Obama Phones & Government Inefficiency

The federal government spent over $2 billion last year as part of its Lifeline (AKA, Obamaphone) program, which is designed to provide cell phones for low income Americans so they can “connect to jobs, family, and 911 services.” The Lifeline program is funded by the Universal Service Fund (USF), which fills its coffers through a tax on your phone bill. The fund supports several other government programs of questionable merit as well, but Lifeline is getting the most press at the moment.

Recent reports are suggesting widespread waste and fraud. Some companies have signed up clients in hospital rooms or by mailing them unsolicited phones. Others have simply signed up ineligible customers for the program. The companies are being blamed for their wrongdoing—and rightfully so—but attention should be placed on the program itself.

There are two obvious lesions here. First, government programs based on “good ideas” are rarely abolished when they are no longer needed. The USF has been in existence since 1997. Today, over 96% of the U.S. population has access to a phone, but the USF tax rate has increased to 3.32% of your telecommunications bill. This explanation for failed government programs is all about bureaucracy.

Second, when Washington hands out money to help those in need, some individuals and organizations will inevitably collude to game the system. When this occurs, the nefarious companies are tagged as greedy capitalists and criminals, while the consumers involved are labeled as an “exception to the rule” and the government is simply treated as an innocent bystander seeking to improve lives. This explanation for failed government programs is all about human nature.

Both explanations are entirely predictable. Consider the mortgage crisis. In short, Congress, the Fed, and Freddie/Fannie devised a system that effectively subsidizes housing, particularly for consumers who really can’t afford a home. Slack lenders that passed off the paperwork for marginal loans to Fannie and Freddie were vilified. Consumers who signed up for negative amortization loans and overextended themselves were treated as victims. The government is now suing S&P, the Fed is keeping rates as close to zero as possible, and the Democrats are talking about expanding government’s role in providing low-income housing.

The point here is that government programs—by definition—are inefficient and invite fraud. Whether it’s an $800 government hammer, an overpriced medical procedure, a subsidized cell phone, or section 8 housing, the lack of market discipline guarantees problems. Consumers tend to seek the most “bang for the buck” when they spend their own bucks. Likewise, sellers design their offerings to accommodate those who pay for the product. If government is paying, then the consumer loses both power and interest in the transaction.

In the case of the Lifeline program, many consumers get phones or phone plans they either don’t need or could have afforded on their own, aided and abetted by everyone else who pays the tax. If the $8+ billion USF tax were the only example of inefficient and ill-fated government intrusion, our economy would be in much better shape. Unfortunately it’s just the tip of the iceberg.