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Jock Gill
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3
EXECUTIVE OFFICE OF THE PRESIDENT
COUNCIL OF ECONOMIC ADVISERS
WASHINGTON, D.C. 20500
Economic Benefits of the
Administration's Legislative Proposals
for Telecommunications
June 14, 1994
NII
Economic Benefits of the Administration's
Legislative Proposals for Telecommunications
June 14, 1994
Summary
The Administration's legislative proposals have the
potential to add in cumulative value more than $100 billion
(in 1994 dollars) to Gross Domestic Product (GDP) over the
next decade.
New legislation can add to GDP by creating a regulatory
environment in which the following trends will accelerate:
Productivity will increase throughout the economy as
new ways of working, new ways of doing business, and
valuable new services are developed.
Jobs and other resources will shift into the
telecommunications and information sector as regulatory
barriers are removed. The productivity of a new job in
this sector exceeds the economy-wide average.
Increased private sector investment in an advanced
telecommunications infrastructure will create a short-
term increase in aggregate demand, accelerating the
rate at which the economy approaches full employment.
The new regulatory environment will accomplish this by:
reducing uncertainty about the course of regulation
promoting competition throughout the telecommunications
and information industries, and
providing a mechanism for removing existing regulatory
restrictions as the development of competition makes
them unnecessary.
With the Administration's legislative proposals, the
telecommunications and information sector of the economy
could nearly double its share of GDP by 2003.
If this occurs, employment in the sector could rise
from 3.6 million workers today to more than 5 million
workers in 2003. Most of these jobs would be shifted
from other economic sectors in a full-employment
economy.
To the extent enactment of the Administration's legislative
proposals stimulates an acceleration of private investment,
and if the economy remains below full employment through
1996, the economy as a whole could add a total of 500,000
new employment opportunities during the years 1994 to 1996.
To improve the nation's emerging National Information
Infrastructure (NII) with technologies that enhance existing
telephone and cable television services, the private sector
may make capital investments over the next decade valued
substantially in excess of $75 billion (in 1994 dollars).
These investments will occur earlier with the
Administration's legislative proposals than without.
2
Economic Benefits of the Administration's
Legislative Proposals for Telecommunications
June 14, 1994
In September 1993, the Administration announced a National
Information Infrastructure Initiative (NII) to "help unleash an
information revolution that will change forever the way people
live, work, and interact with each other." To accomplish this
end, Vice President Al Gore has proposed legislative and
administrative reform of telecommunications policy. The
Administration's proposals are based on the following five
principles:
encouraging private investment in the NII,
promoting and protecting competition,
providing open access to the NII for consumers and
service providers,
preserving and advancing universal service to avoid
creating a society of information "haves" and "have
nots," and
ensuring flexibility so that the newly-adopted
regulatory framework can keep pace with the rapid
technological and market changes that pervade the
telecommunications and information industries.
This document illustrates the great economic benefits to the
nation that could be achieved through new legislation to
accomplish these ends.
I. The Potential for Economic Growth
The telecommunications industry plays a crucial role in our
economy. Like the railroad and highway infrastructures built in
earlier generations, our telecommunications infrastructure brings
people together and helps firms reach their customers and
suppliers quickly and cheaply. As a result, our lives are
enriched and our firms and workers are more productive.
Even without new legislation, the vast opportunities created
by advances in communications and information technology will
likely transform the economy and the way we live and work.'
¹The analogy to the railroad and highway networks may not be
helpful in understanding the effect of the NII on industrial
structure. The transportation network encouraged the development
of large industrial firms by making it easier to obtain scale
economies. In contrast, an advanced communications network may
particularly favor small firms serving narrow market niches.
