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Hazlett in Financial Times: Subsidized Stimulus Programs Unlikely to Achieve Aims

Professor Thomas Hazlett speculates in the Financial Times that government subsidies spread across the Broadband Technology Opportunities Act (Department of Commerce) and the American Recovery and Investment Act (Department of Agriculture) will do little to truly stimulate the U.S. economy. In fact, Hazlett finds evidence that firms building rural broadband networks have in some cases halted operations altogether, "circling back to Washington."

Hazlett is part of a group of 71 economists expert in telecommunications (including two Nobel Laureates) who are urging the government to abandon the customary examination of competing proposals and subsequent award of project funding at will. Instead, says the group, the government should take a different approach it calls "reverse auctions" in which the government would state its performance criteria and then take bids, awarding funding to the lowest bidders.

Shovel-ready broadband stimulus, Financial Times, May 1, 2009. By Thomas W. Hazlett.

Excerpt:
"The proposal has only a remote chance of being adopted because it is both transparent and economical. Having to make goals objective and explicit takes the discretionary political fun away. And assigning rights by competitive bidding is like having that fraternity party without any beer at all.

"While sold as an emergency injection of 'shovel ready' projects, beauty contests take time. And broadband – which the government has trouble defining, let alone funding – demands planning. So the FCC has launched a proceeding to determine what broadband is, where networks exist, and how we need to boost them. This inquiry hopes to wrap up by February 2010. Quick for a regulatory commission, but that deadline misses the 'stimulus' train. So billions will be spent – policy makers hope – before the actual plan ever arrives.

"Of course, planning is often over-rated. The US already spends $7bn every year on subsidies for 'universal service' in the telephone business. As Robert Crandall of the Brookings Institution writes: 'There is no evidence that the existing subsidies reduce traditional voice telephone rates or increase telephone subscriptions.' Instead, some 900 small, inefficient rural telephone companies work the 'cost-plus' system. I found, in a 2006 study, that carriers were awarded incredibly rich federal pay-outs – as much as $13,345 per line per year, as in the case of a Hawaiian telco operator – many multiples of the cost of competitive, unsubsidized cellular or satellite phone service.

"An audit released by the FCC Inspector General late last year found that 23.3 per cent of the subsidy payments made directly to phone companies were 'erroneous.' That adds up to about $1bn per year in documented waste, fraud, or abuse. And this in a program set-up in 1996, not facing any emergency, and not stimulating anything but the grease industry – now a growing service business in the 'stimulus' sector."

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