Free public broadband is required

I have resisted writing about the so-called National Broadband Plan (NBP) up until now because the level of debate is quite frustrating. Once again, on a crucial issue that goes to the heart of national development, we are all being hoodwinked by spurious neo-liberal logic. Like all these debates, once it is constructed along an inapplicable macroeconomics, then all sorts of nonsensical points are raised that sound reasonable but are not. For example, the current debate appears centred on how the Government will ever be able to pay back the debt that will be incurred to build the network if consumers find it too expensive to use? On the face of it, the question is seductively sensible. But if you understand the choices open to the Australian government as the sovereign issuer of the currency then you will immediately recognise that the question and related concerns are fundamentally flawed.

To make headway we need to take the NBP out of the “free market rhetoric” and see it as an essential public good that is best constructed as a “natural monopoly” by the national government which faces no financing constraints. Then you have a different perspective altogether and most of the debate that is going on at present falls away as irrelevant and its ideological basis becomes immediately obvious.

First, who said that the optic fibre network should ever be something that has intrinsic commercial value? In saying that I am not considering so-called value-adding services that might use the network. Just consider the network itself – the optic fibre into our houses. Why should that not be seen as essential public infrastructure? In that context, it is immediately obvious that it becomes the legitimate responsibility of the Federal government to provide it to advance public purpose? Clearly if we ignore the neo-liberal rantings that have derailed the global economy after years of eliminating public provision of essential infrastructure the benefits of having a universal and single infrastructure based on best-practice are obvious.

Second, what does it actually cost? If the real goods and services that are required to construct it are available then the Federal government will be able to purchase them using deficit spending. No debt is required. The only reason that debt might be issued coincidently with the spending incurred to construct the network is if the Federal government considered there was too much liquidity in the private economy which was thwarting its overall economic management (most notably monetary policy). It is highly likely that the results of the GFC will be a protracted period of under-utilised capacity, particularly labour and so net government spending (rising deficits) will be extremely beneficial to the economy.

So let us forget arguments about how the government will pay for it! It will pay for it like it pays for anything else by signing cheques and crediting private bank accounts. Then it will monitor the general state of the economy and it might increase taxes or issue bonds if they want private purchasing power to be less. Of-course, it might also decrease taxes and buy back bonds if it considers more private purchasing power is required. You can see the point. These liquidity management issues are not related in any causal way with the decision by the Federal government to net spend in the AUD to build the broadband network.

Third, once we clear the neo-liberal baggage surrounding “financing issues” then we can further dismiss the arguments about the broadband network being doomed to fail because the high access fees that will be necessary to recoup commercial returns will choke off household demand. These arguments are just nonsensical and rely on us believing that the only value that matters are commercial (privatised) returns.

Why are we being manipulated by all and sundry into constructing this infrastructure solely in terms of a market-based (privatised) commercial project? I was reminded of this again today when I read Paul Sheehan’s latest non-column in the Sydney Morning Herald. He said:

The latest grand plan, a $43 billion broadband network, may produce a world class communications platform, but it can never produce an adequate commercial return on investment. It will also destroy tens of billions in the market value of Telstra … The proposed federal budget deficits will have to be paid for by higher borrowing and higher taxes … But after the next election, after generations X, Y and Z have begun to realise the magnitude of the debt and taxes Rudd is leaving them, the electorate will at least want the option of a federal fire extinguisher.

Statements like this, which purport to be analysis, show how bad our national debate is. The deficits do not have to be paid back ever! Deficits are a flow not a stock! There is nothing there to be paid back in the future. The spending today is gone! The development of the infrastructure would be paid for and built and enjoyed by the future generations the so-called X, Y and Z. They will thank this generation for having the foresight to build a first-rate public good that all of us will enjoy for years to come.

No future generation will have to hand back the fibre! No future generation will have to pay a cent more in tax because of the budget deficit incurred to build the fibre network today! No future generation will have to pay higher interest rates because of the construction of the fibre network today. All of these claims have no foundation in macroeconomics. The Government might voluntarily increase taxes or interest rates as an expression of macroeconomic policy in 2020 but those decisions will have no relation to the net spending today.

Great public infrastructure projects generate massive social returns. It is possible that privatised benefits are small but the social benefits enormous. Even mainstream economic theory recognises that the market will fail to allocate resources to such projects because the market is unable to properly calculate social returns (those that arise beyond the narrow confines of a private transaction). All the evidence available points to the social returns being significant. In that case, the infrastructure should remain forever a public asset and be maintained for the public purpose by Government. Any sop ideas of selling off the asset to the private sector after 5 years, which is designed to ease the neo-liberals out there, is a sell-out and a relinquishing of legitimate government responsibility to maintain public goods for public purpose.

