Universal service subsidies keep the price of telecommunications service in hard-to-reach and high-cost areas on par with the price of service to inexpensive areas. Substantial reform for this system of wealth transfers is now politically viable. All universal service reform proposals should begin by facing the following economic reality: Consumers pay for subsidies. With this proposition in mind, the policy benchmarks that follow can be utilized to measure reform proposals.

Background.
"Universal service" is the insider term to describe telecommunications subsidies. Last year the federal budget estimated the value of these subsidies for the first time. By the end of fiscal year 1998, a $3.3 billion transfer from long-distance, urban, and business consumers to local, rural, and residential consumers will take place. This would have passed with barely an eyebrow raised, except, the proponents of universal service subsidies have created programs that are now highly visible. Equally as important, the cost of universal service is on the rise. In fiscal year 1996 universal service cost consumers $957 million, but by fiscal year 2000 these subsidies are estimated to cost more than $10.3 billion.

In the past, long distance companies made payments to the federal universal service fund. Currently, any company that provides interstate service is required to contribute to the subsidy fund. Beginning next month, some long-distance service providers will begin to itemize a charge on consumers’ bills that is specifically dedicated to federal universal service programs.

Comments from the Speaker of the House and other leading members of Congress, the president and members of his Cabinet, the vice president, members of the Federal Communications Commission (FCC), and leading providers of telecommunications services have elevated an obscure question of telecommunications policy to the forefront of Washington’s political battles. Unless the rhetorical heat of policymakers is tempered by common-sense policy prescriptions, consumers will continue to be losers in the subsidy shell game called universal service.

The Telecommunications Act of 1996 expanded the pool of universal service beneficiaries. Schools, libraries, and rural health care providers became eligible for discounted telecommunications services. In order to administer this new federal giving program, the FCC established a series of non-profit corporations. The Schools and Libraries Corporation, the non-profit corporation under the most scrutiny, has received more than 30,000 requests for the e-rate subsidy. The cost of these requests is estimated to be in excess of $2 billion.

Three tests that any reform must pass.
Many universal service reform proposals are now in circulation. A proposal that meets the following three tests will provide the most benefit to consumers.

The costs and benefits of universal service subsidies must be made explicit.
The universal service programs should be consolidated, targeted to those in need, and limited.
The funding of universal service programs should be linked to objective measures of performance.
The costs and benefits of universal service subsidies must be made explicit. The proponents of universal service subsidies — for rural and high-cost consumers as well as for schools, libraries, and hospitals — assert that the programs are necessary. If this is the case, then there is no harm in providing taxpayers with information about the size, scope, and administration of universal service programs. It is only natural that information about these "necessary" programs would make taxpayers feel better about the effectiveness of their government. Clarity for the costs and benefits associated with universal service is the right step to take as well as the correct legal step to take. Section 254(e) of the 1996 Telecommunications Act expressly mandates that universal service support be "explicit."

Universal service should be changed from an entitlement based on geography and type of service to a means of helping those truly in need. The General Accounting Office has identified 40 federal programs that provide financial support for telecommunications. The programs — found everywhere from the Department of Education to the Rural Utility Service — should be consolidated and targeted to those most in need. The high cost associated with providing telecommunications services to millionaire ranchers, ski bunnies in Aspen, Colorado, or vacationing golfers at Hilton Head Island, South Carolina, should not be subsidized by poor and urban consumers.

Finally, the revenue stream, or source of funding, for universal service programs should be directly related to the performance of the programs. This requires a change to current policy. First, universal service programs must meet objective criteria for success. Analysis of the current system is trapped in a failed New Deal mentality that counts how much money is spent as a measure of success. Usually the goal of universal service is stated in terms of providing additional people with service — not in terms of how much money is shifted from one part of the economy to another. Therefore, funding should not continue unless a universal service program is able to make significant progress toward achieving its measurable objectives, namely higher penetration rates or better learning environments for schoolchildren.

If the merits of universal service exist, they are able to stand up to an honest assessment by taxpayers.

The Telecommunications Act of 1996 has been an agent of tremendous change. New regulatory burdens, repeating cycles of litigation and few observable benefits to consumers have been its progeny. All of that is about to become history. An agile long-distance company with a ferocious appetite for new customers is prepared to defy Washington regulators.

Technology and innovation have recreated telecommunications industries many times over. Dramatic change is standard. However, the regulatory process in which telecommunications providers must work is slow — slow moving and slow to change.

When innovation answers the call of competitive forces, regulation is left behind. Early this month, U S West announced a new strategic partner in Qwest Communications. Together, they will provide a wide variety of services. If consumers find this arrangement valuable, it will be a success in spite of regulation, not because of regulation.

Instead of battling one another before state public service commissions, federal regulators and the press, these telephone companies have thrown out the old regulatory play-book and made their own rules. By forming this type of partnership, local and long-distance telephone companies can begin to offer a full range of telecommunications services. Everything from a dial tone and call-waiting, to paging, wireless, Internet, and long-distance services could come on one bill, in one custom designed package and from one company. Washington has traditionally stood in the way of this level of service.

This strategic arrangement would also defy the historically cozy relationship that telephone companies have had with regulators. Prior to the 1984 breakup of AT&T, government-granted monopolies for telephone service lulled providers into a mind-set of go-along to get-along — even at the expense of good business decisions or improved consumer satisfaction. Since 1984, local telephone companies have tried to litigate their way into new markets by challenging regulatory restrictions on which business they can enter. Now, one of them has found a way to bypass the courtroom and jump directly into the long-distance market. While this should make consumers happy, time will tell what the entrenched regulators in Washington will say.

