Can the Budget Be Cut; D. Bandow

THEFREEMAN IDEAS ON LIBERTY Can the BudgetBe Cut? by Doug Bandow T o listen to Washington officials, you'd think cutting the budget was impossible. In their view, every program, no matter how inconsequential, has played a critical role in America's past success and must be preserved to ensure the nation's future progress. But you don't have to look far into the budget to find spending for which there is no conceivable justification. Consider welfare for business. For instance, over the last decade the Agriculture Department's Market Access Program (MAP) has spent roughly $1 billion to promote the export of goods produced by agribusiness. Impecunious enterprises like McDonald's, Ernest and Julio Gallo, Tyson's Foods, Pillsbury Company, Campbell Soup Co., Pepperidge Farms, Jim Beam, Ralston Purina, Welch's Food, Inc., and the Wine Institute have all ended up on the federal dole. Despite a new majority supposedly devoted to fiscal frugality, Congress actually increased program outlays for last year by $14.5 million annually.

Nor is MAP the only bit of corporate welfare in the federal budget. To the contrary, every year Uncle Sam spends $75 billion, roughly half the current deficit, on 125 dif ferent programs to directly enrich business. To these the 104th Congress made only modest reductions. "Of the $19.5 billion bud geted for the 35 least defensible programs, Congress cut just $2.8 billion in 1996," or Mr. Bandow, this month's guest editor, is a Senior Fellow at the Cato Institute and the author ofseveral books, including The Politics of Plunder: Misgov ernment in Washington (Transaction). about 15 percent, report Cato Institute ana lysts Stephen Moore and Dean Stansel. They add: Many corporate subsidy programs were reduced minimally, or not at all. Those programs include the Agricultural Re search Service; the Conservation Reserve Program; the International Trade Admin istration; fossil energy R&D; the Bureau of Reclamation; the Office of Commercial Space Transportation; the Overseas Private Investment Corporation; the Export Import Bank; and the Agriculture Depart ment's Market Promotion program.

Business subsidies deserve to go on the chopping block simply as a matter of priori ties. Deficits continue to accumulate at more than $100 billion a year, and, unless further cuts are made, will soon start rising again. Thus, every low-priority program should be eliminated, and enriching some of the largest and most profitable businesses in America should be considered the lowest priority of all. Nor are loans and loan guarantees a cheaper means to achieve the same ends of direct outlays. For instance, the Rural Busi ness Cooperative Service and Rural Housing Service use below-cost credit to underwrite virtually everything, from housing to business, in rural areas. Unfortunately, politicized credit usually turns out to be bad credit. Delinquency rates for the government aver age eight percent, roughly three times private rates. During the 1980s the Small Business 216 The Foundation for Economic Education Irvington-on-Hudson, New York 10533 Tel. (914) 591-7230 Fax (914) 591-8910 E-mail: freeman@westnet.com April 1997 Faith in the Fed E conomic life is encompassed by politi cal and social institutions. When they are conducive to economic effort and productivity, conditions may improve and bring forth general prosperity. When they turn hostile and burdensome, economic con ditions are bound to deteriorate. This is why everyone must always keep an eye on the body politic.

A prominent political institution in every country is the central bank. In the United States, it is the Federal Reserve System, the 1914 masterwork of the Woodrow Wilson Administration. It is the federal moneybag which can finance any government expendi ture and come to the rescue of any number of banks and financial institutions. It can cre ate new money with the speed of a comput er command and transfer it in seconds by high-speed modem. It can create deposits of one dollar as efficiently as it can create one million, one billion, or even one trillion dol lars. The Fed derives this magical power from its position as money monopolist, from the legal tender force of its money, and from its regulatory powers over financial institu tions. Its power is purely political, created and granted by the United States Congress, sanctioned by the courts, and enforced by the police. The eyes of the economic profession, of the media, bankers, businessmen, investors, and speculators are glued on the Fed.

