Hazlett and Subsidies of High-Speed Data Networks

Thomas Hazlett and Richard Epstein write periodically in the "New Technology Policy Forum" in the "Technology" section of the Financial Times.  Anyone interested in telecommunications should keep up with their work.  As part of the stimulus bill, formally known as the American Recovery and Investment Act, the Congress allocated $7.2 billion to subsidize the spread of high-speed data networks in unserved and underserved areas.  Hazlett explains why this program as passed by the Congress will not stimulate economic activity ("Shovel-ready broadband stimulus," May 1, 2009).  It is illustrative of perverse incentives created by government programs to improve private economic activities through subsidies.

Plagued with the sharpest economic downturn in a generation, US policy makers scrolled through a series of emergency deficit-enhancement measures in 2008-09. The third and final such effort was enacted in February. At $800bn, it set a new standard for government red ink: 12 per cent of 2009 GDP – twice the previous post-World War II high.

The theory is that, by sweeping unemployed resources into the marketplace, society not only gets a bargain, it bucks up consumers and investors, instilling confidence. And don’t forget this stimulation: emergency spending projects are to Congress what free beer is to a college fraternity party.

Markets are yet to feel the buzz, but what society will be getting is, in some instances, already visible. Consider the $7.2bn subsidy spread across the Broadband Technology Opportunities Act (Department of Commerce) and the American Recovery and Investment Act (Department of Agriculture), monies to fund up to 80 per cent of the cost of building private high-speed data networks in “unserved” and “underserved” areas.

As much as it hurts me to say this about programs with such well-polled names, neither program will achieve what it advertises for the US economy. They do offer real hope, however, that the recession will soon be over for communications lawyers and shareholders of ridiculously inefficient rural telephone companies.

In macro-economic terms, meanwhile, the “broadband stimulus” may be perverse: firms that had been building rural broadband networks have reportedly halted operations, circling back to Washington. In March, industry consultant Joseph Upton noted that rural phone carriers were “paralysed,” unsure how to play the subsidy game. “One CEO told me that she had six previous quarters of 25 per cent growth in a company that had been on the skids,” wrote Upton, “but the minute the stimulus word came out, all business just stopped.”

In an unquoted section of the article, Hazlett explains that a reverse auction, which is supported by 71 economists including two Nobel Laureates and Hazlett, might solve some of the problems inherent in the bill and why the Congress will not support a more efficient method of allocating funds.