Will Monopolies Steal the Infrastructure Money?

We tend to talk about infrastructure in terms of spending amounts. But infrastructure in a monopoly-dominated economy is not just about money, it's about who governs.

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Today I’m writing about the Congressional debate over what we call ‘infrastructure,’ meaning our ports, roads, railroads, broadband, and the physical plant on which the U.S. operates. In this debate, there’s a lot of focus on the amounts of money, but not a lot on the rules setting market power over these different sectors. So that’s what I’m going to write about, specifically looking at two sectors, railroads and broadband. Both of these sectors have been critical during the pandemic.

Also, I’ll have some stats on the extent of shortages in the U.S., and a few thoughts on the Facebook whistleblower who released a tranche of sensitive documents over the last few weeks.

First, some house-keeping. I turned the series of shortages into a piece for the Guardian that went sort of viral. I’m getting a lot more tantalizing tidbits on what is happening in the guts of U.S. supply chains, more on that in future issues.

And now…

Why Does Rural England Have Better Broadband than Manhattan?

A few months ago, I got a note from a reader deeply involved in broadband policy. He wanted to explain why competition, and not just investment, is a driving factor in what kinds of internet access we get. Here’s what he wrote:

Can you imagine living in a place where internet service can be as fast as 3 gigabits per second, there are lots of internet providers, and they compete on speed, price, and quality of service?  If you lived in London, UK, or indeed in York or rural England or much of Europe (where the average price of an internet connection is about $20 a month cheaper than in the US), you wouldn’t have to imagine, this would be your reality.  But as any of your readers in the US know from their own experience, this is not the experience we have in the US.  Why not? 

It’s not like rural England has less capital to invest than, say, Manhattan, but it has better broadband. Why? The answer, of course, is that in the U.S. our broadband infrastructure is under the control of private monopolies like Comcast and Charter. In the U.K., there’s a strong regulatory system that promotes both investment in the underlying network and competition on top of it.

Policymakers have understood the U.S. has low speeds, high prices, and a lack of access, for at least ten years. Today this discourse takes the form of a fight over an infrastructure bill, which among other things puts a lot of money into broadband. One would think this money would improve our broadband deployment. And yet, without more competition, here’s what my contact told me what more spending could mean.

If those funds are spent the way their predecessor funds have been (nearly $11 billion has been spent by the FCC’s Connect America Fund Phase 2 in the last 5 years and a recent GAO study totals federal broadband investments from 2009 to 2017 at $47.3 billion), most will go to large private corporations to subsidize them to build out privately-owned broadband connections to rural areas with the only requirement being that they support slow upload and download speeds.

And that, in a nutshell, is why it’s hard to get excited or intrigued by bland talk of ‘infrastructure.’ On something we understand - internet access - most of us realize it won’t make a difference, and tune out. (In fact it’s worse than not making a difference, the money in the legislative package will go towards building infrastructure that is already outdated when it’s switched on.)

Infrastructure Week

Frustrated stasis over infrastructure legislation isn’t just a Biden-era dynamic. During the last administration, Trump sought to roll out an infrastructure plan and flubbed it so badly that ‘infrastructure week’ became a running joke in D.C. The U.S. Chamber of Commerce and the AFL-CIO have both been asking for more infrastructure spending for decades, and sober-sounding engineering societies are always giving failing grades for American bridges and demanding a major fix. In 2007, a high profile Minneapolis bridge collapse served as the visual reminder of the need for updating of bridges. Little seems to come of all this fretting.

And yet, the framing itself obscures the actual stakes of the argument, because debating our physical plant goes far beyond thinking about how much money government should spend. What matters is political power - not just whether we have bridges or broadband, but who gets to set pricing and access to them. Much of the infrastructure in the United States is private, and controlled by unregulated firms with dominant market power. And the unregulated nature of this private infrastructure means that more money won’t necessarily translate into more capacity.

The story of broadband follows this trajectory. In the late 1990s, the United States led the world in both dial-up and high-speed internet connections, with a competitive industry and dozens of firms who provided internet access. The U.S. had created the broadband industry and much of the technology behind it. Behind this success story was policy; telecom networks had to lease their networks to competitors under a framework known as ‘open access,’ which is what the UK still operates on.

