would be willing to pay (even if indirectly) to receive them. The risk-taking involved is easy to overlook now.

What did the pioneers of broadcasting get for their trouble? Government appropriation and licensing of that revolutionary resource. (This is not to ignore that some of the early titans of broadcasting reaped benefits from the government’s takeover of the spectrum.)

It almost didn’t work out that way. When the first radio broadcasters commenced, they sometimes interfered with each other. Aggrieved parties did what Americans always do when they believe their property has been violated: They went to court. The courts, quite naturally, began to apply the common-law principles of trespass to resolve the disputes. Formal property rights were beginning to emerge.

But in the 1920s the federal government got into the act. Then-Commerce Secretary Herbert Hoover, who oddly has a reputation as an advocate of individualism and laissez faire, began by unilaterally regulating the airwaves. Next he engineered the Federal Radio Act of 1927, which authorized a new government agency to parcel out the spectrum to licensees. (Yes, it could have been worse: Hoover could have set up a state broadcasting monopoly.) With the authority to issue and revoke licenses came the power to impose obligations on broadcasters, such as the equal-time rule, the fairness doctrine, the restrictions on indecency, and the prohibition of obscenity. Theoretical ownership by the public always means actual control by government.

The last 20 years have seen some relaxing of the rules, but few people have seriously questioned the socialized status of the airwaves. With good reason people worry about what they and their children might be exposed to on radio and television, and I don’t mean to minimize that concern. But I do mean to say that collective—that is, government—ownership is an illegitimate solution in a free society.

* * *

Former President Ronald Reagan died in June. Richard Ebeling assesses the Reagan legacy.

Government enjoys meddling so much, it even interferes when people are doing what it wants them to do. James Payne has an example.

With freedom comes change. As John Hood says, it’s important to look for the upside as well as the downside.

The right to property is subtly eroded every day by the agency that’s supposed to protect it. Dale Haywood explains.

We hear much about borders these days, but few notice how they really protect liberty. Andrew Morriss explores this unappreciated feature.

We’re often urged to fear bigness when it comes to business. But as Wayne Dunn points out, we wouldn’t have to worry about that if the size of another entity were brought under control.

Has any political philosopher been more demonized than Herbert Spencer? Roderick Long demonstrates that the great classical liberal deserves better.

The International Labor Organization has a history of endorsing government intervention in all ways. So Jude Blanchette wasn’t surprised when the ILO called for beefing up government schooling in the developing world.

In this month’s FEE Timely Classic, the late Dean Russell revisits some of Frédéric Bastiat’s great writing on free trade and protectionism.

Our columnists spared no effort in finding compelling topics. Richard Ebeling reflects on a global tobacco treaty. Lawrence Reed reports on his trip to Vietnam. Thomas Szasz surveys the mental-health landscape after 300 years of “psychiatric reforms.” Burton Folsom tells the story of the National Road. Charles Baird weighs support for unions in the United States.

Books coming under scrutiny this month deal with the Gulag, diversity, lawyers, and the inoffensive language of textbooks.

—Sheldon Richman

Few of us would understand the jargon employed in a recent ruling overturning telecommunications regulations issued by the Federal Communications Commission (FCC). But it’s not necessary to know what “UNE-P” means or how “hot cuts” are performed to take an interest in the proceedings. At stake are fundamental principles of interstate commerce and property rights.

Three times in the past eight years, federal courts have struck down as arbitrary and over-reaching prior versions of the FCC regulations governing competition in local telephone service. Three times the commission has been ordered to revise its autocratic rules. The latest incarnation of the regulations, unveiled last October and struck down on March 2, is in some respects the worst of the lot, as if the FCC were increasingly deaf to judicial censure.

It’s a troubling state of affairs for obvious reasons. Regulatory uncertainty has inhibited telecom investment and innovation, thereby eroding the reliability of the network as well as impeding economic growth. The commission’s intransigence, meanwhile, insults the separation-of-powers doctrine and exposes the telecom industry to regulatory abuse. It’s a case study of the government bull in the proverbial china shop.

The blame largely falls on Congress. Key elements of the 1996 Telecommunications Act decreed outcomes but not means, leaving the FCC to expand its regulatory empire. Indeed, the agency subsequently issued more than 10,000 pages of new rules, predictably unleashing a frenzy of litigation.

Ironically, the 1996 Act was intended as an instrument of reform. In a major departure from six decades of state and federal policy, Congress rightfully sought to end the monopoly franchise system in local phone calling. Unfortunately, lawmakers presumed that government could create a competitive market through regulation—a conceit that doomed their good intentions.

The most problematic aspect of the act is the requirement that major wire-line companies such as Verizon, BellSouth, SBC, and Qwest allow rival firms to use their networks at regulated rates. Such “forced access”—a regulatory taking of private property if ever there was one—was necessary, Congress reasoned, to allow new entrants to gain market share. Once their business base was established, competitors were expected to construct independent facilities.

The FCC devised a complex formula to set access rates based on the cost of operating a hypothetical network. The phantom network would presumably feature the most advanced technologies and operate at optimum efficiency.

Of course, no such network actually exists. And with no market confirmation of these hypothetical network costs, regulators set the access rates artificially low. Because the rates fail to cover operating costs in many instances, the network owners are effectively subsidizing their rivals.

Not surprisingly, the robust wire-line market envisioned by Congress has not materialized. Reliance on incumbent networks has largely failed to stimulate new products or services, or even lower rates—the hallmarks of competition. In essence, forced access has simply allowed new entrants to slap their names on existing services and call it competition. Most have no incentive to construct independent facilities. And faced with the prospect of having to “share” their facilities, many incumbents have been unwilling to undertake new investment.

Disappointing Results

In Michigan, for example, the Mackinac Center found that 89 percent of the local wire lines billed by competitors in 2002 actually were serviced in whole or in part by an incumbent network, up from 62 percent in 1999. Meanwhile, there has been a corresponding decline in the proportion of lines served by independent facilities. Competitors utilized their own facilities to service a mere 10 percent of their customers in 2002, down from 29 percent in 1999.

In short, the forced-access regime has failed to achieve its most basic policy goals. As stated by securities analysts with Fulcrum Global Partners LLC: “The fact that we are no closer to a deregulated market than we were in 1995 speaks volumes for how ineffective the law was in the first place. The incremental social burden that the Telecom Act of 1996 has placed upon the industry, consumers and the country overall cannot begin to be measured.” But bad as the economic consequences have been, the surrender of constitutional and market principles is worse. There can hardly be a more direct violation of the Fifth Amendment “takings” clause than the FCC’s regulatory declaration that “the incumbent must accept the novel use of, and modification to, its network facilities.” From the standpoint of network owners, the regulated access rates are downright confiscatory.

