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Barack Obama's 'Digital Lines' to Nowhere

So spoke President Barack Obama in his inaugural address today:

"We will build the roads and bridges, the electric grids and digital lines that feed our commerce and bind us together."

When Obama said this, he was no doubt referring to his stated goal of having government build out broadband networks on taxpayers' dime. The massive $825-billion stimulus package unveiled in Congress last week devotes $6 billion to build out broadband to areas where high-speed online connectivity is sparsely available.

Providing private goods like broadband Internet access is a task best left to private enterprise. As Obama himself noted only a few moments earlier in his address:

“It has been the risk-takers, the doers, the makers of things…who have carried us up the long, rugged path towards prosperity and freedom.”

Unfortunately, it seems that President Obama does not fully understand the true meaning of this line. If he did, he would realize that the very risk-takers he lauds are the ones who ought to be tasked with building the “digital lines” that “feed our commerce”.

We rightly rely on government to provide public goods such as national defense, dispute resolution, and the enforcement of property rights. We rely on the private sector, however, for nearly everything else. In an open marketplace, competing firms take risks, investing in business ventures with hopes of earning a profit by selling goods and services above cost. Demand is met with supply, and consumers enjoy the goods and services they desire at prices that aren't too high.

Broadband is not a public good, and government should not be in the business of funding the development of networks for private use. Investment in broadband in the U.S. today may be below the socially optimal level, but this is the case because of too much government involvement in the marketplace, not too little of it. Moreover, it is not at all clear that government has any better idea than the marketplace how much investment in broadband is socially ideal.

To be sure, spending billions of taxpayer dollars may well mean faster and more widely available broadband access in America. To make this happen, however, capital would have to be reallocated to government from other, likely more productive uses. $6 billion spent on broadband at government's whim necessitates $6 billion in additional tax revenue, which must come from the pockets of private firms and individuals. For government to spend the funds on delivering a service that the market has deemed unworthy—specifically, fiber optic connectivity to homes across rural America—would deny private entities the ability to spend or invest that $6 billion as they see fit.

Residential broadband access is hard to come by in many rural and low-income areas, and many unserved consumers would love it if firms were to provide high-speed Internet in their neighborhood. Many of these people value broadband considerably as a tool of commerce, communications, and entertainment—or at least they say they do when asked—yet in many cases, private businesses have decided against laying out the funds needed to build out fat-pipes to these areas.

Is the state of broadband access in rural areas proof of market failure? Hardly. What it actually suggests is that, while some unserved individuals clearly desire broadband, residents of underserved communities don't value broadband enough overall to make it worth deploying. This signals to private firms that in some regions, building fat pipes to every home is an unwise use of limited funds. Instead, these firms allocate their scarce resources to other pursuits—ones which consumers actually value enough to justify an initial investment.

What of claims that the U.S. is lagging behind foreign countries in terms of broadband speeds across? While these reports may hold some truth, they're hardly cause for alarm. After all, different countries have different characteristics—not just geography and population density, but consumer preferences as well. It's quite possible that some of the nations with speedier broadband than America actually suffer from too much investment in broadband—and that their economies have suffered as a result. Like telecommunications firms in Japan, which over-invested in building out high-bandwidth fiber optic networks, some nations that currently surpass the U.S. in terms of broadband connectivity may well have harmed their economies on net by misallocating funds. The fact that the average U.S. worker is still more productive than the average worker of any nation with government—funded broadband is a testament to the fact that we can use capital efficiently without embracing a command-and-control approach to broadband.