The Crandall paper makes some important contributions in the area of our economic understanding of the empirical results of U.S. telecommunications markets. I have some detailed, econometric comments to share with Bob, but I am not going to bore everyone with them now. Let me just note that the empirical results are compelling and make much intuitive sense. I am not sure what the immediate policy implications are; the results are consistent with any number of hypotheses about U.S. telecommunications policy.

Rather, I will focus on what the American government, based on this paper and others, should represent to other governments about telecommunications policy.

It is part of the conceit of being an American actually to believe that we do things better than other countries. It is certainly a conceit that I largely share. In many instances, I believe the United States does a very good job whether it is the environment or freedom of speech. But mostly, I think we do a good job of having

(1)markets that work,

(2) a government that largely stays out of interfering with markets,

(3) a legal system based on the rule of law, not the rule of ad hoc decisions, that allows for the protection of property and the enforcement of contracts,and

(4) a legal system that, without discrimination, encompasses the government as well as the private sector.

In my view, the latter three characteristics ensure the first. There is a reason that billions of people around the world, given the choice, would opt to live in America. It is not because we do everything wrong.

When we in America do something right, we should probably just keep quiet about it. When we do something that is not very clever, we should examine it, change it, and warn others not to make the same mistake. Thus is telecommunications policy in the United States, a not-so-very clever policy.

The issue for public policy is not whether UNEs make sense or not, or whether TELRIC or some other form of regulation makes sense. Although price regulation never seems to make sense. Or whether one form of entry strategy is better than another. Or whether an empirical study shows that some firms have succeeded where others have failed. These are of course interesting questions for individual companies. But the issue for the government should be: Does it refrain from interfering with markets? Does the legal system protect property and contracts? Is it based on the rule of law or rule of ad hocery? Does the law apply equally to the private and public sectors?

Telecommunications policy in the United States, sadly, cannot answer affirmatively to any of these questions, and thus, markets do not work well. It is very difficult to read the Telecommunications Act of 1996 and translate current rules and governmental practices into that law. Sections 251 and 252 clearly envision market based solutions such as negotiated contracts between private parties as norm rather than the exception. In every state in the Union, micromanaged regulation has strangled any appearance of private contracts. What passes for telecommunications regulation is only dimly related to Sections 251 and 252, the combination of which could have had regulations that parrot the statutory language. And dare I even begin to describe the abomination and other unnatural acts euphemistically called the implementation of Section 254 on universal service by the FCC. Never were rules and law further apart.

And the treatment of law as mere suggestions rather than binding instructions by the FCC did not begin in 1996. It is part of a longer pattern of the squishy nature of U.S. communications law. One example of long-standing lawless action is the FCC’s role in implementing the Undersea Cable Act, a responsibility by statute given to the President, presumably which cannot be delegated to an independent agency.

We have government agencies consistently inventing the most imaginative interpretations of the law, and all too often exceeding even the most far-fetched interpretation. And, in most instances, these fantastical interpretations involve excessive government in the market, an involvement that is not required by law, and perhaps not even permitted.

The courts, eventually, catch up with some of the most egregious breaches of the law. But the courts take years to reach these conclusions, and sometimes, regrettably, perhaps out of exasperation, they let the government agencies pursue their imaginative, self-glorifying policies. These policies, create years of uncertainty about what the law actually is, and endless uncertainty about whether parties seeking to have a written statute enforced will ever have any basis for consideration. A government agency that can reinvent the law today, can reinvent the law tomorrow. What the law is may change, and its mercurial nature is all that is predictable. Sadly, many private parties would rather play along with this rule by whim rather than rule of law. Perhaps private parties fear retribution. Or perhaps they naiively believe that they can game the system better than their competitors.

Regardless of the motives of the government in writing these imaginative rules, they unambiguously harm consumers. Regulatory uncertainty increases. Investment falters. No one knows the rules of the game. Paradoxically, the biggest losers in this drama are new entrants. New entrants more than incumbents rely on clear property rights, clear contract rights, and clear liability rules to have a viable business plan to enter a market with no market share. Where rules have little or no basis in law, where rules reside in the vaporous cloud of legal uncertainty, where potential and actual customers are not certain of the legal standing of their telecommunications provider, no new entrant under any business strategy can possibly succeed.

So what should America tell Japan or any other country? I think that the answer is simple. Competition is not evil. But competition is inherently an artifact of a system of markets based on the rule of law, laws that protect property and contracts. Laws that are predictably followed and have a predictable, and written basis for appeal. Property and contract rights that can be enforced by government agencies, and by courts if necessary. Competition is not an artifact of regulation.

So what can we say? Don’t repeat our mistakes. Write law and rules that have a legal basis, and competition will show up. Where property and contracts are protected and enforced by the government, entrepreneurs, including American entrepreneurs, will be present. The world does not work the other way around. Don’t start with the idea for a regulation, then write it, and hope that law will be built around a regulation in search of a legal basis. The law will not show up, nor will competition.