Open access was a common carrier rule, meaning that it was a rule designed to ensure that private citizens controlling public rights of way had to adhere to obligations to the public. Such regulatory policy is part of a tradition that dated back to the National Telegraph Act of 1866, when Congress first applied common carrier rules to private communication networks. Other common carriage obligations on telecom networks included privacy safeguards, network investment rules, price caps, and consumer protection requirements.

As policy, such common carriage rules worked remarkably well. Open access meant allowing firms like AOL and Compuserve to sell directly to consumers, without being blocked by incumbents like AT&T. Then came broadband. At the time, the hot technology was DSL, which piggybacked off of copper wire phone lines. Cable modems were also on the horizon, as were the prospects of fiber to the home and wireless technology.

In the early 2000s, however, the telecom lobby convinced the Bush administration’s Federal Communications Commission to end America’s 200 year successful experiment with common carriage rules. The FCC played a trick, and decreed that broadband was different than traditional telecommunications. In reclassifying broadband’s legal status, the FCC got rid of the common carrier obligations of telecom firms. Then the Supreme Court, in a case known as Brand X authored by Clarence Thomas, upheld this determination (Thomas has since reversed himself on the need for common carriage rules, suggesting they should be applied to firms like Google). Telecom giants cut off access of competitors to the broadband networks they controlled, and the vibrant space of broadband competitors died.

Soon, other countries began overtaking the U.S. in broadband deployment. Today, tens of millions of Americans have access to just one fairly slow network, if that. Prices increased by 19% from 2016-2019, and are higher in terms of average monthly cost when compared with East Asia or Europe, across all technologies. Moreover, the government doesn’t have a good handle on the situation, because incumbents won’t give the FCC very much data. The FCC’s broadband maps are known to be comically inaccurate.

Expensive crappy broadband is a story of unregulated monopoly undermining the public interest. There are, however, some places in the country that avoided this fate. Chattanooga, Tennessee built its own public fiber network, and has some of the best internet access in the United States. There are dozens of towns and cities who have followed Chattanooga’s example, building their own muni networks, often through a public electric utility. This movement is growing despite an increasing number of telecom-backed state laws prohibiting such public networks.

But the exceptions like Chattanooga, with observers agog at cheap high speed service that should be the norm, reveal our sad state of affairs. The situation in the U.S. is so bad that when Google announced in 2010 that it would begin building out high-speed fiber-optic broadband of more than one gigabit to the home, over a thousand cities applied to the search giant to ask the company to install in their communities. Hundreds of thousands of people submitted comments to the firm as well. Americans were reduced to begging a private monopoly to save them from other private monopolies on which they depended. (Google mostly didn’t follow through.)

Does the legislative text being debated by Congress alter this dynamic at all? In a word, no. It does little to challenge the the dominant incumbents. Originally, Treasury recommended granting a big pot of money to cities who wanted to build fiber networks that would compete with existing incumbents, which would have spurred lower prices and higher speeds for everyone. But telecom interests balked, and in the Senate these firms have substantial influence (especially but not entirely within the Republican caucus). So the bill mostly shifted to subsidizing those same firms, or at least, not challenging them. The Bloomberg headline says it all:

The New Railroad Barons

It’s not just broadband. The other reason the infrastructure debate is so demoralizing is because it is so divorced from what we are experiencing as citizens and economic actors. The political debate always seems to revolve around how much money Congress wants to spend and ancillary taxes to pay for it, along with buzzwords like whether to do ‘public-private partnerships,’ various green initiatives, and different financing mechanisms. Sometimes people talk about the need for high-speed rail, which would be nice. The legislation does have a bunch of money for our public passenger rail system, which is Amtrak.

But the inability to ride trains, while important, is a legacy problem that policymakers want to solve because they understand it, because interest groups have rallied around it for decades, and because it doesn’t require taking on power. The harder problem that is far more immediate and important is the breakdown of our supply chains and the resulting shortages. Why is this happening? There are many reasons, but a key one is that our major freight railroads, all of which are Wall Street-owned, are actively disinvesting in rail yards, rolling stock, and distribution centers, cutting service on routes that are profitable, but not profitable enough.

