Access to reliable, high-speed Internet is almost given in today’s America. But should it be subsidized? The Federal Communications Commission says yes. On May 28, FCC Chairman Tom Wheeler announced a proposal to expand the agency’s 30-year-old Lifeline program to include broadband Internet. Costing about $2 billion annually in recent years, Lifeline defrays the cost of monthly landline or mobile phone service for low-income subscribers. Phone companies and consumers each bear part of the cost; Internet Service Providers might have to contribute to the new plan. Funding has been so high under Obama that the program now often goes by the nickname, ‘Obamaphone.’ Given rampant fraud, the main issue would seem less the proper funding level than the program's very existence.
Federal aid for residential phone service actually has been around well before Barack Obama took office as president. The FCC launched Lifeline under a different name in 1985 to enable telecom companies to offer monthly service discounts to low-income households. A participating firm reduces customer bills, and the government in turn reimburses the firm. Eligible households must have incomes no higher than 135 percent of the poverty line and/or receive benefits from one or more means-tested anti-poverty programs, including Medicaid, food stamps and Section 8 rental housing vouchers. The per-household subsidy can be as high as (and usually is) $9.25 per month; extra aid is available for residents of Native American and Alaska Native tribal communities. Only one person per household may participate, and that person must choose between a landline and a cell phone subsidy. And residential phone subscribers as well as service providers contribute to the subsidy pool; resident customers see a surcharge on their monthly phone bill that averages about $2.50. About 2,000 telecom companies are certified providers. The money has added up. In fiscal year 2013, the federal government spent $1.8 billion on Lifeline aid for about 17 million households; spending in fiscal year 2014 dipped to under $1.7 billion. The telecom provider, not the government, determines beneficiary eligibility – a major problem, as we shall see later.
Initially, the program covered only landline phone service. But in 2005, the Bush-era Federal Communications Commission expanded it to include prepaid wireless plans. As part of the Telecommunications Act of 1996, Congress already had placed the FCC's Low-Income Program (of which Lifeline by far is the largest) and three other programs – the Connect America Fund, Rural Health Care, and the Schools & Libraries Program (E-Rate) – under a new subsidy mechanism known as the Universal Service Fund (USF). That law also chartered a new entity, Universal Service Administrative Company (USAC), to run all programs, which in fiscal year 2013 cost a combined more than $8.3 billion.
The FCC thinks that as far as Lifeline is concerned, there is plenty of room for expansion. On Thursday, May 28, Chairman Tom Wheeler unveiled the rudiments of a plan that would make high-speed broadband Internet service eligible for Lifeline aid. “A world of broadband ‘haves’ and ‘have-nots’ is a world where none of us will have the opportunity to enjoy the full fruits of what broadband has to offer,” Wheeler noted in a blog post. “As communications technologies and markets evolve, the Lifeline program also has to evolve to remain relevant. Broadband is key to Lifeline's future.” The proposal would apply to the purchase of stand-alone Internet access for laptops, home computers and cell phones. The proposal thus far has avoided the sticky issue of whether Internet Service Providers would have to contribute funds and in what proportion. The FCC reportedly may decide on a course of action as early as this Thursday, June 18.
The proposal to expand Lifeline into cyberspace rests on the highly questionable premise that our nation suffers from a gaping “digital divide.” Wheeler and other program enthusiasts frequently cite data purporting to show that Internet service is largely a privilege of the well-off. Pew Research Center survey data released in November 2010 concluded that 95 percent of U.S. households with an annual income of at least $75,000 owned a cell phone, as opposed to 75 percent of households with an income of less than $30,000. The Pew report also found that 87 percent of $75,000-and-over households had broadband home Internet service, a figure that was only 40 percent for households making less than $30,000. Because blacks and Hispanics are overrepresented in lower income brackets, they tend to have less service. In May 2013, the U.S. Census Bureau released a report, “Computer and Internet Use in the United States.” Based on data collected in a July 2011 supplement to the Current Population Survey, the study concluded that 75.6 percent of all U.S. households had a computer at home, up from 8.2 percent in 1984 and 61.8 percent in 2003. Internet access was 71.7 percent in 2011, up from 18.0 percent in 1997 and 54.7 percent in 2003. Whereas 76.2 percent of non-Hispanic whites and 82.7 percent of Asians in 2011 had Internet service at home, blacks and Hispanics registered figures of 56.9 percent and 58.3 percent, respectively. The figures for all groups were well higher than in 2000.