Currently, the five Baby Bells are prohibited from providing long-distance service in their own regions. Unless, that is, the Bell company meets a series of statutory obligations and passes an arduous three-step review process. No company has ever been able to meet all of the requirements. Subsequently, consumers have seen little change in the aftermath of the Telecommunications Act. Likewise, long-distance providers have not entered local residential markets in earnest, and as a result, competition has been slow to develop in the local loop.

Although the Telecommunications Act prohibited the Bells, which includes U S West, from offering long-distance service through a subsidiary, the law does not address the idea of partnering with an independent company. Initial estimates of the Qwest-U S West deal suggest that as many as 25 million customers across the Western United States could have one stop shopping for telecommunications services. In exchange for paying a fee to U S West for every new long-distance customer, Qwest is generating traffic for its new 16,000 mile fiber-optic network.

The Telecommunications Act was a positive step. Competition in all communications markets is its stated goal. However, its downfall has been reliance on regulation as a means of achieving competition. For an industry that always has been heavily regulated, a strategy to bypass the cumbersome regulatory procedures of the Federal Communications Commission and to simply offer new services to consumers is bold and commendable.

Strategic partnerships provide a competitive alternative for consumers. There are few other incentives for companies to join forces. As a result of the Qwest-U S West partnership, tens of millions of consumers across fourteen states have a new competitive choice for telecommunications service. Consumers benefit from competition through lower prices, new services, higher quality product information and faster rates of innovation. Let’s hope that everyone in Washington sees it that way.

Every high school civics student knows that two-thirds of the U.S. Senate must ratify any treaty before it becomes law. However, the Clinton administration is attempting to bypass the Constitution, encouraging state and local governments to implement the Kyoto Protocol, the recently-negotiated global warming treaty, before submitting it to the Senate.

For example, the administration has held town meetings around the country to build support for Kyoto-style policies. At these events, speakers from federal agencies (Agriculture, Commerce, Interior, FEMA, EPA) typically warn that unless the United States and other nations reduce their emissions of carbon dioxide and other "greenhouse gases," the local community or economy may be afflicted by outbreaks of malaria and dengue fever, floods, droughts, hurricanes, or other natural disasters. Such scare tactics are used repeatedly, even though the computer models on which global-warming scenarios are based are far too crude to predict regional, let alone local, weather impacts.

No Pretense of Balance. Especially noteworthy are two conferences the EPA bankrolled and co-sponsored with its state and local counterparts — ECOS (the association of state environmental agency heads), STAPPA/ALAPCO (the association of state and local air quality regulators), and the Center for Clean Air Policy (a think tank supported by the National Governors Association). On January 21-22, 1998, these organizations held an Eastern States "Post Kyoto and Beyond" conference in Baltimore, Maryland. Revealingly, the conference brochure declares that the United States "must now begin designing policies and programs" to reduce carbon emissions 7% below 1990 levels — as if the Kyoto Protocol already had the authority of law. Similarly, the EPA’s Web site says that states should get involved now because, among other things, they can, " ... encourage and support the federal government to take action at the national level."1

Not surprisingly, the two-day program exhibited not even a pretense of balance or objectivity. With the exception of one corporate lobbyist seeking a tax break for early action to reduce emissions, all the speakers were either environmental bureaucrats or green activists. All toed the EPA company-line that global warming is a huge problem for which increased regulation is the only solution.

Early Implementation. At both the Baltimore and the San Francisco conferences, administration officials stressed the importance of giving "appropriate credit" for "early action" to reduce emissions. However, the officials offered no specific definition of "early" or "appropriate." Since there is no legal mechanism to give any type of credit for emissions reduction efforts now, it will be difficult to get states and industries to act prior to Senate ratification of the Protocol. In addition, the treaty itself does not allow governments to accrue credit for early emission reductions before ratification by a majority of Protocol signatories.

Instead of formal credit, President Clinton may intend to use greenhouse pork to persuade states and industry to make reductions now. His Climate Change Technology Initiative (CCTI) calls for $6.3 billion in tax breaks and R&D for low-carbon technologies. Utilities will receive a 10% tax break for emission reductions, while various national labs and industries will receive $2.7 billion to develop technologies deemed to be climate-friendly.

State Action Plans. Through such local meetings and regional conferences, the administration is apparently attempting to recruit pro-Kyoto lobbyists in bureaucratic power centers outside the U.S. Senate’s authority. What’s more, the EPA is providing its state and local counterparts both technical and financial assistance to develop "climate change action plans." At the Baltimore conference, one Vermont environmental official presented an elaborate plan to reduce greenhouse gases. Another top New Jersey environmental official blamed urban sprawl for excessive greenhouse gas emissions, wondering aloud whether his state should consider land-use limitations as an abatement strategy. If enough states choose to implement such schemes, Kyoto will become the de facto law of the land, regardless of how (or whether) the Senate votes on ratification.

Fortunately, many states remain skeptical of the prudence of early action, with Alabama, New Mexico, Ohio, Delaware, South Dakota, Virginia, and West Virginia taking official stances against the treaty. Some states have also passed resolutions specifically to block early implementation of the Protocol.

New Propaganda Campaign. Without evidence that the impacts of global warming will be felt locally, states have little incentive to implement Kyoto-style policies or to support ratification. Accordingly, at the Baltimore conference, the administration asked states to step up their local education efforts across the country. To this end, state officials wondered aloud about which potential environmental catastrophes would be most effective in gaining public notice. One official from New Jersey pointed directly to sea level rise as the issue most capable of arousing public fear.

