The Obama Phone's Roots in Government Deregulation

The Obama Phone lady is many things in the eyes of conservatives. To Rush Limbaugh, she is the personification of government-fostered dependency: "She may not know who George Washington is or Abraham Lincoln, but she knows how to get an Obama phone." To others, such as reader John Kane, she symbolizes a corruption of the democratic process: "When a politician starts outright handing out toys for votes, to the tune of millions in a critical swing state, that's news." To others, such as reader Judy Helton, she symbolizes self-interested greed: "The cell phone lady IS a typical Obama voter, that being welfare thieves of every color, gender, age, sexual preference, religion and culture, hoping to use a voting booth to self enrich at the uncompensated expense of the entire American working population." Or, as reader David H. Lynch Jr. wrote, she represents a half of the country financing a cushy lifestyle with the other half's tax dollars: "47 percent of people are not going to vote for Romney — because they are getting bribed by government." For reader Renee McGhee, she represents the unjust winner in a zero-sum game of government handouts: "Will OBUMMER START to STIFF those on Social Security and STEAL FROM OUR bank accounts to MAKE it right with HIS PEOPLE???"

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Of course, we doubt that anyone who's been passing around the Obama Phone video is thinking too deeply about the "issue" of Obama Phones. We think it's just a cheap attempt to dabble in racist stereotypes. But let's take them at their word: if the most pressing issue in the 2012 election is government-funded cell phones, and let's even set aside the misnomer of "Obama Phone." Why would someone in 2012 think that Barack Obama gave them a phone? The Obama Phone is a perfect example of the combustible mix of deregulation, lobbyists, and clever marketers: a more efficient system that's also expensive and wasteful.

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But first, you have to go way, way back. The telephone business was once a regulated monopoly, which in practice meant the government could tell the phone companies to do things — like providing discount service for poor people or pay to string wires out to remote areas — in exchange for continuing to enjoy their monopoly. But over the course of the last 30 years, starting with the 1984 break-up of the AT&T monopoly of local telephone service into Baby Bells, regulations have eased as new telecommunication providers have emerged. 

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The creation of the Lifeline program -- which has now been dubbed the "Obama phone" -- during the Reagan administration was one of these attempts to ensure that the new fragmented and competitive telecom industry still provided the same public goods that the old monopoly did. Far from a government cheese handout, Lifeline was funded through a "universal service charge" on phone bills, and then administered by a private non-profit. While the distinction between a surcharge and a tax may seem technical, it was specifically selected to over a proposed welfare program — a straight-up handout referred to as "phone stamps." The Universal Service Fund was created to be a lean, nimble private sector beast.

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The guys who came up with the idea for Lifeline were Republican Sen. Bob Packwood and Democratic Rep. John Dingell. The Reagan administration soon got on board, as The New York Times reported on December 27, 1983, in part because of "a growing recognition that the price of telephone service could become a 1984 campaign issue." Then other Republicans got on board -- Sens. John Heinz and John Chafee urged the Federal Communications Commission to "take concrete steps to ensure that local telephone companies offer lifeline programs designed to preserve affordable phone service," according to The Washington Post on September 15, 1985.

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Initially, AT&T and MCI attacked the proposed legislation. Telecom executives wanted "phone stamps," and thought a government agency should "target a subsidy to the needy," as AT&T chairman Charles L. Brown told Congress in 1983. But Lifeline backers didn't "want to create a politically vulnerable and unwieldy government 'phone-stamp' program that would subsidize phone service for the poor through increases in state and federal taxes," The Washington Post reported July 30, 1983. Phone companies were already subsidizing local service through long-distance rates, and supporters wanted Lifeline funded in a similar way. Thus a new line appeared on phone bills.

1996

Lifeline was expanded in 1996 in yet another moment of pushing for small government. AT&T agreed to offer more plans to low-income people in exchange for an end to the FCC's last phone price controls, as The New York Times reported September 28, 1995. The Telecommunications Act of 1996 created the Universal Service Fund, which mobile phone carriers had to contribute to. The money collected by the universal service fee goes to the Universal Service Administrative Company, which gives the money back to companies to build cell towers in rural areas, offer service to poor people, get schools and libraries connected to the Internet, and get rural health care providers communications services.

Mid-2000s

So, now Lifeline was a private, business-friendly idea to fund cell phones for poor people, but it wasn't quite free market enough. In an editorial for Business Communications Review on July 1, 2004, Eric Krapf wrote, "lots of poor people have to drive from their homes in the city to malls or other suburban places to work in low-wage service jobs (assuming they're lucky enough to have a car in the first place). For these folks, who don't get to spend a lot of time around the house, a cell phone would probably be a better 'lifeline' option than landline service." Krapf suggested vouchers so people could pick what kind of communication is best for them. "Then subsidize the least expensive end device and set up a prepaid account they can use with whatever type of carrier they want," he wrote. This is what happened. Customers can now pick a landline or a cell phone.

Congressional hearings at this time focused on how to modernize the 1996 law. "See, the reason I'm looking at this flexibility is just for the same reason when we wrote the '96 Act, and some of us were around here when we did that," Sen. Conrad Burns, Republican of Montana, said in a hearing on the Universal Service Fund in March 2006. "We missed the estimate of wireless users so bad it's unbelievable now that we've got more cell phone numbers than we've got hardwired numbers." South Carolina Republican Jim DeMint said, "I'm worried that the whole concept of Universal Service Fund is basically subsidizing or based on an old technology."