Proponents claim that the regulations are necessary to neutralize the monopoly advantages once enjoyed by incumbents. (So the FCC, which for 60 years preserved that monopoly system, is now the architect of reform?) But such regulatory punishment appears to conflict with the ex-post-facto clause of the Constitution, leaving us to wonder how our law-abiding actions today will be sanctioned by government sometime in the future.

The latest rewrite of the telecom rules also undermined the tenets of interstate commerce. The commission majority had directed 50 state utility commissions (and the District of Columbia) to determine which elements of the local telecom network should remain communal property. But as the U.S. Court of Appeals for the D.C. Circuit ruled in March, this delegation of authority represents a “fundamental misreading of the law.”

A handful of “conservative” lobbyists have attempted to argue that this delegation of regulatory authority to the states is proper from a federalist perspective. But interstate commerce is unquestionably the province of the federal government, and nothing so defines modern telecommunications as the absence of geographic boundaries.

It is worth noting that the most rapidly expanding sectors of the telecom industry—wireless and cable telephony—are the least regulated. As history has repeatedly shown, technological progress thrives in the absence of centralized authority. Both alternatives represent significant competitive challenges to local wire-line carriers—without subsidies or onerous regulation.

If we strip away the technical particulars that often cloud this policy debate, what we essentially are left with are disparate visions about the power of markets to maximize technological innovation. It is clear that the regulatory model has failed to achieve policy objectives.

All this is yet another reminder that deviating from time-tested principles of a free marketplace, property rights, and due process under constitutional rules carries costly consequences.

This mandate appears to be at odds with the wishes of the American people. In spite of the outstanding theater-quality picture and sound on the high-definition televisions (HDTV), they account for less than 1 percent of all the TVs in American homes. It is hard to win the digital revolution when there are over 265 million of the primitive nondigital TVs still in use. That’s 2.4 sets per household. Since these TVs have a lifespan of between seven and ten years, most will still be alive and kicking when the federal government flips the “off” switch. So unless the government blinks, Congress can expect to hear from a lot of angry constituents. Thus far the federal government has been hanging tough. In 2006, America will have five choices: Buy a digital-ready TV, subscribe to cable TV, subscribe to satellite TV, buy a set-top box converter so that your old-fashioned TV can decode the digital signal, or start reading books.

Joel Brinkley of the New York Times has noticed the anomaly of government’s ordering a new consumer technology. “No other national technological transition has ever been backed by this sort of government decree. Nobody was forced to trade a horse for an automobile, a Victrola for a radio or a typewriter for a computer.”¹

Why aren’t the people buying these phenomenal government-endorsed TVs? There are two primary reasons. The first is cost. Although the price has started to come down in the last couple of years, HDTVs are still a luxury that few can afford. The price ranges from $1,300 to $10,000. It gets worse. You will still have to cough up another $650 for a set-top box converter to receive the digital signal.² In contrast, the average complete total price for a nondigital TV ranges between $200 and $400.

The other reason for not buying an HDTV is right now there is little to watch. For the few who decided to buy an HDTV, their biggest complaint was the lack of high-definition programming.³

Ironically, a surprising number of people use their HDTV just to watch DVD movies. The next time you are at an appliance store and see one of those “gold-plated” HDTVs with the “fabulous” cinema-quality picture and sound, ask the salesman: “Is that a broadcast high-definition picture or is that picture coming from a DVD player?” After a great deal of obfuscation, he will probably say: “Um . . . DVD player.”

As with all products, consumers weigh tradeoffs. There is no doubt that many shows will look fantastic in high-definition color. However, many people (in fact, the overwhelming majority) have decided that it is really not all that important (nor worth the money) to be able to see every pore on Larry King’s face or to hear Katie Couric’s voice in theater-quality Dolby sound.

Since HDTV is designed to work best with screen sizes of 45 inches or larger, what about all those small TVs in the kitchen? Consumers have apparently decided that a giant HDTV home-entertainment center on the kitchen counter is not very practical. Watching TV on a 13-inch color set first thing in the morning while eating corn flakes may not be the greatest viewing experience possible, but the American people have decided that it is good enough. Unfortunately, this lackadaisical attitude is at odds with what Congress and the FCC think consumers want.

How does the federal government justify its efforts to pawn off digital TV on a public that is clearly not interested? It appears that the ghost of industrial policy past has come back to haunt America. In the case of HDTV, we have an elitist government making policy based on what it thinks will be good for industry and what it thinks an uninformed public really wants. To the FCC, the digital TV revolution is far too important to be left to the inefficient and time-consuming whims of the marketplace. Since there is no individual industry or company that has the wherewithal or long-term vision to win the “digital revolution” by itself, the FCC will use its omnipotent knowledge and its mandate power to insure the correct outcome.

But how smart is the FCC really? Does its track record in choosing winners warrant an “Oracle of Washington” status? Should we entrust the adoption of digital television to the wisdom of the FCC with its heavy-handed mandates? Or, should we simply let the marketplace decide? A review of the last TV revolution provides some interesting insights.

The FCC and the Color TV Standard

In the early days of television there were three competing color standards vying for the FCC’s blessing. The CBS Field Sequential System had the inside track. However, it had a major flaw. It was incompatible with the nine million black-and-white sets already in homes across America. Viewers with those TVs would not have been able to watch a show broadcast by that system (even in black and white) without a costly converter. If this incompatible standard were to be adopted and the public refused to buy the converter, color broadcasters would be beaming their signals to a nonexistent audience. The other two competing color systems were compatible with black-and-white sets. Would you like to guess which system the FCC picked?

On September 1, 1950, it approved the CBS system by a 4-to-1 vote. But a year later something strange happened. CBS discontinued its color broadcasts. Maybe the lack of an audience contributed to the decision.⁴

To no surprise, on December 17, 1953, the FCC publicly changed horses and adopted the National Television System Committee (NTSC) compatible color system as the U.S. standard. It was based on one of the black-and-white-compatible designs that the FCC had dismissed as technically inferior. Color broadcasts using the new FCC standard were authorized to begin in January 1954.

Even though the compatibility problem was resolved, the transition from black and white to color was still exceedingly slow. It took 12 years (1954–1966) before each of the three networks would have a full prime-time color lineup. It took 23 years (from 1954–1977) until 75 percent of the homes in America had at least one color television. Although slow, there was little “technology frustration” and there were no government-mandated transition deadlines to elicit the wrath of either viewers or broadcasters. A viewer with a black-and-white TV did not need a set-top box converter to see a color-broadcast program. It simply appeared in black and white.

People could quickly grasp the concept of going from black and white to color. However, the average consumer today doesn’t have a clue as to what going from analog to high-definition means. “Walt Disney’s Wonderful World of High-Definition” does not have the same ring to it. Most would-be consumers have no idea what “better pixelation” is or really care to know.