Innovation in the telecommunications and information sector is
already occurring at a rapid rate. In the past decade, the
facsimile machine has shifted from a curiosity to a commonplace,
and the cellular telephone does not lag far behind. Television
news is now transmitted instantaneously from the field to the
studio by satellite. Internet use is moving beyond government
and academic researchers to involve other government functions,
private individuals and private sector firms as well. The number
and variety of cable television channels has been growing. More
and more, people work from home or the road by computer and
modem, away from their physical office. The power and
sophistication of personal computers in homes and offices, and
what can be accomplished using them, has grown by leaps and
bounds.
It is widely recognized that equally important advances in
technology are on the horizon. Technical change will permit
private industry to make new products and services available and
affordable. We can be confident that a telecommunications and
information revolution is upon us, even though we do not yet know
the details. Two way, interactive, broadband service will
someday be the norm, although we cannot now know whether the
emerging broadband network will be formed from wires, fiber optic
lines, wireless technologies, or hybrids of these alternatives.
And we can be confident that the computing power available to
consumers of the multimedia services provided by the emerging
information infrastructure will rise, even though we cannot
predict whether that power will be lodged in a server outside the
house or office, or in the home and office through a personal
computer or a set top box connected to a television.
The Administration's legislative proposals will accelerate
the rate at which the telecommunications and information
revolution arrives in three ways: by reducing uncertainty about
the course of regulation, by promoting competition throughout the
telecommunications and information industries, and by providing a
mechanism for removing existing regulatory restrictions as the
development of competition makes them unnecessary. Private
industry will be encouraged to invest more rapidly in the
nation's emerging information infrastructure, and to develop new
services more rapidly. The legislative proposals also reduce the
likelihood that regulation will distort the choice of technology
or other investment decisions. These effects on private
investment, combined with the price reductions that will flow
from new entry and greater competition, will accelerate the
²Separately from its legislative proposals for regulatory
reform, the Administration is funding a wide range of research
and development projects, many in collaboration with industry, to
improve the information infrastructure and develop improved
applications.
2
development of new services, the creation of new jobs, and the
growth of productivity for the rest of the economy.
The precise contours of the new telecommunications and
information marketplace cannot be predicted because they depend
on innovations not yet developed and the details of legislation
not yet enacted. Because of these uncertainties, it is
qualitatively more difficult to forecast the development of this
sector, and the consequences of regulatory reform legislation for
economic growth, than to predict, for example, the consequences
for GDP of changes in the tax code or the monetary base.
Accordingly, the estimates provided in this document are not
comparable to the economic forecasts routinely published by the
Administration. The estimates depict one plausible scenario for
the development of the telecommunications and information sector,
and the effects of new legislation on that development. They
should be interpreted as illustrative of the character of the
likely economic consequences of the new legislation rather than
as a forecast of those consequences.
II. Methodology and Results
A. Baseline Scenario
The CEA estimates were made against a baseline description
of the likely growth of revenues in the telecommunications and
information sector in the absence of the Administration's
legislative proposals. The baseline scenario was developed from
recent trends, and private sector and government estimates.³
In making these estimates, the telecommunications sector was
divided into three major components: (1) "conduit" (local and
long distance telephone; cable television; wireless services;
emerging services that combine data, voice and image
transmissions; multimedia services such as pay per view and video
on demand; and communications equipment), (2) "content"
(broadcast television and radio, newspapers and magazines, motion
pictures and home video, books and prerecorded music), and (3)
"computers" (computer hardware and software, and computing and
³If sector prices fall more rapidly than expected as a
result of competition and innovation, and if the lower prices do
not immediately lead to a substantial increase in demand, sector
revenues could be significantly less than described in the
scenario in the near term. Yet if sector prices are lower than
expected because of cost-saving innovations, GDP growth would
likely be greater in the long run.
3
data processing services) 4 In the baseline scenario, these
sectors will experience significant growth in the next decade
(Figure 1).