At both conferences, administration and other pro-Kyoto speakers emphasized the alleged "co-benefits" of greenhouse gas reductions, asserting that decreased carbon dioxide emissions would dramatically improve public health by simultaneously reducing other "pollutants," such as fine particulate matter. The source of this line of argument is a controversial study, published in the British medical journal, The Lancet, which claims the Protocol would save eight million lives by 2020. The Lancet article, however, is based largely on the same controversial particulate matter study the EPA relied upon in the recent battle over new air quality standards. The study’s lead author, C. Arden Pope, has questioned the article’s conclusions, stating in Science News that he "hopes that people will not place too much weight on its estimates of lives that can be saved by climate policies. Those numbers are still preliminary and rest on substantial uncertainties."2

Conclusion. The Constitution demands that states should not take steps to implement the Kyoto Protocol prior to ratification by the U.S. Senate. In past regulatory decisions, however, such as the recent proposed rule to reduce ozone transport, the perception of state support has been key to the administration’s justification for controversial regulations. Without the support of state governments, the Kyoto Protocol has little chance of ratification. However, if the administration persuades states that immediate carbon emission reductions are economically and environmentally beneficial, Protocol ratification may be right around the corner.

1http://www.epa.gov/globalwarming/actions/state/state/ websumm.html

2Science News Online, http://www.sciencenews.org/Sn_arc97/11_8_97/Fob1.htm, November 8, 1998.

After months of waiting, Council of Economic Advisors member Janet Yellen has revealed the administration’s cost estimates of the Kyoto Protocol. She claims that the cost of the agreement to the average American family would be no more than $110 annually.1 This figure, however, remains controversial and differs greatly from the analyses of responsible economic forecasting firms, such as WEFA, Inc., that put the impact to American families at $2,700.2

Where’s the analysis? Although differences in such estimates are to be expected from the inexact science of economic modeling, the administration’s figures have no underlying documentation or analytical foundation. In fact, when asked where the underlying analysis was, Janet Yellen said her brief testimony was the underlying analysis.

However without more substantial analysis, the administration’s claims about the cost of the Kyoto Protocol are unbelievable. In addition, recent events suggest the Clinton administration is hiding something. One administration official has claimed that the actual analysis reveals that the president’s advisors were unable to agree on the impacts of the treaty.3 Such dissension among the president’s own economic advisors is reminiscent of the economic debate over the new air-quality standards. If history does in fact repeat itself, the administration’s cost analysis of the global warming treaty, once unearthed, will prove what critics have maintained all along: the Kyoto Protocol is a bad deal for America.

A trend of partial truths. Last July the Environmental Protection Agency (EPA) promulgated by bureaucratic fiat the most expensive and scientifically indefensible "air-quality" regulations in American history. Now that the standards are set in stone, the EPA quietly admits that the actual economic costs are vastly higher than initially claimed.

During the debate over the new particle and ozone standards, the EPA released only a partial annual cost estimate of $8.5 billion for both standards. This figure was widely misreported as an accurate estimate of the full cost of compliance. After enactment, however, the EPA admitted in one of its obscure regulatory impact analyses (RIAs) that the full cost was actually $46 billion.4 It also revealed that the new standards are so stringent that it is technologically impossible for 47 unnamed counties to comply.5

This expense might seem justified if the EPA’s assertion that 20,000 annual deaths occurred due to fine particle exposure were true. However, the discovery of a statistical error lowered that number to 15,000. According to the scientist who found the error, former Carter administration environmental advisor Dr. Kay Jones, less than 1,000, and more probably zero, deaths actually occur. The agency failed to respond to Dr. Jones. Even more disturbing was the EPA’s admission in the final rule, buried deep within a footnote in the Federal Register that, in fact, only one fine particle mortality study supports the new particulate matter standard, and not the 80 or so studies it had previously cited.

As for ozone, the congressionally appointed Clean Air Scientific Advisory Committee (CASAC) said there was no reason to make the ozone standard more stringent — the current standard was sufficiently protective of the public health. EPA economists seemed to agree with CASAC. In weighing the financial costs and monetized health benefits, they admitted in the final RIA (once again, after the standard became final) that the ozone standard would produce only negative annual social benefits in the range of $1.1 to $8.1 billion.6 Thus, the EPA knowingly moved forward with a standard that will do harm to the American people.

The cost of Kyoto. From what little we know about the Clinton administration’s economic estimates, it is probably keeping us in the dark about the real costs of the treaty. Although the president has proposed a so-called "free-market" solution to reducing greenhouse gases, his proposed international "cap and trade" program is no more than a stealth tax — one that would permanently limit economic growth in this country. Absent a major technological revolution in the energy sector, this cap could cost America trillions of dollars in the next century.

President Clinton would like us to believe that $6.3 billion in tax credits and subsidies for research and development will find a replacement for cheap fossil fuel energy. The facts show that $5 billion in government research since 1979 have failed, with solar electricity still costing three times as much as coal to produce. Regardless of cost, solar power can only produce a very small percentage of America’s electricity due to intermittence resulting from ever-present clouds. Even environmentalists now discount the future of solar energy. Christopher Flavin, an expert in renewable energy, recently admitted that one type of solar power, central-station generation, had little chance of penetrating the market.7

Conclusion. If the debate over the air quality standards is any indication, the Clinton administration is hiding the truth about the real costs of the Kyoto Protocol. If the administration continues to hide its analysis of the treaty’s economic impacts, we can only assume the worst.

