Broadband Lessons from Labour

by on February 3, 2009 · 5 comments

The Senate version of the economic stimulus package (H.R. 1) winding its way through Congress would provide $9 billion in direct public subsidy for broadband network deployment subject to a “non-discrimination” requirement which, like the “open access” requirement in the House bill, could turn into onerous “network neutrality” regulation.

Meanwhile, Britain has outlined its digital transition plans in “Digital Britain – Interim Report.”

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It is interesting to compare the substantially more free-market direction Britain is taking with the silly approach our own Congress is considering.  For one thing, Britain is going to let private investors finance network upgrades.

The Government is not persuaded that there is a case now for widespread UK-wide public subsidy for Next Generation Network deployment, since such widespread  subsidy could simply duplicate existing private sector investment plans or indeed chill such plans.

Another reason direct public subsidies should be avoided is they distort competition.  Over at the Progress & Freedom Foundation blog, Ken Ferree cites a recent U.S. government audit report (analyzing significant problems with the current broadband grant and loan programs of the USDA Rural Utilities Service) which asked the evident question: “What is the government’s responsibility if, due to subsidized competition, a preexisting, unsubsidized broadband provider goes out of business?”

Next, the British report touches on the third rail of broadband policy, by noting that if Internet service providers offer guaranteed service levels to content providers in exchange for increased fees, it could lead to “differentiation of offers and promote investment in higher-speed access networks. Net neutrality regulation might prevent this sort of innovation.”  The report adds that

the Government has yet to see a case for legislation in favour of net neutrality. In consequence, unless Ofcom [Britain's FCC-equivalent] find network operators or ISPs to have Significant Market Power and justify intervention on competition grounds, traffic management will not be prevented.

So the British digital transition is based on some sound free market insights, and keep in mind that Britain has a Labour government!  Here in this country we are heading in the other direction due to some muddled thinking, and not just on the Left.  A prominent Republican writes that “conservatives should cheer” over the fact the stimulus package will include billions to promote broadband deployment and adoption.

Although a case can be made for broadband subsidies in areas which cannot be served by a phone, cable, wireless or satellite provider except at prohibitive cost, the number of households in these areas is extremely small.  Connect Kentucky proved that subsidies were unnecessary to make broadband available to approximately 95 percent of the state’s households.

The stimulus package is not narrowly targeted to remote areas which it is economically impossible for broadband providers to serve with current technology.

(Yes, a primary objective of the stimulus package is to create jobs, but there is an argument that spending on other infrastructure will create more jobs now, when we need them.  See, e.g., “Not so fast,” in the Economist.)

What is the “conservative case” for the direct public subsidies for broadband in current versions of the stimulus package?  The Republican writer claims, first, that a national strategy is needed to address previous policy interventions, often regulatory relics from earlier eras.  But this is an argument in support of deregulation, not subsidization.

When Reagan said “Government’s view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it,” he was referring to the view which prevailed before he became president.  Reagan’s comment wasn’t an endorsement.  Reagan opposed big government.

The second argument is that rational economic participants might under-invest in network upgrade and expansion because broadband deployment offers fewer positive network externalities for individual actors than for society as a whole.  In fact there is only one reason why rational economic participants might under-invest in broadband, and that is if public policy has the potential to deprive investors of a competitive return on their investment.  Broadband isn’t like basic research, to cite one of the writer’s better examples; from an investment perspective, basic research is like a crap shoot at best.  Broadband, on the other hand, is a proven money-maker. That is, unless profit is expropriated through regulation, excessive or discriminatory taxes or government-subsidized competition.

Third, the writer claims more robust broadband deployment and adoption will promote conservative ends, such as freedom from teacher unions, more independence from Mideast oil, less work for trial lawyers, more headaches for mainstream media, etc.  But is it ever ethical or conservative to argue that ends justify means?  Our friends on the Left are constantly justifying their horrible policies on the basis of their wonderful intentions.

In conclusion, there is no conservative case to be made for expansive broadband subsidies, only some conservatives who hold unorthodox views.

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