Is There Economic Justification for Public Funding of Broadband Internet?

DATE: February 24, 2011

TO: redacted

FROM: Scott redacted

SUBJECT: Is There Economic Justification for Public Funding of Broadband Internet?

SUMMARY

An article in Businessweek entitled “The Flaw in Obama’s Wireless Plan” discusses the benefits of choosing wireless technologies over fiber optic in the President’s plan to push broadband service into rural areas. Although that article discusses the means of carrying out the President’s plan, this paper is about justification for carrying out the project in the first place. In terms of economic freedom, the question becomes whether it is economically beneficial for the government to back such projects instead of leaving them to the private sector.

THE CIRCUMSTANCES

Currently, somewhere between 5 and 10 percent of Americans do not have access to internet at broadband speeds. This is according to a report put together by the National Telecommunications and Information Administration. The people affected are mostly rural citizens living in remote parts of the country. Their homes and cities are large distances from any decent sized urban centers. There is usually a considerable distance between each home which increases installation costs. Also, there are fewer residents per a given coverage area with which to spread the costs, which increases the individual cost per person. President Obama has set a goal of funding the infrastructure needed to supply broadband internet to these outlying areas.

REASONING FOR THE PROGRAM

The White House feels that broadband access in rural areas will provide job opportunities in the way of call centers or software development. It sees the internet’s utility to existing businesses and farmers for improved interaction with suppliers and customers as well as a useful tool for small and home-based business. In addition, the benefits and opportunities to education and the medical field are stated goals. As the president said in a State of the Union speech, the initiative is “about connecting every part of America to the digital age (Brendan.)"

PRACTICAL ARGUMENTS AGAINST THE PROGRAM

The broadband project has many admirable intentions. However, it is important to determine whether those are appropriate governmental actions. Is this assistance essential for the ones who stand to gain from it and is it truly necessary.

The purpose of the President’s plan is not extending internet to rural areas; dial-up internet via phone line is already available. The planned infrastructure is to be an improvement over what is already available. This is a key distinction. The basic benefits that the internet provides are already currently available to those rural citizens, albeit at slower connection speeds. Essentially, the President’s plan is to bring faster internet service to those rural areas.

The new infrastructure would allow for “photos and video, and using video conferencing (Tarter.)” Those are hardly necessities which, if they were, might justify this program. Since they are not, it is hard to see why government involvement is required. The social benefit to those rural citizens is closer to an improvement in luxury than one in basic necessity.

It is not as though the rural citizens are cut-off from the world, either. They have access to telephone and cable or satellite television, both of which would keep them abreast and up to date on happenings the world over.

For those citizens who actually require the benefit of a broadband connection, an alternative already exists. Broadband internet via satellite, though expensive, exists as an option in practically any rural area. Therefore, for rural businesses and farmers who see a benefit to having broadband service, the extra expense of satellite broadband would simply a cost of doing business.

THE ECONOMIC ARGUMENT

Some of the goals of the president’s plan sound economically beneficial and likely they would be. However, would they have a net beneficial effect? In other words, would the costs outweigh the benefits?

As the Businessweek article points out, there are several options for a delivery method such as fiber-optic cables or wireless technologies. Who is to say what the best option is for each situation? There is the very real possibility that the technology they install may be obsolete within a short time of being installed. In the private sector, a cost benefit analysis would be done to determine whether the benefit will outlast the initial cost. This analysis would be driven by the fear of loss of capital. In a government program such as the broadband initiative, the potential loss of capital does not weigh so heavy in the analysis. Instead, potential loss or gain of constituency usually replaces that consideration.

In totally free markets, private companies would assess whether there was a market to be gained which would reward the expense of installing the infrastructure. If they saw that the project was economically feasible, they would not hesitate to make the investment. The fact that private firms have spurned the project should be a red flag telling us that the project is not economically feasible.

According to the study done by the white house, the plan is intended to close a gap of only 14% between urban and rural broadband users. The study showed that about 70 percent of rural households were connected to the internet compared to about 84 percent of urban households. This relatively small gap (which is reasonably understandable considering the circumstances) does not seem significant enough to warrant the expense. The indication is that the broadband initiative will be a terribly inefficient allocation of resources.

Another consideration of this government program is that it will take opportunities away from those who may have found ways to work within the current infrastructure. For instance, those small businesses that currently provide dial-up internet service will be pushed out of business, not by natural competition, but by the government. What is more, the broadband campaign will discourage entrepreneurship and innovation. Left unhindered, entrepreneurs and innovators might have discovered new and better ways of reaching remote locations with broadband service and their discoveries could be the technological fuel for a new wave of advancements.

POLITICALLY MOTIVATED ISSUES

Implementing the initiative will require several choices to be made such as which areas to extend service to, which technologies get implemented, which firms are hired to install the infrastructure, as well as which firms are awarded the contracts for broadband service billing after the infrastructure is put in place. When the government and its officials are tasked with making these decisions, can we be assured that their choices are not politically motivated?

As shown earlier, the plan intends to close a relatively small gap of usage between urban and rural users of only about 14%. The reality that just a slight increase in usage would be realized indicates that the beneficiary pool from this project is a small number of citizens. Is it possible that those who will be benefitting the most are well-connected individuals who stand to benefit personally, and possibly monetarily, when broadband is extended to areas they have an interest in?

The technological options like wireless or fiber optic were mentioned earlier. The government has to decide which to implement. This decision will benefit the related industry. If fiber optic cable is chosen, the manufacturers of that cable will benefit financially. In that hypothetical situation, can the taxpayers be assured that lobbyist for that industry has not influenced the direction of the program?

Cable, internet and/or telephone service suppliers who will provide broadband billing services will gain new subscribers without the outlay of expensive investments in infrastructure which would normally be required. Regardless of how fairly the process of choosing who gets those contracts is, is it fair and equitable at all? For the government to take on the expense and risk of private enterprise while private enterprise accepts only the rewards is completely inequitable.

CONCLUSION

The plan to extend broadband is expressed in terms that appeal to the sensibilities of many of us. The marketing of it as “Strengthening Rural Infrastructure” sounds like a goal we could all get behind and be excited about. However, it is important to look below the surface and see what underlies the program. Since government programs use taxpayer dollars, it is necessary to ensure that the use of those funds is for practical purposes. Along those same lines, it becomes prudent to see to it that taxpayer money is not wasted on economically inefficient endeavors. Finally, confronting any possible political motivations is simply being responsible. In applying these criteria to the rural broadband initiative, the program does not pass the first two and is suspect in the last. It stands to reason that such a program is not appropriate in a free market society that believes in economic freedom.

Works Cited

Brendan, Greeley. "The Flaw in Obama's Wireless Plan - BusinessWeek." BusinessWeek - Business News, Stock Market & Financial Advice. Businessweek, n.d. Web. 24 Feb. 2011.

"Strengthening the Rural Economy - Strengthening Rural Infrastructure | The White House." The White House. N.p., 26 Apr. 2010. Web. 25 Feb. 2011.

Tarter, Steve. "Broadband map shows 10 percent of us still lack high-speed access - Peoria, IL - pjstar.com." Home - Peoria, IL - pjstar.com. Journal Star, 21 Feb. 2011. Web. 24 Feb. 2011.