1Joby Warrick, "White House Predicts Low Cost for Pact On Warming," The Washington Post, March 4, 1998.

2Mary Novak, Testimony before the House Committee on Government Reform and Oversight, April 23, 1998.

3Patrice Hill, "White House not letting public see warming papers," The Washington Times, May 14, 1998.

4The Environmental Protection Agency, Regulatory Impact Analyses for the Particulate Matter and Ozone National Ambient Air Quality Standards and Proposed Regional Haze Rule, July 16, 1997, p. ES-12, 13.

5Ibid., p. ES-11, 12.

6Ibid., p. ES-20.

7Comments by Worldwatch Institute economist Christopher Flavin at the Department of Energy’s annual National Energy Modeling System Conference, March 30, 1998.

Every high school civics student knows that two-thirds of the U.S. Senate must ratify any treaty before it becomes law. However, the Clinton administration is attempting to bypass the Constitution, encouraging state and local governments to implement the Kyoto Protocol, the recently-negotiated global warming treaty, before submitting it to the Senate.

For example, the administration has held town meetings around the country to build support for Kyoto-style policies. At these events, speakers from federal agencies (Agriculture, Commerce, Interior, FEMA, EPA) typically warn that unless the United States and other nations reduce their emissions of carbon dioxide and other "greenhouse gases," the local community or economy may be afflicted by outbreaks of malaria and dengue fever, floods, droughts, hurricanes, or other natural disasters. Such scare tactics are used repeatedly, even though the computer models on which global-warming scenarios are based are far too crude to predict regional, let alone local, weather impacts.

No Pretense of Balance. Especially noteworthy are two conferences the EPA bankrolled and co-sponsored with its state and local counterparts — ECOS (the association of state environmental agency heads), STAPPA/ALAPCO (the association of state and local air quality regulators), and the Center for Clean Air Policy (a think tank supported by the National Governors Association). On January 21-22, 1998, these organizations held an Eastern States "Post Kyoto and Beyond" conference in Baltimore, Maryland. Revealingly, the conference brochure declares that the United States "must now begin designing policies and programs" to reduce carbon emissions 7% below 1990 levels — as if the Kyoto Protocol already had the authority of law. Similarly, the EPA’s Web site says that states should get involved now because, among other things, they can, " ... encourage and support the federal government to take action at the national level."1

Not surprisingly, the two-day program exhibited not even a pretense of balance or objectivity. With the exception of one corporate lobbyist seeking a tax break for early action to reduce emissions, all the speakers were either environmental bureaucrats or green activists. All toed the EPA company-line that global warming is a huge problem for which increased regulation is the only solution.

Early Implementation. At both the Baltimore and the San Francisco conferences, administration officials stressed the importance of giving "appropriate credit" for "early action" to reduce emissions. However, the officials offered no specific definition of "early" or "appropriate." Since there is no legal mechanism to give any type of credit for emissions reduction efforts now, it will be difficult to get states and industries to act prior to Senate ratification of the Protocol. In addition, the treaty itself does not allow governments to accrue credit for early emission reductions before ratification by a majority of Protocol signatories.

Instead of formal credit, President Clinton may intend to use greenhouse pork to persuade states and industry to make reductions now. His Climate Change Technology Initiative (CCTI) calls for $6.3 billion in tax breaks and R&D for low-carbon technologies. Utilities will receive a 10% tax break for emission reductions, while various national labs and industries will receive $2.7 billion to develop technologies deemed to be climate-friendly.

State Action Plans. Through such local meetings and regional conferences, the administration is apparently attempting to recruit pro-Kyoto lobbyists in bureaucratic power centers outside the U.S. Senate’s authority. What’s more, the EPA is providing its state and local counterparts both technical and financial assistance to develop "climate change action plans." At the Baltimore conference, one Vermont environmental official presented an elaborate plan to reduce greenhouse gases. Another top New Jersey environmental official blamed urban sprawl for excessive greenhouse gas emissions, wondering aloud whether his state should consider land-use limitations as an abatement strategy. If enough states choose to implement such schemes, Kyoto will become the de facto law of the land, regardless of how (or whether) the Senate votes on ratification.

Fortunately, many states remain skeptical of the prudence of early action, with Alabama, New Mexico, Ohio, Delaware, South Dakota, Virginia, and West Virginia taking official stances against the treaty. Some states have also passed resolutions specifically to block early implementation of the Protocol.

New Propaganda Campaign. Without evidence that the impacts of global warming will be felt locally, states have little incentive to implement Kyoto-style policies or to support ratification. Accordingly, at the Baltimore conference, the administration asked states to step up their local education efforts across the country. To this end, state officials wondered aloud about which potential environmental catastrophes would be most effective in gaining public notice. One official from New Jersey pointed directly to sea level rise as the issue most capable of arousing public fear.

At both conferences, administration and other pro-Kyoto speakers emphasized the alleged "co-benefits" of greenhouse gas reductions, asserting that decreased carbon dioxide emissions would dramatically improve public health by simultaneously reducing other "pollutants," such as fine particulate matter. The source of this line of argument is a controversial study, published in the British medical journal, The Lancet, which claims the Protocol would save eight million lives by 2020. The Lancet article, however, is based largely on the same controversial particulate matter study the EPA relied upon in the recent battle over new air quality standards. The study’s lead author, C. Arden Pope, has questioned the article’s conclusions, stating in Science News that he "hopes that people will not place too much weight on its estimates of lives that can be saved by climate policies. Those numbers are still preliminary and rest on substantial uncertainties."2

Conclusion. The Constitution demands that states should not take steps to implement the Kyoto Protocol prior to ratification by the U.S. Senate. In past regulatory decisions, however, such as the recent proposed rule to reduce ozone transport, the perception of state support has been key to the administration’s justification for controversial regulations. Without the support of state governments, the Kyoto Protocol has little chance of ratification. However, if the administration persuades states that immediate carbon emission reductions are economically and environmentally beneficial, Protocol ratification may be right around the corner.

