The Role of Government in a Digital Age Joseph Stiglitz, Peter Orszag, and Jonathan Orszag Presented at EPI Conference on Privatization: Trends, Evidence, Alternatives January 11, 2001 Original study commissioned by the Computer & Communications Industry Association

Overview Existing rules for evaluating governmental activities need to be updated to reflect ongoing shift toward a digital economy.   President Clinton: For the government, “knowing when to act and – at least as important – when not to act, will be crucial to the development of electronic commerce.” Purpose of report: explore when the government should and should not act.

Economic Theory The theoretical underpinnings behind private versus public production shift as the economy moves toward a digital one. On one hand, the public good nature of production in a digital economy, along with the presence of network externalities, may suggest a larger public role than in a bricks-and-mortar economy. On the other hand, an information-based economy may also improve the quality and reduce the cost of obtaining information, which by itself makes private markets work better than before. Furthermore, government failure may be even more pronounced in the context of rapidly moving information-laden markets than in traditional bricks-and-mortar markets.

Principles for Government Activity Lack of clear theoretical guidance regarding the separation between government and business in a digital economy makes decision-making rules all the more important. OMB Circular A-76 and other existing norms for government provision of goods and services need to be updated for the digital age.

Principles for Government Activity Green Light Principles: Activities the government should undertake with little concern Yellow Light Principles: The government should exercise increasing levels of caution before undertaking Red Light Principles: The government should exercise substantial caution before undertaking

Green Light Principles Principle 1: Providing public data and information is a proper governmental role Principle 2: Improving the efficiency with which governmental services are provided is a proper governmental role Principle 3: The support of basic research is a proper governmental role

Yellow Light Principles Principle 4: The government should exercise caution in adding specialized value to public data and information Principle 5: The government should only provide private goods, even if private-sector firms are not providing them, under limited circumstances Principle 6: The government should only provide a service on-line if private provision with regulation or appropriate taxation would not be more efficient

Yellow Light, continued Principle 7: The government should ensure that mechanisms exist to protect privacy, security, and consumer protection on-line Principle 8: The government should promote network externalities only with great deliberation and care Principle 9: The government should be allowed to maintain proprietary information or exercise rights under patents and/or copyrights only under special conditions (including national security)

Red Light Principles Principle 10: The government should exercise substantial caution in entering markets in which private-sector firms are active Principle 11: The government (including government corporations) should generally not aim to maximize net revenues or take actions that would reduce competition Principle 12: The government should only be allowed to provide goods or services for which appropriate privacy and conflict-of-interest protections have been erected

Case Studies The Department of Labor’s On-Line Job Market Information United States Postal Service eBillPay Lexis-Nexis On-Line Tax Preparation Software Fee-Based Search Engine from the National Technical Information Service

USPS eBillPay Electronic Bill Presentment and Payment (EBPP): delivery of bills and collection of payments   USPS announced in April 2000 that it was entering EBPP market. Partnered with CheckFree and a smaller provider (YourAccounts.com). Case study: Is EBPP an appropriate activity for a government corporation like the USPS?

eBillPay: USPS Rationale GAO: Movement from paper to electronic billing could reduce revenue by more than $16 billion per year for USPS, assuming that every bill now mailed is instead billed and paid on-line. Billing statements currently represent 25 percent of USPS revenue.

Evaluating eBillPay OMB Circular A-76 limits the government’s ability to engage in commercial activities that compete with the private sector. The eBillPay program would be explicitly allowed under the “Market Tests of Experimental Competitive Products” section of the proposed Postal Modernization Act of 1999 (H.R. 22).  

Firms already offer EBPP

eBillPay: Green Light Principles Is access to EBPP a public good? Even if it is, eBillPay by itself will not provide universal access to EBPP. Does not address digital divide: those not on-line do not gain access. Pricing is not lower than competitors. Professor Dan Spulber of Northwestern University: “The Postal Service raises its traditional argument of universal service, namely that only the government can provide a low-cost service that’s available to all. And I think that’s not really the case. The private sector is fully capable. I mean, where does it stop? At some point, the same arguments could be used to justify the Postal Service delivering pizza.”

eBillPay: Yellow Light Principles USPS not responsible for privacy or consumer protection issues in EBPP Network externalities are more complicated. EBPP seems to be characterized by network externalities. But private sector seems to be developing EBPP standards itself, and does not necessarily need further impetus from the government.

eBillPay: Red Light Principles The government should exercise substantial caution in entering the EBPP market, since a number of private-sector firms are active. USPS activity seems motivated by net revenue concerns; not an appropriate motivation for governmental activity. Government should only be allowed to provide goods or services for which appropriate privacy and conflict-of-interest protections have been erected: Issues surrounding USPS eBillPay?

Conclusions Appropriate role of government in the economy is not static. Principles and case studies illuminate boundaries for governmental action. In some cases (e.g., judicial information), the government should be doing more. In some cases (e.g., the America’s Job Bank), government seems to have struck the appropriate balance among conflicting pressures. In other cases (e.g., eBillPay), the government seems to have over-stepped the boundaries that should apply to public provision of goods and services.