Kevin Hassett Got it Wrong about “Title II” & Net Neutrality: The Proposed Tax Cuts Must be Worse.

I was just reading/viewing some discussions about the new proposed tax cuts and criticism by Kevin Hassett (Chief of the White House Council of Economic Advisers) of other economists who disagree with him. And I started laughing as I remembered Hassett et al. worked on ‘studies’ paid for by AT&T and the various astro-turfy groups for years in an attempt to prove that “Title II” harms investment and the world will come to an end with Net Neutrality.

Only in a Trump universe could this happen where the person in charge of our economy can get the basics about broadband investment and Title II wrong, (which I’ll explain in a moment) – and manipulate the facts, though everything has to sound plausible.

I won’t address the tax plan but if it resembles the blatant badness of his broadband analysis – and mimics attempts to help the corporate friends, AT&T et al., then it probably is “some combination of dishonest, incompetent and absurd”, as Larry Summers, economist, observed.

Brought to You by Your Favorite Telephone Company and Lobbying Group

Here’s one of my personal, favorite, really, really important economic analyses:

“The Impact of Title II Regulation of Internet Providers on Their Capital Investments”, Kevin A. Hassett and Robert J. Shapiro, November 2014

This is the footnote:

“The authors gratefully acknowledge support provided by AT&T, Inc., for the research for this study. The views and analysis are solely those of the authors.”

And the team of Hassett and Shapiro also worked on other reports, including this gem:

The Impact of Broadband and Related Information and Communications Technologies on the American Economy”, Kevin A. Hassett and Robert J. Shapiro, May 3, 2016
“Throughout most of human history, advances in knowledge have helped drive economic development and growth. In our own time, the new ideas driving much of recent growth and development have involved the Internet and the information and communications technologies (ICT) that comprise and support it. As a result, this “broadband/ICT sector” plays a major role in the American economy. This study will assess the basic dimensions of that role.”

Don’t you just love this opening? It reminded me of the opening of the movie “2001: A Space Odyssey” where our distant ape relatives throw bones into the sky and they turn into a spaceship on its way to the moon. The movie was more convincing than this string of clichés.

However, this report, too, is sponsored. IIA is a front group for the telephone and cable companies to lobby about the Internet.

“We gratefully acknowledge the research and analytic assistance of Dr. Aparna Mathur and the support provided by the Internet Innovation Alliance. The views and analyses expressed here are solely those of the authors.”

Note: These acknowledgements about financial backers aren’t on the front page of the documents.

The Embarrassment that is the Hassett “Title II” Analysis.

The conclusion in these and other reports, etc., about Title II is what their clients wanted – hide the truth and make up numbers that look like you know what you’re talking about.

“The final section provided an empirical example of our approach to analyzing the impact of Title II regulation on Internet investment. First, we showed that Title II regulation should be expected to increase costs, and therefore is the type of policy that should be expected to reduce investment. Second, we reviewed field-specific evidence that suggested that the scale of the negative effect could be quite large, from about 5.5 percent to as much as 20.8 percent.”

I note the phrases: “Field-specific evidence”… “increase costs”, “reduce investment”?

We’ll use actual evidence.

The Fiber Optic, FTTP Networks of Verizon Are All “Title II” as of 2005—Right When Net Neutrality Started being an Issue.

This excerpt documents that Verizon New York, the state utility, was granted the right, in 2005, to have the broadband, fiber optic, FTTP, fiber to the premises wires be part of the Verizon NY state utility. And these are and have been Title II, common carrier, and under the Communications Act of 1934.

And this is almost the exact same language and treatment of the fiber networks that happened in every Verizon state utility. Title II didn’t harm investment in broadband. Period. However, economists hate actual data from real live actual state orders.

Hassett: Title II Will Harm Investment Based on a “Novel Approach”.

“The results are not surprising. The study finds that under Title II regulation, ISPs are likely to invest significantly less than they would absent Title II regulation, putting at risk much of the very large capital investments that will be needed to meet the expected increases in demand for data services.
“The study employs a novel approach to project a baseline of capital investment growth assuming that the FCC maintains the current “light touch” regulation of data services. In particular, it utilizes a quantitative model to estimate the portion of capital investment from 2009 to 2014 subject to Title II regulation and the portion unencumbered by Title II. The study is based on data from a subset of companies with Title II regulated wireline networks as well as lightly regulated wireline and wireless data networks. From these recent historical trends, we develop a baseline of expected investment growth from 2015 to 2019 and compare it to the alternative case in which wireline data services are reclassified under Title II.
“If the status quo continues, with data services unencumbered by Title II regulation, the several ISPs in our sample are expected to spend approximately $218.8 billion in new capital investments over the next five years in their wireline and wireless networks. In contrast, under Title II regulation of all wireline data services, these ISPs’ wireline and wireless capital investments over the next five years would drop to an estimated range of $173.4 billion to $190.7 billion. Title II regulation of ISPs thus reduces these companies’ total investments by $28.1 billion to $45.4 billion (between 12.8 percent and 20.8 percent) over the next five years. Wireline investments by these firms would be 17.8 percent to 31.7 percent lower than expected.”

