by Gary Shapiro
The law is almost as notable for what it doesn’t contain as for what it does. As enacted by Congress, the complete text of the act runs 128 pages. You’ll find “Internet” in there, but the words “Web” and “e-mail” don’t appear a single time. “Broadband” shows up just once. And you can spend all night looking, but you won’t find “Skype,” “Wikipedia,” or “YouTube.”
Congress can hardly be faulted for failing to include things that hadn’t been invented yet, but the pace of technological change since 1996 has been both dizzying and exhilarating. Affordable broadband Internet technology actually predates both the Web and the America Online dial-up service, ironically enough. Researchers in Bell Labs first invented the technology that would become DSL in the 1980s. Unfortunately, the Bell-era monopoly phone companies had little incentive to market a product that would cut into their highly profitable businesses selling more expensive alternatives like T1s and second phone lines. So the technology sat on the shelf for years. Only after Congress opened up the industry could new competitors finally jump into the market with their own DSL services, while cable providers began their own broadband revolution by unleashing cable modem service.
For a brief moment, it looked like the century-old monopolies might finally fade away and competition would fully replace regulation as the engine behind broadband deployment. Consumers began to gain a real choice among broadband providers, and new alternatives were being launched seemingly every week. All that competition was spurring innovation and driving down prices, as it always does.
Unfortunately for most of us here in the United States, those exciting times have not yet created a robustly competitive broadband marketplace for all Americans. While other countries have continued implementing policies designed to make broadband faster and more affordable, regulators in the United States have been hesitant to fully embrace competition as the most effective tool in promoting broadband deployment. A sputtering regulatory regime, subject to abrupt reversals of policy as administrations have changed, has handicapped new entrants and left many markets dominated by a monopoly or a duopoly in broadband service—hardly the ideal recipe for innovation and progress. Although existing telephone and cable companies have been pioneers in broadband deployment and continue to make innovative new services available to consumers, more competitors would bring more innovation and more choice.
The results of our slow move toward broadband competition are stark. According to the OECD, the United States ranks fifteenth in terms of the percentage of households with broadband Internet access.56 Our average connection speeds are just a half to a third of those of global leaders like Hong Kong and South Korea.57 Barring a completely unforeseen shift in the national regulatory structure, wireline broadband competition is on hold. The future will have to be wireless.
Wireless broadband avoids many of the disadvantages intrinsic to traditional copper or fiber optic networks:
Cost. Laying cable is incredibly expensive. In comparison, a wireless network can go up anywhere you can find a tall building to bolt your equipment onto.
Scalability. Wireless services can be built to meet real-time demand. As traffic increases, providers can just add an antenna. (Although, as we’ll see, there are some limitations we’re now facing.)
Portability. There’s a reason so many homes have Wi-Fi networks: No one wants to be chained to one place for accessing the Internet.
Disaster recovery. In the event of a natural or “man-caused” disaster, it can take weeks to repair cut or downed lines. Wireless services work as soon as power can be restored at both ends of the connection.
SPECTRUM PROBLEMS
There is a problem, though, which is that the spectrum currently allocated for wireless communications services in the United States is getting awfully crowded. Indeed, as iPhone users in many cities know firsthand, companies are facing challenges accommodating the huge growth in wireless broadband demand. As the United States leads the world in creativity and applications (“apps”), this looming spectrum crisis needs to be addressed.
As with many of our nation’s problems, the answer is obvious and not that complicated, but standing in the way is a powerful interest group. In this case, it’s the television broadcaster’s lobby.
I won’t deny the nation’s broadcasters are in a quandary. Their business model relies on the incredibly inefficient use of hundreds of billions of dollars worth of high-quality wireless spectrum that was loaned to them for free by the American people.
At the same time, their market share has dropped from 100 percent, when the government first gave them that valuable property more than seventy-five years ago, to less than 10 percent today. In a world with cable, satellite, and Internet TV alternatives, there’s little need for a redundant over-the-air broadcast system. (For those television viewers who cannot afford pay service, numerous studies have shown that subsidizing their connection to a “pay” service can be done for a tiny fraction of the money that the reclaimed spectrum would bring at auction.)
Unfortunately, confronted with the inarguable fact that our nation is running out of wireless spectrum, and that broadband is a bipartisan national priority, broadcasters have repeatedly worked to block proposals to reallocate the nation’s spectrum more efficiently.
Let’s look at the facts. Wireless broadband networks are reaching a choke point. The FCC reports that we need at least 500 megahertz of spectrum just to keep up with demand for broadband service. The nation’s broadcasters use only a portion of the hundreds of megahertz of high-quality spectrum that we let them use for free. Reallocating some of that spectrum for broadband services would allow over-the-air televison to continue while still solving our wireless crisis.
We are truly in deep trouble as a nation if we can’t reallocate a public resource that leaders across the political spectrum agree we desperately need to use in a different way if we’re going to stay globally competitive. This is especially true when the business squatting on this spectrum borrowed it without paying taxpayers and when the terms of the loan indicate that it is for a limited period of time and subject to the “public interest.”
