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Slashed?
The Hill is reporting that Senate Budget Committee Chairman Kent Conrad (D-ND) “has slashed Obama’s proposed increases in domestic discretionary spending from 12 percent to 6, according to lawmakers who met with Conrad.”
Unemployment is rising, businesses are failing, and folks are truly “slashing” their spending habits. But in Washington, to “slash” means to increase spending 6% instead of 12%. I’m sure most hard-working Americans — the poor stiffs whose taxes will pay for this “slash” — wished their budgets were in line for a 6% increase this year.
The Subway Business Administration
Yesterday, President Obama announced a government initiative to help small businesses, largely through the Small Business Administration (SBA). But more on that in a bit…
A February 24th Wall Street Journal article discussed the fact that defaults of SBA-backed loans to franchisees at 500 franchises went up 52% in fiscal year 2008. Loan losses went up 167%. Sure, the economy isn’t doing too hot right now. What grabs my attention is the fact that taxpayers are backing loans to business operations like Subway, Domino’s Pizza, and Planet Beach tanning salons. Is capitalism in this country so incapable, recession or not, that the government needs to ensure an adequate supply of credit to sandwich shops? Tanning salons? A recent headline on MSNBC.com reads, “In many cities, tanning salons exceed Starbucks.”
The Journal reported that in the last eight years 42% of SBA-backed loans to Cornwell Quality Tools Co. franchisees went into default. Yet, Cornwell’s CEO says that it opened 127 new franchisees last year and indicated that “relatively few used SBA lending to enter the business,” according to the article. Proponents of the SBA argue that the agency is needed to help businesses that are unable to obtain credit or financing through traditional channels. What this story shows is there’s obviously a very good reason why these businesses couldn’t obtain private financing. It also shows that, in the case of Cornwell, there’s no “need” to have taxpayers backing loans to its franchisees when so many are opening up without such help.
Is it even true that small businesses are generally so unable to obtain credit that the government must fill the void? According to a recent study by the Government Accountability Office (GAO), “Between October 2006 and March 2008, SBA determined that 31 of the 97 lenders reviewed had failed to consistently document that borrowers met the credit elsewhere requirement or personal resources test.” In other words, a third of the borrows didn’t prove they couldn’t obtain money elsewhere. Moreover, the GAO says, “we found that lenders evaluate a borrower’s ability to obtain credit elsewhere on reasonable terms against their own conventional lending policies.” That litmus test hardly provides proof that deserving small businesses are being left out in the cold. The reality is that the SBA-backs loans to small businesses that could have obtained credit through private means — or shouldn’t have been loaned money in the first place.
Cato adjunct scholar, Dr. Veronique de Rugy, has found that “no more than 1 percent of [all] small business loans each year are SBA loans. The private sector finances most loans without government guarantee and, hence, the SBA is largely irrelevant in the capital market.” Moreover, because SBA financed loans have below market rates, small businesses who aren’t subsidized by the government are placed at a competitive disadvantage. Table 3 of de Rugy’s study for Regulation magazine (download article here and go to pdf page 7), lays bare the SBA’s irrelevance, and the competitive disadvantage the vast majority of small businesses face because of the agency’s subsidies.
The table shows the top 25 industries receiving SBA 7(a) loans for fy2002. At the top of the list are full-service restaurants, with limited-service eating places in second, and automotive repair and maintenance in third. The SBA loan ratio (SBA loans divided by total number of small business establishments in the industry) for the top three, are 1.5%, 1.2%, and 0.6%. The ratio for the top 25 industries was 0.3%; the ratio for all industries was 0.2%. I’m not a math whiz, but less than 1% isn’t very much.
Let’s circle back to the President’s announcement…
First, the President said the U.S. Treasury “will begin making direct purchases of securities backed by [Small Business Administration] loans to get the credit market moving again, and it will stand ready to purchase new securities to ensure that community banks and credit unions feel confident in extending new loans to local businesses.” That idea sounds kind of familiar to me. Oh, right.
Second, the President said “These purchases, combined with higher loan guarantees and reduced fees, will help provide lenders with the confidence that they need to extend credit, knowing they both have a backstop against their risk and a source of liquidity.” According to the Wall Street Journal, “Mr. Obama’s plan, aimed at helping troubled small businesses, will increase that guarantee to as much as 90% of a loan. The plan also will temporarily eliminate many of the loan fees that help pay for the program and cover potential defaults.”
