Government’s job-killing broadband stimulus

Raymond Keating Chief Economist, Small Business & Entrepreneurship Council
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First, there’s the fairy tale version of government stimulus spending.

This says that politicians and their appointees can spur the economy forward by spending more taxpayer dollars. Infrastructure spending tends to be a favorite, and in the twenty-first century, of course, infrastructure is not just roads and bridges, but also broadband Internet service.

Real-world economics tells a very different story.

For example, more resources spent on government, for whatever purpose, means fewer resources available for consumption and investment in the private sector. For good measure, while the private sector allocates resources according to their highest value as determined ultimately by consumers, government doles out dollars according to political incentives — i.e., special interest lobbying and support, political party and connections, and the impetus to expand power, budgets and staff.

According to the liberal fairy tale, government spending stimulates the economy, and we’re all better off. But reality tells us that we’re worse off as resources get allocated according to political preferences rather than private choice and competition, and the private sector is drained of resources and often directly undermined by this government spending.

That’s exactly what’s going on with so-called broadband stimulus spending, which is going to be the subject of a hearing on February 10th in the House Subcommittee on Communications and Technology.

Consider the situation of Eagle Communications in Hays, Kansas. In a letter last year to Secretary of Agriculture Tom Vilsack and Rural Utilities Service Administrator Jonathan Adelstein, Gary Shorman, Eagle’s president, explained that a broadband stimulus grant would undermine the investment his firm made in providing broadband access to homes and businesses in Hays.

According to Shorman, Eagle employs 277 workers, of which 212 are employee-owners. But a $101 million grant to Rural Telephone Service Company would do the following: “The use of this award money to overbuild Eagle, which has invested over $20 million in private capital in Hays and surrounding areas, jeopardizes the company’s survival and the jobs of its 277 employees. Eagle currently offers Hays residents and businesses broadband service of up to 100 mbps, as well as cable television and digital phone service. It also offers local businesses web hosting, e-business, and wireless solutions.”

Shorman added that given the threat to private jobs, “Allowing our facilities in Hays to be overbuilt using government subsidized funding turns the core purpose of the Recovery Act on its head.”

He also observed: “The government should not penalize a small company that has invested private capital in its communities while supporting another company that has repeatedly benefited from government subsidies not only from RUS (with which it has partnered on at least 32 other projects, according to the January 25 release), but also from federal USF funding (over $58 million in 2007 and 2008 alone), and state USF funding ($13 million during those same two years).”

Unfortunately, no one should be surprised that private capital investment is undermined by the government doling out more dollars to a firm that has plenty of experience in the corporate subsidies game.

Another case was mentioned in a February 5th Milwaukee Journal Sentinel report. Under the broadband stimulus program, the city of Reedsburg received a $5.3 million federal grant. Now city officials are complaining that they face $3 million in cost overruns due to “the federal Davis-Bacon Act, which requires contractors working on federally assisted projects to pay workers no less than the locally prevailing wage for similar projects.”

Again, it’s not surprising that Davis-Bacon jacks up the costs of projects and taxpayers wind up footing the bill.

Of course, another question is: Why is a local municipality in the broadband business?

The Sentinel report noted that the federal grant threatens David Bangert, owner of WiConnect Wireless in Reedsburg. According to reports, “Bangert is worried about competing with the tax-funded Reedsburg program. ‘I have a sizable investment that’s at risk because of the stimulus grant given to the city,’ he said, adding that he is expanding into Richland County, where the company isn’t competing with federal dollars. WiConnect has more than 40 broadband access points that use wireless transmitters sometimes mounted on barns and other tall buildings. If the Reedsburg project does not move forward, Bangert said, he will be relieved that the government is not trying to put him out of business.”

Particularly given the amazing leaps forward in technology, no reason exists for government to subsidize or get into the broadband business. Politics winds up trumping the market. Private investment and risk-taking are crowded out by government spending, which, given the incentives in the public sector, inevitably leads to bigger bills for taxpayers. It’s time to roll back the government subsidies game in broadband, and let the market, led by risk-taking entrepreneurs and small businesses, work.

Raymond J. Keating serves as chief economist for the Small Business & Entrepreneurship Council.