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After the breakup: U.S. telecommunications in a more competitive era
Book
445
reviews
become functions of quantities. As the author points out, the dynamics of such models are extremely complicated and he analyses a number of important special cases. The author in these chapters has established a general framework for the dynamic analysis of multisector models away from the steady stable paths of the traditional analysis. A general analysis of the nonlinear dynamics of such models is probably an impossible task, so economic theorists will gain insight into their behaviour by building up a catalogue of dynamic special cases capturing economic issues of importance. The building of such a catalogue will proceed via models in [w’, [w3 (which in addition to steady stable paths may also exhibit limit cycles and chaos), models reducible to these by centre manifold theory, and possibly [w2” (coupled nonlinear oscillators). Professor Zhang has taken the first steps in the building of such a catalogue. Overall I found this book to be a worthwhile addition to the growing literature on economic dynamics. Unfortunately it is marred by a large number of typographical errors.
References Semmler, W., ed., 1986, Competition, instability, and nonlinear cycles, proceedings (Lecture notes in economics and mathematical systems, Springer-Verlag). Gabisch, G. and H.W. Lorenz, 1987, Business cycle theory (Lecture notes in economics and mathematical systems, Springer-Verlag). Batten, D., J. Casti and B. Johansson, eds., 1987, Economic evolution and structural adjustment (Lecture notes in economics and mathematical systems, Springer-Verlag). Ricci, G. and K. Velupillai, eds., 1988, Growth cycles and multisectoral economics: The Goodwin tradition (Lecture notes in economics and mathematical systems, Springer-Verlag). Di Matteo, M., A. Goodwin and A. Vercelli, eds., 1989, Technological and social factors in long term fluctuations (Lecture notes in economics and mathematical systems, Springer-Verlag). Ferri, P. and E. Greenberg, 1989, The labor market and business cycles theories (Lecture notes in economics and mathematical systems, Springer-Verlag). Lorenz, H.W., 1989, Nonlinear dynamical economics and chaotic motion (Lecture notes in economics and mathematical systems, Springer-Verlag). Puu, T., 1989, Nonlinear economic dynamics (Lecture notes in economics and mathematical systems, Springer-Verlag). Chiarella, C., 1990, The elements of a nonlinear theory of economic dynamics (Lecture notes in economics and mathematical systems, Springer-Verlag).
Carl Chiarella University
of Technology,
Sydney,
Robert W. Crandall, After the Breakup: U.S. Telecommunications Competitive Era (The Brookings Institution, Washington, pp. xii + 174, $25.95 hardback. This little book is economic history the economist’s tool kit and used
at its best. Robert it to illuminate
Australia
in a More D.C., 1991)
Crandall has taken the post-war U.S.
446
Book reviews
telecommunications industry. Further, he has managed to do this in a readable way that makes even his professional analysis accessible to non-economists. The U.S. telecommunications industry is best viewed as a regulatory cartel where a balance of economic and political interests was struck. In this balance, the industry, dominated by the Bell System, got regulation that assured its profits and protected it from competition and the antitrust laws. The politicians and regulators got a long distance-to-local subsidy that benetitted their strongest political constituency - rural and residential subscribers. This balance was politically efficient because it optimized vote-getting. But it was very inefficient economically, resulting in greatly over-priced longdistance services and perverse incentives. Inevitably, market forces began to tear it apart, to the benefit of economic welfare. Although he does not couch his analysis in exactly this way, this is the story that Crandall tells. He begins with an elementary description of the telephone network, the U.S. industry, and its regulation (chapter one). This is followed by a brief history of the industry with an emphasis on post-war developments (chapter two). The salient story here is how technological change systematically lowered the cost of providing long-distance service. Rather than allow long distance rates to fall, as would have occured in an open market, regulators seized the profits generated there and used them to subsidize local service. As a result, the over-priced long distance services attracted a host of competition and private provision of telecommunications services. Crandall next analyses telephone services and rates (chapter three). He uses original work to show that even though the traditional common carriers are growing only slowly, and their employment has fallen by nearly 30% in the 1980s the U.S. telecommunications system is not declining. As a result of entry in response to regulators’ attempts to maintain cross subsidies, some 25% of the nation’s investment in telecommunications is now in the hands of unregulated private networks. Crandall analyses total factor productivity to show that liberalization has improved efficiency by more than any potential loss in economies of scale and scope. Next Crandall describes how deregulation of customer premises equipment and the AT&T divestiture have combined to make the equipment market much more competitive (chapter four). The heart of Crandall’s book is contained in an excellent chapter (five) on the effect of recent developments on income distribution and economic welfare. Contrary to what one hears from consumer advocates and the popular press, Crandall shows that the lessening of the long-distance to local subsidy has had only a tiny regressive impact on income distribution. Further he shows that there has been no decline in the quality of telephone
