Internet Access and the Role of Government

The following article originally appeared in the January 11, 2002 issue of the MIRS newsletter in answer to the questions: "What role, if any, should government play in increasing residents' access to broadband high-speed Internet service?  Is there a supply problem or a demand problem?"

In May 2001, the Michigan Economic Development Corporation (MEDC) unveiled a plan for accelerating the wiring of the state for high-speed Internet access, or what's usually referred to as "broadband."  Dubbed "LinkMichigan" initially, the plan was intended to address two alleged problems with the telecommunications infrastructure in Michigan: congestion and a lack of access.  Actual legislation to implement the plan debuted in November. 

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By any measure, LinkMichigan (now called "MI HiSpeed Internet Plan") would constitute sweeping state intervention in the Internet access provider market.  The initial proposal, now in the process of being modified to increase chances for passage in a legislature that expressed great skepticism in the waning weeks of 2001, would have imposed a new tax of seven cents on every linear foot of high-speed lines in the state—raising upwards of $100 million from Internet, telephone and cable TV customers.  Half of that revenue would go to local governments that opt into the plan and relinquish their rights-of-way permitting authority; the other half would go to a new bureaucracy that would subsidize the laying of new broadband lines mostly to "underserved" areas of the state and, in the words of the Wall Street Journal, "implement a swarm of new regulations."   The plan also called for finding ways to tax satellite and cellular access, not just land lines.

The initial legislation would enable the state to do far more than subsidize broadband deployment.  Despite assurances from the administration to the contrary, it would open the door for the state to own and operate broadband lines as well.  Moreover, it would also have institutionalized future increases in the right-of-way tax by indexing it to the Detroit Consumer Price Index.  The Governor has since indicated that such linking is open for discussion, and reportedly the administration has also lowered its proposed tax from seven to five cents per linear foot. 

Nonetheless, there are reasons to be more than a little skeptical of this proposal, not the least of which is the way in which the administration and its MEDC have gone about selling its supposed virtues.  Their tactics included misrepresenting the availability of broadband in the state to generate a sense of urgency for government to intervene.

Homes and businesses get high-speed Internet access through six different ways: cable modem, telephone DSL, T1 telephone service, ISDN telephone service, cellular service or satellite.  The MEDC claims that Michigan is 37th in the nation in the percentage of households and businesses using high-speed lines, but that doesn't tell the full story.  According to Federal Communications Commission (FCC) data, Michigan ranks 11th among the 50 states in terms of the number of providers of high-speed Internet lines, with 15 providers.  The only states that have more providers than Michigan are, not coincidentally, those with larger populations needing service.  In another report, the FCC concluded that "overall, deployment of advanced telecommunications capability is proceeding in a reasonable and timely fashion."

In terms of the number of high-speed lines, Michigan ranked an impressive 10th among the 50 states.  According to the FCC's "Statistics of Communication Common Carriers," there were over 1.1 million kilometers (over 687,000 miles) of high-speed cable deployed in Michigan as of December 1999.  A document released in November by the Michigan Chamber of Commerce, the Communications Workers of America, the Mackinac Center for Public Policy and the Telecommunications Association of Michigan pointed out that "Today broadband and high-speed Internet access is available nearly everywhere in Michigan via T1 service, ISDN and satellite.  DSL and cable modem services are being offered in many Michigan communities, with new ones being added nearly daily.  This rapid deployment is occurring despite the fact that only about 12.5 percent of the households that have broadband available to them are actually buying it."

With the exception of a few areas that are dwindling steadily in size and number, anybody who wants broadband in Michigan can get it.  A Wall Street Journal editorial of Dec. 17 summed up what these data tell us: "These figures speak to a lack of interest in broadband's offerings, not a lack of availability to broadband services.  There's no market failure here." 

In December, the MEDC released maps that the agency said demonstrated that broadband supply is inadequate in Michigan.  Scott Stevenson of the Telecommunications Association of Michigan was quick to note, "The maps showed only some of the DSL broadband that is available today in Michigan, but no other broadband technologies. The maps also did not reflect planned broadband deployments across the state that have already been announced.  There are more than 160 rural telephone company exchanges that have or will have broadband services available next year that aren't on the MEDC's maps.  The picture the map paints is totally incomplete, misleading and inaccurate."

But the map fiasco may have been indicative of the MEDC's larger problem, namely, of finding victims of inadequate broadband supply in spite of repeated solicitations.  A Nov. 29 Detroit News editorial stated that whereas once the MEDC had claimed that many businesses had complained about the lack of access, "now it appears the MEDC can't find those complaints."  The fact remains, the editorial noted, that "high-speed lines are being built by private companies in a rational manner—they're going first in areas of highest demand.  That will generate money to build lines later in areas where demand is lighter."

