GOP's Work Has Only Begun

The future of third-wave infotech industries, to borrow from Toffler, hinges on how fast government can dismantle the second-wave regulatory structure, say some of technology's most prominent observers

ouse Speaker Newt Gingrich made a telling choice last week just after Congress passed the $189 billion tax cut bill, a key plank in the GOP's Contract with America. The Georgia Republican addressed a forum at the Personal Communications Industry Association, a trade group for a new industry -- personal communications -- which was given life when the Federal Communications Commission auctioned off some $7.7 billion in radio spectrum in recent months.

"We need you as an industry to help communicate to the American people about the extraordinary opportunities available using modern technology," Gingrich said April 6. "Help us to identify the laws, taxes, regulations and bureaucracies we need to clear out of the way so you can, in fact, bring those dreams to life."

Though Gingrich and his allies have been derided by pundits and the press for creating benefits for the rich with their contract, the GOP's rhetoric is aimed at enriching the constituencies of the information age rather than increasing the wealth of current ones -- defense contractors and such.

GOP policies, such as a reduction in capital gains taxes and regulations and tax cuts, are designed to spur investment in information-age industries, and unleash older ones willing to compete from restrictions imposed upon them during the apex of the industrial era.

By this way of thinking, the Contract with America is just the beginning of a more fundamental and lasting change in the very concept of governance. According to the digerati, many more changes are needed if the regulatory and legal structure of the nation is to promote the demands of the information-age economy -- rather than retard it in favor of older industries.

"The federal government has always made decisions based upon the size of the constituency. Constituencies are tied to the economy of the past, not the economy of the future. Technology should be developing the economy of the future," said Rep. Robert Walker, (R-Pa.), chairman of the House Science Committee.

Walker himself has found solid, if trendy, intellectual underpinnings among the pundit-philosophers of the digital age.

Futurist Alvin Toffler has written that the political battles on Capitol Hill are between forces of the second wave, industrial economy, and those of the third wave, information-technology future.

"Congress can accelerate things," said Nicholas Negroponte, digital-age guru, MIT professor and author of the new book about the information economy, Being Digital, in an E-mail interview. "The big deal about being digital is not even in the book, alas. I have come to believe that one of the most important consequences is that the little guy will be able to compete with the multinational. This is a global, not national, consequence."

George Gilder, senior fellow at the Discovery Institute in Seattle and author of Life After Television, observed that allowing new companies to compete does not benefit entrenched powers. Deregulation can destroy the powers that be. "The freedom model of deregulation is not likely to be any company's or industry's first choice," said Gilder, in a recent chat.

"Each, of course, would like to preside over a government-protected monopoly and to enjoy government restrictions on its competition. But since you cannot possibly grant special advantages to everybody, it would seem logical that free and open competition should be accepted as each lobby's second choice."

Perhaps the most prominent example of how regulations tend to discourage entrepreneurs is in telecommunications. Walker observers that present economic regulations "freeze in that which is." US West, Ameritech, Nynex and the other Baby Bell phone companies provide an example of what Walker means. These companies have been forbidden from manufacturing for more than a decade under a consent decree reached with the Justice Department.

As executives planned for a recent technology trade show, one was inspired by the idea of creating a cardboard mock-up of the type of telephone equipment the companies could make if Congress removed those restrictions. Corporate lawyers quickly killed the plan, fearing the Justice Department would construe creating the cardboard mock-up as "manufacturing" and could find the Bells in violation of antitrust laws.

Such regulations of the past, designed to protect consumers in a different era, are today restraining technological development, observers say. Cellular telephony and voice mail, conveniences used in daily business life, were delayed for a decade in the 1980s by regulations, as were broadband networks, capable of conveying billions of bits of data per second over fiber optic cables. Companies had to find ways around the regulations -- such as creating completely separate operations or lobbying Washington for incremental exemptions -- to bring those innovations to the market.

Estimates by Michael Jensen, former president of the American Financial Association and the Harvard Business School, show that such rules may cost the U.S. economy $2 trillion in economic growth in the coming years, as cable and telephone companies are prevented from merging, due to fears over concentration of market power and wealth.

Such regulation began to take hold of the economy when two other economic eras were colliding, the first-wave agricultural economy and the second-wave industrial era, observers say. During the Progressive Era, from 1900-1916, the era of big government began; federal inspection of food, banking regulations and antitrust laws were written. Then came the telephone regulations in the 1930s. Until that time, most American business was conducted through sole proprietorships or partnerships. As the second-wave industrial age began to flourish, the first wave of agriculture began to decline and consolidation changed the face of industry. Now, in the words of economist Martin J. Sklar, author of Corporate Reconstruction of American Capitalism, 1890-1916: The Market, Law, and Politics, capitalism was transformed from an array of small, entrepreneurial so-called "price takers" to gargantuan, industrial "price seekers." The belief at the time was that consumers no longer received protection from market forces. And because large firms operated nationally, the states could not control them.

According to Peter Huber, a senior fellow at the Manhattan Institute for Policy Research, and author of Orwell's Revenge, a book about regulatory overreach, present regulations, especially in the area of antitrust, are premised on the contradictory idea of "promoting competition by forbidding it. If private companies divided up phone and cable, and broadcast and cellular markets in a private agreement not to compete, they'd be put in jail," says Huber.

But technology users -- small businessmen, consultants and the like -- will benefit even more than the technologists from the revolution. They will be able to prosper by building businesses wherever they choose, and communicating with clients on new telecom connections, said Gilder.

"Unless telephone and cable companies are allowed to merge or directly collaborate with one another to create fiber optic systems and digital services in the phone companies' existing territories, and unless entitlement subsidies and other artificial regulatory requirements are ended quickly and decisively, financial obstacles to investment will delay introduction of the pending communications revolution by five to seven years," says Gilder.

"Not only will our languid economy lose the massive $2 trillion stimulus I am predicting, but America will also lose its worldwide leadership in telecommunications. We are in a golden, though probably, brief, moment for the American economy and civilization. Thanks to the nature of new technologies and a dawning political awareness that these technologies have overturned the logic of regulation, Congress has the chance to free American industry to lead the world into what I have called the telecosm,'' concluded Gilder.


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