Infrastructure Week?

Chris:  Hello. Welcome back to TPI’s podcast Two Think Minimum. I’m Chris McGurn, TPI’s Director of Communications. Each week on this podcast we facilitate a conversation between TPI fellows and special guests on some of the most pressing and important issues in tech policy and tech politics. This week’s episode features a very important conversation on infrastructure.

For the past couple of years, tech companies have been very good at convincing consumers that our wireless cloud-based ecosystem is just that – wireless and cloud-based without any sort of physical components to it. That, of course, is not the case, though it might not necessarily still be the series of tubes as it was famously called once upon a time.

Scott:  I’m not sure that it’s the companies that have been convincing people of that.

Chris:  Oh, yeah?

Scott:  It’s important to them they try to convince people, they try to show people how much infrastructure is required. It depends whether they’re talking about policy people or consumers.

Chris:  I was talking about consumers. If you look at any of the major providers, they don’t really talk about the infrastructure. They talk about how easy it is to get things up in the cloud and how it can move around with you. They don’t really talk about the fact that they require server farms and the networks and the actual infrastructure of this component.

Scott:  There’s a disconnect between DC and consumers. All consumers care about is how it works, and they want to know about the strings and wires and cables. But we want policymakers to know about those strings and wires and cables that are required to make all of it work.

Chris:  Exactly. The language that’s used when these companies are talking to consumers is very different than when they’re talking to policymakers.

Scott:  Probably as it should be.

Chris:  When they’re talking to consumers, if you look at your ISP bill every month it doesn’t say, “We need to expand our reach out into rural parts of the country so we’re going to charge you ten bucks more a month.”

But when they talk to policymakers, the nuts and bolts of how much it costs to actually wire people’s houses, is definitely the top of mind for them.

Chris:  That all being said – is a great segue into the fact that tonight is also the President’s first State of the Union address where infrastructure is going to be playing a huge role. Whether or not broadband infrastructure, or general tech infrastructure, is going to be discussed I don’t know, but in a $1 trillion package hopefully there’s some funding there.

To talk about this more, here is our Sarah Oh, who is TPI Fellow and Scott Wallsten, you’ve already heard from, TPI Senior Fellow and President. They’re going to discuss this issue in a bit more detail.

Sarah:  Before we get to the President’s discussion of infrastructure, this morning the Subcommittee on Communications and Technology[1] on Capitol Hill is holding a hearing titled, “Closing the Digital Divide, Broadband Infrastructure Solutions.”[2] Scott, do you know about what they’re talking about? Why are they focusing on broadband infrastructure? What’s the problem and why should we care?

Scott:  The hearing is actually going on as we speak, we can see it playing on the [monitor]. We’re watching the video stream which shows how important it is to actually be paying attention in real-time, which we’re not, because we know what everyone’s going to say already.

They’re focused on it because rural broadband is still an issue. Even though we’re doing rural broadband a lot better than it’s being made out to be these days, it’s still not nearly as good as it is in urban or suburban areas. We decided as a society that we want everyone to have some minimum level of service. The question is – how to do that? How to do that in a cost-effective way?

Sarah:  The private sector is currently investing over $75 billion per year.[3] What’s holding them back from investing more in rural areas? Is that the market failure argument or is it just that demand is low in rural areas?

Scott:  I think this is not a market failure. A market failure is that if you take into account the total benefits they are less than the private benefits, the benefits to the firm alone. If they could take into account all the total benefits they might exceed the cost and then they’d want to do it. That’s a market failure.[4]

In this case, it’s not clear that it’s a market failure, because the societal benefits from increasing speeds in rural areas are probably not a lot bigger than the private benefits, and even to the extent that they are, those benefits should accrue to the network that invests in them as well which makes it not technically a market failure.

That goes to one of the reasons for universal service, the idea of universal service. It’s not just to solve a market failure. It’s to meet both equity and political objectives. The equity objectives are that we’ve decided that we want everybody to have some minimum level of some kind of service. The political objectives, of course, is that politicians like to give constituents money.

Chris:  Is that really happening? If you’re taxing everyone at the same rate to invest in rural broadband, and Lake Tahoe and Jackson Hole, Wyoming are the recipients, then is that really equitable or is that really working to the way it was designed to work?

