A Lost Consensus on Deregulation and Competition

Everyone knows that the contemporary telecom debate pits free-market opponents of regulation against progressives who want a more activist government. But if that’s what you’re expecting, then the 1970s and early 1980s look very puzzling. You had the Democratic Carter administration and left-wingers like Ted Kennedy pushing to deregulate major industries. And you had a government crusade to break up Ma Bell that was launched by the Republican Ford administration and completed by the conservative Reagan administration.

To understand what was going on, we have to look back even further in history. The transpartisan enthusiasm for these policies emerged as a reaction to an ideology that will seem alien to modern observers. For the majority of the 20th century, this reining orthodoxy held that central planning was efficient and too much competition was destructive. Tim Wu called it Vailism, after the AT&T president who convinced the federal government to make AT&T a regulated monopoly. And it’s closely connected to James Scott’s concept of high modernism.

This ideology shaped much of Franklin D. Roosevelt’s New Deal. His National Recovery Administration had as its explicit goal to help industries form cartels so they could raise prices. That sounds insane to modern ears, but it wasn’t an aberration; the same attitude underpinned much mid-century policymaking. The Roosevelt administration created or expanded a number of government agencies, including the Federal Communications Commission, the Interstate Commerce Commission, and the Civil Aeronautics Board, which openly discouraged new entrants into the industries they regulated in order to prop up the incumbents’ profits.

The high modernist consensus against competition only started to unravel in the 1960s when economists like George Stigler documented how economically damaging these anticompetitive policies were. In the 1970s, their arguments started to make an impression inside the beltway. When Stephen Breyer took a break from teaching law at Harvard to work on the Hill for Ted Kennedy, he brought the emerging academic consensus with him.

Libertarians (including this one) like to point this out to liberals as a kind of “gotcha” story: even Ted Kennedy supported deregulation. But it’s important to remember that this coin has two sides. It’s equally true that even the Reagan administration supported the breakup of AT&T. And that’s not all.

Consider the Computer Inquiries, a series of regulations designed to prevent AT&T from dominating the nascent market for online services. It will surprise no one that this activist, big-government regulatory project was inaugurated by the Johnson administration. But it didn’t end with Johnson. The process produced three major orders over almost two decades, and there was remarkable continuity among the Johnson, Nixon, Ford, Carter, and Reagan administrations.

This consensus—repeal anticompetitive laws while actively protecting new entrants from the incumbents—survived the AT&T breakup. Indeed, the 1996 Telecommunications Act, which was passed by the conservative Gingrich Congress, is based on the same basic intellectual framework. It relaxed various restrictions on telephone and cable companies entering new markets, while simultaneously instituting an “unbundling” regime that forced incumbent telephone carriers to lease parts of their networks to competitors at regulated rates.

This might look like a philosophically confused mixture of deregulation and re-regulation, but I don’t think that’s how the legislation’s authors saw it. Rather, the unifying theme of the act was competition. Both the regulatory and deregulatory provisions of the bill were designed to increase the number of firms in various telecommunications markets.

That consensus has evaporated over the last 15 years, replaced by the pro- and anti-regulatory camps that are so familiar today. My sympathies are generally with the anti-regulatory camp, but I’m starting to think we’ve lost some important insights from that earlier consensus.

Once a “private” company becomes deeply intertwined with the state, it can be difficult to ever fully separate them. Formally repealing state privileges may not fully undo the damage if the incumbent continues to enjoy the fruits of past favoritism. And incumbents can leverage their intimate knowledge of the regulatory process—and decades of political capital accumulated from past interaction with regulators—to twist facially neutral regulations into weapons against their competitors.

This means that deregulated incumbents like AT&T and Verizon may never become fully private entities. And so a truly free-market agenda requires more than just reflexively opposing all government interventions in the telecommunications market. The government is not monolithic. Sometimes (as with the AT&T breakup and the Computer Inquiries) one part of the government works to check the harmful policies of another.

This principle is complicated, and reasonable people are going to disagree about how best to apply it. But one of the most obvious ways to check the power of incumbents is by making sure they have plenty of competitors. Competitive markets make regulators’ jobs easier because they force companies to serve consumers well even when regulators aren’t watching. So if regulators see a nice, clean opportunity to preserve or expand competition, they should probably take advantage of it.

The market and the political system are not separate, hermetically sealed spheres. It’s obvious that regulatory decisions shape the evolution of the market, but the evolution of the market shapes the options available to regulators. Promoting competition today will strengthen the case for deregulation tomorrow. Policies that undermine competition today will strengthen political pressures for regulation tomorrow.

An earlier generation of free-market economists understood this. And one way or the other, it’s a lesson we’re going to learn again. I just hope we don’t have to learn it the hard way.