Municipal Broadband and the Myth of Economic Development

Published September 27, 2005

Hey buddy, want to attract new businesses to your city? Sign here and I’ll even throw in cheaper cable TV for your residents.

That pitch is being heard everywhere–from hamlets in Iowa to cities the size of Philadelphia, San Francisco, and Chicago. Taxpayers should hold onto their wallets and purses, because this latest economic development scam could cost them millions of dollars.

The product is municipally owned communications systems–usually cable TV, telephone, and Internet access. Proponents of a municipal Wi-Fi network for Philadelphia, for example, claim it will generate 3,000 jobs. But it is doubtful those jobs will ever be created, or that taxpayers will recover more than a small fraction of the money they are being asked to pay to build these systems.

The most frequently cited “study” purporting to show a link between municipal broadband and economic development is a little essay on the alleged economic impact of a municipal communications system in Cedar Falls, Iowa written by Doris Kelley, which you can find on the Internet. Who is Doris Kelley? Why, she’s the former marketing director for Cedar Falls. Her essay is little more than a few anecdotes combined with unsubstantiated opinions written by a paid booster.

A newer study by George Ford and Thomas Koutsky on Lake County, Florida looks more like a real scholarly study, but it isn’t. Its only measure of economic growth is “gross retail sales,” a poor proxy for economic growth caused by broadband. The study contains no data at all on pick-up rates, quality, or price of broadband services in Lake County or the “control” counties. Without such numbers we cannot know if businesses actually benefit more from the municipal service than from the private services they use in other counties.

Access to high-quality broadband at a reasonable price is part of a good business climate, but that doesn’t mean it is like fairy dust that creates jobs and happiness wherever it is sprinkled. Broadband promotes economic growth by boosting the productivity of businesses, in particular banking and finance.

Duplicating services already available from private providers discourages private investment and diverts taxpayer dollars from other, more important, public goods and services. Providing broadband to residences–the focus of most municipal broadband proposals–isn’t likely to have any impact on a city’s or state’s economic growth.

A real scholarly study of this issue was produced in June by the Center for Business and Economic Research at Marshall University in Huntington, West Virginia. Its authors, Mark Burton and Michael Hicks, conclude: “The magnitude of the potential benefits from more extensive service offerings, particularly to residential users, appears to be relatively small and thus a questionable investment for local governments or other municipal operations.”

Only a few cities today attempt to own and operate their own communications systems. Their advocates claim they break even and produce economic benefits for their lucky residents. More objective researchers, including Dr. Ronald Rizzuto of the University of Denver, say otherwise.

A study just produced by Dr. Rizzuto examined the finances of the three biggest municipal communications systems in Iowa and found all of them lose money and have been poor investments for taxpayers. In some cases they are being subsidized through higher rates charged for electricity and other utilities. Other researchers looking at the finances of communications utilities in other states have reached similar conclusions.

Of course, not all communities are being well served by their incumbent telephone and cable providers or other competitors offering broadband from other platforms. There is plenty those communities can do short of starting their own communications utilities.

Cities can remove regulatory barriers to the expansion of cable into voice markets and telcos into video markets. Franchising agreements and fees are a huge obstacle. Zoning and licensing regulations that keep out small competitors should be repealed. Some of those rules can delay roll-out of new services for years.

Finally, cities and states ought to remove or lower taxes and fees on telecom services. In Illinois, for example, reducing those taxes to the rate applied to other goods and services would save the average household about $27 a month … about what it costs in most areas to buy unsubsidized privately provided residential broadband!

Contrary to what advocates and consultants say, broadband isn’t “just like sewers” or other traditional public utilities. It’s a fiercely competitive industry with rapidly changing technology.

Building a municipal communications system isn’t part of a good economic development plan. Cities hoping to get on the broadband bandwagon should review policies that are discouraging investment in affordable broadband before gambling their taxpayers’ dollars on municipal broadband.

Joseph L. Bast ([email protected]) is president of The Heartland Institute, publisher of IT&T News, and author of a policy study on municipal broadband published by The Heartland Institute in 2004.