Via Mark Thoma, Paul Krugman's New York Times op ed for today observes that despite a considerable lead over Japan and Europe in broadband connectivity in the late '90's and early '00's, the U.S. now lags both Europe and Japan considerably in both percentage of population with broadband internet connections, and in bandwidth for those with broadband connections.

This is a classical example of the disincentive of monopolies to innovate. Various decisions by the Bush administration and its Congressional allies over the past 6 years -- particularly the decisions not to impose common carrier status on local telephone and cable TV companies with respect to broadband services -- left control over virtually all local U.S. broadband markets in the hands at most two service providers: the local telephonce company or the local cable company. The result has been predictable. Americans now pay more for internet connectivity and receive lower quality service than do Japanese or European consumers.

Krugman concludes his column by saying:

It's too early to say how much harm the broadband lag will do to the U.S. economy as a whole. But it's interesting to learn that health care isn't the only area in which the French, who can take a pragmatic approach because they aren't prisoners of free-market ideology, simply do things better.

I would add that economists need to work a little harder to make the public understand that economics itself has nothing to say about the benefits of free markets. The benefits economists associate with market allocations are those brought about by competitive markets, and this is precisely what is lacking in American broadband today.

Scott Wallsten of Progress on Point offers a counterargument to Krugman in "Towards Effective U.S. Broadband Policies" .

He says that using OECD statistics to compare cross-country broadband adoption rates and other measures vs. the U.S. are not especially meaningful for several reasons. OECD data are more questionable than FCC data, advertized broadband is not the same as actual broadband, etc. (Time Warner's Road Runner cable subscribers here in New York got a nice increase in speed in the last month at no additional cost. I assume the three other cable companies using Time Warner's pipes did too.)

Wallsten points out that network sharing (unbundling) can be detrimental to broadband growth because of the diminished incentive to invest. He claims that the removal of barriers to entry would be more effective in building spectrum. Removing local franchise restrictions would also help; they block new competitors and restrict demand by keeping the price of services such as television artificially high. (I'm surprised Krugman didn't know about this. Or maybe he does, but it doesn't fit neatly within his fairy tale.)

Unbundling itself is not necessarily a good policy. In fact, Wallsten cites evidence that facilities-based competition yields better results than access-based competition. (But since the former is more the product of state regulators, rather than those of the "robber barons" influencing policy makers in Washington D.C., Krugman overlooks them.)

As for France's position vs. the U.S., that country hasn't had the local franchising (and therefore pricing) barriers that have bedeviled broadband firms here.

So when Krugman says:

... real French bureaucrats used judicious regulation to promote competition. As a result, French consumers get to choose from a variety of service providers who offer reasonably priced Internet access that's much faster than anything I can get, and comes with free voice calls, TV and Wi-Fihe is missing the real story.

Krugman's gratuitous use of the term "robber barons" is also wrong. While there were some political entrepreneurs operating in 19th century America, the robber baron theory of history is long on half-truths and short on facts, as shown in The Myth of the Robber Barons .

It's ironic that AT&T was granted a monopoly of phone service (and was allowed to buy out the most attractive local exchanges, while the less lucrative ones faded away under the financial pressure of its monopoly) during the progressive era, which was named for the supposed attention to the public weal by progressive reformers, who were allegedly responding to the economic changes wrought by the rapacious "robber barons."

Krugman concludes:

It's too early to say how much harm the broadband lag will do to the U.S. economy as a whole. But it's interesting to learn that health care isn't the only area in which the French, who can take a pragmatic approach because they aren't prisoners of free-market ideology, simply do things better.

The broadband lag is probably more apparent than real (and dial up, which is fading away, does quite well for most people who have it). Does Krugman seriously think that companies like Amazon, Google, and Intel are going to be outcompeted by French national champions because of France's alleged lead in broadband?

And if he thinks that French healthcare is better than America's, even with all the problems caused by decades of intervention by the U.S. federal and state governments going back to WW II, he's really out in leftfield.

Wallsten's observation that the data on broadband usage and capabilities across countries are noisy is well-taken and ought to be a spur to the OEDC economists and statisticians to improve their data collection and analysis capabilities, since these kinds of cross-country comparisons are extremely useful for economic policy analysis.

On the issue of the effects of unbundling, I think Wallsten's analysis is off the mark. While it is true (as the many cited studies have shown) that cable companies, which have not been subjected to unbundling regulations, have invested more in their internet infrastructure than local telcos, which have been subject to unbundling, this kind of snapshot view of the data ignores the dynamic interactions that have been occurring in what is still a market for an evolving technology.

If one looks back 10-15 years, the first true broadband technologies available to consumers in their homes was DSL, developed by the telephone industry to operate over its existing twisted copper wire networks. At the time the so-called Baby Bells started offering DSL services, the cable television industry had yet to solve the technical challenges of multiplexing digital data signals onto their already complex mix of analog television and radio signals.

