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The federal government is headed toward afinancial crisis as a result of chronic overspend-ing, large deficits, and huge future cost increasesin Social Security and Medicare. Social Securityand Medicare would be big fiscal challenges evenif the rest of the government were lean and effi-cient, but the budget is littered with wasteful andunnecessary programs.

In recent years, mismanagement scandals haveoccurred in many federal agencies, including theArmy Corps of Engineers, the Bureau of IndianAffairs, the Department of Energy, the FederalBureau of Investigation, and the National Aeronau-tics and Space Administration. Even the NationalZoo in Washington has recently been shaken byscandal. The $2.3 trillion federal government hassimply become too big for Congress to oversee.

The good news is that Americans do not needsuch a big government. Most federal programs areunconstitutional, unnecessary, actively damaging,or properly the responsibility of state govern-ments or the private sector. This study analyzesprograms that could be cut to create annual budg-et savings of $300 billion. If these cuts were phasedin over five years, the budget would be balanced byfiscal year 2009 with all of President Bush’s taxcuts in place.

Some reform ideas should be applied through-out the government. Business subsidies should beterminated, and commercial activities should beprivatized. Also, federal grants to the states shouldbe scaled back. Currently, a complex array of 716grant programs disgorges more than $400 billionannually to state and local governments, whichbecome strangled in federal regulations. Thatform of “trickle-down” economics is very ineffi-cient.

Such reforms were on the agenda in theReagan administration and in the RepublicanCongress of the mid-1990s. But the need forspending cuts is even more acute today because ofthe large fiscal imbalances that loom from pro-jected growth in entitlement costs. Spending cutswould not just balance the budget; they wouldalso increase individual freedom and expand theeconomy. All federal spending displaces privatespending, but many federal programs activelydamage the economy, cause social ills, despoil theenvironment, or restrict liberty as well.

Given the government’s record of mismanagedand damaging programs reviewed in this report,policymakers should be far more skeptical aboutthe government’s ability to solve problems withhigher spending.

Downsizing the Federal Governmentby Chris Edwards

_____________________________________________________________________________________________________

Chris Edwards is director of fiscal policy studies at the Cato Institute.

Executive Summary

No. 515 June 2, 2004

Introduction

Federal spending has grown rapidly inrecent years, rising 35 percent between fiscalyears 1999 and 2004.1 Congress and the pres-ident have driven the budget deep into deficitjust a few years before the costs of entitle-ments for the elderly soar when the baby-boom generation starts retiring in 2008.

Rising entitlement costs would be a hugefiscal challenge even if the rest of the federalgovernment were lean and efficient. Butunneeded programs are found throughoutthe federal budget, and mismanagement iswidespread. Experts agree that entitlementprograms should be overhauled, but the restof the government also needs major reforms.

Some of the agencies recently making head-lines for gross mismanagement include theArmy Corps of Engineers, the Bureau of IndianAffairs, the Department of Energy, the FederalBureau of Investigation, and the NationalAeronautics and Space Administration.2 Eventhe National Zoo in Washington has beengrossly mismanaged in recent years.3 TheOffice of Management and Budget’s mostrecent “scorecard” of federal agency perfor-mance includes only 8 green grades for goodperformance out of 130 total grades given.4 Amajor report on federal performance by theSenate Committee on Government Affairs in2001 concluded that the government has “ter-rible” management and a “staggering” prob-lem of waste, fraud, and abuse.5

Some efforts have been made to fix theworst abuses. The Bush administration hastried to improve federal management. Formervice president Albert Gore tried to reinventgovernment. Congress provides occasionaloversight of federal agencies. But major fail-ures continue to occur, and many programscannot show any beneficial performanceresults. Chronic mismanagement is a signalthat the $2.3 trillion federal government is toobig for Congress to oversee.

The good news is that Americans do notneed such a big government. Many federalactivities could be performed by the privatesector. To pursue lasting reforms, Congress

should examine every agency and ask whetherits activities need to be carried out by the gov-ernment at all. This study focuses on cuts tothe nondefense discretionary portion of thebudget, which are not intended to be a com-prehensive list of possible budget reforms.Indeed, major reforms are also needed indefense and entitlement programs, such asmoving to a system of Social Security person-al accounts. Such reforms are discussed inother Cato studies.6

Along with a detailed list of cuts, thisstudy proposes a framework to help policy-makers determine which programs should becut and which of three reform actions shouldbe taken. The reform actions are

• termination,• devolution to state or local governments,

and• privatization.

Many sources are available for use indetermining the best targets for reform. TheGeneral Accounting Office provides a steadystream of analyses of wasteful and ineffectiveprograms. The Reagan administration in the1980s and congressional Republicans in the1990s targeted many programs for termina-tion.7 For example, in 1995 the House passeda plan to eliminate more than 200 programsand agencies including the Departments ofEducation, Energy, and Commerce.8 Thoseplans should be revived. Also, there is nowextensive foreign experience in privatizingactivities such as passenger rail, air trafficcontrol, and postal services.

This study proposes detailed spendingcuts of $300 billion annually. Figure 1 showsthat the cuts would balance the budget byFY09 with President Bush’s tax cuts in place.The Brookings Institution released a detailedreport in January with options for balancingthe budget. The report noted that “althoughtax increases are unpopular with those whofavor smaller government, no one has sug-gested how to achieve balance withoutthem.”9 This study provides a detailed planfor smaller government that balances the

2

Chronic mismanagement

is a signal that the$2.3 trillion

federal govern-ment is too bigfor Congress to

oversee.

budget without tax increases.Calculations for Figure 1 assume that

spending cuts would be phased in over fiveyears and that federal interest costs would fallas the deficit shrank.10 Figure 1 uses theCongressional Budget Office’s projection forfederal revenues assuming that all of PresidentBush’s tax cuts are in place and made perma-nent. The CBO’s spending baseline was usedas the starting point for the spending projec-tion that includes the proposed spending cuts.

The proposed spending cuts would sub-stantially downsize the government comparedto the CBO baseline, but total spending wouldincrease during the next decade because ofgrowth in entitlement programs. This reportfocuses on cuts to discretionary spending, butFigure 1 illustrates the need to cut both dis-cretionary and entitlement spending if overallspending is to be reduced.

With the president’s tax cuts in place, fed-eral revenues would rise to $2.595 trillion byFY09.11 With $300 billion in spending cutsphased in over five years, overall federal out-lays would rise to $2.553 trillion in FY09, cre-ating a $42 billion surplus. By contrast, theCBO projects that the deficit in FY09 will be

$281 billion under the baseline, or $258 bil-lion under the FY05 Bush budget.12

With the proposed budget cuts, spendingwould fall from 20 percent of gross domesticproduct in FY04 to 17.6 percent by FY09.Meanwhile, revenues would be 17.9 percent ofGDP in FY09 with the Bush tax cuts in place.

By FY14, the proposed spending plancombined with revenues, assuming the Bushtax cuts, would generate a surplus of $159billion. By contrast, the deficit would be $284billion in FY14 under the Bush budget plan,according to the CBO.

It will be a big challenge for policymakersto make the proposed budget cuts in the nextfew years. Congress and the Bush adminis-tration still do not grasp the huge overspend-ing problem that lies ahead as entitlementcosts soar. The administration has called for“better management” of programs but hasbeen loath to actually eliminate any. Pork-barrel programs and business subsidies donot need better management; they need to beterminated. Amtrak does not need bettermanagement; it needs to be cut free of thegovernment yoke so it can innovate, cutroutes, and maximize profits.

3

Congress and the Bush administrationstill do not graspthe huge over-spending problem that liesahead as entitlement costssoar.

1,500

2,000

2,500

3,000

3,500

4,000

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Spending: CBO baseline

Spending: With proposed cuts

Revenues: With Bush tax cuts

Figure 1Proposed Spending Cuts Balance the Budget by 2009

Bill

ions

of D

olla

rs

Fiscal Year

Sources: CBO March 2004 revenue and outlay projections and author’s budget cut calculations.

It is realistic and feasible to cut $300 bil-lion from the federal budget. American soci-ety would be better off, and individualswould enjoy greater economic freedom. Ifenacted, the proposals in this study wouldnot only balance the budget in the near term;they would help defuse the fiscal time bombof costs of entitlements for the elderly that isset to explode on young taxpayers. As entitle-ment costs rise, cuts that now seem radicalwill become a policy imperative.

This report first examines why federaldownsizing is needed. The balance of thereport discusses the five main failures of gov-ernment programs that signal the need fortermination, privatization, or devolution tostate governments. The Appendix contains adepartment-by-department discussion ofprogram weaknesses and proposed reforms.

Why Downsize?

Less Is MoreThe federal government will spend about

$2,300,000,000,000 this fiscal year. After tak-ing out the government’s core functions ofnational defense and justice, it will still spendabout $1,800,000,000,000. That amounts toabout $17,000 for every household in theUnited States. Clearly, the federal governmenthas amassed a huge range of spending pro-grams that go beyond its basic responsibilities.

Indeed, the government is so large that theactivities of hundreds of federal agencies arebeyond the knowledge of most citizens. Thegovernment has become too large for our rep-resentatives in Congress to oversee adequately,as scandal after scandal attests. Congress hasshown itself incapable of running a $2.3 tril-lion organization with an adequate degree ofcompetence. For example, the GeneralAccounting Office has not been able to certifythe federal government’s financial statementsfor seven years in a row because of weakaccounting controls and mismeasurement ofassets, liabilities, and costs.13

The government has become big not justin dollar terms; its influence has infiltrated a

vast range of activities that were previouslyprivate. Like an octopus, the federal govern-ment has eight tentacles that reach out tomanipulate society, as illustrated in Figure2.14 Those include direct activities of the fed-eral bureaucracy, government purchases,loans, grants to state and local governments,transfer payments and subsidies, regulations,taxes, and stand-alone federal businessessuch as the U.S. Postal Service.15

Figure 2 shows that federal spending inFY04 includes $1.0 trillion in transfer pay-ments to individuals, $0.4 trillion in govern-ment purchases, $0.4 trillion in grants to stateand local governments, and $0.3 trillion incompensation for federal workers. This reportfocuses on the spending tentacles: it does notdiscuss taxation and regulation in detail.

From the perspective of individuals andbusinesses, dealing with the ever-changingactions of the tentacles is a complex task. Forexample, businesses play defense as they strug-gle under the burden of taxes and regulations,but they go on the offense by taking advan-tage of subsidies, such as grants and loans.

From the perspective of the government,multiple tentacles expand its power over soci-ety to the greatest degree within the politicaland legal constraints it faces. For example,loans and loan guarantees grew rapidly in the1970s as members of Congress discovered thatthey could reward favored interests while side-stepping the political constraints on higherdirect spending.16 Similarly, grants (or “grants-in-aid”) to the states allowed the federal gov-ernment to circumvent traditional concernsabout expansion of its power over state activi-ties. Grants allow federal politicians to becomedo-gooder activists in areas such as educationwhile shoveling cash into state coffers to muf-fle concerns about federal encroachment.

By using the various tentacles, the federalgovernment leverages its almost two millioncivilian employees to gain broad control overthe economy and society. For example, federalprocurement turns private-sector workers intogovernment-directed agents. Federal grantsturn state and local government workers intotools of the federal government. The Brookings

4

By using various tentacles,

the federal government leverages itsalmost two

million civilianemployees to gain

broad controlover the economy

and society.

Institution’s Paul Light set out to determinehow many people were in the federal govern-ment’s “shadow workforce,” which includesthose who are not in the civil service but per-form government-directed work.17 For 2002,Light found that the total federal workforcewas 16.8 million, including 1.76 million in thecivil service, 5.17 million contractors, 2.86 mil-lion employed through grants to private orga-nizations, 4.65 million employed throughgrants to state and local governments, 0.88 mil-lion in the U.S. Postal Service, and 1.46 millionin the uniformed military, as shown in Table 1.(By FY04, the number of workers in the civil ser-vice had risen to 1.86 million.)18

Americans would be better off if the size,scope, and complexity of the federal govern-ment were reduced and they received a more

limited range of better quality federal ser-vices. The federal government has becomelike a bloated conglomerate corporation thatis involved in so many activities that corpo-rate executives are distracted from core mis-sion areas. For example, the Bush WhiteHouse at the highest levels was spending sub-stantial time and effort in 2001 helping outEnron Corporation on an investment inIndia that had gone bad.19 When theWashington Post reported that in 2002, theadministration argued that it was just per-forming routine business to help guard tax-payer interests in the $640 million in federalloans that had been given to Enron for theproject.20 However, the fundamental prob-lem was with involving taxpayer money insuch a risky foreign scheme to begin with.