A similar baseline was created for investment in the
telecommunications services component (the "conduit" category)
(Figure 2) Some of this investment is needed to maintain the
existing level of service when equipment breaks or becomes
obsolete, or when population grows. The rest will make available
the enhanced telecommunications services (e.g. switched broadband
services, tele-medicine, and expanded electronic commerce) and
the new information services (e.g. real-time multimedia services,
electronic dissemination of government information, and "virtual"
field trips for school children) that will be available on the
information superhighway of the future. The bulk of the
investments needed to do so will be put into place by 2003, in
the baseline scenario.⁵
Only a portion of the investment depicted in Figure 2 will
be dedicated to the development of enhanced services. This
portion can be estimated by subtracting the current level of
accounting depreciation recorded by the providers of
telecommunications services--a measure of the real investment
level required to maintain existing services--from the projected
gross investment levels. Applying this methodology, the present
value of these incremental capital investments over the next
decade is approximately $75 billion in 1994 dollars. 6 This is
4These definitions exclude some activities that other
definitions of the telecommunications and information sector have
included. For example, the "content" component excludes
commercial printing and greeting cards, and the "computers"
component excludes consumer electronics other than communications
equipment.
⁵The estimates illustrated in Figure 2 do not account for
investments made by firms in the "content" or "computers" segment
of the telecommunications and information sector, nor investments
by firms elsewhere in the economy that will obtain access to new
markets and new ways of providing their services from the
creation of the NII. These figures also do not account for human
capital investments in education and training, as workers learn
to use the NII to become more productive.
⁶This figure assumes that the transmission infrastructure
will be built as a hybrid combination of fiber optic lines,
coaxial cable, copper telephone wire, and wireless transmission.
If this portion of the new infrastructure were instead to be
built entirely of fiber optics, replacing rather than upgrading
the existing telecommunications network, the total cost could
easily exceed $100 billion, according to private sector
4
Figure 1
Baseline and Legislative Scenario Revenues
Revenues (billions of dollars)
2,000
legislative
1,500
basline
1,000
basline
legislative
500
O
1993
1998
2003
conduit
content
computer
CEA Estimates
Figure 2
Telecommunications Services Sector Investment
Baseline Scenario
billions of dollars
60
55
50
45
40
35
30
1993
1998
2003
CEA Estimates
likely an underestimate of the total cost of providing advanced
services because it ignores investments firms have already made
and it ignores those investments that the baseline scenario
contemplates would not be made until after 2003.⁷
B. Legislative Scenario
The effect of the legislative package can be understood as
allowing the telecommunications and information sector to achieve
certain revenue levels years earlier than under the baseline
scenario, and this is how it is modeled here. The legislative
projections, illustrated in Figure 1, assume that the "conduit"
and "content" industries in the telecommunications and
information sector will achieve by 2003 revenue levels that they
would not reach until 2008 in the baseline, and that the
"computer" industries will achieve by 2006 revenue levels they
would not otherwise reach until 2008.⁸ Moreover, the projections
assume that revenues do not begin to respond to new legislation
until 1998. This assumption, which may be conservative, reflects
the time that may be needed for firms to adjust capital spending
to the new regulatory framework and for regulators to develop the
rules necessary to implement the new legislation.
Similarly, the legislative package is assumed to accelerate
estimates.
This figure is an overestimate, however, to the extent some
investments will turn out to have been spent on technological
dead ends or otherwise wasted.
⁸The assumption that new legislation to remove regulatory
barriers and encourage competition will accelerate revenue growth
in this manner is broadly consistent with the predictions of a
recently-conducted "Delphi survey.' The respondents agreed, for
example, that by 1998-2000 interactive multimedia services and
products will have widespread consumer acceptance in the home.
The survey found that this transformation will occur five to
twenty years sooner than most other projections for the growth of
the information superhighway. The respondents also agreed that
business and regulatory barriers, not technology, are the most
critical problems for the deployment of the necessary
technologies. These results appear consistent with the modeling
strategy adopted here: they suggest that new legislation to
remove regulatory barriers and encourage competition will
accelerate sectoral growth and investment, relative to forecasts
based on current trends. Dwight L. Allen, Jr., H. William
Ebeling, Jr., and Lawrence W. Scott, "Perspectives on the
Convergence of Communications, Information, and Entertainment:
Speeding Toward the Interactive Multimedia Age," Deloitte &
Touche, 1994, pp. 13-14.
