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We’re from the Government, and We’re Here to Help You Buy a House
There has been some good analysis of this week’s much-hyped agreement between the U.S. Treasury Department – which facilitated the meeting, we are told, but didn’t use any form of coercion – and mortgage lenders to bail out assist homeowners in danger of being slammed with a much higher monthly payment on their subprime mortgage come January. But there are some elements of the deal that haven’t been greeted with much skepticism – or, indeed, haven’t been reported much at all.
For starters, Treasury secretary Henry Paulson insists the agreement won’t cost taxpayers money. What he really should have said is that it won’t cost federal taxpayers money. But it might cost state taxpayers money. The White House will push Congress to let state governments issue tax-free bonds to fund programs that help homeowners refinance their mortgage. Those bonds have to be paid off by taxpayers some day. I usually like federalism, but this is not the sort I’ve grown to love.
Another part of the deal is to allow the Federal Housing Administration to expand its programs and help refinance 200,000 mortgages. As Paulson reminded reporters, the administration is asking Congress to increase the ceiling on the amount of FHA loans and lower the down-payment requirements to below the current rate of 3% of the home price. And here I was thinking big loans that were handed out with little or no money down were part of what got us into this problem in the first place. Silly me.
Nor is it really clear that the administration’s approach here won’t actually cost federal taxpayers money, either. The proposal allows the FHA to charge loan insurance premiums based on risk, like private lenders do. Currently, all FHA mortgage holders – at a high-risk of default or not – are charged the same amount. You realize this is a much-needed change when you discover that currently the FHA is running deficit of $143 million because so many of its loans have gone bad and the premiums it collects from all loans isn’t enough to cover the losses. But, as Bloomberg News reports, the post-refinancing default rate of the subprime loans that the White House now wants the FHA to play with could be between 40 to 60 percent. Taxpayers might get stuck paying for these loans after all.
The implicit theme of these proposals is that Uncle Sam might just be better at this mortgage business thing than the private sector. I guess it might be tiresome to insert a joke here about the U.S. Postal Service, eh?
Why a Government Spending Freeze is Incomprehensible to Bureaucrats
In today’s Washington Post, columnist David Ignatius takes Congress to task for its failure to pass the appropriations bills – and not just this year but almost every year since 1977.
“The talk among some of my government buddies this week was an obscure term of federal budgeting known as a “continuing resolution.” This is what Congress passes when it hasn’t gotten its act together to pass a real appropriations bill before the start of a new fiscal year. The ‘CR,’ as it’s known, allows agencies to continue operating at the same spending level as the previous year. But it plays havoc with normal management functions such as planning and contracting.”
“[University of Maryland political scientist Roy T. Meyers] summarized the inefficiencies that result from having to run an agency without knowing your budget. ‘When regular appropriations are delayed, uncertainty about final appropriations leads many managers to hoard funds; in some cases, hiring and purchasing stops.’” [Emphasis mine.]
I don’t really have a problem with Congress getting very little done. And I kinda like CRs, especially if they last all year. Those sorts of CRs dramatically limit spending, as evidenced by the just-lapsed fiscal year. The budget won’t grow until Congress passes all the appropriations bills. That’s probably what Ignatius and his “government buddies” don’t like.
When Congress passes a CR, it’s wrong to say that an agency head won’t know what his likely budget will be. He knows exactly what it will be: last year’s spending level. This simply means managers have to live within the constraint of a budget that isn’t higher than last year’s.
Of course, businesses have to deal with this sort of thing all the time when their profits dry up. Perhaps it should be no surprise to the cynical that government bureaucrats – who have a guaranteed “customer base” (read: taxpayers) because anyone who doesn’t “buy” their product (read: tax evaders) can be arrested – don’t like to deal with it.
Bush IS a Big Spender, Pt. 2
Further to Dan’s post below, here’s the McClatchy story arguing that President Bush is the biggest spending president since LBJ. The article got lots of notice — probably because it was linked on the Drudge Report for most of Wednesday.
The story is mostly old news — I’ve been making the same point for years. But, because it is based on updated data that I provided to the reporter, I’m happy to see the message ripple through the news cycle.
Clearly, the folks at IBD aren’t happy with the McClatchy story. They describe the notion that Bush can be called the biggest spender since LBJ as a “dishonest argument.” Their editorial in today’s edition points out that this claim is based on annual growth rates. That’s true, but the authors go on to say that a better measure of whether a president is a big spender or not should be based on how large government is as a share of GDP.
