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July 24 1998 3:30 AM

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The biggest thing standing between rural communities and Internet service is a new federal subsidy.

Last month, the Federal Communications Commission dialed in a $1.275 billion subsidy to help schools, libraries, and rural health care providers purchase Internet service. The program, which will help pay for Internet access and internal data wiring at the educational and health facilities, resurrects a two century old debate in the political economy: What services should the federal government subsidize?

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Under the rubric of "universal service," the feds already require business and urban phone customers to subsidize rural customers to the tune of $1.7 billion. Some states mandate phone discounts for the poor and make up the difference by boosting other users' bills. In the name of universal service, the federal Rural Electrification Administration spends $33 million subsidizing electric power for upcountry customers. And since its inception, the government has subsidized postal service to rural addresses at the expense of urban customers.

Universal service's original proponents maintain these services are so essential to modern civilization that it would be unconscionable to allow the market to price them beyond the reach of the less affluent. In that spirit, the government currently believes the Internet--which just a few years ago was considered a luxury--is now a necessity.

The merits of universal telephone and postal service aside, there are several strong arguments against an Internet subsidy:

1) You can live and learn quite handsomely without access to the Internet.

2) Many of the poorer rural communities that have applied for the subsidy lack the high speed phone lines that make the Internet worthwhile, keeping them Internet have-nots.

3) Where fast rural lines are available, schools and libraries can scarcely afford textbooks and periodicals, let alone new computers and training for Web surfing.

4) However well-meaning the new subsidy, technology is moving so fast that the old regulatory apparatus--based on permanent scarcity and obstacles of distance--don't apply to the Internet.

If the federal government is serious about making Internet access affordable to schools and libraries, it should disconnect this program.

The Internet "e-rate" subsidies, as they're known, were authorized under the 1996 Telecommunications Act and are funded with new taxes on long-distance telephone companies, the size of each company's contribution depending on its market share. AT&T and MCI have protested the tax and pledged to pass the cost on to consumers: MCI charges 5 percent on all out of state long-distance calls, and AT&T charges a flat rate. The FCC has received 30,000 e-rate applications and expects to start handing out funds this summer.

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