The Federal government can build this network without necessarily incurring any debt and without having to make a single cent from households or businesses for access to it. They may decide that where private commercial advantage is being made as a result of the access that a charge is reasonable. I support that. But to suggest that Ma and Pa Kettle will have to pay enormous fees to get the high speed access is missing the point. Public purpose is not a commercial concept.

Fourth, providing national infrastructure like this is the legitimate role of national government. We should also remember that the Internet was a public creation in the first place. Most of the services from the public infrastructure should be provided free (or at nominal cost) to all users given that capacity will not be a major issue and the marginal costs will be minimal. The return can be measured (if you want) in the number of Australians that use the new capacity to become “information rich”.

Fifth, it is also clear that infrastructure of this scale in Australia constitutes what economists call a natural monopoly which has no connotation to the usual meaning of the word monopoly (which is about market share). A natural monopoly refers to the cost structure of a particular industry and is distinguished by very high initial fixed costs of start-up and very low marginal costs. So the railways were a classic example. Telecommunications infrastructure is another good example.

The fixed costs of creating the industry infrastructure are so high that as usage increases the average total costs decline significantly. In these cases, one provider (firm) can provide the good or service cheaper than a multi-firm industry structure. So competition merely increases the social costs of that industry by inefficient duplication of the high fixed cost infrastructure.

This is usually seen as a rationale for state provision of the infrastructure and regulations to ban competition in that part of the industry. As long as the total average cost is declining as scale increases (which is the typical case where adding an extra customer is virtually costless) then competition among firms will drive them all into insolvency because they will never recoup the intitial heavy investment costs.

This was the classic case of the American railways in the C19th. The late 1800s and early 1900s have been referred to as the golden age of the railroad receivership. We saw competing railroad companies rolling out costly tracks alongside each other and spruiking for customers with all sorts of deals and promises. Many went broke, although many were also in the railroad business as a front for their land development activities. A good friend of mine, Michael Perelman wrote a fascinating book a while ago about all this – The Natural Instability of Markets: Expectations, Increasing Returns, and the Collapse of Capitalism. Very good reading. The Age columnist Ken Davidson made this same point over the weekend.

In the Post WWII period up until the mid-1970s, the Federal Government realised that it had to develop infrastructure so as to provide for the disadvantaged who had no “market power”. In particular, communications were provided on a needs-basis rather than on strict capacity to pay criteria because it was recognised that access to information and connectivity was central for a growing and fair society. It would never have been “economic” (by which I mean profitable for private capitalist firms) to provide even the copper wired telephony that links our country.

So if we use the same arguments then as we are using now then we would never have built any public infrastructure.

The consequences of the neo-liberal era that has dominated public policy over the last 35 years is that we are now lagging behind the rest of the developed world in public infrastructure provision. Some have lots while others have none! Which is exactly the logic of the free market system but hardly a sensible way to organise a nation.

Telecommunications has been at the centre of this neo-liberal quest to get government out of the industry so that the top-end-of-town can get their hands on the wealth built by public investment.

The subsequent claims that privatisation and deregulation generated competition and better deals for consumers is a sham of the highest order. All the changes have merely stifled the capacity of the “natural monopoly” Telstra to build infrastructure and allowed a host of telcos to exploit highly subsidised connectivity to bombard us with a plethora of incomprehensible “plans” and nightly marketing visits from hapless sales staff who trudge the streets trying to get a commission. Any quality service development would have come anyway without all the marketing gloss. Ken Davidson again is worth reading on this point.

It is clear that this neo-liberal experiment has failed to deliver best-practice technology to all Australians. It is clear that information access is very much driven by income. The earlier warnings of a new form of poverty – information poverty – are clearly evident although it is not a new cohort that is enduring the burden. Its the same old same old – they endure unemployment, lack of choice generally for want of income, and lack of capacity to engage in the information revolution.

So the Federal government should just build this new optic fibre network as a public investment.

This raises issues about what to do with Telstra. It is difficult to see how the Government can just ignore it, as some statements by the Communications Minister in recent months have suggested. We might not like what Telstra has become under the neo-liberal urgings of successive governments and a host of dud CEOs, but it remains the firm with the “natural monopoly”. All the marketing brochures from their so-called “competitors” and related hoopla and the arbitrage that looks like competition will not extinguish that reality. Just like the Job Network failed to create a true free market for labour market services, so has the privatisations etc failed to create a competitive market for telecommunications.

In the case of telecommunications it was stupid to try given its natural monopoly status. I agree with Tristin Ewings that Telstra should be “re-socialised”.

