The Federal Government CAN Afford to Invest in Infrastructure

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April 16th, 2016

One argument against federal funding to support special access and community broadband networks—or potentially any infrastructure project—is that the federal government “can’t afford it,” especially given the widely held belief that it should prioritize balancing the federal budget and paying down the federal debt.[1]

My suggestion to those holding this view (or being confused and/or intimidated by it in public policy debates) is to begin examining the extensive literature related to Modern Monetary Theory (MMT), perhaps starting with the selection of material to which I provide links at the end of this post (some of which are scholarly in nature, others geared more toward the layperson).[2]

I certainly don’t expect this single blog post to convince skeptics of the validity of MMT, but will discuss it a bit more before moving on to other perspectives that inform the policy approaches I’m attempting to develop here.

One of the most central and policy-significant concepts of MMT is that what we consider to be the federal government’s “deficit” and “debt” are not the equivalent of the debts carried by private households and businesses (or, for that matter, individual states).  The key difference—and one with major policy implications—is that the federal government is the “issuer” of our nation’s currency (and thus cannot “run out of dollars”), whereas the rest of us are “users” of that currency (and definitely can run out of dollars). This doesn’t mean that the federal deficit and federal spending levels don’t matter at all, it just means that how they matter isn’t the same as how household and business debts matter.  As MMT economist Bill Mitchell put it in a long blog post that I excerpted in a much shorter one (bolding is mine):

[A] nation will have maximum fiscal space:

 1) If it operates with a sovereign currency; that is, a currency that is issued by the sovereign government and that is not pegged to foreign currencies; and

 2) If it avoids incurring debt in foreign currencies, and avoids guaranteeing the foreign currency debt of domestic entities (firms, households, or state, province, or city debts).

 Under these conditions, the national government can always afford to purchase anything that is available for sale in its own currency. This means that if there are unemployed resources, the government can always mobilize them – putting them to productive use – through the use of fiscal policy. Such a government is not revenue-constrained, which means it does not face the financing constraints that a private household or firm faces in framing their expenditure decision.

 To put it as simply as possible – this means that if there are unemployed workers who are willing to work, a sovereign government can afford to hire them to perform useful work in the public interest. From a macroeconomic efficiency argument, a primary aim of public policy is to fully utilize available resources.

Back in 2012 I discussed MMT in a number of posts on my personal blog.  Another post that strikes me as especially relevant to this discussion is entitled Understanding and Embracing the Sovereign Currency Opportunity.  It discusses a post by Dan Kervick on the New Economic Perspectives blog, which I thought did a good job of describing the nature of what I refer to as the “sovereign currency opportunity,” and its relevance to broadband and other infrastructure-related policies.

As Kervick explains:

MMT argues that [what we refer to as a federal budget deficit] should be recognized as the normal operating condition of an intelligent national government pursuing public purposes in an effective way, at least when that government is a sovereign currency issuer that lets its currency float freely on foreign exchange markets. If the government is running a deficit in its currency, then the non-governmental sectors of the economy are running a surplus in that currency and their net stock of financial assets in that currency is growing. If the government is running a surplus, on the other hand, then the net stock of financial assets in the non-governmental sectors is decreasing.  We expect a growing economy to be increasing its financial asset stocks, and so we should expect government deficits as a matter of course.

A related critique of public investment in infrastructure is that it will crowd-out private investment. But, as if often the case with special access and local broadband networks,  if the private sector entities best positioned to make that investment (mainly because they operated for decades as competitively and financially protected monopolies) require financial returns that lead to the economic harms suggested by both CFA’s and ASR’s analyses, then I’d argue that so-called crowding out of that investment is likely to be a good thing for the economy and society as a whole (I discuss factors related to the interaction between “shareholder value” and “social value” here and here).

[1]  I’ll briefly note here that several of Bernie Sanders’ key economic advisers (including Stephanie Kelton, who recently served as the Democrat’s Chief Economist on the Senate Budget Committee chaired by Sanders) appreciate the relevance of MMT to today’s policy debates, including the expanded fiscal space it opens up to federal governments that are issuers of sovereign currencies (which, btw, is sadly no longer the case for nations that use the Euro as their currency).  So, even though Sanders typically balances his ambitious infrastructure investment and other proposals with offsetting tax revenue, an understanding of MMT makes it clear that this is not necessary in the way that most politicians and voters (and still too many economists) appear to believe that it is.]

[2] For those interested in more information about MMT, I’d recommend the following, in rough descending order of sophistication and time required to digest them:  1) a recently published textbook entitled Modern Monetary Theory and Practice – an Introductory Textby economists Bill Mitchell and Randall Wray; 2) a Levy Institute working paper entitled Modern Money Theory 101, A Reply to Critics, authored by Wray and Eric Tymoigne; 3) Wray’s MMT Primer, including a link to the published version and the original blog-based discussions on which it was based; 4) my own first exposure to MMT, Seven Deadly Innocent Frauds of Economic Policy, by Warren Mosler; 5) a layperson-friendly graphics-rich e-book entitled Diagrams & Dollars, Modern Money Illustrated, by J.D. Alt (available as a Kindle e-book or a somewhat abridged two-part blog post) and, for those with only a few minutes of time; a very brief excerpt from early MMT textbook draft material that I cited in a 2012 blog post because I thought it succinctly summarized several key points)

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A “Public Infrastructure” Perspective on Special Access

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As I discussed in an earlier post, the Consumer Federation of America (CFA) recently released a paper by its Director of Research, Mark Cooper, which made the case that the FCC’s decision to deregulate special access in 1999 was premature and has resulted in large-scale economic harm, including an estimated $150 billion over the past five years. Cooper’s analysis focused on two elements of harm: 1) the direct cost associated with non-competitive excess-profit-extracting pricing and; 2) the indirect economic costs associated with this pricing regime.