Book
reviews
447
service. But most important, he convincingly demonstrates that there has been a great improvement in overall economic efliciency - between $0.7 and $1.4 billion annually - due to the lowering of long distance rates. This analysis also shows that there are further gains available of about ten times this. The practice of using telephone rates to redistribute income reduces total welfare by $2 for every dollar transferred from upper to lower income households. While the final chapter realistically assesses the state of the industry, Crandall generally eschews both blame and policy prescription. This is perhaps the book’s strength and weakness. Not pointing the linger at anyone, and calling the shots as he sees them, lends credence to his analysis. On the other hand one does not have to read between the lines much to conclude - rightly in my view - that increased competition, deregulation, and the divestiture have greatly improved the performance of the industry and that more is welcome. On the negative side, in common with most books addressing the telecommunications industry, the book’s major weakness is its lack of any substantive analysis of how the political-economic mechanism works in this industry, so realistic suggestions can be made on how it might be altered to produce a more efficient outcome. The industry begs for an application of the economic theory of regulation to its history and prospects. My own belief is that political-regulatory forces do not reform themselves. The progress made by the FCC and by antitrust enforcement has been bitterly opposed by political forces and state regulators. A new short-run balance of economic and political forces has been reached. But the ball is still squarely in the political arena of the various regulatory commissions, Congress, and Judge Greene’s court. There activity is now dominated by selfinterested jockeying and rent-seeking. Most of the disinterested policy recommendations in opposition to further liberalization are based on either the spectre of what the operating companies COULD do by acting irrationally, like cross-subsidize, or what they MIGHT do because of the perverse incentives of state regulation, like goldplate the rate base. Public policy is also hampered by the tendency to use introspective tests, which need information that is largely unknowable, rather than having faith in market processes, where the information is, to sort out matters. In my view further progress will come about only by the inevitable gnawing of the market as it chips away at every niche where regulation has produced uncompetitive results. Crandall’s excellent little book shows us where these niches are. University
of Idaho,
John T. Wenders Moscow, ID, USA
445
reviews
become functions of quantities. As the author points out, the dynamics of such models are extremely complicated and he analyses a number of important special cases. The author in these chapters has established a general framework for the dynamic analysis of multisector models away from the steady stable paths of the traditional analysis. A general analysis of the nonlinear dynamics of such models is probably an impossible task, so economic theorists will gain insight into their behaviour by building up a catalogue of dynamic special cases capturing economic issues of importance. The building of such a catalogue will proceed via models in [w’, [w3 (which in addition to steady stable paths may also exhibit limit cycles and chaos), models reducible to these by centre manifold theory, and possibly [w2” (coupled nonlinear oscillators). Professor Zhang has taken the first steps in the building of such a catalogue. Overall I found this book to be a worthwhile addition to the growing literature on economic dynamics. Unfortunately it is marred by a large number of typographical errors.
References Semmler, W., ed., 1986, Competition, instability, and nonlinear cycles, proceedings (Lecture notes in economics and mathematical systems, Springer-Verlag). Gabisch, G. and H.W. Lorenz, 1987, Business cycle theory (Lecture notes in economics and mathematical systems, Springer-Verlag). Batten, D., J. Casti and B. Johansson, eds., 1987, Economic evolution and structural adjustment (Lecture notes in economics and mathematical systems, Springer-Verlag). Ricci, G. and K. Velupillai, eds., 1988, Growth cycles and multisectoral economics: The Goodwin tradition (Lecture notes in economics and mathematical systems, Springer-Verlag). Di Matteo, M., A. Goodwin and A. Vercelli, eds., 1989, Technological and social factors in long term fluctuations (Lecture notes in economics and mathematical systems, Springer-Verlag). Ferri, P. and E. Greenberg, 1989, The labor market and business cycles theories (Lecture notes in economics and mathematical systems, Springer-Verlag). Lorenz, H.W., 1989, Nonlinear dynamical economics and chaotic motion (Lecture notes in economics and mathematical systems, Springer-Verlag). Puu, T., 1989, Nonlinear economic dynamics (Lecture notes in economics and mathematical systems, Springer-Verlag). Chiarella, C., 1990, The elements of a nonlinear theory of economic dynamics (Lecture notes in economics and mathematical systems, Springer-Verlag).
