Editor’s note: Solveig Singleton is a senior policy analyst for the Project on Technology and Innovation at the Competitive Enterprise Institute.

WASHINGTON, D.C. … With WorldCom and Global Crossing bankrupt, Qwest in crisis and downturns in profits for BellSouth and other substantial companies, a lot of people are asking a lot of questions. Among the competing theories of what went wrong, what thread of truth might guide us out of the labyrinth?

The Greed/Hype Theory? Alan Greenspan’s “infectious greed” hypothesis caught on in the press. But the “greed” hypothesis explains nothing. A profit motive is often an engine of success. Why would greed yield bankruptcy, not profits, especially across one sector of the economy? Why hype, when there were real opportunities? What cues or incentives led so many systematically astray?

Can we blame “deregulation”? From Gene Kimmelman, a director at the Consumers Union advocacy group, and others on the left of the spectrum, the 1996 Telecommunications Act is taking its share of the blame for the meltdown. In people’s minds, the Act was “deregulation” … that was how the politicians sold it … so “deregulation” must be at fault. But free marketers have noted all along that there was little about the Act that was deregulatory. Let’s review.

What did the Act deregulate? It removed legal barriers that prevented phone companies from getting into cable television service and vice versa. But it was too late … the Internet was where new investment money was going.

As for local phone service, the theory behind the Act was that aggressive unbundling, of necessity overseen by regulators, could create “competition.” But unbundling is not deregulation.

Did the Act let local phone companies offer long-distance service? No. In theory, maybe, but in practice few permissions have been forthcoming, and those slowly.

The Act added new universal service obligations with new taxes and fees for consumers, especially on second phone lines.

Reed Hundt’s FCC, which implemented the Act, grew. The FCC discouraged industry consolidation by slow and rule-bound approval of mergers.

Whatever the cause, it can’t be deregulation. By and by large, that has still not happened.

The cure … still less regulation.

In fact, and by no accident, financial crisis and scandal have come to telecom and energy … the most regulated, not the least regulated, sectors of the economy. The lesson of the telecom collapse is the major work of deregulation remains to be done. Next on the agenda should be:

  • Open up wireless. On the wireless side, politicians have stepped up the pressure on the FCC to raise big money in spectrum auctions. But this just increases the debt and speculation problem for telecom. And it slows the actual deployment of wireless by the private sector. Wireless connections, not unbundling and regulated prices, are the best low-cost answer to local phone competition … and probably universal service as well.
  • Allow consolidation to continue. In the real world, sustainable competition, with growth driven by consumer demand, does not need hundreds and hundreds of companies. Between a few major domestic car companies and free entry for a few foreign competitors, there’s stiff competition in the car industry. The problem in telecommunications was not too few big competitors. There was, and there still are, too many (there will always be room for small niche competitors … like WorldCom used to be). Commissioner Powell of the FCC has the right idea in signaling that a former Bell company might be a good bidder for WorldCom. But foreign investors should be welcome, too.
  • End the artificial long-distance/local phone service divide. Keeping some phone companies from offering long-distance phone services by artificial legal barriers makes no economic sense for consumers. Tear down this iron wall.
  • Beware forced open access for broadband. Fostering weak resale competition doesn’t work. It means more weak competitors competing in a risky market made more uncertain by the legal risks of regulation.
  • Competitive Enterprise Institute: www.cei.org