National Policy Analysis Logo

 # 325  

 February 2001




Government Policies Toward Business Help Push Economy Toward Recession

by Amy Ridenour

 

My, how things change.

Once upon a time, the government guarded the public against business monopolies.

Nowadays, the problem is the government. Its policies toward business are harming competitiveness and helping to push the economy toward recession. The economy, retirees and working wage families are taking a hit.

Back in 1984, the biggest business news was the breakup of AT&T - the old "Ma Bell" - into a long distance company and seven regional "Baby Bells." AT&T went from a company with $149 billion in assets to one with $34 billion; from a company with a million employees to one with a third of that.1

Nowadays, market pressures force change and competition on technology companies in ways we never conceived of in 1984. But rather than stand aside and let the market tame the dominating power of big firms, government gets in the way.

AT&T is one case in point.

Recently AT&T announced plans to break up into four parts as part of its conversion from a voice long distance company to one that offers cable TV, Internet access and local and local distance telephone.

Ironically, the very government that once forced AT&T to break up has been standing in the way of its current efforts to improve competitiveness.

Government caps on cable ownership are preventing AT&T from developing a comprehensive communications network to compete with the regional Bell companies - which is perverse, since the government's purpose in 1984 was to force competition between the Bells. Needed approvals for mergers with cable companies dragged on forever. Some local governments thought AT&T should not be allowed to own cable TV firms unless it agreed to let competitors use AT&T's cable system for their own purposes - which included competing with AT&T. But what company buys resources for its competition's use?

All in all, government's response to AT&T's metamorphosis - which it should applaud - has been to obstruct and delay.

Odd behavior for a government that claims to support competition.

AT&T is far from the only company to face counterproductive government behavior.

The Nasdaq technology index plummeted from approximately 5,000 to 3,500 after the Clinton Justice Department, Joel Klein and David "Dimpled Chad" Boies spearheaded an attack on Microsoft leading to a court order to break it up. Investors immediately reconsidered their enthusiasm for technology stocks, realizing that successful risk-taking might be rewarded by a profit-killing visit from Uncle Sam.2 According to Lawrence Kudlow, chief investment strategist and economist at ING Barings LLC, the government assault on Microsoft alone cost the economy nearly $1.3 trillion in wealth loss.

4.8 million AT&T stockholders,3 more than a few of whom are retirees, can sympathize. But make no mistake: The general public, not just stockholders, is hurt by government's anti-competitive behavior.

A study by the independent, non-profit Institute for Policy Innovation analyzed the effect of the Microsoft decision on the entire economy. Their conclusions are staggering. They conservatively estimate that, because the decision raises the cost of capital, it will reduce 2000-2010 tax receipts of all levels of government by $52.5 billion. Computing the losses in interest savings as well results in a lowering of government surpluses by $66.8 billion - federal surpluses by $40.3 billion and state and local by $26.5 billion.

Aunt Minnie, hang on to your hat, because this is bound to adversely affect the needed bailouts of Social Security and Medicare.

That's not even the worst of it. The study's authors, Gary and Aldona Robbins, believe the Microsoft decision alone will reduce gross domestic product by $147.2 billion. Consumer spending will be reduced by $66 billion. The higher cost of U.S. capital relative to that of the result of the world will cause U.S. exports to decline by $14.6 billion. With U.S. production down, investors, savers and entrepreneurs will earn less, reducing personal income by $59.6 billion. Savings will fall by $77.6 billion. The slower economy will result in the creation of 44,900 fewer jobs.

Slower economic growth, say the authors, means a lower standard of living for everyone. The loss from the Microsoft decision alone represents a loss of $507 for every single American, or $1,293 for every household.4

Imagine what the losses to the economy are when the harm caused by faulty policies to AT&T and hundreds of other companies is factored in.

Some Americans cheer when government attacks big business. They don't consider that the end result might be an attack on their own pocketbook.

In the 17th Century, poet and clergyman John Donne taught that all mankind is interconnected. His famous words apply also to the economy: Never send to know for whom the bell tolls; It tolls for thee.5

 



Footnotes

1 "Post-Divestiture AT&T," AT&T website, downloaded from http://www.att.com/history/history4.html on November 1, 2000.
2 Lawrence Kudlow, "Boies Back on Stage," The Washington Times, November 26, 2000.
3 "AT&T Declares Quarterly Dividend," AT&T press release, September 25, 2000.
4 Gary and Aldona Robbins, "The Real Economic Costs of the Microsoft Decision," Institute for Policy Innovation, Lewisville, Texas.
5 John Donne (1572-1631), Meditation XVII, Devotions upon Emergent Occasions.

# # #

Amy Ridenour is President of The National Center for Public Policy Research, a Washington, D.C. think tank. Comments may be sent to [email protected].




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