“Civil rights” activists see lower rates for blacks and Hispanics as clear evidence of racial discrimination. Malkia Cyril, executive director of the Oakland, Calif.-based Center for Media Justice, put it this way in 2011 in an article for The Huffington Post: “We know that digital inclusion and closing the digital divide is only possible with affordable, accessible, and open high-speed networks. True representation of people of color and the poor demands that the civil rights community fight for this as vigorously as we fight for equal access in our schools, services, and in the broader society.” More recently, this past Wednesday, June 10, Wade Henderson, president of the Washington, D.C.-based Leadership Conference on Civil and Human Rights, in a letter to Chairman Wheeler urged immediate expansion of Lifeline to include Internet service. He cited, with great alarm, Pew and other data showing that while 92 percent of households with incomes in the $100,000-to-$150,000 range have broadband service, these figures were: 47 percent for households with incomes below $25,000; 64 percent for African-Americans; 53 percent for Hispanics; 63 percent for people with disabilities; 51 percent for people with limited English proficiency; and 38 percent for households who prefer to communicate in Spanish. Such disparities, he insisted, deprived “historically disadvantaged communities of the very opportunities they need to participate fully in America’s success.” This view, all too often pitched in this sort of moralizing tone, is highly misleading for at least two reasons.
First, computer prices have dropped dramatically over the years, even as the speed and range of features of computers generally have expanded dramatically. During the early and mid-Nineties, a microcomputer running at 5 Mhz typically cost around $3,000. Today a microcomputer running at 2 Ghz (400 times as fast) can be had for $1,000 or less. Name-brand laptops powered by Windows 8 now cost as little as $250 and possibly less during a Black Friday or year-end holiday sale. And for all intents and purposes, every computer sold today is equipped with Internet access, and a Web browser and search engine. Computer service is an investment affordable to the overwhelming majority of Americans willing to invest in their own future. The idea that large swaths of the American public systematically been “excluded” from computer access is ridiculous.
Second, the notion that one has a right to a subsidy for phone or Internet service if he or she cannot afford it is philosophically flawed. Rational persons, regardless of race or income, adhere to something resembling a budget – i.e., income-based spending limits – on which to base future consumption decisions. Such people are aware of constraints, adapt to them for the time being, and try to improve their economic situation. One no more has a “right” to a high-speed computer than a “right” to a flat-panel TV, a new car or an Ivy League education. In his classic 1995 book, “The Vision of the Anointed,” economist and Hoover Institution Senior Fellow Thomas Sowell rebutted the deception inherent in treating lack of affordability as an injustice:
People are often said to lack “access” to various jobs, educational institutions, or credit, when in fact they may not have behaved or performed in a way that would enable them to meet the same standards that others meet. “Access” is just one of a number of ex ante expressions – “opportunity,” “bias,” and “glass ceiling,” for example – used to describe ex post results in such a way as to preempt the whole question as to why those results turned out the way they did…
People who do not choose to spend their money on health insurance, but on other things, are denied “access” to health care by “society.” On the contrary, they are often given medical treatment at other people’s expense, whether under specific social programs or in various other ways, such as using hospital emergency rooms for things that are not emergencies at all, or which have become emergencies only because nothing was done until a medical problem grew too large to ignore.
