The Public Policy

...One looking for justifications for the suit against AT&T will search these avenues in vain...

...It threatens to destroy what AT&T board chairman John D. deButts has aptly called a "unique national resource...

...Previously, I noted that the evils of monopoly were a matter of "textbook economics...

...Moreover, long distance service is sufficiently separate from the rest of the Bell System to permit independent operation, and this avoids giving AT&T any more control than is absolutely essential...

...One spokesman for the Antitrust Division, quoted in the December 2, 1974 issue of Newsweek, was even more blunt: "If lower prices don't result from freer competition, well, so be it...

...If successful, the suit would force the most radical government shakeup of a major industry in the history of the country...

...Divorced from AT&T, it is likely that the Labs would either go under, or (perhaps worse) come under the benevolent tutelage of the federal government...

...In this effort he deserves both understanding and cooperation...

...In addition, theoretical arguments about the virtues of free competition are simply false in this instance...

...It is a suit virtually devoid of economic justification...

...Teddy Roosevelt discovered early on that one of the most popular sermons one could preach from that "Bully Pulpit," known more prosaically as the Presidency, centered around the evils of Robber Barons, and he proceeded to cultivate an image as a swashbuckling trust-buster which, deserved or not, remains a central feature of his historical reputation...

...This is a rather scanty, speculative basis for messing with a successful industry, and it turns out that even thesearguments are implausible...

...However, as anyone who has read his Samuelson can tell you, the necessity of monopoly for certain types of industry is an equally fundamental tenet of modern economic theory...

...Before embarking on a review of the performance of the Bell System, it is worth pausing for a moment to consider the overall structure of the industry itself...

...Second, the naive belief that long distance can be feasibly separated from the rest of the system not only takes for granted the virtues of the unified network such action would destroy, but also overlooks the role Long Lines plays in keeping' down costs in other areas...

...The government is charging that AT&T has "conspired" with its various subsidiaries to restrict competition in the telecommunications industry, and claims that the only solution to this problem lies in splitting up the company...

...Or maybe consumer prices have simply become too high...

...Perhaps the Bell System has exploited its monopoly position by piling up huge profits, despite regulation...

...While it is at least conceivable that public ownership might provide the answer to these problems, the federal government showed for once both proper respect for the abilities of private industry and a corresponding awareness of its own limitations when it decided how to deal with the phone monopoly...

...poor, it is textbook economics that monopolies maximize profits by restricting output below the levels which would prevail in a competitive market, thereby creating artificial shortages and inflated prices...

...And to top it off, the Justice Department even admits that it doesn't know if the action will improve anything...

...Should these measures prove insufficient, the government is holding in reserve the possibility of making AT&T sell the Bell Laboratories, its research and development organization...

...The FCC keeps if anything an overscrupulous eye on the activities of Ma Bell, and profits hover with remarkable consistency at a discreet 7, percent, give or take a few points...

...So on the surface, an antitrust action against an admitted monopoly that did some $25.53 billion in business last year seems squarely in the mainstream of governmental efforts to preserve free competition...

...Perhaps lack of competition has bred industry-wide complacency, leading to technological and developmental stagnation...

...little or rich vs...

...Nevertheless, I think it is important at this juncture to examine the merits of what the Justice Department proudly proclaims is the largest antitrust suit ever brought...

...But to acquiesce in, if not actively promote, a misdirected attack on one of the strongest sectors of the economy is hardly the act of a man with the seriousness and intelligence needed to guide the nation from a recession...

...It amounts to little more than the following: "The need for monopoly at the operating level doesn't require monopoly at the manufacturing stage...

...At best, as even the usually understated Wall Street Journal has charged, it is little more than "political grandstanding"--and moreover, it is grandstanding that will alienate large numbers of people who would otherwise be sympathetic to a Republican administration...

...Accordingly, the communications legislation passed by Congress in the 1930s contemplated precisely the situation that now obtains—namely, a private monopoly, but subject to regulation by the Federal Communications Commission and similar state agencies to guard against the possibility of monopoly pricing...

...But even if AT&T survives unscathed, the whole affair has already produced some serious doubts about the administration, and in particular, about the current occupant of the White House...

...At the very least, it is the most significant antitrust action since the United States took on the first John D. Rockefeller's personal fiefdom and broke up Standard Oil...

...What then is the theory behind the suit...

...Moreover, the firm noted that Western's overall operation was marked by high quality, low costs, quick delivery, and reasonable prices—which would-be competitors could not hope to match...

...And while the phone company has felt the pinch of higher labor costs and other inflationary pressures along with all other industry, its prices have hardly risen at an astonishing rate...

...Like most large-scale research and development units, Bell Labs requires steady infusions of capital from a reliable source...

