Broadband Stimulus: the Case for Going Slow

Posted by: Stephen Wildstrom on January 10, 2009

President-elect Barack Obama, who ran as the high-tech candidate, has promised to make federal investment in broadband Internet service part of both his economic stimulus program and his plan for long-term economic growth. The idea has provoked a flood of ideas, from advocacy groups and the struggling tech industry. But Obama should be very cautious in assessing the untested notion that pumping money into broadband can do much to boot the economy in the short term. Indeed, there’s a good chance the new Administration may end up disappointing its enthusiastic tech supporters. While some parts of its economic program are well fleshed-out, technology policy is little more than a blank page. The concept of broadband stimulus consists of a single vague sentence in the Obama economic agenda.

There's a good reason for the vagueness. I have yet to see anyone make a compelling argument for how spending on broadband might stimulate the economy in the short term. Supporters mostly cite a white paper published by the Information Technology & Innovation Foundation that argues that $10 billion of federal spending for broadband would produce 498,000 jobs. Unfortunately, the evidence presented in support of this rather improbable claim is gossamer thin; no government program in history has come close to generating that much employment at that low a cost, barely $20,000 per job. In purely economic terms, its arguments simply ignore the question of the law of diminishing returns to scale , which means that the efficiency of investment declines as you invest more. And while the ITIF is non-partisan, the group is backed by industry forces that have a lot to gain from such a program; its board includes representatives of Cisco, IBM, Oracle, and Microsoft.

Furthermore, while there are many reasons that country could benefit from faster Internet connections, there's no evidence of a broadband crisis that the government must step in to fix. It's hardly a point of pride that the U.S. ranks 15th out of 30 countries in the Organization for Economic Cooperation & Development's June, 2008 survey of the proportion of the population with access to residential broadband. But it is worth noting that the countries ranking significantly ahead of the U.S. are nearly all small and very densely populated. The fact that Denmark is 12 points ahead of the U.S. on broadband penetration is not a cause for panic. Of the countries ahead of the U.S., only Korea and. to a limited extent, Canada and Germany, are serious competitors in global tech markets.

Over the longer term, improving the nation's broadband infrastructure may boost growth and improve competitiveness, though it is hardly a magic bullet. There are three big issues that need addressing. First we have to decide just what is required. The OECD defines broadband service as anything faster than 256 kilobits per second, ludicrously slow in an age of Internet video. But the argument of advocacy such as Free Press that the government should aim for 100 megabit connections, strikes me as expensive overkill, even in the name of “future proofing.” I love my 20 megabit Verizon FiOS connection, but I have never come close to using half its speed and I'm not likely to in the foreseeable future. The 5 megabits or so offered by cable and fast DSL seems a much more affordable goal. The most pressing problems are bringing broadband to those who can't get it and those who can't afford it. The former are 10 million or so mostly rural households and the cost of serving them will rise sharply as we get down to pockets of really isolated folks. the best source of funding for this is repurposing of the obsolete federal Universal Service Fund, which exists to subsidize rural voice lines. The other unserved group consists largely of is the urban poor and elderly. The technology divide that separates them from the digital world is unlikely to be bridged just by offering cheap broadband, Subsidies for network construction and subscriptions could end up doing little more than boosting the semi-monopolies enjoyed by the cable and telephone carriers. The digital divide is an important social issue, but one whose resolution requires more than simply throwing money at the problem.

Building a broadband plan for long-term growth is going to take more time than the Administration and Congress can afford to a stimulus package. For sensible policy, slower may be better.

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Reader Comments

Carol Anne Ogdin

January 12, 2009 01:44 PM

If you lived in a rural area, and compare the changes in wealth between the "haves" and the "have nots," you'd understand clearly why broadband is required for every American.

It shocks me that people who HAVE broadband, and reap its benefits, can make broad-brush claims about people who DON'T have that access, and have no near-term prospects of getting it.

The reasoning in this article could equally apply to roadways: Since we won't see dramatically improved economic benefit from them for decades, they shouldn't be funded now. Now do you see how absurd this argument is?

David St. John

January 12, 2009 04:50 PM

Stephen, a serious suggestion...

I think FiOS offers a 10meg down/2meg up service. Why not ramp your 20 down to 10 and then write another post in three years and tell us how you are liking it?

I can tell you that, as an independent consultant who works from home, my 5meg/1meg service from the cable company is not cutting it. You may not need more than that, but I would suspect there are many home businesses out there that do -- especially with the emergence of cloud computing applications we are seeing. You ought to look into it.

Steve Wildstrom

January 12, 2009 06:07 PM

@David St. John--When I signed on for FiOS a few months ago, 20/20 was offered as the default. Frankly, I think the niominal speeds of FiOS service are somewhat arbitrary. It's not that I don't want faster service, it's that I can;t seem to get anything on the net to pump data out any faster than that. I downloaded the Windows 7 beta kit from Microsoft this weekend. T think the fastest speed I saw was about 600 megabytes/sec (not quite 5 Mb) with an average of around 500. I don;t think it was the FiOS that was gating the speed but the source.