Scott:  Absolutely not. Actually those are two different questions. One, is it equitable? No, we’re taxing everybody the same amount and redistributing it to everybody no matter whether rural people are rich or poor. Actually I shouldn’t say rural people – it’s rural telecom companies. How much the actual consumers benefit is a completely different question.[5]

Is it working the way was designed to? That’s a harder question because it was probably really designed to benefit certain constituents, those constituents being owners of rural telephone companies. Not that I’m cynical.

Sarah:  Which brings us back to a topic we were just chatting about earlier related to infrastructure, maybe not broadband, but earmarks. Chris, you were just chatting about what it was like in Washington when you first moved here when there was more earmark activity, what do you think?

Chris:  Once upon a time, infrastructure specifically, was very bipartisan in the sense that it was more regional than it was partisan. People from the South would all band together to get infrastructure packages passed, and the Midwest would be the same.

You don’t really see that anymore. The last real bill that focused on this topic was probably about ten years ago, and that was highly partisan and controversial. Now, without even the earmarks, you can’t even get the pet projects to support, and have members of Congress support larger packages anymore.

Whether or not that’s a good thing or a bad thing, I think there are arguments on both sides. But certainly there was a different way that it worked last time and you could say that there was more positive legislation coming out of Congress when it was possible to have earmarks.

Scott:  How do you think earmarks might – if earmarks came back, how might that affect investment in broadband and other kinds of technology? Do you think it might?

Sarah:  I’m currently divided on the pork barrel spending issue and earmarks. What I learned in law school and economics courses was that it’s a waste – pork barrel – pork. But now that Congress doesn’t have earmarks, it seems that there’s less cooperation and just less deal making.

Scott:  So it seems like pork might be kosher.

Sarah:  Yes. I’m thinking that actually earmarks might be beneficial[6] even if they’re costly in terms of waste like a center for some pet project in some small town, like $600 million. Now I’m thinking, “Well, if it allows Congress to put together reasonable trillion dollar packages, then maybe that’s a cost that we as a society have to make.”

Scott:  It’s interesting you might think that a trillion dollar package could be reasonable.

Sarah:  Okay, well, maybe not [chagrin!]  You asked me about rural broadband in connection to earmarks in your question. In terms of federal spending, the Universal Service Fund spends $8 billion per year, much of which acts similarly to earmarks. At least to rural broadband providers, there are recurring payments going out to ISPs around the country who – I don’t know what they’re building.[7] A lot of that funding is going to overhead. We still hear that rural communities don’t have a lot of broadband.

I’m not sure. Should Congress gift an earmark of $X million to a certain rural broadband provider? I don’t think so, but I’m still thinking.

Scott:  This is kind of a rhetorical question, but if we’re spending this much money and four-and-a-half billion of the Universal Service Fund[8] plus several hundred million from the Rural Utilities Service and other funds that go to rural health care and schools and so on – if service is still as bad as people say, despite all of this money that we’ve been spending for years and years and years – a total of close to $100 billion now in real dollars – what is the justification for spending more? It’s a rhetorical question but still maybe tell us why people, what do you hear? What do people say?

Sarah:  The argument is that federal stimulus will fill the gap that private industry isn’t filling. An infrastructure bill could double the amount the private sector is spending, like $70 billion a year, and therefore stimulate our economy. It sounds a little bit –

Scott:  But now you’re moving to a general statement about infrastructure, not about broadband.

Sarah:  Broadband. Right. As a society, if we wanted fiber everywhere we would just pay for it and there would be fiber in the ground. I don’t think it would be a smart move, a smart use of money. Allocating federal funds from a central decision maker is ripe for miscalculation. How are we supposed to know where to put fiber down and spend the money?

It sounds a little bit Chinese, like state-owned enterprises, just building buildings and building highways to nowhere.[9] That’s not what we do here in the U.S., hopefully not.

Chris:  I’m waiting to see if we do nationalize the 5G network to shift from broadband to wireless.[10]

Scott:  That was an interesting proposal. Who knew the day would start with nationalizing our telecommunications network yesterday. Sarah, what did you make of that?

