Tag: federal subsidies

Higher Education Subsidies Wasted

A study from the American Institutes of Research finds that federal and state governments have wasted billions of dollars on subsidies for students who didn’t make it past their first year in college. The federal total for first-year college drop outs was $1.5 billion from 2003 to 2008.

Due to data limitations, the figures are only for first year, full-time students at four-year colleges and universities. Community colleges have even higher drop-out rates, and part-time students or students returning to college are more likely to drop out. Therefore, the numbers in the report are “only a fraction of the total costs of first-year attrition the nation and the states face.” Moreover, it doesn’t include the cost for students who drop out some time after their sophomore year.

Federal policymakers from both parties are fond of lavishing subsidies on college students. Proponents argue that without federal subsidies, an insufficient number of future workers will possess the skills necessary to compete in a global economy.

However, a Cato essay on federal higher education subsidies argues that students wishing to attend college already have plenty of incentive to save or borrow from private sources:

Supporters of student aid subsidies argue that higher education is a “public good” that would be underprovided in a free market. However, that is probably not the case. People have a strong incentive to invest in their own education because it will lead to higher earnings. Those with a college degree will earn, on average, 75 percent more during their lifetime than those with just high-school degrees. That is a big incentive for people to save or borrow in private markets to pay for their own college costs. There is no “market failure” here.

In fact, higher education subsidies drive up tuition prices:

It is matter of supply and demand. More and more Americans have sought a college education, which has pushed prices higher. Ordinarily, such upward pressure would be restrained by consumers’ willingness and ability to pay, but as government subsidies have helped absorb tuition increases, the public’s budget constraint has been lifted. Peter Wood, a professor at Boston University noted that federal subsidies “are seen by colleges and universities as money that is there for the taking … tuition is set high enough to capture those funds and whatever else we think can be extracted from parents.”

But isn’t it great that Uncle Sam is helping put more young folks in college? Not necessarily:

Many of those additional students may not have been ready, or suited, for college. As evidenced by the rising shares of college students who require remedial work. Further evidence of the problem is that institutions have lowered their standards to adapt to the rise in second-rate students. The American Academy of Arts and Sciences reported that from the mid-1960s to the mid-1990s, college grade point averages grew steadily but Scholastic Aptitude Test scores declined. The share of entering college students who complete degrees has also fallen over the decades. In addition, while college attendance is up, overall adult literacy has barely budged over the last 15 years.

The essay also notes that college students devote 3.2 hours to education on an average weekday, versus 3.9 hours to “leisure and sports,” and that the six-year graduation rate for bachelor’s students is only about 56 percent, indicating that many students are not very serious about education.

Just as housing subsidies incentivized people to purchase homes that they otherwise shouldn’t have, higher education subsidies have incentivized people to go to college who weren’t ready or suited for it. In both cases, the cost to taxpayers has been substantial while the alleged benefits have proven illusory.

Unfair Subsidies for Buses

Cato essays on the Department of Transportation contain a common theme: federal subsidies for various modes of transportation have stifled privately funded and operated alternatives. One emerging bright spot is private intercity bus companies.

From a Cato essay on Amtrak subsidies:

If Amtrak is privatized, passenger rail will be in a much better position to compete with resurgent intercity bus services. The rapid growth in bus services in recent years illustrates how private markets can solve our mobility needs if left reasonably unregulated and unsubsidized. A Washington Post reporter detailed her experiences with today’s low-cost intercity buses: “This new species offers curbside pickup and drop-offs, cheap fares, clean restrooms, express service, online reservations, free WiFi and loyalty programs … The bus fares undercut Amtrak and, depending on the number of passengers, personal vehicles.”

That’s why a story out of Minnesota is disturbing. According to the Duluth News Tribune, Jefferson Lines, which operates a bus line between Duluth and the Twin Cities, received $2.65 million in federal stimulus money to purchase five of the eight buses it has in service. One of Jefferson Lines’ competitors isn’t happy:

That angers Dave Clark, owner of Skyline Shuttle, which provides transportation from Duluth to the Twin Cities. Clark claims it’s unfair for Jefferson Lines to use government money to compete with his business and cut into his revenue.

“When there’s a market and they are competitors, it should be left to the market without government interference,” Clark said. “They could have taken the risk themselves, but they relied on the taxpayer to take the risk.”

The first problem is that federal taxpayers across the country are being forced to subsidize a private bus line in Minnesota. The second problem is that the government is effectively picking winners and losers in the market for intercity bus services. Instead of spreading transportation subsidies across every form of transportation, the federal government should cease with the seemingly endless interventions and allow free individuals to figure out what makes the most sense.