Economic reporters on radio and television hasten to report on every move of the Fed. "Did it add liquidity today or did it abstain from creating credit?" When the Chairman speaks the financial world holds its breath. An encouraging remark may lift stock prices hundreds of points and add one trillion dol lars to equity wealth. A critical remark may cause the bond and stock markets of the world to plummet. Woe to the investor who fails to listen or interpret correctly the words of the Chairman! The powers of the Federal Reserve System reach to all corners of the world. It is the "lender of last resort" not only to the U.S. Government and American finan cial institutions but also to foreign central banks. It watches over and comes to the rescue of banks in distress from Mexico to Malawi. Its vast international powers rest on two foundations: the central position of the American financial market in the world and the central role of the U.S. dol lar as the reserve money of the world.

The Fed manages the international dollar standard. Most economists view the vast powers of the Fed with favor and applaud its man agers. Unfortunately, they seriously overes timate the Fed's power and take no heed of the fateful role played by the Fed. Their blind faith in political power cannot bear to look. As the monetary arm of the Federal gov ernment, the Fed suffers from all the temptations, foibles, and uncertainties of politics. Its primary purpose is to finance govern ment and conduct money and credit policies in accordance with the general plan of the administration in power. Ultimate control over the System rests in the hands of the President of the United States. He appoints the seven members of the Board of Governors and the United States Senate confirms them. His Secretary of the Treasury and his Treasurer sign all Federal Reserve currency from the one dollar bill to the $100 bill which is the largest denomina tion now being issued. These signatures alone make a farce of Federal Reserve independence.

While the Fed wields monopolistic power over U.S. money markets, it faces potent competition in international markets. The Japanese yen and the German mark are "hard-money" competitors to the U.S. dollar, setting limits to the inflationary powers of the Fed. To ignore them is to invite danger ous dollar crises and the demise of the world dollar standard. Therefore, the U.S. dollar must always remain competitive in purchas ing power and worthy of the trust of its own ers; Fed policies must remain in step with the policies of the competitors. Despite its vast powers the Fed's ability must not be overrated. It has limits which are visible in the dollar-yen and dollar-mark quotations in the money markets of the world from London to Tokyo. The limits also make their appearance in rising con sumer prices which reveal the consequences of the countless additions of Federal Reserve credit. When consumer prices rise beyond the margins of public tolerance, the Fed is caught in a bind. Its function to provide liq uidity for multifarious purposes conflicts with the function of "fighting inflation." The problem is that the Fed has only one tool adding or reducing its own liquidity. To fight inflation, it must cease and desist from adding liquidity, from inflating the currency and expanding its credits. In short, it must not pour more fuel on the fires of inflation which it ignited.

Americans may soon experience the lim its of Fed power when the Bank of Japan or the Bundesbank raise their interest rates or when consumer price inflation raises its ugly head. The Fed would have to raise its rates in order to remain competitive with the Bank of Japan and the Bundesbank or to call a halt to the consumer price inflation. The raise would cause financial markets to tum ble. In loss and suffering, Americans may finally realize that their faith in the Fed was painfully misplaced and their reliance on political money management a standing invitation to disaster. They may even learn that the creation of the Federal Reserve System by the Congress radically altered the political and economic order. It built a politi cal command post over the people's money and banking which in time was to become the money monopolist. The law which creat ed the System provided a federal fountain head which in time was to become the pater familias of the trillion-dollar welfare state. It built a powerful engine of inflation and ren dered the economy highly vulnerable to business booms and recessions. In the end, the American people may even regret the creation of the Fed and want to abolish the Wilson monster.

At this time, a wise man will not trust three things: the solemn promises of central bankers to "fight" inflation, the bluster of politicians to "balance" their budgets, and the chatter of Fed governors about the stabi lizing effects of their policies. Hans F. Sennholz Spring Book Sale Save now on selectedtitlesfrom the 1997 FEE Catalogue Hurry! Offer ends April 30, 1997 BIDINOTTO, ROBERT J., editor Criminal Justice? Essays on the causes of crime, the results of rampant criminality, and hard-headed solutions. 320 pages, $15.95 (P) sale $3.95 EBELING, RICHARD M., editor Disaster in Red: The Failure and Collapse of Socialism Why socialism did not work and cannot work. 376 pages, $24.95 (P) sale $18.95 ELLIS, ABRAHAM The Social Security Fraud The book dissects the inherent problems surrounding America's Social Security system and offers promising alternatives of privatization. 208 pages, $14.95 (P) sale $9.95 FREEMAN CLASSICS SERIES Taxation and Confiscation Brings together essays on the destruc tive nature of confiscatory taxation.