Sarah:  I first thought that the slide deck – I clicked on the slide deck Sunday night. I saw the link from Twitter and I read it on my little phone, the little slide deck – I didn’t know what to make of it. There was no marking on the presentation; there was no date stamp on it.  Being someone who has spent a lot of time in government documents, I thought that document looked very familiar, like a low-level outline for strategy. It did not seem like a policymaking document.[11]

Scott:  That’s a really interesting point, because also having spent time in government – people in government, they really believe in what they’re doing and they will put together a proposal for something – it might be one of the stupidest things you’ve ever seen, but that person meant well. On the other hand, in this administration, we don’t see a lot of very professional documents. So it’s sort of hard to say what level this was.

Sarah:  Right.

Chris:  Maybe they’ll just put all the 5G towers along the wall that they want to build on the southern border and then at least San Antonio will have 5G everywhere.

Scott:  That’s brilliant because then that would provide service on the Mexican side, and Mexicans can subscribe to the service, and perhaps that way we’ll tax them to pay for our Universal Service Fund, maybe that will pay for the wall.

Chris:  Only a few hours until the State of the Union, let’s rush this to the White House, see what they say about it. But that does raise another question, what’s the point of funding more? I know you asked rhetorically, but could it be that, just demand increased from when they first started laying down broadband to now, obviously with Internet of Things popping up, with more and more people connected to more and more devices, is there an argument to be made that because there’s more demand now, that we need to keep up with the capacity?

Scott:  You’re asking whether we need more investment as a result of the kind of new things our telecommunications network is used for. That’s a good point, because they do require ongoing investments and upgrades.

We also know that the rural universal service has never been effective. Most studies show that it had almost no impact on the number of households that had telephone service during the time when it covered phone service. The Government Accountability Office and other government agencies have asked it to be more transparent and to set measurable goals and so on.[12]

You’re making a good point that we shouldn’t assume that once something is built it’s built forever and that’s all we ever need, because we know that from the industry’s ongoing investment. But it needs to be possible to evaluate it, and so that should be built into the system.

Let me ask you a question, Chris. Before you came here, telecom broadband technology wasn’t your main focus. When you hear us talking about this issue, and that there’s this waste and that it’s not effective. What do you think? Is your reaction generally, why are we still spending so much money on this, or is it like you said before, well, maybe it’s just because there was never enough money in the first place or do you think we’re crazy? What’s a general reaction from somebody who kind of knows how DC works but hasn’t been following this issue for their entire professional life like we have sadly?

Chris:  Well, you guys might be crazy but that’s what a PhD in economics would do for you. I’ve never been as deep into this issue previously like you mentioned, but it is a very hot topic and it’s been a hot topic as long as I’ve been in DC which is since 2003.

Back then, there was a lot of conversations going on. It was sort of like at the cusp of switching from dial-up to broadband connections.

Scott:  In 2000.

Chris:  2000, 2003. I remember the first office I worked in only one person was online at a time and it was still the old modem dial-up and it was just grating. The context I’d provide is it’s only been 15, 20 years and so it seems like a lot has been built and a lot has been developed in that time.

From a consumer perspective, we’re using a lot more devices now. For someone who doesn’t understand this stuff it’s like, “Well, as long as it works at the end we don’t really care how much it costs.” We’ll gripe about our bills every month but we don’t really care as long as we can stream Netflix without it buffering and we can also be checking Wikipedia and also asking Alexa things.

Scott:  But you do care about your bill.

Chris:  Yeah.

Scott:  Everybody is going to make that trade-off between their bill and how much they can stream. To the extent that there’s a connection between the cost and how much you pay, they’d care.

Chris:  That’s true, we certainly do. That comes back to whether or not the government needs to pay more money or if the private companies have to pay more money and what the balance between that is.

Scott:  Either way, consumers are paying.

Chris:  Consumers are paying. Not only that but consumers are paying for broadband, every consumer is also paying for wireless. They’re paying a fair chunk. I think my first wireless bill was 40 bucks a month and now I’m paying over a hundred.

Scott:  But think about what you could do with your wireless now that you couldn’t do then.

Chris:  I can’t flip it open anymore and that’s a shame.

Scott:  That’s true.

Chris:  That’s too bad.

