The Government Should Not Subsidize Internet Access

By Mark I. Schwartz


Free-market capitalism is the engine that created the technological wonderland that we both marvel at and take for granted today. Market forces are rapidly expanding Internet access across society, but the economics behind the Internet’s phenomenal growth remain poorly understood by many people. Some observers recommend that the government step in to bridge the “digital divide” between those who can afford Internet access and those who cannot. Government intervention will only distort markets and will ultimately hurt everyone.


Current proposals call for the government to intervene in two ways, and both of them are harmful. One would impose new taxes to subsidize Internet access. The other would impose new regulations that could, among other things, force Internet service providers (ISPs) to give away some access. Each time the government taxes or regulates citizens or companies, it alters the playing field, voiding countless potential exchanges and innovations that would otherwise have taken place. For example, if new regulations cut into the revenues of an ISP, the ISP will have a smaller budget to pursue innovations. The reduction in innovation will harm both the company and its customers.


The free market can correct the digital divide on its own. It is important to understand that by providing economic opportunity and empowering consumers, free-market economies are better at assisting the poor than those characterized by government intervention. Free markets are an integral part of our overall freedom. Government intervention can prove to be harmful to the economy and democratic society as a whole.


The Internet has only been in existence as a commercial medium since the 1990s. According to studies, personal computers with Internet access are expected to reach a penetration level of 50 percent of American households by around 2001. Other consumer technologies became accessible much more slowly. It took 28 years for radio to reach a penetration level of 50 percent in American homes; television took 17 years; telephones took 70 years; videocassette recorders (VCRs) took 35 years; and microwave ovens took 28 years. The fact that it may take another few years before Internet access is truly widespread in America is not sufficient reason for government intervention.


The key to making something universally available is affordability, the key to affordability is innovation, and the key to innovation is a free market in goods and services. The explosion of PC and Internet usage clearly demonstrates the power of the free market. According to the research firm PC Data, Inc., from 1995 to 1999 the average price of a PC dropped by almost 50 percent to just over $900. During the same period, the amount of instructions the average computer can process each second has more than doubled. In terms of power for each dollar spent, PC prices have declined to a small fraction of what they were just a few years ago. During this period Internet access has also seen price reductions and a move to monthly rather than hourly rates. Some ISPs are now even providing free service.


Internet access is accelerating the pattern we have already witnessed in the growth of consumer technologies such as televisions, CD players, and a host of others that have become commonplace in American society, all without government intervention. No one would now claim that there was a television divide or a microwave divide. Interestingly, today the price of the average computer is rapidly falling, and in the near future we can expect them to drop below the price of the average television set. Monthly Internet access is already in many cases less expensive than cable television service.


Other market developments are helping make universal access a reality. For instance, some companies are now giving away computers, Internet access, or both, in exchange for permission to monitor consumers' online interests. The objective is to offer this data to advertisers. This new business model is based on the belief that controlling a portion of the Internet user’s screen is potentially far more lucrative than simply selling PC hardware or software for a profit. Data on Internet usage patterns are facilitating market research to a degree of detail previously unheard of. Advertisers can tailor their messages to consumers with a certain narrow band of preferences and tastes, including consumers in low-income communities.


PCs and Internet access are likely to become the next significant benefit in the American job market. A number of companies, such as Ford Motor Company and Delta Airlines, Inc., announced plans in 2000 to provide free home computers and Internet access to all of their employees in the belief that it will benefit the companies in the long run. Employers who fail to follow suit will likely have difficulty attracting and retaining good employees.


In short, market forces are rapidly bringing computer and Internet access into every home. This is occurring because companies recognize the economic benefits of wiring the American landscape.

Trusting the Marketplace to Provide Computers and Internet Access


A basic tenet of free-market capitalism, first described in British economist Adam Smith’s 1776 work The Wealth of Nations, is that voluntary economic exchange takes place when both parties believe they will derive benefit. The system regulates itself. Prices that emerge from these voluntary transactions naturally coordinate the activity of millions of people, helping everyone get more of what they want. Smith’s theory is holding true in high technology just as it has in countless other industries. Computer and Internet access are expanding and becoming cheaper because businesses can profit from extending access to nearly everyone, and because nearly everyone wants these technologies.