5

Figure 2Tentacles of the Federal Government: The Reach of Government in 2004

Grants to State/Local Governments• $418 billion in grants

• 716 grant programs

Federal Bureaucracy• 1.9 million civilian employees

• 1.5 million uniformed military

• 66,000 in the legislative and judicial branches

• $282 billion in annual worker compensation

Taxes and Tax Loopholes• $1.8 trillion in taxes

• 137 official tax loopholes for favoredactivities

Transfer Payments and Subsidies• $1.0 trillion in transfers to individuals

• $44 billion in direct business subsidies

Government Purchases• $424 billion in federal procurement and other

purchases

Government Corporations• The Tennessee Valley Authority, the

U.S. Postal Service, and dozens ofother businesses

Regulations• $860 billion annual cost to the

economy• 75,000 new pages of regulations

every year

Loans• $249 billion in outstanding loans

• $1.2 trillion in outstanding loanguarantees

• 129 loan and loan guarantee pro-grams

Sources: Author’s compilation based primarily on the Budget of the U.S. Government, FY 2005, and U.S. Bureau of Economic Analysis, Survey ofCurrent Business, March 2004, p. 23. All data are for FY04.

Consider that, a year and a half after the9/11 tragedy, the GAO reported that nine dif-ferent government agencies still had a dozendifferent terrorist “watch lists” that were noteasily comparable.21 The GAO concluded thatthe watch list system was “overly complex,unnecessarily inefficient, and potentially inef-fective.”22 The problem had still not been fixedby early 2004.23 Americans deserve better thanthat. Unfortunately, policymakers are usuallytoo busy dishing out special-interest spendingand intruding on state functions to focus onnational security problems. Indeed, theWashington Post recently reported that mostmembers of the House and Senate intelligencecommittees have been too busy with otherpolitical and policy activities to read crucialterrorism reports or hold oversight hearings torectify problems in the intelligence agencies.24

Modernist architects argued that “less ismore” in building design. The same is true ingovernment design. Many poorly performingcorporations have shed extraneous activitiesin recent years to refocus on “core competen-cies.” The federal government should do thesame. Reforms should focus on shedding thenoncore functions of the government so thatCongress and the administration can con-centrate on delivering high-quality basic ser-vices such as national security.

Making Room for the Elderly SpendingExplosion

Modest spending constraint, a fallingdefense budget, and a strong economy pro-

duced the first federal budget surplus in 29years in FY98. But fiscal responsibility didnot last long, and a gaping deficit appearedjust four years later in FY02. The budgetdeficit for FY04 will be a record $477 billion,with large deficits expected for years tocome.25

Most of the recent run-up in spending hasbeen in the discretionary budget—thosefunds that are annually appropriated byCongress. This study focuses mainly on cutsto that part of the budget, which represents7.8 percent of GDP. The proposed cuts wouldreduce that by 2.6 percent of GDP, enough toeliminate the deficit with the Bush tax cuts inplace for at least the next 10 years.26

The proposed cuts would also begin tack-ling the bigger fiscal problem of making wayfor the coming cost explosions in SocialSecurity and Medicare. The number ofretired Americans will grow rapidly in thenext few decades—by 2030 the number ofAmericans aged 65 and older will rise by 96percent, while the number of workers to sup-port them will rise only 18 percent.27 Thatwill create a severe budget strain becauseCongress has made generous promises tofuture retirees without any plan to pay thecost. In addition to programs for the elderly,growth in Medicaid will add to the budgetsqueeze with an expected annual growth rateof more than 8 percent after 2008.28

The nation is on a financial collisioncourse, and Congress will be forced to makeradical changes sooner or later. If the overall

6

Policymakers areusually too busy

dishing out special-interest

spending andintruding on statefunctions to focus

on national security

problems.

Table 1Federal Workforce Including Shadow Workforce, 2002

Federal civilian workforce 1.76 millionFederal contractors 5.17 millionFederal grant-created jobs 2.86 millionState and local workers doing federal business 4.65 millionU.S. Postal Service 0.88 millionUniformed military personnel 1.46 millionTotal workers doing federal activities 16.8 million

Source: Paul C. Light, “Fact Sheet on the New True Size of Government,” September 5, 2003,www.brook.edu/gs/cps/light20030905.pdf.

size of the federal government is limited to 20percent of GDP as it is today, then unre-formed Social Security, Medicare, andMedicaid will consume nearly 80 percent ofthe budget by 2040.29 The fiscal collisioncourse is also evident in the size of unfundedpromises that Congress has made. In addi-tion to today’s federal public debt of $3.9 tril-lion, taxpayers may be on the hook for $2.9trillion in federal employee retirement bene-fits, $1 trillion in veterans’ benefits, $3.6 tril-lion in Social Security benefits, $15.6 trillionin Medicare benefits, and $7 trillion in thenew Medicare drug benefits.30

The only realistic way out of the comingbudget squeeze is to reform entitlements andcut discretionary programs. The $300 billionin cuts proposed in this study would be anunprecedented reform, but it will make senseto more policymakers as gushers of red inkcontinue to flow in coming years. Besides,$300 billion in budget cuts is hardly radicalwhen one considers recent growth in the fed-eral budget. Total outlays increased from$1.9 trillion in FY01 to $2.3 trillion in FY04.Thus, the cuts proposed here would not evenbe as large as three years of spending increas-es under President Bush.

Government Spending Displaces PrivateSpending

To support its huge array of programs, thefederal government extracts about $2 trillionin taxes from families and businesses eachyear. That extraction comes at an enormouscost. Most obviously, every dollar the govern-ment spends is one dollar less for the privatesector to spend. The more tax money isextracted from individuals, the less they haveto spend on food, clothing, housing, andother needs. The more tax money is extractedfrom businesses, the less they can spend onresearch, investment, and expansion, to thedetriment of the nation’s economic growth.

The costs of a large government do notend there. Every added dollar of federalspending costs the private sector more thanjust a dollar. Taxes cause economic distor-tions by changing relative prices and divert-

ing resources into less productive uses. Thecosts created by those distortions are called“deadweight losses.”31 Economic researchindicates that deadweight losses cost theeconomy 25 cents or more of each added dol-lar of federal revenue.32 Thus, governmentprograms that do not create benefits at least25 percent greater than their tax costs makeno economic sense.

Many academic studies have found thatdeadweight losses of additional taxes aremuch larger than 25 percent. Harvard’sMartin Feldstein concluded that “the dead-weight burden caused by incremental taxa-tion . . . may exceed one dollar per dollar ofrevenue raised, making the cost of incremen-tal governmental spending more than twodollars for each dollar of government spend-ing.”33 Thus, a new $1 billion NASA space-craft could cost the private sector more than$2 billion.

As the government grows larger, highertaxes reduce the rewards to work, savings,entrepreneurial activity, and business invest-ment. Consider a working person who is con-sidering launching a side business to earnextra income. If the government raises taxrates and dissuades her from those plans, thenation loses the added production and theinnovative ideas that she could bring to theeconomy. As federal spending rises, taxes arepressed upward, and many such privateopportunities are suppressed.

It is doubtful that most federal programscreate benefits as large as those of the private-sector activities they displace. Consider theeffects of federal crop subsidies of $17 billionthat will go directly to farmers this year.34

First, the subsidies add $17 billion to thefarm economy but destroy $17 billion ofactivity elsewhere as resources are shiftedinto farming. Second, extracting higher taxesto pay for the program creates deadweightlosses costing at least another $4.25 billion(or as much as $17 billion if Feldstein is cor-rect). Third, the subsidy program itself maycause further damage. For example, farmsubsidies are thought to harm the environ-ment by causing excessive use of fertilizers

7

Every added dollar of federalspending coststhe private sectormore than just adollar.

and overuse of marginal farmland thatwould otherwise be forests or wetlands.

To conclude, higher taxes and govern-ment spending crowd out the private agen-das of families and businesses, causingresources to flow to activities chosen by thepolitical elite rather than by Americans them-selves. There is a high hurdle that needs to becleared for government programs to makeany sense, given the private-sector damagethat is caused by funding them.

Are Programs Constitutional?

This study focuses on the economic andpractical failures of federal programs, but insorting out which programs should be cut,policymakers should first consider whetherprograms are authorized by the U.S.Constitution. The Constitution established afederal government of limited powers. Thosepowers are enumerated in Article I, section 8,which allows for spending mainly on securi-ty-related functions, such as establishingcourts, punishing crime, and maintaining anarmy and a navy.35

Despite the straightforward limitationscreated by the Constitution, the SupremeCourt has accepted ever-looser readings of thelimits to federal power. Since the 1930s spend-ing has flowed into any area that has hap-pened to suit the immediate whims of federalpoliticians. Today, the government funds avast range of activities that violate both the let-ter and the spirit of the Constitution, even ifthe Court fails to enforce the original legalcontrols on federal authority.

The Constitution’s Commerce Clause hasbeen expanded far beyond what the Framersenvisioned. Written to ensure the free flow of“commerce among the states,” it was meantto limit state governments, which had begunerecting protectionist barriers to trade.36

Since the New Deal, that interpretation hasbeen turned on its head by the SupremeCourt. The clause has served as an excuse toexpand federal regulatory power over any-

thing that has a vague relationship to inter-state commerce. Instead of acting as a brakeon government power as originally intended,the clause has been used to expand govern-ment power over the economy.

Recently, however, the Supreme Court hasbegun to rediscover the limits on theCommerce Clause. In United States v. Lopez,the Supreme Court ruled that Congressexceeded its constitutional authority by out-lawing the possession of guns near schools.37

That was the first time in more than 60 yearsthat the Court acknowledged that there arelimits to the commerce power.38

The General Welfare Clause of Article I, sec-tion 8, is also said to provide a justification formuch of today’s $2.3 trillion federal budget.But the clause, as understood by JamesMadison and other Founders, was meant toensure that spending on enumerated ends wasfor the broad benefit of Americans, not fornarrow groups of citizens.39 Unfortunately,expansive interpretations of the clause by theSupreme Court in recent decades have allowedCongress to establish many programs that arenot to the general benefit of Americans at all.Today, much federal spending targets certainbusinesses and individuals and is not for the“general welfare.”

To provide one small example, two federalagencies provided loans of more than $1 bil-lion to Enron Corporation during the 1990sfor risky overseas projects.40 That spendingwas clearly aimed at a narrow interest and notthe general interest. Aside from being consti-tutionally dubious, such narrowly targetedspending schemes usually do not make practi-cal sense—in this case, large firms have easyaccess to private financing and do not needgovernment loans.41 This report focuses onpractical problems with such spending, butthe deeper problem is that such programs donot pass constitutional muster either.

Members of Congress take an oath touphold the Constitution, and they shouldstart taking that oath seriously. Too oftenCongress either ignores the Constitution orcasually inserts boilerplate language into leg-islation to claim authority—under the

8

Today, much federal spending

targets certainbusinesses and

individuals and isnot for the

“general welfare.”

Commerce Clause, for example. Instead,when a questionable program comes beforethem, members of Congress should askwhether there is constitutional authority forit and vote against it if it violates the funda-mental law of the land.

Federal Programs: Five Reasons for ReformRegard for the Constitution has not been

a sufficient reason for members of Congressto control federal spending. Therefore, thisstudy provides policymakers with a frame-work to use in addressing the practical prob-lems that confront many programs. A federalprogram may have any of five types of prob-lems that would justify its elimination:

1. A program is wasteful. As defined here,that means it has high levels of fraudand abuse or is duplicative, obsolete,mismanaged, or ineffective.

2. A program is an unjustified redistribu-tion of wealth.

3. A program actively damages society, forexample by distorting the economy orreducing individual freedom.

4. A program’s function would be better per-formed by state and local governments.

5. A program’s function would be betterperformed by private businesses orcharities.

This study identifies more than 100 feder-

al programs and two major departments thatpossess one or more of those deficiencies.Depending on the problems with each pro-gram, one of four reform solutions may beappropriate: restructuring, termination,devolution to state governments, or privati-zation. Table 2 illustrates the relationshipbetween problems and solutions.

Row 1 in the table includes such pro-grams and agencies as NASA, which is bothobsolete and mismanaged. NASA’s activitiesshould be privatized to the extent possible,then the rest of the agency should be termi-nated. This study focuses on programs thatcan be ended entirely and does not addressprogram restructuring, which may be appro-priate in some cases for proper federal func-tions such as defense.

Row 2 includes federal subsidies to indi-viduals and businesses that make no eco-nomic or moral sense, such as farm subsidies.Whether or not such subsidy programs arewell managed or efficiently delivered is besidethe point. Congress should cut programsthat have no purpose other than to transfermoney to narrow special-interest groups.