As it turns out, a few days after Cooper presented an overview of his analysis at a New America Foundation event, a paper was published by Economists Inc. Written by EI principal Hal Singer and, according to its cover page, funded at least in part by USTelecom, the nation’s ILEC trade association, the EI paper approached the issue from a different perspective, as explained in its executive summary:

This paper seeks to model the likely impact of the FCC’s recent effort to preserve and extend its special access rules on broadband deployment, as telcos transition from TDM-based copper networks to IP-based fiber networks to serve business broadband customers. The deployment impact of expanded special access rules can be measured as the difference between (1) how many buildings would have been lit with fiber by telcos in the absence of the rules and (2) how many buildings will be lit with fiber by telcos in the presence of the rules. With an estimate of the cost per building, the deployment impact can be converted into an investment impact. And with estimates of broadband-specific multipliers, the fiber-to-the-building network investment impact can be converted into job and output effects.

The executive summary also highlights the study’s key findings:

In the absence of any new regulation (the “Baseline Case”), an ILEC is predicted to increase business-fiber penetration… from 10 to 20 percent over the coming years…Next, we model a scenario where special-access price regulation extends to the ILECs’ fiber networks. Assuming this scenario reduces an ILEC’s expected Ethernet revenue by 30 percent—the typical price effect associated with prior episodes of price-cap regulation and unbundling—the model predicts that ILEC will increase business-fiber penetration from 10 to 14 percent (compared to 20 percent in the Baseline Case)…Thus, the special access obligations under this scenario result in a 55 percent reduction in an ILEC’s CapEx relative to the Baseline Case….Thus, expansion of special access price regulation to Ethernet services is predicted to reduce ILEC fiber-based penetration by 67,300 buildings nationwide—a result that is hard to reconcile with the FCC’s mandate to encourage broadband deployment.

Singer then considers the spillover effects of this reduced ILEC investment in fiber infrastructure. Using “a jobs multiplier of approximately 20 jobs per million dollars of broadband investment” and “a fiber-construction output multiplier of 3.12,” Singer estimates the resulting economic harm of FCC special access rules to be an annual loss of 43,560 jobs and $3.4 billion in economic output over a five-year period.

It’s worth noting that Singer’s estimate of $17 billion in economic losses over a five year period due to imposition of special access rules is considerably lower than Cooper’s estimate of $150 billion in economic harm from the unregulated status quo in today’s special access market. While Singer and others will likely take issue with Cooper’s assumptions and estimates, the latter’s paper seems to, at the very least, make a strong case that the economic benefits and harms associated with different special access regulatory regimes don’t only flow in the direction analyzed by Singer, and that policymakers would be wise to carefully consider a full array of harms and benefits associated with alternative regulatory approaches.

An opportunity to explore new policy, funding, ownership models

My sense is that both of these studies raise valid points about the types of economic harm associated with different approaches to (de)regulating special access (and other telecommunications) markets.

I also believe that valuable perspective on this issue can be gained from a review of of ASR Analytics’ estimates of economic benefits resulting from BTOP investments in fiber infrastructure (some of which I discussed in a recent post).  Not only does the ASR study do a good job of applying prior knowledge and accepted methods in analyzing broadband-related economic impacts, it also suggests to me that, rather than getting caught up in the details of the Cooper/Singer and related debates, a more useful approach is to take a step back from the quantitative details of these dueling studies, and consider broadband public policy from a “public infrastructure” perspective.

In a follow-up post I outline a research project designed to build on the knowledge base developed by ASR’s study of the Comprehensive Community Infrastructure (a.k.a., “middle mile fiber”) component of the BTOP program.

In addition, I’ve prepared several other posts that try to explain some of the threads of scholarship that inform my own view of how—especially in cases lacking sufficient competition—special access and last mile access networks can deliver the most social value if treated as public infrastructure.

An annotated list of links to these posts is provided below.  I’d encourage anyone involved and/or interested in policy debates related to issues such as special access, community broadband, network neutrality and universal service to review these posts and perhaps also explore the sources they refer to:

a)  the relevance of Modern Monetary Theory (a.k.a. Functional Finance) to policymaking related to federal financial support for investments in telecommunications and other infrastructure;

b) the demand-side analysis of infrastructure resources  laid out by Brett Frischmann in his 2012 book, Infrastructure: The Social Value of Shared Resources, and the Internet- and telecom-related policies it suggests;

c) the analytical framework developed by author Marjorie Kelly in her book Owning Our Future, which highlights key differences between what Kelly refers to as “generative” vs. “extractive” ownership models. One post reviews Kelly’s key concepts and considers AT&T as an example of extractive ownership of telecommunications infrastructure.  A second post considers how Kelly’s framework applies to the role of community-owned broadband networks in the Internet access sector, and suggests research questions related to this that I believe are worthy of further investigation.

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