Symposium | Our Digital Future

Net Gains: A Pro-Growth Digital Agenda

By Robert Atkinson Doug Brake

Tagged technologytelecommunicationsThe Internet

A general pessimism over technological progress has crept into the national dialogue. Everywhere one turns there is a new article about how robots are stealing our jobs, how all the gains from innovation go to the rich, or how all the low-hanging fruit of technological progress has been picked. This pessimism is at odds with the historical fact that economic growth through enhanced productivity has been a boon to every American. Growth-driving innovation is far from over, though many underestimate the need for good policy-making to power the right kind of innovation. When it comes to reaping the gains of innovation, we cannot just close our eyes and hope for the best.

One area ripe for reform: telecommunications policy. Wireless and wired broadband networks are the lifeblood of our growing digital society, yet it has been nearly two decades since the last major update to our communications laws. In that time, we have seen a veritable revolution in telecom. Landline phone use is plummeting, the “app economy” is booming, and everything is converging on digital broadband networks. It’s time to bring our laws into the twenty-first century, and to do so in a way that puts front and center the growth and innovation these networks can deliver.

Income distribution and inequality have dominated policy conversations for some time now. Thomas Piketty’s Capital in the Twenty-First Century gave empirical form to the intuitions behind cries of “We are the 99 percent.” But while inequality and other related problems are worth having a well-grounded debate about, we should not allow them to drown out any and all discussion of economic growth. Indeed, comprehensive data from the Congressional Budget Office show clearly that while inequality has grown—although nowhere near as much as Piketty claims—all income groups have benefited from growth.

We would therefore be remiss in ignoring the opportunity for greater economic growth through good policy decisions. Looking beyond the platitudes of “rising tides,” the power of sustained growth and innovation to improve lives is obvious and all around us. Through dramatic improvements in agriculture, we are able to feed far more people with less backbreaking work. We are able to provide the average American with state-of-the-art health care that is the envy of the world (provided she is insured, of course).

And we have, in the last few years, reaped tremendous economic, social, and cultural benefits from innovations within the information and communications technology (ICT) sector. ICT is now poised to deliver a robust and broad-based twenty-first-century economy—but only if we put the right policies in place.

What has ICT innovation meant for us? Sure, it has provided new means of entertainment and keeping in touch with family and friends. But more importantly, new forms of communications technology allow for significant gains in productivity that reverberate throughout the economy. Productivity is the main determinant of national income per person, because over the long term a nation can consume only what it produces or is able to trade for. Productivity increases stem from a variety of factors, but the principal one is the use of more and better “tools” by producers. And in today’s knowledge-based economy, the tools that are most ubiquitous and effective in raising productivity are ICT-based.

ICT is the key driver of productivity largely because it is a “general-purpose technology.” These types of technologies represent fundamentally new systems that change virtually everything about an economy. ICT changes what and how an economy produces, as well as how production is organized, managed, and located. A new kind of hammer might improve productivity in the construction industry; innovations in communications networks and the software that ride on them improve virtually every industry. This sort of revolution in general-purpose technology warrants a change to the laws and regulations that have been left behind by the pace of innovation.

ICT, like other general-purpose technologies, continues to increase in sophistication as it diffuses throughout the economy. Moore’s Law—shorthand for the exponential growth we have seen in computing power—describes the phenomenon of the rapid price declines and performance gains associated with information technology. While there has been plenty of debate over the limits of this growth, computers have in fact doubled their processing power every 12 to 24 months, even as unit prices have dropped. Given the right research and development policies, we can expect the pace of growth to continue for at least another five to ten years. Similar gains are generalizable throughout the ICT sector.

These technologies have become pervasive and integral to most industries and products, enabling innovations further downstream. We aren’t just talking about email and conference calling. A variety of software applications now allow for teams to collaborate in entirely new ways to make entirely new products. A small company based in Kansas City can easily work with a designer in San Francisco to have iPhone cases manufactured in Minnesota. By any measure, ICT ranks up there as one of the most transformative breakthroughs in human history.

There is strong evidence that ICT fueled the U.S. productivity boom throughout the 1990s and has remained a key driver of growth since then. The beneficial effects of ICT on productivity have been found from firms to industries to entire economies.

