Regulatory Uncertainty Harms Broadband Investment and the Economy

On November 30, 2015, in an article for the Wall Street Journal, Eric Morath reported that capital expenditures within the entire U.S. economy declined 3.8% through the first 10 months of 2015 compared to the same period in 2014. Mr. Morath reported that lower levels of investment in facilities and equipment have slowed U.S. productivity and output and that this slowdown is a key reason why the overall economy has not grown faster than 2% in recent years.

Mr. Morath gives a couple of reasons why companies are not investing as heavily as economists forecast just one year ago. Perhaps foremost, businesses have hesitated to commit to projects due to consumer demand that remains uneven. But, significantly, according to Mr. Morath, “concerns about the regulatory environment” is another reason for the investment decline.

“Concerns about the regulatory environment” is certainly worth considering with regard to investment in broadband facilities.

There does not seem to be uneven consumer demand in the broadband market. Indeed, demand is increasing rapidly. In fact, mobile data traffic is projected to increase seven-fold from 2015-2019. Consumers continue to use more data; acquire newer, more innovative devices and applications; and consume ever more content. The cost savings (in time and money) that Internet access provides consumers (through shopping, transportation, work, education, entertainment, and myriad other applications) generally more than offsets any nominal increase in the price of broadband service.

But while broadband Internet providers may not suffer from the lack of demand depressing other markets, they do confront an uncertain, more costly regulatory environment that likely affects their forward-looking capital investment decisions. The prospect of continuing Title II public utility-like regulation may well cause broadband providers to invest less than they otherwise would. It is often difficult to know with any precision how much a company would have invested absent concerns regarding costly regulations. But sometimes there are enough worrisome signs to suggest paying close attention – especially in the already current slow investment, slow growth economic environment.

As Free State Foundation Research Associate Michael Horney outlined in an October 2015 blog, Progressive Policy Institute economist Hal Singer found a $3.3 billion decline in broadband capital expenditures from the first half of 2014 to the first half of 2015. This decline correlated with the conduct of the FCC’s Open Internet proceeding and the resulting order imposing public utility-like regulation on the Internet service providers. And with regard to regulatory uncertainty and its potential adverse investment impact, it is worth acknowledging the inherent uncertainty created by the FCC’s new amorphous “general conduct standard.”

On November 5, 2015, Mr. Singer updated his earlier figures to include the first three quarters of both 2014 and 2015. He determined that capital expenditures for broadband fell year-over-year by $2.9 billion among wireline providers alone and by $2 billion if wireless providers are included in the sample.

In September 2015, Michael Mandel, the Progressive Policy Institute’s chief economic strategist, released a report, “U.S. Investment Heroes of 2015: Why Innovation Drives Investment,” ranking the top 25 companies according to their estimated domestic capital investment in their most recent fiscal year. Here is the key chart from that report.

As the chart shows, with respect to 2014 capital expenditures, four of the top 25 companies are broadband Internet providers that are now subject to Title II regulation.  AT&T and Verizon are the top two “investment heroes.” Both of these broadband providers decreased investment in the first three quarters of 2015 compared to 2014’s first three quarters.

Summing the capital expenditures of AT&T, Verizon, Comcast, and Time Warner Cable, these four major broadband providers invested $48.7 billion in 2014. In other words, over 28 percent of capital expenditures in Mr. Mandel’s top 25 ranking is attributable to these four broadband providers. So if the regulatory environment is having a negative effect on the broadband Internet provider “investment heroes,” as may well be the case, then it surely will adversely impact aggregate productivity and economic growth.

Moreover, if the regulatory environment is causing the nation’s largest broadband providers to curtail investment, it almost surely is doing the same with respect to the smaller ones.

The Court of Appeals for the D.C. Circuit just heard the appeal from the FCC’s Open Internet order. The ultimate fate, as a matter of law, of the FCC’s reclassification of Internet providers as telecommunications carriers subject to the Communications Act’s public utility-like regime remains up in the air. But, in the meantime, on the ground, it appears that the FCC’s action – the “concerns about the regulatory environment” as the Wall Street Journal reporter put it – already likely is negatively impacting the rate of investment.

Needless to say, as a matter of policy, this is not good for the overall economy or for those looking for jobs that a more robust economy might create.

Studies Emphasizing Negative Effects of Taxes on Economic Growth

The Tax Foundation's Dr. William McBride published a Special Report in December titled "What is the Evidence on Taxes and Growth?"  McBride conducted an economic literature review of more than two-dozen peer reviewed academic journal articles from the last thirty years examining the empirical relationship between taxes and economic growth.

The Special Report contains a helpful table listing the referenced studies, summarizing their methodologies and findings.  McBride concluded that, "the results consistently point to significant negative effects of taxes on economic growth even after controlling for various other factors such as government spending, business cycle conditions, and monetary policy." 

According to McBride, "a review of the empirical studies establishes some standards by which a tax system may be judged."  Applying those standards, McBride judged that "the U.S. has probably the most inefficient tax mix in the developed world."  Here, McBride pointed to U.S. tax policy regarding personal and corporate income taxes, including double taxation of corporate income through capital gains and dividend taxes.  As explained in the Special Report, these kinds of taxes can adversely affect production, innovation, and risk-taking, thereby harming economic growth.

But McBride also offers a way forward for U.S. tax policy:

Pro-growth tax reform that reduces the burden of corporate and personal income taxes would generate a more robust economic recovery and put the U.S. on a higher growth trajectory, with more investment, more employment, higher wages, and a higher standard of living.