Scott:  You also can’t knock someone out with your phone, they’re too small.

Chris:  To take it back to your question, Scott, it seems like it’s a lot of money. But on balance, given where else the government spends money, it doesn’t seem like a terribly wasteful amount.

Scott:  I think you’re telling us, you’re saying to us, “Good God, look at the bigger picture. It might be waste, but compared to what other things, other waste in government and what we spend, it’s really not, it’s not much.”

Chris:  Yeah.

Scott:  Is that what you’re saying?

Chris:  Pretty much.

Scott:  So what we do is worthless. Maybe that’s too far.

Sarah:  Right. Maybe it’s a good time to talk about the President’s proposal.[13] There is an [unofficial] document online about some proposed infrastructure initiatives from the President.[14] That document mostly covers traditional infrastructure, waterways, highways, bridges. American infrastructure is in need of repair around the country, that is very capital-intensive, and safety focused, like [for] everyday people driving over bridges.

The [unofficial] President’s document only has one line for rural broadband, but mostly focuses on major infrastructure. What do you think? Do you think broadband will make it in to any infrastructure initiatives?

Scott:  It’s important to think a little bit about the bigger picture.  [The document] tends to focus on bridges and roads and waterways and so on. Anybody who’s driven around let’s say New York City for example knows the problems in the infrastructure as their car goes through pot hole, after pot hole, after pot hole, and sees the bridges.

But on the other hand I’m very skeptical about, I wouldn’t take at face value, the claims about how bad it is and how much money is needed. Whenever somebody sees, anybody who wants money is going to say they need lots of it. You can be sure that the amounts that people say are needed are overstated.

Certain types of infrastructure – say, water, water provision – is the economics of them are terrible, whether it’s privately owned or publicly owned, it doesn’t matter. The reason is because a water system, once it’s built, can run more or less forever. Not forever; it can run for a long time with very little investment. But at some point it’s going to need big chunks of an investment along the way, [like] if a pipe ruptures, ideally you want to make sure that those pipes don’t rupture.

What that means is that [the utility has] to charge enough to be able to pay for those things when they happen and do sufficient maintenance along the line. But that means those utilities will have to maintain some kind of pots of money – they’re called quasi-rents – because it looks like they’re earning profits but they’re really not because they’ll have to be spent later.

The problem is nobody likes big pots of money. Politicians see them and then they want to use that money for other things around other priorities.

If it’s a private company then the investors don’t want the money to just sit there. So, whether it’s publicly owned or privately owned, the economics are terrible.

While I am skeptical of the size of the numbers people present of the need, it’s true that the economics of lots of these types of infrastructure, the incentives are really bad, and we need to be more thoughtful about making sure that they stay up to snuff.

Sarah:  I haven’t thought about it much, but to replace the water system in Detroit, for instance, you have to pull up all those pipes. That’s like every hundred years.

Scott:  Right, exactly. When you do it it’s expensive.

Sarah:  Very. All the pipes, that’s very expensive.

Chris:  This brings up another good point discussing all these figures and what it would cost. We mentioned earlier that there’s a hearing going on right now on rural broadband. The President offered his proposal of a trillion dollars, but there are also 25 other bills up for discussion within Congress. Have you guys looked at those or what are your thoughts on some of the proposals that are floating around currently?

Sarah:  I read the document that’s circulating for today’s Subcommittee hearing, and many of [the bills] were introduced last year in 2017. They’re small pieces of legislation about improvements to certain programs.[15]

One particular bill, the LIFT Act, seems quite ambitious. It talked about setting aside money for broadband deployment – 75% through a reverse auction mechanism, and 25% through statewide reverse option for next generation 911 services.[16]

I am a little bit new to reading legislative proposals. It seems like for every one piece of legislation that is successful, there are maybe 200 proposals, maybe more, I don’t know.

Sarah:  Are the odds better or worse than venture capital getting a bill through?

Scott:  It’s a good question, comparing bills to venture capital.