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320 pages, $14.95 (P) sale $9.95 Postage and handling: Please add $3 per order of $25 or less; $4 per order of $26-$50; $5 per order of more than $50. Send your order, with accompanying check or money order, to FEE, 30 South Broadway, Irvington-on-Hudson, NY 10533. Visa and MasterCard telephone and fax orders are welcomed: (800) 452-3518;fax (914) 591-8910. Booksellersand otherswho wish to orderin quantity shouldcall ReneeOechsner,at (914) 591-7230.

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The moral precepts and the self-evident truths that guided our Founding Fathers may not be fashionable in our time, but they are as inescapable and inexorable as they have been throughout the ages. We are free to ignore and disobey then1, but we cannot escape the rising price we must pay for defying them. Faith of Our Fathers includes an incisive introduction by Mary Sennholz and powerful essays by Clarence B. Carson, John Wesley Young, Robert A. Peterson, Wesley H. Hillendahl, Gary North, Ridgway K. Foley, Jr., Hal Watkins, James C. Patrick, Hans F. Sennholz, George C. Roche 111/ F. A. Harper, Jarret B. Wolstein, Leslie Snyder, Bruce D. Porter, Benjamin A. Rogge, Paul L. Adams, Ken Ewert, Ben Barker, John K. Williams, Edmund A. Opitz/ Erik von Kuehnelt-Leddihn, and Calvin D. Linton. Published by The Foundation for Economic Education, Inc. Irvington-an-Hudson, NY 10533 ISBN 1-57246-063-6 398 pages (indexed) paperback $19.95 Availablein bookstoresnationally,or call (800) 452-3518 • Fax (914) 591-8910 Administration saw 20 percent of its loans go bad. The delinquency rate for the Farmers Home Administration (since folded into the Rural Housing Service) ran nearly 50 percent.

And even loans that are repaid are not cheap, since they divert credit from more produc tive uses elsewhere in the economy. That is, money is not free, so if Uncle Sam is providing subsidized loans to politically favored inter ests, he is inevitably directing money away from more deserving, but lesswell-connected, businesses and individuals. A Matter of Principle There is a more fundamental principle at stake, however. The problem isn't just that we can't afford to subsidize corporate Amer ica. It is that we shouldn't do so. It isn't right to take money from average taxpayers for the benefit of business interests. Put bluntly: Gallo Wine should pay to promote its own products. The role of government is to fulfill critical common goals that can't be achieved privately, not to redistribute wealth among private parties based on the size of their campaign contributions. The fact that major corporations don't have to pay their own way, and instead are able to enlist legislators to mulct common citizens and businesses with more modest political connections-deforms the entire political system. It is the availability of hundreds of billions of dollars in taxpayer loot that has encouraged the creation of PACs and the consequent flow of special interest money into politics. Companies like Archer Daniels Midland simply buy access to politicians in both parties, access lacked by the people who pay the bill. As a result, the only way to "clean up" politics is to eliminate the benefits up for auction, not to rerig the political game.

Of course, advocates of corporate welfare are rarely foolish enough to admit that their goal is self-enrichment. Rather, they argue that the programs generate countervailing benefits-usually jobs. After all, if Mc Donald's is selling more hamburgers over seas, it is employing more people at home. But there is nothing in the Constitution that 217 empowers Congress to take money from some to benefit others, even if a fewjobs are created in the bargain. In fact, far more jobs are destroyed in the transaction. The point is, federal spending is not free. Money given to Archer Daniels Midland, Boeing, General Electric, IBM, and Ralston Purina is taken from people and enterprises across America. Which reduces their purchases, investments, and other eco nomic activities-and thus the number of jobs created. There ain't no such thing as a free lunch, goes the saying, and nowhere does it apply with more force than to the issue of corporate welfare.

