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Capitol Comment

    Capitol Comment 274 - It's the New New Economy, Stupid!

    04/27/2000

    In 1992, Bill Clinton coasted into the White House on a simple message: It's the economy, Stupid. During his two terms in the White House, we saw a communications revolution that gave birth to the "New Economy." As he prepares to leave office, President Clinton's legacy could be described as the beginning of the "New New Economy." Government lawyers and their private-sector trial-lawyer counterparts are attempting to replace engineers and designers as the driving force in the technology sector.

    If the government continues picking winners and losers in the marketplace, legislators and litigators will replace investors and innovators as the people who build the future.

    By week's end, lawyers from the federal government and 19 states will submit remedy proposals in the Microsoft antitrust case. Do we want to allow government lawyers to plan the digital economy? Assistant Attorney General Joel Klein chillingly stated that this decision "sets the ground rules for enforcement in the information age." This action will wed the information economy to what former Labor Secretary Robert Reich called "regulation through litigation."1

    Clinton Once Declared, "The Era of Big Government is Over." In its place is a practice of suing companies in order to force a monetary settlement or an agreement to certain business conditions. In the past such punishment has been saved for politically unpopular industries, namely tobacco and firearms. But now the government wants to help some companies achieve through litigation what they were not able to get in the marketplace.

    America's combination of free markets and free minds have created a way of sharing information that is changing the world. Impressive amounts of wealth have been created along the way by not only the entrepreneurs who had the ideas, but also by average Americans who invested in this new sector through their mutual funds and retirement plans. These savings are in peril because of the government's action; when newspapers reported Monday that the government would seek a radical breakup of Microsoft, rather than just try to regulate its behavior, the stock price dropped by more than $12 per share; investors lost more than $63 billion.

    Until now, Government Officials have let well Enough Alone. The private sector develops, markets, and sells products to consumers who choose which ones will succeed and which ones will fail. Government coffers have benefited as well; a healthy economy leads to higher incomes, which bring in more money, which in turn, politicians spend freely. But now the government wants to get in on the game. So, they have shifted the focus of the information revolution from the West Coast to Washington D.C., from innovation to regulation.

    Faster than a Suing Bureaucrat. The Microsoft antitrust case started with a complaint from Netscape. At that time, Netscape, the scrappy upstart, was pummeling Microsoft in the "browser wars" of the late 1990s. Microsoft had miscalculated the importance of the Internet and was desperately trying to catch up. Microsoft included free copies of its browser with its Windows operating system, and this action sparked the government's antitrust suit.

    But the times have changed. Market forces have turned the tables on Microsoft faster than the lawsuit did. Today, Netscape is now part of the AOL-Time Warner media juggernaut, whose online service has 22.2 million users and growing. In addition, Microsoft faces challenges from Linux, a free operating system, and from Palm OS, which dominates the handheld computing market. Some experts speculate that Microsoft's attachment to its operating systems may cause its downfall, much like Apple's attachment to its hardware led to troubles during the mid 1990s.2 These threats to Microsoft came about through market forces, not government intervention.

    Nevertheless, it appears the government has decided that it cannot trust consumers to make the right choices when it comes to their software. But it may not end there. When Judge Penfield Jackson's findings of fact were released in November, it was like blood in the water. Since then, 131 lawsuits have been filed in 37 states plus the District of Columbia.

    Who Wants to Sue a Billionaire? Microsoft's market dominance is not unique to the technology sector. Today's rate of innovation lends itself to the quick adoption of standards, which are then widely accepted. No one seems to have the time to fight a VHS vs. BETA-type battle. Intel dominates semiconductors, Cisco rules networking, and Oracle is the standard for enterprise-level databases. Other technologies, such as Adobe's Acrobat create new markets and then dominate them. How long will it be until companies who cannot break into these markets look for the government to give them a way in?

    It's the New New Economy, Stupid! If the government continues its campaign of picking winners and losers in the marketplace, legislators and litigators will replace investors and innovators as the people who build the future. The power to choose which companies and products succeed will shift from the wallets of consumers to the checkbooks of special interest groups and corporate lobbyists. In the end, we will all be poorer because of it.

    1 Robert Reich, "Litigation is out, regulation is in," USA Today, February 11, 1999.

    2 See Neal Stephenson's recent book, In the Beginning … Was the Command Line, for his argument that market forces may cause Microsoft to lose power.