Who Pays for Universal Service?: When Telephone Subsidies Become Transparent

Citation

Prom, C. (2001), "Who Pays for Universal Service?: When Telephone Subsidies Become Transparent", The Bottom Line, Vol. 14 No. 2. https://doi.org/10.1108/bl.2001.17014bae.004

Who Pays for Universal Service?: When Telephone Subsidies Become Transparent

Who Pays for Universal Service?: When Telephone Subsidies Become Transparent

Crandall, R.W. and Waverman, L.Brookings InstitutionWashington DC2000

Keywords: Telecommunications industry, Taxation, Subsidies

This study of universal service may appeal mostly to policy wonks and researchers, but it is not without use for library administrators as well. As the title implies, Crandall and Waverman analyze the economic costs and benefits behind the various "universal service" subsidies provided under US telecommunications policy, particularly the 1996 Telecommunications Act (TCA). Such subsidies ostensibly were intended to encourage universal subscription to residential telephone service by reducing the cost of the local service, particularly for rural connections where the line cost is much higher than in urban areas. These below-cost local connections are financed by very high long distance rates.

That was the original purpose of "universal service", and if it had remained that way, there would be little reason to review this book in a journal devoted to library finance. But the TCA expanded universal service to include the provision of Internet services to eligible schools, libraries, and rural health facilities. It provided an annual fund of $2.25 billion raised by a new levy placed on the providers of long distance service. This amounts to 3 per cent of the price of long distance service, although the rate would rise to 8 per cent if complete funding was provided.

Since passage of the TCA, this so-called Education-Rate or "E-Rate" has proven to be extremely popular among educators and librarians, even though only 4-5 per cent of the disbursed funds have gone to libraries. Certainly the American Library Association has unabashedly supported the E-Rate as a fundamental means by which access to digital information can be expanded. It is seen as an issue of social and economic entitlement.

In essence, Crandall and Waverman (both economists) argue that the universal service policies of which the E-Rate is a type operate in a very inefficient and unfair fashion. This conclusion is based on a lengthy econometric analysis, accompanied by a large number of tables and charts, of telephone demand, calling patterns, and expenditures sorted by region and household income levels. Although data is also provided for Canada and Britain, most attention is focused on the USA. Crandall and Waverman estimate that the subsidies cost consumers $7 billion per year in the USA. They do not help poor consumers as intended since high long distance rates are the most important contributing cause of the unpayable bills that lead to disconnected service. The policies also transfer at least as much money to the well off as they do to the poor. Crandall and Waverman argue that even if the universal service policies were efficient and fair, there would be little need for them. Nearly every household has a telephone and would continue to have one without the subsidies. Thus, the authors project that the effects of rebalancing the rates would have positive economic effects for most households, including low-income households. However, they admit that such rebalancing would be politically difficult since it would mean apparent price increases of about five to seven dollars per month for local connections, a charge most consumers would resist vociferously even if long distance carriers reduced rates in kind.

What does this have to do with libraries? This economic analysis of universal service provides a previously absent economic basis for criticizing the E-Rate. John Shuler has noted that much comment for or against the E-Rate has amounted to little more than sloganeering and no one has measured its effects. Crandall and Waverman undercut many of the assumptions behind this sloganeering. Getting libraries and schools connected to the Internet seemed like such a worthy goal that no one bothered to question whether the funding mechanism chosen was rational, just, and effective – or even needed.

It is true that in 1998 and 1999 the E-Rate was subjected to fierce criticism by (mostly Republican) members of Congress and telecom industry lobbyists who rightly pointed out that it was a hidden tax subject to no legislative control. Criticism died down considerably since then, but Crandall and Waverman now supply some of the economic data, which was missing from the earlier debate. They point out some of the more obvious problems with the subsidy program:

1. 1.

   it funds only the communications link (hardly the most costly component of Internet access);

2. 2.

   schools were developing Internet access without the subsidies;

3. 3.

   there is little rationale for using a tax on long distance telephone usage rather than funding from general federal revenues;

4. 4.

   it benefits wealthy and poor schools alike;

5. 5.

   it is administered by a large and costly bureaucracy, and lastly;

6. 6.

   no mechanisms have been established to weigh the effectiveness of the measure.

Ultimately, these criticisms may have little effect. As one lobbyist has noted "Once you have large sums of money pouring into every school district in the country, it's impossible to turn off the spigot". But if nothing else, Crandall and Waverman's work should prepare librarians and educators for another round of battles on this issue. Using ammunition such as that supplied here, lobbyists are likely to attack the E-Rate and universal service subsidies. Those who support the programs will need to develop more persuasive reasons for that support or be prepared to see their funding disappear.

Chris PromAssistant University Archivist at the University of Illinois