In the color-TV revolution 50 years ago, we had a government that eventually acquiesced to the realities of the marketplace. Today, we have a government hell-bent on riding roughshod over everyone in order to make its digital vision of the future a reality.

Opposing Sides in the Digital War

There are clearly two opposing sides in the “Digital TV War.” As usual, the consumers are all alone on one side. Aligned against them are the federal government (Congress and the FCC) and its two allies: the National Association of Broadcasters (NAB) and the Consumer Electronics Association (CEA). The TV manufacturers, represented by CEA, clearly had the most to gain from the digital war. If crawling in bed with the federal government would force every family in America to buy a $1,500 TV, why not go for it? In contrast, it was a mystery why the broadcast industry was also crawling in the federal bed.

As if part of a horror movie, this bedroom scene turned into a nightmare. The first bedfellow to start screaming when the lights went out was the broadcast industry. The TV manufacturers would be next.

From the earliest days of the digital revolution, the NAB has been fighting (against the consumer and even against its own constituents) to make the government’s vision of HDTV possible. The TV manufacturers’ business model is obvious: “Sell millions of HDTVs to make billions.” In contrast, the broadcaster’s business model for HDTV makes absolutely no sense. It appears to be: “Spend billions to make millions.” Advertisers pay to have viewers watch their commercials. If just a few viewers will see their commercials with a great high-definition picture, how appealing can this be to advertisers?

In April 1997 the FCC mandated that all TV broadcasts would be digital by 2006. As a result, each station would be forced to meet an aggressive digital-transition schedule. By May 1, 2002, all commercial TV stations were to be online with at least “some” of their programming in digital format.

And how successful were the commercial stations in meeting their deadline? Of the 1,240 commercial stations in the country, 68 percent failed to meet it. The FCC was clearly not amused. Although 772 stations were granted a six-month extension, another 71 stations had their requests denied. Those recalcitrant stations that choose to flout the authority of the FCC run the risk of having their broadcast licenses revoked.

The major reason for the failure to meet the deadline was cost. It is easy for the federal government to make mandates—they don’t have to pay for them. For the small broadcast stations in “fly-over America,” this digital mandate presents a severe financial hardship. The conversion price tag, for all stations, both large and small, starts at around $3 million.⁵ High-definition broadcasting thus causes capital and operational expenses to skyrocket without any increase in revenue. It would appear that the concept of “making a profit to survive” is totally alien to the FCC bureaucrats since they operate in a taxpayer-funded bankrupt-proof environment.

The Next Victim: Television Manufacturers

While the nightmare for the broadcasters is ongoing, the nightmare for the TV manufacturers is about to begin. On August 8, 2002, the FCC voted 3 to 1 to require electronics manufacturers to include digital tuners in all new television sets by 2007. The actual phase-in date will depend on the size of the set. TVs with screens 36 inches or wider would be required to include the digital tuner by July 1, 2004.

The TV manufacturers feel that this mandate is absurd. The FCC’s own data shows that only 14 percent of viewers watch TV using an over-the-air broadcast. The other 86 percent get their TV from either cable or satellite.⁶ Since the overwhelming majority of viewers will never use the $250 tuner, why is the federal government forcing all TV consumers to buy a product they clearly do not want? Answer: the federal government feels that by manipulating the market, it can artificially create a demand for HDTVs where one does not currently exist. In theory, this will lead to a groundswell of real consumer demand for HDTVs. The CEA estimates that the federal government’s mandate to stimulate that demand will cost $7 billion. The Detroit News calls this a “TV tax on consumers.”⁷

The federal government’s latest attempt at industrial policy has been, and continues to be, a fiasco. It is very clear that it has lost the digital TV war. Based on the incredibly slow pace of the transition to digital TV, it is incomprehensible that the American people will accept 2006 as the end of TV as we know it. The federal government did not mandate an end to black-and-white TV, and it should not impose a mandate this time either.

But don’t expect the bureaucrats to learn the right lesson: on October 10, 2002, the FCC unanimously approved a new standard for broadcast digital radio.⁸

Notes

1. Joel Brinkley, “The Dawn of HDTV, Ready or Not,” New York Times, October 26, 1998.
2. “TV Sets,” Consumer Reports, October 2002, search “HDTV” at www.consumerreports.org.
3. “DTV Owners Survey,” HDTV Magazine, November 2000.
4. Karla Robinson, “H is for Headache,” Ace Weekly, September 14, 2000.
5. David Lieberman, “Order to Go Digital Staggers Small TV Stations,” USA Today, July 17, 2002.
6. “Many Broadcasters Will Not Meet 2002 DTV Deadline,” General Accounting Office Report, GAO-02-466, April 23, 2002.
7. “Stop FCC’s Stealth TV Tax,” Detroit News, August 13, 2002.
8. Barnaby Feder, “FCC Approves a Digital Radio Technology,” New York Times, October 11, 2002.

In 1978 Michael Jensen and William Meckling, writing in the Financial Analysts Journal, offered an extraordinarily gloomy prediction for the future of capitalism: “The most spectacular period of economic growth in our history is over,” they wrote, because “government is destroying two vital instruments of that growth—the system of contract rights and the large corporation.”¹ Constitutional and electoral constraints on political plunder have proven ineffective, Jensen and Meckling wrote, as the courts, politicians, and regulators have revoked or attenuated property and contract rights and have attacked freedom of association as well, “especially in the civil rights arena.”²

With regard to the stock market, Jensen and Meckling forecast that because of the instability of property rights caused by government intervention, investors have become much less certain that any contract they enter into now will be subject to the same rules and regulations in the future. An early consequence of the erosion of property rights will be a reduction in the capitalized values of corporate securities, with many corporations able to remain in business only so long as they can finance their operations from internally generated cash flow or [government] subsidy.³

As of 1999 the Dow Jones Industrial Average was about 15 times higher than it was in 1978, when Jensen and Meckling issued their dire warnings. But this doesn’t mean that they were wrong about the effects of the American regulatory state on stock prices. The Dow Jones average might be even higher yet were it not for the large degree of governmental control of the means of production that is exercised through regulation. And the stock market is surely much more volatile because of the great uncertainties created by regulation. Overzealous regulators may even cause the market to crash. As discussed below, it was proposed regulation and taxation of corporate takeovers that likely precipitated the 1987 U.S. stock market crash.

Political Entrepreneurship

Although regulators are usually blamed for the economic and social harm inflicted by regulation, it is politicians who are ultimately responsible. The U.S. Department of Labor may enforce the minimum-wage law, for example, but it is Congress that passed it. Regulation is just another form of pork-barrel politics whereby politicians dispense regulatory favors to special-interest groups, at the expense of the rest of society. Corporations are particularly susceptible to attacks by politicians pandering to special-interest groups because corporate ownership is relatively invisible, widely dispersed, and politically incohesive, as a rule. Moreover, the stock market is so volatile and complex that the owners of corporations (shareholders) would find it difficult, if not impossible, to attribute declines in their asset values to specific government actions. In contrast, special-interest groups are, by definition, more focused and politically well organized.

