The Biden administration’s $ 1,000 billion “infrastructure plan” has sparked controversy, but there’s no question America needs repairs. President Biden’s words resonated when he said “America is 13th in the world for infrastructure.”
The bipartite package includes subsidies for the deployment of broadband. Mr. Biden asked for $ 100 billion. Republicans and Democrats have compromised $ 65 billion in the “Infrastructure 1” package. Most of that, $ 42 billion, is earmarked for rural communications network subsidies, promising to bridge the “digital divide”.
It is doubtful. The government has already spent at least $ 200 billion (in 2021 dollars) on the “universal service fund” established by the Telecommunications Act of 1996. Most of the money was intended to expand the networks that serve rural areas, but a portion has also been allocated to schools and libraries, health facilities and low-income mobile phone users.
This money had little impact on the network infrastructure. In 2011, the Federal Communications Commission found that 19 million people, living in seven million homes, could not benefit from peak broadband service. Ten years later, despite more than $ 50 billion in additional subsidies for high-cost networks, the number in underserved areas reached 30 million, according to Biden.
Another big package of operator subsidies is unlikely to complete the broadband infrastructure. The government has operated with a blatant lack of accountability, despite a constant stream of warnings from the Government Accountability Office that the system needs much better oversight. It was revealed in a 2006 study that Sandwich Isles Communications received over $ 13,000 per household per year to provide old-fashioned landline service to a small town in Hawaii. This was back when economists considered any wireline service over $ 1,000 a year to be unreasonably expensive because satellite options were available at a lower cost. Outrageous spending continued, paid for by a regressive telephone tax that hit low-income households the hardest.
The FCC only saw the absurdity in 2015, when the Internal Revenue Service secured the Sandwich Islands owner’s conviction on six counts of fraud for padding expenses. The company has never served more than 3,659 customers.
The episode reveals surprisingly limited monitoring of the huge cash flow, which in this case paid for management massages, $ 1.3 million for a private residence in California, and tuition at private schools for the children. of the boss. The vast majority of Internet operations receive no subsidy but offer fixed broadband access to 96% of US homes, according to FCC data, or 90% according to the administration, with 4G / 5G wireless and satellite covering virtually everything. the rest.
The carriers that receive payments do not appear to expand the network much and their customers would be served without the subsidies. Economists Greg Rosston and Bradley Wimmer published a study in 2000 which estimated that the complete elimination of subsidies (and the taxes to pay them) would not reduce phone coverage by more than 0.3%. With the competition we now have in broadband – with cable, mobile networks and satellites now added to the mix – the impact might be even less today.
A key reform suggested by economists has been attempted. In 2011, the Obama administration decided to use auctions to distribute certain broadband subsidies, hoping to lower costs and increase the number of sites served. In 2018, the first major test of competitive offers, savings averaged 70%. One of the engines of these economies was technological neutrality, the refusal of the government to dictate the technology used. The biggest winner of the 2018 auction was Viasat, a satellite operator that agreed to offer broadband service to 190,000 addresses (nearly a third of the total funded) in return for government spending of less than 10% of the traditional formula of the FCC.
Despite this lesson, most grants are still distributed using the government’s cost-plus model, with companies receiving more money when they have implausibly high overhead costs. Administrative costs are where most of the money goes. A 2019 GAO study was titled “The FCC Should Take Additional Steps To Manage The Risk Of Fraud In Its Broadband Support Program In High Cost Areas.” ”
The GAO is right. We must eliminate endemic waste, fraud and abuse before distributing an additional $ 42 billion to Internet service providers.
Mr. Hazlett is Professor of Economics at Clemson and Chapman Universities. He was Chief Economist of the FCC from 1991 to 1992.
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