5
the rate of private sector investment in the narrowly-defined
telecommunications industry. The estimates assume that 40
percent of the infrastructure investment made between 2001 and
2003 in the baseline case will instead be put into place between
1994 and 2000 with new legislation. The 40 percent figure
recognizes the difficulty of accelerating investment that
replaces depreciated capital stock and investment that cannot be
put into place until other investments have been made. Under
these assumptions, private investment will become $9 billion
greater each year than the baseline projects (except half that
amount in 1994) 9
C.
Consequences for GDP Growth
By accelerating private investment in the information
infrastructure and accelerating the availability and development
of new services, GDP will increase. The three transmission
mechanisms involved are discussed in turn.
1.
Multiplier Effect of Increased Investment
Every dollar of increased domestic investment before the
year the economy is projected to reach full employment is assumed
to increase GDP by $1.60 during the year it occurs. This
multiplier is consistent with the predictions of most large-scale
macroeconomic models for periods in which the economy is below
full employment. In recognition of the leading position of U.S.
manufacturers in producing the sophisticated capital equipment
required to build an advanced telecommunications infrastructure,
the analysis treats all such investment spending as domestic.
2. Shifting Inputs into a High Value-Added Sector
A new job in the telecommunications and information sector
will produce greater output per labor input than the average new
job in the economy. Thus, when the economy shifts inputs,
especially workers, into this high value-added sector, national
wealth increases even at full-employment. This cannot happen
today because regulation restricts entry and otherwise creates
distortions limiting sector output. Much of that regulation was
necessary in the past in order to prevent the even worse
distortions resulting from the exercise of market power by a
natural monopolist. But as developments in technology shrink the
scope of potential monopoly power in telecommunications, and as
⁹The projections assume that new legislation will not begin
to affect private investment decisions before mid-1994. This
assumption is conservative to the extent investment has already
begun to accelerate in anticipation of the legislative enactment.
6
regulatory reforms encourage the development of competition,¹⁰
the economy can shift resources into this more productive sector,
and so increase social wealth.¹¹
The GDP projections assume, based on the results of a recent
academic study, 12 that labor inputs will initially produce
approximately 10 percent more output if shifted from the average
sector into "conduit, ⑉13 approximately 3 percent more output if
shifted into "computers," and no additional output if shifted
into "content. " These estimates are conservative to the extent
workers shifting to the new jobs would come disproportionately
from sectors of the economy with below average value added. The
projections also assume that non-labor inputs would become more
productive if shifted into the telecommunications and information
sector to the same degree as workers.
The benefit derived from the additional shift of economic
activity into the telecommunications and information sector
(relative to the baseline case) that will result from the
Administration's legislation is assumed to begin in 1998. As
regulatory distortions are removed and resources shift into this
sector, however, the sector's productivity advantage will
decline. This decline is assumed to occur at a rate that would
end the productivity advantage of the telecommunications and
information sector by 2008.
¹⁰The Administration's legislative proposals will encourage
the development of competition by, for example, allowing cable
firms to offer telephone service and vice versa, unbundling local
telephone services, creating a level playing field for all
service providers (including wireless providers), guaranteeing
all providers open access to the network on nondiscriminatory
terms, and ending rate regulation of firms lacking market power.
¹¹More technically, the marginal productivity of labor and
other inputs in this sector is higher than the economy-wide
average because regulation intended to protect against monopoly
abuses cannot perfectly substitute for competition. Legislation
that encourages greater competition and the removal of
unnecessary regulation will allow inputs to shift into this
sector, increasing social wealth.
¹²william T. Dickens, "Good Jobs: Increasing Worker
Productivity with Trade and Industrial Policy," working paper,
University of California, March 11, 1992.
