March 28, 2012
by Harold Furchtgott-Roth
Is there a "spectrum shortage?" Those two words send shivers down the spines wireless industry executives. New services demand ever more spectrum, and, the story goes, there simply isn't enough spectrum available. An Internet search engine will easily find hundreds of thousands of links to the term "spectrum shortage." Many claim to have coined the term "spectrum shortage;" many more claim that it will be the downfall of America.
As the National Broadband Plan intoned two years ago: "The growth of wireless broadband will be constrained if government does not make spectrum available to enable network expansion and technology upgrades."
The National Telecommunications and Information Administration announced on March 27 that is taking steps to clear the 1755-1850 Mhz band for commercial purposes. It is an enormous undertaking and will take years to complete. In the meantime, and afterwards, the fear of spectrum "shortages" persists.
Few in Washington are willing to ask the tough question: Why is there a "shortage" of spectrum? The answer is not the finiteness of spectrum as no one focuses on a "land shortage" or a "copper shortage."
Ask any student of introductory economics--at least those who stayed awake through part of the classes--about shortages, and they will know the answer. In a well-functioning market, shortages simply do not exist. At a market-clearing price, demand just equals supply. If there were a "shortage," i.e. less supply than demand, prices would be bid up to the point where the market would clear.
Prices of spectrum are highly volatile, moving in dramatic short cycles, but on an upward trend. Prices are up, yet spectrum is still widely described as having a "shortage." Why? Should prices increase further?
The only reason we can have "shortages" in a market is because the market is not functioning well. Perhaps the most common reason for "shortages" is the government prevents markets from responding to price signals. Sadly, that is precisely the situation with spectrum: the government is standing in the way of the market.
Government-created shortages are not new. During World War II, the federal government controlled the distribution of a wide range of goods from food to cars and the result was "shortages." In the 1970s, the federal government limited the price of petroleum, and the result was "shortages" of gasoline and home heating oil. Today, the federal government has shuttered coal-fired power plants in several states, and brownouts result during periods of peak electricity demand.
But those and many other examples of government-induced shortages at least had a plausible explanation. With spectrum, there is no such explanation. Spectrum shortages are not the result of war, an international crisis, or even love of the environment. We have spectrum shortages simply because we have bad policies.
Two examples illustrate what is wrong with our spectrum policy: over-regulation and lack of clear property rights.
First, we have too much regulation of spectrum. To buy or sell a spectrum license can take months or years and substantial legal transactional fees. Practically all Americans would starve if they had to buy food in the same manner that businesses buy and sell spectrum licenses. The American economy would come to a halt if all assets had to pass through FCC review. The FCC license transfer application is all too often a game of "Mother, May I," in which the FCC always plays Mother. The FCC often trumpets the success of secondary markets, but the successes of secondary market transactions are overwhelmed by the failures.
Congress is not helping matters either. The new law for broadcast spectrum is a prime example of how to ensure that spectrum shortages persist for many years to come. The FCC or Congress could have dezoned spectrum and let the highest bidders buy licenses immediately from current owners. Instead, zoning persists, and the FCC is established as the monopoly broker to buy and sell broadcast licenses with an enormous commission going to the Treasury. The incentive auction must be completed by 2021. There is no timeline on transferring licenses.
If real estate were bought and sold this way, America would come to a grinding halt. The real estate industry and the American public would never put up with it. But the wireless industry and spectrum markets have never known true deregulation. Having always been limited by regulation, no one complains vigorously about yet more regulation to the wireless industry. If America's wireless industry were even slightly deregulated, we would have an upheaval of economic growth and innovation.
The second reason for "shortages" is the failure of Washington to recognize fully the property rights inherent in spectrum licenses. Real estate has property rights. Intellectual property has property rights. The vast majority if not every valuable spectrum license in America has been bought and sold at least once as if it were property. But FCC rules strike at the core of property rights. While intended to lessen shortages, build-out requirements, anti-hoarding mandates, technology mandates, increased use of spectrum sharing and unlicensed spectrum, and a focus on "usage" all paradoxically worsen "shortages."
If local governments could force homeowners to "share" their temporarily unused spare bedroom, there would be a predictable shortage of homes. Socialism and property rights do not coexist well.
Rather than embrace property rights as the route to economic growth, the FCC goes to lengths to deny the existence of property rights in spectrum licenses. This anti-property-right perspective leads to the all too predictable result of greater rights for those without licenses.
By a form of squatters' rights of anarchy, unlicensed users kicked licensees out of part of the 900 MHz band. Recently in a mobile satellite services band, we have seen that a license can be encumbered by users in an adjacent band with indiscriminate receivers. When the property rights of licenses are encumbered or entirely absent, spectrum with true property rights comes in short supply.
Ultimately, why there is a spectrum shortage in America depends on whether one is an economist or a politician. To an economist, there is absolutely no reason for a shortage and every reason to deregulate spectrum and unleash the full potential of America. To a politician, spectrum scarcity is part of the game of regulation. Sadly, spectrum is governed more by politics than economics, and shortages are the result.
Harold Furchtgott-Roth is a Senior Fellow and Director of Hudson Institute's Center for Economics of the Internet.
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