Row 3 includes programs that restrictindividual freedom, damage the economy,harm the environment, or hurt society inother ways. One example is antitrust enforce-ment by the Department of Justice and theFederal Trade Commission, which restrictscommercial freedom. While the federalantitrust bureaucracy will cost $215 millionin FY04, the negative economic impact couldbe much larger if the agency blocks mergers

9

A federal program mayhave any of fivetypes of problemsthat would justifyits elimination.

Table 2Program Problems and Reform Solutions

Program Problems Reform Solutions

1. Wasteful (fraud and abuse, duplicative, Restructure, terminate, devolve, or privatizeobsolete, mismanaged, or ineffective)

2. Unjustified redistribution Terminate3. Actively damaging Terminate4. State and local function Terminate or devolve5. Private function Terminate or privatize

and other business activities that increasemarket efficiency.42 Another type of harmfulfederal activity is subsidies for agriculture,logging, electricity, and water, which wasteresources and can damage the environment.

Row 4 includes the large array of federalprograms that are properly state and local gov-ernment functions. Federal spending in thoseareas should be ended. For example, federalprimary and secondary education programsshould be ended as a counterproductive intru-sion into a local activity. If federal involvementin state and local activities were ended, policy-makers and taxpayers in each state coulddecide which programs were appropriate ineach state’s particular situation.

Row 5 includes federal activities thatshould be left to the private sector and carriedout by individuals, businesses, or charitableinstitutions. This study makes a best guess asto whether programs should be simply termi-nated or actively privatized. For example,Amtrak could be privatized as a whole entity.On the other hand, federal foreign aid pro-grams should simply be terminated and aidwork left to private charities.

Table 3 provides a list of $300 billion inbudget cuts.43 The proposed cuts are primari-ly in the nondefense discretionary portion ofthe federal budget. Defense spending is nottackled in this study, but it should also becut.44 Indeed, by most accounts, the Pentagonis one of the most wasteful federal agencies,and large savings could be gained by restruc-turing its operations.45 For example, muchtraditional government-owned military hous-ing is in poor shape and needs to be upgrad-ed. A good solution that is being pursued bythe Bush administration is to privatize mili-tary housing; that would create higher quali-ty housing and cut costs.46

The failures of each program or agency aremarked in Table 3, and one or more reformoptions are recommended. To simplify theanalysis, the study focuses on those programsthat should be zeroed out entirely. Most federalprograms could be trimmed to save money, butthe best option for programs listed here is fulltermination, devolution, or privatization.

Multiple reform options are marked in somecases because different reforms are suitable fordifferent parts of some agencies. For example,the first row in the table proposes terminationor privatization of the $124 million AgricultureStatistics Service. Many of this agency’s activi-ties are probably wasteful, but some statisticsmight be in high demand. Useful activitiescould be transferred to private farm organiza-tions, which could assemble and distribute sta-tistics themselves. Ultimately, it should be up toentrepreneurs and consumers to determinewhether such activities are worthwhile.

The following sections provide a discus-sion of each of the five justifications for end-ing federal programs. The Appendix providesfurther discussion of many of the programslisted in Table 3.

Wasteful Programs

Budget analysts and policymakers oftenmean different things when they describe afederal program as wasteful. In this study,“wasteful” spending refers to five types ofprogram failure: high levels of fraud andabuse, duplication, obsolescence, misman-agement, and ineffective performance. Thosefive types of waste are discussed in turn here.In Table 3, programs are marked as wastefulif they fail on one or more of these counts.

Fraud and Abuse Government and private watchdog groups

regularly uncover waste, fraud, and abuse inthe federal budget. To focus on those govern-ment failings, the GAO began tracking a“high-risk” group of poorly managed agen-cies in 1990.47 The 1990 list of 14 high-riskagencies has expanded to 25 today. Someactivities, such as student loans, have been onthe list for 14 years despite repeated GAOcalls for reform.

The federal government pays out hundredsof billions of dollars a year to businesses forpurchases, reimbursements, and subsidies.Large handouts attract large-scale abuses. Forexample, about $13 billion of annual pay-

10

“Wasteful”spending refers to

five types of program failure:

high levels offraud and abuse,

duplication, obsolescence,

mismanagement,and ineffective

performance.

11

Table 3Proposed Federal Budget Cuts

Program Problems Reform SolutionsFY04

Outlays Unjustified Actively State/Local Private Devolve ($millions) Wasteful Redistribution Damaging Function Function Terminate to States Privatize

Department of AgricultureAgricultural Statistics Svc. $124 X X XEconomic Research Svc. $71 X XAgricultural Research Svc. $1,154 X X XCoop. State Research and Ext. Svc. $1,082 X X X X XAgricultural Marketing Svc. $1,021 X X X XRisk Management Agency $4,034 X X X XFarm Service Agency $16,877 X X X XRural Development $1,043 X X X XRural Housing Svc. $1,549 X X X XRural Business Cooperative Svc. $107 X X X XRural Utilities Svc. $108 X X X XForeign Agricultural Svc. $1,917 X X X XForest Service: Land Acquisition $154 X X XForest Service: State and Private $455 X X X X X

Total proposed cuts $29,696 Total department outlays $77,739

Department of CommerceEconomic Development Administration $417 X X X XInternational Trade Administration $364 X X X XMinority Business Development Agency $22 X X XFisheries Loans and Marketing $32 X X X XPacific Salmon state grants $330 X XTechnology Administration $9 X XAdvanced Technology Program $195 X X X XManufacturing Extension Partnership $40 X X X X XOther NIST programs $421 X X XNational Telecom. and Info. Admin. $104 X X X X


Department of EducationElementary and Secondary Education $24,968 X X X X X XInnovation and Improvement $55 X X XSafe and Drug-Free Schools $43 X X XEnglish Language Acquisition $819 X X XSpecial Education and Rehab. $12,482 X XVocational and Adult Education $1,932 X X XPostsecondary Education $2,379 X X X XStudent Aid $19,067 X X X XEducation Sciences $598 X X X XDepartment management $522 X X


Department of EnergyGeneral Science $3,405 X XEnergy Supply $714 X X X XFossil Energy, Research and Dev. $590 X X X XEnergy Conservation $882 X X X XStrategic Petroleum Reserve $171 X X XEnergy Information Administration $78 X X XClean Coal Technology $19 X X X XPower Marketing Administrations $155 X X X X X


Continued

12

Table 3 Continued



Department of Health and Human ServicesSubstance Abuse and Mental Health Svc. $3,133 X X XHealth Care Research and Quality $327 X XTemporary Assistance for Needy Families $18,866 X XState payments for family support $4,098 X XLow-Income Home Energy Assistance $1,892 X X X XPromoting safe and stable families $414 X XNIH: Applied R&D $12,500 X X XHealth professions education $409 X X X XChild care entitlements to states $2,866 X XChild Care and Development block grant $2,237 X XSocial Services block grant $1,767 X XHead Start $6,775 X X XFoster Care and Adoption grants $6,442 X XAdministration on Aging $1,313 X X


Department of Homeland SecurityState and local programs $3,768 X XFirefighter assistance grants $399 X XTransportation Security Administration $2,810 X X XCoast Guard - Boat Safety grants $65 X X


Department of Housing and Urban DevelopmentLow-Income Housing Assistance $22,250 X X X X XPublic Housing Operating Subsidies $3,551 X X X X XDrug Elimination Grants $75 X XRevitalization of Public Housing $626 X X X X XPublic Housing Capital Fund $3,716 X X X X XNative American Housing block grant $734 X X XCommunity Development Block Grants $5,990 X X X X XHome Investment Partnership Program $1,747 X X XHomeless Assistance grants $1,400 X X XOther Community Planning and Dev. $461 X X X XAssisted Housing Programs $609 X X XPolicy Development & Research $44 X XManagement and Administration $937 X XOther activities $4,037 X X X


Department of the InteriorBureau of Reclamation $1,234 X X X X X XU.S. Geological Survey $840 X X XState and Tribal Wildlife grants $65 X XSport Fish Restoration Fund $336 X XBureau of Indian Affairs $2,180 X X XLand Acquisition Programs $63 X X X


Department of JusticeState and Local Law Enforcement Assist. $1,516 X XWeed and Seed program $31 X XCommunity Oriented Policing Services $1,271 X XJuvenile Justice Programs $208 X X

13



Department of Justice continuedAntitrust investigations $133 X X


Department of LaborEmployment and Training Admin. $5,600 X X X XWelfare to Work $181 X X XCommunity Service for Seniors $445 X X XTrade Adjustment Assistance $770 X X International labor affairs $110 X X


Department of StateEducation and cultural exchanges $325 X X X XUnited Nations $317 X XInter-American Organizations $129 X XOECD $82 X XInternational Narcotics Control $520 X X XAndean Counterdrug Initiative $966 X X X


Department of TransportationAmtrak and related $1,457 X X XFAA-Essential air service $20 X X X XFAA-Air Traffic Control $2,798 X X X XFAA-Grants to Airports $3,394 X X XFAA-Facilities and Equipment $3,271 X X XFederal Highway Administration n/a X X X X XFederal Transit Administration n/a X X X XMaritime Administration $633 X X X X


Other Agencies and ActivitiesAccounting Oversight Board $97 X XAgency for International Development $4,613 X X X XAppalachian, Delta, Denali Comm. $94 X X XArmy Corps of Engineers $4,308 X X X X XCargo Preference $443 X X XCorporation for National and Comm. Svc. $609 X X XCorporation for Public Broadcasting $437 X X XDavis Bacon Act $1,100 X X XDrug control advertising & related $500 X XEPA-State and Tribal Assistance Grants $4,039 X XEqual Employment Opportunity Comm. $325 X XExport-Import Bank $0 X X X X XForeign Military Financing $5,432 X X XForeign Military Sales $3 X X XFTC-Antitrust enforcement $82 X XInt. Assistance: Economic support $3,760 X X X XInt. Assistance: Multilateral $2,632 X X X XInternational Military Training $89 X XInternational Trade Commission $60 X XLegal Services Corporation $341 X XMillenium Challenge Corporation $298 X X XExcess military bases $5,000 X X

Continued

ments to Medicare providers are erroneous orfraudulent, according to the GAO.48 The pro-gram is bilked by numerous scams, such asbilling the government for more expensivehealth services than are provided and makingclaims for bogus patients.49

Similar problems face Medicaid, which issubject to “waste and exploitation,” accordingto the GAO.50 Recent investigations found $1billion of fraud just in California’s portion ofMedicaid.51 The program’s nursing home ben-efits have generated a large industry of finan-cial planners who help higher-income seniorshide their assets in order to qualify. That costsabout $10 billion per year in excess charges.52

Also, state governments have concocted a vari-ety of abusive schemes to boost federalMedicaid payments to their coffers.53

Programs that provide handouts to indi-viduals have similar problems. Scam artistsbilk federal taxpayers out of billions of dol-lars in housing subsidies, earned income taxcredits (EITC), student loans, food stamps,and unemployment insurance.54 There is $2billion in annual overpayments for federalrental housing subsidies.55 Almost one-thirdof EITC payments—about $9 billion annual-

ly-are erroneous or fraudulent.56 People havea clear incentive to underreport their incomeand overreport the number of their childrento boost EITC payments. The food stampprogram pays out $1.4 billion annually inerroneous and fraudulent benefits.57

Substantial fraud seems to occur in justabout every federal program that hands outtransfer payments. An interesting case wasthe Department of Housing and UrbanDevelopment’s program for police officers tobuy cut-price homes in troubled neighbor-hoods. The program was suspended after itwas discovered that officers were buying thesubsidized houses but then renting them outrather than moving in, thus making a profitat the taxpayers’ expense.58

Another common type of fraud is misuseof federal grant money. In one recent exam-ple, a Washington, DC, anti-poverty organi-zation with a $36 million annual budget wasfound using federal grant money to purchaseluxury automobiles, a fishing boat, sportstickets, and other items for the personal useof its executives. A Washington Post editorialnoted that “it’s an old but nauseating story:anti-poverty workers advancing their inter-

14

Table 3 Continued



NASA $14,604 X X X XNational Endowment for the Arts $118 X X XNational Endowment for the Humanities $132 X X XNational Labor Relations Board $242 X XNational Mediation Board $11 X XNeighborhood Reinvestment Corp. $114 X X X XOverseas Private Investment Corporation $0 X X X X X XPeace Corps $302 X XPresidio Trust $43 X XService Contract Act $610 X X XSmall Business Administration $3,978 X X X XTennessee Valley Authority $0 X X XTrade and Development Agency $62 X XU.S. Postal Service subsidies $60 X X

Total proposed cuts $54,538

Grand total spending cuts $300,150

Source: Author’s analysis. FY04 outlays are from the Budget of the U.S. Government, FY2005.Note: “Wasteful” programs are those that are duplicative, obsolete, mismanaged, ineffective, or have high levels of fraud. Federal highway and transit are “n/a” becauseboth spending and gasoline taxes should be cut, resulting in no net effect on the deficit.

ests at the poor’s expense.”59

Congress occasionally looks into theseproblems and promises reforms, but theproblems continue unabated because of thenature of government. Fraud generates aCatch-22 for those who support expansivegovernment programs. On the one hand,fraud is clearly a waste of taxpayer money andshould be stopped. On the other hand, mini-mizing fraud to acceptable levels requires ahuge amount of bureaucratic rules andenforcement activities, which cost taxpayermoney and reduce program efficiency. TheEITC program is a good example. A high errorand fraud rate has plagued the program foryears despite new anti-fraud rules and morepaperwork. The federal budget even containsa separate line item for “Earned Income TaxCompliance Initiative,” which will cost $202million in FY04.60 That is a big bureaucraticexpense just to police one program.

