TCS Daily


Rules for Politicians to Live By

By James K. Glassman - February 23, 2000 12:00 AM

We live in an amazing era. This may be the most exciting and rewarding time to be alive on the planet. In the United States, it is certainly the most prosperous period in history. In no small part, we owe our prosperity to the boom in technology.

So the key question is how to encourage this remarkable technological progress which has spread benefits so broadly. Not only has unemployment dropped to 4.1 percent overall, but it has fallen even more among African-Americans - from 14 percent to 7 percent - and among Hispanics - from 11 percent to 6 percent. What can public policy do to continue, even accelerate, this prosperity?

Recently, I attended a breakfast at which Virginia Gov. Gilmore was the speaker. During the Q and A, he was asked this question: What can government do to encourage entrepreneurship in America? Instead of mouthing the usual platitudes, Gov. Gilmore said something very simple and to the point: The best way to help, he said, was by keeping the Internet a tax-free zone.

Frequently, government does best when it does nothing. And, for a legislator, nothing is not easy to do. People often ask me, How much credit should Bill Clinton receive for today's prosperity? I say, a great deal. Not for what he has done, but for what he hasn't done.

It's almost impossible to keep up with the technology involved in all of these issues. My advice to politicians: don't worry. Particular technologies are not the issue. In the end, the principles expressed in your laws will be much more important than whether you use the latest version of Explorer or know what a megabit is.

To put it another way, it's the job of high-tech companies to understand the engineering and design new products. It's the job of legislators to create the environment that allows consumers to benefit from them.

I think we can all agree that our main objective is robust economic growth. The central question for politicians should be: how can we encourage this growth to continue?

We suggest four key principles, based on the successful history of the high-tech industry. We call them the Tech Rules.

Number One: Consumers first!

Number Two: Don't let companies to run to the government for help in the marketplace.

Number Three: Embrace tax policies that encourage growth and innovation.

And Number Four: Promote free trade around the world.

Now let's talk about the details.

Number One: consumers first. This does not mean listening to self-appointed consumer advocates. It means allowing consumers to drive the market with their free choices. Consumers, naturally, want more value at lower cost, and by this measurement the computer business has been the most consumer-driven industry in the history of the world. In the United States, the price of computing power has been dropping in half every eighteen months for almost three decades.

So how did this apparent market miracle happen? One thing we know is that the government did not get between the creators of new technology and the consumers who stood to benefit from it. Nobody told the garage operators in Silicon Valley what products to invent, how to sell them, what prices to charge and which deals to offer to which customers.

Now let's apply that lesson to today's technology markets. What does the consumer of high-tech products want most of all right now? If you've spent any time at all on the Internet, you know the answer: speed. Web surfers have been demanding fast Internet access for years. Unfortunately, local telephone lines are owned by government-created monopolies, so we've been waiting a long time.

The good news is that competitors are finally emerging, prodding those local monopolies. Small companies like Covad and Northpoint are offering high speed service over telephone lines. Satellite and wireless operators are developing their own competing services. And cable operators have now signed up more than one million customers for their high-speed connections.

So, how should government officials respond to this budding industry of fast Internet providers? If you want to serve consumers, the policy direction should be clear, based on our experience with the computer industry.

Don't get between the creators of this technology and the consumers who want it. Don't regulate new pathways to the consumer. Don't re-write telecom laws every five minutes.

In 1996, Congress and the President agreed on a way to deregulate telecommunications. The idea was to let local telephone monopolies into the long-distance business as long as the locals opened up their own markets to let other companies compete with them. But recently, the Baby Bells have convinced influential members of the House to introduce a bill to let local companies into one lucrative part of long distance - data transmission (that is, Internet and other online communications) without opening up their markets as the Telecom Act required.

Will this law help certain producers? Absolutely. Will it help consumers? No, because it will keep local markets closed.
Another problem with laws like this is that they increase uncertainty. The truth is that society needs rules. They should be clear-cut and not changeable at the whim of legislators swayed by the interests of particular producers. Investors, for example, need to know that when the rules of the game are set, they won't be altered, corrupting the reason for the investment in the first place.

Remember, Adam Smith said it in 1776: pay attention to the needs of consumers. The producers can take care of themselves.

Which brings us to Rule Number Two: Don't allow companies to run to the government for help in the marketplace.

The fact is that you never know where the next great idea will come from, so trying to help specific companies is futile, and sometimes it's downright destructive.

But if you allow an environment with no barriers between creators and consumers, the results will surpass even your most bullish expectations.

In the mid-1980s, a husband and wife on the Stanford University faculty wanted to exchange e-mail love letters at work. Unfortunately, their academic departments used incompatible computer networks. So they created a new type of digital router to bridge the divide, and in the process created a new company. They named it Cisco Systems - one of the most successful businesses in American history.

Going further back into the history of high-tech, when a small California company created the microprocessor in 1971, few people understood the significance. It certainly wasn't a major business story that year. In fact, even many people within the company thought that other products were more important. Today, Intel's microprocessor is the heart of the digital economy.

So as much as you may want to help, it's nearly impossible for you to know which companies will yield the greatest benefits to society. The only wise course is to let companies compete; let markets and consumers decide.

Still, sometimes in your zeal to support technology you will be very tempted to help specific companies. These companies will come to you and say, "All we want is a level playing field." Remember, a level playing field doesn't mean that you give every competitor an equal chance of winning - it means that you allow the best team to win.

Perhaps the most egregious example of regulation aimed at helping companies instead of consumers is the Microsoft anti-trust case. Companies which believe they were wronged by Microsoft have a recourse: they can go to court. But it's a lot easier and cheaper to enlist the government to go to court on your behalf. What the government seems unwilling to accept is that in a genuine free market, with truly open competition, there are indeed winners and losers among producers. But among consumers, only winners.

Our third rule says: Embrace tax policies that encourage growth and innovation. It's important to ask the right question. The question is not: how do we maintain existing tax systems? The question is: how do we allow the explosive growth of the Internet to continue and also fund state governments?

We do not exist to serve the tax code. Taxes and government exist to serve us. So let's benefit from experience in choosing the best tax-collection system. What's working like gangbusters in the e-economy is unregulated commerce, free of sales taxes. This allows fast growth, which in turn is generating more wealth, higher offline sales taxes, higher property taxes, and higher income taxes. Why would anyone want to disrupt this virtuous cycle?

Finally, let's talk about Principle Number Four: Promote free trade around the world.

It is the ultimate irony that we off all people are debating free trade. If the French want to debate free trade, I guess I could understand that. The Japanese? Well, maybe.

But the United States? In truth, I think all countries win in a free-trading system, but we win more than anyone else. The whole world wants our technology products. The whole world is learning English to communicate across our networks and to speak our computer languages. The whole world wants our medicines and our medical devices. Airlines around the world fly our airplanes, Nike's Air Jordan is still the coolest brand on the planet, and the world wants to watch Hollywood's movies. We lead the world in all of these great high margin-businesses, we accumulate all these pieces of paper called dollars, and then we get to trade all these pieces of paper for lots of great stuff that we don't want to make ourselves. It's a great deal.

Politicians should feel secure in the knowledge that you don't need a PhD in electrical engineering to advocate good technology policy. All you need is a commitment to free markets.
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