At the very least policymakers could target the most egregious of the 125 business wel fare programs. The worst 35 alone cost $19.5 billion in 1995. Where the Money Goes The Commerce Department has always been the epicenter of general corporate wel fare. Among the most outrageous business subsidies are: • Advanced Technology Program ($431.0 million in 1995)-R&D grants to the giants of corporate America. • Economic Development Administration ($409.7 million)-grants and loans to help local governments lure firms to their areas. • International Trade Administration ($266.1 million)-export promotion services. • Manufacturing Extension Partnership ($91.0 million)-technical assistance to man ufacturing enterprises. • Minority Business Development Agency ($43.8 million)-assistance to minority owned firms. • National Oceanic and Atmospheric Ad ministration ($1.912 billion)-specialized forecasting activities for the agricultural, avi ation, fishery, and shipping industries.

Another important fount of corporate welfare is the Agriculture Department, which spends even more money while benefiting an even narrower special interest. The culprits include: • Agricultural Research Service ($758.4 million)-subsidies to increase agricultural 218 THE FREEMAN • APRIL 1997 productivity, improve food products, and en courage new uses of them. • Commodity Credit Corporation ($9.813 billion)-assorted crop subsidies. • Conservation Reserve Program ($1.743 billion)-payments to farmers not to farm their land. • Cooperative State Research, Education, and Extension Service ($932.1 million) assistance to farmers in their operations. • Economic Research Service ($53.9 mil lion)-agriculture industry research. • Export Enhancement Program ($800 million)-subsidies for big exporters. • Federal Crop Insurance Corporation Fund ($709.2 million)-underwriting crop insurance for farmers.

• Foreign Agricultural Service ($118 mil lion)- overseas government offices to pro mote food exports. • Forest Service/Road and Trail Construc tion ($130.9million)-building roads, most of which primarily benefit private lumber com panies. • Market Promotion Program [since re named the Market Access Program] ($85.5 million)-underwriting corporate advertising abroad. • National Agricultural Statistics Service ($81.3 million)-collection of data used to formulate crop subsidies. • Rural Utilities Service ($128.1million) subsidizing the cost of electricity and tele phones in onetime rural areas, delivering many of the resulting savings to business. Energy and Transportation Subsidies The Energy Department devotes billions of dollars to research and statistical activities that primarily benefit the energy industry. The Energy Information Administration ($84.6 million) accumulates industry data, the Energy Supply Research and Develop ment program ($3.315 billion) underwrites research on energy technologies, the Fossil Energy Research and Development program ($423.7 million) subsidizes more energy re search, and the Power Marketing Admin istrations ($272.5 million) provide cheap power to some of the nation's most affluent regions.

The Transportation Department is another agency that benefits business more than the public. The Essential Air Service program ($33.4 million) subsidizes airlines to serve politically favored areas, the Federal High way Administration/Demonstration Projects ($352.1 million) deliver almost pure pork to local construction firms, the Maritime Ad ministration/Differential Subsidies ($214.4 million) underwrite high-cost merchant ships, and the Office of Commercial Space Trans portation ($6.1 million) funds supposedly private-sector space activities. The Department of the Interior, through the Bureau of Mines ($152.4 million) and Bureau of Reclamation ($841.2 million), sup ports the mining and cattle industries. The Geological Survey ($547.6 million) maps re source deposits, to the benefit of mining interests. In the Department of Defense, the Army Corps of Engineers ($3.409 billion) creates waterways and water projects, which typically enrich local business interests. The Semiconductor Manufacturing Technology program ($89.5 million), known as Sematech, provides direct handouts to the semicon ductor industry. The Technology Reinvest ment Program ($443.0 million) underwrites the behemoths of industry to produce dual use (for both civilian and military) technolo gies.

