--------- July 2,1997 Time to Walk the Walk on Telecom Policy by Jeffrey A. Eisenach The Progress & Freedom Foundation Thanks to Ira Magaziner -- of all people -- the Clinton Administration has finally learned to talk the free market talk that brings joy to denizens of the Internet. Now, as always with this Administration, the question is whether it will also walk the walk. Magaziner deserves real credit for crafting the Administration's new "Framework for Global Electronic Commerce." In language that could have come from the Cato Institute (or my own Progress & Freedom Foundation), it credits the amazing growth of the Internet to the relative absence of intrusive government regulation. And it concludes that the Internet should remain "a market-driven arena, not one that operates as a regulated industry." The paper -- and the process that created it -- has already had a salutary impact on Administration policy. The White House has now backed away from its previous support of the Communications Decency Act in favor of "industry self-regulation, adoption of competing rating systems and development of easy-to-use technical solutions." And last month, Treasury Undersecretary Larry Summers, reportedly at Magaziner's urging, had very positive things to say about the "no new taxes on the Internet" legislation sponsored by Congressman Chris Cox and Senator Ron Wyden. The Administration's conversion to a free market view of the Internet is, however, far from complete -- even rhetorically. Most importantly, the Framework's treatment of telecommunications regulation amounts to an endorsement of the Federal Communications current policies -- policies that are, if anything, more regulatory than before passage of the supposedly deregulatory Telecommunications Act of 1996. Following the path laid out by Vice President Gore and outgoing FCC Chairman Reed Hundt, the Framework ignores the fact that technological innovation is rapidly ending the "natural monopoly" characteristics of the market for local telephone (and Internet) access. What government should be doing in this context is allowing marketplace incentives to work, thereby encouraging new technologies and new competitors to turn the potential for local access competition into a reality. What it is doing, under the FCC and with the apparent blessing of the Framework, is continuing a price regulatory regime that destroys marketplace incentives for the development of new technologies and competitors. The Framework, which begins by stating that "government attempts to regulate are likely to be outmoded by the time they are finally enacted," ends up endorsing the idea of "implementing, by an independent regulator, pro-competitive and flexible regulation that keeps pace with technological development." Nice fantasy -- but in contrast to the reality of the FCC's implementation of the Telecommunications Act, it comes off as nothing but a bad joke. Telecommunications is not the only problem area with respect to policy. Most notable among the others: Encryption, where the Administration stubbornly adheres to its unworkable, privacy-invading notion of "key escrow" for encryption software -- i.e., giving the police the key to your house in advance in case they decide later they want to conduct a search. Still, problems aside, what we have from the Clinton Administration is a real and laudable move -- partly rhetorical and partly real -- in the direction of less regulation of the Internet. For the most part, the Administration is now talking the deregulatory talk. Will it also walk the walk? Here are three giant steps that would go along way to proving the Administration means what it says. First, will the Administration appoint a new FCC (there are four vacancies, including the chairmanship) that understands the idea of dynamic competition to erode natural monopolies? The FCC's current "managed competition" approach is inconsistent with the broader principles of the Framework and hugely destructive to the innovation and entrepreneurship the paper emphasizes so strongly. A new Commission would no doubt want to re-think the Commission's recent rulings with respect to Interconnection and Universal Service, both of which represent massively regulatory approaches to problems the free market can largely solve. Secondly, will it specifically endorse the Cox-Wyden legislation prohibiting discriminatory taxation of the Internet? Saying nice things about the bill is one thing; endorsing it and working for passage is something else. Third, will the Administration support the new legislative agenda being developed and soon to be introduced by Senator Conrad Burns and Congressman Billy Tauzin (chairs of the Senate and House telecommunications subcommittees)? Among other things, this legislation is expected to declare "enhanced services" (including broadband Internet access services) an essentially regulation-free zone -- exactly the sort of thing the Framework says the Administration should support. Free marketers want to believe the Administration has seen the light on regulating the Internet. Our message now is simple: Take three giant steps -- and throw away on the key on key escrow -- and show us you really mean it. ###