Interface: The Journal for Education, Community, and Values

by Jeffrey Barlow <barlowj@pacificu.edu>

Editor, Interface

INDEX:

.01. Introduction

.02. The Digital Divide and Broadband

.03. The Internet: After the Bubble Popped

.04. What is Appropriate Federal Policy?

.05. Broadband and Homeland Security

.06. Conclusion

.07. Notes

.01. INTRODUCTION (return to index)

In the previous issue of Interface we discussed "The Digital Divide in the Fall of 2002" [1]. To summarize our position there:

1) First, we argued that to high school students, a critical element in the digital divide is home access to computers. vs. public access. Hence, recent arguments that public access to computers has recently reduced the digital divide to the point where it no longer requires or justifies federal intervention to diminish it are irrelevant. The digital divide is, and always will be, relative. Those who have maximum access are advantaged; those who have markedly inferior access are disadvantaged.

2) Second, we argued that in addition to the importance of home access, there is another important element: broadband Internet access. As an important Pew study demonstrates, the most marked difference between those with broadband access and those without it is the time spent searching for information. The many advantages of broadband are so important that Pew refers to "an emerging broadband lifestyle."
In this editorial we will extend this analysis and conclude that a federal program to extend broadband is necessary to bridge the digital divide, and that such a program would both be very beneficial for the American economy, and would strengthen homeland security. [2]

.02. The Digital Divide and Broadband (return to index)

Let us begin by defining broadband. As implied above, Internet access is always going to be relative to the fastest practical communications speeds. At present, there are available a variety of arcane communications channels that are essentially instantaneous, but we are interested here in those accessible to the public at a reasonable cost. At present those channels are largely restricted to Cable Modems and DSL.[3] Roughly 21% of Internet users or 24 million Americans currently have such access. [4]

There would seem to be currently two major obstacles to broadband access facing potential consumers: first, price; second, accessibility. Of these, price is clearly primary, [5] though many living in rural areas might well disagree. Industry also faces two important problems: cost of investment, and the federal regulatory thicket. The first is simply that extending broadband is relatively expensive and likely to be a poor investment until consumer demand awakens to the new opportunities presented. The second is that there are many possible ways to extend broadband, and cable companies and telephone companies favor different regulatory devices and standards, intended, of course, to maximize their own competitive advantage. As a result, the savage battle over federal standards and practices has had the overall effect of retarding rather than facilitating such development. [6]

Some have argued for another obstacle to the expansion of broadband: many people neither want nor need it. [7] The issue here is essentially in sufficient attractive content requiring broadband to deliver it. Most people are still wedded to television for their consumption of high bandwidth media. However, we think that the problem here is not an inherent one: people who have broadband, rarely, if ever, go back. And if there were more consumers, there would also be more content. True broadband would enable a distribution of a far wider range of digital products than is currently the case. We conclude that the primary obstacle is, indeed, price, and the secondary one, geographic accessibility. [8]

.03. The Internet: After the Bubble Popped. (return to index)

Given these many problems, what is the likelihood of immediate expansion of broadband? We need to examine here the health of the telecommunications industry in general. The news, is, of course, extremely depressing. The 2001 and 2002 collapses of the dot.com and telecom bubbles amounted, as D. Quinn Mills states, to "a vast waste of financial capital." [9] While it is difficult to find current figures, evidence suggests that the amount of money available for investment was both drastically curtailed and has not even begun to expand once more.

The Internet-related firms have been devastated. The number of firms exhibiting at one of the largest trade shows, New York's Internet World, were 126 this year; several years ago there were 700 exhibitors. Total attendance at such shows is projected to be 56 million people, down from 140 million in 1999, just before the bubble burst. [1 0]

Many argue that the worst for the .com and telecoms is far from over. Despite the immense loss of value in the crash, 71% of the firms funded by venture capital since 1998 are still functioning. But some believe that they are living on a "massive overhang of venture capital" and will go out of business in great numbers as their accumulated funding is depleted. [1 1]

However, the development of broadband may ultimately depend not upon new firms, but upon established ones. But the picture here is not much better. The telecoms, too, have lost enormous financial value and are, if anything, overbuilt and overinvested at present. WorldCom is the outstanding example of such firms, of course. Recently, technical difficulties at WorldCom caused the marked slowing of the Internet for the entire United States. [12] This bankrupt firm carries more than half of the country's Internet traffic in its UUNet..

Given the weakness of the American and world economies, and in particular the financial difficulties of the .com and telecommunications sectors, to expect rapid expansion of broadband communications flies in the face of reality. Just as the venture capitalists earlier provided stimulus for these industries, stimulus they can no longer provide, external sources of funding are necessary.

