Tuesday, November 18, 2003 - The Progress & Freedom Foundation Blog

Arrow, Carlton and Solow Report

Just returned from the PFF Hill Seminar with Nobel Laureates Kenneth Arrow, Robert Solow, and Professor Dennis Carlton. Along with Gary Becker, these gentlemen authored a Lexecon report on behalf of Verizon concerning regulation and innovation. [The link is not yet available on the Lexecon website.]

The points were somewhat familiar: "forward-looking incentives matter, and the current regulatory rules harm the forward-looking incentives of incumbents and competitors, and ultimately consumers...." Nevertheless, to hear these points from the authoritative minds of these economists was worthwhile.

Professor Solow began by noting that productivity gains are the only sustainable way to increase economic output. In recent years, many of these productivity gains have come from information technology and communications. These productivity gains are real, but diffuse, he pointed out, being reflected not just in the communications sector but throughout the economy by firms that use the now more productive communications technology. Citing the well-known example of FCC delay of wireless rollout, he said that regulation can impede productivity gains in ways that have real, macroeconomic impact.

Professor Arrow had my favorite bit of understatement: "competition provides a much richer information pace than regulation." He focused on how resale "competition" killed the incentives to innovate, both for incumbents and new entrants. Furthermore, he noted that regulation begets itself: TELRIC pricing, if low enough, precludes facilities-based entrants from the markets, which is in turn used as evidence that no facilities-based entry is possible, thus justifying the initial move to impose resale "competition" through unbundling.

Professor Carlton closed by noting that dual level rate regulation in the wholesale and retail markets is "in tension." That would be a bit more understatement. Finally, he noted that the consumer harms from mis-begotten regulation are much higher in an arena of rapid technological change as opposed to a stable one.

I would finally add that the professors were generous and gracious. It was an honor to meet them. (This would be the geeky hero worship of big name economists part of the blog.)

posted by Ray Gifford @ 2:39 PM | General