1http://www.epa.gov/globalwarming/actions/state/state/ websumm.html

2Science News Online, http://www.sciencenews.org/Sn_arc97/11_8_97/Fob1.htm, November 8, 1998.

Urban ozone smog has declined nationwide for over a decade, with particularly strong gains in the Northeast (see chart1). Despite such improvements in air quality, the standard for ozone has been tightened, escalating fears among many states that increasing controls on local sources of ozone smog will fail to achieve compliance.

Urban ozone smog has declined nationwide for over a decade, with particularly strong gains in the Northeast (see chart1). Despite such improvements in air quality, the standard for ozone has been tightened, escalating fears among many states that increasing controls on local sources of ozone smog will fail to achieve compliance. To allay these fears, the Environmental Protection Agency (EPA) has proposed a controversial regional control strategy that focuses on "downwind" emissions from coal burning utilities in the Midwest, claiming that these sources, through ozone transport, contribute significantly to ozone levels in Northeastern states.

Ozone transport: fact or fiction? Ozone smog — created when nitrogen oxides and volatile organic compounds react in the presence of sunlight — is known to traverse state lines within Northeastern states. However, long-range ozone transport, the idea that significant levels of ozone travel hundreds of miles away from its source only to later rain down on urban areas, remains a construct of mathematical models that has yet to be proven by actual data.

Nonetheless, Northeastern states, either convinced of the reality of ozone transport or seeking to shift the burden of their own pollution problems, have joined the EPA in an effort to tighten emissions of Midwest power plants by filing a petition under the Clean Air Act. If granted, the petition would allow the EPA to directly regulate hundreds of individual sources of chemicals called precursors that contribute to ozone formation. In addition, the EPA has proposed a controversial new rule designed to limit oxides of nitrogen (NOx), a key ozone precursor, in 22 states in the eastern "transport region," an extensive area encompassing many parts of the Midwest, Northeast, and Southeast.2

Will the EPA’s new regional control strategy increase attainment of the new standard? The EPA rule is closely tied to the newly tightened air quality standard for ozone. The agency told the states that the proposed ozone transport rule, "should be enough to allow most of the new nonattainment counties in States covered by this rulemaking to be able to comply with the new standard."3

However, a recent analysis of the rule based on research from EPA scientists and the Ozone Transport Assessment Group (OTAG), which is comprised of environmental officials from 37 states in the eastern half of the country, found that the regional strategy will save only two areas in the Northeast from the bite of the agency’s tighter new standard for ozone.4 Further, a report from OTAG found that ozone transport is most significant only up to approximately 150 miles from the source of NOx precursors. Thus, it is very unlikely that Ohio and Illinois contribute significantly to the smog problems of New York and Philadelphia,5 or that the EPA’s plan will improve air quality in states as far away as Maine and Vermont.

Did the states really support the EPA’s regional strategy? In order to buttress its case for regulation, the agency falsely claims OTAG voted in support of the regional strategy. However, the assessment group never reached a consensus on the issue. Indeed, the final OTAG report called only for more research before moving ahead with any controls.6 But, as usual, the EPA is refusing to listen to the states and its own scientists, moving ahead with a NOx cap it says will cost $1.37 billion annually in 2007.7 Other economists claim the cost is closer to $2.5 to $3.7 billion annually.8

The EPA’s failure to acknowledge its own science has some in Congress up in arms. A bill, H.R. 3690, recently introduced by Rep. Robert Wise (D-WV) would give states at least seven years to meet the requirements of the EPA’s ozone transport proposal, and requires the EPA to give states an additional year (from the date of enactment) to perform more research on ozone transport. The EPA would also have to wait until one year after the research is published in the Federal Register to promulgate the rule. The bill also postpones the rule’s actual implementation until five years after promulgation. Lastly, the bill prohibits the EPA from reaching a decision concerning the Clean Air Act petitions from the Northeast states until 180 days after promulgation of the ozone transport rule.

Conclusion. The ozone transport rule is proof that a disturbing trend has emerged in the way the EPA interprets environmental science. Once again, the EPA is ignoring the scientific evidence presented by its own scientists, while falsely characterizing OTAG’s position. Thus, the proposed rule and the Northeast’s petition remain indefensible.

1Kay Jones and Jonathan Adler, "Time to Reopen the Clean Air Act; Clearing Away the Regulatory Smog," Cato Institute Policy Analysis, #233, July 1995; 1994-1996 data updated by Zephyr Consulting.

2Federal Register, November 7, 1997, Volume 62, Number 216, pp. 60317-60367; States affected by the rule would include Alabama, Connecticut, Delaware, Georgia, Illinois, Indiana, Kentucky, Massachusetts, Maryland, Michigan, Missouri, North Carolina, New Jersey, New York, Ohio, Pennsylvania, Rhode Island, South Carolina, Tennessee, Virginia, West Virginia, and Wisconsin.

3Ibid.

4Kay Jones and Joel Bucher, "Will Reducing Ozone Transport Improve Regulatory Compliance?" Forthcoming article in Environmental Management.

