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Computer
Games - The
Crime of Internet Subsidies
(From Reason, November 1997)
By James V. DeLong
The
Internet is a wonderful tool. Say you want to write
an article on the role of criminal sanctions in the
plan to subsidize Internet connections for schools and
libraries. Without leaving an air-conditioned study
you can download the Telecommunications Act of 1996,
the 824-page Federal Communications Commission Report
and Order implementing it, and a deluge of backup material.
Because
the Internet is so useful, the idea of subsidizing educational
connections to it seems like a Great Idea to Make the
World a Better Place. As with most such ideas embraced
by the government, debate over the policy was superficial,
and schools and libraries now gleefully anticipate $2.25
billion a year in subsidies. But their thirst for loot
has led them into a danger zone. Government subsidy
programs come with tangled strings of conditions and
regulations. These are enforced by sanctions, including
not only criminal fines and jail terms, but also civil
monetary penalties, punitive damages, hefty remedial
payments, and asset forfeitures. Many of these are not
formally "criminal," but a "civil"
penalty of $10,000 stings just as much as a "criminal"
fine.
The
schools and libraries aren't worried, remaining confident
of their own probity. But they should be worried. A
growing number of middle-class managers, professionals,
entrepreneurs, and land owners are finding themselves
in trouble as a result of their participation in government
largess. Medicare is a prime example, as the political
pressure to hold down "fraud and abuse" makes
the government downright grumpy. Doctors at 125 teaching
hospitals are in jeopardy from audits for Medicare fraud.
Two hospitals already audited have been nicked for $42
million in repayments and fines. Some hospices are also
in trouble for collecting Medicare payments for patients
who then stayed alive longer than the six months the
government allows for terminal illness.
Other
programs follow the same trajectory. Savings and loan
executives profited for years from government restrictions
on competition and other benefits, then got bitten by
the hand that fed them. Over 6,000 executives and owners
were charged with crimes in the fallout from the S&L
mess, including 3,700 who went to jail, despite estimates
by Bert Ely, the recognized guru of finance in Washington,
D.C., that only about 3 percent of the losses were due
to fraud.
The
basic idea of the Internet subsidy program seems simple.
The part of the law creating it is short, about a page.
It says that telecommunications carriers, "upon
receiving a bona fide request," must provide services
to schools and libraries for educational purposes at
a discount specified by the government. The carrier
then treats the discount as an offset to other obligations
created by the act. The law gives the FCC rule-making
authority, specifies that the services provided may
not be resold, and excludes for-profit schools and those
with endowments of more than $50 million.
Passing
a general statute is easy, but the real work of implementation
is up to the FCC. The initial FCC Report and Order on
this program runs 86 densely written pages--and that's
only the beginning. Soon these initial texts will become
thickly crusted with interpretations, caveats to the
interpretations, amendments, reversals, exceptions,
court cases, and informal guidance. Hot lines for advice
will be set up, staffed by summer interns and 22-year-old
English B.A.'s willing to work cheap.
People
who have not dealt with regulatory programs don't fully
comprehend how complicated and difficult the process
becomes. It helps to look at the statute with an implementer's
eye, dreaming up questions that must be answered: What
is a bona fide request? What is a school? What is a
library? What do you do with a library that is a sub-unit
of a non-eligible school, such as a college? What if
a college spins off its library into a free-standing
corporation--does that render it eligible? What about
a consortium of libraries, some of which are eligible
and some not? Or a consortium of schools? Or of both?
What is an endowment of $50 million--does this include
the value of a school's land and buildings, and, if
so, must the real estate be priced to market? What are
"educational services"? If a student uses
the Internet connection to look at pornography or to
run a business on the side, is his school liable for
refunding the discount? Does his action taint the school's
entire discount, or only that part of the service fairly
allocable to the violation? If it is allocable, do you
allocate by full cost or variable cost?
Does
a library violate the provision against resale of the
service if a student works part time for a private company
and uses a library Internet connection at night to do
paid research? What if the library doesn't know what
the student is doing--does that matter? Can the carrier
insist that a school police its students to be sure
they do not look at Penthouse (except to read articles
on free speech, of course) and do not resell the service?
Can other schools and libraries insist on policing,
on the ground that the total subsidy is capped at $2.25
billion, so if one school diverts services to noneducational
uses other schools may be deprived?
These
are not abstract issues. Every one of them must be addressed,
and this list is a bare start. The FCC has reached some
initial conclusions. For example, a college can indeed
spin off its library into an eligible entity, and carriers
must grant a discount on the cost of wiring individual
classrooms within a school, not just on the cost of
connecting to the wall of the building. (After all,
says the commission, the president said that we should
wire 2 million classrooms, not just schools. This closes
the inquiry into whether this policy makes sense.) The
FCC has also established a schedule setting six different
levels of discounts depending on the economic need of
the locality, and decided that the applicable level
should be self-certified by the school or library. Other
questions are answered as well, but there is still a
long way to go, and every answer will raise new questions.
The
commission rules resolving these issues--or leaving
them maddeningly uncertain--are criminal statutes. It
says so right there in Title V of the act. Anyone can
be fined and jailed for one year for "willful and
knowing" violations of the act or of FCC rules.
Anyone who "willfully or repeatedly" violates
rules is also subject to civil penalties, which can
be imposed by the commission itself under procedures
and standards of proof looser than those applicable
in courtrooms. For schools and libraries, the penalties
can go up to $10,000 per day for a continuing violation.
Carriers and others who are in the business face considerably
higher civil penalties.