It’s time to require broadcasters to return at least half their present spectrum by 2015. Given the political strength of broadcasters, it seems that government cannot simply reclaim the spectrum it lent them, so broadcasters may have to be paid out of the proceeds of repurposing this spectrum for better use. It’s an unfortunate reality, but it’s worth it to avoid years of costly litigation and ever more crammed wireless networks.
The high prices this spectrum is expected to attract would be an appropriate market-based incentive to ensure its future use. For broadcasters facing declining market share and revenues—a 26 percent drop since 2005, according to the FCC—voluntary spectrum auctions would provide a revenue windfall.
Most of this spectrum should be auctioned off for use as wireless broadband. We should expect significant interest to come from companies that haven’t historically been in the Internet Service Provider business, like perhaps Google (or the next Google). That’s how much potential this spectrum has.
A portion of the spectrum should be allocated for unlicensed purposes. These frequencies—like the ones on which your cordless phone and garage door opener operate—would be open for any non-interfering use.
We should do this because the reclaimed television spectrum is so valuable that only deep-pocketed companies will be able to make the investments needed to win those auctions. But if there’s one thing we know, it’s that innovation often comes from start-ups— from someone who has an idea and sets out to design, build, and sell a product based on that idea.
Unlicensed spectrum will allow smaller players to play that innovative role and will ensure innovative new technologies aren’t blocked from reaching the marketplace, the same way DSL once was.
The 1900s were the era of broadcasting, but now we are in the Internet century. We cannot let an old business model hog government property any more
than we would have granted horse-and-buggy makers exclusive use of the public roads after the invention of the car.
Our nation needs broadband access for the thousands of new businesses and millions of jobs it will create, for the scientists and doctors it will educate, and for the connections to developing economies across the globe it will forge.
I have personally advocated for broadband since the mid 1990s. Back then, I spoke repeatedly about how generations often benefit from one innovative infrastructure technology that spurred investment and a shift upward in quality of life. Consider how plumbing, electricity, the telephone, and cable TV each changed the average American’s life and even the home construction industry.
The difference with broadband is that one option per household isn’t enough. You probably don’t put much thought into your toilet. It either works or it doesn’t, and the rates you pay are well-regulated and nominal.
Internet access doesn’t operate the same way. One size doesn’t fit all. And as service providers continue pushing for the right to discriminate or charge more for certain types of Internet traffic, real concerns are starting to emerge.
The Net Neutrality issue is a good example of why government involvement should be limited to those areas where there are substantial market or regulatory failures.
Net Neutrality is the concept that a broadband service provider (like cable or a telephone company) should not be able to block out access to Web sites that it views as competitors. The cable and telephone companies correctly claim that the market is working and they have rarely blocked Web site access for competitive purposes. But Internet companies and other businesses that rely on the ability to be accessed by consumers with a click of a mouse are concerned and want the government to mandate Net Neutrality.
There is a middle-ground approach. Rather than attempting to develop ironclad rules for a rapidly shifting marketplace, we should institute a national policy favoring competition, combined with easy termination options, to allow consumers to choose what type of broadband service they want to purchase, without worrying that their two-year contract locks them into a service that blocks YouTube videos.
We should also encourage broadband deployment through incremental steps, such as allowing employers to pay for employee broadband at home as taxable benefit. This alone will encourage massive broadband deployment. It will also encourage telework, getting cars off our highways and helping us take the steps needed to address climate change. Another great idea pushed by Minnesota Senator Amy Klobuchar and California Representative Anna Eshoo is to require that underground broadband lines be laid for every federally supported transportation project.
The current FCC is to be applauded for its courage in adopting a National Broadband Plan that calls for the redeployment of desperately needed wireless spectrum for use in innovative new broadband services. Under chairman Julius Genachowski’s leadership, the commission worked in a bipartisan manner to adopt a robust plan that, if implemented, would protect our nation from the looming spectrum crisis that threatens our world dominance in broadband. The National Broadband Plan is bold—it challenges incumbent industries while embracing next generation technology and innovation as engines of economic recovery and growth. While the plan requires Congress to take additional steps to implement, it has the support of the president and of many in Congress as well as the technology sector and consumer groups. It is my fervent hope that entrenched incumbent industries that refuse to innovate will be unsuccessful in their effort to block progress on this plan.
For far too long, the United States—the birthplace of the Internet— has lagged behind other developed companies in terms of broadband penetration and innovation. It’s time for that to change.
10
Government Spending: Imperiling Innovation and More
“The budget should be balanced, the Treasury should be refilled, public debt should be reduced, the arrogance of officialdom should be tempered and controlled, and the assistance to foreign lands should be curtailed lest Rome become bankrupt. People must again learn to work, instead of living on public assistance.”
