IPI Publication Opinions/Editorial
Related Publication Title:
The Real Economic Costs of the Microsoft Decision
IPI Issue Brief
Related Publication Title:
The Real Economic Costs of the Microsoft Decision
IPI Issue Brief
| Released by Gary and Aldona Robbins, and Bartlett Cleland | Published Outlet: |
| on 10/12/2000 |
| URL to original published op/ed: |
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Press Release (09/26/2000)
Press Release (10/02/2000)
Press Release (06/29/2001)
Media Advisory (10/02/2000)
OpEd (10/12/2000)
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by Aldona Robbins, Gary Robbins and Bartlett D. Cleland
For More Information, Please Contact Sonia Hoffman
(888) 557-4IPI or shoffman@ipi.org
"This case has rattled the markets. This is the damning evidence that the market does not like the Microsoft case. The consensus on Wall Street is that the government is not going to make anything better. The government is perceived as a bigger problem."
While this assessment from Tom Hazlett of the American Enterprise Institute is correct, reverberations extend far beyond financial markets. According to the American Shareholders Association, in just ten short years the number of Americans owning stock has jumped from 52 million in 1989 to 79 million in 1998. Many hold stocks through work-based pension programs like the popular 401(k) plans, which have accumulated $1.4 trillion in assets. As one of the most widely-held stocks, “this case” against Microsoft has hit both Wall Street and Main Street.
Microsoft stock has been in retreat since Judge Thomas Penfield Jackson ruled that the software giant violated federal antitrust law and should be split up into two companies. Part of the remedy also would force Microsoft to disclose trade secrets including the source code for its popular Windows operating system – stripping the company of intellectual property.
Before the initial ruling became public last April, shares had reached an all-time high of almost $120 at the end of last year. After the news, shares began to plummet, hitting a 52-week low of $60 at the end of May. With the stock currently trading around $70, Microsoft’s market capitalization has fallen from $570 billion at the start of this year to around $360 billion.
At least some of the drop in Microsoft’s market value is due to an increase in the risk that the government will be allowed to revoke Microsoft’s property rights and harm future profitability. A new study from the IPI Center for Technology Freedom points out that, besides hurting individual portfolios, this increase in risk adversely affects the economy as a whole.
If only a quarter of the drop in market value--roughly $60 billion--is due to increased risk, that is still enough to add about 6 basis points to the return required to invest in U.S. corporate capital. Having to pay investors this higher return raises the cost of capital and results in less capital than would have been absent the higher risk. Less capital means that fewer workers will be needed. With less labor and less capital, the economy will produce less output. With less output, workers, savers and investors will receive lower incomes.
Over the next eleven years, this higher cost of capital would be enough to lower gross domestic product by $147.2 billion. Consumers would be able to buy $66.7 billion less goods and services, and businesses would invest $65.8 billion less in plant and equipment. The slower economy would create 44,900 fewer full-time jobs and generate $59.6 billion less in personal income. Put another way, the macroeconomic fallout from the Microsoft case could end up costing every man, woman and child $507 and $1,293 for the average American household.
Because government currently takes 30 percent of GDP, slower growth would also mean less tax revenue. Federal receipts would be lower by $34.1 billion, while state and local governments would collect $18.4 billion less revenue.
Perhaps states should worry more about the revenue consequences of their attorney generals pursuing antitrust action against Microsoft and less about finding ways to tax electronic commerce.
The Microsoft case has already cast a long shadow over the economy. Investor fears over what might happen to the future profitability and viability of the software giant has increased risk and with it, the cost of U.S. capital. Presumably, the government embarked on this course because it sees Microsoft as a threat to competition. The question that remains is: Even if the action results in greater competition, will the savings to people who buy software be large enough to justify the losses to everybody else?
IPI Senior Research Fellows Aldona and Gary Robbins authored the Microsoft study. Both are former Treasury economists and now operate their own consulting firm, Fiscal Associates.
Bartlett Cleland is the Director of the IPI Center for Technology Freedom. He was formerly Technology and Policy Counsel to Senator John Ashcroft.
Please email to BCleland@IPI.org.
