Real Lessons from the Telecom Mess (Archive)

The Business Week cover story for August 13, 2001, “Lessons from the Telecom Mess,” contains a larger message if we connect the dots properly. It evaluates the 1996 “deregulation” of the US telecommunications industry. The deregulation, as it is called, was supposed to open the industry to competition that was supposed to give consumers better service at lower prices. But, as the story’s title implies, it has been a disaster to consumers and the industry itself. It now promises to help further drag down the economy. For consumers opening monthly phone bills from their landline and cell phone providers, the promise of lower prices and integrated service is a fading mirage. Last week one of the leading suppliers to the telecommunications industry, JDS Uniphase reported that it wrote off about $50 billion, equal to the total market value of American Express or Boeing Corporation or the Ford Motor Company. The telecommunications sector has now overtaken the technology sector in job layoffs. In July the industry recorded almost 45,000 job-cut announcements. In July the technology companies “only” announced about 26,000 layoffs. The telecom total for the first seven months this year is now over 175,000. These write-downs and layoffs are further exacerbating the economic slowdown.
As the Business Week story demonstrates, the industry turmoil can’t be explained by economic slowdown alone. Although absent the slowdown, it might have better weathered its deregulation wound. The underlying conceptual problem that the story fails to address is that for the last two decades economic policy has been built around a rigidly held orthodoxy – that the absence of regulation is equivalent to the presence of beneficial competition. However, regulation and competition are not opposite terms. Moreover competition does not automatically prove beneficial to consumers. I could almost write a similar story about our failed attempts to use managed care and profit incentives to reform health care or electricity deregulation as a means to lower consumer utility prices. In all three cases we never learn that we need to look more critically at our core orthodoxy. Instead, as the Business Week writers do for the telecom mess, the policy proponents claim we just did it wrong and that further adjustments are all that is needed.
But reality in all three cases is complex. In each we confront issues that have roots in history and social values. By now we should know that the simple imposition of a structure of “deregulation” or “competition” over any area never does the trick. It is naive to think of competition as a universal solvent to wash away our economic woes. We can no longer afford the luxury of such simplicity. As the telecom mess and its risks to our prosperity show, we are playing with economic fire if we don’t change our approach. We need a realism informed by an appreciation of history that puts social values, and not economics alone, at the core. I am not optimistic that this will happen any time soon.