Telephone Straddle

THE FEDERAL COMMUNICATIONS COMMISSION IS NOT A social-services agency, but you'd never know it from chairman Reed Hundt. He's an evangelist who's turned a drab subject - deregulation - into a religion. So Hundt was predictably bragging last week that the FCC's latest decrees under the Telecommunications Act of 1996 heralded a new era. The FCC has realized, he said, ""the impossible dream of connecting every single American to the Information Highway.'' It has also lowered long-distance rates for grandmothers and hastened the day of complete deregulation. Hallelujah.

Does all this seem overdone? Well, yes. What the FCC actually did was something less than Hundt's glowing description. The agency perpetuated a baffling system of communications subsidies - and created a huge new one to connect every school to the Internet. It lowered some phone rates and raised others. The whole process may prop up phone rates, prolong regulation and frustrate ""the most efficient technologies,'' says communications expert Thomas Duesterberg of the Hudson Institute.*

Although deregulation is only partial in the phone industry, it - along with new technologies - has already resulted in big benefits. The typical household now devotes about 2 percent of its spending to phone service, roughly the same as in 1980. But what it now gets is much greater: two to three times as much long-distance calling, many new services (voice mail, call waiting) and, increasingly, cellular phones and second lines for computer services. For the process to continue, Congress and the FCC need to step aside and let it happen. Instead, they're manipulating ""deregulation'' to advance pet agendas.

Consider the glitziest part of the FCC plan: the school subsidies. Under the program, schools would receive up to $2.25 billion annually to install Internet access circuits and to reduce monthly charges. President Clinton and Vice President Gore are big fans of this scheme. The idea is to introduce children to the Net, cultivate computer skills and prepare students for better jobs. This is mostly a way to subsidize photo ops for politicians who like to be seen with children and computers. Otherwise, it's a lousy idea.

Let's be clear: computer skills are important, but many children are already acquiring them at home. More will. Between 1987 and 1997, the proportion of households owning computers has doubled from 18 to 40 percent, estimates the Electronic Industries Association. Prices fall; ownership rises. The same thing is happening with the Net. Since 1995, the share of Americans 18 and older using the Net regularly has risen from 8 to 28 percent, reports the market-research firm Find/SVP.

Schools will inevitably lag. Connecting them to the Net won't matter much if they don't have lots of computers and modems and can't update them. Those costs dwarf the FCC's subsidies. Suppose there's a computer for every four students. The costs of buying these computers, maintaining them and training teachers on them could total $10 billion to $15 billion annually, finds a study by Wayne Leighton of Citizens for a Sound Economy. Even wealthy school districts can't afford this. My 12-year-old daughter attends the sixth grade in public schools of Montgomery County, Md., which in 1993 had the 10th highest household income among all counties. Her computer class still uses Apple IIe's, vintage mid-1980s.

But if computers and the Net were free, they wouldn't transform schools in the way that cyber zealots believe. Computers won't teach children to read, write or think. My 7-year-old son has better computer skills than reading skills, but his reading skills are more critical for his future. The same is also true for low-income students. It will rightly be said that many don't learn computer skills at home. But the main problem for these children is basic literacy, not computer literacy. With the former, they'll ultimately get the latter.

Of course, schools will and should connect with the Net. But which schools, how much and how fast should be left to local officials. Bribing them with a federal handout could do more harm than good. Principals and teachers will have to comply with the program's rules - submitting, for example, a ""technology plan'' detailing their computer program - to qualify for subsidies. Time is precious; more should be spent with students, not forms.

These educational benefits may be phantom, but the higher overall phone rates needed to pay for them aren't. The school subsidy will be financed by a tax of about 1 percent on the revenues of all phone firms, which will recover the tax in their prices. There's another tax of about 1 percent (applied only to long-distance firms) to subsidize rural phone service and local phone service for poor families. The subsidies for the poor may be justified. The rural subsidy isn't. If people prefer to live in remote Montana, they should enjoy the pleasures and bear the costs.

To do all this in the name of ""deregulation'' is odd. In fairness, the FCC is not a free agent. Congress ordered it, in the Telecommunications Act, to act on these issues. That's the point: Congress and the FCC praise deregulation and practice regulation. States, which control local rates, also like regulation. The new subsidies overlay old subsidies. Long distance subsidizes local service; businesses subsidize homeowners. The system needs to be dismantled. Otherwise, new competition will circumvent the system by serving customers - big companies - that are now overcharged. This will have little social value. But the FCC has barely edged away from the subsidy system.

Economist Robert Crandall of the Brookings Institution rightly suggests Congress rewrite the 1996 law to embrace genuine deregulation. The fear that this would sharply raise family phone bills is overblown. In 1995, a typical family spent about $63 on its monthly phone bill. Of this, only about $20 was for basic local service. Even if that rose (questionable), the increase would soon be offset by drops in long distance and other services. Wise deregulation works. But what the FCC did last week was more clever than wise.