Yes, many people do not have a computer with Internet access. Nor do they own a cell phone. But it is hardly a stretch to assert that some of these people simply don’t feel any need to have one. Others, whether out of illiteracy or inertia, lack the ability to navigate such devices. At any rate, the ownership trend has been upward. That about three-fourths of all households with a combined annual income of less than $30,000 have a mobile phone, as Pew researchers found several years ago, is a landmark achievement. Three decades ago, when Lifeline was launched, relatively few people in any income bracket owned a cell phone. And what passed for cell phones back then would be laughed at today.
Lifeline isn’t simply unneeded. It’s also hugely expensive, thanks to a push by the current administration. Yet Congress has seen fit to oblige the Obama White House. During fiscal years 2005-08, program spending averaged a little over $800 million, holding fairly steady over that period. Four years later, however, that figure had ballooned to more than $2.2 billion. There is a good deal of evidence to indicate that this money has been less than well-spent.
As mentioned earlier, service providers, not the federal government, determine household eligibility. Aspiring participants apply via “self-certification” after which they are judged eligible or not. Phone companies, however, are not disinterested observers. Ever looking to expand their customer base, they have every incentive to take applicants at their word without performing due diligence. Making it even easier for applicants is the fact that subscribers, once enrolled, don’t even have to recertify. Worse, as participation in a means-tested anti-poverty program is sufficient evidence of need, the pool of participants grows alongside the welfare state. Vendors use government subsidies to hand out phones. Radio and TV stations in markets across the country frequently air commercials selling Lifeline subscriptions. All of this adds up to an invitation to fraud, an invitation that many scam artists have taken up.
It would be hard to overestimate how extensive Lifeline fraud has been, especially under President Obama. A Wall Street Journal analysis published in February 2013 showed that 41 percent of over six million active subscribers “either couldn’t demonstrate their eligibility or didn’t respond to requests for certification.” If anything, this was an undercount because two of the largest subsidized phone companies, TracFone Wireless and Nexus Communications, convinced the FCC to keep their results confidential. Even if the numbers for TracFone and Nexus reflected those of participating telecom companies as a whole, the level of fraud would be well into the hundreds of millions, and possibly close to $1 billion, each year. And in October 2010, the U.S. Government Accountability Office (GAO) issued a report, “Improved Management Can Enhance FCC Decision Making for the Universal Service Fund Low-Income Program,” concluding that the program lacked sufficient internal controls.
In any number of states, fraud virtually defines Lifeline. Examples:
Georgia. As of late-2014, an estimated 721,000 persons in the state were Lifeline subscribers, more than the entire number of eligible households. Georgia Public Service Commissioner Doug Everett, in proposing a $5 consumer service fee, explained the situation this way: “We found multiple phones in the same household because no one is verifying or checking information…There’s always going to be collateral damage when you’re having a war, and we’re having a war with fraud and abuse.”
Maryland. By the third quarter of 2012, the number of Lifeline subscribers in Maryland had risen during the previous three years by roughly 100-fold to 645,000, nearly double the number of eligible low-income households in the state. By any measure, this is a staggering increase.
Colorado. Lifeline provided 117,000 free cell phone plans in Colorado in the first half of 2014 alone. It’s a fair bet many of those subscribers were hustlers. In the fall of 2014, a investigative news team from Denver CBS-TV affiliate KCNC made multiple trips to the local intersection of Colfax Avenue and Broadway, where a number of mobile phone distributors set up tents to hand out free phones. Reporters found evidence of sales agents knowingly looking past food stamp fraud in order to give away free phones and service.
It’s not as if the Federal Communications Commission hasn’t noticed these things – or taken action. In 2011, the FCC conducted a review of more than 3.6 million subscriber records. The effort reportedly eliminated nearly 270,000 duplicate subscriptions in 12 states, saving an estimated $33 million. On January 31, 2012, the FCC adopted new rules to discourage waste and abuse. Prominent steps included: the creation of a National Lifeline Accountability Database to prevent multiple carriers from receiving support for the same subscriber; the creation of databases from government sources, so as to enable automated verification of initial and ongoing eligibility; the end of the Toll Limitation and Link Up subsidies, which have served as an incentive to sign up as many low-income customers as possible; the establishment of a uniform, interim flat rate of reimbursement, allowing carriers to obtain a subscriber’s signature electronically; and the development of metrics for program performance.
