Those of you who actually read your phone bills (can’t say we’re among them) may have noticed a line item labeled “universal service charge.” The amount doesn’t amount to much: a small percentage of long-distance changes that come to a dollar or two per month, at most. But multiply the figure by hundreds of millions of phone lines and it comes to real money – roughly $8 billion annually. And with the House now pondering changes in the Universal Service Fund program, it’s time to rethink the whole idea from scratch.
Start at the beginning. Back in 1996, when Congress partially deregulated telecommunications regulation, it directed the FCC to come up with a plan to subsidize customers who might otherwise be priced out of the market. In particular, Congress decided that the program should reduce the cost of telecom service to high cost (i.e., rural) areas and to poor families, as well as to schools and libraries. Rural areas got an additional boost with money to pay for telemedicine links with urban doctors. The FCC responded with an elaborate plan to set spending priorities, collect the cash from phone companies and funnel it to service providers.
Free-market types have a number of ways to rationalize such “cross-subsidies” in terms of economic efficiency. First, there’s the price discrimination argument: Just as it serves airlines (and society at large) to charge varying fares in order to fill empty seats, it pays telecom providers (and society) to charge some customers more than others to cover the fixed overhead costs of network services. For example, if the telcos are going to run lines to Podunk anyway, they’re probably better off adding an extra 50 customers at heavily discounted rates.
The sexier rationale follows from the economics of networks: the more inclusive the network, the more it is worth to each user. Thus, at least in theory, I benefit because I’m able to phone a farmer of modest means who lives in rural North Dakota.
Last but hardly least, there’s the issue of economic justice. Phones are arguably a necessity, not a luxury. So we should subsidize service for the poor just as we subsidize their food, housing and medical care.
Look closely, though, and the case for the Universal Service Fund looks a bit ragged. Yes, price discrimination along the lines of air fares sometimes makes sense. But service providers have the flexibility to do that already (check your mail for the latest offers). Yes, inclusive networks are more valuable to all than exclusive ones. But nobody has the faintest idea how much more, especially when networks already cover the vast majority of potential users.
The fairness argument holds up better. Low-income Americans have gotten the short end of the stick in recent decades, and Congress has been reluctant to use taxpayer money to supplement their living standards. Maybe the country is a better place because poor people get a break on service connecting them to their communities — not to mention 911. But that still leaves the question of why heavy users of long distance service in Pittsburgh should be the ones to pay for local phone service in Peoria.
The broader, and most troubling, question about the Universal Service Fund is political. Do we really want Congress or the FCC to be handing out “free” money that registers on hardly anybody’s radar? Phone customers rarely notice the tab amid the detritus of miscellaneous taxes and surcharges. And telecom companies, which are paid to provide many of the services mandated by the fund, are more inclined to worry about how the money is divvied up than how the money is used. It’s not surprisingly, then, that USF spending has quadrupled since 2000.
What’s more, spending is likely to escalate as politicians search for more problems to solve with other peoples’ money. The FCC has explicitly made universal broadband service a priority and endorsed the use of USF funds to get from here to there.
Is access to high speed Internet for the 5-10 percent of Americans who don’t have it now, generally because they live far from cities, worth the price? We’re skeptical. But if it is, we’d like to see Congress come up with the cash from a more visible source. Indeed, if we ran the show, we’d be inclined to replace the program with means-tested vouchers (good for land-lines or mobile phones) to assure basic phone service for the really poor and leave the rest to the market.
(This post was also published on Forbes.com.)