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Ghost Savings: Spectrum or Spectral?

Posted By Ernest Istook On December 5, 2011 @ 4:22 pm In Economics | Comments Disabled

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The federal government owns vast assets that would be better managed and more productive in the hands of the private sector.  Selling some of these makes sense to reduce debt, reduce the deficit, and help shrink our bloated government.

However, selling assets is often abused as another Washington ploy that claims to reduce the deficit but becomes a ruse for more spending.

There is real money to be had from the sales.  Public lands.  Unused buildings.  And the ever-popular “spectrum auctions” that take bids for the right to use different portions of the airwaves.

But proceeds too often are spent to make short-term fixes of spending gaps, creating no permanent solutions to serious ongoing problems and instead delaying reforms.  They do not reduce the deficit.  They do not reduce the size of government.

Congress is poised once again to abuse asset sales by using them to justify more spending rather than to shrink government and its deficit spending.  A prime example is that they may use permanent auctions of spectrum to plug just part of a single year’s problems with Medicare payments to doctors.

That’s a standard Washington game:  Use different time frames to make something look better.  In the real world, we know that something can only be sold once (excepting perhaps the Brooklyn Bridge).  And one-time money should not be spent on repetitive costs.

Congress has created a recurring problem known in D.C. as the “doc fix.”  This traces to a 1997 decision (creating what is officially known as the Sustainable Growth Rate—SGR) to cap the amounts paid to doctors by Medicare.  That made projections of future costs appear to be smaller.  Because the SGR formula cuts payments so that they lag behind actual costs, doctors rightfully complain about government is price-fixing.  Physicians warn that they cannot afford to treat Medicare patients unless they are paid properly.

Undoing the SGR is expensive; it projects as a $300-billion expense over the next 10 years.  Instead, ever since 2003, Congress has rescinded the SGR’s cuts for one year at a time—fixing the payments to doctors.  Thus, the “doc fix.”

The longer the underlying formula remains unfixed, the more it gets out of whack.  Without a doc fix this year, medical providers will see a 27% cut in their fees come January.  But making just a one-year adjustment carries a $21-billion price tag.  Politics requires that Congress claim to get the money from an offset someplace else in government, rather than just borrowing that amount.

Enter the spectrum auction as a major source of money.

Since 1994, the Federal Communications Commission has auctioned off different wavelength segments of the airwaves, for uses that include radio and TV broadcasting, cell phones, public safety and military communications, and wireless broadband.  Having a license to use the spectrum has become increasingly valuable as technology expands.  The auctions have generated tens of billions of dollars to the federal treasury, much more than earlier allocation systems that involved only licensing and lotteries.

Auctions are held whenever Congress authorizes it for segments of the spectrum.  For example, an auction in 2006 raised $13.9-billion; one in 2008 raised $19.6-billion.  These proceeds do not always reduce the deficit, though, because Congress often uses some of the money for other things.  Like public safety communications networks.  Educational TV.  Cultural broadcasts.  So net savings often become illusory.

The successful spectrum bidders essentially get a permanent lease, subject only to costs of renewal applications every few years.  Those who have been using non-auctioned airwaves—such as licensed broadcasters and others who won under the old lottery system—want to hang onto those rights, and not have to compete in an auction.

The latest proposal is to have another spectrum auction and use its proceeds as an offset for a one-year “doc fix” for Medicare.

President Obama projected it could raise $28-billion, but wanted to use big chunks of that for a public safety communications network.  The Congressional Budget Office projected that network would cost almost $12-billion, reducing the net budget savings of the spectrum auction to $15.8-billion.  Several bills in Congress propose variations on this theme.

But netting $15.8-billion from auction of permanent spectrum rights is an unbalanced and insufficient offset for the $21-billion cost of a one-year “doc fix.”  The fix is temporary; the sale is forever.

Doing a doc fix a single year at a time is costly and delays the real reforms needed to Medicare.  But by pretending that selling part of the spectrum forever is a justified offset for more spending, Congress would be trying to grab money out of thin air.


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