Internet ventures are thriving in the United States because bringing a business idea to market is easier here than anywhere else. The recent boom in Internet startups, financed by private venture capitalists and initial public offerings on stock exchanges, bear this out. As has been observed by Reuven Brenner, an economist at McGill University in Montréal, Canada, the dynamic growth of the U.S. economy is not replicated elsewhere because in most countries capital markets are highly regulated and controlled by a few banks. In a regulated marketplace, people who lack savings or inheritance rarely have the opportunity to get the financing needed to pursue their business ideas. As a result, people without financial resources do not get many opportunities to move from the ranks of the poor to the middle class and beyond.


The question of government involvement in Internet access also touches on another central aspect of democracy—protection of private property. British political philosopher John Locke recognized protection of private property as the state’s primary purpose in his Two Treatises of Government (1690), and his reasoning inspired American revolutionary Thomas Jefferson and others to enshrine economic liberties, such as the protection of private property, in the U.S. Constitution. Their objective was to institute safeguards to restrain government from imposing taxes and regulations that encroach on property rights. When the government stays out, everyone benefits.


Economic and political freedoms are two sides of the same coin, and anything that reduces freedom in one area of our lives is likely to affect freedom in the rest of our lives. Like free speech, free-market capitalism is essential to the stability of a free society, and such a society requires a free marketplace of ideas. Speech that is considered radical today may one day become majority opinion, so momentary political majorities in the United States are not allowed to make permanent decisions on what speech is appropriate. Likewise, it is not appropriate for government today to decide what a particular market for goods or services should look like far into the future. Such regulation squelches the market’s emerging innovations, reducing economic choices, and thereby, economic freedom. Furthermore, bureaucrats cannot keep up with the speed of change on the Internet and cannot anticipate where it is headed. Government interference will only disrupt the industry and decrease the potential for future growth.


To suggest that government should act to bridge the digital divide between the prosperous and the poor is to miss the point of free-market capitalism. American economist Milton Friedman once asked, “Can a free market in ideas long be maintained if a free market in goods and services is destroyed?” If we allow the government to intervene in the Internet, we will further reduce our economic freedom and, by necessity, our political freedom.


Government intervention will bring about harmful economic consequences. Most areas of regulatory intervention start with a narrowly defined problem. When regulation seems to succeed in resolving the original issue, regulators invariably expand the scope of intervention to rectify newly perceived problems. In addressing Internet concerns, government involvement will likely spread to issues such as guaranteeing upgrades to universal broadband access or attempting to alleviate privacy concerns. Eventually, an entire bureaucracy will be in place regulating the Internet, spending billions of dollars, micromanaging the industry, and effectively eliminating the industry’s ability to respond to market signals. One example of bureaucratic sprawl is the Interstate Commerce Commission (ICC), which was created in 1887 to deal with a narrow band of complaints about the railroad industry. This bureaucracy soon came to regulate almost every area of the railroad system, and then expanded into the trucking industry in the 1920s and into air travel in the 1940s. As in many other cases, the country was left with a costly and intrusive bureaucracy.


Management through a centralized bureaucracy is the last thing that the Internet needs if it is to continue flourishing. In the words of Austrian-born economist Friedrich A. von Hayek, “Man does not and cannot know everything. When he acts as though he does, by directing markets, he engages in a fatal conceit, which can only lead to disaster.”


Taxation and regulation both impose enormous costs on the economy. A government must tax, borrow, or impose regulation to pursue a goal such as subsidizing Internet access. The costs of taxation are obvious. Regulation imposes costs that are less visible but no less certain. If the government were to pass a law requiring all ISPs to allocate a percentage of their revenue to guarantee access to low income communities, the associated cost to the ISPs and to their customers would be high and difficult to measure. At first glance, one might even conclude that the cost was nominal. This cost is probably one of the reasons that government officials find regulation preferable to taxation these days, and precisely why it should be avoided.


