With New Technology, Federal Control Always Grows--But Wait

Earlier this month, the president of the United States met with a hacker named “Mudge.” The Internet and the federal government will never be the same.

The meeting came at the White House conference following hacker attacks on key commercial Web sites. Promising to step up federal efforts to protect e-commerce from denial-of-service attacks, President Bill Clinton called for federal funding of a high-tech security institute.

Did Republicans attack the president for this expansion of government into cyberspace? No, they did not. In fact, GOP lawmakers have attacked the Clinton administration for being too late with too little when it comes to the cybercops.

How things have changed.

When the Internet first arose in the land, libertarians hoped and many liberals feared that the United States was headed toward a post-government world. In the e-topia many thought they saw, the Net made governments irrelevant. E-commerce was international; no government could regulate the flow of goods, money or information on the World Wide Web.

Moreover, e-topia would be a land of small business; the corporate dinosaurs, too large and clumsy for the new environment, would lose to a new race of “e-mammals”--smarter, quicker competitors that would chow down on the eggs of the big guys.

Well, not exactly. Now that the technology is maturing, we can see the hopes and the fears were both misplaced. The Internet is extending both the reach and power of the federal government, building new corporate giants and crushing small business and curbing the states.

Look at tax policy. The federal decision to ban states from trying to collect sales taxes on e-commerce means that cities and states are losing more control of revenue. It’s a massive federal power grab over one of the key sources of state and local independence. It’s also a transfer of the tax burden to small mom-and-pop retail businesses from big Internet chains. If you buy flowers from the local florist, you pay tax. Order them over the Web from a national company, and you don’t.

This is only the start. Much of the power of the states today comes from their constitutional authority to regulate economic activity within their frontiers. Doctors, lawyers, beauticians and physical therapists must all pass state exams for state licenses--and a lawyer who passes the bar in, say, Michigan, can’t represent clients in Missouri.

Beauticians and physical therapists don’t have to worry too much, but the Web will end most state control of commerce. E-commerce is interstate commerce, and all its activities come under the Feds.

Ultimately, this will lead to a replacement of state powers by federal regulations. Take medicine. Already, services like WebMD.com and Health.com provide medical advice over the Internet, and many HMOs are moving patients’ records and other documents onto their servers. Given the enormous cost benefits of a medical system that relies as much as possible on Internet-assisted contacts--it’s far cheaper to e-mail a question to a doctor than to schedule an appointment--it may only be a matter of time before health care falls entirely under federal jurisdiction.

Meanwhile, small businesses by the thousands and, eventually, perhaps the tens of thousands, will fall by the wayside. Who needs local travel agents when you can buy tickets over the Net? Who needs a local stockbroker when you can e-trade? Who needs a local independent bookstore when you can log onto Amazon.com? Local banks, law firms, car dealers, retail stores: They are all already feeling the hot winds of e-competition.

Law-enforcement powers will also shift to the Feds. Whether it’s child pornography, threatening e-mails, hacking, data theft or consumer fraud, the Internet will inevitably expand federal criminal jurisdiction, while marginalizing the role of state law enforcement.

International economic activity, both legal and criminal, is also going to increase on the Net; that, too, makes the national government stronger rather than weaker. True, the government will have a hard time cracking down on offshore gambling casinos or porn sites that use the Net, but guess what? Gradually, governments will get more resources to fight offshore crime. The mysterious National Security Agency already spends billions of dollars a year, much of it monitoring telephone traffic. As it fights terrorism, drug running and other evils, the U.S. government is certainly going to acquire more powers to monitor Web activity.

So the Web proliferates and the winner is Uncle Sam. Nothing new here: That’s how technology usually works.

Look at the railroads. They were originally seen as enemies of the state and big business. Roads and canals were usually publicly owned and operated. Railroads were private: taking government out of the transportation and infrastructure business. Small businesses in small cities and towns could access national markets, allowing them to compete against the big guys.

What happened was different.

Take money. Early on in U.S. history, paper money was issued by private banks, not the federal government: A $5 bill represented a promise by a given bank to redeem the bill for $5 worth of gold coins. These bills traded at different prices, depending on the bank’s reputation. That system worked reasonably well when most business was local. But railroads made that unworkable as both people and goods traveled more. The system broke down completely during the Civil War, when the federal government moved armies and supplies over the rails. The National Bank Act of 1863 created national paper currency under federal control, and private bank currency was driven out of the markets.

Railroads also created the need for government regulation. Farmers, furious over what they saw as an abuse by the railroads of their monopolistic position, persuaded Congress to set up the first great federal regulatory body, the Interstate Commerce Commission, to control railroad rates and behavior. Railroads also opened the door to a new wave of national corporations, like Standard Oil and U.S. Steel, that crushed thousands of small businessmen and exercised far more power than any pre-railroad company could hope to acquire.

Railroads even turned the federal government into our national timekeeper, making clock time an issue of federal laws. Before railroads, cities, towns and private citizens used to keep their own time, setting their watches and clocks by the sun. With railroad technology, that didn’t work any more, and finally the federal government passed its first Standard Time Act in 1918. Thanks to the railroads, time today isn’t what the sun says: It’s what the federal government thinks it should be.

But if the Internet doesn’t mean the federal government is going to wither away, it also doesn’t mean Big Brother is coming. When a new technology like the Internet comes along, government becomes more powerful than it used to be; but individuals also have more choices, more freedom. Those new choices compensate us for the increased power that flows to the federal government as it fights Internet crime and regulates key economic transactions over this amazing system. New small businesses will spring up to replace the small businesses that don’t survive; and they will benefit from the Web’s ability to create a worldwide customer base. State governments will find new sources of revenue to replace the ones they’ve lost. And everything will settle down until the next technological breakthrough creates a new round of illusions about the end of government and the collapse of corporations.

You heard it here first: The biotech revolution will destroy big corporations and make the federal government obsolete.

Not.