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Hitting Budget Numbers May Be Up for Auction | Commentary

Last week, the Congress passed a deal that paved the way to avert another government shutdown in January. Yet as Democrats and Republicans on Capitol Hill — along with the White House — debated America’s fiscal future, there is another debate happening far from the spotlight over how to auction off the next round of spectrum for mobile wireless carriers.

While how to hold an auction may seem esoteric and technical, these two debates are deeply interconnected.

Of course given the state of the government’s finances, one would generally hope that our public leaders would seek the most money when the government sells a public asset, such as wireless spectrum.

However, wireless carriers, such as T-Mobile and Sprint, have argued to the Federal Communications Commission that we should not do that. These competitors of AT&T and Verizon have advocated that the FCC should limit how the two largest wireless providers can participate in the upcoming 600 MHz spectrum auction.

As my colleague Maya Meidan, Yale’s Phil Haile and I show in a recent paper, even the mildest of the participation restrictions currently under discussion will cost between $7 billion and $13 billion in spectrum auction revenue. More severe restrictions, which might result in de facto exclusion of AT&T and Verizon from the auction, would magnify this loss, implying auction revenue reductions of as much as $27 billion. (T-Mobile claims that it has solved this revenue hole through the so-called dynamic market rule, which will lift bidding restrictions if not enough revenues are raised. But the T-Mobile proposal still restricts bidding and will result in losses of similar magnitudes.)

And at a time where it is close to impossible to find consensus over how to raise revenue or cut spending further, the country cannot afford leaving billions — and perhaps tens of billions — of dollars on the table, which is precisely what limiting participation in the upcoming spectrum auctions would do.

The upcoming auction of 600 MHz spectrum is expected to be a significant revenue raiser. So much so that when President Barack Obama signed into law the Budget Control Act in 2011, he and Congress were counting on proceeds from this auction to pay for the cost of making this spectrum usable by wireless providers and to build FirstNet (a critical first-responders communications network), while helping the government reduce the deficit by $13 billion over the subsequent decade.

If the FCC is going to make policy that brings in less money and increases the federal deficit, then the Office of Management and Budget, Congressional Budget Office and the relevant congressional committees should be part of the debate.

Supporters of participation limitations claim that revenue losses would be offset by more aggressive bidding strategies by other firms or by the entry of new bidders. In effect, they argue that less will be more — and we should just trust their theoretical arguments.

However, my colleagues and I have shown that the number of bidders outside the biggest four wireless carriers (AT&T, Verizon, Sprint and T-Mobile) would need to more than double to offset the adverse effects arising from even the least aggressive restrictions on auction participation under consideration.

Alternatively, the budgets of non-AT&T/Verizon bidders would need to increase by 80 percent to offset the same adverse effects. Such increases in the number of bidders, or in the budgets of existing bidders, are so large that they are implausible. If it sounds too good to be true, it usually is. There is no economic support for the argument that limiting participation will increase revenue — in fact, the opposite is likely true, to the tune of billions of dollars.

In a time when the federal government needs more revenue, the proposals under consideration to limit participation in the upcoming FCC auction of 600 MHz spectrum seem particularly misguided. With so much money at stake, those who care about our fiscal balance should focus on how to maximize the returns from this auction and weigh in on this spectrum debate.

Jonathan Orszag is a senior managing director of Compass Lexecon LLC, an economic consulting firm. He served as an economic policy adviser on President Bill Clinton’s National Economic Council. The study mentioned in this op-ed was funded by AT&T.

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