In his Dec. 17, 2001, Newsweek column entitled "Broadband's Faded Promise," economist Robert J. Samuelson pointed out that "About 10 percent of U.S. homes get broadband, up from virtually none in 1998.  Historically, this rate of adoption compares favorably with other new consumer-electronics products.  Getting to 10 percent household penetration took 12 years for color TVs, 8 years for cell phones and 4.5 years for CD players."  If this trend continues under the influence of largely market forces, Samuelson says, "someday there will be a bandwagon effect, when more customers inspire more services, improved technology and lower prices—and vice versa."  The sky isn't falling, the market is working rationally, and it's hard to see why Michigan or any other state needs higher taxes, bigger government bureaucracies, or state-controlled and subsidized expansion of the Internet network.

Nonetheless, the MEDC is impatient.  It wants tomorrow to arrive today.  This is like saying in 1890 that horses are too slow and so is the expansion of automobile ownership, so the government should levy a tax and establish an agency to get cars in the hands of more people.   That would surely have put government in the driver's seat, whether or not it would have put more consumers there—ensuring that costs would rise, innovation would be stifled, and expansion of the industry would have gone forward in irrational and uneconomic ways.  The fact that not everyone had a car by 1900 was not a reason for government to intervene; rather, it was the best reason for it to stand aside and thereby maximize the incentives of private entrepreneurs like Henry Ford to work their magic in accordance with the forces of supply and demand.

Are some people in certain remote areas of Michigan without broadband access?  Certainly, but people who choose to live in remote areas give up convenient access to many things that individuals living in the city enjoy, in favor of a different lifestyle. This voluntary tradeoff is evidence that the market is working in a reasonable and efficient manner.  MEDC intervention will grow an already out-of-control bureaucracy and disrupt the natural, beneficial process of a free market.  It reminds me of the words of Henry David Thoreau who once said, "If I knew for certain that a man was coming to my house to do me good, I would run for my life."

Even if government intervention in the Internet access market were a good idea, there already are over 20 federal subsidy and loan programs aimed at deploying broadband-type services in schools, libraries, and other, mostly rural areas.  How much good will another state program do?  At best, its effect will be marginal; at worst, it will delay or kill the growth of new telecommunications technologies such as satellite-based Internet connections that could, and in some cases already do, provide advanced broadband services to people in inner cities, suburbia, and rural communities.  These advanced providers already are gaining ground and could very well surpass cable broadband in popularity before the government has finished wiring the state.

Other options catching up to cable delivery include mobile wireless technology (Internet data sent to mobile phones); fixed terrestrial wireless (Internet data transmitted by cell phone towers to a computer); digital broadcast television (traditional television broadcasters using a portion of their spectrums to provide Internet access); and lastly, electricity providers.  Technology is now being developed that would allow data transmissions through the very power lines that bring electricity to the homes of Michigan citizens.  The MEDC plan would substitute the wisdom of a few central planners for that of consumers and the market as a whole, but experience suggests that entrepreneurs seeking a profit are in a much better position than the state to accommodate the broadband needs of Michigan citizens.

A larger, more important point than how many miles of lines have been laid is this: It is simply not a proper function of state government to determine what the "right" amount of access is.  Only to the extent that government inhibits the operation of market forces (through artificially high right-of-way fees or other obstructions) is there a role for the Legislature.  To those who think that state government exists for the purpose of doing anything for anybody with other people's money just because somebody asks for it, I suppose this will come as a disappointment.

There is one element of the evolving MI HiSpeed Internet Plan that has merit.  The notion of creating a statewide, one-stop permitting process to cut red tape for companies that provide telecommunications, cable or wireless technology services is a good one. 

That's the direction the overall plan should have taken from the beginning.   As Rich Studley of the Michigan Chamber put it, "we had hoped that the MEDC would focus on less government regulation and taxes and more on market-related solutions but instead they've proposed higher taxes and more government intervention."  What explains the MEDC's penchant for the latter approach?  It's the nature of the beast.  The MEDC is a gargantuan empire essentially out-of-control and in self-preservation mode.  It's own literature brazenly and shamelessly declares its main priority to be its own continuation through the next administration; bureaucracies who think that way naturally cook up schemes to arrogate more authority for themselves and make as many of the rest of us dependent upon them as possible.

The governor and the MEDC should focus their efforts to expand broadband access on streamlining the expansion process and lightening the burdens of government, and letting the marketplace take care of the rest.  Higher taxes, mushrooming bureaucracy, subsidies for some and unfair government competition for others, and state direction of enterprise—all these things that form the core of the MI HiSpeed Internet Plan do not belong to the legacy of an administration that in so many other ways has done much to make Michigan a favorable place to do business again.

"The governor and the MEDC should focus their efforts to expand broadband access on streamlining the expansion process and lightening the burdens of government, and letting the marketplace take care of the rest."