July 1, 2001
L.A. Loves a Loophole
There's no getting around it...
Do Lifeline Programs Promote Universal Telephone Service for the Pool?
Hardly at all. In fact, they do little more than reapportion income (em a task that lies outside the FCC's mandate.
The Federal-State Joint Board on Universal Service recently proposed to expand subsidy programs for Lifeline telephone service. Under the Telecommunications Act of 1996, the Joint Board seeks to add more low-income households to the telephone network.
Will such a strategy work? Our recent findings suggest not. They indicate that simple continuance of such programs, much less expansion, is a highly questionable proposition.
Lifeline programs sponsored by the Federal Communications Commission, in cooperation with the states and the local exchange carriers, are said to promote universal service. However, our estimates confirm that assertion only in the most limited sense. Our findings indicate that Lifeline programs impart a statistical effect on telephone service penetration rates, but also appear to show that the overwhelming majority of Lifeline subscribers would have taken network service even if the assistance program were not available. For these customers, the program simply redistributes income. Beyond that, we also found that very large increases in expenditures for these programs would have little effect on service penetration.
Using a variant of L. J. Perl's economic model, with 1990 census data %n1%n broken to the state level, we estimated elasticities for the individual variables, such as income level, price, or policy factors (see Table 1), and for each state in the sample (see Table 2). Surprisingly, we found that Lifeline elasticities were not correlated with state income, number of poor households or number of subscribers to the Lifeline programs. %n2%n This pattern of response to the Lifeline expenditures may have something to do with state-specific implementation strategies.
Across the sample, a hypothetical 10-percent increase in program expenditures increases penetration rates by substantially less than one-tenth of 1 percent. Moreover, the mere act of funding depresses the expected benefits even further. That effect occurs because Lifeline programs obtain financing through increases in the price of long-distance service, which is known to be inversely related to penetration. %n3%n
While our state-specific results offer an interesting application of our model, we do not mean to imply that our findings are finely tuned at the state level. But the policy implications would not change even if we have significantly underestimated the impact of Lifeline programs. Overall, we found strong evidence that Lifeline programs are not efficient in any reasonable sense. In general, the programs are not effective either, with some possible exceptions, as noted.
How the results break down
A reasonable question to ask about the impact of these programs is just how many people are affected (see Table 2). Using a weighted average of estimated state program elasticities of 0.0016, the national average telephone penetration rate (using a 44-state sample) would be reduced from 94.54 percent in 1990, to 94.38 percent by eliminating Lifeline programs. The penetration rate for the poor in the absence of Lifeline programs would have been 80.0 percent instead of 81.2 percent.
Lifeline subscribers break into two groups. About 123,000 households are added to the network and therefore increase the penetration