Claims of Special Access Savings from Regulation Are Inaccurate

Wednesday, April 20th, 2016

Claims by the Consumer Federation of America (CFA) that expanded special access regulation will somehow boost the U.S. economy by $150 billion over five years are exaggerated and are based on faulty analysis, according to an economic critique by Phoenix Center Chief Economist George Ford.  Ford highlights several flaws in the CFA analysis.

First, CFA overstates the increase in special access likely to be purchased if regulators cut prices in half.  Based on what Ford calls “a flimsy estimation technique,” CFA’s model implies that if regulators cut prices of special access by 50 percent,  businesses would consume three times as much special access, which he finds to be a “silly prediction.” But this prediction is just a starting point in the CFA analysis: it gets magnified throughout the course of the analysis by factors that account for growth and follow-on economic activity – i.e., indirect effects as the new-found money circulates through the economy – to produce the final result of $150 billion over five years.

Ford concludes the CFA study makes assumptions that are empirically unsupported and theoretically implausible. In fact, Ford shows that equally valid economic assumptions yield a range of contradictory results, sometimes harms and sometimes benefits, and typically of a much smaller magnitude than CFA suggests. Therefore, he argues, the CFA framework can provide no special insights into the impact of regulated special access price cuts.

The Ford critique of CFA focuses on static price effects of special access regulation. However, it is also important to look at the dynamic impact on innovation, including the transition to fiber-based services for business broadband. A paper by Hal Singer of Economists Incorporated addressed this very question.  Singer estimated that expanding special access regulation to fiber-based business data services could reduce fiber building penetration, reducing jobs by more than 40,000 per year over five years and reducing economic output by $3.4 billion per year over five years. Singer discussed his paper in more detail on a recent podcast.