Governor Holcomb recently announced a new program allocating $100 million to promote broadband access in rural places. This is a bold and thoughtful policy experiment that will yield significant benefits. Nevertheless, it is important to understand what the problem with broadband really is, and what this policy can, and cannot address and where the benefits actually accrue. 

There can be little doubt that many Hoosiers, maybe 100,000 or so, lack any landline wireless and maybe one million lack the sort of reliable service that most urban dwellers expect and pay for. The reason for this is straightforward. Wireline telecommunications access to a home is what economists call a natural monopoly. In this case, nearly all the costs come in the form of laying the wire or fiber optics to a home, not in the actual service provision. 

For a natural monopoly service to be profitable, it must have sufficient local demand to justify the initial investment. The lack of service is due to the simple fact that doing so is not profitable, and the extra $100 million cannot fix that fact. The government can subsidize service or alarm telecom companies into extending service to unprofitable areas to prevent unwanted competition. In reality, it’ll probably do a bit of both.

There can also be little doubt that the lack of broadband already makes things worse in many rural and poor places across Indiana. My colleagues and I at Ball State completed a study last year that found that measures of regional inequality were worse due to the absence of this technology. A remedy to this will make many rural dwellers better off, but this is a complex issue, with several dimensions. Let me explain them in turn.

The commercial economic development effects of this proposal will be near zero, and certainly far less than $100 million. The factors that make places unprofitable for broadband make them unprofitable for most other types of commerce as well. Whatever anecdotal evidence arises from new businesses benefitting from this program will be overwhelmed by continued economic and population decline in rural areas. The benefits accruing to this program are to found outside traditional economic development, and that is good news, otherwise the program would not be justifiable. 

 It’s important to admit that urban households heavily subsidize rural households in Indiana. On a per capita basis, the spending gap between the most rural and urban places is more than $2,500 per year. This is true despite much lower costs of rural living. Urban dwellers pay much higher land and rental costs, pay for more local services and are big losers when it comes to the transfer of wealth between city and country. Any call upon urban taxpayers to subsidize rural taxpayers for economic development is dubious public policy. Fortunately, that is not the real justification for this service.

The real benefits to expanded broadband access come in several forms. In maybe one third of Hoosier schools, students lack basic broadband internet service in their classrooms or at home. This reduces both access to information, and places students at a disadvantage in higher education. While part of this is a consequence of poor decisions by communities, it is in all our interests to insure that these students have better opportunities. I believe the $100 million is justified by these benefits alone. 

Today, nearly all public services are accessed through the internet, as are a growing suite of private services. The absence of broadband access limits household ability to apply for or receive public services across the entire domain from applying for retirement benefits to scheduling a BMV visit. Today private activities ranging from banking to retail purchases are performed online through broadband connections. 

Healthcare services, including those delivered to homes increasingly need broadband access to enable diagnostic services, medical records and other services. While health care professionals transport much of these services on their own equipment, the demand for in-home series will grow over time. Places without broadband will be at a healthcare disadvantage. 

To reiterate the absence of local economic development benefits to broadband, I note that access to more private services through the internet will shift local consumption away from local firms. So, it is imperative that communities focus on ensuring broadband adoption is high where it becomes available. There is no panacea here, as households in a wired community will find themselves even less able to access important goods and services if they aren’t also connected.

My final words on this are to commend again the state’s leadership on this issue. Since the enormously successful 2007 deregulation of telecommunication, it has been difficult to garner support for more innovation in this area. I have largely agreed with this policy hiatus, but the world has changed enough that this policy experiment is now needed. It will not be popular with everyone, and probably will not pay off politically. But, it is surely the right thing to do.