¹³This figure is for the conduit component excluding
telecommunications equipment; the initial productivity gain for
shifting resources into telecommunications equipment is taken to
be only 8.4%.
7
3.
Greater Economy-Wide Productivity
The new information infrastructure will boost the economy's
productivity. 14 Productivity gains arise for at least two
reasons: geographically distant firms will be able to behave in
more ways as though they were neighbors, and changes in the
innovation process arising from new ways of working will increase
the likelihood of future innovations. If the investments that
will develop the NII are accelerated, so services come on line
more quickly than in the baseline case, these productivity gains
will commence more quickly than under the baseline scenario.
The GDP estimates below assume that a productivity boost
from the new infrastructure begins in 1998 under the
Administration's legislation. The incremental productivity gain
is assumed to be 0.03 percent per year, commencing in 1998. This
figure is consistent with other estimates of the productivity
gains from infrastructure investments, and excludes productivity
gains already captured by virtue of the shift of workers to high
value-added industries.
The productivity rate is assumed to revert to the baseline
trend between 2000 and 2008. This treatment of the productivity
increase is conservative because it ignores the possibility that
the productivity rate increase will instead persist.
4. GDP Projections
Taking into account all three transmission mechanisms, the
new legislation is projected to create a stream of annual GDP
increases over the next decade with a present value of more than
$100 billion. More than $30 billion of the increases will come
from the multiplier effect of increased investment. Economy-wide
productivity increases account for more than half of the
remainder.
D.
Consequences for Employment
An increase in GDP that takes place when the economy is
operating below full employment will create new jobs. (In
contrast, no new jobs are available at full employment even if
"Productivity gains of this sort are plausible. For
example, one study found a large social gain to computerization
in the finance services industry not captured by the
manufacturers of computers. The downstream benefits of technical
progress in mainframe computers between 1958 and 1972 were
estimated as at least 1.5 to 2 times the level of expenditures in
this sector. Timothy F. Bresnahan, "Measuring the Spillovers
from Technical Advance: Mainframe Computers in Financial
Services, " American Econ. Review, vol. 76, 1986, pp. 742-55.
8
GDP rises.) Based on the predictions of large-scale
macroeconomic models, one billion dollars of new GDP created by
putting unused resources to work is assumed to create 17,000 to
20,000 new jobs. As a result, the economy as a whole could add a
total of 500,000 new employment opportunities during the years
1994 to 1996.
E. Growth and Employment within the Telecommunications and
Information Sector
The rapid growth projected for telecommunications and
information sector revenues will lead the sector to grow as a
fraction of GDP. Figure 3 depicts the growth of inflation-
adjusted revenues for this sector under the baseline and
legislative scenarios.¹⁵ In 1993, telecommunications and
information revenues equaled more than 9 percent of GDP. 16 With
the Administration's legislative proposals, the sector's GDP
share could nearly double between 1993 and 2003.
In 1993, 3.6 million workers were employed in the
telecommunications and information sector. Under the baseline
scenario, assuming that recent trends in the growth of sector
revenues per employee (average labor productivity) continue, the
sector will employ more than 4.5 million workers in 2003.
Acceleration of revenue growth (and acceleration of labor
productivity growth) in the legislative scenario will lead the
sector to employ up to 5.5 million workers in 2003.
F. Foreign Trade in the Telecommunications and Information
Sector
Neither the baseline nor the legislative scenario fully
captures the potential benefits to the telecommunications and
information sector, or the U.S. economy as a whole, from the
¹⁵Although much of the sector's revenue increase comes from
the development and diffusion of new innovations, some is likely
an artifact of the way service functions are classified. For
example, during the 1950s, firm expenditures on preparing
payrolls were probably not classified as part of the
telecommunications and information sector. Yet to the extent the
payroll function requires the use of computer hardware and
software, and data processing services, it is more likely to be
so classified today.
