Telecom Law in Michigan: Change, or Get Left Behind

(The following is an edited version of remarks made on May 24, 2005 in Lansing by former U.S. House Majority Leader Dick Armey at a luncheon hosted by the Mackinac Center for Public Policy.)

Good afternoon. I am Dick Armey, and I am from Dallas, Texas. I am a free-market economist, and I am very proud of the fact that somehow, when I was young, I discovered the discipline of economics and later had the privilege of becoming an economist. Even after having been a member of Congress and a U.S. House majority leader, I still think of my self-definition as, "I am an economist."

I watch this electronic age developing around us. The marvels of this electronic age should be astounding to all of us. If you study economic history, the first economic revolution was the agricultural revolution, and from that followed the industrial revolution. Well, I became convinced several years ago that we’re really now in the electronic revolution. And just like during the agricultural and the industrial revolutions, there are massive transformations in the structures of economies.

I am reminded of something my father always used to say. My father was an old-fashioned guy who believed in such things as practical American genius. His point was, if you don’t keep up with progress, you get left behind. And his point was significant: If you do get left behind, it is your own fault. My father wasn’t much of a person for thinking in terms of someone else pulling your fat out of the fire. …

I became convinced, watching this marvelous world of discoveries going on around us and the speed of change taking place, that there are going to be massive transformations of economies. If you study economics at all, you know about Joseph Alois Schumpeter’s great theory of creative destruction. Remember, the fundamental problem of any economic system — any community of production and consumption — is that you must allocate scarce resources among competing ends. The fact of the matter is that resources must be allocated away from losing propositions, so that they can be redirected to winning propositions. The entrepreneur, the creator, the discoverer — this is the person who is always looking forward, saying, "What’s new coming down the line? How can I be a part of it, and how can I get the resources from what has passed?"

Governments have a tendency to look backwards, trying to preserve the past, because the past is where the existing special interests are vested, and governments tend to serve them. Well, what happens is that governments tend to stand in the way of progress, because they impede the process of creative destruction that takes the resources away from the things of the past and allows them to be redirected to the future. And governments that are not quick-footed in keeping up cause their own economies to fall behind.

So I realized that this wonderful electronic revolution was going on all around us and that governments — whether state, local or national — could do very little to make it happen. They are capable of doing a whole lot to screw it up. In fact, "Armey’s Axiom No. 1" is this: The market is rational; the government is dumb.

Governments are fundamentally, systemically dumb. I don’t mean to be unkind when I say that. The fact of the matter is that real people, in the ordinary business of life, pursuing their own interests and those of their families, are able to do those things because they are smart.

Why are they smart? Because they know what they want; they know what they can do. They are very quick and able at allocating their scarce resources among competing ends and directing themselves in a matter that is most satisfactory.

Governments are inherently stupid, because they are not doing for themselves, but are doing for other people. The first problem of all governments is that they don’t know what they are trying to do.

I always laugh at people who say, "The government will provide for us." Well, let me ask you this: When was the last time you bought your spouse the right birthday present? There is nobody in the whole world who knows your spouse as well as you do or loves your spouse as much as you do. … There is nobody in the whole world who more grievously suffers as immediately the consequences of getting it wrong. And you can’t get it right. You have every incentive in the world — love and fear — riding on the right decision. And you can’t get it right.

If you take that lesson and apply it back to the notion of government taking care of us, why would you expect a bunch of people in the state House to get it right? That is why politicians will fundamentally revert back to doing those things they know how to do, which is to work for themselves — just as everybody else does.

But what happens is that governments screw things up because governments look backwards. Governments are inherently dumb in terms of the rationality of choice.

I don’t mean to say these are not good people. They are good people. They are able people. They are responsible people. They are decent people — on either side of the political spectrum.

But it is a systemic avarice, not individual avarice. Although you might say there are some bad apples in Congress and the Legislature, there are bad apples to be found everyplace. Systemically, governments are dumb because governments don’t know what governments are supposed to do.

I could ask you here to give me a definition of the public interest. If I have 50 of you lined up, I would get 49 or 61 different definitions.

Adam Smith, by the way, best defined the public interest (as he did most everything best) in 1776. And don’t you think it is a marvelous accident of history that "The Wealth of Nations," the treatise that created the discipline of economics, was a treatise on free enterprise written in the year of the work of the greatest historical experience of free enterprise in the history of the world? In 1776, in "The Wealth of Nations," Adam Smith said the ultimate economic activity is consumption. To the extent that the government intervenes in the affairs of commerce, it should do so on behalf of the consumer. … That is still, for me, the best definition of the public interest.