.04. What is Appropriate Federal Policy? (return to index)

A short time ago, many would unquestionably have replied in answer to the above question: "No federal policy is the appropriate policy." But, in the changed atmosphere following the tragedy of 9-11 not even the most conservative and ideological would argue that federal spending should be a priori resisted. Having spent ourselves from a federal surplus to a federal deficit that may well haunt our grandchildren, the question of appropriate federal investment in any given instance is now an open one.

It may seem that given the funds being invested in homeland defense and other forms of security, telecommunications in general will surely benefit, negating the arguments made earlier. Others, however, disagree. [13] But whether this funding is likely to occur or not, it has a fundamental weakness. Its overall impact will be restricted to a relatively few number of firms and sectors and it will be overwhelmingly focused upon Washington D. C, And, like most defense spending, it has a relatively low multiplier factor, and is also, of course, inherently inflationary in that it increases capital without increasing desirable goods on which it can be spent. In addition, like most defense spending, it will cause enormous waste and result in few social "goods". The counter to this argument of course, would be to reply that all such defense spending is necessary following 9-11. We suggest a simple test for such spending: Would it have prevented the 9/11 disasters?

Economists traditionally recognize three sources of demand in the American economy: consumers, industry, and government. Demand, however, must be backed with funds if it is to be "effective." Both consumers and industry fail this test. Only the government remains as a source of demand for goods. Some economists believe that the economy faces even the specter of deflation. Under such circumstances, several members of the Federal Reserve Board now believe, federal stimulus is appropriate and it is important that it be timely as well, as the case of Japan shows. [14]

At present this position is restricted to such liberal economists as Paul Krugman, columnist for The New York Times. [15] Krugman's argument is worth quoting at length here:

The key point is that this isn't your father's recession — it's your grandfather's recession. ... It's a classic overinvestment slump, of a kind that was normal before World War II. And such slumps have always been hard to fight simply by cutting interest rates...

And this situation may last for a while. The overhang of excess capacity, especially in telecommunications, will be worked off only slowly. It's all too possible that we may be looking at a sluggish economy into 2004, maybe beyond. The Fed should cut rates further — it may not be enough, but it will help. What else should we do?...

The answer is that we should have a sensible plan for fiscal stimulus — one that encourages spending now, to bridge the gap until business investment revives. ... First, extend unemployment benefits, which are considerably less generous now than in the last recession; this will do double duty, helping some of the neediest while putting money into the hands of people who are likely to spend it. Second, provide aid to the states, which are in increasingly desperate fiscal straits. This will also do double duty, preventing harsh cuts in public services, with medical care for the poor the most likely target, at the same time that it boosts demand...

And how will we pay for all of this? You know the answer to that: Cancel tax cuts scheduled for the future. The economy needs stimulus now; it doesn't need tax cuts for the very affluent five years from now.

This isn't rocket science. It's straightforward textbook economics, applied to our actual situation. It's also, I'm well aware, politically out of the question. But I think we're entitled to ask why.

Like Mr. Krugman, we can, of course, ask why; but the answer is self-evident. A spending program of the sort proposed by Krugman smacks too much of Democratic rather than Republican policies, and in the current political climate, is surely visionary. But we believe that he is basically correct, that federal spending is necessary to stimulate the economy.

.05. Broadband and Homeland Security (return to index)

In the present environment it is clear that for federal programs to move easily through both the Whitehouse and the Congress, they must be related to security. We believe that the expansion of broadband is related to security in that not only is the national vulnerability most to be feared a continually weakening economy, but that in particular the distortion of R & D funding into defense, narrowly defined, must be avoided. [16] Spending on broadband would stimulate the most basic sinews of modern warfare---the industries related to computing and to telecommunications. The multiplier effect would be considerable and most of the spending would be in local firms and communities rather than restricted to huge projects in federal facilities. A wide variety of allied industries, from entertainment to education, would be immediately benefited. Consumers, particularly the most disadvantaged, would see immediate results.

.06. Conclusion (return to index)

We think that the need for broadband expansion and for a federal stimulus to its development is clear. Without the expansion of broadband, further development of computers and telecommunications will be markedly slower than over the past twenty years. We believe that these industries are vital to national security and economic well being.

For such federal spending to succeed, however, some political and economic patterns would have to be radically altered. If there is precedent for national investment in transportation and communications, there is also ample history to show that such programs easily become boondoggles twisted to reward some firms at the expense of others, some constituencies at the expense of others, etc. The current squabble over standards would have to be resolved by technical experts rather than by lobbyists. A federal program to spur the development of broadband would have to be carefully considered and managed if it were to be successful. The same can be said of every other federal program, of course.