This
blend of command-and-control, subsidies, and enforcement
through serious penalties guarantees future trouble
for the schools and libraries. By now we have enough
experience with this blend that the result has a certain
inevitability. Judging by the history of other regulatory
programs, details will soon proliferate to the point
where no one can fully understand the rules. Even the
most honest beneficiary will find it difficult to judge
what he must do. For many, the transaction costs of
figuring out the program's requirements will outpace
its benefits. As a result, they will try to use common
sense--a treacherous guide in any regulatory program.
Even seeking official help is often little real help.
If the English B.A. at the other end of the hot line
tells you a bureau letter interpreting a commission
rule defining a statutory term means X, are you bound?
Is this The Law? Probably, but there is no clear legal
answer.
Initially,
the FCC is likely to spend little to enforce the provisions
of this program, given all the other demands on its
resources, and given that the commission does not really
care about the details now that the public relations
harvest has been reaped. That might seem good for schools
and libraries. But if you cannot get an answer to a
question, and it seems unlikely that you will be caught
if you err, the obvious course is to make doubtful calls
in your own favor.
Eventually,
someone will go back and re-examine these decisions,
especially if the total resources for the program get
squeezed. Then you can be in deep trouble. Because of
limited resources for enforcement, the government will
likely move to a system of enforcement through terror.
If problems become rife enough to cause political embarrassment,
and if the agency can move against only a small percentage
of violators, it will make a horrible example of those
few. For example, the Environmental Protection Agency
explicitly sets penalties at levels designed to represent
the expected gain adjusted for the probability of getting
caught. If you save $10,000 by ignoring a rule, and
the chance of your getting caught is only 1 percent,
then the fine becomes $1 million.
These
eventual enforcement efforts will not lack for targets,
because everyone will have irresistible reasons to game
the system. Students with access to cheap Internet service
will respond like rational economic beings and use more
of it. They will also take a broad definition of education,
which will expand to include language arts (chat rooms),
motor skills enhancement (computer games), and biology
studies (on-line porn). The more enterprising will discover
the glories of arbitrage. If you have free access to
something that people in the real world pay for, you
have something valuable to sell. This student gaming
of the system will create tough enforcement problems
for schools and libraries, and much debate about who
is responsible for preventing it.
Schools
and libraries will also have incentives to play games.
They want to bring as many services as possible within
the discount by interpreting the rules liberally. This
impulse will be strengthened by the silliness of a basic
premise of the program. The president's goal--"wire
every one of 2 million classrooms"--has the same
brainless quality as the targets of a Soviet five-year
plan. Why should every classroom be wired? Might not
some be used for reading, or writing, or even teaching?
And is the issue not better decided at the local level?
The temptation to rechannel resources into what the
people at the working level really need will be constant.
Carriers
will develop games of their own. Deep down, they may
not really care what the schools and libraries do. But
they don't want to be charged with granting illegal
discounts, and they don't want the government to deny
them their credits, so they have to cover themselves
somehow. This will put them into conflict with the schools
and libraries over basic issues.
All
this complexity and gamesmanship will provide endless
opportunities for mistakes and overreaching. And remember,
mistakes and overreaching are now crimes. We've already
seen this happen with the mother of all subsidy programs,
Medicare. The government is involved in endless disputes
with care providers over the nature of "fraud."
Many of these cases involve real fraud, of course, but
many are ambiguous. For example, one dispute is with
teaching hospitals over staff doctors who supervise
a resident who performs the actual hands-on patient
care. Hospitals have been billing the doctor as a care
provider; the government calls this criminal fraud.
Other disputes concern the allocation of indirect overhead
to health care services. Arcane and fundamentally insoluble
issues of cost accounting now have criminal implications.
These
types of conflicts will always arise in any program
of subsidies for services. And talk about legal uncertainty
and complexity: The government in 1997 says the hospitals
should have known they were wrong because they got a
letter about it in 1970. Some of the current Medicare
disputes go back to interpretations made in the late
1960s, which modern practitioners are unlikely to be
aware of.
In
some ways, schools and libraries are fortunate: The
word willful got inserted into the statute, so the government
may well have to prove criminal intent before nailing
someone. This is not true in many other regulatory areas,
where knowledge and intent have been rendered irrelevant.
Lobbyists
for the schools and libraries also got a provision shielding
their clients from civil penalties for violating a rule
unless the FCC tells them they are sinning and they
continue to commit similar violations. This puts them
miles ahead of the battered veterans of many other regulatory
programs, where you might get a letter saying you've
been trespassing on some obscure regulation for years
and should please remit a check for $10,000 per day
for the entire period. Many ways remain to nail the
schools and libraries nonetheless, if the government
puts its mind to it.
The
path ahead for schools and libraries is grimly predictable.
In the flush of euphoria, they will interpret things
in their own favor. As good, law-abiding members of
the middle class, it will barely occur to them that
these interpretations are treading near the edge of
criminality. Some will be cautious, but they will look
foolish as others reap benefits and nothing happens
to them, so they will join the parade.
After
a time, scandals will hit, followed by exposés
and recriminations. The FCC will move against a few
institutions with the heavy guns of criminal and civil
sanctions. Others will panic and decide they must have
a zero-error policy. They will bring things under tighter
control, asking "Mother, may I?" of the FCC
for every tiny change. But the whole program will have
become too complicated and contentious for its requirements
to be predictable, and things will settle into the standard
regulatory equilibrium of high transaction costs, quarrels
over subsidies, sharp dealing, scandal, and occasional
human sacrifice.
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