Moreover, Congress has established a num ber of independent agencies with no function other than the enrichment of business. The Export-Import Bank ($782.1 million)-long known as Boeing's bank because it financed so many of the aircraft manufacturer's deals provides loans, loan guarantees, and credit insurance to the purchasers of American goods. The Overseas Private Investment Cor poration ($58.3 million) offers loans, loan guarantees, and risk insurance to U.S. busi nesses that invest overseas. The Small Busi ness Administration ($917.4 million) hands out loans and loan guarantees, and provides consulting services, to smaller enterprises. The Tennessee Valley Authority ($142.9 mil lion), like the Power Marketing Administra tions, offers low-cost electricity. The Trade and Development Agency ($45.0 million) promotes V.S. investment overseas. Restrictions, Quotas, and Tariffs Some corporate welfare is delivered indi rectly. The $1.4 billion sugar price-support program is backed by quotas on imported sugar, which cost consumers several billion dollars a year. Some 40 percent of the benefits of the program go to the largest one percent of sugar farms. All told, the V.S. government imposes restrictions, like quotas and tariffs, on more than 8,000 products, including autos, computer parts, mushrooms, steel, and tex tiles. Estimates of the cost of protectionism, which primarily enriches domestic producers, run as high as $80 billion annually.

The Jones Act requires that private com panies use U.S. flag vessels to ship products between V.S. ports. Military goods and half of other government cargoes (furnished un der federal contract, for instance) must go on more expensive American carriers. This sim ple regulatory directive, which cost the De partment of Defense alone $436 million in 1995, acts as a huge windfall for corporate America. Ethanol, a corn-based substitute for gaso line, is expensive and inefficient, but receives two tax benefits-credits for firms that pro duce ethanol and exemption from federal excise taxes-worth some $500 million annu ally. Companies like Archer Daniels Mid land, which dominates the ethanol market CAN THE BUDGET BE CUT? 219 and contributes heavily to Democrats and Republicans alike, are the primary beneficia ries. Subsidies to Amtrak support a quasi independent firm and lower the price to business travelers. So-called Food for Peace, ostensibly a foreign-aid initiative, was created to unload domestic food surpluses abroad.

NASA offers a cornucopia for government contractors. The Corporation for Public Broadcasting provides welfare to the wealthy, if not specifically to corporate America. And on and on. Even a decade of huge budget deficits has changed nothing. Over that time Congress eliminated two truly egregious programs, the Synthetic Fuels Corporation (which subsi dized the production of high-cost synthetic energy) and Urban Development Action Grants (which paid businesses to invest in particular regions). But the rest continue, though occasionally with different names (Congress turned the Rural Electrification Administration into the Rural Utilities Ser vice). And new ones, like Sematech, contin ually arise. It is time to kick corporate America off of the dole. The federal budget has long been filled with waste. But few expenditures are more obnoxious than those for business wel fare. Policymakers should be able to agree that there is at least one thing government should not do-mulct taxpayers to enrich corporate interests. If legislators won't cut this kind of abusive spending, what programs will they kill? D THEFREEMAN IDEASON LIBERTY 1996 Bound Volume S turdily sewn in a single volume with navy blue cloth cover and gold foil stamping, the twelve issues from January through December 1996 - 854 pages, fully indexed for handy reference to the latest literature of freedom. More than 100 feature articles on topics such as education, environment, government regulation and control, health care, individual rights, money, morality and ethics, private property, voluntary action, and international trade. Reviews of more than five dozen books-and all the 1996 issues of Notes ofFEE.

$24.95 each Save! Special introductory price: $19.95, through April 30, 1997 THEFREEMAN IDEAS ON LIBERTY Government-Mandated Insecurity by Tadd Wilson A s a 22-year-old still paying off college debts, I may seem a bit premature in worrying about my retirement. Then again, how could I not? Every payday, more than 15 percent of my check is syphoned away, osten sibly to ensure that I have an income when I retire at age 65. Or will it be 70-or 75? And will there really be any funds to collect when I retire? Most importantly, why can't I decide how best to provide for my own future? The Making and Breaking of Trust A glance at the history of Social Security shows why it has been dubbed the "third rail" of American politics. In their debate on the Social Security Act of 1935, the two major parties appeared to switch traditional roles. The Republicans advocated a program tar geted solely at the poor (not the party's usual constituency) to be a funded on a pay-as you-go basis out of general tax revenues. The Democrats, on the other hand, backed a program to include everyone (not just their poorer supporters), and to be paid for with earmarked tax dollars held in a "trust fund."