As important as IT is, it is the “C”—communications—in ICT that has been a critical enabler of the digital revolution. Simply put, the impact of IT on the economy and our lives would be significantly limited if it weren’t for the advance of communications. Broadband networks are the tendrils of the ICT revolution, spreading the gains from increased productivity throughout the economy. Research has shown that broadband deployment is an effective means to help an economy grow. A World Bank study estimated that each 10-percentage-point increase in broadband penetration adds about 1.3 percent to a country’s gross domestic product.

Here’s where policy comes in. Broadband networks continue to operate under increasingly outdated laws. The Communications Act, the collection of laws that govern U.S. telecommunications, was given its structure all the way back in 1934. The last significant update to these laws was made 19 years ago, with the Telecommunications Act of 1996.

Think back to 1996. The Internet was still a nascent phenomenon. Those were the days of dial-up modems, just five years after the World Wide Web was first introduced to the public. Text messaging was not yet popular. The first ringtone would not be downloaded for another two years.

Even as updated in 1996, our communications laws by and large ignored the Internet. The Telecommunications Act mentions it only a handful of times, and only in passing. Instead, the update was focused on competition in landline phone networks. The law aimed to give new entrants a leg up in the capital-intensive industry, helping them along until they were able to build new phone networks of their own. In hindsight, this looks more than a little silly. The ultimate objective of the 1996 act—enabling competition in what were largely regional phone monopolies—was certainly laudable. And we did end up with competition in phone service—just not in the way the law anticipated. The plan was for regulators to micromanage the rates at which competitors could get access to incumbents’ equipment, allowing new guys to bootstrap their way into stringing a second set of copper phone wires to virtually every house in America. Thankfully, this scenario did not play out as envisioned (copper is not great for broadband). Instead, we saw cable networks offering phone and broadband service and the ascendancy of mobile phones over the traditional landline.

This is just one change of many that we have seen in telecommunications since 1996. More and more video entertainment is being streamed over the Internet rather than delivered over the air. We connect through applications like Skype, FaceTime, and Snapchat. We email instead of writing letters, text instead of calling. This isn’t to say that these modes of communications demand regulation, but simply that things have changed. The time is ripe for a new set of laws.

So what are the principles that should guide a new communications act?

As it turns out, we can learn a lot from our past errors. The 1996 act didn’t work as intended because we were too confident. We thought we understood the possible changes in the industry and the limitations on competition in wired networks. Instead, we saw a proliferation of competition for voice services. Wireless phones, cable voice-over-Internet-protocol offerings, and a growing number of voice applications offered over broadband are now luring consumers off their landline phones. Laws that were designed to inject competition into the telephone market now, in some cases, have the perverse effect of stifling operators’ ability to change their networks in response to these new realities.

Dynamic competition, whereby innovative new entrants can redefine a market, is the rule and not the exception in the ICT sector. This form of competition is most rapid and apparent among the platforms that ride atop networks—think Apple and Android fighting it out for market share of smartphone operating systems. But the sweep of history generally, and competition for voice services after the 1996 act specifically, shows this to be true for networks themselves as well—think mobile phones competing with landlines, or Google Fiber competing with cable broadband and DSL.

We should be humble about our ability to predict the future when updating any laws affecting ICT. Thus we should enshrine one key principle to guide an update: technological neutrality. We cannot assume that we know the right technology for any particular purpose. To the extent possible, we should regulate services that are comparable from a user’s perspective similarly, allowing for flexible changes to the underlying technology.

It’s for this reason that reforms designed solely at expanding “open-access” fiber are misguided. Open-access policies are just what they sound like: Through regulation, the government picks a single network to be opened up for access by several competitors. Such policies are designed to encourage competition on things like customer service and price based on the wholesale rates set by the government—what economists call “static efficiencies.” But a main defect of open-access policies is that they kill off investment in infrastructure and discourage the development of new technologies. Countries that pursued these policies have seen such investments fall off dramatically. This is one reason why America has a far greater percentage of households with access to high-speed networks than Europe, which has largely gone the open-access route.

Many seem to think fiber is some sort of “endgame” for broadband, simply because of its raw capacity. While it’s true that fiber-optic networks are capable of very fast download speeds, much higher than what the average American now uses, both cable and DSL—the two dominant wired networks today—have clear upgrade paths to reach the same speeds. Furthermore, there is good reason to believe that DSL, cable, fiber, and wireless networks will all be able to comfortably outpace consumer demand in terms of speed. An update of our telecom laws should not assume upfront that we know which technology will win the day.