The FCC followed up this effort the following year. On November 1, 2013, the commission's Enforcement Bureau estimated that more than two million recipients of Lifeline aid improperly had received duplicate subscriptions, up from its 1.1 million estimate of a month earlier; the FCC eliminated these subscriptions. The next month, the commission started up a database of Lifeline subscribers in Arkansas, Louisiana, Maryland, Oklahoma and Washington State in order to flag existing duplicate accounts and prevent new ones from being created. The commission expanded the program to the rest of the nation in April 2014.
Accordingly, the government has stepped up its crackdowns on unscrupulous phone carriers. A prominent example: On April 10, 2014, the U.S. Justice Department charged three men – Thomas Biddix, Kevin Brian Cox and Leonard Solt – with one count of conspiracy to commit more than 15 counts of wire fraud, claims and money laundering in connection with their fleecing of the Lifeline program out of $32 million. The indictment was the result of a joint probe by the FBI, the IRS and the FCC inspector general. During September 2009-March 2011, said the feds, the defendants diverted the funds to a Melbourne, Fla.-based company, Associated Telecommunications Management Services. The accused individuals also allegedly used a large portion of the money to “finance their personal business ventures and lavish lifestyles, including personal living expenses, luxury automobiles, yachts and private jet airplanes.” The case is still active.
Additionally, the FCC’s Enforcement Bureau have uncovered a number of cases in which phone companies apparently violated FCC rules limiting Lifeline subscriptions to one subscriber per household and/or received payments for thousands of customers already obtaining Lifeline service from the same company. In November 2013, the FCC issued Notices of Apparent Liability (NALs) against the following companies: Conexions Wireless ($18.4 million for violations over the course of eight months in Arkansas, Maryland and West Virginia); i-wireless ($8.8 million for violations over seven months in Ohio, Illinois, North Carolina, Tennessee, West Virginia, New York, Indiana and South Carolina); and True Wireless ($5.5 million for violations over eight months in Arkansas, Maryland, Oklahoma and Texas). The next month, the FCC issued NALs against three companies for requesting/receiving Lifeline support payments for individual customers who appeared more than once on the subscriber lists of the following companies: Cintex Wireless ($9,461,978); Telrite Corporation ($22,399,761); and Global Connection ($11,702,695).
The bad reputation of Lifeline hasn’t passed unnoticed on Capitol Hill. Sen. David Vitter, R-La., thinks the waste and fraud are of such a magnitude as to justify canceling plans to extend the program to cyberspace. “The FCC has failed to manage Lifeline efficiently in is current form,” he remarked upon Chairman Wheeler’s announcement last Wednesday. “I cannot support any expansion of a program that has so few safeguards in place.” Earlier, back in March 2013, Vitter had proposed an amendment to a Senate budget resolution that would have eliminated mobile phone services from the Lifeline program. The measure was defeated along party lines, save for Sen. Claire McCaskill, D-Mo., who voted with the Republicans. McCaskill and Sen. Tom Coburn, R-Okla., each also sponsored separate amendments that, respectively, would have eliminated the program outright and imposed a $5 minimum fee for subsidy recipients. Neither initiative came up for a vote.
Meanwhile, on the House side, Energy and Commerce Committee Chairman Fred Upton, R-Mich., and Communications and Technology Subcommittee Chairman Greg Walden, R-Ore., that same month sent a letter to then-FCC Chairman Julius Genachowski expressing the view that the internal reforms have been insufficient to stem the waste and abuse. They wrote:
While reforms the FCC adopted starting in 2011 may be slowing growth, they do not appear to be containing the absolute size of the fund. We remain concerned that the trajectory is still unsustainable. Since the American people ultimately pay for the program through a surcharge on their phone bills, and because many of those footing the bill face their own challenges in the economy, we want to make sure ratepayer funds are being spent wisely. And since waste and abuse will divert funds from helping those who truly need it, we want to make sure the funds are being appropriately targeted.