Sarah:  Hundred bills to one that passes. But in any event, [there are] 25 bills up for discussion, at least the proposals write down possibilities for how to appropriate funds. I don’t know about broadband deployment. $40 billion is over ten times the amount that was in the stimulus bill. One of my papers is on $3 billion of infrastructure spending from the Recovery Act. I look at a hundred projects that spent the $3 billion, [and I] track down what was built from that $3 billion.[17]

When I look at a number, like $40 billion, I kind of wonder, “Well, what are they going to do with that money and how will they distribute it?”

Scott:  That raises a few things. One is, if you recommend me giving away this money you’ve got to think about how you will give it away and how to make sure you get the biggest bang for the buck. That sounds like an awful lot of money.

On the positive side, reverse auctions, which is probably the best way to distribute this money, now seems to be coming mainstream, despite opposition for so many years. That’s a very, very good thing. But on the other hand, and in some sense, this isn’t a fair criticism because this is about infrastructure, but we’re spending all of this time and effort and money focusing on rural broadband when if you really want to get more people online, if your focus is getting people online – it’s income that’s the biggest determinant – not whether you’re rural or urban.

We should be spending more effort on how to help low-income people get online, and that doesn’t mean us adding money to the Lifeline program. It means more work, more research on why people aren’t online because it turns out to be complicated. If you look at the pilots that the FCC did a few years ago – what do we need to do? We need more experiments, we need to have a better understanding of what might get people online and what they want to do and what’s our government services could be available and so on. We should be focusing our efforts there. That’s where we could make a difference.

Sarah:  Right, so the adoption part of the discussion, not just deployment.[18]

Scott:  Exactly.

Sarah:  How about pole attachments and rights-of-way?  Should Congress be thinking about legislation to help infrastructure in that area? I saw one bill that had a mention of rights-of-way?

Scott:  We should hear your opinion first because this is partly a legal question. We know rights-of-way and pole attachments, on one hand, sounds like just about the most boring topic you could ever discuss. I mean, really, it’s hard to imagine something more boring.

They’re really important. If you want companies to put up small cells, extend wires, they need those things. The question is how to get it? It begins to get into questions of federalism versus economics. Cities [and] municipalities, do have real concerns. You don’t want people digging up your streets every other day.

Sarah, you’ve got a JD also, so you should know something about federalism more than I do. So what are your thoughts?

Sarah:  We could do a whole [podcast] on pole attachments. There are [many] proposals. I was surprised, I think, Verizon is supporting a one build campaign, allowing companies to build once and share poles.[19] But in terms of federalism you don’t want to override municipalities from controlling all attachments or rights-of-way too differently in a fragmented way.

Maybe we can bring on some guests but [the argument is that] poles are dumb infrastructure. It doesn’t take much smarts to build poles for attaching fiber and therefore there should be some uniform rules on all the poles in the country.

Scott:  Those rules have to include lots of things, because different types of lines have to be a certain distance apart so that their signals don’t interfere with each other. There are also technical rules.

But technical rules are usually given as just a reason to not do something, and there’s very often an actual solution. When somebody says it’s a technical problem, as Tom Hazlett said in his book, his new book,[20] so frequently there it’s often just a way to block something.[21]

There are rules, usually the gas line is on the other side of the street from the electricity line. That kind of makes sense, so the rules did make sense.

Sarah:  But when you’re dealing with 80,000 municipalities[22] who each have a town council and each wants some sort of, I don’t know, kickback, or who can block build out, I can see the reason for wanting some uniformity across the country.

Chris:  Let me just ask for the person staying at home, what do the pole attachments and rights-of-way mean to their service for the end-user?

Scott:  The infrastructure needs to get to your house somehow. If it’s your cell phone signal, there’s got to be a tower near enough that it can give you a strong enough signal. If it’s your wired home broadband, wires [have] got to come to your house, and that means it’s got to come down the street and go all the way to your house. How does it get there? If you’re lucky, all the wires are underground, so you don’t see them. But that means it’s hard, you’ve got to dig up the street to put new cables down there.

More typically, especially in older place, older communities they’re up, literally, on poles and all the wires there. You look up and you see this hideous maze of wires and wooden poles. Companies need a way, providers need a way, to attach their cables there. There needs to be some order to it.

But you also want them to be able to. If nobody could attach a new wire to it, let’s say the electricity companies owns the cable, the poles, and won’t let anyone put any other wires on it, you’re not going to have any wired broadband unless you get permission to dig up the street and put a cable there. Of course that’s a lot more expensive and also difficult. You still got to go through the town.