5Rudolf B. Husar and Wandrille P. Renard, "Ozone as a Function of Local Wind Speed and Direction: Evidence of Local and Regional Transport," Center for Air Pollution Impact and Trend Analysis, http://capita.wustl.edu/OTAG/reports/otagwind/ OTAGWIN4.html, July 26, 1997.

6"Did the Midwest Win the OTAG War?" Electricity Daily, October 10, 1997, Vol. 9, No. 72.

7"EPA Forges Ahead With Trading Plan in Face of Criticism, Uncertainties," Daily Report for Executives, Monday May 11, 1998.

8Tom Hewson, "How Much More? Evaluation of Three Proposed NOx Control Programs for Utilities in 37 State OTAG Region," Energy Ventures Analysis prepared for Midwest Ozone Group, pp. 17-18, May 1997.

"Life is better here," claims a new advertisement for a telecommunications company. The slogan conjures images of individuals free of hassles and ready to tackle the challenges of the 21st century with technology as an ally. Unfortunately, today’s laws and regulations stand in the way.

Life certainly would be better if American consumers could save more than $85.1 billion over the course of the next five years. Sound farfetched? Sadly, it would only require the introduction of a dose of common sense to federal telecommunications policy.

Between the authority of the Congress and the activism of the Federal Communications Commission (FCC), two actions would dramatically improve the shape of our national telecommunications policies. As a result, life would be better for American consumers as they look toward the next century. The same actions could also make it easier for politicians as they look toward the next election cycle.

Step One: Congress should pass legislation to eliminate the federal excise tax on telecommunications services.

Step Two: The FCC should repeal its universal service regulations and request detailed instructions from Congress on how to administer this costly and questionable entitlement.

Taken together, these changes would save American consumers nearly $4.1 billion in the second half of 1998 alone. Over the course of the next five years, the savings would be a staggering $85.1 billion or nearly $855 per household.

In addition to being sound policy, this two step approach has the added benefit of being a political winner. Congress could deliver a tax cut, and administration’s expert regulatory agency could declare that it will no longer attempt to implement costly regulations without explicit authority and direction from Congress.

First, consider the excise tax, a three-percent tax that consumers pay on all telecommunications services. This is a federal penalty on communication. One hundred years ago this tax was conceived as a luxury tax — to fund the Spanish-American War. In a time of peace, when communication services are ubiquitous, this type of "luxury tax" is an anachronism and should be eliminated.

Next, the FCC should admit the obvious and ask for help. Congress gave the FCC an impossible task and is now complaining that it has not been fulfilled. Under the guise of universal service, the Telecommunications Act of 1996, and its subsequent regulations, has exacerbated an intricate cross-subsidy regime that favors local customers over long-distance customers, rural customers over urban customers, and residential customers over business customers.

The primary goal of the Act was to decrease regulation and increase competition. Easy enough, Congress assumed that the former would lead to the latter. Congress, however, also rightly demanded that the elaborate telecommunications subsidy system become explicit to consumers. Finally, in conjunction with an overactive FCC, Congress dramatically expanded the pool of beneficiaries — notably through discounted Internet services to schools, libraries and rural healthcare providers.

Congressional leaders now maintain that they expected to realize all of these goals while consumer rates remained steady or even dropped. Impossible. The FCC could not possibly tax and then spend billions of dollars on telecommunications subsidies without forcing rates to increase on telecommunications services.

In its present form, the administration of universal service is in serious trouble. Recent congressional hearings have cast an unfavorable light on the FCC’s creation of a series of non-profit corporations to administer the universal service programs. Currently, litigation in the 5th U.S. Circuit Court of Appeals is trying to determine if anyone other than Congress can assess and collect taxes — specifically to pay for universal service. Furthermore, the General Accounting Office deemed that the FCC violated the law when it established these corporations.

If the FCC succeeds in all of its legal challenges, it will find itself responsible for a multi-billion dollar program that the president’s budget estimates will more than quadruple in the next five years. Dr. Jerry Hausman of M.I.T. has estimated that for every dollar raised to pay for Internet access by the Schools and Libraries Corporation, an additional $1.05 to $1.25 must be raised to administer the program. Universal service is costly and inefficient.

The fuse has already been lit for this political time bomb. Unlike the excise tax, the universal service shell game is almost entirely hidden from consumers. In July, the charges assessed by telephone companies to consumers will increase to keep pace with the collection schedule created by the FCC. And in November, members of Congress will have to answer to voters about those new charges being administered by the FCC.

As an alternative, the FCC should excuse itself from the messy business of administering tax and social welfare policies. Universal service subsidies, if they have any merit, should be debated publicly and passed by Congress. All the FCC should do is ask for direction and then wait until Congress provides a practical answer with specific guidelines.

Life is better when individuals are able to communicate freely. As a result, government has an obligation to keep itself out of the business of regulating and taxing communication. Unfortunately, a one hundred-year-old tax and the FCC stand in the way of real savings for American consumers.

Coronary heart disease (CHD) is America’s number one killer, causing or contributing to more than 750,000 deaths each year. Over half of American adults have borderline or high cholesterol levels, which contribute to CHD. Studies have shown that certain types of fiber (as part of a low-fat, low-cholesterol diet) can help lower one’s cholesterol levels and therefore reduce one’s risk of heart disease.

Psyllium (silly-um). On February 18, 1998, the FDA announced it will allow foods containing soluble fiber from the husk of psyllium seeds, such as breakfast cereals and dietary supplements, to advertise their ability to lower the risk of CHD. This information will provide an important tool to consumers who seek to lower their risk of heart disease.

