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Capitol Comment

    Capitol Comment 205 - Tying Regulation to Reality

    10/02/1998

    I make mistakes. For example, last weekend the one tie that I brought to an out-of-town wedding did not match my suit. I took responsibility for poor wardrobe selection and wore the tie anyway. However, there were other choices. It would have been possible to purchase a new tie, borrow a tie, or go to the wedding with no tie at all. In the end, I chose to wear the tie and accept the ridicule associated with that decision.

    This window into everyday life illustrates a basic economic truth that telecommunications policymakers have not learned. Individuals’ decisions, what economists call "consumer choice," cannot be replaced by a group of well-meaning experts. The Federal Communications Commission (FCC) recently announced their tentative approval of a merger between MCI and WorldCom. While the decision to allow the merger to go forward is sound, it never should have been made by the FCC. In fact, this is ridiculous.

    First, it is duplicative. The Department of Justice has an entire division, approximately 800 people strong, devoted to this issue. At the Anti-Trust Division, mergers are examined both before and after they occur. And the Federal Trade Commission has an explicit mandate to pursue consumers’ interests with regard to this type of activity as well.

    Second, it is arrogant. Each merger is scrutinized by the millions of investors in each company. The interest of an investor is the same as a consumer – a company that provides high quality products and services at competitive prices. The combination of consumer choice and investors’ knowledge is superior to any team of economists assembled at the FCC.

    The regulation of business plans is not confined to mergers. Earlier this year, US WEST and Qwest Communications announced a strategic partnership that provided consumers with one-stop-shopping for local and long-distance telephone service, call-waiting and caller identification features, paging, wireless and Internet access. The services could be custom designed to meet the needs of the consumer and a single payment and rate would suffice. Within weeks an activist FCC stepped in to halt the sale of this service after more than 130,000 customers had signed up.

    The arrangement is on hold while it winds through the legal system. At issue is whether consumers can choose their level of telecommunications service or if the FCC should determine the types of service various companies are allowed to provide. It would appear that the primary interest of FCC regulators is to manipulate the market for telephone service through a Byzantine system of rules and regulations. But even well-intentioned regulators cannot beat the marketplace when it comes to providing better, newer and cheaper products. On the other hand, the interest of consumers is clear; they want convenient service, not more regulation.

    Since most people agree that good telecommunications policy is important, like being well dressed, who should make the critical decisions about the future and direction of the industry? There are two options that may ensure consumers receive the best value from the telecommunications industry. The first is to require someone in Washington to grant permission to companies before their products, services and prices are offered. The alternative is to allow firms to offer products and services freely and let consumers determine the direction of the market through their choices.

    At first glance, it may seem attractive to delegate important economic decisions to dispassionate, professional and disinterested experts. It is not. Today this type of person is called a bureaucrat. Every decision made by a bureaucrat has an impact and is made without the knowledge of the consumer’s needs, desires or preferences. With economic regulation, some firms are hurt and others are helped.

    The second option places consumers in charge; consumer choice becomes the test for success. In the case of price regulation, there is a pool of interested individuals called consumers. Consumers who are unhappy with a price can tell sellers through the purchase of other goods or services. Another choice would be for consumers to make fewer purchases, or in effect, save more of their money. The result is price regulation accomplished by those most interested – buyers and sellers.

    Consumer choice should be the principle that guides any economic regulation. Individuals are better suited to take responsibility for their decisions than government regulators. It is a mistake to tie our economy to regulators when consumer choice serves us so well.