Another type of abuse is old-fashionedmisuse of the public purse by self-interestedpoliticians and bureaucrats. For example, aLos Angeles Times investigation found thatSenate Appropriations Committee chairmanTed Stevens (R-AK) has become a millionaireby using his legislative power to channel fed-eral contracts to business partners in hishome state.61 In one deal, Stevens steered a$450 million military housing contract to anAnchorage businessman. The businessman,in turn, helpfully turned a $50,000 invest-ment by Stevens into a $750,000 windfall forthe senator six years later.62

Another recent example of abuse was a$23 billion Pentagon contract for new tankerairplanes. The deal involved Air Force pro-curement officials and members of Congresscurrying favor with Boeing and pushingthrough an inflated contract for the planes.63

The Pentagon’s inspector general concludedthat the deal broke a variety of federal con-tracting rules and could waste anywherefrom $500 million to $2.5 billion of taxpayermoney if it goes through.64

The only lasting solution to these prob-lems is to cut the government down to size.With a smaller federal empire, members of

Congress would have less money to steertoward dubious projects and could devotemore time to overseeing the operation ofremaining programs. At the same time, citi-zens, watchdog groups, and the media couldpay closer attention to the problems in eachprogram and spend more time questioningthe politicians who are supposed to watchout for taxpayer interests.

DuplicativeFederal programs often have overlapping

objectives. The GAO reports that there are 50different programs for the homeless in eightdifferent federal agencies, 23 programs forhousing aid in four agencies, 26 programs forfood and nutrition aid in six agencies, and 44programs for employment and training ser-vices in nine agencies.65

The Senate Committee on GovernmentAffairs also examined federal duplication.66 Itfound 27 different programs for teen preg-nancy, 130 programs for at-risk youth, 19programs for substance abuse prevention, 25programs for rural development, 17 agenciesthat monitor international trade agreements,10 agencies that are involved in export pro-motion, and 342 programs for economicdevelopment.

One reason why all this duplication occursis that politicians and bureaucrats have theirfingers in the wind to discern the sexy issues ofthe day, whether they involve “environment,”“exports,” “jobs,” “children,” or “homelandsecurity.” When a hot new issue arises, everydepartment is quick to erect a new program toscore a larger budget allocation. For example,the Small Business Administration has triedto cash in on the popularity of anti-drug pro-grams with the creation of a “Drug-FreeWorkplace” grant program, which is supposedto help small businesses create drug-free workenvironments. At least nine other federaldepartments are on the anti-drug taxpayergravy train.67

A classic case of unneeded bureaucracy isthe Bush administration’s new position foran assistant secretary of commerce for man-ufacturing in the Department of Commerce.

15

A Los AngelesTimes investiga-tion found thatSen. Ted Stevens has become a millionaire byusing his legislative powerto channel federal contractsto business partners in hishome state.

The position is a political sop in response torecent concerns about manufacturing joblosses. No doubt the new “manufacturingczar” will write reports and jet off to confer-ences here and there to give speeches, but theczar will have no actual ability to create man-ufacturing jobs.

Program duplication often occurs when itbecomes clear that a government programsimply does not work. In that case, politi-cians create a new program to tackle theproblem because they gain talking points forthe campaign trail by proposing legislationto “solve” problems. However, to avoid get-ting into bureaucratic turf fights and offend-ing special interests, policymakers often leaveold programs in place to spin their wheels.

A good example is the Bush administra-tion’s new Millennium Challenge Accountprogram for foreign aid. Bush plans to boostU.S. foreign aid by 50 percent with the addi-tion of MCAs, which would be run out of anew agency. Foreign aid is already dispensedby the U.S. Agency for InternationalDevelopment and half a dozen other agen-cies.68 MCAs were created because it was wide-ly recognized that the traditional delivery offoreign aid was a failure. Steven Radelet, a for-eign aid expert and former top Treasury offi-cial, testified to Congress last year: “The U.S.foreign aid system, particularly USAID, isbogged down under heavy bureaucracy, over-ly restrictive legislative burdens, and conflict-ing objectives. The MCA is intended to be dif-ferent.”69 Unfortunately, that difference willcost taxpayers an additional $5 billion annu-ally by 2006.70

ObsoleteFederal programs have an unfortunate ten-

dency to linger decades after the problemsthey were designed to solve have disappeared.Economic growth, technological advances,and entrepreneurial innovation often mitigatethe social ills that programs have tried to solve.For example, cable television undercuts thetraditional justification for subsidies to theCorporation for Public Broadcasting. CPBwas supported as an educational alternative to

the three main commercial TV networks. Buttoday there are dozens of cable networks,including specialized educational channels,that fill every conceivable market niche.

Federal loan programs are another exam-ple of obsolescence. The government hasloan and loan guarantee programs for farm-ers, small businesses, housing developers,students, and many other favored groups.But those programs make less sense all thetime because of the increasing sophisticationof financial markets. As noted in this year’sfederal budget, greater availability of infor-mation, better managing of risks with deriva-tives, and financial deregulation havereduced the need for federal loan programs.71

Consider, for example, that one of today’s keysources of risk capital for small growth com-panies—venture capital—barely existed 30years ago. But today the venture capitalindustry pumps as much as $100 billionannually into small companies.72

NASA is also obsolete. In the 1960s itplayed a role in winning the Cold War byensuring that the United States was theleader in space. In recent decades, privatebusinesses, such as communications satellitefirms, have gained a foothold in space.Meanwhile, NASA has floundered with poormanagement, cost overruns, and uncleargoals, particularly in its manned space pro-gram. Congress should begin closing downNASA and opening up space to private entre-preneurs. Even manned space flight could besupported by the private sector if spacetourism becomes viable in coming years.73

NASA provides a good example of whatcan be called “policy by talking points,” bywhich obsolete programs are sustainedbecause of simple retail politics. Castingabout for an uplifting initiative for PresidentBush to discuss on the campaign trail, theWhite House recently announced an ambi-tious scheme to send a manned space mis-sion to the moon and to Mars. With recentNASA failures, little demand for such ascheme from the public, and the governmentdeep into red ink, that expensive initiativemakes no practical sense.

16

Economicgrowth,

technologicaladvances, and

entrepreneurialinnovation often

mitigate thesocial ills that

programs havetried to solve.

Nonetheless, the White House marketingteam keeps reviving old and unneeded pro-grams because the president needs soundbites for his election year speeches. Recently,the Bush administration indicated that itwas interested in expanding the TradeAdjustment Assistance program—a positionthat the administration opposed just twoyears ago—because Bush needs a media mes-sage on jobs.74 A few months ago, the admin-istration called for reviving the Manufactur-ing Extension Partnership—a program thatused to be targeted for termination byRepublicans—because the administrationneeded talking points on manufacturing.Thus, regardless of whether programs work,if they fit into the latest media themes fromthe White House, they get gold plated.

Defenders of federal programs often arguethat there are no private alternatives to a par-ticular service offered by the government. Butin many cases it is the existence of governmentprograms and government regulations thatprevents entrepreneurs from offering servicesin the first place. For example, NASA has dis-couraged entrepreneurship and competitionwith itself in the space business, and govern-ment has thrown numerous regulatory road-blocks in front of private space launches.75

Another well-known example is federal lawthat makes it illegal for entrepreneurs to com-pete against the USPS on first-class mail ser-vice, even if the competitor would offer con-sumers better service at lower cost.

When the government gets out of the way,there can be explosive private-sector growth.For example, growth in the U.S. venture cap-ital industry was triggered by two policychanges.76 First, the rules for pension plansunder ERISA (the Employee RetirementIncome Security Act) were loosened in 1978to allow pension funds to invest in higher-risk investments including venture capital.Second, venture capital markets were stimu-lated by a cut in the capital gains tax ratefrom 49.5 percent to 28 percent in 1978, andto 20 percent in 1980.

As a result of those policy changes, ven-ture capital investments soared from under

$1 billion per year in the late 1970s to morethan $4 billion by 1983.77 Early recipients ofventure capital funding included high-techdynamos Apple Computer, Intel, andGenentech. Who needs business subsidy pro-grams when private markets fuel the growthof such great companies?

With further free-market reforms, entre-preneurs could demonstrate that there aremore obsolete government programs thanare usually recognized. For example, in manycities developers are dissuaded from con-structing low-income housing because ofrent controls, costly construction standards,and other regulations that reduce the returnto investment. It is a myth that private hous-ing markets cannot provide decent homes forthe urban poor.78 Rather than piling onehousing program on top of another, policy-makers should focus on removing barriers toentrepreneurs in the low-income housingindustry. As policymakers look to downsizethe government, they should also look toclear the way for America’s entrepreneurs tofill the voids.

MismanagedFederal mismanagement runs wide and

deep, with serious shortcomings in govern-ment financial controls, human resources,technology implementation, and other activ-ities. The federal government has failed sevenyears in a row to produce financial state-ments that could be certified by the GAO.79

There are common mismanagement prob-lems that occur in agencies across the govern-ment. For example, major procurements andconstruction projects—from highways toweapon systems—routinely have large costoverruns. At many agencies, mismanagementproblems occur year after year despite wristslapping by the GAO and other watchdogs.The following are some recent examples ofserious mismanagement problems:

• Department of Defense. The GAOconcludes that the Pentagon’s financialmanagement problems are “pervasive,complex, long-standing, and deeply

17

The White House marketingteam keeps reviving old andunneeded programsbecause the president needssound bites forhis election yearspeeches.

rooted in virtually all business opera-tions throughout the department.”80

The Pentagon loses track of assets,wastes billions of dollars on poor man-agement of its excessive inventory, keepsunreliable budget data, low-balls projectcosts, and makes billions of dollars inoverpayments to contractors.81

• NASA. The official report on theColumbia disaster in 2003 found thatNASA suffers from ineffective leadership,flawed analyses, and a reactive and com-placent approach to safety. It noted thatthe mistakes made on Columbia were “notisolated failures, but are indicative of sys-tematic flaws” in the agency.82 The 1986Challenger disaster was also traced toflawed NASA management.83 NASA’spoor management manifests itself in thelarge cost overruns of the InternationalSpace Station. The project’s estimatedcost has skyrocketed from $17 billion in1995 to $30 billion today, and the stationis four years behind schedule.84 A newGAO report in April called attentiononce again to NASA’s poor financialmanagement.85

• FBI. The FBI has come under criticismthat poor management during the pastdecade prevented it from averting the9/11 disaster. It seems that all the cluesneeded to prevent Al Qaeda’s destruc-tive activities were available to the FBI inthe aftermath of the 1993 World TradeCenter bombing and that the agencycould have prevented further attacks ifit had pieced the clues together.86 With asmaller federal government, membersof Congress would have more time toscrutinize agencies charged with anti-terrorism functions to ensure good per-formance.

• Bureau of Indian Affairs. In what hasbeen called the “Indian Enron,” the BIAhas mismanaged billions of dollars inIndian trust funds. Former specialtrustees of BIA have given scathing con-gressional testimony about the BIA’sinability to clean up the financial mess.

Trustee Thomas Slonaker testified thatthe Department of the Interior and theBIA are incapable of reform, unwillingto follow the law, and do not “hold peo-ple accountable for their actions withconsequences for poor performance.”87

Trustee Paul Homan testified that the“vast majority of upper and middlemanagement at the BIA were incompe-tent,” but in reform efforts stretchingover the last 25 years no senior managerhas been removed.88 In April 2004 acourt-appointed investigator resigned,charging the government with obstruct-ing his probe of federal corruption relat-ed to the trust funds.89

• Army Corps of Engineers. This $4 bil-lion agency has been found to falsifydata to justify large white-elephant con-struction projects.90 The agency is fre-quently criticized for pouring billions ofdollars into unneeded and environmen-tally damaging projects in the districts ofimportant members of Congress. In2000 it was discovered that the agency’stop managers manipulated economicstudies to lend support to a wasteful $1billion Mississippi River project.91 A sim-ilar scandal erupted over a $311 millionproject to dredge the Delaware River.92

In the latter case, local refineries were themain beneficiaries of the project. TheArmy Corps should be privatized withlocal governments and businesses, suchas the refineries, purchasing its serviceswithout imposing costs on federal tax-payers.

