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February 6, 2005
David Warsh, Proprietor


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The Caretaker’s Hand

One of the proudest names in American industry quietly entered the history books last week when, just shy of its 130th birthday, AT&T Corp. agreed to be acquired by one of its offspring, SBC Communications Inc. of San Antonio, Texas, for the trifling sum of $16 billion (In contrast, Procter & Gamble paid $57 billion for Gillette Co.)

In an age of initials, relatively few could remember when American Telephone & Telegraph had been the ultimate blue-chip equity investment, the biggest phone company in the world, and Southwestern Bell Co. one of its regional operating companies, was located in St. Louis.

The merger prompted a certain amount of reflection on the nature of decentralized market systems. None was better than an article on page one of The Wall Street Journal, in which staff reporter Christopher Rhoads went back over the record:

Mixed Calls
AT&T Inventions Fueled Tech Boom, And Its Own Fall
Bell Labs Invented Transistor, But Couldn’t Exploit It;
Passing Up A Cell License
A Secret On Sale for $25,000

Too bad there was no similar display of retrospective thinking where it is most needed, on The Wall Street Journal’s editorial page. From that quarter came only the usual knee-jerk reaction, “creative destruction and all that.”

On the front page, Rhoads related the story of how in 1948, working the Bell System Laboratories in Murray Hill, New Jersey, William Shockley, John Bardeen and Walter Brattain invented the transistor, a revolutionary “solid-state” device that, in the course of a decade, would replace vacuum tubes for most purposes. The Bell team won the Nobel Prize in physics in 1956 for their discovery.

“The transistor, and its subsequent miniaturization on silicon chips, made it possible to store and distribute ever-greater amounts of information,” wrote Rhoads. “That drove the development of computers, satellites, space exploration and much of modern communications and electronics.”

Shockley quit the phone company, moved to California and started a company that began the evolution of what we know today as Silicon Valley.

“The resulting upheaval created new industrial fortunes — and destroyed others. AT&T was on the casualty list. After its forced breakup in 1984, it was slowly crushed by technologies that drove down the price of a long distance call, and more recently by wireless calling and Internet phoning. In the past few years, its revenue has shrunk steadily, leaving it with valuable long-distance customers but little else.”

On the editorial page the next day, however, the company’s passing was observed with the usual nod to “creative destruction,” and a complacent murmur of self-congratulation. “The point to keep in mind is that, whatever its individual failings, AT&T’s demise is a sign of our general economic success.”

True enough, but hardly the whole truth.

Glossed over entirely was the central mechanism of the drama — the 1982 decision of assistant attorney general for antitrust William F. Baxter to compel the break-up what seemed to many at the time the brightest jewel in the American economic crown.

It was on Friday, January 8, 1982, that Baxter undertook what was almost certainly the boldest and most successful act of U.S. industrial policy in the second half of the 20th century. (Only the wholesale deregulation of the financial industry beginning in1975 compares.)

On that single day, Baxter shut down one 13-year-old government lawsuit, against IBM, as lacking merit and, in another, obtained AT&T’s agreement to sell off its heavily-regulated telephone-operating companies.

Baxter’s decision had to be ratified by the White House, where President Ronald Reagan overruled Defense Secretary Caspar Weinberger and Commerce Secretary Malcolm Baldrige, who warned that the telephone breakup would imperil American security or undermine its competitive position or both.

Also powerless to deflect the decision were one million employees, company lobbyists in all fifty states, battalions of well-paid publicists, economists and historians — and, of course, the editorial page of The Wall Street Journal. .

Immediately afterwards, the Journal’s editorial writers opined that both suits had been “a costly struggle that never made any sense.” The IBM case, they noted, was “the last important act of Lyndon Johnson.” The AT&T case had been launched early in the Ford administration “but grew out of the economic interventionism that had become even more pervasive and intrusive during the Nixon years.”

“In neither case did the government ever make clear what social or economic purpose it planned to serve by trying to break up these two companies. In truth there was not much of a case to be made.”

In fact, the government’s case was based mainly on its intuition that technical progress was not proceeding as rapidly as it might if AT&T were not a carefully-regulated company. The Mississippi River of profit that flowed from its phone companies financed a splendid research laboratory, it was true, but relatively few of its innovations seemed to make it to the marketplace. As Sir John Hicks had put it, “The best of all monopoly profits is a quiet life.”
(Lacking a powerful theory, the government’s best argument for divestiture was an example. Various unregulated long distance carriers had won permission from a federal judge to enter the long distance business for themselves, siphoning off some of AT&T’s profits by using low-cast microwave technology that the Bell System had been slow to adopt.)

To their credit, the editorialists at the Journal recovered from their harrumphing bout the very next day, long enough to observe that Bell Labs had an R&D budget exceeding that of the Japanese Ministry of Industry and Trade, and to express the hope that now AT&T would be free to compete with IBM.

Even then, the Journal managed to find a government villain: a 1956 consent degree that it said had prevented AT&T from bringing its most sophisticated technologies to market on its own — but which, at the bargain fee of $25,000 per customer, had led to a worldwide transistor licensing boom. (That autumn, University of Chicago economist George Stigler won a Nobel Prize for, among other things, demonstrating that companies often persuade regulators to insulate them from competition.)

The AT&T breakup worked as planned from the very beginning. By the end of 1982, MCI had touched off a veritable gold-rush in telecommunications, boldly leasing Amtrak right-of-way between New York and Washington and ordering 60,000 miles of single-mode fiber optic cable from Corning Glass — enough to finally launch the industry, once and for all.

Cable television companies began wiring cities; cellular phone companies and communications satellite firms opened their doors for business. IBM, no longer hampered by government oversight, began its defense against the usurper Microsoft.

Meanwhile, the host of technologies that had been developed mainly by the Defense Advanced Research Projects Agency over the years was commercialized, bringing forth first the Internet and then the user-friendly World Wide Web, servers, routers and all ther rest. Practically before they knew it, telephone companies with their central-switching technology had been out-flanked by communications networks in which message traffic was, literally, too cheap to meter.

True, AT&T and the telephone operating companies it had spun off were hampered at every turn in the years after 1984 by zealous oversight by Federal District Court Judge Harold Greene, who had overseen the consent decree in the first place — a point made last week by the cleverest Wall Street Journal columnist, Holman Jenkins.

But when, in similar circumstances in the Microsoft trial, Federal District Court Judge Thomas Penfield Jackson took great pains to avoid the errors that Judge Greene had made, the Wall Street Journal editorial page had only scorn for him. And when it came time to celebrate the vibrant telecommunications sphere amid “our general economic success,” William Baxter was the forgotten man. The longtime Stanford University law professor died in 1998 at the age of 69.

The real point to keep in mind, therefore, is that government regulators are like caretakers on a great estate. They plant here and prune there, ideally with imagination and restraint. Sometimes they are lazy, or officious, or corrupt; sometimes, capable and conscientious.

Occasionally, like Baxter, they are geniuses. Too often, like Judge Greene, their good intentions get the better of them. The caretaking hand of government has great power, for both good and ill. The ritualistic abuse of public managers is just plain stupid.

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