A re-socialised Telstra with a new natural public monopoly in fibre-optic cable communications infrastructure – and wireless infrastructure – could potentially provide cheaper and higher quality service. Partly, this could be the consequence of rigorous scrutiny from consumers and government: and partly following more efficient cost-structures. A public Telstra, under such circumstances, would have no cause to abuse its market power.

The network infrastructure could then be made available to commercial service providers to offer a range of new services that would be made possible by the speeds of the new network. There are so many possibilities here for innovative private companies: Voice over Internet Protocol; Video and Audio conferencing; Remote Medical Diagnostics and Telemedicine; Remote Education/Distance Learning; Video on Demand; High Definition TV and more.

It is clear that building a first-rate broadband infrastructure will also increase employment growth (the sheer size of the investment will do this) and stimulate all sorts of new private businesses to innovate in the areas noted in the previous paragraph. So the private sector spins off the public infrastructure but not in a way that compromises the fundamental efficiency and equity aims of the exercise.

Given that we would eliminate “competition” at the infrastructure level, the connectivity charges would be more sensible and reflect some public return. For Telstra it could offer very cheap services to ensure equity and wide usage. We would all be better off.

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    2 Responses to Free public broadband is required

    1. graham says:

      Dear Bill,
      can you please explain what this “monitoring” actually means (see quote from blog below) in operational terms? What is monitored and how is it done? I suppose one of the things would be to investigate if demand equals productive capacity but how can this be measured. Yes, I can see how to measure when labour is being “fully” utilised but how does this relate to demand? So in order to make the considerations you mention then the government would need to have some “instrument” to achieve this. I can’t see that the monitoring of the inflation rate is adequate as you have mentioned in previous blogs. So how is it done?

      “Then it will monitor the general state of the economy and it might increase taxes or issue bonds if they want private purchasing power to be less. Of-course, it might also decrease taxes and buy back bonds if it considers more private purchasing power is required. You can see the point. These liquidity management issues are not related in any causal way with the decision by the Federal government to net spend in the AUD to build the broadband network.”

      Also, what is the difference between a flow and a stock? Why is a deficit a flow and not a stock? I think of a deficit as an entry in an account – so what is flowing? Such an entry seems to me to represents something which has flowed, namely that some “money” has been transferred from one account to another resulting in the transferrer having a negative balance.

      I must say I find the jargon in economics and finance worse and more confusing than in computer science.

      Still learning!

      Cheers

      Graham

    2. bill says:

      Dear Graham

      It is a good point and one that has been used by the conservatives to argue for Fiscal policy rules rather than discretion. They say that there is no reliable way to measure the impact of fiscal policy and given the lagged nature of economic data, often fiscal policy becomes pro-cyclical because by the time the net spending (or reverse) starts to work, the cycle has turned up (or down). Therefore fiscal policy is alleged to reinforce the instability of the system rather than provide counter stabilisation.

      But from my perspective there is sufficient information available to run a prudent counter-stabilisation policy although caution is always required. You can make assessments based on the so-called sectoral balances which are derived from the basic national accounting identity as to how much net spending is required. The labour market provides clear information. The one thing you know if there is high labour underutilisation is that the federal budget deficit is too low! You have to then estimate what the non-government saving desire is and that is an art not a science. Further, this is why the Job Guarantee is so compelling because it operates entirely as an automatic stabiliser. You always know if there are not enough jobs if someone turns up at the JG depot for a minimum wage job! Then private spending decisions, which are the mirror of their saving desires typically, will drive the appropriate budget deficit. When private spending is strong, less JG applicants will turn up, and the budget deficit will be lower and vice versa.

      A flow is like the water that comes from your tap and a stock is the volume of water that you put in your bath tub. A flow is measured as something per unit of time whereas as stock is an amount measured at a point in time. When we are told the deficit is x per cent of GDP, that is misleading because every minute of the day spending and tax flows are occuring and the account balance you are thinking off just stylises these continuous flows into some measure at a point in time. But all spending (and taxation) are flows – they are volumes of $s per month or per day. Once the spending is done … it is gone! Once the river has flowed past it has gone! You can measure the accumulation of flows which are then stocks!

      A professor said to me as a young student that the process of studying economics at university is one where you enter the course as a bright young intuitive mind and you exit it hopelessly lost in incomprehensible jargon. And he wasn’t referring to the stupidity of the mainstream analysis. Just the way in which it is clothed in mysterious language. All disciplines use these devices to give them an air of authority and to lessen the likelihood that they will be challenged by some smart upstart.

      So, sorry. I try to use as little jargon as possible. But then …. I have studied economics for years now.

      best wishes
      bill

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