• Department of Energy. Laboratoriesoverseen by DOE, including Los Alamos,Oak Ridge, Sandia, and LawrenceLivermore, were mismanaged for yearswith ongoing security lapses. The GAObegan reporting on those problems atleast 20 years ago, but few reforms weremade. Then a major scandal erupted inthe late 1990s when it was revealed thatChina was stealing design informationon nuclear weapons from the labs.93 A1999 House of Representatives report

18

The InternationalSpace Station’sestimated cost

has skyrocketedfrom $17 billion

in 1995 to $30 billion today.

concluded, “Despite repeated PRC theftsof the most sophisticated U.S. nuclearweapons technology, security at ournational nuclear weapons laboratoriesdoes not meet even minimal stan-dards.”94 A high-level administrationpanel investigating the scandals con-demned the DOE as a “dysfunctionalbureaucracy” where “organizational dis-array, managerial neglect, and a cultureof arrogance . . . conspired to create anespionage scandal waiting to happen.”95

• Transportation Projects. Large, some-times massive, cost overruns are common-place in federally funded transportationprojects.96 In 1985 government officialsclaimed that Boston’s “Big Dig” highwayproject would cost $2.6 billion and becompleted by 1998. The cost has bal-looned to $14.6 billion, and the project isstill not finished.97 In a 1989 referendum,Denver residents agreed to construction ofa new $1.7 billion international airport. Bythe time the airport was opened in 1995,the cost had mushroomed to $4.8 bil-lion.98 In 1994 Virginia officials claimedthat the Springfield interchange projectwould cost $241 million. The cost has nowsoared to $676 million.99 The cost of NewYork’s Penn Station redevelopment hasmore than doubled, and the project isyears behind schedule.100

Those are not isolated cases of bad man-agement. Such problems are chronic andplague much of the federal government.101

The GAO found that half of the federal high-way projects it examined in recent years hadcost overruns of more than 25 percent.102

Large cost overruns are routine on multi-bil-lion-dollar technology upgrade projects atfederal agencies.103 For example, the FBI’s$600 million project to update its computersystems finally neared completion in 2004but is $123 million over budget and 21months late.104

Or consider the Department of Energy’sperformance on big contracting projects. TheGAO tracked 80 major DOE projects begun

between the mid-1970s and the mid-1990s.105

It found that 31 were terminated prior tocompletion, which caused billions of dollarsin losses. Most of the rest were either overbudget or behind schedule.

The costs of Pentagon weapons systemsare often low-balled in order to feed as manyprojects into the procurement pipeline aspossible. Similarly, the government usuallylow-balls its estimates of the long-term costsof entitlement programs to gain initialapproval. Legislators may include benefitlimitations in entitlement bills to hold costsdown. But such limits either do not work, areevaded, or are later repealed. When costs soarand programs do not work, politicians holdhearings to cast blame elsewhere—on drugfirms or hospitals, for example.

When Medicare Part A was enacted in1965, costs were projected to rise to $9 billionby 1990, but actual costs reached $67 billion.When the Medicaid special hospitals subsidywas added in 1987, the annual costs wereprojected at $100 million. By 1992 costs hadrisen to $11 billion annually.106

Soon after the ink was dry on the 2003Medicare prescription drug bill, the Bushadministration informed the public that thecost would be $534 billion, one-third morethan the $400 billion that had been promised.Subsequent investigations revealed thatMedicare’s chief cost analyst knew about thehigher costs months before the legislation wasenacted, but he was threatened with termina-tion if he made that knowledge public.107

Of course, it is true that cost overruns andmismanagement are not unique to the feder-al government. There have been many high-profile scandals at major corporations andnonprofit groups such as the United Way.108

Poor management can plague any organiza-tion, but recent corporate scandals show thatprivate markets have mechanisms to correctexcesses and to punish reckless and incompe-tent executives. In the private sector, poorperformers are weeded out, executives andmanagers are fired, and resources are shiftedto better-run competitors. By contrast, thefederal government has few built-in mecha-

19

Large, sometimesmassive, costoverruns are commonplace infederally fundedtransportationprojects.

nisms to correct mistakes and to create therenewal that all organizations need in ourfast-changing society.

Nonetheless, Congress can take steps toavert the worst federal management failures.For one thing, more “carrots” and “sticks” areneeded in the government to ensure goodemployee performance. For example, payraises for federal managers should be contin-gent on good agency performance. Good per-formance could be defined as receipt of apassing grade on the Bush administration’s“management scorecard,” passing GAOfinancial audits, or keeping programs underbudget. Managers in agencies that fail perfor-mance tests should have their salaries frozen.The Bush administration is pursuingreforms in the Departments of Defense andHomeland Security that would eliminateautomatic pay raises based on longevity; rais-es would be tied instead to individual perfor-mance evaluations.109

One stick needed to improve federal perfor-mance is a substantial increase in the employeefiring rate. In the private sector, everyone fromCEOs to mailroom clerks gets fired if perfor-mance falls short. One survey found that 37percent of departing CEOs at the largest U.S.companies were fired instead of leaving volun-tarily.110 By contrast, data from the Office ofPersonnel Management show that the federalfiring rate for poor performance is just 1 in4,000 workers per year.111 The StateDepartment has fired only six employees forpoor performance during the past 18 years.Unfortunately, no private-sector firing dataexist to compare directly with federal data. Butfor the broader category of “involuntary sepa-rations,” the federal rate is just one-fourth ashigh as the private-sector rate.112

The Bush administration has complainedthat it can take 18 months or longer to fire afederal employee. Firing a bad worker involvesa major time commitment on the part of aconscientious federal manager. Indeed, theOPM notes that managers need to exert a“heroic” effort to overcome obstacles toremoval of an employee.113 According to anOPM survey, federal managers think that

“procedures dealing with poor performanceare too complicated, time consuming, oronerous; they do not get higher managementsupport; and they perceive their decisions willbe reversed or that they will be falsely accusedof discrimination in their actions.”114

As a result of those problems, bad workersare frequently reassigned within the govern-ment rather than fired. A BrookingsInstitution survey of federal workers foundthat, on average, 23 percent thought thattheir coworkers were “not up to par,” andonly 30 percent thought that their organiza-tion did a good job of disciplining poor per-formers.115 Note that that survey was aftereight years of the Clinton administration’s“reinventing government” initiative.

One factor that sustains poor performanceis that bad workers often receive good reviewsfrom negligent managers who do not want torock the boat. There is an ingrained federalculture to score virtually all workers highly:the federal Merit Systems Protection Boardhas found that just 1 percent of federal work-ers are rated below “fully successful” in annualreviews.116 Such false high scores create a hur-dle for new managers trying to prove that aworker’s actual performance is poor.117

The dearth of firing is consistent with thegeneral lack of incentives for good perfor-mance in the bureaucracy. Surveys find thatmost federal workers do not believe that thebest-qualified people are the ones receivingpromotions.118 A study by the OPM conclud-ed that “the federal white-collar pay systemsends and reinforces the message that perfor-mance does not matter.”119 A 2003 OPM sur-vey of 100,000 federal workers found thatjust 36 percent of employees thought thatpromotions were based on merit and just 27percent thought that steps were taken to dealwith poor employees.120 All in all, federalworkers put in their time, automaticallymove up the pay scales, and are nearlyimmune from dismissal.

IneffectiveMany federal programs do not solve the

problems that they were set up to solve.

20

The federal firingrate for poor

performance isjust 1 in 4,000

workers per year.

Sometimes that is due to mismanagement,but it is often due to the fact that many prob-lems in society are simply not susceptible togovernment “solutions.”

One reform idea pursued by the Bushadministration is to quantify the perfor-mance of federal programs. A “managementscorecard” grades each department on vari-ous parameters. In its most recent scorecard,which had 130 total items, the administra-tion’s Office of Management and Budgetawarded just eight “green” grades for goodperformance.

At a more detailed level, the OMB has rated400 individual programs on their effective-ness, revealing federal performance that ismixed at best. More than 40 percent of pro-grams have been rated “ineffective” or “resultsnot demonstrated,” meaning that even man-agers have not been able to measure perfor-mance. The administration claims that it willmove funding from poor programs to betterprograms, but it would be much better ifmoney were simply returned to the taxpayers.

The Bush reforms build on proceduresestablished under the Government Perfor-mance and Results Act of 1993. That actrequired nearly all agencies to prepare strate-gic and performance plans regularly.Agencies are required to put down on paperwhat they are doing, what outcomes they areseeking, and whether they have reached theirgoals. Those sound like routine proceduresthat agencies should have been followingsince the founding of the nation. In the past,however, many agencies made no attempt toaccount for their performance. Despiterecent reforms, the GAO nonetheless con-cludes that “few agencies adequately showthe results that they are getting with the tax-payer dollars they spend.”121

Federal programs are not effective for avariety of reasons. Some programs fall intobureaucratic traps such as excessive layers ofmanagement. For example, much of the for-eign aid budget gets lost in layers of bureauc-racy inside and outside the government.Funding gets consumed by federal aid work-ers, U.S. contractors, subcontractors, sub-

subcontractors, and all their salaries, meet-ings, reports, plane flights, meals, and otherexpenses. Foreign aid also gets swallowed upby corrupt foreign officials.

The many “economic development” pro-grams in the federal budget are awash inwasteful bureaucracy. Consider this explana-tion of a program in the FY05 budget: “TheRural Strategic Investment Program will pro-vide rural communities with flexibleresources to develop comprehensive, collabo-rative, and locally-based strategic planningprocesses; and will implement innovativecommunity and economic developmentstrategies that optimize regional competitiveadvantages.”122 That fancy language proba-bly covers the fact that much of the moneywill be spent on meetings, memos, reports,grant applications, and other unproductiveactivities.

The main reason why government pro-grams do not work well, however, is notwasteful bureaucracy but that governmentactivity involves central planning. Federalprograms and regulations try to reorganizethe voluntary interactions of millions of peo-ple in our complex society. Policymakers areoften surprised by the unexpected conse-quences of their initiatives. An example is therecent reintroduction of wolves toYellowstone National Park. The program isreshaping the park’s entire ecosystem in dra-matic ways unforeseen by federal scien-tists.123 Federal spending and regulation arelike wolves let loose in a free-market ecosys-tem. Individuals and businesses react to gov-ernment actions and try to avoid rules thatreduce their wealth or restrict their freedom.

The effects of HUD’s Section 8 housingprogram provide an example of the law ofunintended consequences. Section 8 is thelargest housing subsidy program, and itsvouchers are supposed to spread poor fami-lies out across many neighborhoods. But theprogram has instead created incentives thatpromote concentration of low-income fami-lies.124 Also, the program was supposed tosubsidize poor tenants, but it ends up pro-viding higher profits to landlords who spe-

21

Many problemsin society are simply not susceptible togovernment“solutions.”

cialize in the bureaucratic complexities ofowning Section 8 apartments.125

The federal government simply does nothave the local and tacit knowledge base thatwould be needed to implement most of its“solutions” with competence. By contrast,private entrepreneurs gain detailed informa-tion by dealing with customers, suppliers,and others in the market. While entrepre-neurs can quickly respond to prices andother market signals, the government doesnot have an efficient feedback mechanism touse in fixing faulty programs.

Although economists have noted the sys-temic shortcomings of government action formore than two centuries, Washington policy-makers continue to believe that they can cen-trally plan the economy. A minor scandalerupted last December when a high-levelDepartment of Commerce official stated thatthe Bush administration had no “vision” orcentral plan for the U.S. manufacturing indus-try.126 Although that official was pointing outa reality of government, many people per-ceived his statement to mean that the admin-istration was not trying hard enough.