...Hence, spinning off and splitting up Western Electric (and letting other companies get into the act if they want to) can bring the benefits of competition to the actual manufacturing of telephone equipment...

...Morgans of the earth seemed, in the popular mind, capable of taking into their own hands control of most of American industry...

...Touche, Ross & Co., the prestigious accounting firm that examined the relationship between Western Electric and the Bell operating companies at the behest of the FCC, concluded straightforwardly that the combination resulted in reduction of both cost and investment...

...Second, the necessity of developing a truly national communications network demands the kind of planning and coordination that is realistically possible only with unified management...

...He has promised to fight inflation—a problem that springs from decades of deficit spending, years of half-hearted but expensive military intervention in Southeast Asia, overweening power on the part of organized labor, and myriad other causes for which Gerald Ford is hardly responsible...

...Even with cheap rates, AT&T has kept long distance efficient and profitable enough to enable the company to offer regular service at reduced prices...

...I hesitate to quarrel with the cogent grasp of economics revealed by this little gem of Presidential analysis, especially since a discourse on the economics of the telephone industry is hardly the most intriguing subject matter with which to fill a column...

...This is hardly what either we or the President need, and one hopes we shall see no more of it...

...Senator Phillip Hart (D.-Mich...

...Now, antitrust actions have, by their very nature, a certain populist appeal...

...He has noted, and commendably so, that our economy poses the most serious problems we currently face...

...Surely the government would not attempt anything as drastic as breaking up the phone company unless the service being provided were seriously wanting in at least some respects...

...and second, that AT&T's profitable Long Lines Division, which currently handlessome 90 percent of the nation's long distance telephone calls, be split off from the parent company...

...And President Gerald Ford took the time in a recent press conference to reassure skeptics that, as he understood it, the suit was instituted not because AT&T is "big," but rather because it had "broken the law...

...as one spokesman has claimed, "the purpose of this suit" is simply "to make the industry competitive, and that is what we're going to do...

...So there you have it—the largest antitrust suit in history...

...What emerges from that examination, however, makes one wonder exactly what there is to be proud about...

...For this suit, far from being directed at a wasteful, inefficient, profit-guzzling, and illegal behemoth, is instead aimed at an efficient and innovative industry, a necessary and tightly regulated monopoly whose performance stands as one of the few bright spots in a seriously troubled economy...

...Thus, any fair evaluation of AT&T would question not the industry's monopoly structure, but rather the company's performance given that structure...

...has gone further, praising the action as indicating a willingness "to work on a basic problem of the economy—the structure of a most significant industry...

...Indeed, long distance telephone calls stand as an almost solitary example of an important service whose price has gone down over the last twenty years...

...The Justice Department itself is at pains to so characterize the suit...

...First, it requires levels of capital outlay so high that investment by more than one firm would yield both wasteful overcapacity and concomitantly higher prices to consumers...

...Specifically, the Justice Department insists first, that AT&T divest Western Electric, a wholly owned subsidiary that serves as the manufacturing and supply unit of the Bell System, and that Western then be divided into at least two competing firms...

...As the Wall Street Journal noted in a highly critical editorial in its November 22, 1974 issue, "the Justice Department can't promise any consumer benefits that might result from its suit to break up AT&T...

...Basically, the telecommunications business has at least two features which make monopoly the most efficient means of providing telephone service...

...Nationwide direct distance dialing, expansion, and innovation that have kept pace with skyrocketing demand, intercontinental telecommunications satellites, and a host of other developments which someone with more expertise than the current author could document make any theory of technological stagnation laughable...

...First, the assertion that AT&T doesn't need its own manufacturing and supply unit ignores the need for uniform, conforming equipment that is prerequisite to a technologically sensitive electronics system of nationwide scope...

...The nation's first laws on the subject, the Sherman and Clayton Acts, were passedin an era when the Rockefellers and J.P...

...Similarly, there may be no reason for keeping Bell Labs within the system...

...Hopefully, he will stick to it even when Justice comes slinking around in three or four years trying to salvage some face-saving compromise out of what is sure to prove a Departmental debacle...

...Even aside from the political advantages of being on the side of the angels in any battle that pits big vs...

...And while the potential threat the action poses to he stability of this industry is disttiThih'g enough, the stupidity of devoting a huge chunk of government resources to such a thoroughly misguided cause raises even more serious questions about the capacity of this administration to deal with what is fondly known as "our current economic crisis...

...Finally, the possible severing of Bell Labs, in addition to revealing a certain governmental ingratitude toward an operation that has made significant contributions to defense and space technology as well as pure communications, might well result in the loss of a valuable facility...

...The one bright spot on the horizon is that deButts, who does not appear to come from the mold that has produced so many self-consciously "concerned," apologetic executives of late, has pledged to fight this one to the end...