In the past, government regulation has slowed the availability of new technologies to consumers. Of the seven important consumer technologies cited, the only one that has consistently been under tight government regulation is the telephone, and the telephone was slowest in reaching most households. The 70 years it took the telephone to reach the 50 percent penetration level is two and a half times the average time period of the other six technologies, all of which are comparatively unregulated. Government regulation of the Internet may actually achieve the opposite of its goal and slow down the natural bridging of the digital divide.


Government intervention also impedes innovation. The experience of the automobile and railroad industries provides an illustration. These industries serve similar markets and provide similar services. Nevertheless, the passenger rail industry is backward, inefficient, and has displayed little innovation over the past several decades. Do trains in the United States look very different today than they did 20 years ago? By contrast the automobile industry is dynamic. New models and innovations such as satellite navigation, airbags, and antilock brakes appear nearly every year. The passenger rail industry is regulated and protected from competition, whereas the automobile industry is competitive and each company must continually improve its products.


The computer, the commercial Internet, and a nearly endless list of other technologies have taken root in the United States and flourished because of the free market. The free market makes them universally available because it encourages people and companies to find innovative ways of reducing production costs and expanding markets. A popular axiom in economics suggests that if you tax or regulate something, you will end up with less of it. The last thing that the United States needs is less innovation and less creation of wealth in the technology industry, especially since this also means that people will be less free as a result.


About the author: Mark I. Schwartz is an attorney in the Washington, D.C. office of Piper Marbury Rudnick & Wolfe LLP, where he practices venture capital and technology law. He has authored numerous articles relating to technology, markets, and government.

The Government Should Subsidize Internet Access

By Tony Wilhelm


Maria Gutiérrez is a single mother living in East Los Angeles, California. She has not completed high school and must juggle her $6.50-an-hour job at a fast-food restaurant with her duties as the mother of two young children. Ms. Gutiérrez had never really heard of the Internet before a recent visit to a new government-funded community technology center. She had seen a few Spanish-language ads on television, but before visiting the center she never thought about how the Internet could enable her to improve her skills, locate valuable social-service information, and communicate with friends and prospective employers.


While millions of Americans are looking to the Internet for economic gain, civic participation, and new educational opportunities, lower-income communities are largely being bypassed. The Internet opens countless opportunities such as seeking jobs through online listings, voting from home, and upgrading skills through online university offerings. Many low-income people are only now beginning to understand this vital tool. Market forces and nonprofit organizations play an important role in expanding Internet access, but only the federal government can guarantee that no community is left behind. A number of government-sponsored programs are already working successfully to bridge the digital divide, but these programs need to expand significantly to bring the Internet to all Americans.


The market for information technology products and services has exploded, outperforming all expectations. So why should government play such an important role in expanding digital opportunities to all Americans? Shouldn’t we just allow the private sector to work without the interference of a federal government that obstructs markets and ties the hands of industry?


The simple answer is that market forces alone have not historically met the essential needs of all Americans. As far back as the 19th century, farsighted public leadership provided an equal chance at “life, liberty, and the pursuit of happiness” for all Americans, a promise first articulated in the Declaration of Independence. The passage of the Homestead Act in 1862, for example, allowed anyone to apply for 65 hectares (160 acres) of land on which a family could build a house and cultivate the land. Rather than giving public property over directly to commercial developers, the government opted for a forward-looking plan in which all citizens would have an opportunity to reap the benefits of the public domain.


Consistent with the principles embedded in the Homestead Act, the federal government’s policies to bridge the digital divide should ensure that everyone has the opportunity to occupy a place in cyberspace. The market creates imbalances in the ability of all citizens to access and use information. People in low-income communities will be left behind in the absence of targeted and innovative government-funded projects and programs.