A safer route for federal bureaucrats is todeclare grand goals and claim exaggeratedbenefits for programs. Many federal websitesinclude pie-in-the-sky mission statements,such as this one from the USDA’s Economicand Community Systems program:

Research, education and extension canbe redesigned and targeted to furtherenrich diverse human capacity to buildprosperity for sustainable communi-ties. ECS encourages a whole systemsapproach. From inner city to farmlandcrossroads, locally geared, “people-focused” programs will result in fami-lies, farms, businesses, and communi-ty-based organizations linking to oneanother and will ensure that peopleshare tools and strategies for commu-nity discovery of issues, needs andresources. It will also result in effectivedelivery of place-based, community-ledsolutions that are needed to balance

trends toward globalization of infor-mation and the economy.127

Other federal program descriptions revealthe wasteful bureaucracy of big governmentschemes. Consider this program summaryfrom the FY05 federal budget:

The Hydrogen R&D Interagency TaskForce, established by OSTP shortly afterthe President’s announcement of theHydrogen Fuel Initiative, serves as themechanism for collaboration amongthe nine Federal agencies that fundhydrogen-related R&D. In 2003, thetask force gathered information andprovided guidance for agency researchdirections. In 2004, the task force willcomplete an interagency 10-year planthat will improve coordination ofagency efforts, accelerate progresstoward the goals of the initiative, andfoster collaboration between the FederalGovernment and the private sector,state agencies, and other stakeholders.The DOE-led International Partnershipfor the Hydrogen Economy coordinateshydrogen research between the U.S. andother participating governments.128

That paragraph exposes a number of clas-sic bureaucratic crutches and failings.Funding for hydrogen research is beingspread across nine separate agencies, guaran-teeing that much time will be spent on meet-ings, writing memos, and similar tasks. Theparagraph does not mention the inevitableturf wars that will arise between the multiple“stakeholders,” just the warm and fuzzyphrase “foster collaboration.” Phrases such as“task force” and “accelerate progress” alsosound good, but how can work have acceler-ated when the government is giving itself 10years to fiddle around with taxpayer money?Indeed, the government seems to be off to aslow start with 2003 spent “gathering infor-mation” and 2004 spent simply drafting aplan.

Past government failures with pushing

22

While entrepre-neurs can quicklyrespond to pricesand other market

signals, the government does

not have an efficient feedbackmechanism to use

in fixing faultyprograms.

particular technologies are widely document-ed.129 Billions of dollars have been wasted onfederal projects for synthetic fuels, superson-ic planes, and other schemes. That the cur-rent administration would try its hand at thisgame once again can be explained only bypolitics, not economics.

Unjustified Redistribution

Which activities should the governmentpursue and which should be left to the pri-vate sector? Economists approach that ques-tion by asking which goods and services are“public goods.” Those are items that arebroadly beneficial and have benefits that out-weigh their costs but are inadequately pro-vided by the private sector because of a mar-ket failure.130 For example, national defenseis a public good that contributes to the gen-eral welfare of all Americans and thus is anappropriate function of the government.

Most current federal programs are notpublic goods. Many programs provide servicesthat could be more efficiently provided in pri-vate markets. Many other programs are not inthe broad general interest but are targeted atnarrow groups of recipients. Such programsdo not gain funding because they have asound economic justification or garner wide-spread support. Instead, they survive becausespecial interests and a minority of self-inter-ested policymakers can use logrolling andother features of the federal legislative appara-tus to sustain them.

Some people support an expansive welfarestate because they believe that a big govern-ment is crucial to helping those in need.However, much of government activity in-volves transferring resources from middle-income taxpayers to middle-income recipients.Some features of Social Security and Medicare,for example, are even biased against the poor.With regard to Social Security, low-incomeAmericans tend to have shorter life spans thanothers and thus receive fewer years of benefits.

With regard to Medicare, higher-incomerecipients tend to incur higher annual expens-

es than poor recipients and may receive largergovernment benefits. Some analyses havefound that Medicare is neutral or even regres-sive in its overall impact. A 1997 study byMark McClellan and Jonathan Skinner con-cluded that “Medicare has led to net transfersfrom the poor to the wealthy.”131

Consider also federal student loan pro-grams. Those are subsidies that go to peoplewho will earn higher-than-average incomesduring their lifetimes. Some people supportstudent loan programs because they believethat college is a public good like nationaldefense. The argument is that if workers aremore educated, then the nation’s economicgrowth will be greater. Although that may betrue, people with college educations will earnon average 75 percent more during their life-times than will those with just high-schooldegrees; that should provide a direct incen-tive for people to pay their own collegecosts.132 With such a direct incentive for col-lege investment, government loan programsare not needed to ensure that a sufficientnumber of students attend college.

Cash subsidies of $17 billion will be paidout this year to a small group of farmers pro-ducing a handful of crops, including rice,wheat, and soybeans. Today’s farmers are nota particularly needy group. Government datashow that farming families have higherincomes than other families, on average.133

Also, farming does not seem to be a uniquelyrisky industry that especially needs govern-ment help. Industries ranging from hightechnology to restaurants have high failurerates but do not receive handouts from thegovernment. Farm subsidies and similar give-aways send the message that Americans arenot equal under the law and that it is OK toloot taxpayers if you have a vocal lobbyinggroup in Washington.

There is about $90 billion of business sub-sidies in the federal budget.134 Such “corporatewelfare” includes direct handouts and indirectcommercial support. As one example of adirect handout, the Community Adjustmentand Investment Program handed $500,000 toa manufacturer of metal storage lockers so

23

There is about$90 billion ofbusiness subsidies in thefederal budget.

that it could relocate its Pennsylvania andMississippi plants to North Carolina.135 Thatis unfair to the two states that lost out, andunfair to taxpayers.

Indirect federal support of businessincludes subsidies for insurance, research,loans, marketing, and other services. Suchsubsidies make no economic sense—if a feder-al program is providing a useful service tobusinesses, then there should be demand inthe private market to sustain the service with-out taxpayer subsidies. For example, theDepart-ment of Agriculture’s Risk Manage-ment Agency describes its mission as helpingfarmers “manage their business risks througheffective, market-based risk management solu-tions.”136 But if the RMA’s services are “marketbased,” the agency may as well be privatized.

The federal government also createsunjustified redistributions of wealth with themany domestic and international tradingrestrictions that it imposes. For example,import tariffs and quotas benefit some U.S.companies at the expense of both U.S. con-sumers and companies that use importedmaterials in their production processes.Sugar prices are three times higher in theUnited States than elsewhere because of fed-eral controls; thus both U.S. consumers andU.S. candy companies are damaged.137

Subsidies and trade restrictions are oftensupported in order to prop up businessesthat are failing in the marketplace. Thatmakes no economic sense. Companies thatare inefficient or producing second-rategoods should be allowed to fail because theyweigh down the whole economy. On theother hand, subsidies sometimes go to com-panies that are highly profitable. But thatmakes no sense either because such compa-nies do not need help from taxpayers.

Business subsidies would be a good firsttarget for policymakers trying to downsizethe federal budget. When the Republicanstook control of Congress in 1994, theyattempted to cut business subsidies.138

Unfortunately, that attempt failed, and littlehas been done since to curtail subsidies.139

The Bush administration’s record on

business subsidies has been mixed at best. Onthe one hand, the president’s budgets havesought modest reductions in a few subsidyprograms, such as the Advanced TechnologyProgram, the Export-Import Bank, theOverseas Private Investment Corporation,and the Small Business Administration.Bush’s first budget director, Mitch Daniels,was critical of corporate welfare. He notedthat it was not the government’s role to “sub-sidize, sometimes deeply subsidize, privateinterests.”140 And he noted that some pro-grams “have nothing to show for years andyears and years of essentially subsidizing cor-porate research budgets.”141

On the other hand, the Bush administra-tion has sought increases in some subsidyprograms, including fossil energy research, theManufacturing Extension Partnership, andalternate fuel subsidies. One Bush programthat will cost $1.7 billion over five years is sup-posed to develop a hydrogen-powered car. Buta recent National Academy of Sciences reportdrove home what a waste of money that proj-ect is. The NAS predicts that hydrogen vehi-cles may not arrive on America’s roads until2050.142

One would have thought that the currentadministration would have learned a lessonfrom the Clinton administration’s failedPartnership for a New Generation of Vehiclessubsidy program. That program dished out$1.5 billion during the 1990s to U.S. automak-ers for hybrid engine research. It turned outthat U.S. companies did not come to marketwith any hybrid cars. Meanwhile, unsubsi-dized Honda and Toyota have introduced suc-cessful hybrid models to U.S. consumers.

Federal business subsidy programs areoften given the warm and fuzzy label “public-private partnership.” But mixing governmentwith private business usually leads to corrup-tion. For example, one scandal that came tolight in 2002 involved the Maritime Admin-istration’s Title XI loan guarantee programfor U.S. shipbuilders. A company calledAmerican Classic Voyages received a $1.1 bil-lion loan guarantee from the program tobuild two cruise ships in Sen. Trent Lott’s (R-

24

Business subsidy programs

are often giventhe warm and

fuzzy label “public-private

partnership.” Butmixing govern-

ment with privatebusiness usually

leads to corruption.

MS) hometown.143 Before completion, thecompany went bankrupt and left federal tax-payers with a $200 million tab. Clearly, thefunneling of taxpayer money into riskyschemes in important politicians’ districts isnot good government, but that is what hap-pens when government gets involved in“helping” industry.

Instead of cozying up to industry, policy-makers should keep their distance from lob-byists wanting subsidies at taxpayer expense.Concentrated and organized minorities arealways asking for a free lunch at the expenseof the silent majority that pays the costs.Unfortunately, too many members ofCongress selfishly seek political success bygiving benefits to the few at the expense ofthe many.

One problem is that policymakers are eas-ily swayed by exaggerated claims of ruinshould subsidies be withdrawn from particu-lar groups. But could today’s recipients ofgovernment largesse survive without federalhelp? New Zealand’s experience with elimi-nating farm subsidies indicates that theycould. That country’s farmers adjusted to arepeal of subsidies and are thriving withoutBig Government.144

In 1984 New Zealand’s Labour govern-ment ended all farm subsidies, which was abold policy stroke because the New Zealandeconomy is roughly five times more depen-dent on farming than is the U.S. economy.Although the plan was initially met withlarge protests, the subsidies were ended andNew Zealand farming has never been health-ier. The value of farm output has soared sincesubsidies were repealed, and farm productiv-ity has grown strongly. Forced to adjust tonew economic realities, New Zealand farmerscut costs, diversified their land use, soughtnonfarm income, and altered production asmarket signals advised. As a report by theFederated Farmers of New Zealand noted,the country’s experience “thoroughly de-bunked the myth that the farming sectorcannot prosper without government subsi-dies.”145 Reformers in Congress should workto debunk similar myths in this country.

Actively Damaging Programs

Federal spending requires the extractionof resources from the private sector and thesubstitution of political preferences for theprivate preferences of individuals. Do govern-ment activities create higher value than theprivate activities that are forgone?

Many federal activities do not. Muchspending is wasteful—either mismanaged,duplicative, or ineffective. Wasteful programscan be thought of as those the benefits ofwhich are less than the added burden on tax-payers.

Some federal programs are worse thanwasteful—they are actively damaging. Suchprograms can negatively affect Americans ina number of ways beyond the tax costs. First,programs can damage the economy andreduce income levels. Second, programs canrestrict individual freedom. Third, programscan create negative social consequences.Fourth, federal programs can damage theenvironment. Those negative effects are dis-cussed in turn.

Economic DamageMany federal programs damage the econ-

omy beyond the added cost of taxes neededto fund them. For example, the governmentoperates a huge regulatory structure thatpushes up production costs, stifles businessinnovation, and restricts consumer choice.Wayne Crews summarizes the scope of thefederal regulatory state in his annual report“Ten Thousand Commandments.”146 His lat-est figures show that the budget cost ofadministering federal regulations is about$25 billion annually, but the cost to the econ-omy of federal regulations is about $860 bil-lion annually.147

Many regulations aim at particular socialends, while others are supposed to help theeconomy. Yet even the regulations that aresupposed to help the economy can end updamaging it. Consider federal antitrust policy.The antitrust bureaucracies in the Depart-

25

Policymakers areeasily swayed byexaggeratedclaims of ruinshould subsidiesbe withdrawnfrom particulargroups.

ment of Justice and the Federal TradeCommission will cost $215 million thisyear.148 But the economic harm created byantitrust laws might be much higher thanthat. Antitrust laws restrict commercial free-dom on the assumption that the governmentknows best how markets should be organized.But the government does not have sufficientknowledge to make such determinations, andits interventions are hit-or-miss at best.

Antitrust laws are more than a centuryold, and experts still have no clear rules todetermine when intervention might be agood idea. Two top Brookings Institutionscholars recently surveyed a century ofantitrust policy and found “little empiricalevidence that past interventions have provid-ed much direct benefit to consumers or sig-nificantly deterred anticompetitive behav-ior.”149 Indeed, the authors discuss numerouslarge cases in which the government got itwrong and pursued actions that damagedthe economy.

Antitrust is driven by special interests andby cloistered bureaucrats who view the econ-omy from a static and legalistic perspective.But the economy is highly dynamic, whichoften makes government “solutions” obso-lete by the time they are imposed. Considerthe antitrust case against Xerox Corporationin the 1970s.150 After inventing the modernphotocopier in 1960, Xerox led the industrythat it created. By the early 1970s, it still helda commanding market share, prompting theFederal Trade Commission to charge thecompany with monopoly. Xerox’s two-yearstruggle with the FTC cost millions of dollarsand ended in a settlement. As it turned out,the government intervention was whollyunneeded as IBM, Eastman-Kodak, Canon,Minolta, and Ricoh surged into the market inthe mid-1970s with copiers that were oftensuperior to Xerox’s. Federal litigationdrained the energy of Xerox’s management,and its market share eroded rapidly as thecompetition heated up.

