Tag: state subsidies

Sequestration: Governors Are a Special Interest Too

The president made an appearance at the National Governors Association’s winter meeting to drum up support for his position that the sequestration spending cuts should be mitigated with tax hikes. The president understands that state politicians are dependent on federal handouts (see chart below), which makes them ideal candidates to help him convince the citizenry that spending cuts would usher in the apocalypse.  

In the battle with congressional Republicans over sequestration, it would be particularly helpful to the president to have Republican governors fan the flames. The post-appearance coverage that I’ve read indicates that some GOP governors took the bait and others did not. For instance, Louisiana Gov. Bobby Jindal dismissed the president’s position as “just trying to scare the American people.” On the other hand, Virginia Gov. Bob McDonnell expressed dissatisfaction with congressional Republicans (and the president’s) inability to come to an agreement to avoid sequestration. 

If an article in Politico is accurate, however, Republican governors are working behind the scenes to get congressional Republicans to acquiesce: 

The new rumblings match what’s been going on behind the scenes for months. Governors have publicly signed on to letters bashing Obama and praising House Republicans’ efforts, but privately their offices have been urging lawmakers to work harder to avoid potentially devastating cuts — particularly those that could hit local programs. 

Having worked for a Republican governor who made it a mission for his state to grab as many federal dollars as possible, I have zero reason to doubt that this is the case. The reason is simple: every federal dollar that a state politician can spend is a dollar that he or she doesn’t have to ask his or her voters to part with. Thus, state politicians love the “free” money from the feds and expend great effort (and additional taxpayer money) trying to obtain it. 

Of course, it isn’t really free.

The States Are Already Getting Bailed Out

In today’s Wall Street Journal, Sen. Jim DeMint (R-SC) and Rep. Kevin Brady (R-TX) advise the states to get their fiscal houses in order instead of holding out hope for a bailout from federal taxpayers. That’s sound advice. However, the states already effectively get bailed out by federal taxpayers each and every year.

The first chart shows that the federal government has accounted for over a third of total state spending in recent years. The increase can be attributed to federal “stimulus” spending. The federal government’s share will retreat as the economy (hopefully) continues to strengthen and federal policymakers limit spending increases in the face of mounting debt. However, getting the federal government’s share of total state spending back to, say, 30 percent would be nothing to celebrate.

The post-stimulus decrease in Washington’s generosity to the states has state and local officials—and the special interests that ultimately benefit from the Beltway-to-State money laundering operation—concerned. Reporters typically relay these concerns to the public without adding any historical context. The following chart provides that context, and it indicates that the concern shouldn’t be that the states won’t be getting as much money; rather, the concern should be that the states have become dangerously reliant on federal money.

So here’s another suggestion for state and local officials. If you want to spend more money than Washington will give you, go out and tell your taxpayers that you want to increase their taxes to pay for it.

[See this Cato essay for more on why the federal government should cut aid to the states.]

Strong Cities, Strong Communities: Bad Idea

When government officials come up with what they claim to be a wonderful new idea, I often think of an old Saturday Night Live skit from 1990 poking fun at commercials for blue jeans. The skit’s scene is a group of middle-aged buddies getting ready to play basketball in their new “Bad Idea Jeans.” Each guy optimistically announces a plan to do something that is actually a “bad idea.” For example, a character says “I don’t know the guy but I’ve got two kidneys and he needs one, so I figured…” and “BAD IDEA” flashes across the screen. (The skit can be watched here.)

The White House’s new “Strong Cities, Strong Communities” initiative had that BAD IDEA screen shot flashing repeatedly in my mind as I read the press release:

Today, the Obama Administration launched Strong Cities, Strong Communities (SC2), a new and customized pilot initiative to strengthen local capacity and spark economic growth in local communities while ensuring taxpayer dollars are used wisely and efficiently. To accomplish this, federal agencies will provide experienced staff to work directly with six cities: Chester, PA; Cleveland, OH; Detroit, MI; Fresno, CA; Memphis, TN; and New Orleans, LA. These teams will work with local governments, the private sector, and other institutions to leverage federal dollars and support the work being done at the local level to encourage economic growth and community development.