It’s this second part that should be particularly galling to regular taxpayers and the vast majority of small businesses dealing with subsidized competitors. The President mentions some temporary tax breaks, but as Raymond Keating, chief economist at the Small Business and Entrepreneurship Council, told the Journal, “the Obama administration would accomplish much more in terms of boosting confidence and getting the economy moving by, at the very least, moving away from imposing higher personal income, capital gains, dividend and estate taxes on investors and business owners.” Additionally, a small business owner writing in Slate, in a piece entitled “Why Small Business Hates the Taxman,” says that what rankles a lot of small businesses is “the sheer hassle of compliance with the tax laws and the complete loss of control you feel when dealing with the government.”
Instead, the administration’s idea of helping small businesses is perpetuating the same moral hazzards that has the government already bailing out reckless private interests to the tune of trillions of dollars in current and future taxpayer dollars. This is change we can believe in? Unbelievable.
Republicans, Democrats, and Appropriators…and Pork
I’m sympathetic to the oft-repeated saying that there are really three parties in Washington: Republicans, Democrats, and Appropriators. This situation is likely to be demonstrated this evening when Republican members of the Senate Appropriations Committee provide enough votes for Democratic Sen. Harry Reid to close off debate and proceed to final passage of the pork-laden $410 billion fy2009 omnibus appropriations bill.
Greasing the skids for bigger government will be almost $8 billion in earmarks contained in the bill. Fox News is pointing out that almost all of the Republican Senators expected or likely to support the Democratic measure stand to deliver quite a bit of pork to constituents and special interests. Not coincidentally, all of the senators named, except Sen. Snowe of Maine, are appropriators. As a matter of fact, if you look at the top 20 senators (both parties) in terms of dollars of earmarks secured for this bill, 15 are appropriators.
Bottom line: Appropriators love spending and they particularly love pork. Sen. Snowe just likes the government spending other people’s money.
**Update: Cloture was invoked on a 62-35 vote and the legislation subsequently passed by voice vote. Every single Democratic member of the Senate Appropriation Committee voted for cloture. Republican appropriators Sens. Cochran, Specter, Bond, Shelby, Alexander, and Murkowski voted yes; Sens. McConnell, Gregg, Bennett, Hutchison, Brownback, Collins, and Voinovich voted no. Thus, without the support of these Republican appropriators, the bill would have been effectively killed. Of the top 20 recipients of earmarks in the bill, only 2 — Sens. Inhofe and McConnell — voted no.
New Mandatory Savings Plan?
I haven’t seen any media attention paid to it yet, and I don’t recall the president mentioning it in his speech Tuesday night. Regardless, p.37 of today’s budget blueprint calls for “Making Saving for Retirement Easier as the Economy Recovers.” Although it sounds innocuous, I believe the contents could be cause for alarm:
“Over the long-term families need personal savings, in addition to Social Security, to prepare for retirement and to fall back on during tough economic times like these. However, 75 million working Americans—roughly half the workforce—currently lack access to employer-based retirement plans. In addition, the existing incentives to save for retirement are weak or non-existent for the majority of middle and low-income households. The President’s 2010 Budget lays the groundwork for the future establishment of a system of automatic workplace pensions, on top of and clearly outside Social Security, that is expected to dramatically increase both the number of Americans who save for retirement and the overall amount of personal savings for individuals. research has shown that the key to saving is to make it automatic and simple. Under this proposal, employees will be automatically enrolled in workplace pension plans—and will be allowed to opt out if they choose. Employers who do not currently offer a retirement plan will be required to enroll their employees in a direct-deposit IRA account that is compatible with existing direct-deposit payroll systems. The result will be that workers will be automatically enrolled in some form of savings vehicle when they go to work—making it easy for them to save while also allowing them to opt out if their family or individual circumstances make it particularly difficult or unwise to save. Experts estimate that this program will dramatically increase the savings participation rate for low and middle-income workers to around 80 percent.”
Here are my concerns just off the top of my head:
Obviously, it represents yet another government encroachment upon individual liberty. While employees would be “allowed” to opt out, employers would not. More ominously, while there is no mention of government subsidization of individual plans or forced contributions by employers, how long will it take for activists and their congressional allies to go down those roads? I can already envision hordes of politicians bemoaning the inability of low- and moderate-income workers to direct any portion of their wages toward their accounts. And don’t just think this will be limited to leftist politicians. When I worked for the U.S. Senate a conservative senator once asked me to design a mandatory savings plan for all citizens in which the government and employers would “contribute.”