Carl Chiarella University
of Technology,
Sydney,
Robert W. Crandall, After the Breakup: U.S. Telecommunications Competitive Era (The Brookings Institution, Washington, pp. xii + 174, $25.95 hardback. This little book is economic history the economist’s tool kit and used
at its best. Robert it to illuminate
Australia
in a More D.C., 1991)
Crandall has taken the post-war U.S.
446
Book reviews
telecommunications industry. Further, he has managed to do this in a readable way that makes even his professional analysis accessible to non-economists. The U.S. telecommunications industry is best viewed as a regulatory cartel where a balance of economic and political interests was struck. In this balance, the industry, dominated by the Bell System, got regulation that assured its profits and protected it from competition and the antitrust laws. The politicians and regulators got a long distance-to-local subsidy that benetitted their strongest political constituency - rural and residential subscribers. This balance was politically efficient because it optimized vote-getting. But it was very inefficient economically, resulting in greatly over-priced longdistance services and perverse incentives. Inevitably, market forces began to tear it apart, to the benefit of economic welfare. Although he does not couch his analysis in exactly this way, this is the story that Crandall tells. He begins with an elementary description of the telephone network, the U.S. industry, and its regulation (chapter one). This is followed by a brief history of the industry with an emphasis on post-war developments (chapter two). The salient story here is how technological change systematically lowered the cost of providing long-distance service. Rather than allow long distance rates to fall, as would have occured in an open market, regulators seized the profits generated there and used them to subsidize local service. As a result, the over-priced long distance services attracted a host of competition and private provision of telecommunications services. Crandall next analyses telephone services and rates (chapter three). He uses original work to show that even though the traditional common carriers are growing only slowly, and their employment has fallen by nearly 30% in the 1980s the U.S. telecommunications system is not declining. As a result of entry in response to regulators’ attempts to maintain cross subsidies, some 25% of the nation’s investment in telecommunications is now in the hands of unregulated private networks. Crandall analyses total factor productivity to show that liberalization has improved efficiency by more than any potential loss in economies of scale and scope. Next Crandall describes how deregulation of customer premises equipment and the AT&T divestiture have combined to make the equipment market much more competitive (chapter four). The heart of Crandall’s book is contained in an excellent chapter (five) on the effect of recent developments on income distribution and economic welfare. Contrary to what one hears from consumer advocates and the popular press, Crandall shows that the lessening of the long-distance to local subsidy has had only a tiny regressive impact on income distribution. Further he shows that there has been no decline in the quality of telephone
Book
reviews
447
service. But most important, he convincingly demonstrates that there has been a great improvement in overall economic efliciency - between $0.7 and $1.4 billion annually - due to the lowering of long distance rates. This analysis also shows that there are further gains available of about ten times this. The practice of using telephone rates to redistribute income reduces total welfare by $2 for every dollar transferred from upper to lower income households. While the final chapter realistically assesses the state of the industry, Crandall generally eschews both blame and policy prescription. This is perhaps the book’s strength and weakness. Not pointing the linger at anyone, and calling the shots as he sees them, lends credence to his analysis. On the other hand one does not have to read between the lines much to conclude - rightly in my view - that increased competition, deregulation, and the divestiture have greatly improved the performance of the industry and that more is welcome. On the negative side, in common with most books addressing the telecommunications industry, the book’s major weakness is its lack of any substantive analysis of how the political-economic mechanism works in this industry, so realistic suggestions can be made on how it might be altered to produce a more efficient outcome. The industry begs for an application of the economic theory of regulation to its history and prospects. My own belief is that political-regulatory forces do not reform themselves. The progress made by the FCC and by antitrust enforcement has been bitterly opposed by political forces and state regulators. A new short-run balance of economic and political forces has been reached. But the ball is still squarely in the political arena of the various regulatory commissions, Congress, and Judge Greene’s court. There activity is now dominated by selfinterested jockeying and rent-seeking. Most of the disinterested policy recommendations in opposition to further liberalization are based on either the spectre of what the operating companies COULD do by acting irrationally, like cross-subsidize, or what they MIGHT do because of the perverse incentives of state regulation, like goldplate the rate base. Public policy is also hampered by the tendency to use introspective tests, which need information that is largely unknowable, rather than having faith in market processes, where the information is, to sort out matters. In my view further progress will come about only by the inevitable gnawing of the market as it chips away at every niche where regulation has produced uncompetitive results. Crandall’s excellent little book shows us where these niches are. University
of Idaho,
John T. Wenders Moscow, ID, USA