The trade-offs are, on the one hand, you could make it a complete free-for-all, and you get lots more cables. But then that would cause more disruption in the street. You could have interference in the lines. But if you make it too restrictive, you won’t get any improvements.

Chris:  Mentioning the number of 80,000 municipalities, it seems like they would all want better connectivity for their citizens though. What are the arguments that you care about why municipalities might put the kibosh on letting more rights-of-way and pole attachments in their towns?

Sarah:  For municipal governments it’s a great way to have some pressure on providers to offer other services. There’s a lot of back-and-forth, “If we’re nice to you in this [town], and let you build out fiber, will you help our schools, or will you support this program that we’re doing over here?”[23]

Municipalities have a lot of leverage over builders of infrastructure to get other benefits. That’s definitely part of the conversation. It’s not easy for providers to build systems when they’re dealing with all sorts of different local governments.[24]

When I talk to my friends about – “well, why doesn’t the cable company build faster? Why can’t [they] be like Google and just build it?”  Part of the value of these cable companies is that they do work with so many municipalities. Cable companies are holders of thousands of contracts and relationships with towns.

Scott:  That’s the legacy of their franchise agreements that they had to make with each town to watch cable service originally.[25] With Google, remember Google had cities compete with each other? Part of what cities offered was easier access to poles and rights-of-ways. That’s certainly not a criticism of Google, because they needed those things to build up service.

Chris:  We’re touching very close to an issue that Congress is talking a lot about. Where do you start defining these big companies like Google as public utilities as opposed to private entities? Are we there yet? Is that good idea, terrible idea, because it seems like you’re talking a lot about –

Scott:  Terrible idea.

Chris:  Terrible idea. I have a feeling you’d say that. But if you’re talking about the physical infrastructure and you’re talking about the footprint these companies have, it seems like there are a lot of issues that are popping up, so terrible idea.

Sarah: Part of the appeal of Google, Amazon, Apple is that they’re able to scale and grow so quickly and dynamically. But that doesn’t happen at the municipal level. Traditional companies that have to deal with town councils can’t grow that quickly because there are so many levels of obstruction and so much zoning and so [many] kickbacks. It’s a different world of public utility, or, political economy.

Scott:  There are different aspects of it. Public utilities were traditionally industries that evolved very, very slowly. Regulation could take time. There are lots of mistakes in the regulation overtime and so on. The rules associated were never meant to apply to industries that change so fast like the ones today. They don’t have just a single purpose.

But there’s some overlap that they need the rights-of-ways just like a lot of utilities did. Doing things like applying common carriage to them is not a good idea. They still need access to some of the same rights-of-ways and poles that utilities do.

Sarah:  This brings up two other newsworthy points. Amazon HQ2 is looking for cities[26] to propose to them, so cities are offering these subsidies or tax credits. You also see cities in the discussion about Bill Gates building a new city in Arizona that’s highly connected.[27]

Scott:  Who’s going to live there?

Sarah:  Well, it’ll be like Internet of Things and it’ll be all digital and –

Scott:  My God, that sounds terrible.

Sarah:  It’s a rebuild. There is discussion of how to overcome old city regulations by either building new cities or enticing cooperation by bringing jobs in the cities.

Scott:  We’re always going to have NIMBY problems, not in my backyard. Every community wants really good cellular service. Nobody wants a cellular tower next to them. Everybody wants the fastest broadband coming to their house, but nobody wants their street to be dug up every day.

Those are inconsistencies but not crazy inconsistencies. I don’t want those things. I want and don’t want those things too.

Sarah:  It’s a good discussion of public and private sector competence. Public utilities are fine for electricity or water. Maybe not even for electricity. People are trying to generate their own electricity through solar panels and bypass the electric grid. A public-private discussion for infrastructure is natural to talk about – who’s best equipped to build out infrastructure, the private sector or public sector?

Scott:  We should talk about that another day actually, that’s a big topic.

Sarah:  Yes. Final thoughts, closing thoughts? Chris?

Chris:  Closing thoughts. We’d covered a lot of ground in a short amount.