Politicians are not merely passive bystanders who go on “listening tours” of their constituencies and then faithfully enact the kinds of laws that the public wants. They are “entrepreneurs” who are experts at either creating genuine economic and social crises or the perception of crises, and then offering their “services” in resolving the crises. The most obvious example of this phenomenon is war. War provides politicians with myriad rationales for controlling and regulating economic activity, and few of the controls are abandoned once the war is ended.⁴

Of course, politicians never admit that they are the source of the problems. They usually blame corporations in particular, or capitalism in general. Hence, we witness a constant recitation of “crises” manufactured by the state and blamed on capitalism. In the agricultural sector, for example, it has been government policy ever since the Hoover administration to simultaneously pay farmers to grow more (with price supports) and less (with acreage allotments), and to subsidize thousands of failing farm businesses with farm welfare in the form of low-interest loans and grants. The agriculture industry is thereby made weaker and more volatile, which of course is reflected in the prices of publicly traded corporations in agriculture and agriculture-related industries. Government intervention is the source of these problems, but the blame is always placed on “agricultural markets.”

The U.S. Department of Commerce publishes fraudulent poverty statistics to make poverty look worse than it actually is and to “justify” such economically destructive policies as increases in the minimum wage or tax increases for the ostensible purpose of redistributing income to the “poor.”

In the environmental arena, countless capitalistic bogeymen have been blamed for everything from cancer to the destruction of the planet. This list of phony environmental scares is so long that any rational, thinking person should routinely assume that everything the organized, political environmental organizations say is a lie.

The federal government has been forecasting an impending energy crisis ever since the dawn of the oil industry—roughly 1866. In that year the U.S. Revenue Commission warned that the nation may run out of oil at any moment. In 1885 the U.S. Geological Survey forecast no chance of oil’s being discovered in California; some ten billion barrels have been pumped from that state since then. By 1914 the U.S. Bureau of Mines was predicting that only 5.7 billion barrels of oil were left; more than 50 billion barrels have been pumped since then. In 1947 the U.S. Department of State warned that “sufficient oil cannot be found in the United States”; in 1948 more than 4 billion barrels were found—the largest discovery in history up to that point and twice the volume of U.S. consumption. In 1951 the U.S. Department of Interior forecast that oil reserves would last only until 1964.⁵

All of these gloomy (and false) forecasts were (and are) accompanied by proposals for more government control of the energy industry to “assure” a more adequate rate of development.

The fundamental effect of this regulatory-propaganda regime on stock markets is to convince more and more investors that the right of corporate managers to use the assets of corporations in the best interests of stockholders and creditors (that is, to maximize profits) is tenuous, if not abrogated completely. The politicization of corporate decision-making via regulation causes an overall decline in capital values as corporate decisions become more and more designed to pander to the whims of politicians and bureaucrats rather than satisfying consumers and earning income for shareholders.

Government regulation is often a form of legalized extortion. For example, federal regulators routinely show up at corporate headquarters and accuse a corporation of being out of compliance with regulations that no human could possibly be in compliance with. The EPA requires that corporations which handle “hazardous materials”—which even includes Windex, according to the EPA—must keep a written record of where each and every container is located at every moment. Former New York state environmental protection commissioner Thomas Jorling described this practice as “a kind of extortion.”⁶ EPA regulators will enter a corporate office and impose huge fines on corporations that could not possibly maintain the EPA’s huge paperwork burden even if they wanted to. Threatened criminal indictments assure payment of the fines.

In a 1997 book, Cornell University law professor Fred McChesney argues that blackmail and extortion are inherent features of the modern regulatory process. In short, political “entrepreneurs” threaten legislation and regulation that will either impose price controls or increase costs (both of which would reduce profit margins) unless the targeted companies and industries compensate the politicians with campaign contributions or other kinds of private payoffs (including speaking honoraria, jobs for relatives, and subsidized travel to luxurious vacation resorts).

Politicians call legislation that is intended to extort campaign contributions from a business or industry “milker bills” or “cash cows.” As explained by one California legislator, a politician “in need of campaign contributions, has a bill introduced which excites some constituency to urge [the legislator] to work hard for its defeat (easily achieved), pouring funds into his campaign coffers.”⁷

Another name politicians have given to such legislation is “juicer bill,” since they are designed to “squeeze” cash out of corporate coffers in return for not harming the corporation with proposed legislation and regulation. So-called “fetcher bills” are also said to be capable of “fetching” gobs of campaign cash.

Examples of Political Extortion

One recent example of a proposed regulation that seems to have been designed purely to fetch perpetual campaign contributions is the battle over reducing the legal blood-alcohol content (BAC) level from .10 to .08. The federal government’s Office of Substance Abuse Prevention has declared that its goal is to eventually have .04 as the legal limit, which can be attained by an adult male who consumes one or two beers. Congress failed to pass such a law in 1998; the law that it did pass, however, creates a slush fund of highway grant money that can be used to bribe states into passing laws that reduce the legal BAC level. The law is to be renewed every year, guaranteeing that the alcoholic beverage industry will be forced to make campaign contributions indefinitely to defeat this neo-prohibitionist legislation.

In 1992 Congress authorized the Federal Communications Commission to impose price controls on cable television. Ever since then, the cable industry has poured millions of dollars of campaign contributions into Washington annually in an apparently fruitless effort to eliminate the controls.

One of the more notorious examples of political blackmail in recent years involved the Clinton administration’s proposals to impose price controls on doctors, hospitals, and the pharmaceutical industry as part of its failed plan for socialized medicine. Once price controls were proposed, reported the New York Times, members of Congress and the president were “receiving vast campaign contributions from the medical industry, an amount apparently unprecedented for a non-election year. While it remains unclear who would benefit and who would suffer under whatever health plan is ultimately adopted, it is apparent that the early winners are members of Congress.”⁸

Representative Jim Cooper, who proposed legislation that was slightly less onerous than Clinton’s, received nearly $1 million in campaign contributions in the first four months of 1994; overall, campaign contributions in 1993 were about one-third higher than in the previous non-election year of 1991.⁹ It was also widely reported at the time that the handlers of Hillary Clinton’s not-so-blind trust were selling her pharmaceutical stocks short every time she made a highly publicized speech demonizing the pharmaceutical industry, which she did quite often. During the Clinton health plan fiasco of 1993-94 the value of pharmaceutical stocks dropped by over $40 billion, according to one account.¹⁰ After the industry poured millions of dollars into the coffers of Washington politicians the price-control plan was defeated.