2004

The telecom industry had been fully deregulated at this point, but there were still just a handful of big players: AT&T, Verizon, Sprint, etc. And they didn't really advertise their Lifeline programs because they weren't big money-makers. But in 2004, a Miami-based company named TracFone, a subsidiary of Mexican company America Movil, applied to the FCC to be designated an eligible telecommunications carrier so it could participate in the Lifeline program. Their business idea was to sign up people eligible for Lifeline, give them a phone and minutes, and then get paid by the Universal Service Fund, and maybe sell subscribers extra minutes. While it may not have been a big business for the big players, TracFone is a wireless reseller -- it doesn't own its own cell towers. It resells minutes from other carriers, which is why if you've ever used a pre-paid phone provider like TracFone or Boost Mobile, you know it's sometimes hard to get calls to go through. This means TracFone's customer base is more down-market -- no credit checks, no monthly bills. In addition to getting access to a big source of new cash, a TracFone spokesman also hoped its new Lifeline subscribers would move on to become regular customers.

TracFone got a kind of trial run in 2005. After Hurricane Katrina, the FCC handed out free cell phones and 300 minutes with money from the Universal Service Fund to people who'd been displaced by the storm. Among the carriers picked to give out these free phones was TracFone. The rules were fairly strict at the time: According to a TracFone press release, "the applicant must have lived in an area affected by Hurricane Katrina, as determined by FEMA, and have been approved by FEMA to receive emergency housing assistance. Applicant must provide TracFone with a copy of the FEMA grant letter advising them they are eligible to receive support, present a copy of a Federal or state-issued I.D. and must answer eligibility questions in writing."  But even then, you could see the potential for waste -- the FCC didn't tally how many people got those Katrina phones, the New Orleans Times-Picayune reported March 3, 2006.

2008

TracFone was the first carrier the FCC approved to offer free cell service, instead of just discounted service, as the Associated Press reported on August 15, 2008. The FCC kicked in $10 per subscriber to TracFone's SafeLink program, and TracFone charged $3.50 more a month in service fees to pay for 68 free minutes a month. Tennessee was the first state to get SafeLink, and it quickly expanded to Virginia, Florida, and a bunch of other states. By March 2009, TracFone complained to the FCC that it wouldn't get people signed up fast enough, because local governments were not quickly certifying it for basic 911 access (the phones have to be able to call 911 even if they're out of minutes).

2010

Soon, a whole bunch of other wireless carriers got in on the program -- by 2010, Virgin Mobile, Verizon, Sprint, i-Wireless, Head Start, Consumer Cellular, Midwestern Telecom, Allied Wireless, and others had free phone plans. That's why you can find all these "free cell phone" websites that look kind of shady, like Obamaphone.net or FreeGovernmentCellPhones.net. In 2011, the FCC said that these carriers were "fiercely competing for the business of low-income consumers by marketing ‘free’ phones." TracFone spokesman Jose Fuentes told Bloomberg in February, "We’ve had a lot of fly-by-night companies come in." Fuentes estimated that more than 1,700 wireless companies were part of Lifeline. Between 2008 and 2012, the number of people with Lifeline phones grew from 7.1 million to 12.5 million. These companies may be fly-by-night at providing cell phone service, but they are pretty good at marketing, and as the rush of merchandise tied to his inauguration showed, Obama's name seems to move product. But they could have chosen another hook. Reaganfreedomphone.com is still available if you want to try to reach out to the Fox News demo.

And that brings us to why there have been abuses in the Lifeline program. People who don't qualify for the program have an incentive to lie and apply anyway, to get free stuff. But the companies also have an incentive to sign those people up -- because the government pays $10 per subscriber, and the companies get to charge for minutes beyond the amount Lifeline users get for free. TracFone customers who run out of SafeLink minutes, for example, can buy a 60-minute card for $20, or 33 cents a minute, which is expensive.

Even back in the 1980s, when the program started in California, Pacific Bell admitted it had no way of verifying applicants' true income. PacBell's vice president for rate making, Glenn F. Sullivan, told the Los Angeles Times on March 10, 1988 that doctors and other people who probably weren't actually poor had signed up. "Sullivan said there is no effective way for Pacific Bell to check customers' claims of low income," the Times reported.

Worse, subscribers have been able to sign up for more than one phone, even though only one per household is allowed. And that brings us to another thing complicating this political lesson. One of Lifeline's problems was the lack of centralization. In January of this year, Federal Communications Chairman Julius Genachowski proposed a central database to make it easier to check for double dippers. The FCC found about 270,000 duplicate subscriptions in 12 states alone in 2011. The FCC says its overhaul will save $200 million this year, and $2 billion over three years. It will address the problem pointed to by PacBell back in the 1980s -- there was no way for these companies to verify income -- by creating "eligibility databases from governmental data sources."

That means the solution, in this case, to cutting a huge amount of waste is bigger government control of the program. But that's probably not where Limbaugh was going with the "Obama Phone" video.