However, this information is not new. Psyllium’s ability to lower cholesterol levels has been reported in medical journals for at least nine years. Yet consumers had a hard time learning of this tool for fighting heart disease until this year, because the FDA suppressed this consumer information for the better part of a decade through censorship and unlawful bureaucratic delays.

FDA censorship. The FDA’s announcement confirmed that fiber from the husk of psyllium seeds (a type of harvestable grain) "may reduce the risk of CHD by lowering blood cholesterol levels."1 This ruling validated studies dating back to 1989. However, for the past nine years, the only way consumers could learn about psyllium’s benefits was if they happened to pick up a 1989 copy of the Journal of the American Medical Association (JAMA) or read about it elsewhere.2

Congress gives the FDA authority to regulate what health claims may appear on food labels. As a result, many consumers do not learn that highly respected medical journals have found a food fights disease until its manufacturer clears the claim with the FDA. Yet, getting the FDA’s permission to repeat something published in JAMA is no easy chore.

Unlawful delays. Hiding healthful information is every bit as dangerous as allowing misinformation, which is why Congress enacted statutory deadlines for the FDA’s approval of food health claims. The FDA is required to file a health claim petition within 100 days of receipt and propose a final ruling after another 90 days.

The FDA filed the psyllium claim within 100 days (98 to be exact). However, the agency took 246 days to propose a final rule — nearly three times the allowed timeframe — and another 272 days to publish the final rule.

The FDA’s announcement made no mention of this. The only way consumers would learn that the FDA failed to meet the statutory deadline is if they happened to pick up the May 22, 1997, issue of the Federal Register, count the dates, and compare them to the deadlines in section 403(r)(4) of the Food, Drug, and Cosmetic Act — if they happened to have a copy lying around.

Consumers and taxpayers have a right to know if the FDA is not doing its job. When approving a health claim, the FDA should disclose how long it suppressed that information (starting the clock at the publication of the first valid study) and what impact that suppression has had on the public health. Similarly, the FDA should report on its compliance with the statutory deadlines laid out in the Food, Drug, and Cosmetic Act for each health claim petition.

Consumers should be glad the good news about psyllium is now available. However, they and Congress should hold the FDA accountable for the censorship and bureaucratic delays that suppressed this healthful information for nine years.

1"Food Labeling: Health Claims; Soluble Fiber From Certain Foods and Coronary Heart Disease," Federal Register (21 CFR Part 101), Vol. 63, No. 32, February 18, 1998, p. 8103.

2 Bell, et al., "Cholesterol-lowering Effects of Psyllium Hydrophilic Mucilloid — Adjunct Therapy to a Prudent Diet for Patients With Mild to Moderate Hypocholesterolemia," Journal of the American Medical Association, 261:3419-23, 1989.

Consumers have an economic interest in the widespread use of strong encryption. Unfortunately, under the current political environment, either Congress or the administration may implement dangerous restrictions on the development, sales and use of this technology. Liberty is at stake, both economic and civil.

Consumers provide confidential information every time they use grocery discount cards, credit and debit cards, automatic teller machines, or any of the burgeoning interactive Internet technologies. Once the information passes from the consumer to the business, additional transfers of the information may occur between the business branch and its main office, the various departments within the business, and between different businesses. Strong protection for consumer information relies on security at every point of the transaction and at every point where the data is stored.

Encryption products allow consumers to scramble access codes and other data; it is encryption that prevents unauthorized access to sensitive information. Every day banking and medical records, credit-related information, private one-to-one computer transmissions, and Internet browsing habits are vulnerable to unwanted and illegal trespassing. The freedom to buy, sell, manufacture, use and improve strong encryption products is the best protection for consumer privacy and the integrity of electronic commerce. As with any other good or service, competition will prompt innovation and quality in encryption technology.

A market uninhibited by costly government regulation can respond to consumer demands and provide products that protect consumers in their homes, in schools, in the workplace, and in the global marketplace.

The foundation of federal encryption policy should be consumer choice. Consumer choice increases security for personal data and electronic transmissions, and it provides the incentives that ultimately will create solutions for the concerns of law enforcement officials. Citizens for a Sound Economy Foundation would like federal encryption policy to take three steps toward increased consumer choice and consumer protection.

1. Liberalize export controls.
American companies are being kept out of the world market by regulations that restrict the export of encryption products. The day has long past when the only competitive products came from America. Secretary of Commerce William Daley estimates that by the end of 1997, there were 656 encryption products available from 29 different countries.1 A study by the Economic Strategy Institute notes that more than 470 foreign firms make encryption products.2 America should export encryption products and American innovation, not jobs and opportunities.

2. Take a common sense approach to privacy.
The Bill of Rights guarantees that individuals are protected from government infringement upon the right to secure their homes, papers and effects. Encryption technologies have emerged as the most commonly used method of securing information on a computer network. In addition to Constitutional protections for individual privacy, this technology is also good for consumers. Encryption permits buyers and sellers to verify and authenticate a transaction over the Internet. Finally, vital personal information resides on countless computer and database systems – its security depends on widespread use of strong encryption.

3. Reject mandatory key-escrow or key-recovery systems.
The Department of Justice is pursuing a path of increased controls on domestic use and manufacture of encryption products. Dating to the Bush administration’s Clipper Chip initiative and living on through a variety of proposals by the Clinton administration, the government has sought to control domestic use of encryption. Mandatory key escrow, key recovery, trusted third party or key management systems are bad policy and should be abandoned. Any government policy that would mandate duplicate keys that allow third party or government access to private consumer transactions creates a vulnerability in the encryption product while creating a situation ripe for abuse.

