The telecoms mess: forget Alan Greenspan. Whether U.S. profit growth resumes depends upon one thing: cleaning up the telecom sector.

• Author: Zoakos, Criton M.

The present bear market is driven by uncertainty over future profit growth. It is therefore timely to point out that a resumption of profit growth in the U.S. economy depends upon getting past the mess in the telecoms sector--far more than it depends on Fed policy. Profit growth will resume if the monopoly grip of the Regional Bell Operating Companies (RBOCs) is broken. If, however, their grip is consolidated, then profit stagnation will settle in for good, and the U.S. economy will relapse into mediocrity.

The reason for this is the role that telecom investment plays in boosting the American economy's overall return on investment. Without telecom investment, the productivity growth of the 1990s will not be sustained. The RBOCs are what blocks telecom investment.

Today, the rate of return on investment for the U.S. economy as a whole and for each corporation within it depends upon growth in telecom investment (see Fig. 1 above and further discussion). This was established during the period that began in the first quarter of 1991, when investment in information technology rose above the level of 40 percent of all investment in equipment and software. It has remained above that 40 percent level ever since.

[FIGURE 1 OMITTED]

Because it constitutes such a great part of IT investment, the collapse of telecom investment could drag overall IT investment to its pre-1991 level of below 40 percent and in this way throw the U.S. economy back to an earlier stage of technological evolution. During the year 2000, telecom investment was 60 percent of all IT investment, but in Q2 2002 it had dropped to 44 percent, which had the spinoff effect of dragging down with it all types of equipment investment.

The collapse of telecom investment, in turn, was triggered by the decimation of competitive local exchange carriers (CLECs) in the hands of the RBOCs and their congressional allies--not by a preceding alleged "overinvestment." The Telecoms Act of 1996 was intended to stimulate competition against the RBOC monopolies, but instead provided such minimal penalties that it practically invited the RBOCs to systematically violate the law and kill the competition. The result has been greater monopoly concentration and less competition in domestic telecom services.

Today, there are only four RBOCs (Verizon, SBC Communications, Bellsouth, and Qwest), compared with eight in 1996. They control the same 92 percent of all telephone wirelines in the country that they controlled in 1996. Collectively, from that year to date, the four RBOCs have paid about $2.2 billion in fines for violations of the law that was meant to help competition and customer service. These fines and legal penalties constitute 3.6 percent of the RBOCs' cumulative net income from 1996 onward. In the process, they have accumulated a "rap sheet" longer than that of Don Vito Corleone.

The effect of this systematic, low-cost law breaking was the exclusion of the competitive local exchange carriers (CLECs) from access to consumers and small and medium businesses, and hence the CLECs' bankruptcy, dissolution, and general retreat. Over $160 billion of CLEC market capitalization and another $50 billion of CLEC investments in plant and equipment was wiped out at the cost of only $2.2...