The letter was drafted in preparation for a House hearing on April 25, 2013. The hearing was held, but did not result in action.
FCC members who support the program believe the recent anti-fraud rules will take care of the fraud problem. Back in March 2013, Commissioner (and soon to be Acting Commissioner) Mignon Clyburn, daughter of black Congressman James Clyburn, D-S.C., responding to the proposed Senate legislation, stated: “(The FCC) inherited a program that did not gave proper controls in place, but last year we took appropriate and significant steps to correct that. As a result, we saved more than $200 million last year and are on target to save $2 billion by the end of 2014.” Tellingly, she ended her statement by saying, “In no uncertain terms should qualifying low-income consumers who have followed the rules be refused service.” This is the language of a true believer. A skeptic would have asserted: “In no uncertain terms should unqualified consumers of any income level be granted service.”
Can the FCC’s Lifeline reforms work? Experience suggests that fraud is so pervasive that the reforms will produce, at best, modest results. And given the previously cited Colorado data for the first half of 2014, phone service providers and consumers haven’t necessarily gotten the message. Conceivably, though not likely, the bad publicity over the scams may wind up delaying or even preventing the launch of Lifeline into cyberspace. The five-member commission isn’t going to hold a vote on the proposal until it resolves the issue of who pays. ISPs obviously aren’t eager to carry the full load, but they do support the idea of an expansion and are willing to negotiate with the FCC. Scott Bergmann, vice president of regulatory affairs for CTIA – The Wireless Association, an industry trade group, parsed his words this way: “We look forward to working with the FCC as it evolves this critical program in a manner that is fiscally responsible to Americans’ reliance on mobile solutions.”
The FCC is officially nonpartisan, but like any bureaucracy, its members think politically. Pursuant to longstanding custom, in a manner similar to that of the National Labor Relations Board, three of its five members belong to the party in power; the two others belong to the party in opposition. As long as Barack Obama is in the White House, then, this translates to three Democrats and two Republicans serving staggered five-year terms. Chairman Tom Wheeler, now 69, is a Democrat who didn’t exactly win his job by being a neutral observer. A successful venture capitalist, he has been a prominent lobbyist, at various points heading the National Cable & Telecommunications Association and CTIA. Significantly, he worked extensively on President Obama’s 2012 re-election campaign during the Iowa caucuses and subsequently bundled more than $500,000 in donations. He’s been serving as FCC chairman since November 2013. Wheeler’s first-term predecessor, Julius Genachowski, for his part, was a Harvard Law School friend of President Obama. He since has joined The Carlyle Group.
Political support for Lifeline remains strong. While the two Republicans on the Federal Communications Commission – Ajit Pai and Michael O’Rielly – and a good many lawmakers on Capitol Hill may oppose the use of funds for an Internet foray, almost nobody in Washington has questioned the wisdom behind the program itself. In other words, even if the FCC reforms succeed on their own terms, they can’t disguise the reality that the program isn’t needed. On an economic level, phone and computer service are affordable. And on a moral level, the public is not obligated to subsidize someone else’s communications. The Lifeline program began small, as all such ventures do, but has morphed into a $2 billion-a-year behemoth. An expansion into the Internet would ratchet up that sum enormously. Lifeline has been a misguided venture in egalitarian enthusiasm. If the FCC cannot bring itself to cancel it, Congress simply should defund it.
Related:
LightSquared Fiasco Puts Harsh Spotlight on FCC’s Genachowski
Did Harbinger Hedge Fund Buy Influence with White House? Probe Asked of FCC Spectrum Giveaway