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Just how big a deal is this year's economics Nobel?

Just how big a deal is this year's economics Nobel?
© iStock, The Hill illustration

Paul Milgrom and Robert Wilson received the 2020 Nobel prize in economics for their work on auction theory, which the Federal Communications Commission (FCC) utilized to design groundbreaking auctions of wireless spectrum. In a commentary published last month in The Hill, James Broughel lamented that the Nobel prize in economics can legitimize silly ideas, making them harder to exorcise from public policy debates.

The most recent Nobel in economics demonstrates that the opposite can also happen. This year, the Nobel committee recognized genuine contributions to economic science that significantly improve people’s lives. Back in 2017, Prof. Milgrom even explained in The Hill how the FCC used his work to design its historic two-sided auction that cleared a substantial portion of broadcast spectrum for mobile broadband.

Economic studies have put some numbers on the impact of spectrum auctions, and they’re big. (The studies I cite below were conducted in many different years, so I have converted all of their results to 2020 dollars using the consumer price index.)

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Consider first the costs of delay when the FCC doled out spectrum through administrative processes rather than auctions. An FCC proceeding to award spectrum for the first two cellular phone licenses in various parts of the country began in 1968. But commercial cell phone service did not begin in the United States until 1983. Had the FCC begun designing a spectrum auction in 1968, surely the spectrum could have been awarded within a few years, and cell phone service could have been available ten years earlier.

MIT professor Jerry Hausman estimated that cell phone subscribers’ consumer surplus – the difference between what people paid for cell phones and what the service was actually worth to them – would have been $63 billion greater in 1983 if cell phone service had commenced 10 years earlier. The costs of administrative delay were high indeed. 

The FCC commenced spectrum auctions in 1993. A key feature was that the FCC simply designated the spectrum for “personal communications services,” without stipulating what type of devices or technologies must be used. By 2008, wireless communications use had exploded — first phone calls, then texts. Professors Thomas Hazlett, Roberto Muñoz and Diego Avanzini estimated that wireless phone calls and texts created annual consumer surplus of $254 billion. And then flexible use of auctioned spectrum allowed a seamless transition to the next big thing: the smartphone.

To put these figures in perspective, compare them to the consumer benefits produced by some other significant pro-consumer initiatives that removed federal regulation of entry, prices and quality of service. 

October 14 marked the 40th anniversary of the Staggers Act, which largely deregulated railroads. Studies estimate that the annual benefit to shippers of rate reductions and service quality improvements are roughly $20 billion - $38 billion.

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This year is also the 40th anniversary of the Motor Carrier Act, which deregulated interstate trucking. Economists estimate that the annual benefits to shippers from lower rates and improved service are between $20 billion - $33 billion.

Finally, the year 2020 also saw the FCC complete its phaseout of the last per-minute access charges that local phone companies received when they originated or terminated long-distance calls. These payments effectively served as a tax on long-distance and wireless phone service. At their height in the early 1980s, they reduced consumer welfare by $16 billion - $28 billion annually.

The consumer value unleashed by spectrum auctions is clearly several times the value created by these other laudable policy reforms. Indeed, the annual value of consumer benefits unleashed by spectrum auctions exceeds the total of approximately $114 billion these auctions have raised for the federal treasury. The most significant value of the auctions is not their revenue-raising potential but their ability to allocate spectrum to the uses consumers value the most. 

It’s almost as if the Nobel committee read Dr. Broughel’s commentary and took his warning to heart. 

Jerry Ellig is a research professor at George Washington University’s Regulatory Studies Center and a former chief economist at the Federal Communications Commission.