DSL entered the market under the same unbundled industry structure that the previous generation of dial-up services did, with numerous local internet service providers acting as resellers for the local telco's DSL technology. The result was cheap and a great deal faster than dial-up. Even so, because the local telcos were not installing broadband fiber optic lines over the "last mile" to the home, the actual roll-out of DSL was slowed considerably by the limited availability of substations that would boost the signal for transit over the noisy copper wires of the last mile.

This slow rollout actually gave the cable industry time to figure out and introduce its own digital technology, both for internet connectivity and for its previous analog TV and radio services. It's hardly surprising that once this industry solved their technical problems, they began investing agressively in it to try and catch up to their local competitors operating over the phone lines.

How did the Baby Bells respond to this? Not by installing fiber optic lines to the home, even though they could have. (Indeed, here in Pittsburgh, in the late 1990's, when Duquesne Light was ordered to divest itself of its electricity generating capacity as part of Pennsylvania's deregulation of its electricity markets, the company took advantage of its control of the underground power conduits in downtown Pittsburgh and the Oakland area, where the University of Pittsburgh and Carnege Mellon University are located, to completely wire these areas with fiber optic cable.) Rather, the local telcos mounted an intensive lobbying effort aimed at Congress, the FCC, and the courts aimed at overturning the unbundling regime that came out of the AT&T divestiture, at least as far as providing broadband internet services.

This multi-million dollar effort eventually paid off. The many local ISPs that had been reselling Baby Bell DSL services were forced out of the market, and only after local markets had been reduced to two large service providers competing (or not) on a more or less equal footing, did the local telcos decide the time had come to connect the last mile with fiber optic cable.

The obvious, but impossible to answer question, one would ask here is how would things have differed if, for example, the cable industry had been forced to compete in the same unbundled environment that the local telcos were operating in when they introduced DSL. While we can't get empirical answers to this kind of counter-factual question, the standard results from industrial organization theory that I mentioned in my post strongly suggest that in general, monopolies have a lower incentive to innovate, due to the fact that when they innovate, they kill off a profitible, though now obsolete, version of themselves.

This isn't to suggest that there was anything irrational in the rent-seeking strategy the Baby Bells pursued. It may have made perfect business sense that they needed to compete with local cable companies on an even footing if their technology was to be viable, particularly since the technologies involved were new enough that recognizing predatory pricing might be problematic. But the fact remains that consumers who adopted DSL early got put on hold while the local telcos wasted millions to effectively re-establish the old AT&T monopoly.

On Bill's comments regarding Krugman's various political statements, I will drop Paul and email and ask him if he'd like to comment directly on this or other aspects of this discussion.

Wallsten may be wrong on unbundling, as Stephen suggests, but Robert M. McDowell points out in "Broadband Baloney" that the more important competition is in platform delivery, not in the broadband buildout. This is what Wallsten says as well.

Napster caused a quantum leap in cable modem and DSL demand; before Napster dial-up was good enough. McDowell points out out that YouTube uses as much spectrum as the whole internet did in 2000.

The bottom line is that, as McDowell says, "Consumers don't buy fat pipes for their own sake; they buy applications and content that requires fat pipes." This of course is one reason why it's so important to be against the monopoly formerly known as intellectual property.

Stephen is of course correct that monopolies have less incentive to innovate. His good thumbnail historical sketch might bring back painful memories.

Just about everyone on my block who had Verizon's DSL service (myself included) eventually switched to cable. Every time I call Verizon they pitch their new and improved DSL (and the price keeps dropping). But I don't want to relive the DSL fizz out moment when I was placing a stock trade and had to call the broker and receive a lower price plus a higher commission.

There is a letter to the editor in this week's (July 23) issue of Barron's, p. 34, by Phillipe Morin, the president of Nortel Networks' Metro Ethernet Networks division. (Sorry, I don't have a link.)

He calls the resurgence (sounds like a riff on the "surge" in Iraq; I hope it doesn't kill as many people) in the optical market "much more dire than people realize."

He says that the growth in bandwidth requirements is in the early innings, and is being driven by a number of applications, including video on the net and delivered to mobile devices. This is responsible for as much as 80% of the growth in demand. What he calls the "megatrend of hyperconnectivity" will lead to greater demand, and he has a laundry list of apps.

Here is the finale-kicker:

"As more and more consumer and business services and applications are introduced, bandwidth requirements will only continue to increase dramatically. The real debate is how much bandwidth will be required and how soon these requirements will become manifest. Prudent network planners will be keeping a close eye on these developments."

To which I say: I'll bet they will, starting with every third rate bureaucrat of France's national finishing school for socialist planners. In the real world, entrepreneurs don't wait around for some [expletive deleted] planner to "plan" the future; they just go out and Do It.

Of course, we've never had a truly free market in telco. Entrepreneurs have been stuck with the baneful effects of the Bell monopoly, despite its 1983 break up. These restrictions, plus other regulations (such as state franchise laws, etc.) make it tougher for them to innovate.

So why not get rid of these regulations, including state frsnchise laws, intellectual monopolies, etc.? In a free market, platform growth will drive broadband growth, because in a free market consumer demand determines how deep and how wide investment is in an industry.