In his book In Defense of the Corporation, Robert Hessen documents how Ralph Nader has long engaged in the same practice as the first lady—shorting the stocks of companies that his numerous think tanks and organizations routinely demonize with highly publicized “studies” alleging corporate wrongdoing.¹¹ The “tobacco settlement” reached by the state attorneys general, the federal government, and the companies might well be considered to be the Mother of All Political Shakedowns. In return for being allowed to stay in business, American tobacco companies are being forced to pay almost a quarter of a billion dollars to trial lawyers and federal, state, and local governments. The media have already begun reporting on how the initial installments are being spent on anything and everything by state and local governments, and not only “health-care costs,” as was promised.

Even this record may someday be broken, however, if the government succeeds in destroying the Microsoft Corporation. Just a few years ago the Washington Post was writing sneering articles about how naive Bill Gates was for believing he could focus his energies solely on producing better computer products without being a “player” in Washington, that is, caving in to the Washington establishment’s legalized extortion racket. Since then, Gates has hired dozens of Washington lobbyists and lawyers and has spent the required millions in campaign contributions.

Regulation is perhaps most effectively used as a tool of extortion when it threatens to sharply increase the costs of doing business, which it always does. Again, the game is for politicians to propose regulations that would drastically increase the costs (and subsequently reduce the profits) of successful companies with “deep pockets.” For example, the banking industry spent millions in campaign “contributions” to stop a 1982 requirement that they withhold taxes on interest and dividends—a paperwork nightmare for the banks. In 1983 and 1984 the life insurance industry spent more than $2 million to defeat legislation that would have banned the granting of gender-based rates and benefits.

Perhaps the most egregious example of regulatory blackmail is enforcement of the so-called Community Reinvestment Act (CRA). The CRA was enacted in 1978 under a patently false pretense—that banks made fewer loans to residents of low-income neighborhoods not because there were fewer creditworthy borrowers there, but because of allegedly pervasive “discrimination” against the primarily black residents of those neighborhoods. Banks do—and should—“discriminate” against less creditworthy borrowers, but in doing so they run the risk of regulatory extortion.

An entire industry of sometimes federally funded “community groups” has sprung up, with names like Center for Community Change and Association of Community Organizations for Reform Now (ACORN), which essentially extort money from banks with the following ruse: Whenever a bank proposes a merger, expansion, or building of a new branch, it is subject to regulation by the Federal Reserve, the Comptroller of the Currency, and the Federal Deposit Insurance Corporation. If anyone files a complaint with any of these agencies accusing the bank of making too few CRA loans, the merger or expansion is halted. So-called community groups frequently lodge such complaints and do not withdraw them until the banks give them or other groups they designate large sums of money, sometimes in the tens of millions of dollars. The Neighborhood Assistance Corporation of America (NACA), led by self-described “urban terrorist” Bruce Marks, has “won” loan commitments totaling $3.8 billion from Bank of America Corp., First Union Corp., Fleet Financial Group, and others. That money is lent to borrowers favored by Marks, and his organization usually gets a lump-sum fee or a percentage of each loan.¹² NACA plans to operate in all 50 states by 2001, when it expects its annual budget to be in the $80 million range.

Regulation and the Stock Market Crash of 1987

Economists Mark Mitchell and Jeffrey Netter have provided powerful evidence that regulatory sneak attacks precipitated the stock market crash on October 19, 1987, when the Dow Jones Industrial Average fell 508 points (22.6 percent).¹³ Their thesis is that proposed changes in the tax treatment of corporate takeover transactions, which would have made such transactions much more costly, triggered the crash.

It is important to recognize the importance to the economy of the market for corporate control, or the takeover market. This market is a keystone of any capitalist economy, for it is the very means by which capital is continually reallocated to those who will make the best use of it. A vital and free capital market, Ludwig von Mises wrote, is the keystone of capitalism and the one thing that most distinguishes a capitalist economy from a noncapitalist one. Unfortunately, that is also why politicians are forever proposing more and more regulatory control of it.

Laws and regulations that restrict corporate takeovers are protectionist. In a corporate takeover a group of investors has determined that a particular company is being mismanaged. They seek, through a proxy battle or other means, to take over control of the board of directors and, subsequently, of management. They may fire some or all of the poorly performing managers, replace them with better ones, and make more profit for themselves and the other shareholders.

No one has perfect foresight, so many takeovers do not work out. But nevertheless, the only way to learn who can make the best use of corporate resources is to allow the free market to tell us, including the free market for corporate control.

Laws and regulations that would restrict takeovers or make them prohibitively costly are invariably the result of lobbying efforts by incumbent managers who have bribed politicians into enacting the protectionist provisions, which only benefit the incumbent managers at the expense of their shareholders and customers.

In early October 1987 the Congress waged a full-scale assault on corporate takeovers by passing several important changes in the tax code.¹⁴ Mitchell and Netter calculated that these changes would have reduced the value of acquiring a company through a takeover by about 25 percent; that would in turn cause a decline in the stock price of the acquiring company. Typically, the stock price of an acquiring company increases 25 to 35 percent as the result of a takeover. Moreover, such a dramatic anti-takeover bill would have reduced stock prices overall by generally weakening the market for corporate control, a major source of efficiency in capital markets.

The Regulatory Attack on Microsoft

Microsoft’s critics claim to believe that what is bad for Microsoft (an antitrust prosecution) is good for the rest of the computer industry and vice versa because of Microsoft’s allegedly “exclusionary” practices. Microsoft is supposedly “a threat to everybody in the industry,” according to Alan Ashton, president of WordPerfect, which has lost almost all of its market share to Microsoft Word.

In a forthcoming article in the Journal of Financial Economics, Thomas Hazlett and George Bittlingmayer expose this as a myth.¹⁵ The authors surveyed all Wall Street Journal articles from 1991 through 1997 announcing the investigations and litigation and gauged the reaction of the stock markets to it. Categorizing all news stories about the regulatory assault on Microsoft as “positive,” “negative,” or “ambiguous,” they found that:

[W]hen Microsoft receives good news, its stockholders experience average market-adjusted returns of 2.4%. But the news is also good for the industry as a whole, which sees average returns of 1.2% over the same dates. (Both returns are significantly greater than zero at standard levels of statistical significance).

During negative events . . . Microsoft stockholders incur average returns of minus 1.2% per event, while the non-Microsoft computer portfolio declines 0.6%.¹⁶

The returns of a few companies, such as Netscape, which is leading the lobbying and public-relations attack on Microsoft, enjoy increased stock prices whenever the news is bad for Microsoft, which explains why it is instigating the political assault on its rival. It is merely attempting to achieve through politics what it has failed to achieve in the competitive marketplace.

The regulatory persecution of Microsoft is yet another example of regulatory extortion. The political establishment is busy extracting “protection money” from Microsoft in return for its promise to allow the company to exist.

