Politics & Policy

The $100,000 Obamaphone for Millionaires

Tee time for taxpayers.
The FCC spends billions subsidizing high-end golf and ski developments.

The Obamaphone lady is moving up in America: She isn’t a rabble-rouser in Cleveland anymore, but a real-estate developer in Maui, a ski-resort owner in Breckenridge, and a dedicated golfer in Scottsdale — and, more important, the telephone companies that serve them. And she isn’t costing taxpayers a couple hundred bucks a year in subsidies, but more than $100,000 per household.

That’s the finding of a new study released by economists Thomas Hazlett of George Mason University and Scott Wallsten of the Technology Policy Institute, who have turned their attention to the aptly named “high-cost fund” administered by the Federal Communications Commission and supported by the 16 percent universal-service tax levied on everybody from landline users to voice-over-IP customers. The fund has spent some $64 billion on carrier subsidies since 1998, and while there is some dispute about how many additional households have phone connections thanks to those outlays, the highest estimates run around 600,000, meaning a cost of more than $100,000 per household.

#ad#The program was originally developed to help extend basic communications to poor people in remote rural areas without telephone service. But the United States ran out of poor people in remote rural areas without telephone service a good long while ago. The administrators of federal programs fear nothing so much as looking for a job in the private sector, so the program found new products to subsidize, such as broadband internet, and new places to subsidize them: No more dirt farms in the sticks, but high-end developments — “mansion-lined gated golf communities” in the words of Dave Herman of the Alliance for Generational Equity, which sponsored the study.

According to Hazlett, the $4.5 billion-a-year program has connected at most 0.5 percent of U.S. households to telephone service.

Those recent beneficiaries in Maui and Scottsdale do not include very many poor people. But the 16 percent tax that supports their subsidies is paid by a great many poor people, especially young immigrants who spend a disproportionate share of their income on international long-distance calls, “a very high tax on low-income people,” Hazlett says.

The problem is a telecom-subsidy model that relies on a cost-plus model of pricing, which gives rural telephone companies an incentive to keep their costs as high as possible. The result is what the result always is when private-sector rapacity encounters public-sector incompetence. When critics began circulating those mind-blowing per-line cost estimates a few years back, the FCC responded with a series of “reforms” that locked in the worst elements of the program.

Confronted with evidence that the program was in some cases costing as much as $23,000 per line every year, the FCC capped subsidies at $3,000 per line per year — still far in excess of what a mobile-phone plan or satellite-based internet-and-telephone package would cost. (And those are just the subsidies — consumers pay out-of-pocket on top of those.) Spending on the program had been in decline, expected to go down to $4 billion in 2012. So the FCC pulled a classic bureaucratic move: It decided that “demand” for the subsidies would be set at a minimum of $4.5 billion a year, and forbade the program’s administers to estimate its needs at any less than that. As Wallsten put it, the program’s new budget is a floor, not a ceiling. So while the FCC is phasing in restrictions on the per-line subsidies, the total outlays under the program are locked in at their current levels — or higher. Average payments will be reduced, but total spending will stay the same or rise, meaning that the FCC will need to find more targets to subsidize.

“You can call it corporate welfare, sure,” Hazlett says, “But it’s a small-business plan, basically. The small, rural companies are the ones that really cash in. There’s more than a thousand of them, and they are literally developed around the idea of federal subsidies for high-cost performance. They wouldn’t exist without the subsidies.”

The authors said they were “stunned” that the Obamaphone lady became such a national scandal when “wheelbarrows full of dole” were being directed at grasping telecoms and their affluent customers. If only people knew where the money is really being wasted.

— Kevin D. Williamson is a roving correspondent for National Review and author of the newly published The End Is Near and It’s Going to Be Awesome.

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