The domestic market for encryption products exceeds $1 billion.3 The effect of encryption policy on the economy is not, however, limited to sales. The Economic Strategy Institute estimates that the current federal encryption policy will cost consumers between $2.8 billion and $9.8 billion in 1999.4 Competition, not government coercion, is the path that will insure consumer protection of both economic and civil rights.

1Daley, William M., Remarks upon the release of "The Emerging Digital Economy," April 15, 1998. Found at http://www.osec.doc.gov/ops/ecom.htm.

2Olbeter, Erik R. and Hamilton, Christopher, "Finding the Key: Reconciling National and Economic Security Interests in Cryptography Policy, Executive Summary" Economic Strategy Institute, p. 2, April 1998.

3Matlick, Justin, "U.S. Encryption Policy: A Free Market Primer," Pacific Research Institute, p. 1, April 1998.

4Olbeter and Hamilton, p. 4.

The American people are currently beleaguered by some of the highest tax burdens in history. The Tax Foundation recently reported that the median two-income family now pays $22,521 in federal, state and local taxes, or 38.2 percent of its income; up from 37.3 percent in 1996.1 Federal taxes now represent 19.9 percent of Gross Domestic Product (GDP), the highest peacetime percentage in history. By 1999, taxes will constitute 20.1 percent of GDP, the highest level since 1945. Congress and the president must get serious about passing real tax reform legislation, such as H.R.

The American people are currently beleaguered by some of the highest tax burdens in history. The Tax Foundation recently reported that the median two-income family now pays $22,521 in federal, state and local taxes, or 38.2 percent of its income; up from 37.3 percent in 1996.1 Federal taxes now represent 19.9 percent of Gross Domestic Product (GDP), the highest peacetime percentage in history. By 1999, taxes will constitute 20.1 percent of GDP, the highest level since 1945. Congress and the president must get serious about passing real tax reform legislation, such as H.R. 1040, the Armey-Shelby flat tax bill, that will offer tax relief to millions of America's over-burdened taxpayers.

Critics of the flat tax have suggested that it would raise taxes on lower and middle-income Americans while providing tax cuts for the wealthy. However, the evidence simply does not support this claim. As the following chart indicates, with a 17 percent rate, and personal allowances that exempt the first $33,800 of income for a family of four, the Armey-Shelby flat tax liberates millions of families from federal taxes. The flat tax is also progressive; meaning that people who earn more will pay more in taxes.

Tax Burden Under the Armey-Shelby Flat Tax

Income Allowance Tax Base Tax Rate Tax Owed

$20,000 $33,800 $0 17% $0

$30,000 $33,800 $0 17% $0

$40,000 $33,800 $6,200 17% $1,054

$50,000 $33,800 $16,200 17% $2,754

$75,000 $33,800 $41,200 17% $7,004

$100,000 $33,800 $66,200 17% $11,254

Source: Citizens for a Sound Economy Foundation calculations.

Not only would lower and middle-income families pay little or no taxes under the flat tax, they would also benefit from higher incomes. A study by economists Barry Seldon, of the University of Texas at Dallas, and Roy Boyd, of Ohio University, found that, under a flat tax, families in every income group would see their disposable income-- money available to save and spend-- rise. As the following chart indicates, the greatest gain in disposable income would go to the lowest-income Americans.

Disposable Income Under the Armey-Shelby Flat Tax2

Income Change in Disposable Income

$0- $12,881 7.6%

$12,882- $25,764 1.6%

$25,765- $38,646 2.5%

$38,647- $51,529 1.4%

$51,530- $64,412 1.0%

$64,413 and up 2.4%

There is little debate that the current tax system slows the rate of economic growth. This can be largely attributed to the disincentives that result from high marginal tax rates, which punish those people who work hard by taking more of their money as they increase their income and are pushed into higher tax brackets. History has shown that lower marginal tax rates, which allow everyone to keep more of what they earn, are a catalyst for economic growth.

Economists agree that a single-rate system, such as the flat tax, would spur economic growth. Unlike the current system, with five marginal rates ranging from 15 to 39.6 percent, the Armey-Shelby flat tax would not punish hard work and success. By lowering all marginal rates to a flat 17 percent, and by eliminating punitive taxes like the capital gains tax and the estate tax, the flat tax would provide everyone with a greater incentive to work, save and invest.

The importance of economic growth cannot be underestimated. Economic growth leads to higher wages, more jobs and improved living standards for all Americans. Even if the flat tax increased yearly economic growth by only half a percentage point (which is a conservative estimate), the average income for a family of four could be as much as $5,000 higher after ten years than under the current system.3

The American people are at the mercy of a two-headed monster — record-high levels of taxation and a tax system that stymies economic growth. Simply making cosmetic changes to the tax code by lowering taxes here and raising taxes there is not enough. The current tax system must be scrapped all together and replaced with a low, 17 percent flat tax that provides tax relief to millions of overburdened taxpayers.

1Claire M. Hintz, "Tax Burden on American Families Rises Again," Tax Foundation Special Report, November 1997.

2Barry J. Seldon and Roy G. Boyd, "The Economic Effects of a Flat Tax," National Center for Policy Analysis, Policy Report No. 205, June 1996.

3Steven Pearlstein, "What’s the Speed Limit on Economic Growth," The Washington Post, January 15, 1995.