The Tobaccoization of Industry?

The so-called tobacco industry “settlement” has ominous implications for all industries (and consumers). The model is for a government-funded attack on specific industries, complete with volumes of junk science and taxpayer-funded lobbyists who pressure for advertising bans and other regulations that make it difficult to sell the product, along with higher excise taxes.¹⁷ The industry’s management is demonized and portrayed as corporate outlaws. The notion of individual responsibility (for smoking, drinking, reckless driving, firearm use, and so on) is abandoned as “responsibility” is socialized. Once this is done and it is established that no one is responsible for his or her own irresponsible behavior, then it is relatively easy to plunder an industry at will through the vehicle of “taxation by litigation.”

Florida, Vermont, and Maryland actually rewrote the laws to strip the tobacco industry of long-standing common law defenses, guaranteeing that those states would win their lawsuits against the industry. There is no reason to believe that politicians will not do the same to other industries now that the precedent has been set. The state governments cleverly hired private trial lawyers to bring the cases and paid them enormous sums—in the tens of millions of dollars each in some states.

Tort lawyers are now touting plans to use the tobacco litigation/extortion model against the producers of firearms, lead paint, pharmaceuticals, beer, wine and liquor, chemical additives, fatty foods, sports utility vehicles, biotechnology, and myriad other products. These industries will be demonized, more and more severe regulatory restrictions and excise taxes will be imposed on them, and their stocks will tumble. No industry is safe from the greedy hand of regulatory extortion.

Notes

1. Michael C. Jensen and William H. Meckling, “Can the Corporation Survive?,” Financial Analysts Journal, Jan.-Feb. 1978, p. 31.
2. Ibid.
3. Ibid.
4. Robert Higgs, Crisis and Leviathan (New York: Oxford University Press, 1987).
5. Ibid., pp. 142-43.
6. Phillip K. Howard, The Death of Common Sense (New York: Time Warner, 1994), p. 33.
7. Fred McChesney, Money for Nothing (Cambridge, Mass.: Harvard University Press, 1997), pp. 29-30.
8. Ibid., p. 57.
9. Ibid.
10. “Requiem for Reform,” Wall Street Journal, October 14, 1994, p. A-10.
11. Robert Hessen, In Defense of the Corporation (Stanford, Calif.: Hoover Institution Press, 1979).
12. John Hechinger, “NACA Helps Low-Income Clients, But its Tough Methods Draw Flak,” Wall Street Journal, September 13, 1999.
13. Mark Mitchell and Jeffrey Netter, “Triggering the 1987 Stock Market Crash: Antitakeover Provisions in the Proposed House Ways and Means Tax Bill” Journal of Financial Economics, vol. 24, 1989, pp. 37-68.
14. Ibid., p. 39.
15. George Bittlingmayer and Thomas Hazlett, “DOS Kapital: Has Antitrust Action Against Microsoft Created Value in the Computer Industry?” Journal of Financial Economics, forthcoming.
16. Ibid.
17. See James T. Bennett and Thomas J. DiLorenzo, Cancer-Scam: Diversion of Federal Cancer Funds to Politics (New Brunswick, N.J.: Transaction Publishers, 1997).

The subtitle of Peter Huber’s Law and Disorder in Cyberspace proudly proclaims the book’s main theme: “Abolish the FCC and Let Common Law Rule the Telecosm.” Huber proposes a free-market revolution for telephone, broadcasting, cable television, satellite, and Internet services, tempered with a few compromises. The book is well worth reading, particularly for his dramatic conclusion—that the Constitution has failed.

Huber begins by telling the story of the telephone and radio, showing how regulatory theory became a self-fulfilling prophecy of monopoly for phone markets and “scarcity” of the airwaves for broadcasters. Then cable television, satellite, and wireless telephony brought competition to shatter the old regulatory paradigms. “The broadcasters,” he says, “were taken aback, much as someone humming in the bath would be taken aback to be suddenly joined by the massed choirs of the Russian Army.” Regulators often treated new technology as an enemy of the “public interest” they were charged with preserving.

In the core of the book, Huber analyzes the problems facing regulators today—price regulation, universal service subsidies for rural and low-income consumers, and the duties of the common carriers. Finally, he considers content regulation, from copyright to privacy.

As he traces this tale of regulatory wrongs in compressed but readable fashion, Huber offers an alternative to bureaucratic control. The FCC, he argues, should be abolished. The airwaves should be sold to private owners. Interference should be a boundary issue to be resolved by common-law courts. Common-law rules should supplant regulation in every sector of the telecommunications industry. Price regulation should be abandoned. Universal service subsidies are incompatible with competition, and are futile in any case, since, Huber concludes, “telecom technology is advancing much faster than the Commission can make policy. . . . And, most important, unleashing free markets will deliver more goods to more consumers.”

But how free would the markets that Huber envisions be? Not entirely. In Huber’s view, antitrust law is part of the “common law.” Thus, any telecommunications carrier would be subject to the guiding hand of the Department of Justice. This recalls the days when the Bell companies, the local phone companies formed after the breakup of AT&T in 1984, needed a judge’s approval for new ventures—leading to delays of months or years—under the consent decree negotiated between AT&T and the DOJ. For Huber, antitrust scrutiny by courts is preferable to the FCC regulation.

Huber’s view of antitrust squarely presents the old problem (for classical liberals) of whether markets should be defined by common law or by more pure theories of exclusive property rights. Common law, especially as broadened and twisted by statute, can subvert markets, but Huber does not address this problem. The economic and philosophical case for antitrust, however, is weak.

Huber agrees that common law is “uncertain,” but believes that the cautious case-by-case proceedings of judges is preferable to bureaucratic regulation. Cable companies, whose rates were regulated in the ’70s, deregulated in 1984, reregulated in 1992, deregulated again in 1996, and now which are threatened with further regulation by the FCC, would probably agree.

In Huber’s discussion of content controls, he argues that the problem of censorship will be solved by giving audiences more technical control over what they view. He explains that a consenting audience cannot complain about content they have agreed to receive. This conclusion is too optimistic. People do complain bitterly about content they have consented to view—and legislators listen. Even the courts rationalize censorship by saying that broadcasters (for example) invade our homes with their programming, though common sense protests that turning a radio or television set on is an invitation to the broadcast content. Government power over media content will be defeated by the sheer amount of content that can now be carried point-to-point or broadcast.

This leads us to Huber’s astounding and saddening conclusion. We must, he believes, put our trust in a common-law “people’s constitution,” because the Constitution has failed. With respect to telecommunications law, he is correct. The Constitution has done little to check the FCC’s growing power and broad discretion over the years. As Huber probably understands but does not say, technology has done more, far more, to erode the power of government. The battle now is to preserve the common-law framework that permits innovation to continue. Innovation is our best hope for defeating the government’s efforts to control the telecommunications market.

