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Federal Funding of…Everything

Here we are in the thick of the election season and, as always happens during such times, we hear endless declarations from the candidates about the various problems that they will fix for us if we will only vote for them, and endless discussion from activists and advocates and self-declared victims and would-be policy-makers about what problems they should fix for us. And in all those declarations and all that discussion there are two common themes which underlie all those promises and pleadings: that, in general, government can fix all those problems; and that, in particular, the Federal government should expend its resources to do so.

Setting aside the legitimate debates over whether or not government is capable of making as much positive difference as the advocates and candidates seem to believe, and setting aside the separate and equally legitimate — and perhaps more important — question of whether government ought to involve itself in such projects, there is another question which was at one time in our history vigorously debated but now seems rarely to be asked: at what level of government is such involvement best applied?

One of the major traditional differences between ‘liberals’ and ‘conservatives’ (and I use the terms with reluctance) was their answers to that question. ‘Liberals’ seemed to believe consistently that government worked best when global and centralized; ‘conservatives’ seemed to believe consistently that government worked best when local and dispersed.

It now seems that even our so-called ‘conservatives’ have given up on local and dispersed, advocating federal action on everything from prescription drug funding to rules on marriage and campaign finance to education policy. And no one seems to be asking the question: is the Federal government the best place for such things?

Last week (28 Feb 2008) the program The Exchange on New Hampshire Public Radio had a discussion about a corporate buyout in the local telephone market. Most of the discussion had to do with who won and lost, whether the deal created a monopoly, whether it was good or bad for consumers, and so on. But at one point a question of funding for making broadband internet access universally available came up and the consensus was — you guessed it — that the federal government ought to fund it. There was no dissent.

That disturbed me and I wrote this to Laura Knoy, the host, to express my dismay. I have received no reply.

29 February 2008

Ms. Knoy,

I heard part of your show on Verizon/Fairpoint in the car Friday and was not in a position to call in — nor would I normally do that, anyway, given that I am much more facile with a pen than with my voice. But I have a question — or is it a point? — so here it is, in writing and after the fact. Think of it as a suggestion for the future.

During the discussion one of your guests suggested, as if it were the most obvious and indisputable point in the world, that the federal government should make funds available to assist states in making broadband access, as a public good, widely or universally available. He pointed out that New Hampshire (and perhaps other states as well) simply don’t have the resources to do so themselves, and that such a lack of local resources justified federal assistance.

From you and your other guests there were murmurs of assent and not a single demur.

This is not the first time I’ve heard this broad theme in policy discussions on your show or on others. It is a given. Everyone agrees the federal government should step in to help when money is tight. States are facing budget shortfalls? The federal government should send cash. Highways are deteriorating? Washington should send cash. Amtrak wants to build high-speed rail between Boston and Washington or between San Francisco and LA? Send cash. Schools are failing? Send cash. The economy is slowing down? Send cash. Oil prices are higher than expected? Send cash. And I never hear the host of any of these shows pause a moment to ask whether that’s really a good thing. If they happen to have some Libertarian fundamentalist as a guest you might hear an extreme and rambling denunciation that no one takes seriously, but all the people who seem thoughtful and reasonable either agree wholeheartedly or let it pass without comment.

But is such federal largesse a good idea? I would like to hear someone at least ask the question.

When people suggest that the federal government send out money to help states or towns or individuals, where do they think that money comes from? Sometimes it seems they believe that dollars swim around in vast schools beneath the placid surface of the Potomac just waiting for the fishing fleets of the Department of the Treasury to net them and dry them and disperse them, an inexhaustible supply of federal resources available to cure all ills. Or perhaps FDR was really an alchemist whose bequest to the nation was not merely the spending habits of the New Deal but a philosopher’s stone with which subsequent Presidents and Senators and Congressmen could support their grand fiscal promises by transforming lead into gold.

