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Is the government strangling the new economy? by James Glassman
- Date: Mon, 10 Apr 2000 01:47:23 -0400
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- Subject: FC: Is the government strangling the new economy? by James Glassman
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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
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.
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
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
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
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
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
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.
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
* * *
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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