Funny thing is, I agree with them, and I’ve made that point before. But the argument the IBD editorial makes is misguided. (I won’t stoop to calling it “dishonest.” I don’t allege they deliberately falsified data, something that would obviously be dishonest in every sense. But calling the argument I’m making “dishonest” — well, them’s fightin’ words!)
To illustrate their point, the IBD editors published a chart detailing the average burden of government spending as a percentage of GDP by president. By this measure, George W. Bush has presided over an average spending burden of 20% of GDP during his time in office to date. That puts him around the middle of the presidential pack over the past 40 years.
That may not seem so bad. But a president who reduced government spending from 30% of GDP to 10% over his term in office would get the same ranking as Bush. So would a president who increased spending from 10% to 30%. Wouldn’t we call the latter a big spender and praise the former? Yes, we would and should.
The Future of the GOP?
Tuesday night’s CNBC/MSNBC Republican candidate debate showed those of us who still value limited government the extent of the GOP rebuilding process to date — a preview of what Republicans would stand for in a post-Bush world.
The top-tier candidates avoided the crass populism some of the second-tier candidates favor and defended free trade instead. It also seems that the candidates have at least learned something from the electoral trouncing last year since each of them ran screaming from the wreckage that is the GOP spending record of the past six years.
Yet each candidate seemed unwilling or unable to enunciate a coherent view of what the role of government should be in a free society. The support for free trade was saddled with an incongruous quest for an unachievable and nebulous “energy independence.” The promises to “control” health care costs were mostly uninfluenced by the notion that it was government meddling that caused the problems in the first place. Even a tepid endorsement of a private-account solution to the impending bankruptcy of Medicare and Social Security was nowhere to be heard.
Some limited-government conservatives might have been slightly reassured by the look of the GOP future on Tuesday, but I’m sure many were left wanting, too.
[A version of this post originally appeared in a National Review Online symposium today.]
Refereeing the Cheney-Greenspan Debate
In today’s Wall Street Journal, Vice President Cheney presents a friendly rejoinder to Alan Greenspan’s recent comments about the fiscal profligacy of the George W. Bush years. In it, Cheney notes:
On the spending side of the ledger, I can’t dispute Alan’s general notion that the federal government is too big and spends too much money–we’ve agreed on that point since we both worked in the Ford administration more than 30 years ago. President Bush feels the same way, and that’s why he has steadily reduced the annual rate of growth in non-security discretionary spending.
The key here is to notice that Cheney is only referring to “non-security discretionary spending.” What Cheney wrote isn’t necessarily wrong. But to make it true, you need to ignore all spending on entitlements (like Medicare and Social Security), everything the Pentagon does, and interest payments on the national debt.
What you’re left with is a very small slice of the budget. About 13%, actually. Asking Greenspan to grade the president using only this very narrow criterion is like asking your college to re-compute your graduation-day GPA using only four of the classes you took.
Why ignore the rest of the budget? After all, the Bush administration did have a hand in expanding many parts of it – the Medicare drug benefit is Exhibit A. Nor is everything the Pentagon does related to the operations in Iraq and Afghanistan. And the rising costs of the national debt are a result of the GOP’s unwillingness to cut spending in the face of deficits.
So, what if we put everything back into the mix except the money spent on the Department of Homeland Security, the security-related functions of other federal agencies, and the operations in Iraq and Afghanistan? (The last of these has been estimated by the Congressional Budget Office as recently as January of this year.)
Doing that, you’ll notice the growth rate has not declined steadily. In fact, as you can see in the chart below, the rate has jumped all over the place. It never went below 3% and, thanks to election-year spending sprees, sometimes went as high as 9%. The average annual growth rate since 2001 was 5.8% — faster than the average annual growth of GDP during that period (4.5%) and almost twice inflation (3%).
Looks to me like Alan Greenspan is on the right side of this fight.
Finally, Some Not-So-Bad News on the Budget
The big surprise in the Congressional Budget Office mid-year budget estimates released today isn’t that the year-to-year deficit shrank again. Or that the long-term liabilities in Medicare and Social Security continue to impend.
The surprise is that federal spending will only grow about 3% in the current fiscal year that ends this October. That’s a big improvement over the annual average 7% growth we’ve seen since the first day of the George W. Bush presidency.
How did that happen? Those familiar with my previous research will probably not be surprised to hear that the new political reality – divided government – has something to do with it.