Government intervention was also a bigwaste of time and energy in the infamous IBMantitrust case that lasted from 1969 to 1982.

IBM was charged with monopolizing themainframe computer business. During thelong legal battle, the industry evolved rapidly.In 1982 the government finally dropped itscase as obsolete and conceded that it was with-out merit. The case cost hundreds of millionsof dollars in legal expenses, generated 66 mil-lion pages of evidence, and diverted IBM’stime and energy from more productive busi-ness endeavors.151 Today, business efforts tofend off the government antitrust wolves costthe economy billions of dollars a year.152

It is remarkable that the government per-sists in launching such dubious interven-tions after its many failures. Federal policy-makers need to be far more humble abouttheir ability to intervene successfully in theeconomy. The federal antitrust agenciesshould be terminated, and policymakersshould start downsizing other agencies thatadd to the $860 billion regulatory burdenimposed on the U.S. economy.

Loss of FreedomThousands of federal rules and regula-

tions—ranging from limits on free speech inbroadcasting to limits on the flush volume ofAmerican toilets—restrict personal freedom.About 75,000 pages of new federal regula-tions are published in the Federal Register eachyear.153 Some rules are enacted with the pub-lic interest in mind, while others are pushedby special interests. Either way, the privateand voluntary sphere of society continues toshrink as government control expands.

Examining the impact of the federal regu-latory structure is beyond the scope of thisreport. But a general problem seems to be thelack of a presumption of individual freedomin the regulatory process. Currently, bureau-crats act as central planners in attempting tobalance the costs and benefits of new regula-tions. But many costs and benefits are simplynot knowable to the government, and federalplanners cannot realistically put values onthe diverse ends of 300 million citizens.

Add to that the government’s poor man-agement record, and there should be a biggeronus on government to prove that programs,

26

Federal policymakersneed to be farmore humble

about their abilityto intervene

successfully in theeconomy.

laws, and regulations are absolutely neces-sary. Too often the knee-jerk reaction of pol-icymakers is to add new government controlswhen a problem arises in society, even whenthere is substantial disagreement amongexperts about the costs and benefits. Instead,when there are large unknowns, the defaultposition should be freedom, and a high hur-dle placed on intervention. Congress shouldcut funding to agencies that are overzealousregulators.

Prescription drug approval is an areawhere individual freedom is undervaluedand the costs of restrictions can be large.Many experts contend that the Food andDrug Administration’s drug approvalprocess, although improved in recent years, isstill too burdensome and risk averse. Theresult is that life-improving and life-savingdrugs are kept off the market. Henry Miller, asenior fellow at the Hoover Institution,argues that “Americans are literally dying forreform” of FDA regulations.154 For example,a new anti-cancer drug, Erbitux, was with-held from cancer patients for two years whilethe FDA procrastinated on approval.155 Someanalysts figure that the slowness of FDA drugapprovals during the past few decades, com-pared with approvals in other industrialcountries, may have cost the lives of hun-dreds of thousands of Americans.156 TheFDA’s overzealous regulation of medicaldevices has also been criticized for unneces-sarily increasing the costs of medical innova-tion, increasing patient suffering and deaths,and driving medical technology companiesoverseas or out of business.157

Federal restrictions on drug use alsoundervalue individual freedom. PatrickMichaels recently took to the pages of theWashington Post to describe the damage thatcould result from the Bush administration’sefforts to reduce the availability of prescrip-tion painkillers.158 He believes that suchactions would result in large economic costs,more Americans living in pain, and moredeaths from heart attacks and strokes. USAToday also editorialized on the issue.159 Thepaper argued that the administration’s

tighter surveillance of doctors who prescribepainkillers is damaging to the tens of mil-lions of Americans who suffer from chronicpain. In such cases, where there is substantialdoubt about the justice and efficacy of gov-ernment restrictions, freedom and noninter-vention are the best policy.

Social DamageDespite what are often the best inten-

tions, seven decades of growth in the federalwelfare state have created many damagingside effects. For example, traditional unre-stricted welfare payments to poor Americanscreated numerous social pathologies, such astrapping people in dependence and reducingupward mobility.

Seven decades of activist federal housingpolicy have also been socially destructive. Theconstruction of massive high-rise public hous-ing projects in the mid-20th century was per-haps the most infamous government failurein social policy. Those projects became war-rens of drugs, crime, and despair for millionsof families. In related efforts, the government’slarge-scale “slum clearing” and “redevelop-ment” schemes left many American cities withhideous and unwelcome zones of concreteand lifelessness.

Congress has begun to fix some of theworst welfare state policies. For example, in1996 it enacted landmark welfare reforms,which have cut the welfare rolls and putgreater emphasis on work and advancementby low-income Americans. Meanwhile, high-rise public housing was such a colossal fail-ure that the government has been activelydemolishing its apartment projects acrossthe country in recent years.

However, much of the welfare stateremains unreformed. In housing, the federalgovernment has replaced some failed pro-grams with newer schemes that are also dam-aging. In the 1970s Congress began replacingpublic housing with Section 8 housingvouchers, which are used by two million ben-eficiaries today. Vouchers, which allow recip-ients to rent private apartments, were sup-posed to solve the problem of concentrated

27

The govern-ment’s large-scale “redevelopment”schemes leftmany Americancities withhideous andunwelcome zonesof concrete andlifelessness.

poverty that was the bane of public housingprojects. But, in practice, Section 8 vouchershave created similar problems of poverty con-centration.160 Also, like old-fashioned welfarebenefits, housing vouchers encourage long-term dependence by recipients and single-parent households. The program’s incomecaps create disincentives to seek work, higherearnings, or advancement. President Bushhas proposed a number of changes to Section8 that move in a reform direction, but thebest reform would be to terminate federalhousing programs altogether.161

Howard Husock, a housing policy expert atthe Manhattan Institute, argues that federalhousing programs have been “profoundlydestructive.”162 HUD programs have not onlycreated concentrated poverty and dependencein subsidized communities; they have creatednegative effects radiating outward to sur-rounding neighborhoods in cities.163

Husock notes that prior to the federalgovernment’s large-scale intrusion into hous-ing in the 1930s, private markets provideddecent low-cost housing relative to standardsof the day. When low-cost housing is privateand unsubsidized, it transforms andimproves over time. Tenants in private hous-ing tend to be temporary, not permanent, asthey have every incentive to strive to betterthemselves, earn more, and move up the lad-der to better housing.

Environmental DamageNumerous federal spending programs

actively damage the environment. Depart-ment of Agriculture subsidies can cause over-production of crops, overuse of marginalfarming land that would otherwise be forestsor wetlands, and excessive use of fertilizers.The Forest Service has subsidized the cuttingof large stretches of forest by constructing380,000 miles of logging roads and under-charging timber companies in its timber har-vest program.164 The federal Power MarketingAdministrations sell electricity at far below-market rates, which has encouraged overcon-sumption of energy by homes and the largeindustrial users of PMA power.165

The federal government’s large engineeringand construction programs have often dam-aged the environment. The Army Corps ofEngineers has pushed ahead with huge proj-ects that make little economic or environmen-tal sense. Federal export loans have supportedenvironmentally damaging projects in less-developed countries. For example, EnronCorporation received $200 million in U.S. gov-ernment financing to build a 390-milepipeline from Bolivia to Brazil through a trop-ical forest in 2001.166 The Washington Postreported that the Chiquitano Forest pipeline,financed by the federal Overseas PrivateInvestment Corporation, was put throughone of the most valuable and unscathedregions of forest in South America.167 Recentscandals have brought down Enron, but scan-dals such as this never seem to bring downgovernment agencies like OPIC.

Federal water subsidies are also damaging.The Bureau of Reclamation runs a vast waterempire in the western United States that sellswater to farmers and homes at a fraction ofthe market cost. The resulting overuse willeventually lead to a water crisis as the West’spopulation keeps rising. The solution is tomove water into the free market and allowprices to rise to efficient and environmental-ly sound levels.168

The bureau’s water megaprojects have ahistory of cost overruns and running afoul ofgood environmental policy. For example, thegiant Animas–La Plata dam project in south-western Colorado has environmental groupsup in arms, and it looks ugly from a taxpayerperspective as well. The official project costestimate jumped from $338 million in 1999to $500 million in 2003.169 Taxpayers andenvironmental groups share a lot of commonground when it comes to federal policy, andpro-green budget cuts would be a good awayto downsize the federal government.170

State and Local Functions

The federal government was designed tohave specific limited powers with most basic

28

EnronCorporation

received $200 million in U.S.

governmentfinancing to build

a 390-milepipeline from

Bolivia to Brazilthrough a tropi-

cal forest in 2001.

government functions left to the states. TheTenth Amendment to the Constitutionstates this clearly: “The powers not delegatedto the United States by the Constitution, norprohibited by it to the states, are reserved tothe states respectively, or to the people.” Butduring recent decades, the federal govern-ment has undertaken a large number ofactivities that were traditionally and consti-tutionally reserved to the states.

The primary mechanism that the federalgovernment has used to extend its power intostate affairs is grants to state and local gov-ernments (“grants-in-aid”). In FY04 federalgrants totaling $418 billion will be paid outto lower levels of government for a hugerange of activities, including health care,transportation, housing, and education.171

Grants to state and local governmentsincreased from 7.6 percent of total federalspending in FY60 to 18 percent in FY04.172

The federal grant structure is massive andcomplex, as detailed in the 1,800-pageCatalog of Federal Domestic Assistance avail-able at www.cfda.gov. That publication is acomprehensive summary of federal grantprograms to lower levels of government, pri-vate organizations, and individuals. TheCFDA lists 716 different grant programsaimed at state and local governments.173

Grant programs range from the giant $177billion Medicaid to hundreds of moreobscure programs that most taxpayers havenever heard of. The CFDA lists a $10 milliongrant program for Nursing WorkforceDiversity and a $59 million program forBoating Safety Financial Assistance. OneEnvironmental Protection Agency programhands out $25,000 grants to local govern-ments for projects that “raise awareness”about environmental issues.174

Such huge federal granting activity hascreated an industry of consulting firms, spe-cialized software, and trade publications allgeared to help state and local governmentsgrab more federal cash. Excessive complexityand duplication in the federal grant industryhave been evident since the 1960s, and occa-sional reforms have not fixed the prob-

lems.175 Indeed, duplicative programs areproliferating: The GAO recently reportedthat there are 16 overlapping grant programsfor local “first responders” such as firefight-ers.176 Grants have proven to be a terriblywasteful way of providing government ser-vices to Americans. It is time to begin large-scale cuts to the federal grant empire.

Ronald Reagan tried to do just that. In his1983 budget message, Reagan argued that“during the past 20 years, what had been aclassic division of functions between the fed-eral government and the states and localitieshas become a confused mess.”177 To sort outthe mess, Reagan pushed for cuts to federalgrants. He was modestly successful, as shownin Figure 3, which illustrates trends in healthand nonhealth grants to the states in con-stant 2004 dollars. Between 1980 and 1985,Reagan cut overall grant spending by 15 per-cent in constant dollars and nonhealthgrants by 21 percent. However, the cuts wereshort-lived and grant spending increasedrapidly during the 1990s.

Figure 4 shows the total number of federalgrant programs aimed at state and local gov-ernments. The effects of Reagan’s cuts in theearly 1980s are evident. But since the mid-1980s the number of grant programs hassoared with only a brief retrenchment in themid-1990s after the Republicans gained powerin Congress. There are more than twice asmany grant programs today as there were inthe mid-1980s. The number of grant programsincreased from 463 in 1990 to 716 in 2003.

The increase in federal grants has occurredbecause of political logic, not economic logic.Federal grants allow Washington to sidestepconcerns about expansion of its powers overtraditionally state activities. By using grants,federal politicians can become activists inareas such as education, while overcomingstates’ concerns about encroachment on theirpower by shoveling cash into state coffers.

Much of the support for grants—and sup-port for centralization of government powerin general—comes from policymakers whothink that the federal government shouldredistribute income from prosperous to poor

29

There are morethan twice asmany grant programs todayas there were inthe mid-1980s.

regions of the country.178 But political realitieshave tended to undermine such egalitarianplans. As a study by the Urban Institute noteda number of years ago, “political pressures inthe design of grant funding formulas consid-erably limit the design of grants to even outeconomic disparities among regions, thusundermining one of the major rationales for

their use.”179 Although the initial goal of agrant program might be to aid poor regions,every member of Congress ultimately wants apiece of the action. Grant programs “mustsprinkle funds among all jurisdictions to gainacceptance” as each member aims to win votesback home.180 Much grant money is “ear-marked” today and thus goes to the districts

30

Every member of Congress

ultimately wants a piece of the

action.