The best way to encourage continued advances in networks, and allow for new technologies to supplant old ones, is to enable competition between different technologies. There are many smart ways in which we can work to enable competition in wired broadband. Often these policy levers are at the local level. Those looking to upgrade or build new networks can work with city officials and local utilities to facilitate access to conduits, rights of way, and poles. Issues around federalism can be a delicate balance, but as we look to modernize our communications laws, we should ensure low barriers to investment and streamline infrastructure access for all network operators.

Meanwhile, the advances in wireless network technology are extremely encouraging, and we expect wireless to offer robust competition to wired networks. An update to our communications laws can build on the amazing growth in mobile broadband by promoting flexibility in spectrum networks and bringing more spectrum to mobile broadband.

A red herring in the national conversation about overhauling our communications law is net neutrality. There is a lot of noise over net neutrality, and the issue has recently been prominent in the national debate. The fact of the matter is that some applications, especially high-bandwidth, real-time applications, would benefit from the kind of prioritization that net-neutrality proponents decry. The Internet architecture as it currently exists is prejudiced against real-time applications, and a regime of appropriate regulation could allow network management to overcome that prejudice in a fair manner. Progressives would be mistaken in maintaining the illusion that all bits should be treated equal.

What we should care about is outcomes—how potential prioritization would affect applications from a user’s perspective—not some abstract notion of “neutrality.” We can and should institute an oversight regime that allows prioritization that simultaneously enables new types of applications and prevents any “tollbooths” or rent extraction. Done right, such a scheme would enable innovative real-time services and encourage continued investment in general-purpose Internet infrastructure while avoiding balkanizing the Internet into separate private networks.

Instead of net neutrality or open access to fiber, progressives should focus on the real progressive cause: the opportunity to get most Americans adequate digital literacy skills and tools so they can be robust participants in the digital economy. There is still a significant portion of our population—about 30 percent—that does not subscribe to broadband. The hard work of bringing everyone online should be the real agenda for progressives.

Historically, broadband adoption has been wrapped in with broadband deployment, and viewed only through the supply side of the equation. The thinking was that if we could just get broadband deployed throughout the country, adoption would take care of itself. Recent research shows this is not the case. Studies by the Pew Internet Project consistently show that among adults who do not use the Internet, almost half say the main reason they do not go online is that they don’t think the Internet is relevant to them. Other surveys have shown that approximately two-thirds of non-adopting households would not consider subscribing to broadband regardless of the price. All this despite the fact that broadband is available to over 96 percent of U.S. households.

Spurring adoption is a complex issue that merits a multipronged approach in an update to the Communications Act. First and foremost, our communications subsidy programs, known as the Universal Service Fund, should be reformed. The Federal Communications Commission has already begun a major update to these programs, working to transition away from subsidizing telephone service to subsidizing broadband. But more can be done. Right now the largest of our subsidy programs focuses on areas that are costly to serve—generally rural areas with low population density. While it is important to get broadband to rural areas, they should not be our main target. Our subsidies should focus on people, not places. It makes little sense for the government to pay to wire wealthy rural towns with broadband when it is often the urban poor who would benefit most from these programs.

We must also work at the local level. Outreach and education programs to help demonstrate relevancy and assist with digital literacy should be standardized and moved beyond the pilot-program level to a national commitment. There is also work to be done in continuing to move all government services online. Not only will this ultimately result in cost savings for the government, but it will provide a focal point for education and assistance in transitioning non-adopters online.

By focusing on real opportunities, like bringing everyone online, we can see the continued flourishing of an ICT-driven economy. This revolution is far from over: The Internet is likely to change more in the next 20 years than it has in the past 20. We should continue our policies that preserve incentives for dynamic innovation in network technology. But an update to our communications laws is long overdue, and any such reforms must focus on the right objective: continuing the diffusion of ICT throughout the economy. By getting the framework for competition and investment right and working to get everyone online, we can sow the seeds of continued growth and development that benefit all Americans.

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Robert Atkinson is the founder and president of the Information Technology and Innovation Foundation.

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