I guess the bright side here is that the administration is implicitly acknowledging that Social Security isn’t the wonderful retirement nest egg defenders have wanted us to believe. I also can’t help but chuckle at the political reintroduction of savings as being beneficial. Over the past year we’ve been repeatedly warned that savings is bad and spending is good. Anyhow, this issue is going to be one to watch going forward.
FY2009 Deficit = FY2000 Spending
Total federal spending in FY2000: $1.79 Trillion.
Total estimated FY2009 deficit according to today’s budget blueprint: $1.75 Trillion.
Obama Budget Irresponsibility Inconsistency
Page 14 of the President’s FY2010 budget “blueprint” contains a section called “Fiscal Irresponsibility” that deserves scrutiny:
“Another manifestation of irresponsibility is the large budget deficits we are inheriting. These deficits, over time, will harm economic growth and impose burdens on our children and grandchildren.”
True.
“Between 2000 and 2008, real Government outlays increased at a 3.6 percent annual average rate, three times the 1.2 percent annual average rate between 1992 and 2000…Furthermore, the amount of debt held by the public has nearly doubled to $6.4 trillion from 2001 to 2008. We are now living with the fallout of this deep fiscal irresponsibility.”
True.
“Unfortunately, we are also inheriting the worst economic crisis since the Great Depression—which will force us to increase deficit spending temporarily as we try to jumpstart economic growth.”
Time-out. The administration accurately states that federal spending and debt have increased at a detrimental pace this decade. Then it says we’re in the worst economic crisis since the Great Depression.
And the solution to the economic downturn caused in part by too much spending and debt is to increase deficit spending and further run up the national debt? By the administration’s own logic, shouldn’t we be experiencing economic growth with all the deficit spending it “inherited?”
HUD the Dud
Last week I blogged on President Obama’s “stimulus” rally prop Henrietta Hughes — a.k.a. “the face of the economic crisis.” Ms. Hughes and her son, who were homeless, asked our messianic president to help them since they’ve been stuck on a two-year waiting list at the Fort Myers, Fl., public housing authority. Using the government’s own numbers, I was able to determine that Fort Myers and surrounding Lee County received almost $70 million in U.S. Housing & Urban Development (HUD) money in the past three years. Some $41 million — or $600 per man, woman, and child in Fort Myers — went to the city’s public housing authority alone.
I concluded that HUD’s inspector general should investigate what the housing authority is doing with all that taxpayer change. And if a story coming out of Las Vegas about its public housing authority is any indicator, there’s a good chance a lack of federal funding wasn’t the problem in Fort Myers. According to the Las Vegas Sun,
The North Las Vegas Housing Authority failed to spend up to $2 million on federal housing programs even as thousands of people were on lists awaiting that help, a recent audit has found… The total amount won’t be known until the city audit and a federal investigation are finished, but so far auditors have determined that at least $800,000 was misused, [North Las Vegas City Manager Gregory] Rose said. Still unclear is how the money was spent, who is responsible, and whether any crimes were committed, he added.
I keep hearing the Obama administration say the “stimulus” bill, which will be funding a plethora of notorious HUD programs, will come with transparency and accountability. The odds of accountability at HUD are somewhere around the odds of me taking off and flying after running really, really fast down the street.
In other HUD news this week:
- A city in Ohio plans on using HUD Community Development Block Grant (CDBG) funds to purchase ball field back stops.
- Tulsa’s city council wants to know more about the $1.5 million in CDBG money the city inappropriately used to pay for employee salaries. The city was to pay it back, but “In December, the city announced that HUD would allow the city to reapply for the $1.5 million to fund two projects it has deemed meet the required use of the funds.”
- In New Jersey, “The [Franklin] township’s former housing coordinator and her plumber husband have been indicted on a variety of charges — including official misconduct, forgery and witness tampering — in connection with what authorities are calling a conspiracy to misappropriate more than $100,000 in federal housing rehabilitation funds.”
- And in West Virginia, the Wheeling city council “voted 6-0 to spend $42,000 in CDBG money to install an outdoor modular floor at the Pulaski Playground tennis courts in South Wheeling.”