A 1999 report prepared by the United States Department of Commerce reveals that households with incomes of $75,000 and higher are more than 20 times more likely to have access to the Internet than those at the lowest income levels. Black and Hispanic American households are approximately two-fifths as likely as white households. People in rural communities also risk being left behind. In rural areas the distance between buildings makes infrastructure development costly. In the rural Southwest it can cost thousands of dollars to get a telephone installed. On many Native American reservations most households are without phones, so the prospects for home Internet access remain dim.


Internet access is about more than just choosing an Internet service provider (ISP). Using the Internet usually depends on the possession of a number of other devices, such as a telephone and a computer. In addition, most providers of telephone and Internet services charge a recurring fee. These costs make the Internet less accessible to poorer households.


A national program called the Universal Service Fund provides a good example of how government programs can help people in lower-income communities and in underserved areas access communications services. The fund subsidizes the cost of telephone installation and monthly charges. The United States government has striven to lower the cost of essential services, such as telephone connectivity, to the point where it is attractive to almost all households. In California, many households including the Gutiérrez’s subscribe to the state’s universal service program, called Lifeline/LinkUp, which establishes affordable telephone service for millions of American households. Although 80 percent of single-parent households have a working telephone, this figure would be substantially lower without the program. Because owning a telephone remains the primary means through which households access the Internet, defraying the cost of telephone service tackles an important obstacle to using the Internet.


Several pilot projects are underway to determine how to provide computers, connections, and Internet access to poor households for as little as $5 per month, with the government, advertisers, and sponsors cooperating to cover the rest of the cost. Other proposals include creation of one-time refundable tax credits to help cover costs associated with the purchase of computer and Internet service. Federal and state policymakers are also examining expansion of the Universal Service Fund to subsidize a new class of essential services, such as high-speed connections and Internet access for low-income and rural Americans. None of these programs can succeed without government support and funding.


Expanding Internet access also depends on providing exposure to the technology in places other than the home. Children in low-income communities are gaining exposure to computers and the Internet in school due in part to a government program called the E-Rate. This program provides $2.25 billion each year to discount the price of Internet service, telephone connections, and internal wiring for public libraries and schools with high proportions of students from low-income families. The program benefits the Gutiérrez family and countless others by providing kids with their first exposure to keyboarding and the wonders of Internet-based learning. In addition, E-Rate helps increase parents’ awareness of and interest in computers due to the enthusiasm of their children.


Adults are also being exposed to the Internet through local community centers. Many have been retooled as community technology centers after receiving a Community Technology Center grant from the U.S. Department of Education. Ms. Gutiérrez’s community center received a grant that paid for computers and allowed the center to hire a part-time technology coordinator. These centers provide volunteers who mentor inexperienced users in a comfortable environment, and the centers now serve as important community hubs. Ms. Gutiérrez has recently discovered that she can learn keyboarding and develop her literacy skills in the housing project where she lives. This possibility is due to a Department of Housing and Urban Development (HUD) Neighborhood Networks initiative that has transformed her living environment into a high-tech learning campus.


Clearly many poor people in similar situations have benefited from the federal government’s commitment to expanding Internet access to all Americans. Unfortunately, these government grants are relatively rare, and those that exist are often insufficiently funded to supply these services in disadvantaged communities.


Helping all Americans get Internet access is crucial, but it is only a first step. Once people have access, we must make efforts to help them use the Internet to develop their skills and talents. Newcomers to the Internet are much more likely to benefit from online resources if they have well-trained instructors, exposure to content that is relevant to their life circumstances, and ongoing educational opportunities.


Training is a crucial but often overlooked prerequisite to operating a computer effectively. Some observers believe an institution should spend about 70 cents on support and development of skills for every 30 cents it spends on hardware and software. The U.S. Department of Education has initiated a program to help teachers integrate technology into the classroom. As schools invest in computer hardware and Internet connections, they must also increase their efforts to provide adequate professional development opportunities for all.


