The Economic Sniff Test and Telecom Investment

Whenever coming across a new economic study offering surprising findings, I initially give it the quick economic sniff test.

After all, depending on the assumptions and interpretations made, economic models can spit all kinds of findings, with some disconnected from the real-world economy.

What’s the economic sniff test? Quite simply, do the findings line up with how the economy actually works, including incentives and costs?

A study released on February 11 by Cbeyond, Inc. about broadband investment clearly fails the economic sniff test. The company’s release asserts that broadband investment has faltered in the U.S. in recent times. In reality, however, a wide array of data and analysis show that broadband investment – including wireless – has grown substantially. As a result, broadband access and choices have expanded for both residential and business consumers.

And contrary to the assertions made in the Cbeyond release, this investment has been and continues to be made because government has not stepped in with unwarranted mandates, regulations and interference – or has rolled back such regulations.

Nonetheless, Cbeyond claims that having the FCC mandate resale of bandwidth to other businesses will spur broadband investment. In reality, though, we have learned from history and economics that such mandates will actually decrease investments in broadband infrastructure. After all, why invest in an alternative when you can tap into the investments made by others?

Broadband investment is important for business and employment growth. For example, a January 2010 study from the Public Policy Institute of California found the following: “Our analysis indicates a positive relationship between broadband expansion and economic growth. This relationship is stronger in industries that rely more on information technology and in areas with lower population densities.”

Given the importance of broadband investment to consumers, small businesses and the economy in general, government intervention and interference – with the increased costs and skewing of incentives that come with such actions – can only create uncertainty and problems that wind up restraining and/or distorting such investment.

Raymond J. Keating

Chief Economist

Small Business & Entrepreneurship Council