What's the biggest threat to economic growth?

The biggest cause for concern is politicians and regulators clinging to 19th and early 20th Century models of how the economy ought to work and how it needs to be regulated. This not only slows the New Economy’s growth. In the right circumstances, the approach risks creating what I call a “regulatory recession” – by limiting the ability of businesses to adapt to rapid change and thus discouraging investment.

A clear example of the old-line thinking has been the assault by the Justice Department upon Microsoft. No one – not even Joel Klein’s own expert witnesses -- has demonstrated what harm was done consumers by Microsoft giving them a free browser to hook up to the Internet or what they’ll gain from the government’s plan to break up the company. It did, though, cost Microsoft investors $200 billion in market value and make all investment in technology stocks more risky, touching off a rout in Nasdaq stocks that has sent them down more than one-third since March. New tech companies are facing an even harder time getting started.

Another is what is going on now with business-to-business – B2B – transactions online. For the most part unregulated, they’ve grown dramatically, topping $300 billion this year. Over the next three years, they are forecast to provide businesses and ultimately consumers $180 billion in savings from new efficiencies. Yet the Federal Trade Commission, in the name of consumer protection and old fears of business collusion, has started holding up the creation of some websites where businesses can openly barter and trade with each other online. FTC Chairman Robert Pitofsky, while giving lip service to free markets, ominously promises to keep a close eye on such B2B deal making.

That’s the same thing the agency advocated on the question of online privacy two years ago, when only about a seventh of websites had privacy policies for personal data provided them by consumers. Now, 90 percent do, and nearly half won’t trade information, yet the commission has decided it needs to set up a policy everyone must follow, no matter that consumers now have plenty of choices.

As FTC Commissioner Orson Swindle, a Clinton appointee, told me at a panel discussion put together by the Online Privacy Coalition earlier this month, the commission “jumped the tracks.” What will it do to B2B or B2C – business to consumer – is anyone’s guess. The legitimate fear, though, is that it will slow activity and reduce savings for everyone.

The Federal Communications Commission is doing much the same thing. William Kennard, the chairman, was a fierce advocate of keeping the government’s hands off cable companies as they and not bow to calls for “open access” to the broadband communications networks they were building. Now the agency seems to be having second thoughts, deciding last month to hold hearings on the issue.

At the same time, the agency is further limiting broadband deployment by its interpretation of a cap set by Congress on control of cable viewership. The 30 percent cap on the number of viewers a cable company is allowed to control is itself arbitrary, and it makes little sense in light of new satellite and phone delivery competition for cable viewers. But making matters worse, the FCC says that if one cable company owns as little as 5 percent of another -- and has no say in its operation — that investment counts toward the cap as if the company owned 100 percent. Only a bureaucrat would create such a bottleneck to inhibit AT&T and others that are investing in cable from creating new high-speed communications networks.

Coupled with the FTC trying to foist on AOL and Time Warner open access requirements as part of their merger agreement, incentive for investment in cable broadband keeps getting narrower, at considerable cost to both consumers and the economy.

Yet, such regulatory hoops are becoming increasingly common for high-tech companies. Antitrust enforcers not only here but now in Europe have helped kill deals involving WorldCom, MCI, Sprint and several wireless companies. And those they haven’t killed they have delayed for up to a year and more, holding up new investment.

All of this comes in the name of promoting competition and protecting consumers. But with the digital age changing the nature of the marketplace daily, the main effect is to put businesses and their investors at risk, while slowing the delivery of new services and raising prices for consumers.

And they do so without having a clue to what is really going on. What regulator four years ago thought that long distance service might become almost a giveaway? And who among these far-seeing bureaucrats and politicians would have predicted that AT&T, the long-distance giant, would decide it had to restructure into four separate companies to compete in the information age? Not one. Still, they show no intention of getting out of the way.

Federal Reserve Chairman Alan Greenspan wisely noted in a speech recently on the challenges to central bankers that past economic models “no longer project outcomes that mirror the newer realities. … It would be folly to cling to an antiquated model in the face of contradictory information.”

Politicians and regulators should heed his words. Otherwise their efforts to protect competition risk throwing the New Economy into reverse, creating a regulatory recession instead.

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