Jewish World Review Nov. 16, 1999 /7 Kislev, 5760
The Clinton administration is on a re-regulatory rampage; Microsoft is just
the tip of the iceberg. Waiting in the wings, however, the 80 million
share-owning Investor Class that has a big stake in the firms under assault
is likely to retaliate in next year's election.
The Justice Department website brags about a hundred anti-trust suits
filed since 1994: IBM, Georgia-Pacific, Cisco Systems, CBS, NBC, Time Warner,
Sony, General Electric, Westinghouse, Alcoa, Lockheed Martin, Northrop
Grumman, MCI, Sprint, Citigroup, Staples, and Intel, to name a few. Just the
other day the department blasted off on seven utility companies.
Numerous product liability and re-regulatory issues are now floating
around Congress, the courts and the Clinton executive branch. Resolution of
these issues could substantially affect steel, defense, property and casualty
insurers, satellite broadcasters, tobacco, HMOs, hospitals and
pharmaceuticals. And this list doesn't even include the myriad of economic
sectors that may suffer from overzealous global warming policies.
None of this is any good for economic growth. Remember Arthur Laffer's
four prosperity killers that have the potential to end economic and stock
market booms -- high inflation and interest rates, confiscatory tax rates,
government over-regulation and protectionist tariffs. Right now the one to
watch is Clintonite re-regulation.
In the last days of this administration, ex-Carterites from Justice, the
Federal Trade Commission, and other agencies are leaping out of the woodwork
to shovel sand into the gears of our high performing Internet economy. Now,
even cyberspace gears are being affected.
The worst economic decades of this century featured similar government
assaults on successful and innovative American businesses. The Carter 1970s
waged war on American oil companies, as well as IBM, AT&T, Dupont and others.
In the 1930s Franklin Roosevelt constantly mocked and attacked American
business. He raised tax rates to exorbitant levels and imposed severe
restrictions whenever possible through his numerous alphabet agencies that
were supposed to revive the economy (but didn't).
Early in the century Theodore Roosevelt excoriated the "malefactors of
great wealth." He told his attorney general that the Standard Oil people
were "the biggest criminals in the country." In addition to Standard Oil,
Roosevelt trust-busted American Sugar, American Tobacco, American Can,
American Aluminum and other big industrial- age firms.
Courtesy of Ron Chernow's great book "Titan", we learned that the great
industrial-age bull market in stocks basically peaked in September, 1906 when
the U.S. government filed suit to dissolve Standard Oil. Following the Panic
of 1907, which included a 38% stock market drop, and a 8.2% economic
contraction in 1908, share prices failed to recover their prior highs until
So threats from trust-busting and heavy governmental regulation are very
serious matters. History shows clearly that anti-trust is anti-growth.
That is why President Reagan appointed the late William Baxter, a
brilliant law professor from Stanford University, to head the anti-trust
division of the Justice Department in 1981. Baxter strongly believed in
free-market competition as the best means of regulating business. So he
curbed the department's appetite for law suits and ended the Carter
re-regulatory litigation explosion.
Other Reagan appointees such as Jim Miller, Christopher Demuth and
Douglas Ginsberg, working in the Office of Management and Budget, the FTC and
elsewhere, also acted to restrain the government's regulatory instincts. It
was no coincidence that U.S. technology innovation took off following the
implementation of these free market policies.
But the Clinton regulatory crusade could take us down a much different
road. The stock market's initial muted response to the Microsoft
fact-finding court decision may not be the last investor vote on this
Yes, the post-PC era has begun. The Internet is replacing the personal
computer as the center of the information economy. Wired and wireless
broadband devices, new Java language, the Linux operating system carried by
Red Hat, hand-held palm computers, and TV set-top boxes are all well beyond
That said, the Justice Department anti-trust suit against Microsoft
constitutes a direct attack on free enterprise innovation and
entrepreneurship. Therefore the government action is an attack on all
technology companies and their right to innovate and compete in the open
Traditionally, government anti-trust actions are supposed to prevent coercive
monopolies that truly damage consumers and the economy. This means that
certain firms deliberately produce less output at higher prices. Like OPEC,
for example. Damaging consumers. Why hasn't the U.S. government gone after
Microsoft, however, has produced more output and sales, at lower prices.