David Lynch in the Washington Post just noted, for instance, that the refusal to build more freight lines is causing delays and shortages from the giant overloaded port of Los Angeles, because there is no direct rail connection between the port and distribution centers in the Inland Empire. While advocates are pointing out that such a link would remove thousands of trucks from the road and ease port congestion, the “railroads doubt the financial case.” And this desire to pull out cash and slowly destroy rail capacity is longstanding. Over the last six years, these firms have fired 33% of their employees! So on the one hand, the government seeks to invest more, but on the other, the private actors who control the capital stock seek to disinvest. It’s like two people both grabbing a steering wheel and trying to go in opposite directions.

Addressing this situation requires more than just grants to rail lines and more money for Amtrak, as well as upgrades to ports. More money will help, but the government must also break the power of the railroad barons, or else the cash the taxpayer puts in will eventually be paid out in stock buybacks and dividends. This problem of coordination and investment is well-known in the industry. As one executive put it at an industry conference on the failure of the various transportation industries to take on the supply chain crisis, “Without fear of regulation, I don’t know what will motivate all stakeholders to be at the table.”

The legislation on deck doesn’t do anything on this front. In fact, while the railroads are fighting the Biden executive order on competition, their trade association has heartily endorsed the infrastructure bill. They’ll take the cash, thank you very much.

The Good News

Not all is lost. In fact, what I’m really criticizing is not so much this legislation, but the very idea of discussing ‘infrastructure’ without any reference to the power dynamics involved.

How to expand the physical plant has always been contested. In 1932, as historian Eric Rauchway points out in Winter War, a major point of contention between Herbert Hoover and Franklin Delano Roosevelt was over infrastructure, in particular the massive and public hydro-electric resource at Muscle Shoals, Alabama, and by extension the Tennessee River Valley.

Herbert Hoover wanted to sell off Muscle Shoals, and tried convincing Henry Ford to buy and run it. FDR, spurred by Southern populists, sought to have government publicly develop and own the electric generation, because the private utilities tended to shut out rural region from access to the grid. Roosevelt’s most bitter enemies were the utility magnates, who tried to stop him from winning the Democratic nomination in 1932, and eventually put up one of their own executives, Wendell Wilkie, to run against him.

Roosevelt won his bout with Hoover, and created the Tennessee Valley Authority, which provided cheap electricity, flood control, fertilizer manufacturing, and jobs across seven then-poor Southern states. The TVA facilitated the industrial expansion of the South over the next two decades, equalizing the wealth of the region with the rest of the country for the first time since the Civil War. At the same time, all over the country, the government in the 1930s helped finance the creation of electric cooperatives to serve rural areas where the private and now-regulated utilities wouldn’t. And the government also broke the power of private utilities with the Public Utility Holding Act of 1935, which broke up utility systems that stretched across state lines. This integrated investment, competition, and regulatory approach ended up creating a cheap and universal electrical grid, with a mix of public and private ownership. That battle was about political power, explicitly.

Today, competition and concentrated power are not taking center stage in Congressional deliberations over infrastructure, even though they should be. That said, our politics on competition policy is trending in the right direction. The Trump administration encouraged competition in vaccine production, and it worked spectacularly well. Biden has signed an executive order that could meaningfully attack concentrations of power across the economy. And in some of the related legislation under debate, there is a provision to cap pharmaceutical prices and address some of the anti-competitive rebating practices driving up pharmaceutical costs. The energy of the antitrust movement is impacting broader discourse, and it will only get stronger over time.

Moreover, there’s already a bunch of useful spending going on around broadband, it’s just not in the infrastructure bill. In early 2021, the first major piece of legislation passed in the Biden era was the American Rescue Plan Act of 2021. (That’s the one with the tens of millions of checks for ordinary Americans.) That bill included $10 billion for local governments to carry out critical capital projects; Treasury recently gave guidance making sure that they can actually finance (real) high-speed broadband, and can even compete with the incumbents. Had we been doing this kind of project, the entire country would have gigabit internet service for far less than the money we’ve wasted over the years.

