Clicking on banner ads enables JWR to constantly improve
Jewish World Review Nov. 16, 1999 /7 Kislev, 5760

Lawrence Kudlow

JWR's Pundits
World Editorial
Cartoon Showcase

Mallard Fillmore

Michael Barone
Mona Charen
Linda Chavez
David Corn
Greg Crosby
Larry Elder
Don Feder
Suzanne Fields
Paul Greenberg
Bob Greene
Betsy Hart
Nat Hentoff
David Horowitz
Arianna Huffington
Marianne Jennings
Michael Kelly
Mort Kondracke
Ch. Krauthammer
Lawrence Kudlow
Dr. Laura
David Limbaugh
Michelle Malkin
Chris Matthews
Michael Medved
Kathleen Parker
Debbie Schlussel
Robert Samuelson
Sam Schulman
Tony Snow
Thomas Sowell
Cal Thomas
Jonathan S. Tobin
Ben Wattenberg
George Will
Bruce Williams
Walter Williams
Mort Zuckerman

Consumer Reports
Weekly Standard


Investor Retaliation -- 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 1924.

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 subject.

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 Microsoft's control.

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 market.

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 them?

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 products.

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 close election.

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 century.

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.


11/05/99: Rosy Lives
10/29/99: Drain Reserves
10/22/99: Supply-Side Is Mainstream
10/14/99: Y2K will likely bring more prosperity
10/07/99: Clinton's tax-cut veto
10/01/99: What's really bugging the stock market?
09/23/99: Growth Trade
09/09/99: Bad Dollar Logic
09/09/99: Buttered bread
08/31/99: Bull Market Alive and Well
08/26/99: Let Prices Rule
08/19/99: Blame OPEC, Not Growth

©1999, Lawrence Kudlow