Wi-Fi for everyone?

The law, signed by Democratic Gov. Ed Rendell last week, says that a municipality generally "may not provide to the public for compensation" any kind of Internet service. This has alarmed Philadelphia, which dreams of blanketing 135 square miles of downtown with Wi-Fi signals.

Many no doubt find the principles behind Pennsylvania's legislation to be entirely sensible. Their argument: Governments should not be in the business of providing Internet service.

The reason for that stance should be familiar to anyone who's waited in line at the local DMV. Whether local, state or federal, government agencies aren't terribly responsive to what "customers" want. Plus, they're prone to wasting tax dollars. Wireless service is no exception.

In the case of Pennsylvania, advocacy groups have predictably attacked the law. Jeff Chester, a Washington, D.C., activist, circulated a statement warning that the state is "prohibiting any city in Pennsylvania from establishing its own Internet service."

That's simply false, and Chester backed away from that claim in a subsequent e-mail exchange with me. In reality, the new law lets cities and townships offer free Internet service of any kind. The law's restriction only kicks in when they provide Internet service "for compensation"--that is, a fee that subscribers would be required to pay. Translated: Philadelphia may be the city of brotherly love, but it's no example of municipal munificence.

The law contains a second important section. This section allows municipal governments to go ahead with their plan if they have "submitted a written request" to the local telephone company--and if that company declines to offer the service. Philadelphia has inked a deal with Verizon to let the city's wireless project proceed.

Lessons from Australia's airlines The guiding spirit behind the law is that the proper role of government should be carefully circumscribed to providing what private companies can't. Police, courts and roads arguably fall into that category. Wireless service doesn't.

Critics maintain that when governments try to compete with the private sector, they tend to botch things up and waste taxpayers' money. Economist David Davies once compared a private airline, Ansett Australian National Airways, to a government carrier that flew very similar routes on the same type of aircraft and charged identical passenger and freight rates set by the government.

Davies published his conclusions in the 1971 Journal of Law and Economics. The private airline was more than twice as productive in carrying freight, he discovered, and transported 20 percent more passengers per employee.

This shouldn't come as a surprise. When managers of an enterprise are spending tax money, they don't perform as efficiently. "Without private investors behind the project, there's no hard-nosed, self-interested check on how wisely the enterprise is operated," says Don Boudreaux, chairman of the economics department at George Mason University. "This fact is true no matter how worthy the enterprise and how smart and experienced the managers."

The Internet's commercial history is in part the story of entrepreneurs who tried to make their fortunes by supplying connectivity for a profit. Some, such as Digex's Doug Humphrey, succeeded magnificently. Others, such as Broadband West's Jim Selby in Aspen, Colo., saw their start-ups go bankrupt because they misjudged customer wants or weren't as capable managers as their competitors. The profit motive encourages investment.

Governments muscling their way in short-circuits this useful process. It requires taxpayers to pay for mistakes, rather than investors who have voluntarily chosen to put their own money at risk. It also creates a powerful incentive for city bureaucrats to squeeze out local businesses that might be viewed as potential rivals--a squeeze that could come in the form of onerous taxes or oppressive regulatory requirements.

While having private firms provide Internet access is no guarantee privacy will be protected, it's probably a better option than having governments do it. In July 2000, a courageous attorney for Earthlink, Robert Corn-Revere, was the first person to reveal details about the FBI's Carnivore surveillance system. Earthlink fought the FBI in court on privacy grounds. Does anyone think Philadelphia would be that bold?

Note that I'm not defending the way the Pennsylvania law is worded. It spans dozens of pages that address unrelated topics in ways that may or may not be wise.

Even the relatively small section dealing with municipal Internet service unfairly favors Verizon over cable companies and other Internet providers--a testament to Verizon's masterful lobbying, not its cogent policy making. Elected officials in Philly making a secret deal with Verizon is unseemly.

But I'll make one prediction you can take to the bank: If other states agree that the broad principles behind this law are sound, they will follow Pennsylvania's lead.