True, agriculture subsidies are lower this year as a result of higher crop prices. And the run-up in spending on a variety of programs in 2006 – like the payouts on flood insurance policies after Hurricane Katrina – was temporary. The most remarkable factor in the trends, however, is that non-defense discretionary spending has been frozen for the first time since the maiden budget of the “Republican Revolution” Congress. (If the trends CBO estimates hold for the remainder of the year, such spending might actually decline by $1 billion.)
Sure, part of this is also the result of a decline in spending on federal Katrina relief. But there’s something else going on, too. Earlier this year, the new Democratic Congress decided to put the federal budget on auto-pilot until October. Instead of passing new appropriations bills to fund the government for the entire year, they passed what is called a “continuing resolution” to keep the government operating.
This didn’t happen because the Democrats were all that interested in spending less money. They just wanted to get the old budget work left to them by the outgoing Republican Congress off the table so they could get on with more ideological-base-friendly legislation, like the minimum wage increase. And the Democrats knew that the president might finally start vetoing legislation, too. A protracted battle over the budget wasn’t something they wanted to spend their energy on in the first half of the year. Thus, the auto-pilot continuing resolution: a piece of legislation that keeps the government running at basically the inflation-adjusted level of the previous year.
With the White House veto strategy finally a credible threat*, it looks like we might have a similar sort of outcome on spending this year, too. Isn’t divided government wonderful?
* As I told David Jackson of USA Today a few weeks ago, George W. Bush “dislikes Democrats more than he likes big government.”
Another Government Shutdown?
In Wednesday’s OpinionJournal.com Political Diary, John Fund writes that House minority whip Roy Blunt told reporters that he believes President Bush will deliver on his threat to veto the budget bills currently working their way through Congress. And with enough Republicans on record agreeing to uphold the veto, Blunt suggests we might end up witnessing a government shutdown later this year.
As you might recall from the mid-1990s, a federal government shutdown does not mean that every federal agency stops whatever it is they are doing. It’s only the non-essential ones that grind to a temporary halt – and, yes, there is an official definition of what constitutes essential government functions: mainly law enforcement and defense. That Congress continues to fund everything else is what keeps policy wonks like me busy.
Maybe Blunt’s statements are the opening gambit in a political game of chicken. There might be little interest in a government shutdown among the Democratic leaders in Congress. So the follow-up to an upheld Bush veto would likely be a compromise stop-gap measure (like a “continuing resolution” that puts the government on auto-pilot for the rest of the fiscal year) that results in much less spending than would otherwise occur in the course of an unimpeded appropriations cycle.
In either case, those of us who prefer divided government might have another example to add to our growing “Great Moments in Gridlock” list.
Is Efficient Government A Good Thing?
One of the behind-the-scenes initiatives of President Bush’s budget staff the past six years has been something called the Program Assessment Ratings Tool (PART) analysis. It’s an effort to measure the “effectiveness” and “efficiency” of nearly 1,000 federal programs. Each program is graded on how well it achieves its “goals,” with marks ranging from “effective” (the equivalent of an A grade) to “ineffective” (the equivalent of an F grade).
In Tuesday’s Investor’s Business Daily op-ed section, Ernest Christian and Gary Robbins take a look at the results to date of the effort:
Congress is about to wave its wand over nearly $1 trillion of additional “discretionary” spending that will, among other things, perpetuate or increase funding for nearly 500 expenditure programs that are not even “moderately effective,” according to the Office of Management and Budget. This includes more than 200 expenditure programs that have failing grades of D or F.
By our calculations, the OMB study, called Program Assessment Ratings Tool (PART), further reveals that on average more than half of all federal expenditure programs are falling about 50% short of their stated goals.
This means that out of every dollar spent, 50 cents may possibly be accomplishing something worthwhile, but the remaining 50 cents might as well have been poured down a rat hole. In these cases alone, the cost of government incompetence is over $250 billion per year.
The list of programs with the lowest grades might make any supporter of limited government point wildly and say, “Told you so!” This rogue’s gallery includes the Department of Housing and Urban Development’s pork-filled Community Development Block Grants, the Department of Education’s Even Start literacy program, and Amtrak. Read the rest of this post »
How I Learned to Read the New York Times While Simultaneously Scratching My Head
From a column on tax reform by Floyd Norris in today’s Times:
“Senator Ron Wyden, Democrat of Oregon, has traveled around to promote what he calls a Fair Flat Tax Act, which is basically an attempt to go back to what Mr. Reagan enacted. It would get rid of many deductions — but save some of the more popular ones, like retirement savings accounts and mortgage interest — and have three tax brackets, of 15, 25 and 35 percent.” [emphasis mine]
Tony Soprano Earmarks
A commentary from Jeff Birnbaum of the Washington Post aired on American Public Media’s Marketplace yesterday. The topic was the evolving alternative to earmarks, what Birnbaum calls “phonemarks.”
