[FYI] (Fwd) FC: Is the government strangling the new economy?

["Axel H Horns" <horns@t-online.de>]

------- Forwarded message follows -------
Date sent:      	Mon, 10 Apr 2000 01:47:23 -0400
To:             	politech@vorlon.mit.edu
From:           	Declan McCullagh <declan@well.com>
Subject:        	FC: Is the government strangling the new economy? by James Glassman
Send reply to:  	declan@well.com

This is from the center-right.org mailing list, headers snipped for
space.

It will be archived at:
  http://www.politechbot.com/p-01066.html

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"Is Government Strangling The New Economy?"
from the Wall Street Journal, April 6, 2000
by James K. Glassman, of the American Enterprise Institute and
http://www.techcentralstation.com

It's not hard to understand why Microsoft's stock price plummeted in
the wake of Monday's unfavorable court ruling, but what explains the
decline of the other high-tech companies that dominate the Nasdaq
Stock Market?

Just look at Microsoft's competitors, the companies that were supposed
to benefit from the federal government's lawsuit.  Scott McNealy, CEO
of Sun Microsystems and one of the most aggressive Microsoft
antagonists, was gloating in a press release Monday after Judge Thomas
Penfield Jackson's ruling.  But Sun's stock dropped $3.75 that day. 
America Online owns Netscape Communications, whose complaint touched
off the federal suit. AOL stock fell 7% in two days.  RealNetworks,
cited by Judge Jackson as suffering from Microsoft's "oppressive thumb
on the scale of competitive fortune," was down 13%.  Two makers of
operating systems that compete with Microsoft's -- Red Hat Software
and Apple Computer -- also dropped.

Changing Environment

The rout in Nasdaq stocks -- which only began to bounce back a little
Wednesday -- has been broad and deep.  The breakdown of settlement
talks in the Microsoft case was only the catalyst.  What investors are
realizing is that the environment that helped produce the high-tech
boom -- low regulation, low taxes, minimal government intervention and
a low level of corporate rent-seeking -- is changing profoundly.

In the past, no one told the entrepreneurs in the garages of Silicon
Valley what products to invent, how to sell them, what prices to
charge or what deals to offer.  Now, the new economy is beginning to
look more like the old -- an environment in which the winners are not
necessarily the companies that please customers the most but the
companies that do best at keeping government at bay -- or, better yet,
at using government to thwart competitors.  Stock prices are falling
because the risks to real innovators are rising.

The pundits continue to argue that tech stocks are in a "bubble." 
They said the same thing a year ago, when the Nasdaq was 40% lower
than today -- not to mention five years ago, when it was 80% lower. 
By this reasoning, stock prices are falling because they are too high.
 It is as if the law of gravity suddenly decided to kick in at, oh,
around 5000 on the index.

But the question is why now?  The answer is the increased threats of
intervention in technology markets -- threats made especially vivid by
the Microsoft decision.  To be specific:

Doing a Smith & Wesson.  The same team that gang-tackled the makers of
cigarettes and guns is going after not just Microsoft, but smaller
high-tech companies.  The Justice Department, state attorneys general
and plaintiffs lawyers are setting their sights on such firms as
DoubleClick, the Internet advertising company accused of privacy
abuses.  "We want to do a Smith & Wesson-like thing with DoubleClick,"
said Jennifer Granholm, attorney general of Michigan, last week.

Commenting on Ms.  Granholm's statement, legal critic Walter Olson
wrote: "We suppose this means that she and her colleagues want to
invent far-fetched legal theories to attack business practices that
have long been regarded as lawful; file a great flurry of suits in
multiple courts so as to overwhelm the designated opponent; use the
threat of bankrupting legal expense to muscle it into submission . . .
and instill fear into other businesses that the same thing could
happen to them unless they cooperate."  DoubleClick, by the way, is
down 38% since the onslaught began.

Biotech blast.  In a statement last month, President Clinton and
British Prime Minister Tony Blair made veiled threats about ending
private ownership of human genome information.  Prices of biotech
stocks tumbled one-third (though Wednesday Mr. Clinton backtracked on
his remarks).

Taxing e-commerce.  Ever since Congress nearly unanimously approved a
moratorium on new Internet taxes, the National Governors' Association
has pushed aggressively to tax electronic sales across state lines. 
Gov. Jim Gilmore of Virginia, who heads the federal commission
examining the matter, worked hard for a ban but failed.  Studies show
that sales taxes would throttle the rapid growth of e-commerce and
depress revenues of Internet companies.

Revenge of the middleman.  One of the joys of the Internet is that
buyers can go directly to manufacturers for their purchases, cutting
costs all around.  But dealers, suppliers and agents are feeling the
squeeze. Rather than devise new clicks-and-mortar strategies, these
middlemen run whining to politicians for help.

In South Carolina, auto dealers are pushing a bill that would prohibit
car makers from owning dealerships and would explicitly bar Internet
sales unless local dealers get a piece of the action.  Charles Condon,
attorney general of South Carolina, said of the bill:  "What if we
passed a statute saying cars couldn't be sold on a particular highway?
 Wouldn't there be outrage?  Why is there no outcry when cars cannot
be sold on the information superhighway?"

Broadband slowdown.  Companies are appealing to politicians to
increase telecommunications regulations on the Internet -- an effort
that threatens to hold up faster broadband technologies, already
delayed by bottlenecks caused by local telephone companies.  For a
year America Online campaigned in Congress, in state legislatures and
in city councils across the nation to get laws passed that would force
cable companies like AT&T and Cox to permit AOL to use, at
government-fixed terms, their high-speed cable pipelines.  Then, in
January, AOL announced it was buying Time Warner; suddenly the shoe
was on the other foot.

But, as George Gilder pointed out on this page recently, it may be too
late to say "Never mind."  The San Francisco Board of Supervisors is
on the verge of mandating cable access, and decision by a Portland,
Ore., municipal body regulating Internet-by-cable is now in the
courts.  If Portland wins, thousands of local governments can become
Internet regulators.

No one ever knows for sure why a stock falls on a given day, but my
interpretation of Nasdaq's sharp decline is that investors, jarred by
the Microsoft decision, have suddenly woken up to these threats of
government intervention.  If they haven't woken up, they had better. 
And so should Al Gore.  The Clinton administration likes to take
credit for a stock market that has quadrupled in the past decade.  It
can't avoid the blame for Nasdaq's collapse.

General Carnage

While Joel Klein and his Justice Department lawyers were publicly and
distastefully celebrating Judge Jackson's decision, the market
capitalization of Microsoft was dropping by more than $100 billion.
That's not some theoretical figure.  It is a loss in real wealth -- in
many cases, in retirement savings -- of more than two million direct
shareholders of Microsoft and of tens of millions more who have
substantial holdings of Microsoft in their mutual funds and annuities.

But Microsoft is only part of the story.  The Nasdaq carnage has been
wide-ranging.  And why not?  The Internet intervention of government,
often in league with trial lawyers, threatens every high-tech firm in
America.

* * *

James K. Glassman, is a fellow at the American Enterprise Institute,
host of the Web site http://www.TechCentralStation.com, and a member
of the advisory board of Americans for Technology Leadership, a group
supported by Microsoft and other tech firms.


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