In The Wealth of Nations, published 220 years ago, Adam Smith argued that the interests of consumers would be better served by an open system of free markets than by the regulated regime of mercantilism that prevailed. Competition, Smith maintained, was more efficient than monopoly. Could anyone oppose Smith’s policy prescription?

We have before us now a simple, straightforward example of Smith’s point, which also shows why some people oppose his principles. An article in the Washington Post National Weekly Edition dealing with the breaking up of AT&T, the giant telephone company that was once a monopoly protected by the federal government, includes some statistics obtained from the Federal Communications Commission, AT&T, and the U.S. Labor Department that are marvelously pertinent to Smith’s thesis.

In the early 1980s, in part as a result of rapid technological improvements (such as fiber optics), not only was AT&T forced by judicial decree to break up into several regional components (the so-called Baby Bells), but also other firms were allowed to compete with AT&T for long-distance telephone service. As everyone who has seen the ensuing barrage of TV commercials surely knows, new firms did enter the market—with a vengeance. What has been the result of replacing monopoly with competition in long-distance telephone service?

First, the average cost of long-distance service has dropped dramatically, from about 50 cents per interstate minute in 1982 to less than 20 cents in 1994, a decline of more than 60 percent. Second, interstate consumer telephone use has almost tripled since 1982. (In the jargon of economists, it could be said that consumers’ demand for long-distance telephone service was elastic, causing the total amount of money spent on such service to go up when the price fell.)

Of course, AT&T has not been the sole recipient of all this new demand for phone service, and as a result has been engaging in drastic downsizing and reorganization. So a third result is that many of its employees have lost their jobs. Indeed, this impact was the focus of the Post’s article, “Ma Bell’s Changing Tone.” The subtitle told the whole story: In a reordered corporate world, it’s employees who pay the toll. The article gave a detailed account of how AT&T had changed from a company that provided a virtual assurance of lifetime jobs when it was a protected monopoly to a firm in which a worker’s future is far more precarious.

As the Post article notes, because customers no longer felt loyal to AT&T (nor did investors, who were unhappy with its profit performance), why should AT&T be loyal to its employees? Since the company was broken up, employment has dropped by about 60 percent, from nearly one million employees in the early 1980s to about 400,000 today.

But to focus on this fact is to miss the doughnut for the hole. The Post data also reveal a fourth effect of this movement to freer markets: employment in the communications industry as a whole has remained high; it peaked at about 1.6 million in the early 1980s and is around 1.5 million today. So breaking up AT&T did not destroy jobs—it relocated them.

The hardships imposed on employees who must suddenly seek new work should not be overlooked. The costs of retraining and relocation can be significant, and crippling. Political power is often used to alleviate such woes; after all, that is the argument behind unemployment compensation.

But surely it is equally important to note that, when competition replaces monopoly, the costs imposed on the few are vastly offset by the benefits that accrue to the many.

A very similar story has been told by the economist Russell D. Roberts in his splendid little book The Choice: A Fable of Free Trade and Protectionism. Roberts explains that opening up to free trade may destroy some domestic jobs in the present, but it will create vast new opportunities for our children in the future.

Of course, the world-wide movements toward privatization, given initial impetus when Margaret Thatcher was Prime Minister of the United Kingdom, and perestroika, the decentralization of economic activity proposed (but not actually pursued) by the Soviet leader Mikhail Gorbachev, are both ongoing efforts toward creating more competitive economies. Communism and socialism differ from mercantilism in that communist governments directly own industries, while mercantilist governments simply regulate them. But the practical economic effects are largely the same; stagnation and low incomes are the prices people pay for such extensive intervention in economic activity.

Our federal government no longer protects AT&T’s long-distance monopoly. The benefits of the new competition to telephone users are dramatic—and should be clear to all who care to look.

Yet much resistance to free enterprise remains, both in the United States and abroad. Those of us who live and work in this country today have benefited enormously from the free markets of the past; our standard of living is substantially higher because our ancestors paid the price, accepting less job security in exchange for the expectation of a rising standard of living. Don’t we owe it to future generations to carry on this tradition?

The so-called “public interest standard” has governed communications policy decision-making at the Federal Communications Commission (FCC) for more than 70 years. It is time to question whether this “standard” does indeed serve the public, or if it has instead served only the interests of regulators and companies that stand to gain via the regulatory process.

Ever since the passage of the Radio Act of 1927, federal regulators have been given the power to regulate if they found it was in the “public interest, convenience, or necessity.” This meant that regulators were given broad authority and discretion to regulate in the name of communications consumers. Unfortunately, in practice, this has resulted in the public truly having no voice in this marketplace.

Why is this so? Precisely because Congress has never defined what exactly is “in the public interest.” As Nobel Laureate economist Ronald Coase noted over 35 years ago, “The phrase . . . lacks any definite meaning. Furthermore, the many inconsistencies in commission decisions have made it impossible for the phrase to acquire a definite meaning in the process of regulation.”^[1] More recently, critics have pointed out that regulation “in the public interest” has come to mean whatever is in the interest of regulators to do at a given time.^[2] Hence, the “public interest” or “public trustee” model of regulation that sprang up 70 years ago gave regulators the ability to exert unusual influence and require special demands be fulfilled, especially as a condition of broadcast spectrum license renewal.^[3] In effect, therefore, the standard is a non-standard: it has no fixed meaning.

Over time, FCC actions taken “in the public interest” have had less than desirable results. Consider:

•       To supposedly serve the “the public interest,” the FCC instituted in 1949 the inappropriately named “fairness doctrine.” The doctrine required radio and television broadcasters to “afford reasonable opportunity for the discussion of conflicting views of public importance.”^[4] Instead of promoting the discussion of conflicting views and free speech in general, the fairness doctrine stifled it. In fact, over the span of its 40-year existence the doctrine was used as a tool of blatant political intimidation and influence by threatening license revocation for failure to comply with the political whims of the day.^[5] The Reagan administration FCC wisely repealed the doctrine in 1987, citing First Amendment concerns and the fact that program diversity (informational, educational, religious, and entertainment fare) had increased steadily over time.

