Did Tauzin-Dingell Crash CLEC Wall Street Party?
Washington— The man who wrote a book predicting the Dow would zoom to 36,000 in five years has some new numbers dancing in his head that could mean Dow 3,600 will come long before Dow 36,000.
The numbers on economics commentator James Glassman's mind are 1542 — as in HR 1542, the House bill sponsored by Reps. Billy Tauzin (R-La.) and John Dingell (D-Mich.) that calls for untethering the Baby Bells from some of their network-opening commitments under the Telecommunications Act of 1996.
The Tauzin-Dingell bill might escape the House in recognizable form later this year, but the outlook in the Senate is not good. Senate Commerce Committee chairman Ernest (Fritz) Hollings (D-S.C.) is a strong opponent, and in the Senate one senator can put the kibosh on legislation with ease.
Nevertheless, Bell competitors — mainly long-distance service providers such as AT&T Corp. and competitive local exchange carriers (CLECs) that offer digital-subscriber-line service — are in a state of panic over the Tauzin-Dingell bill, claiming it would drive them out of business.
Glassman, a resident scholar at the American Enterprise Institute, wholeheartedly agrees.
"If the Tauzin-Dingell bill passes, the CLECs are dead," Glassman said in an interview two weeks ago.
Glassman, a former stock-market columnist with The Washington Post
who urged investing for the long run, is the co-author of the 1999 book with the bullish title, DOW 36,000: The New Strategy for Profiting from the Coming Rise in the Stock Market. Needless to say, Glassman has been discouraged by a sharp stock-market slide across all the major indices over the last 15 months — especially the technology-laden NASDAQ, the Wall Street home to so many of the CLECs.
Last month, Glassman (on his own and not as an AEI representative) and a few collaborators released a study condemning the Tauzin-Dingell bill as an attempt by the Bells to snuff out rivals and block the advent of competition to replace regulation as the guarantor of consumer welfare.
Glassman's report contained what he calls an "event study," an examination of whether news items harmed the market performance of certain stocks. Glassman, drawing conclusions which drew instant criticism, claimed that nine favorable media stories about the Tauzin-Dingell bill — seven of which were published in March and April of last year — were directly responsible for dragging down a basket of CLEC stocks by 84 percent between March 2000 and May 2001.
"The study only confirms what common sense would tell anybody," Glassman said. "The point is that as an investor or a lender, you've got to be out of your mind to go into CLECs with the Tauzin-Dingell bill overhanging it."
Between March 14, 2000, and May 10, 2001, Glassman's CLEC basket went from $242 billion in market capitalization (price per share times the number of shares outstanding) to $36 billion. He claims positive news accounts of the Tauzin-Dingell bill were responsible for $95 billion, or 46 percent, of the $206 billion in CLEC market-cap incineration.
Glassman emphasized that the CLEC decline was much worse than the overall falloff in the NASDAQ index — 84 percent vs. an adjusted 48 percent.
What are some of news events Glassman cited for triggering the CLEC crash? One involved testimony Tauzin gave last March promoting his bill before the Senate Commerce Committee, and another involved Tauzin expressing his "warm feelings" toward new Federal Communications Commission chairman Michael Powell two months ago before the House Energy and Commerce Committee, which Tauzin chairs, announced the re-introduction of the Tauzin-Dingell bill.
In his report, Glassman said these and other events directly caused the CLEC stock market implosion.
"It's absolutely absurd," said Tom Hazlett, an economist and Glassman's colleague at the free-market-leaning AEI think tank. "He has no other variables. He fails to include any other alternatives."
Hazlett is planning to release a detailed rebuttal to Glassman's work shortly, and the two are planning to debate the issue at AEI on July 12 with former Republican FCC member Harold Furchtgott-Roth acting as referee.
Tauzin spokesman Ken Johnson also attacked Glassman's finding.
"It's absolutely ludicrous," said Johnson. "Worse than fuzzy math, Glassman is preaching voodoo economics."
Some of the problems with Glassman's study are not hard to identify.
First, the Tauzin-Dingell bill was introduced in July 1999, eight months before the NASDAQ hit its all-time high in March 2000. Glassman did not explain why, if the Tauzin-Dingell bill was so awful, the NASDAQ surged during the first eight months of the bill's existence. Glassman's report cites events that occurred only after the NASDAQ hit its peak.
Hazlett found that CLEC stocks jumped 11 percent on the day the Tauzin-Dingell bill was introduced as well as the days before and afterwards.
"He just ignores the whole surge period and then starts focusing when there is this carnage on Wall Street," Hazlett said. "That's called sample-selection bias. It ignores all the real Tauzin-Dingell events, like what happened on the day the bill was introduced."
Glassman countered by saying: "We could have done the analysis starting in 1999 and we probably would have ended up with exactly the same thing."
Second, nearly everyone (probably including Tauzin and Dingell themselves) observing the bill knew the measure was a non-starter in 1999 and 2000 because then-House Commerce Committee chairman Rep. Tom Bliley (R-Va.) opposed it. That being the case, any events Glassman cited in 2000 had to be weighed against the political reality of Bliley's hostility to the bill.
Glassman, however, said his 2000 events were defensible.
"If you are looking at the most important dates in the bill, it is our opinion that those dates are when significant action occurred on the bill," he said.
Third, Tauzin replaced Bliley in January and didn't get around to introducing the Tauzin-Dingell bill until late April. Even if that event signaled a major threat to the CLECs, the bulk of the Wall Street destruction of CLEC stocks had already occurred.
Finally, absent from Glassman's study is any mention of the fact that a few weeks before the Tauzin-Dingell bill was introduced in July 1999, then-Senate Commerce Committee chairman Sen. John McCain (R-Ariz.) introduced a bill (S. 1043) that mirrored its key provisions: long-distance data relief and exemptions from the duty to lease high-speed data network elements to rivals.
Glassman said he could have used the McCain bill just as easily as he used the Tauzin-Dingell bill to prove his point.
"If you want to use the McCain bill, that's OK as well," said Glassman. "There is no doubt that the CLECs are under vicious attack by lots of people. It's McCain, it's other people, though I think McCain may have changed his mind recently."
A goal of political science is to demonstrate causality, showing that event A produced outcome B to the exclusion of all other variables. Hazlett said Glassman's study didn't come close to meeting that standard.
"Just because you see a correlation doesn't mean that caused" the CLEC stock crash, Hazlett said. "The Tauzin-Dingell bill has had no impact on the stock market that we can observe."
But Hazlett did concede that the Tauzin-Dingell bill could have some influence on investor sentiment and has "some economic importance" given the massive lobbying war going on between the Bells and the CLECs and their defenders.
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