Additionally, communities nationwide will be eligible to compete for comprehensive economic planning assistance through a grant competition designed to spark local innovation. By integrating government investments and partnering with local communities, SC2 channels the resources of the federal government to help empower cities as they develop and implement their vision for economic growth.

The Wall Street Journal reports that federal officials from HUD, Labor, Commerce, Transportation, and the Small Business Administration will be “deployed” to the cities. In other words, the Obama administration wants to send bureaucrats from federal agencies that are notorious for wasting other people’s money to help local bureaucrats do a more “efficient” job of spending other people’s money. That’s like asking Anthony Weiner to fix your Twitter account.

A couple of the cities chosen by the administration are ironic. Seriously, hasn’t the federal government done enough to New Orleans already? Detroit is an example of why decades of federal subsidies to urban centers in decline have been a failure. As I note in a Cato essay on HUD community development subsidies, of which Detroit has been the fifth largest recipient since 2000, federal handouts create a disincentive for local officials to pursue sound policy reforms:

Despite all the abuses, perhaps policymakers believe that Community Development Block Grants are nonetheless effective at stimulating growth. After 30 years and more than $100 billion it should be easy to demonstrate the program’s success, but it’s hard to find any examples of city rejuvenation created by the program. Instead, numerous cities, such as Detroit, which have been major CDBG recipients, have fallen further into decline. The reality is that no amount of federal money can overcome the local hurdles to growth in cities such as Detroit—including political corruption and destructive tax and regulatory policies. Indeed, just like international development aid, federal aid to the cities likely increases corruption and stalls much-needed local reforms.

Some people will view this initiative as a crass effort to shore up urban support for the president’s reelection campaign. There’s probably a good bit of truth to that criticism. But both parties have been using subsidies to state and local government to curry political support for decades. Therefore, Republicans who raise a stink over the administration’s initiative should be prepared to work for the involved programs to be abolished. Otherwise, the complaints will amount to little more than political hot air.

See this Cato essay for more on federal subsidies to state and local government.

It Ain’t So, Joe

Vice President Joe Biden is an affable fellow, which sometimes makes his tendency to exaggerate the truth somewhat amusing. However, Biden’s latest tall tale is as unamusing as it is wrong.

From the New York Daily News:

“Every single great idea that has marked the 21st century, the 20th century and the 19th century has required government vision and government incentive,” he said. “In the middle of the Civil War you had a guy named Lincoln paying people $16,000 for every 40 miles of track they laid across the continental United States. … No private enterprise would have done that for another 35 years.”

I’ll go straight to the 19th century railroads issue by referencing the work of two Cato scholars who probably know a little bit more about the topic than Joe Biden.

First, Randal O’Toole discusses railroads and land grants in his book Gridlock: Why We’re Stuck in Traffic and What to Do About It:

Early American railroads were built almost entirely with private funds. These railroads provided such superior transportation that by 1850 they had put most toll roads and canals out of business. Individual states still competed with one another for business—and may have offered various favors to the railroads serving those states…. For the most part, however, no federal and few state subsidies went to railroads in the eastern United States.

The Pacific Railway Act provided land grants and low-interest loans to the companies completing the railroad from Council Bluffs, Iowa to California. Later laws provided land grants (but no low-interest loans) for railroads from St. Paul to the Puget Sound, Los Angeles to New Orleans, Los Angeles to St. Louis, and Portland to San Francisco. In total, about 170 million acres were granted to the railroads, but Congress eventually took back about 45 million acres for nonperformance, leaving the railroads a maximum of about 125 million acres.

Congress expected that the railroads would sell the land to help pay for construction. In many instances, there was no immediate market for the land. Much of it was not farmable, and the United States had a surplus of wood so there was little market for timberland. In the latter half of the 20th century, the energy and timber resources on lands granted to the Northern Pacific, Southern Pacific, Sante Fe, and Union Pacific railroads proved very profitable. But this did not help them build the railroads in the first place.