NOTES: (return to index)

[1] Jeffrey G. Barlow, The Digital Divide in the Fall of 2002, The Journal of Education, Community, and Values: Interface on the Internet. 2002, 08.
http://bcis.pacificu.edu/journal/2002/08/editorial.php

[2] "The Broadband Difference, How online American's behavior changes with high-speed Internet connections at home" p. 4.
http://www.pewinternet.org/PPF/r/63/report_display.asp.

[3] For a discussion of these, see Simson Garfinkel, "Cable modems or DSL: Which is better?" My Net connection approaches light speed with cable, but that doesn't guarantee a victory over DSL. Salon, 9/23/99
http://www.salon.com/tech/feature/1999/09/23/cable_dsl/

[4] Some sources put this group at no more than 10% of users: Roy Mark, "ISPs Organize Against FCC Deregulations" Internetnews.com,
http://dc.internet.com/news/article.php/1367701

[5] For evidence that price is, in fact, the primary bar to most consumers, see: D. Ian Hopper, "Report: Demand Low for Broadband" Washingtonpost.com Monday, September 23, 2002;
http://www.washingtonpost.com/wp-dyn/articles/A54599-2002Sep23.html
See also See, for example, the materials in "Bringing a Nation Online: The Importance of Federal Leadership" A Report by the Leadership Conference on Civil Rights Education Fund and the Benton Foundation With Support from the Ford Foundation Prepared by Leslie Harris & Associates July 2002 .pp 7-11.
http://www.civilrights.org/publications/bringinganationonline/

[6] See Roy Mark, "ISPs Organize Against FCC Deregulations" Internetnews.com,
http://dc.internet.com/news/article.php/1367701
For an example of the complexity of this field see the Senate bill S. 2048 "Consumer Broadband and Digital Television Promotion Act" and associated discussions:
http://www.politechbot.com/docs/cbdtpa/

[7] D. Ian Hopper, "Report: Demand Low for Broadband" Washingtonpost.com Monday, September 23, 2002;
http://www.washingtonpost.com/wp-dyn/articles/A54599-2002Sep23.html

[8] Mills, D. Quinn. Buy, Lie, and Sell High: How Investors Lost Out on Enron and the Internet Bubble. New York: Prentice-Hall Financial Times, 2002. 175.

[9] Mills says that as of the 2nd quarter of 2001, less than 13% of the amount of venture capital available one year earlier was being invested. This means that new start-ups in the very expensive telecom field are unlikely indeed.

[10] "Internet world dying in its booths" Washingtonpost.com, 10/03/2002, Page EO1,
http://pqasb.pqarchiver.com/washingtonpost/access/...

[11] The Download "Predictions of a Coming Storm" Washingtonpost.com, Thursday, October 3, 2002; Page E01
http://pqasb.pqarchiver.com/washingtonpost/access/...

[12] "Internet Problems Tied to WorldCom's UUNet Unit" Thursday, October 3, 2002; 2:55 PM, Washingtonpost.com,
http://www.washingtonpost.com/wp-dyn/articles/A38808-2002Oct3.html

[13] This position is represented at: Cynthia L. Webb , "Investors Smell Green in Government IT Sector" Government Contractors Take Advantage of Tech Bust To Actively Court Wall Street Washingtonpost.com Friday, October 4, 2002; 12:00 AM
http://www.washingtonpost.com/wp-dyn/articles/A39865-2002Oct3.html
Other industry analysts, however, take a contrary view. See: Cynthia L. Webb, "Experts: Cybersecurity Draft Not Likely To Lead To IT Spending Flood " Washingtonpost.com, Thursday, September 19,, 2002; 12:00 AM,
http://www.washingtonpost.com/ac2/wp-dyn/A35827-2002Sep18?language=printer

[14] David Leonhardt, " Japan and U.S.: Bubble, Bubble, Toil and Trouble" The New York Times, October 2, 2002
http://www.nytimes.com/2002/10/02/business/02JAPA.html

[15] See Paul Krugman, "My Economic Plan" The New York Times nytimes.com, October 4, 2002
http://www.nytimes.com/2002/10/04/opinion/04KRUG.html

[16]Jeffrey Barlow, "The Internet, Securities, and Security", The Journal of Education, Community, and Values, July, 2002 at:
http://bcis.pacificu.edu/journal/2002/07/editorial.php

May 2013

Volume 13, Issue 5