The Increasing Burden of Government Employees on Taxpayers
Dennis Cauchon of USA Today and Stephane Fitch of Forbes recently penned articles on the excessive nature of state and local government employee benefits and the threat taxpayers face as a result.
First, Cauchon reports that “State and local governments have set aside virtually no money to pay $1 trillion or more in medical benefits for retired civil servants…With bills coming due as Baby Boomers start to retire, states, cities, school districts and other governments may be forced to raise taxes, cut benefits or both — a task made especially difficult in an economic downturn.”
I would add that the task of cutting benefits for government employees is especially difficult because state and local politicians are generally beholden to the government employee unions. Even those policymakers not predisposed to carry water for the unions are hesitant to ruffle the feathers of a sizable voting block, not to mention a vocal one that still has a lot of regular citizens conned into believing government employees are underpaid, selfless, public “servants.” Trust me, I’ve witnessed this game first hand.
Cauchon also spotlights the big picture problem: “These medical costs are part of a larger burden taxpayers face in providing health care for an aging population. The federal government has a $1.2 trillion unfunded obligation to pay medical costs for retired federal workers and military personnel. Medicare and Social Security push the nation’s unfunded promises above $50 trillion.” He also notes that the same private sector employees who pay for these benefits via taxes are not so lucky: “Unlike private companies, most governments subsidize health insurance for retired employees.”
For more Cato work on unfunded medical benefits for state and local government employees, see here and here.
Second, Fitch reports on the outrageous pension benefits state and local government employees are receiving. This piece should be read in its entirety (warning: don’t read it standing up), but I’ll list a few tidbits here:
Henrietta Hughes, HUD, and the Ft. Myers Public Housing Authority
Henrietta Hughes, the southwest Florida woman who was singled out this week by President Obama at a “stimulus” rally in Ft. Myers, Fl., is being labeled by the press as “the face of the economic crisis.”
According to ABC News, Hughes told the president in front of the crowd, “I have an urgent need, unemployment and homelessness, a very small vehicle for my family and I to live in…. The housing authority has two years’ waiting lists, and we need something more than the vehicle and the parks to go to. We need our own kitchen and our own bathroom. Please help.” President Obama gave her a kiss on the cheek, and told her, ‘We’re going to do everything we can to help you, but there are a lot of people like you.”
An uproar has ensued between left and right factions of the blogosphere. There have been accusations that Hughes was planted at the rally by the president’s handlers. There have been questions regarding a house she apparently owned and sold. And yesterday a local news outlet reported that a local faith-based nonprofit had offered Hughes and her son living arrangements, which she turned down.
I have no idea what is or isn’t true, but I don’t doubt this woman and her son are in a tough spot. What caught my eye was Hughes’ accusation that the Ft. Myers Public Housing Authority has a two-year waiting list. Whether planted or not, the president was handed a convenient prop to stir public opinion in favor of the so-called “stimulus.” The implied message was: “Pass this stimulus so people like Henrietta Hughes and her son will have a home.”
So I decided to look into what sort of federal money the U.S. Department of Housing & Urban Development (HUD) has been pumping into Ft. Myers and surrounding Lee County, Fl. The government’s USAspending.gov website is a useful, if imperfect, tool for uncovering who and where our tax dollars are going.
Sandefur, Science, and the State
Cato adjunct scholar Timothy Sandefur has a thoughtful post up on his blog that calls for “separating science and state.” I recently posted on some questionable behavior by National Science Foundation employees, see here and here, but Tim’s blog gets to the heart of the matter and I highly encourage those interested in the subject to check it out.
Here are some teasers:
“It is morally reprehensible to use government’s coercive power—which, like it or not, means government’s power to imprison people, and to do other violent acts to them—to take away people’s earnings for projects that someone else considers worthwhile.”
“[A]ny time government can impose burdens on, or grant benefits to, private interest groups, those groups will use their time and effort to persuade government to do that in their favor. Legislation then gets enacted for the private benefit of political insiders, rather than for the “genuine public good.” This is just as true in science as it is in public contracting, occupational licensing, or any other endeavor. I believe it corrupts scientific integrity for investments and grants to be made on the basis of personal favoritism and political influence.”
“The question is not whether there is some hypothetically perfect way of deciding which research projects to fund and how; there is not. The question is whether there is any reason to believe that politicians are more skilled at making those decisions than are private individuals and private organizations. Given their expertise and their incentives, I see no reason to believe that government officials are more qualified to make those decisions, and good reason to believe they are less qualified.”