Amtrak’s New Rail Cars

Amtrak has announced that it will spend $300 million on 130 new rail cars, including sleeper and dining cars, for its long-distance trains. The government company’s announcement came with the obligatory statement that the purchase will create 575 jobs. That’s more than $500,000 per job.

As a Cato essay on Amtrak discusses, all of Amtrak’s long-distance routes are money-losers. For example, the Sunset Limited, which runs from New Orleans to Los Angeles, lost $462 per passenger in 2008. According to the Government Accountability Office, long-distance routes account for 15 percent of riders but 80 percent of financial losses.

Amenities like sleeping and dining services contribute to the red ink:

The demographic being served by these long-term routes does not demonstrate a strong need for taxpayer subsidies. Eighty percent of long-distance train riders use it for recreational and leisure trips, and riders tend to be retirees. Premium services like sleeper and dining cars contribute to operating losses for long-distance trains. These amenities are heavily subsidized, which means taxpayers—and not the pleasure-seeking retirees—are incurring the burden.

To maintain its unprofitable routes, Amtrak is dependent on federal subsidies, which are usually about $1.5 billion a year (Amtrak also recently received $1.3 billion in stimulus money). Amtrak has asked for $2.5 for the upcoming fiscal year, and the Senate Appropriations Committee has proposed a 25 percent increase.

Amtrak’s press release brags: “Last fiscal year (FY 2009), the railroad carried 27.2 million passengers, making it the second-best year in the company’s history.” That sounds good until you realize that Amtrak accounts for only 0.1 percent of the nation’s passenger travel. Moreover, Amtrak projected in 1976 that its ridership would grow from 17.3 million in 1975 to 32.9 million by 1980.

With the nation’s debt spiraling out of control, taxpayers can no longer afford to subsidize Congress’s toy train. If intercity passenger rail makes economic sense, it could be profitably supported by its ridership and run as a private company. If not, then it makes no more sense for taxpayers to keep Amtrak operating than it would be for the federal government to subsidize stagecoaches.

To Kill ACORN, Kill the Programs

Last year, when the issue of defunding ACORN was a hot-button issue, I told countless radio talk show audiences that the focus should be on eliminating the underlying fuel that created the organization—the flow of federal subsidies.

Chris Edwards pointed this out in September. If Congress simply stops subsidizing ACORN, its activists will reincorporate under new names and again become eligible for funds. Alas, that’s precisely what ACORN is currently doing.

From FoxNews.com:

One of the latest groups to adopt a new name is ACORN Housing, long one of the best-funded affiliates. Now, the group is calling itself the Affordable Housing Centers of America.

Others changing their names include what were among the largest affiliates: California ACORN is now Alliance of Californians for Community Empowerment, and New York ACORN has become New York Communities for Change. More are expected to follow suit.

A comment from Frederick Hill, a spokesman for Republicans on the U.S. House oversight and government reform committee, doesn’t indicate that the GOP has quite received the message:

To credibly claim a clean break, argued Hill, the new groups should at least have hired directors from outside ACORN.

It appears that for many Republicans, attacking ACORN represented political opportunism, not a statement about the proper role of the federal government.

Further rendering the GOP’s ACORN agenda moot was last week’s ruling by a U.S. District judge that singling out ACORN for defunding is unconstitutional. It truly boggles the mind what passes for constitutional and unconstitutional in this country.

Tuesday was the birthday of James Madison, the “Father of the Constitution.” Reflecting upon Madison’s wise words, it’s hard to understand how the federal “community development” programs that have funded ACORN could pass constitutional muster:

“The government of the United States is a definite government, confined to specified objects. It is not like state governments, whose powers are more general. Charity is no part of the legislative duty of the government.”

“[T]he powers of the federal government are enumerated; it can only operate in certain cases; it has legislative powers on defined and limited objects, beyond which it cannot extend its jurisdiction.”

“With respect to the two words “general welfare,” I have always regarded them as qualified by the detail of powers connected with them. To take them in a literal and unlimited sense would be a metamorphosis of the Constitution into a character which there is a host of proofs was not contemplated by its creators.”

“If Congress can do whatever in their discretion can be done by money, and will promote the general welfare, the government is no longer a limited one possessing enumerated powers, but an indefinite one subject to particular exceptions.”

See this essay for reasons why these HUD community development programs should be abolished.