Here’s the basic idea (from the transcript available at the Marketplace website):
Eager to avoid the bad publicity of legislative earmarking, lawmakers are secretly calling or writing bureaucrats and demanding that they fund their pet projects by fiat. These projects-via-telephone, or “phonemarks,” are the hottest new gimmick on the Washington scene.
Executive branch officials can dole out millions of dollars with impunity. And they avoid the scrutiny of the public, since they are done quietly and without any disclosure.
Earmarks actually have to be written down in a public law. Phonemarks, on the other hand, are accomplished through bureaucratic sleight-of-hand and nobody but the lawmaker and the bureaucrat need to know for sure.
My preferred descriptor is “Tony Soprano earmarks.” As I wrote in a January 22 column for Business Week:
Even if transparency leads to fewer earmarks, there are no promises these projects won’t reappear in other ways and other places. The congressional budget process is nothing if not a game of reinvention. You could call spending items Happy Funtime Projects instead and sock them away in another part of the budget, but they will remain the coin of the realm on K Street.
Of course, Congress could simply give a bucket of money to an agency with no strings attached. But then a member of the Appropriations Committee would write a letter to the department head suggesting something like: “Gee, wouldn’t it be nice if Project X got some of this pot of money?”
Can you really blame a government department head who reads a letter like that—from a member of Congress who controls his budget and oversees his agency—and obliges? It would strike anyone in that position as similar to Tony Soprano saying to the corner grocery store owner: “Nice little place you got here. Damn shame if anything were to happen to it.”
Now for a secret. The big problem in Washington isn’t earmarks. They’re just a symptom of the real problem: policymakers who believe the federal government should be all things to all people. Pork projects – disclosed or not – are inevitable in such an environment no matter what you call ‘em.
Uncle Sam: Electrician
My new Cato policy analysis goes into great detail about how the federal government uses your tax money to subsidize businesses. In fiscal 2006, the “corporate welfare state” cost $92 billion, all of which funded programs that provide unique benefits to particular companies or industries.
One of these programs is the Rural Utilities Service (RUS). A relic of the New Deal, the goal of the program was to electrify the countryside. Now that reading by candlelight in the boonies is a thing of the long forgotten past, the RUS has morphed into a fountain of cash for rural electricity co-ops.
As a story on the front page of this morning’s Washington Post highlights, it’s always easier to create a program than to kill it:
The key to the longevity of the Agriculture Department’s programs for rural utilities has been the [electricity co-ops'] powerful political voice. More than 30,000 members gave an average of $41 last year to the co-op association for political contributions. Given their geographic scope, the co-ops can mobilize letter-writing campaigns across a vast number of states and congressional districts.
To learn more about the corporate welfare budget generally, tune in to my live interview on Bloomberg Radio’s “On the Economy” today at 6:30 pm Eastern. A podcast about the corporate welfare state will be featured on the Cato website on Tuesday.
Moving (Government) Forward Faster
Washington, D.C., mayor Adrian Fenty released his proposed budget last week. Titled “Moving Forward Faster,” it’s an example of the sort of thing you’d expect from a D.C. mayor who is quite fond of the nanny state.
To avoid having to read the entire document yourself, here’s the punch-line: Government spending – that is, expenditures financed by locally-derived revenue, not federal transfers – grows by a proposed 8.8 percent. By way of comparison, the city’s budget under Mayor Anthony “Baseball” Williams grew by an annual average of 7.5 percent.
But the large increase can be explained by a growing DC population, right? Nope. The most recent Census numbers show that the city’s population fell between July 2005 and July 2006. Even if fewer people flee to Virginia or Maryland this year – or even if more people start actually moving in the opposite direction – it’s virtually impossible that the population growth figures will spike by nine percent. Average annual population growth since 2003, for instance, hasn’t even come close to breaching the one-percent mark.
Fenty describes his budget proposal as “fiscally conservative” in his transmittal letter to the DC Council. Yet maybe we shouldn’t ridicule him for that. Since he’s operating in a city where a Republican president who spends taxpayer money almost as fast as Lyndon Johnson also calls himself “fiscally conservative,” perhaps the mayor is just mimicking the local custom.
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