The reality, of course, is that there is no magical and bottomless well of wealth from which federal assistance gushes forth without cost or consequence. The federal government aggregates money for its beneficence in the same way every government does: it extracts it from other uses, either by taxing its citizens or by borrowing from the nation’s reserve of capital.

If the state of New Hampshire wishes that its citizens be taxed more to pay for some public works project like ensuring universal Internet access, it has the authority to levy those taxes itself. And, if it were to do so, the efficiency with which those resources could be allocated to that purpose would be higher than it would if the resources had to make their way to Washington, through the federal bureaucracy, and back to New Hampshire.

Similarly, if the state of New Hampshire wishes, rather, that money be borrowed from the capital markets to pay for such a project, it also has the authority to do that as cost-effectively as the federal government can and with the same gain in efficiency from keeping the money local rather than routing it to Washington and back.

In both cases, the only argument for making the federal government take action, rather than doing it locally, is that it allows the politicians of New Hampshire to claim credit while avoiding responsibility: the benefit — Internet access — is tangible, obvious to all, and a direct result of their successful lobbying for federal assistance; the costs, in terms of taxes paid and other economic activity foregone, is indirect, dispersed, obscured by intermingling with the effects of myriad other projects from myriad other states, and in any event accrues to the detriment of “the Congress” or of “the President” rather than to any individual that can be identified and held to account.

In other words, federal assistance for such projects does not reduce the burden they impose; and, arguably, it increases that burden to the extent that moving money through the federal bureaucracy involves some amount of inefficiency. Having the federal government provide that assistance merely distributes that burden in such a way that it becomes impossible to account it and, therefore, impossible to hold anyone responsible for it or to make a realistic assessment of the cost/benefit tradeoffs. Perhaps that is by design: it is a good way to get pet projects that could not withstand such scrutiny approved and paid for. But, in that case, good advocacy constitutes bad governance. And, whether the accounting is transparent or opaque, I assure you we will pay the bill.

* * * * * * * * * *

The only valid argument in favor of federal support for local projects is as a form of social insurance or of social leveling.

In the former, the federal government takes on responsibility for random misfortune, effectively spreading the risks of such misfortune evenly over the states. If you assume that every state will have its share of misfortune over time, then the net effect is not to reduce the cost of misfortune to any state but to spread that cost out over time rather than have it fall all at once at the time of disaster. Even if some states are more prone to misfortune than others and, therefore, benefit disproportionately from such insurance (which means other states bear the costs disproportionately), the mitigation of risk may make the extra cost worthwhile for those more fortunate, just as most people find health and automobile insurance worth the price. The most obvious examples of federal assistance as social insurance are things like disaster relief after hurricanes and earthquakes and floods and wildfires, but arguably buffering localized (but not national) economic downturns and general economic assistance to poorer regions (on the theory that the distribution of poorer and wealthier regions evolves over time) fall into this category.

But federal assistance for local infrastructure projects or to compensate for structural economic or cultural differences between states does not constitute social insurance. The only real justification for such programs is as a mechanism of social leveling — that is, they are based on a presumption that states which are wealthier and/or more culturally sophisticated somehow owe a debt of assistance to those which are less so, and that the federal government is responsible for discharging that debt by transferring resources from the former to the latter.

The only rational reason to argue that the federal government should assist the state of New Hampshire in making internet access universal — or that the federal government should help with any other infrastructure project — is that you believe the citizens of New York and California and Massachusetts and New Jersey and Kansas and Illinois should subsidize our needs or desires. You may believe that to be true and you may have a good argument to support your view, but it is neither obvious nor indisputable and I would bet the citizens of New York and of California and of Massachusetts and of New Jersey and of Kansas and of Illinois — and many in New Hampshire — would disagree. It is certainly a topic worthy of debate.

Might I request that, in the future, when such notions are put forward in discussions on your show, you treat the suggestion with the skepticism it deserves? That is a discussion I would love to hear.

(C) Copyright 2008, Augustus P. Lowell

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