Steve Wildstrom

January 12, 2009 06:32 PM

@Carol Anne Ogdin--I agree that extending broadband to unserved and underserved areas and suggested using the Universal Service Fund to help subsidize something the private sector obviously cannot or will not do. My question is whether it is appropriate to think of this as an issue of short-term economic stimulus rather than as am issue of equity.♠

Carol Anne Ogdin

January 12, 2009 08:26 PM

@Steve Wildstrom:

First of all, kudos for reading the comments; many journalists don't.

Second, we have a 50-year solution for my County to be deployed, at a capitalization of about $250 Million. Implementation could take about 36 months. That sounds like a "short-term economic stimuls" to me.

RC

January 13, 2009 11:28 PM

Stephen,

I think you make some good points, however I don't agree with either your short- or long-term prospects. I think we need to aim for 100Mb/100mb service to nearly all the population. (And, I'm not just thinking in terms of wired access, we need improvements in wireless access, too)

In the short term, there would likely be tremendous job creation just laying down the infrastructure, and building the products necessary for the roll-out. These activities can start almost immediately once the funding is available.

In the long run, this capability would open up opportunities that we cannot even begin to think of today. The easy one's are in the areas of medicine, education, entertainment, etc.

If you consider the advancements that came after the railroads, highways, and phone system (all infrastructure projects) this would be a worthwhile investment into America's future.

I think there may also be benefits in terms of our nations security, wealth creation (the "next" MS, Intel or google? ) and energy policy.

In my view, this is almost a no-brainer for the new administration.

Commissioner Rachelle Chong

January 16, 2009 12:34 AM

I must comment that California has rejected the "go slow" approach. In 2006 the Governor's Broadband Task Force performed a broadband data and mapping project to see where our unserved areas were. It turns out about 4% of California is unserved, but that means about 2,000 most rural communities. We decided that the Digital Divide was not to be tolerated in California given economic and social benefits of broadband.

Further, the California PUC (where I am a commissioner) ordered a new two year program in late 2007 to give 40% infrastructure grants to any broadband provider who will build to these unserved areas, using a 5 cent/month surcharge on the average phone user's bill. So as you suggest, we repurposed a part of our intrastate phone surcharge for this important task. The California Legislature supported this decision with legislation authored by Senator Alex Padilla.

We are granting these applications now, and cautiously optimistic that many of these "digital have not" communities will be served within a few years. But it will take more money than the $100 million we will raise in this program to resolve the problem. This is why a broadband component to the economic stimulus package may help us close the gap for the very expensive and hard to serve areas.

Rob Atkinson

January 17, 2009 03:56 PM

Stephen, thank you for referencing our report from The Information Technology and Innovation Foundation. You suggest that the evidence is "gossamer thin." Yet, in reviewing the report you will note that half our jobs numbers come from using existing BLS data on salaries and the standard BEA multipliers. If you don't believe that these US government models are accurate, that's a whole different issue. In addition, we estimate about half the jobs coming from a "network multiplier". We estimate this from a quite comprehensive econometric analysis of broadband and jobs. In other words, more broadband stimulates other economic activity. For example, IDC notes that people who subscribe to broadband purchase $370 more in computer equipment. Likewise, in states with higher broadband penetration people have faster computers.

The bottom line is that given that the economy needs stimulus and that Congress will likely allocate more than $850 billion toward it, isn't it better that a good portion of it go to investments, like broadband, health IT, or roads, rather than simply to consumption?

Steve Wildstrom

January 17, 2009 09:49 PM

@Rob Atkinson Rob, the main problem I have with the ITIF study is the pervasive assumption that things will work in the future as they did in the past, maybe more so. But the law of diminishing returns, or more specifically in this case, the law of diminishing marginal utility of investment, says this is very unlikely to happen. Two practical examples of this: First, the early adopters of broadband were people who were dying for the service and knew what they wanted it for. They were the people who made the most efficient and productive use of it. As we move out the adoption curve, the new customers will increasingly be reluctant adopters and they are likely to contribute little additional output, at least in the short run. (This is much less true of people who don’t have broadband because they physically cannot get it and that is why I was glad to see the House Democrats focus on rural broadband. The problem here is that as we try to serve that last 10%, the marginal cost of serving that dwindling number of unserved households will approach infinity.)

The second issue us that going from dial-up to broadband, even lousy first-generation DSL, was a huge qualitative change. You no longer thought of "going online" or "logging in to the Internet." Being on the network was simply the normal state of affairs. Making broadband faster provides lots and lots of benefits, but it does not offer the same sort of qualitative break.

I believe that as a matter of social equity it is very important that we find a way to offer universal broadband. And fast broadband will definitely be beneficial to long-term economic development. The question I raise is whether this is really an appropriate question when we are considering short-term economic stimulus.

(We can talk sometime about the whole question about multipliers for federal spending or tax cuts. This is an issue a followed a lot more closely in the past than I have in recent years, but the experience of the 70s and 80s suggested that it is extremely difficult to know ex post what the impact of a policy change was and thoroughly impossible to predict ex ante what it will be.)

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