My contact suggested exactly what Treasury did, which is to allow cities to build out capacity to compete with private monopolists. They can even lease it out to anyone who wants to compete (much like the original open access regime that worked so well.) One of the reasons, in fact, that Senators in this new package were so adamant about ensuring that new money couldn’t go for building broadband to compete with slothful incumbents is because the telecom firms got burned in this original aid package. Cities all over the country are beginning to use this money to plan broadband projects that are somewhat similar to what Chattanooga did. So that’s good.

The question today, as it was with railroads and the TVA, is simple. Who governs? Is it we the people, or is it what Franklin Delano Roosevelt once called the ‘informal economic government of the United States,’ or what today he might call Comcast, et al. That has *always* been the question when it comes to infrastructure. That’s why it’s so hard to get this stuff through Congress, and to talk about it coherently. Because that physical stuff, paid for by our money, should belong to all of us. But the technocrats and the oligarchs find such a reasonable arrangement utterly outrageous.


Facebook’s Run of Bad PR Continues: Yesterday, a whistleblower and former Facebook employee named Frances Haugen was interviewed on 60 Minutes. She will testify to the Senate this week. Haugen is responsible for leaked documents published over the past few weeks in the Wall Street Journal on various harms the social network has been knowingly inducing. For instance, Facebook researchers knew that Instagram caused teenage girls to want to kill themselves.

Haugen has shared her documents with state attorneys general and European regulators to facilitate that endpoint. Haugen’s stated goal is to fix the company. “I don’t hate Facebook,” she said. “I love Facebook. I want to save it.” Interestingly, Haugen has not shared documents with the Federal Trade Commission, because she doesn’t believe that antitrust is the right route and doesn’t want the company broken up. She also opposes repealing Section 230 of the Communications Decency Act.

While a lot of the information coming out of these documents is useful, I hope no one takes her policy recommendations seriously. After all, the most obvious way to take on Facebook knowingly causing harm by offering a bad product that makes teenage girls want to kill themselves is a product liability suit. Unfortunately, it’s impossible to bring a product liability suit of this type against Facebook. Why? Because Section 230 likely precludes it.

I was also a bit disappointed with the Senate hearing last week that resulted from these leaks. The net takeaway was a demand by Senators that Mark Zuckerberg not launch Instagram Kids. That’s… not very much. For years we’ve known that Facebook is lawless and destructive, the problem is the libertarian attitude that Zuckerberg just needs to be nicer. Sorry, but no. While it’s bad that bank robbers steal, if they keep doing it over and over in broad daylight, the fault lies with the cops.

A lot of people think that the public relations disaster from these leaked documents is a serious blow to Facebook. I’m hoping it helps shift the policy discourse.

More than Half of Americans Have Experienced a Shortage: As part of my series on shortages, I’m going to start throwing in data on consumer experiences and business expectations as I find it. To that end, here’s some interesting marketing data on the prevalence of shortages and supply shocks.

  • Over half (54%) of Americans have experienced stock/supply/shipping issues related to COVID-19

  • Supply chain issues are persisting: 47% of people have purchased items that were not their first choice, because their desired item was out of stock or unavailable due to the pandemic

Also, from the Daily Shot, here are three interesting charts. First, according to the Federal Reserve Bank of Dallas Texas Retail Outlook, businesses experiencing supply chain delays have increased their estimates on shortages dramatically. In June, two thirds of firms estimated their supply chains would return to normal within six months. This month, 72.3% of firms think it’ll take more than six months, with fully one third of them saying it’ll be more than a year.

The second chart shows that container shipping rates have skyrocketed. For some reason, U.S.-linked shipping rates have gone up far more than non-U.S.-linked routes. It’s probably that our regulators are weaker, and we no longer have much of a domestic shipping industry, so it’s easy to price-gouge.

Finally, though vendor lead time is extreme, it’s starting to come down. There’s a lot of new business investment happening, with 20 semiconductor factories coming online this year alone, and 20 more next year.

Does this mean shortages will eventually ebb? In some sectors, yes, but it will take much longer than it should. And it could get a lot worse.


Thanks for reading. Send me tips on weird monopolies, stories I’ve missed, or comments by clicking on the title of this newsletter. And if you liked this issue of BIG, you can sign up here for more issues of BIG, a newsletter on how to restore fair commerce, innovation and democracy. If you really liked it, read my book, Goliath: The 100-Year War Between Monopoly Power and Democracy.

cheers,

Matt Stoller