Free the digital economy.

FOR the past 150 years, a hallmark of the American economy has been that we are almost always first in inventing and adopting cutting-edge technologies. That has been true in every area from drugs and vaccines to automobiles, aeronautics, TV, radio, semiconductors, and computers.

That's why a new United Nations report on the digital economy is so disturbing. It finds that when it comes to the next generation of communications technology, high-speed broadband service, the United States is not a global leader, but a laggard. Broadband technology makes Internet service faster and more reliable, and allows us instantly to download text, video, music, and data.

In the area of broadband, America is not in first, or second, or even third place. We now rank eleventh in the world in home and office access to high-speed Internet service. Only a little more than a third of American homes and businesses have broadband, even though this technology has been with us for several years. Six out of ten Americans are still sputtering around on the Internet in clunky Model Ts as the rest of the industrialized world zooms past us in eight-cylinder Porsches. As the accompanying chart shows, this is the first new consumer product in decades whose dispersal to middle-class households is taking longer than it did for the previous technological Next Big Thing.

The economic costs of falling behind are huge. Nearly $2 trillion of stock-market value has been lost in the telecom industry since 1999, thousands of firms have gone bankrupt, and they have flushed tens of thousands of well-paying jobs down the tubes with them.

Who's to blame for this wreck? Congress and federal regulators. The 1996 Telecommunications Act was supposed to remove regulatory hurdles to the information superhighway. Instead it has erected anti-growth price controls that stunt new investment. Peter Huber of the Manhattan Institute explains what has gone wrong: "We have a stupefyingly complex labyrinth of rules that regulate the price of everything. It is HillaryCare for the telecom industry." Most damaging of all is a rule that requires the Baby Bell telephone companies, which are expected to invest $100 billion in broadband infrastructure, to allow competitors to free-ride on the system at below-market costs. They are essentially asked to build the lemonade stand and then let their rivals use it too.

The FCC should deregulate and lift all price controls, as we did so successfully in trucking, airlines, and energy in the late 1970s and early '80s. Some at the FCC still cling to the obsolete notion that broadband is a monopoly service and must be price-fixed. In this age of satellite technologies, cable TV hook-ups, and near-universal cellphones, the broadband industry already faces competitive forces that will hold prices down and serve customers efficiently.

Economist Robert Crandall of the Brookings Institution estimates that there would be $500 billion a year in added telecom investment if we simply imposed a saner regulatory structure. Liberating the digital economy from the leaden hand of regulation would allow America to rise from Number 11 to Number 1 in the world in telecommunications innovation.

That'd be more like it.

Number of Years It Took for
Major Technologies to
Reach 50 Percent of
American Homes

Telephones          71
Electricity         52
Radios              28
PCs                 19
Cable               15
Cellphones          14
VCRs                12
Internet Access     10
DVD Players          5
Broadband Service    8 *

* AND COUNTING

SOURCE: DALLAS FEDERAL RESERVE BOARD, 2002