•       To promote “the public interest” in the early 1960s, the FCC restricted the development of cable television at the request of broadcasters who felt their turf was being threatened. As telecommunications scholars Michael K. Kellogg, John Thorne, and Peter W. Huber note, “For many years the FCC’s principal objective was to suppress the cable industry by preventing direct competition between cable, and over-the-air broadcasting. It did so quite successfully. . . .”^[6] Essentially, the commission did not allow the entrepreneurial cable industry to offer innovative service options to consumers since it posed a threat to the survival of some local broadcasters. This regulatory setback delayed the onset of video competition for over a decade.^[7] Despite no clear justification of how this served “the public interest,” the FCC carried these anti-competitive policies, even though no explicit grant of Congressional authority had been given to do so.^[8]

•       More recently, the FCC has attempted to serve “the public interest” by using the Children’s Television Act of 1990 as a tool of blatant regulatory extortion. The FCC went beyond the statutory language of the act and used the law to demand a specific, quantitative minimum number of hours of children’s programming^[9] in exchange for other business freedoms. For example, after CBS and Westinghouse announced their intention to merge, FCC regulators (who have the power to block such alliances) forced the companies to promise that certain quantitative programming requirements would be honored as a condition of merger approval. Several other firms have faced similar threats from the FCC as a condition of normal business operation.

Fewer Choices, Less Freedom of Speech

Two things should be obvious from these examples of the public interest standard in action. First, the public interest or public trustee model of regulation often does not serve the public in any constructive way. Industry competition and innovation is often discouraged because of the standard, meaning the public has fewer and poorer quality choices available to them.

Secondly, the public interest standard makes a mockery out of the First Amendment, especially in the realm of electronic wireless communication. Ever since the adoption of the Radio Act of 1927, Congress and the FCC have bought into the mistaken notion that the supposed scarcity of spectrum, or potential interference within the spectrum, justifies asymmetrical First Amendment treatment of electronic communications providers.

As Thomas G. Krattenmaker and Lucas A. Powe, authors of Regulating Broadcast Programming argue, “[B]y adopting public ownership of the spectrum and administrative control over its uses, Congress chose a legal regime for broadcasting that differs radically from the law that governs every other mass communications medium in the United States. Congress thus put its imprimatur on the twin myths that scarcity and interference are phenomenon unique to broadcasting and that scarcity and interference necessitate administrative control of the quality of broadcasts.”^[10]

Ironically, regulation itself created artificial scarcity and interference within the spectrum. Because the government enforced an extremely inefficient licensing policy in the early days of spectrum management and then rejected the imposition of a more orderly property-rights regime to govern the spectrum, scarcity and interference resulted. Instead of solving the problem by instituting property rights and private ownership, which solved the problems of land scarcity and trespass centuries ago, Congress and the FCC instead opted for an inefficient system of public management with “the public interest standard” as its guiding star.

The rest, as they say, is history. But it is a history we should not and cannot forget since we are still living with its adverse consequences. The FCC still uses the public interest standard to restrict beneficial industry advances that, in turn, deny new services to the public. It also inhibits the free flow of information and free speech in general.

How, then, can “the public interest” be truly served? By encouraging vigorous market competition—and by rejecting misguided social compacts and vague regulatory standards flowing from Washington.

1.   Ronald H. Coase, “The Federal Communications Commission,” The Journal of Law and Economics, Vol. 2 (October 1959), pp. 8-9.

2.   See, William T. Mayton, “The Illegitimacy of the Public Interest Standard at the FCC,” 38 Emory Law Journal 715 (1989), pp. 715-769; Mark S. Fowler and Daniel L. Brenner, “A Marketplace Approach to Broadcast Deregulation,” Texas Law Review, Vol. 60 (1 1982-1983), pp. 207-257; Thomas G. Krattenmaker and Lucas A. Powe, Regulating Broadcast Programming (London: The MIT Press, 1994), pp. 173-174; Adam D. Thierer, “A Report Card on the Pressler Telecommunications Plan (S.652),” Heritage Foundation Issue Bulletin No. 209, May 5, 1995, pp. 14-15.

3.   This does not mean, however, that broadcasters put up a serious fight to end the public trustee paradigm. On one hand they speak of its importance to ensure that viable competitors are kept out of their market, while on the other, they cite its intrusiveness as an excuse to produce mediocre programming. As Henry Geller, fellow at the Markle Foundation notes, “A broadcaster loves to be considered a public interest figure. Broadcasters generally want the economic benefits of being a public fiduciary without having to meet the burden of adhering to public interest content regulation.” See Henry Geller, “Broadcasting and the Public Trustee Notion: A Failed Promise,” Harvard Journal of Law and Public Policy, Vol. 10, No. 1 (Winter 1987), p. 90.

4.   FCC Report, Editorializing by Broadcast Licensees, 13 F.C.C. 1246, (1949).

5.   For more information see Adam D. Thierer, “Why the Fairness Doctrine is Anything But Fair,” Heritage Foundation Executive Memorandum No. 368, October 29, 1993; E. Brandt Gustavson, “The Fairness Doctrine: Once and Future Threat to Speech, Religion,” in Speaking Freely: The Public Interest in Unfettered Speech (Washington, D.C.: The Media Institute, 1995), pp. 87-106; “The Hush Rush Law,” the Wall Street Journal, September 1, 1993, p. A14; John Corry, “Fairness Most Foul,” The American Spectator, November 1993, pp. 50-51; Thomas W. Hazlett, “The Fairness Doctrine and the First Amendment,” The Public Interest, Summer 1989, pp. 103-116; Jonathan W. Emord, “Toward a Free Broadcast Press,” Freedom Technology, and the First Amendment (San Francisco: Pacific Research Institute, 1991), pp. 233-248; Krattenmaker and Powe, “The Fairness Doctrine,” in op.cit., pp. 237-275; Ford Rowan, Broadcast Fairness: Doctrine, Practice, Prospects (New York: Longman, 1984).

6.   Michael K. Kellogg, John Thorne, and Peter W. Huber, Federal Telecommunications Law (Boston: Little, Brown, 1992), p. 689.

7.   See Jonathan W. Emord, Freedom, Technology, and the First Amendment (San Francisco: Pacific Research Institute for Public Policy, 1991), pp. 252-254.

8.   See Thomas W. Hazlett, “Station Brakes: The Government’s Campaign Against Cable Television,” Reason, February 1995, pp. 41-47. Hazlett notes that when cable television (or “CATV” as it was known then) was developing between 1950 and 1972, “Cable television was then officially judged a menace to society, and the [FCC] had launched a regulatory jihad against it. Like all holy wars, this offensive was undertaken in the `public interest.”’ Hazlett dramatically illustrates the FCC’s protectionist policies in action by quoting from a 1966 Commission report on cable. The Commission stated: “We must thoroughly examine the question of CATV entry into the major markets, and authorize such entry only upon a hearing record giving reasonable assurance that the consequences of such entry will not thwart the achievement of Congressional goals. We cannot sit back and let CATV move signals about as it wishes.”

9.   For more information see Adam D. Thierer, “Who Will Mind the Children? The Regulation of Children’s Programming in the Information Age,” in Speaking Freely: The Public Interest in Unfettered Speech (Washington, D.C.: The Media Institute, 1995), pp. 47-66.

10.   Krattenmaker and Powe, op.cit., p. 18 [emphasis added].