“Closely related to the corrupting effects on the economy caused by government “investments” is the corruption of science that inevitably results from government interference…The bottom line is: when government writes the checks, it will make the rules, and those rules will interfere with scientific independence and scientific integrity.”
“Probably the most common objection to ending government subsidies for science research is that it’s necessary because private industry won’t make the investments for pure science, or is too insistent on immediate returns on investments so that private investors will not devote money to research that lacks an obvious commercial application…Terence Kealey has pointed out that scientific research is already largely funded by private industry, and that funding tends to be dramatically more efficient in making a real difference in the lives of real people…Private philanthropic organizations devote a tremendous amount of private money to scientific research, and it is good quality research. The March of Dimes, the American Heart Association, and the American Cancer Society receive boatloads of money from non-government sources. The Hughes, Keck, Rockefeller, and Carnegie Foundations have poured hundreds of millions of dollars into top-notch scientific research. David Packard of Hewlett Packard gave $4 billion to his research foundation.”
“What’s more, take a more skeptical look at some of the alleged payoffs of government-funded research. It’s true that government-run science projects have sometimes created great new innovations (as well as some pretty awful ones). But a lot of these discoveries would have been made by private research institutions, for less cost, and with less bureaucratic interference. And much of the time, these alleged benefits are wildly exaggerated.”
National Science Foundation Employees Gone Wild
The federal government’s National Science Foundation (NSF) has become the bureaucratic version of Animal House. Last week I blogged on a NSF inspector general discovery that agency employees were viewing pornography, engaging in sexual online chats, and using taxpayer-funded trips to pursue women. Now comes word from a New Zealand newspaper that NSF employees in Antarctica have been jello-wresting and skinny-dipping in frigid waters.
The quotes from defiant NSF employees are priceless, and demonstrate how little regard they have for the taxpayers paying their salaries:
“I will just say that I was terminated for having harmless jello wrestling…”
“Every trip, there are more and more rules, restrictions and guidelines that seem designed to take all the life out of the place and make it more like a unionised auto factory.”
“Yes, I know it is a workplace, but they are sucking all the fun out of the place.”
As I noted last week, “The House version of the ‘stimulus’ plan being developed in Congress would give the government’s National Science Foundation (NSF) an extra $3 billion, in part, to ‘put scientists to work looking for the next great discovery.’ Three billion dollars is a considerable chunk of change given that the NSF spent more than $6 billion in fiscal year 2008.”
I shudder to think what this gang is going to discover with the additional money.
Transparency, Accountability, and the Debt Bomb
The NPR article containing the interview with House Appropriations Committee chairman David Obey (D-WI) that my colleague Michael Cannon blogged on earlier today ends with statements by former Government Accountability Office (GAO) head David Walker that are worth highlighting:
As it stands now, says David Walker, a former U.S. comptroller general, the bill appears to have no mechanism for directing spending. It’s left up to those state and local officials, who may or may not have the ideas or the means to spend it appropriately. And that will lead to “a series of disappointments that it’s too late to do anything about,” Walker says.
The bill does make it possible for lawmakers and the public to track the money — but only after it’s spent. And that, he says, will lead to bad surprises.
Take, for example, the giant bank bailout known as TARP. That spending has gone all wrong, Walker says. Though the inspector general and the Government Accountability Office are keeping track of the billions spent there, “they’re basically reporting on what didn’t happen,” he says.
“Well, it’s a little bit late,” he says. “And so the question is, what are you going to do on a prospective basis? I mean, you can’t change history. What are you going to do on a prospective basis to minimize the possibility of being disappointed again?”
What are you going to do? Here’s what you (Congress) should do: Don’t spend the money to begin with.
Like the “good government” crowd, a group that includes voices from the left end of the political spectrum to the right, I’m all for transparency with regard to how politicians spend taxpayer money. It obviously makes my job of pointing out the myriad ways in which legislators and bureaucrats waste our money much easier.
Greater transparency was a major theme of President Obama’s campaign. Although the president has gotten off to a rough start (see my colleague Jim Harper’s comments here), his much ballyhooed intentions are reflected in the “stimulus”/debt bomb heading toward his desk. As NPR reported on Wednesday, “budget watchdogs say Obama’s stimulus package contains spending transparency provisions that are nothing short of revolutionary.”
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