In an effort to expand the use of telecommunications services by low-income Americans, the Federal Communications Commission’s Lifeline program offers subsidies to qualifying low-income households to offset the price of such services. As with any Federal subsidy program that gives away billions of dollars, the Lifeline Program has been plagued by waste, fraud and abuse by unscrupulous customers and vendors—a problem highlighted by the “Obama Phone” controversy. Such malfeasance is headline material and, in turn, motivates reform. Despite its problems, however, the Lifeline Program continues to serve a valuable and statutory purpose of helping connect low-income households to our communications infrastructure and the all benefits associated with it.
In an effort to clean up the Lifeline Program, the Commission has implemented a number of significant reforms, many of which have proven successful. Even now, better tools to manage fraud are being deployed. For these efforts, the Commission should be commended.
Other of the Agency’s proposed reforms appear motivated by the claim that that nearly all Lifeline subscribers would obtain service even without the subsidy, a claim based on a graduate student paper concluding that 7 of 8 Lifeline subscribers, and 19 of 20 wireless Lifeline subscribers, would purchase service without the subsidy. If true, then we might ask why the subsidy program exists at all? If false, then the Commission’s policies are being driven by unsound evidence.
At first glance, these estimated displacement rates are suspiciously high and, even if legitimate, it is unclear whether the Commission’s proposed reforms will make matters better or worse. The Agency offers no meaningful economic analysis tying its reforms to the alleged problems. To fill this analytical gap, I recently released a paper entitled A Fresh Look at the Lifeline Program in which I review this empirical evidence, conduct my own empirical analysis, and offer a compelling yet simple theoretical argument suggesting that some of the Commission’s Lifeline policies are counterproductive.
For the complexity and length of my paper I apologize, and attempt here to give interested readers an overview of my findings.
First, I tackle the question of the empirical claim of a stunningly high displacement of Lifeline accounts for regular subscriptions. My careful review of the earlier empirical analysis used to support the high displacement rates finds a number of problems with this work: (1) it is poorly documented; (2) it measures displacement only indirectly; and (3) contains a number of apparent and serious statistical flaws. Perhaps most limiting to the analysis is that nothing in the data indicates whether a household is a Lifeline subscriber, or whether there are any Lifeline subscribers at all in the data. The data do not permit the quantification of the flow of persons in and out of the Lifeline Program. So, at best, the analysis of the Lifeline program is indirect and crude. Also, the study’s data ended in 2010 and thus preceded a number of material reforms as well as the dramatic shift in the Lifeline Program from predominantly wireline to almost entirely wireless services. As such, we may conclude the results are largely irrelevant for modern policy and require updating. As for the technical problems with the study, they are, in fact, technical; I won’t bore you with the details. I believe the problems are severe, if not fatal, but you can decide for yourself in reviewing my paper.
Second, while the earlier study may not be informative, the question of the displacement of Lifeline for regular accounts remains on the table. Therefore, I attempt to quantify this displacement using a more straightforward empirical strategy. Specifically, I posit that if Lifeline accounts and regular accounts are very good substitutes, as is claimed, then we should expect to see a relationship between the two sorts of accounts over time. If Lifeline accounts rise, then regular accounts should decline, or at least grow more slowly than if Lifeline accounts were stable or falling. Using state-level, biannual data on Lifeline and regular accounts over five years, I am unable to detect any relationship between the two account types, despite using multiple empirical models, techniques, and robustness analysis. For the data I use, which measures Lifeline accounts directly, there is no quantifiable displacement between the two types of accounts. Consequently, it is reasonable to conclude, for now at least, that the Commission would err in basing Lifeline reforms on high displacement rates.
Finally, and perhaps most importantly, I offer a theoretical analysis that shows the “free but limited” service packages offered by resellers discourage the displacement of Lifeline for regulator accounts. This prediction directly conflicts with some of the Commission’s proposals based on attenuating the displacement effect. Specifically, the Commission’s proposals to exclude resellers from the program, establish maximum discounts, and to increase the minimum service standards are counterproductive—these reforms will increase the alleged displacement of Lifeline for regular accounts and reduce access the most-disadvantaged of low-income Americans.
My economic argument flows from the concept of a “separating equilibrium.” The fully-discounted offerings of the resellers have very low prices but also have limited service offerings—maybe a gigabyte of data, a few hundred calls, a basic mobile device, and so forth. Consumers willing to pay for a full-service package of large data allotments and the latest and greatest devices are unlikely to be attracted to these limited offerings, despite the low price. Consequently, the highly-discounted offerings of a limited service reduce displacement for regulator accounts, in effect scaring off the higher-value customers. A policy of raising minimum service standards makes the Lifeline service more attractive to higher-value users, thereby increasing displacement. The higher prices that result from these policies, either from the maximum discount or the higher minimum standards, will exclude many low-income Americans from modern communications services, which directly contradicts the Commission’s stated goal of the Lifeline program, the courts’ interpretation of that goal, and perhaps even the Agency’s statutory mandate.
Lifeline helps millions of low-income Americans afford communications services. But, like most subsidy programs, Lifeline has seen its share of fraud. As the Commission pursues a more efficient and reliable Lifeline Program, a primary challenge its leaders face is to avoid throwing the proverbial “baby out with the bathwater” by effectively strangling the Lifeline program in the name of reducing fraud. America’s poor suffer enough; they need not suffer more because unscrupulous individuals exploit a poorly-administered system. The Commission can and has done much to attenuate fraud. To avoid the influence of latent bias spawned by the disdain for fraud, the Commission’s more general reforms should rely on sound economic analysis and good empirical work that speak to a clearly-established goal.
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Dr. George S. Ford is the Chief Economist of the Phoenix Center for Advanced Legal & Economic Public Policy Studies (www.phoenix-center.org), a non-profit 501(c)(3) research organization that studies broad public-policy issues related to governance, social and economic conditions, with a particular emphasis on the law and economics of the digital age. For those interested, a full copy of Dr. Ford’s paper discussed herein, Phoenix Center Policy Paper No. 55, A Fresh Look at the Lifeline Program, may be downloaded free from the Phoenix Center’s web page at: http://www.phoenix-center.org/pcpp/PCPP55Final.pdf.