In January 1893, the Great Northern Railway completed its route from St. Paul to Seattle without any land grants (except a small grant to a predecessor railroad) or other federal or state subsidies. The railway competed directly with the Northern Pacific, and to some extent with the Union Pacific, which served some of the same territory. The Great Northern’s builder, James J. Hill, knew that the other railroads had been built primarily for the subsidies, and as a result, they were poorly engineered and often followed circuitous routes. Hill built the Great Northern along the most direct route his engineers could find, so his operating costs were far lower than competitors’.

When the economic crash of 1893 took place a few months later, the Northern Pacific, Union Pacific, and almost all other western railroads went into receivership…Many people predicted that the Great Northern would not be able to compete and would follow the others into bankruptcy. But Hill managed to stay out of receivership, and the Great Northern remained the only transcontinental built in North America without government subsidies that never went bankrupt.

By 1930, American railroad mileage peaked at about 260,000 miles…only 18,700 of these miles were built with land grants or other federal subsidies.

Second, Jim Powell writes about government corruption and 19th century railroad subsidies in his book on Teddy Roosevelt, Bully Boy: The Truth About Theodore Roosevelt’s Legacy:

Whenever politicians interfered in the railroad business, however, corruption and inefficiency inevitably occurred. The most dramatic case involved construction of the first intercontinental railroad. Railroad lawyer Abraham Lincoln supported the project, and he made it a priority after he became president in 1861…

Stephen Ambrose and other historians have faulted private markets for lacking the capital or the imagination to build the transcontinental railroad. Certainly it was true that private entrepreneurs and financiers did not see the point or risking huge sums to build a railroad across a vast, empty, and sometimes mountainous terrain. Private entrepreneurs and financiers added value by developing the rail network bit by bit, supporting the expanding freight business. The process was gradual. Grandiose schemes like the transcontinental railroad drained resources from some regions to benefit special interests.

There was no money to be made from operating a railroad through a desolate wasteland, yet the federal government rewarded railroad contractors with big subsidies: a thirty-year loan at below market interest rates; twenty sections (12,800 acres) of government-owned land for every mile of track; and an additional subsidy of $48,000 for every mile of track laid in mountainous regions.

Thomas Durant, Oakes Ames, and other officers of the Union Pacific Railroad, which went a thousand miles west from Council Bluffs, Iowa, started the Credit Mobilier company in 1867 and retained it to do the construction. Credit Mobilier distributed to shareholders profits estimated at between $7 million and $23 million, depleting the Union Pacific’s resources. In an effort to stop congressional investigations, the officers bribed Speaker of the House James G. Blaine and other congressmen with Credit Mobilier stock. Seldom modest about their thievery, congressmen voted themselves a 50 percent pay raise. The Union Pacific Railroad fell deep into debt, without enough revenue from passengers or shippers, and went bankrupt in 1893.

It is not surprising that Joe Biden, an individual who has spent his entire career in government, possesses a child-like devotion to the federal government’s capabilities. Biden is a major proponent behind the Obama administration’s misbegotten plan to build a national system of high-speed rail. That Biden stands to achieve historic notoriety for helping facilitate this latest government boondoggle is only fitting.

See Cato essays on federal transportation subsidies and the Department of Transportation timeline, which notes the Credit Mobilier scandal:

1872: The New York Sun exposes the Credit Mobilier scandal, perhaps the largest business subsidy scandal of the 19th century. Credit Mobilier is a construction company financially controlled by the leaders of the Union Pacific Railroad that makes huge profits at taxpayer expense. Congressman Oakes Ames (R-MA), who is an agent of Credit Mobilier and part-owner, distributes shares of the firm’s stock to members of Congress at a discounted value. In return, those members treat Credit Mobilier favorably in a variety of ways, such as by voting to appropriate funds for the firm. The scandal illustrates the corruption that usually results when the government intervenes in the economy and subsidizes businesses.

This Week in Government Failure

Over at Downsizing Government, we focused on the following issues this week: