Trustbuster

This space has never written about John McCain, except in passing. However, in reading Stephen Moore’s piece in the WSJ this morning, we noticed one of those moments that begin to work for us like a pebble in our shoe.

On a broader range of economic issues, though, Mr. McCain readily departs from Reaganomics. His philosophy is best described as a work in progress. He is refreshingly blunt when he tell me: “I’m going to be honest: I know a lot less about economics than I do about military and foreign policy issues. I still need to be educated.” OK, so who does he turn to for advice? His answer is reassuring. His foremost economic guru is former Texas Sen. Phil Gramm (who would almost certainly be Treasury secretary in a McCain administration). He’s also friendly with the godfather of supply-side economics, Arthur Laffer.

Moore may be reassured, but we are not. McCain is 69 years old (though his website bio omits this). He has served in Congress for 23 years. He is ranking member on the Senate Commerce Committee. He is at the top of the MSM’s list of GOP candidates for President in 2008. And he still, after all these years and all this experience dealing with commerce, needs to be educated on economics?

Moore’s piece paints a picture of McCain as the new TR that is not new, but came to us in a new way in the light of McCain’s comment about economics. McCain is no fan of big business, and, in full disclosure, neither are we. Big business does a lot of things well and a lot of things in awful, stultifying, non-economic ways. But the excesses and non-economic decisions of big business are subject to the cruel corrections of the marketplace, perhaps even more so than small businesses. (We have written of these declines here and here, among other places.) Consider what the marketplace has done to giants like US Steel or the New York Times or General Motors when their managements failed to adapt to a changing marketplace. By contrast, consider what McCain wrote in 1999 about mergers under the 1996 Telecommunications Reform Act:

Common sense tells you that the higher telephone, cable TV, and wireless bills that consumers have been paying since 1996 aren’t going to drop, and the increasing concentration among companies in the telecommunications industry isn’t going to stop. In perhaps its greatest irony, the Act has succeeded in laying the foundation for more regulation, more concentration of control, and higher rates, even as it proves that competition, not regulation, produces better service at lower prices.

Let’s focus for a moment on the consequences of the increasing industry concentration the Act has spawned. Why is this happening? because more venturesome companies are acquiring telecom businesses so they can expand into new markets, and this, in turn, forces more conservative companies to either increase their share of their existing markets by buying out their competitors –or sell out. Thus has the Act remade seven Regional Bell Operating Companies into four, created the two largest long-distance telephone companies out of the original four largest, and transformed what was widely called “Ma Bell” into what is now being widely called “Ma Cable.”

Depending on your perspective, you can view this merger mania as a rational marketplace responding to an irrational law, or as a gratuitous industry sellout of consumer welfare for corporate profit. But on one point there can be no disagreement: whatever its causes, and whatever its ultimate effects on the industry and on different classes of consumers, this telecom industry merger cotillion leaves would-be industry entrants and small telecom businesses without partners while the big players dance. Since new entry and the ability to grow existing businesses are key components of competition, and since competition is the surest way to achieve the goals of better service and lower prices, trampling small business underfoot in the industry’s dash to consolidate ill serves consumers’ interests.

Small businesses have always faced substantial problems in trying to become independent, long-term players in the telecommunications market. These problems have been even more severe for members of minority groups and for women, because they have historically found it more difficult to obtain necessary capital. But the sheer size and scope of the industry concentration incentives unleashed by the Act have made what was once a high barrier well-nigh insurmountable.

Well, all that worrying was before LDDS and UUNET became Worldcom and went bankrupt, and before Global Crossing made Terry McAuliffe a fortune and then filed Chapter 11 — they have been in a constant turmoil of restructuring. Oh yes, regarding the “common sense” that told McCain that telecom bills were not going to fall: while it is hard to get apples-to-apples comparisons of costs from 1996 – 2005 because of all the new features that phones have, Vodaphone’s customers (to use one example) have gone from 3 million to 155 million in that time, and the industry estimates that there will be a cell phone for almost one out of two people on the planet by the end of the decade; clearly they have become trivially expensive. And as for cable TV, another of McCain’s concerns: cable TV was a bit player in 1975; it may well be so again in 2025, given the pace of technological change.

Our point is that regulatory tinkering with fast changing / fast growing / fast innovating industries is mostly a fool’s errand. The federal government sued IBM to break up the company because it was going to dominate the world with its mainframes — you remember IBM, don’t you? you remember mainframes, don’t you? And there was that Microsoft suit; just what was that about anyway?

If a man thinks that fiddling with the merger laws in a fast changing, brutal industry is vital and necessary for the common weal, it is our view that he is focusing on the wrong things from the standpoint of overall economic growth and vitality. This is troubling. You can’t teach an old dog new tricks. If a man who is nearly 70 years old, and has had significant experience as an overseer of commerce, says he needs to beccome “educated” on economics, we would do well to believe him.

One Response to “Trustbuster”

  1. DL Says:

    For a man who knows little about economics, he sure was deeply involved in the Keating 5 scandel. I suppose finance and economics are teo diferrent subjects different with this guy – like the first amendment has nothing to do with McCain Feingold either!

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