Take a look, then, at your public policies, and tell me the extent to which public policy is guided by that notion. How many times does public policy that affects commerce find itself constructive in the interest of some entity other than the consumer? Quite often, it gives advantage to one producer over another.

What I see happening in Michigan is a good example. You have a backward-looking government that is impeding the ability of your state’s economy to get with modern times. …

The automobile industry has a great tradition in this state. But the future of Michigan’s economy cannot be the automobile, as it maybe has been in years past. The future, the growth, if you look at the world economy today, is in modern telecommunications, electronics, computers, the Internet.

My wife got a marketing call the other day. It cracked me up. I said, "Honey, that call probably came from Pakistan." We’ve got modern communications centers so great now that people who do telecommunications make calls from overseas. Yet Michigan’s regulatory laws are so antiquated that you get restrictions on your ability to make phone calls within the state.

Now, if a business is looking to locate in Michigan, its officials calculate the cost. They say, "I have to do a lot of marketing in Michigan. I am going to have a flood of phone calls in Michigan. My business depends on my being able to do that. I am going to India."

From anyplace in the world, they can set up their whole business, and where telecommunications are concerned, they can communicate more quickly, more reliably and with less cost to your Michigan households and residents. Those are jobs that could be going to Michigan citizens; that’s growth and development.

I have gotten very interested in Michigan, because your state is about to begin the process that we’re completing in Texas of telecommunications reform. You’ve got to have a force within the state that goes to a legislator and says, "This is a new and different time."

My wife and I are building two new homes. She is in charge of all things related to color and design. (I am not authorized. The builder comes to me, and I say, "I am not authorized.") I’m in charge of all things communications.

I can’t get what I had — DSL. I can’t get DSL because I’m more than three miles from the switch. So I’m working out my options, and they aren’t all that bad. I found a competitive local carrier that is going to bring fiber optics to my house. I’ve got to pay for it — that’s the bad news. But if you get fiber optics to your house, you’ve got all the telecommunications capability you will need for the rest of your life.

In Texas, I can afford it. But who is going to be willing to do that here in Michigan? Your Baby Bells aren’t going to do it, because the minute they build capital structure under existing laws, all the free riders might jump on their capital. They’ve got to sell access to that capital structure to their competitors at rates that are more favorable than what they can charge their own customers (if they could get it), and their competitors use this capital to undercut them. So what we are talking about are telecommunication laws that are antiquated.

I grew up in rural North Dakota. I remember when bringing in electricity or bringing in telephones was such a difficult proposition that you had to have government support and all kinds of regulations regarding universal services.

You don’t need those kinds of regulations now. What those regulations do is basically say to providers: "Stand back. Don’t put your time and money and capital and discovery into this, because you can’t recover your investment, and you’re likely to have to share your equipment."

I created a word back in 1977, when I wrote my textbook on microeconomics. … The word is "octopoidal." The telecommunications industry is, to a large extent, octopoidal. Capital must extend like the tentacles of an octopus out to the customers. How do you get people willing to do that?

As you review telecommunications law in Michigan, you have the opportunity to bring your legal structure up to the promise of the electronic revolution in the 20th century. But if you’re going to have the same telecommunications regulations that you had after World War II, you are not going to be competitive with the rest of the world.

Michigan is a great state. It’s got one of the best hockey teams, although you’re not doing very well in football — and that’s fine with me; I’m a Vikings fan. But why should Michigan be behind? Why should your unemployment rate be so deplorably high compared to other states?

For years, I was on the House Labor Committee, and I kept joking to your representatives that you ought to keep these labor laws you have in Michigan: We love all these businesses coming down to Texas. Businesses like a right-to-work state like Texas.

Generically, you’ve got a problem in this state. I mention labor laws, but if you look at taxes and regulations, you’re talking about a cost to do business. When a business looks at whether to locate in Michigan, they are going to measure the cost. The additional costs that rise from higher taxes and stricter regulations can amount to a lot of money. So a business is going to go to Texas instead.

Telecommunications is critical because, more and more, nobody is going to be able to grow a business except on the basis of their comprehensive communications with the rest of the world. The cutting edge of all growth in the world economy has been, and will continue to be, electronic.

Telecommunications is the aorta for all of the electronic marvels that are driving the world economy. Telecommunications law can be a great liberator. We are quite optimistic with the direction in which we are going in Texas, and that direction is deregulation.