—CICERO, 55 BC
REAL GROWTH VERSUS GOVERNMENT SPENDING
As a matter of fact, Cicero never said this. As discovered by Paul Boller and John George in their book, They Never Said It: A Book of Fake Quotes, Misquotes, and Misleading Attributions, the quote, which has been widely circulated, was a 1986 newspaper fabrication. Nevertheless, I couldn’t find a better quote, so, with apologies to Marcus Tullius Cicero, I’m sticking with it because it perfectly captures the importance of good governance.
Our tale of two cities is the story of how Washington, D.C., like Cicero’s Rome, has grown out of control at the direct expense of our once-thriving private sector, with Detroit as one very painful example. As a nation, we have largely forgotten that every single dollar of government spending is either paid by present taxpayers or borrowed from future taxpayers. In other words, there is no such thing as a free lunch from our government. Unless we return to governing on the basis of this truth, our economy and entire nation are at grave risk.
Earlier, we examined why innovation is the key to real growth in our economy and jobs. But innovation in the U.S. is being strangled by national policies that threaten to condemn future generations to stagnation and decline, and it all starts with massive government spending.
U.S. government spending is entirely divorced from any economic reality. In 2009, our federal government spent $3.5 trillion. This compares to $2.5 trillion spent in 2005, a 40 percent increase in only four years. Moreover, in 2009 the feds collected $2.1 trillion in taxes and fees, resulting in an annual deficit of $1.4 trillion. And according to the most optimistic Obama Administration forecast of future deficits, the total debt will grow to a minimum of $11 trillion in 2019. This level of debt would be 82 percent of our GDP, double the level of 41 percent in 2008.
But our national situation is much, much worse than that. Add in $2.5 trillion in state and local debt, $3 trillion in unfunded state pension liabilities, $106 trillion in unfunded Social Security and Medicare liabilities, and $1 trillion in unfunded state health care and other benefits, and a more realistic projection of future federal deficits (in light of such initiatives as Obamacare and total U.S. debt obligations) amount to “$130 trillion or so, or just under ten times the official national debt” according to one estimate.58
Much has been written about the financial problems of Social Security and Medicare, so I won’t rehash those matters. However, it’s only recently that the financial time-bomb of public unions has been recognized, so a few words about that are appropriate. I’ll begin by betting that you don’t know that the U.S. Bureau of Labor Statistics reports that, in 2009, the number of government union workers (7.9 million) for the first time in our history exceeded the number of private sector union workers (7.4 million). And given the further expansion of government and the contraction of the private sector since 2009, this differential has undoubtedly grown.
As noted above, the public union problem is primarily one of unfunded pension and health-care liabilities. The federal government and nearly every state and local government have committed to defined benefit plans for their full-time employees. These programs are massive: the federal retirement program supports more than 2.5 million annuitants. The fifty states and thousands of local governments support more than 8 million annuitants. The payouts are generous because most payouts are based on years of service and total compensation in the worker’s final year. For example, the annual payout to retirees generally is 2–3 percent per year of service multiplied by final compensation. Thus, a fifty-two-year-old worker making $100,000 in his final year before retiring could get $90,000 per year for life, not counting lifetime medical benefits.
Predictably, our federal government is already shifting funds to state and local governments to help pay for their plans. About one-third of 2009’s nearly $800 billion “stimulus” package and the entire summer 2010 swe
etener stimulus went to states, primarily to enable state government to both avoid layoffs and pay pension obligations. No one knows what will happen when the stimulus plan funds to states run out in 2011.
The massive federal debt destroys future private sector investment because the only ways to pay off this staggering level of debt are to (a) increase taxes and (b) print more money, which will drastically lower the future value of the dollar. Both actions lower the returns that private sector investors can earn. Moreover, the riskier an investment, the greater the return that investors need to compensate for the risk, and innovation investments are invariably among the most risky, so they will be disproportionately ravaged, crushing economic growth and job creation.
UNCERTAINTY
But the devastating results for innovation from such massive government spending go beyond higher taxes and a debased dollar. First, out-of-control debt directly increases overall economic uncertainty among private sector investors, significantly complicating their investment decision-making and further reducing investment. Second, as we are seeing in the present economic crisis, our government typically responds to economic turmoil by significantly increasing and expanding regulation of business, which increases costs, lowers investment returns, and further increases uncertainty.
In fact, a September 2010 report issued by the SBA Office of Advocacy found that rules and restrictions imposed by the federal government now cost Americans some $1.75 trillion annually, up 60 percent in less than five years. The report also says that the cost per employee of these regulations is higher for small firms than for large firms. And a recent conference on the 2002 Sarbanes-Oxley Act held by the American Enterprise Institute found that:
. . . the process of nurturing innovative and high-tech start-up companies has been slowed [because] the high cost of becoming and remaining a public company has made an initial public offering (IPO) financially impractical for many small companies, which in turn has narrowed the options of the venture capital firms that have usually provided seed money financing for risky high-tech start-ups.59