The conclusion of all of these made up numbers is that they want the reader to believe that Title II harms investment. And it sounds plausible until you actually examine real data. (I guess the ‘novel approach’ meant fictional.)

And there are other ‘experts’ making similar claims. Hal Singer, another analyst that works for the telcos, quotes the USTA about how ‘Title II’ has harmed broadband investment in his Forbes column, May 17, 2017.

“So what happened to broadband investment under Title II? According to the latest data from USTelecom, the broadband industry trade association, broadband investment declined for the first time in 2015 since the economy emerged from the Great Recession. Even though the FCC’s reclassification order was not adopted until late February 2015, the industry understood that Title II would be the law as early as November 2014. Not only was investment less in 2015 than in the prior year (a useful benchmark for a world absent Title II), but aggregate investment took another drop in 2016 (a decline of roughly $3 billion or four percent compared to 2014 levels).”

Let’s see:

Verizon announced years ago that it was no longer rolling out FiOS, its FTTP service, except in Boston; AT&T stopped upgrading its entire network after they bought DirecTV, and even canceled the U-Verse brand. So, except for a few million lines of fiber AT&T committed to deploy under the AT&T-DirecTV merger, there is no wireline investing. So all of these analyses are just made up because the companies stopped building, not because of Title II.

There is also a major cover up, I mean pause in investment because while every company is going wireless and 5G, the stuff doesn’t work as advertised yet… thus a ‘pause’. Maybe Mr. Singer forgot - “Verizon to Commercially Deploy 5G Wireless Networks in 2017” as told by Zacks Equity Research, April 22, 2016, headline. 5G requires a fiber optic wire installed every few blocks to handle the wireless traffic.

But blaming it all on Title II is a great cover for the business failure of not upgrading the state utilities or stalling because the promised tech is still vaporware.

And just to be clear, Boston, too, is being done as Title II. In fact, Verizon claimed it didn’t even have to supply maps of the deployment to the city because it was part of the existing state utility and under the Communications Act of 1934.

None of these Analyses Used ‘Actual’ Available Financial Data, Just ‘Gross’ Numbers that are Essentially Meaningless—and Grotesque.

  • Using actual facts: Case in point—Local phone customers and the state utilities are the investors, not the companies’ investors.

Just to demonstrate how disingenuous these analyses are, because the fiber optic wires were included as part of the state utility (and because of major manipulation of the accounting based on the FCC’s failure to fix its own accounting rules), here is an excerpt of the Verizon NY state-based utility financial reports for 2015, filed with the NY Public Service Commission.

Verizon New York’s “Local Service” revenues, which are the basic copper-based phone lines, were $1.3 billion but it paid over $1 billion in construction/network upgrades. There is no construction of the copper networks and virtually no serious maintenance. This should be $150-$250 million at best, not $1 billion. Instead, the expenses for construction cross-subsidize most of the fiber optic networks, including the wires to the cell sites, and because they are Title II, they somehow are dumped into the ‘local service’ expense accounting.

Conversely, the ‘Access’ revenues, which include the “Business Data Services”, brought in $2.5 billion in revenues but paid $484 million, even though the fiber optic wires to the cell sites are part of this category.

Not a big deal? Customers of the wired networks were overcharged over $1,500.00 per line because of rate increases since 2005 and the cities were never properly upgraded or maintained.

And all of these machinations are exasperated by the total failure of the FCC to investigate their own accounting rules and complicated by these ‘experts’, pundits, and economists who are not objective or even ethical but create a financial fiction to help their clients, the phone and cable companies.

Where’s any calls for investigations of customers as defacto investors or areas that were never properly upgraded, or the cross-subsidies or…?

Title II, then, has been the investment mechanism by which the companies can divert billions of expenses into the local networks, a fact based on the actual financial reports of Verizon New York and other states. (I note that the FCC stopped requiring the telcos to supply basic financial data and most states stopped any requirements to supply annual reports.)

And the tax cuts?

Larry Summers, an economist with a long bio, including former treasury secretary and president of Harvard, criticized Kevin Hassett:

Kevin Hassett accuses me of an ad-hominem attack against his economic analysis of the Trump Administration’s tax plan. I am proudly guilty of asserting that it is some combination of dishonest, incompetent and absurd. TV does not provide space to spell out the reasons why, so I am happy to provide them here.”

My Latin is rusty but I can say that the Hassett Title II analyses matches the description of “some combination of dishonest, incompetent and absurd”—and I’ll be happy debate the facts.

See the IRREGULATORS and New Networks Institute reports, filings, etc. for something called ‘facts’.

This tax plan must truly be… I’ll let the economists fight over that.

Finally, who wants to place bets that the Hassett analyses become the centerpiece of the FCC’s upcoming decision to get rid of Net Neutrality and Title II? Chairman Pai is a former Verizon attorney, after all.

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