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A public policy blog from AEI
Promoting universal access to modern communication services and the internet, especially for low-income and disadvantaged Americans, is a noble cause and a pragmatic objective worthy of government support, but the Federal Communications Commission’s (FCC) Lifeline program is not an effective or efficient means of achieving these goals. We need a better approach to open the doors of digital opportunity to low-income and disadvantaged Americans.
There is widespread agreement that broadband availability and internet access generate significant socioeconomic benefits and that expanding both availability and adoption are worthy objectives for public policy. Research has shown that when people from low socioeconomic positions begin using the internet, they use it for a variety of capital enhancing activities, including education, job seeking, and obtaining health information. There is also substantial research demonstrating the benefits of broadband expansion in rural areas.
Unfortunately, the only major federal program aimed at making the internet available to disadvantaged populations — the FCC’s Lifeline program — is both ineffective and inefficient. Designed more than 30 years ago to subsidize landline telephone service for low-income and elderly citizens, it was “updated” in the mid-2000s to subsidize cell phone service, and in 2016, it was extended to broadband. In 2016, Lifeline spent about $1.5 billion to subsidize telephone service to about 12 million people.
The problem with Lifeline is in its basic design. The subsidies do not go directly to individuals but instead pass through more than 2,000 telephone companies — the vast majority of which are small resellers — which receive monthly $9.25 checks from the Universal Service Administrative Company (USAC) for each qualifying customer they claim to serve. Eligibility is conditioned on participation in any of the major federal assistance programs, such as Medicaid or SNAP. Obviously, the companies have an incentive to sign up as many subscribers as possible, even if they already have phone service, and have virtually no incentive to carefully check eligibility or police fraud. It is not surprising, then, that the program causes very few people to buy communications services they would not buy anyway and that it is fraught with waste, fraud, and abuse.
The Government Accountability Office (GAO) has issued report after report detailing the program’s ineffectiveness, the lack of effective oversight by the FCC, and the resulting billions of dollars in wasted spending. In 2010, the GAO reported that the commission had failed to take even the most obvious steps to prevent fraud, resulting in literally millions of duplicate claims — that is, multiple companies claiming to be serving the same subscriber, or even individual companies claiming to be serving the same subscriber multiple times. Two years later, the FCC adopted reforms designed to reduce duplicate claims, which ultimately led to the decertification of 29 percent of the program’s subscribers — meaning that companies had been fraudulently claiming subsidies for nearly one out of three recipients. As then Commissioner Ajit Pai pointed out, by the time the 2012 reforms were put in place, the program had already written checks for about $1.3 billion in fraudulent claims.
Next, the GAO tackled the program’s ineffectiveness, pointing out in a 2015 report that the FCC had never taken time to assess whether the program was achieving its public policy goals. In response to the GAO’s questions, the commission produced two academic studies, both of which suggested the program has little if any effect on subscribership. One of the studies produced found that only one out of 20 households enrolled in the wireless Lifeline program subscribed to telephone service because of the subsidy, and the other found that Lifeline had almost no effect on subscribership, although the now defunct Link Up program — which provided support for signing up new subscribers but was terminated by the commission in 2012 — was somewhat more effective.
Earlier this year, the GAO issued yet another report. Among its findings: Of the 3.4 million Lifeline subscribers it audited, it could not verify the eligibility of more than 1.2 million, suggesting that more than a third of what the federal government is paying out for Lifeline is going to telephone companies to provide service to people who are not eligible for the program. Moreover, telephone companies claimed subsidies for more than 5,400 people who had been dead for more than a year at the time the claim was filed. The report was also clear in pointing to the sources of these problems: unscrupulous Lifeline resellers. Many of them even rely on third-party contractors and overseas call centers to enroll new subscribers. Sen. Claire McCaskill (D-MO), who joined Sen. Rob Portman (R-OH) to request the GAO report, put it well: “We’re currently letting phone companies cash a government check every month with little more than the honor system to hold them accountable, and that simply can’t continue.”
Given this, it is time to design and implement something a lot better than Lifeline. Here are four principles for replacing the program with a more effective approach to advancing digital opportunity.
First, federal and state governments should work to reduce barriers to broadband deployment and adoption, and to the efficient functioning of the broadband marketplace, so as to lower prices and increase the availability of affordable broadband services. That specifically includes reducing taxes — including universal service fees — on broadband services. Taxes and fees overall account for 18.6 percent of the average consumer’s monthly bill, and while some of those are general sales taxes, Federal Universal Service Fund taxes alone account for more than a third of the total, 6.64 percent. Financing communications subsidies by taxing communications users makes no economic sense — it is literally putting money into one pocket after taking it from the other. If universal service programs are worth funding, they are worth financing out of general tax revenues.
Second, regardless of whether Lifeline is replaced or reformed, support should be targeted to those who do not already have service. As Commissioner Michael O’Rielly put it in his dissenting statement on the 2016 Order which extended the program to broadband, the refusal to target support means that “the agency prefers to give away money to people who already have broadband while other hard-working Americans that sit just above the eligibility threshold pay ever higher fees to fund the program, possibly at the expense of being able to afford broadband themselves.”
Third, the replacement for Lifeline should reflect an assessment of who needs help and of what sort. What we know with certainty is that throwing more than a billion dollars a year at the problem in the form of $9.65 monthly checks written to telephone companies for serving anyone eligible for a federal assistance program is not achieving the desired goal. A more effective approach would begin by realizing that the Americans most likely to be offline today are the elderly and those with low educational attainment and that these populations likely need more than a free phone to make real use of the internet. Similarly, while blacks and Hispanics are nearly as likely to own smartphones and tablets as whites, they are more than twice as likely as whites to say that training would help them use the internet more effectively in making important decisions. Also, as my colleague Daniel Lyons has suggested, a Lifeline replacement program “should include ways for low-income recipients to acquire computers and other equipment they need to get online,” perhaps drawing lessons from the old Link Up program.
Fourth, and finally, it is time to consider a new delivery mechanism, one that involves neither the federal regulatory agency which has so grossly mismanaged the Lifeline program nor the telephone companies that have profited so handsomely from that mismanagement. The FCC has demonstrated repeatedly, under talented management from both political parties, that it is not very good at the low-income assistance business. It is time to try another path.
This blog is based on the author’s testimony before the Senate Committee on Commerce, Science and Transportation on September 6, 2017.
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