Along with the rest of the information technology revolution, more growth
with falling prices has been a huge benefit to consumers, spurring the
economy to record employment and wealth creation.
If there is even a hint of monopoly status from Microsoft's success in
standardizing computer software operating systems, it is to the benefit of
consumers, who have voted with their dollars to purchase these path-breaking
Over time, however, market competition levels the playing field through newer
innovations and lower prices from new technology entrants and their new
products. In the fast-changing technology paradigm, monopolies cannot last
unless they have government backing.
But neither federal courts nor government bureaucrats should be defining or
publicly second-guessing what makes an operating system or what constitutes
proper pricing. Even technology industry participants who dislike Microsoft
will surely dislike arbitrary government decisions even more. The regulatory
threat to Microsoft is therefore a regulatory threat to the whole industry.
Judge Thomas Penfield Jackson's finding of fact has a difficult time defining
exactly what the facts are. He concedes that "the inclusion of Internet
Explorer with Windows at no separate charge increased general familiarity
with the Internet and reduced the cost to the public of gaining access to it
. . . . These actions thus contributed to improving the quality of Web
browsing software, lowering its cost, and increasing its availability,
thereby benefiting consumers."
But then he somehow concludes that Microsoft's successful innovations have
actually prevented others in the industry from making new innovations. Huh?
Innovation is good, but not when it's done by Microsoft?
Then, dazzling us with confusion, Jackson argues that Microsoft can set the
operating system price, or could keep its prices higher, or could delay the
arrival of new innovations from others. Not that they did, but that they
could. Point is, did is fact. But could is theory.
For PC users who want to change their operating system, there are four main
options. IBM's OS/2 Warp version 4.0 upgrade costs $149. Red Hat Linux
5.2/Intel costs $50. Sun Microsystem's Solaris 2.6 is priced at $380. Or,
for Apple users, who can only work off the Macintosh operating system, theirs
is street-priced at $99.
Microsoft's Windows 98 upgrade costs $88, putting it in the lower end of the
range. But not even the cheapest. Is this monopolistically and coercively
wrong? Or just good consumer marketing? After all, these guys are engaged
in a profit-maximizing business. But as these price listings show, it's a
very competitive business.
So with all that duly noted, it is particularly troubling that Judge Jackson
seemingly bought into the Joel Klein/David Boies Justice Department arguments
lock, stock and barrel. Ex-Carterite Klein, and clever former white shoe
lawyer Boies, have from the very beginning personalized and politicized the
Microsoft case, turning a policy dispute into a jihad.
Now, it is well known in Washington, DC circles that Microsoft belatedly but
aggressively parceled out large chunks of money to the leading free market
think tanks in order to generate positive op-ed and opinion articles, along
with pamphlets, books and television appearances in support of the Microsoft
position. Up against the government's vast public relations machine,
Microsoft finally got smart and defended its own interest.
But the more pro-free market and pro-Microsoft articles that were published,
the more the Justice Department jihad intensified. The case took on epic
proportions. At one point Mr. Klein journeyed to European capitals in order
to drum up support for foreign anti-trust lawsuits against Microsoft.
Like it or not, sometimes politics trumps the law. This is why Microsoft is
likely to embark on an appeals process whose outcome will not be completed
until after the next presidential election, where pro-competitive anti-trust
restraint will replace Clintonite trust-busting zeal.
Presumably Microsoft executives recognize that three million investors own
the publicly-traded shares of their company. This wing of the new Investor
Class has realized $460 billion in new wealth from the appreciating value of
the company, roughly equivalent to 5% of GDP. Pretty fair piece of change,
don't you think?
If Microsoft becomes a government regulated public utility, this wealth would
be significantly eroded, a huge taking of investor private property and a big
set-back to the economy.
So, shareholders will surely vote their portfolios by opposing the regulatory
minded Democratic party. Three million is a big number in what could be a
Anti-trust is not only anti-growth, it could boomerang into electoral defeat
for Al Gore or Bill Bradley. Then the information economy's long boom will
be free to continue well into the next
JWR contributor Lawrence Kudlow is chief economist for Schroder & Co. Inc and CNBC. He is the author of American Abundance: The New Economic & Moral Prosperity. Send your comments about his column by clicking here.
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©1999, Lawrence Kudlow