Texas is ahead of Michigan. You’ve got to catch up. The fundamental principle should be deregulation — maximizing the incentives to discover, create, invest and build. Nobody is going to invest their money here if state law says they’ve got to turn it over and let another guy ride free on their capital.

(Mr. Armey then took questions from the audience.)

Q: There are a lot of proposed mergers among telecommunications companies in the news. What effects do you think this will have on the economy, and what effect should that have on the regulatory environment?

A: Well, "Armey’s Original Axiom" was, "Given the size of the market and economies of scale, the market will always generate the optimal number of firms operating at the optimal size." And telecommunications, given the nature of the technology, is always going to promote integrations, mergers, takeovers and so forth.

This is not new. Go back to 1952. There were probably 30 separate automobile companies in this country. Now we are down to The Big Three.

There is a tendency to believe that mergers are inherently competition-diminishing. I don’t buy that. I believe that the optimal number of firms can be one, given the right conditions of market size and economies of scale. With all the creativity in telecommunications, I prefer to sit back and watch all these mergers take place.

Q: You have a public service commission in Texas that regulates and dictates to these companies what they can and cannot do. How do you work with them?

A: Well, you have to work with them, obviously. The commission is responsible for implementing the laws that are written by the legislative body.

So, you start with that. I mean, everybody cusses the IRS. The poor old devils in the IRS, bless their hearts — they are just trying to make a living. But we write insane tax law and tell them to enforce it, then we cuss them when we get audited. It’s the same thing with the commission. The commission can only work within the bounds of the law.

I have argued for years that legislators leave a lot of loose ends in the law and therefore leave a lot of latitude for commissions. I promise you, if you give me a position of public responsibility and authority, I am going to work for myself to some degree or another. Do you think these commissioners aren’t going to build their empire? So, the legislative body has got to define the limited jurisdictional range of the commission.

I used to call it "the legislative aftershock." Remember Michigan Rep. Bill Ford? He didn’t like me much. One time, when we were trying to work out some details of a law, he said, "Oh well, just leave that to the agencies." It hit me how many times we just don’t want to do the hard work of typing out the language and instead leave it to the agencies to do it. That gives the agencies latitude.

My view is that our regulatory commission is not inherently a bad thing, and that it possibly may be a useful thing, if it is properly franchised in the law that it is asked to administer.

Q: Please explain to members of the Michigan Public Service Commission and some legislators the difference between overregulating telecommunications and what is truly in the public interest. There is a great deal that they do, well intended though they may be, under the rubric of consumer protection that is, in fact, contrary to that.

A: … Government excess is born out of two audacities. One says, "The people aren’t competent, therefore we must protect them." This gets me singing, "Mr. Big Shot, who do you think you are?"

The other audacity is the notion that people can’t be trusted, and therefore, we must regulate them. I used to tell my colleagues when we sat down to work things out to get to some governing principles. What are we trying to do here? What is this about?

It’s about the well-being of the consumer, the household. We work to eat. … That’s what we’re living for. So the object of our affection must always be the consumer. It is not about protecting one competitor against another. So define the law.

How much regulation do we need in an area of creativity where people are providing service all over the place, in new ways, with new devices?

You may be in the position of writing or administering the law, but that doesn’t make you smarter than the people. I’ve heard colleagues say, "Oh heck, I can’t vote that way. People back home won’t understand." And I say, "How do you figure that they were smart enough to elect you, but too dumb to understand the issues?"

We get in these offices, and we don’t have respect for real people, their abilities and integrity. My prayer for America is that we have a government that knows the goodness of our people. We are a good people, and we are an able people.

If I know that as a public official, then I can restrain myself. The world is not going to go under or go on the rocks if I don’t have my hands on the levers. In fact, the ship may be better off without me. That’s something you really have to work at.

There are a lot of people enthusiastic about Big Government. I never understood that. My mother, bless her heart, raised me right. Basically, her take was very simple: The government’s no damn good. Don’t trust them.

I appreciate you letting me be here. I hope it’s been worth your time. Thank you.

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Dick Armey is a former House majority leader and is co-chairman of FreedomWorks, a grass-roots organization that promotes principles of limited government. He gave the remarks shown above at a luncheon in Lansing hosted by the Mackinac Center for Public Policy, a research and educational institute headquartered in Midland, Mich. Permission to reprint in whole or in part is hereby granted, provided that the speaker and the Center are properly cited.