¹⁶Sector revenues as a fraction of GDP overstate the sector's
share of GDP to the extent revenues exceed value added. For much
of the sector, especially the services that are included, the
difference is unlikely to be large. If commercial publishing and
consumer electronics are added, sector revenues in 1993 would be
closer to 10% of GDP than 9%.
9
Figure 3
Telecommunications and Information Sector
Revenues 1950 to 2003
Revenues (billions of 1994 dollars)
1,600
1,400
legislative
scenario
1,200
1,000
800
600
baseline
400
scenario
200
O
1950
1960
1970
1980
1990
2000
CEA Estimates
development of a Global Information Infrastructure (GII). That
development will promote U.S. export growth, leading to increases
in telecommunications and information sector revenue, domestic
GDP, and domestic employment.
Over the next decade, many foreign governments will change
their regulatory approaches and promote additional infrastructure
investments. As other countries spend to improve their
information infrastructure, privatize their existing
telecommunications networks, and allow more competition, the
world market for telecommunications and information is likely to
experience tremendous future growth. U.S. firms, often already
world leaders in these fields, can expect to achieve further
success in the global market. As that success generates
additional scale economies in production and encourages
innovation, domestic producers will lower their costs. This
dynamic promises to promote exports by enhancing the comparative
advantage of the U.S. in the global marketplace.
10
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HAWAII INC'S
Network News
The Newsletter of the Information Industry in Hawaii
Volume 3, Number 5, March 1994
The national information infrastruc-
applications, not from a technological
system An NII that is interoperable at
ture (NII) is most often talked about as
perspective but from the perspective
key interfaces will help create an
a technological phenomenon-the
of what matters to people: better
infrastructure that is ubiquitous,
merging of the telecommunications,
health care and education, and im-
interactive, and accessible to all
computer, software, and entertain-
proved and expedited government
potential users and service providers."
ment industries.
services.
NII politics, like all politics, is
But in the view of Washington
"We must not forget the parts of the
local. "The experience gained through
attorney Kenneth R. Kay, NII is also a
NII policy that 'put people first."
networks like Hawaii FYI is in-
political phenomenon, and focusing
on its politics may help to overcome
some of the technological, economic,
and other hurdles involved in
developing and deploying it.
Kay, who serves as executive director
NII: Changing the
of the Computer Systems Policy
Project in Washington, was one of a
series of nationally prominent
speakers at HINTS-6, the 1994 Hawaii
Information Network and Technology
Paradigms of Power
Symposium held March 23-24 at the
Sheraton Waikiki Hotel.
"Computer technology and the NII
The NII will not succeed without a
valuable. Make the NII real to your
have the potential to change the
new politics of cooperation between
representatives: train them on the
paradigms of power in this country,"
industry and government. "Develop-
Internet, get them on-line communi-
Kay said, "by giving people
ing and deploying the NII will require
cating with constituents, underscore
unprecedented access to information
many different activities, some
the value of applications that matter in
and enabling them to be information
appropriate for industry, some for
Hawaii." $
providers. As the technologies of the
government, and some which will
computer, telecommunications, cable,
require industry and government
software, and entertainment industries
working together."
converge, so do the political interests
of the public, government, and a range
The political interests of the
of U.S. industries."
business community and the public
interest community are converging.
Kay made six observations about the
"Cyber-space is one area where the
"information superhighway":
public interest and business interests
The NII has become a national
may often be in sync."
issue. It's a bipartisan issue and
The NII will require unprec-
needs to stay that way. "We can't
edented cooperation among indus-
permit the NII to become a battle-
tries. "Companies and industries
ground for political one-upsmanship
need to communicate and cooperate to
-it's far too important for that."
ensure that existing and new NII
The NII must be viewed as a
components work together as easily,
people project, not just as a technol-
quickly, and transparently as the
ogy project. "We need to focus on NII
components of today's telephone
Kay: "It's a political phenomenon."