Computer games: the crime of Internet subsidies

Reason, Nov, 1997 by James V. DeLong

The crime of Internet subsidies

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?