Exposure to technology will help people from low-income communities enter technical fields. Statistics indicate that youth from disadvantaged backgrounds are presently underrepresented in computer science, engineering, and math programs. Efforts must be undertaken to open the educational pipeline to people from all backgrounds. Targeted programs at institutions such as Native American tribal colleges, Hispanic-serving institutions (undergraduate institutions with at least 25 percent Hispanic enrollment), and predominantly black colleges and universities can help expand the pool of information technology professionals from currently underrepresented minority communities. The federal government has played a critical role in jumpstarting new corporate-community partnerships to initiate workforce-skills development programs.


The government can also play a role in promoting Internet content that is worthwhile and relevant to people in low-income and underrepresented communities, thus helping to spur interest in online resources. Internet presences such as NetNoir and BET.com have increased demand for Internet services among African Americans because they focus on cultural and racial identity and provide a valuable new community experience. In addition to the need for culturally relevant content there is a critical need for content in languages such as Spanish and Chinese, because 32 million Americans speak a primary language other than English.


Private entrepreneurs have developed many successful Web portals aimed at the general public, but the federal government can play a vital role in initiating the creation of content that appeals to a diverse audience. The Department of Commerce’s Technology Opportunities Program (TOP) has served as a catalyst in cultivating online communities. One grantee, the New York Online Access to Health Initiative, has become an important source of Spanish-language health information on the Internet.


Because the Internet is largely a text-based tool, efforts to promote Internet use should go hand in hand with literacy programs. Educational opportunities may very well spark broader interest in using the Internet. Can a person who cannot read a story to his child comfortably navigate the world’s largest library? Through the Department of Education and Commerce, technology programs should continue to encourage technology-assisted learning programs for adults with limited literacy and support online efforts designed to raise literacy. One TOP grantee, the Puente Learning Center in East Los Angeles, assists mostly immigrant Hispanics in learning English as they gain computer skills.


The market has facilitated the enormous growth of the Internet, but the success of the market is no substitute for addressing the unmet needs of underserved communities. The time to fix a leaky roof is when the sun is shining. In communities that have not reaped the benefits of a growing economy—inner cities, tribal lands, and parts of rural America—the government can act as catalyst, wiring institutions and building skills, and thereby attracting investment in those communities to create jobs.


In addition to expanding opportunity for all Americans, government plays a critical role in regulating relationships among industry competitors, acting as the referee who ensures that a fair set of rules are developed and enforced. Congress, of course, determines the rules, and independent organizations such as the Federal Communications Commission (FCC) regulate and enforce these rules. The government should be particularly vigilant in monitoring the delivery of high-speed broadband services. Broadband will improve performance, but the cost of developing these infrastructures is enormous. Thus they tend to be deployed first and foremost in wealthy communities, where providers can charge steep monthly fees for a bundle of services, such as long-distance service, Internet access, and pay-per-view movies and events. Low-income neighborhoods are in danger of being left further behind by this next big step in communications.


Since these services are critical to the vitality of entire communities—in developing e-commerce in rural towns and in attracting businesses to inner cities—the government must monitor services to ensure that entire neighborhoods are not bypassed. As universal service grows to encompass high-speed services, moreover, government’s responsibility will be to develop a fund into which all providers of telecommunications services will contribute equitably. Without a referee in place to arbitrate and enforce these policies, it is difficult to imagine companies voluntarily adding to the fund.


The market distributes access according to the law of supply and demand, benefiting some but leaving many people behind. Philanthropists also play an important role, but are not necessarily bound to long-term support. Only the government has its eyes firmly focused on the common good, ensuring that nobody in society is left behind in the information age.


About the author: Tony Wilhelm, Ph.D., is program director of the Communications Policy and Practice program at the Benton Foundation, an organization that promotes the use of digital media to engage, equip, and connect people to solve social problems. Wilhelm has authored several studies and books including Democracy in the Digital Age (2000).
Microsoft ® Encarta ® 2006. © 1993-2005 Microsoft Corporation. All rights reserved.