Federal Aid to States Is Too Popular

The Economist’s Free Exchange blog asks: “[W]hy isn’t federal aid to states more popular, and popular enough to get through Congress, given that nearly every American lives in one?”

I would ask the blog’s author: How much more popular would he like it to be? As the following charts show, federal aid to state and local governments has catapulted to record levels.

As I’ve discussed elsewhere, Medicaid has been driving the growth in federal subsidies to state and local governments. But other areas, such as education, income security, and transportation, have also seen substantial increases.

Subsidizing state and local government is quite popular with federal, state, and local policymakers and associated special interests. It’s doubtful the average citizen is aware that so much of their state’s spending is derived from their federal tax dollars. However, I suspect that most folks (who aren’t on the take) would frown upon the concept of sending money to Washington only to have politicians send it back to the states via the federal bureaucracy. While there may be popular support for many of the state programs funded with federal dollars, citizens need to understand that federal subsidization of state and local government has fueled unhealthy government growth at all levels.

State and Local Subsidies

Earlier this week I criticized the U.S. Conference of Mayors for going to Washington and groveling for more federal handouts. Let me provide some more background for my criticisms with a look at federal budget data. The first chart shows that since 1960, total federal subsidies to state and local government have increased an astounding 1,173%.

Several readers have asked me what particular programs account for this large increase in state aid. The federal budget breaks down the total figures into categories. Not surprisingly, health subsidies — mainly Medicaid — account for almost half of the current total and are the driving force behind the massive overall increase:

However, there have been large increases in other activities as well. Here are the changes by federal budget function in state aid since 1960, in billions of 2010 dollars:

  • Health: $1.5 to $310.7 (+21,128%)
  • Education, Training, Employment & Social Services: $3.7 to $103.3 (+2,723%)
  • Community & Regional Development: $0.7 to $20.3 (+2,674%)
  • Other*: $0.7 to $12.0 (+1,707%)
  • Natural Resources & Environment: $0.7 to $7.8 (+966%)
  • Income Security: $19.0 to $113.8 (+498%)
  • Transportation: $22.0 to $73.5 (+235%)
  • General Government: $1.5 to $4.7 (+221%)
  • Administration of Justice*: $2.6 to $5.3 (+100%)
  • Agriculture: $1.5 to $1.0 (-32%)

*Administration of Justice begins in 1975. “Other” begins in 1965 and consists of grants for national defense, energy, social security, and veterans’ benefits and services.

All of these categories are at or near their high water mark in constant dollars with the exception of Natural Resources & Environment ($13.8 in 1980), Agriculture ($4.5 in 1985), and General Government ($26.9 in 1975).

Rather than being deprived, state and local governments have developed an unhealthy dependency on federal money. In a way, the states have become an extension of the federal government. This is at odds with the Constitution, which clearly intended for the federal government to have specific limited powers. As the 10th amendment states, “The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.” There seems to be very little reserved to the states anymore, and even less to the people.

See these essays for more on constitutional basics and the desirability of fiscal federalism.

“Keep Your Subsidies off My Ovaries”

In my recent Cato paper, “All the President’s Mandates: Compulsory Health Insurance Is a Government Takeover,” I explain that if Congress compels Americans to purchase health insurance, it would “inevitably and unnecessarily open a new front in the abortion debate, one where either side—and possibly both sides—could lose.”

Slate’s William Saletan explains how the pro-choice side could lose:

This week, the Senate finance committee is considering amendments that would bar coverage of abortions under federally subsidized health insurance. Pro-choice groups are up in arms. After all, says NARAL Pro-Choice America, “In the current insurance marketplace, private plans can choose whether to cover abortion care—and most do.” If Congress enacts subsidies that exclude abortion, “women could lose coverage for abortion care, even if their private health-insurance plan already covers it!“…

The argument these groups make is perfectly logical: If you standardize health insurance through federal subsidies and coverage requirements, people might lose benefits they used to enjoy in the private sector. But that’s more than an argument against excluding abortion. It’s an argument against health care reform altogether.

Saletan also explains why pro-life and pro-choice positions on Obama’s health plan are irreconcilable:

To get what they consider neutrality, pro-choicers have to make pro-lifers pay indirectly for abortions. And to keep what they consider clean hands, pro-lifers have to make abortion coverage federally unsupportable and therefore, in a subsidy-dependent system, commercially nonviable.

Rather than an argument against all health care reform, I’d say this is an argument against reforms that expand government subsidies or otherwise give government the power to choose what kind of insurance you purchase.  Fortunately, there are better ways to reform health care.