-

50

100

150

200

250

1960 1965 1970 1975 1980 1985 1990 1995 2000 2004

Health care grants

Non–health care grants

Figure 3Real Federal Grants to State and Local Governments

Bill

ions

of C

onst

ant 2

004

Dol

lars

Fiscal Year

Source: Author’s calculations based on Budget of the U.S. Government, FY05, Analytical Perspectives, p. 120.

434

367

303

320

330

335

349 38

1 415 434 46

3 513 53

9 573 593

608

570

583

591 63

0 653

665 69

1 716

200

300

400

500

600

700

800

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

Figure 4Number of Federal Grant Programs for State/Local Governments

Source: Office of Management and Budget based on Catalog of Federal Domestic Assistance. The figure for2002 is estimated.

of powerful members of Congress, not to thetruly needy regions.

A good example is the $6 billion Commu-nity Development Block Grant program. ThatHUD program was created in 1974 to channelfederal money to low-income urban areas forkey services such as fire and police. But todaythe program spreads taxpayer largesse widelyto some of the wealthiest areas of the countryfor often-dubious projects. Today, all urbanareas with 50,000 or more people are eligiblefor the program, not just the needy ones.181

The FY03 federal budget noted that the pro-gram has funded such projects as the installa-tion of a traffic light in wealthy Newton,Massachusetts.182 Such grant programs oftenbecome little more than slush funds that fed-eral politicians use to buy votes back home.

The Department of Education’s $10 bil-lion Title I program provides another exam-ple of the difficulty of targeting grants to aidpoor Americans. A recent statistical analysisby Nora Gordon of the University ofCalifornia, San Diego, found that, althoughTitle I is supposed to steer money to poorschool districts, the actual effect is differ-ent.183 She found that within a few years of agrant being given, state and local govern-ments used the federal funds to displace theirown funding of poor schools. Thus, poorschools may be no further ahead despite thefederal grant money directed at them.

A high-minded purpose may underliemany federal grant programs, but grants arean inefficient method of governing America.The money to fund federal grants comes frompeople living in the 50 states. They send theirtax dollars to Washington where they get real-located by Capitol Hill horse-trading androuted through layers of departmentalbureaucracy. The depleted funds are sent backdown to state and local agencies, coupled withlong lists of complex federal regulations withwhich those agencies must comply.

Federal grants can set off a gold-rushresponse at state and local levels, producingirresponsible overspending decisions. Withfederal matching grants, state politicians canspend an added dollar on their constituents

while charging them only a fraction of a dol-lar in state taxes, depending on the matchingrate.184 In such cases, program expansion isvery attractive. With Medicaid, for example,state governments have expanded benefitsand the number of eligible beneficiariesbeyond reasonable levels because of the gen-erous federal match.

Medicaid illustrates how states can abusethe handouts they receive from Washington. Inrecent years, numerous states have bilked thefederal government out of billions of dollarswith complex schemes to maximize Medicaidpayments.185 For example, some statesimposed taxes on health care providers thatwere at the same time rebated to the providers.The effect was to increase reported stateMedicaid spending and boost federal match-ing funds. Amazingly, states have continued tooperate such schemes despite a decade ofscrutiny by the federal government.186 Indeed,state gamesmanship to maximize federalgrants goes back to at least the 1960s.187

Given all those problems, it is not surpris-ing that the OMB finds that grant programshave poorer performance, on average, thanother federal programs.188 States have littleincentive to spend grant money efficientlybecause it comes to them “free.” In Marylandrecently the head of the state’s Office ofCrime Control and Prevention was indictedfor diverting federal grant money into a polit-ical campaign.189 Talk about inefficient!

To reduce the wasteful state spending ofgrant money, reformers have sought to con-vert matching grants to block grants. Blockgrants provide a fixed sum to states and givethem flexibility in program design. For exam-ple, the 1996 welfare reform law turned Aidto Families with Dependent Children, a tra-ditional open-ended matching grant, intoTemporary Assistance for Needy Families, alump-sum block grant.

Although state governors complain whenthe federal government cuts grants, taxpayersthroughout the 50 states would benefit fromcuts. First, state residents are, of course, feder-al taxpayers who will pay for the $418 billionin grants this year. Second, centralization of

31

Federal grantscan set off a gold-rushresponse at stateand local levels,producing irresponsibleoverspendingdecisions.

government spending power creates unfairredistributions of taxpayer money betweenstates. For example, states receive varyingamounts of highway grants for each dollar ofgasoline taxes sent to Washington.190 Whilesome states lose out, other states get unneed-ed “highways to nowhere,” often named afterchampion pork barrelers such as Sen. RobertByrd (D-WV) and former representative BudShuster (R-PA).

Third, federal grants reduce state govern-ment flexibility and innovation. The classicone-size-fits-all federal regulation was the 55mph national speed limit, which wasenforced between 1974 and 1995 by federalthreats to withdraw state highway grantmoney. Today, Medicaid has perhaps themost inefficient top-down rules of any grantprogram. The FY05 Bush budget notes thatthe “complex array of Medicaid laws, regula-tions, and administrative guidance is confus-ing, overly burdensome, and serves to stiflestate innovation and flexibility.”191 But whilethe Bush administration complains aboutMedicaid, its own No Child Left Behind edu-cation law of 2002 is the source of much stateand local anger at top-down federal control.

Fourth, grants impose on taxpayers thecosts of the bureaucracies that are needed toadminister the intergovernmental flows ofmoney. Indeed, the federal grant superstruc-ture is intensely bureaucratic and wasteful. Totake one example, the $59 million Weed andSeed anti-drug program for schools has a 74-page application kit that references 1,300pages of regulations that grant recipientsmust follow. The Bush administration is rightthat the federal grant process is “overwhelm-ing,” “off-putting,” and “intimidating.”192

Many grant programs involve three levelsof bureaucracy—federal, state, and local—before funds are disbursed for a project. Thatis “trickle-down” economics at its worst. Forexample, the $441 million Safe and DrugFree Schools program sends money to stateeducation bureaucracies, which in turn usecomplex procedures to send funds down tolocal school boards.193 School boards needexpert bureaucrats to complete lengthy

application forms to get the funds. The Bushadministration has concluded that this pro-gram is not effective, as schools tend to spendthe money wastefully.194

Federal grants for local “first responder”activities are popular in the wake of 9/11, butthey too are bogged down in bureaucracy. Insome cases, grant money flows through fourlevels of government—federal, state, county,and city—before items such as emergencyradios are purchased.195 A House committeereported in April 2004 that $5.2 billion of $6.3billion in first responder grants made since9/11 “remains stuck in the administrativepipeline at the state, country, and city levels.”196

Much of the first responder money hasgone to dubious projects of little value that areunrelated to terrorism risk. A large share of thefunding was distributed to states on the basisof factors, such as population, that are unre-lated to risk. At the state level, the Housereport found that almost one-third was allo-cated to projects without regard to terrorismrisk. One rural county of 11,500 people inWyoming received $546,000. One rural coun-ty in the state of Washington used a federalgrant to buy a $63,000 HAZMAT unit, but itdoes not have a HAZMAT team to use it.197

Like other grant programs, first respondergrants have spurred much wasteful lobbyingactivity. On March 4, 3,000 local officials flewinto Washington to lobby Congress for largerfirst responder grants.198 They were followedon March 16 by firefighters from across thecountry coming to lobby Congress.199

Community Development Block Grantsshare those sorts of inefficiencies. Some CDBGmoney is handed out to state governments,which in turn hand it out to local governments.The program has terribly complex formulas fordetermining which areas get funding.200 TheOMB concludes that the CDBG program has“an unclear mission, loose targeting require-ments, and a lack of focus on results.”201

Perhaps the most serious problem causedby grants is that federal politicians are spend-ing their time dealing with local issues ratherthan devoting full attention to crucial nation-al issues. Members of Congress busily steering

32

Federal grants for local “first

responder” activities are

popular in thewake of 9/11, but

they too arebogged down in

bureaucracy.

pork projects to their districts have had littletime to seriously oversee government, forexample by dealing with mismanagement atthe FBI.

Federal grants create problems for the vot-ing public as well. The overlapping programsof federal, state, and local governments makeit very difficult for citizens to figure outwhich agency or politician is responsible forproblems. All three levels of government playbig roles in such areas as transportation andeducation, which makes accountability diffi-cult. Politicians themselves have becomeskilled at pointing fingers at other levels ofgovernment when policies go sour.

The solution to those problems is to movetraditional state and local functions back tothe states. In the 1980s the Reagan adminis-tration pursued “New Federalism” to re-sortfederal and state priorities such that eachlevel of government would have full responsi-bility for financing its own programs. Forexample, Reagan proposed that the federalgovernment fully run Medicaid but that wel-fare and food stamps be fully operated andfinanced by the states.202

Reagan sought to cut grants and terminatespending in areas that were properly state activ-ities. For example, he tried unsuccessfully toabolish the Department of Education, calling it“President Carter’s new bureaucratic boondog-gle.”203 Another dimension of Reagan’s planwas for the federal government to cut directfunding of local governments and just dealwith state governments.

Reagan’s New Federalism was only partlysuccessful. He did manage to cut grant spend-ing and turn some grant programs into blockgrants.204 In the Omnibus Budget Reconcili-ation Act of 1981, 59 grant programs wereeliminated, and 80 narrowly focused grantswere consolidated into 9 block grants.205 Thatconsolidation into block grants substantiallyreduced the regulatory burden for those pro-grams.206 As noted, federal grants to the states,measured in constant dollars, were cutbetween FY80 and FY85.207

The Republican Congress in the mid-1990stried to revive Reagan federalism. They sought

to abolish the Department of Education butwere again unsuccessful. The Republicans didhave some success in turning grant programsinto block grants, most notably with welfarereform in 1996. However, President Clinton’sveto pen was a barrier to many reforms,including the Republican budget plan in 1995that would have turned Medicaid into a blockgrant and cut the program by $187 billionover seven years.208

Grant spending has soared in recent years.Total grant outlays have increased from $225billion in FY95 to $418 billion in FY04. WhileRepublicans used to seek abolition of theDepartment of Education, outlays on thatdepartment have soared from $36 billion inFY01 to $63 billion in FY04 under the currentRepublican president. In addition, under theRepublican Congress the number of “ear-marked” local spending projects has soared.209

With today’s large deficit and coming costincreases in entitlement programs, there is lit-tle budget room for federal spending on stateand local activities. Policymakers need torevive federalism and transfer programs backto the states. State and local governments arein a better position to determine whether resi-dents need more roads, schools, and otheritems. By federalizing such spending we areasking Congress to do the impossible—to effi-ciently plan for the competing needs of adiverse country of almost 300 million people.

Private Functions

Many federal activities are commercial innature and could be carried out by privatefirms in competitive markets. In some areas,companies are prevented from offering ser-vices to the public because of governmentrestrictions. For example, the U.S. PostalService has a legal monopoly on first-classmail. In other areas, the government dupli-cates services that are already available in theprivate sector. USPS’s parcel delivery com-petes with private parcel services, for exam-ple. Another example is the federal govern-ment’s National Zoo in Washington, which

33

Federal politicians arespending theirtime dealing withlocal issues ratherthan devotingfull attention to crucial nationalissues, such asmismanagementat the FBI.

has recently been rocked by scandals regard-ing its poor treatment of animals.210 There isno need for the government to be in the zoobusiness. Indeed, some of the best zoos in thecountry, such as the San Diego and Bronxzoos, are private.211

In a government-wide analysis, the Bushadministration has determined that abouthalf of all federal employees perform tasksthat are also performed by private businessesin the marketplace and thus are not “inher-ently governmental.”212 The administrationhas begun opening up some of those activitiesto allow private firms to bid for work that hasbeen performed in-house. The administrationestimates that the cost saving from such com-petitive sourcing averages about 20 percent.213

However, competitive sourcing is not pri-vatization. The administration goes astraywhen it supports competitive sourcing ofprograms when privatization or terminationwould be superior. Privatization gets spend-ing off the government’s budget entirely andprovides for much greater dynamism, effi-ciency, and innovation than is possiblethrough government contracting.

In addition, privatization avoids a seriouspitfall of contracting—opening up the govern-ment to greater corruption. A recent scandal atthe Pentagon was classic. Two senior procure-ment officials were convicted of receiving sexu-al favors and $1 million in cash for awardingminority set-aside defense contracts to particu-lar firms.214 One of the men headed thePentagon’s Office of Small and DisadvantagedBusiness Utilization, which helps minorityfirms win contracts. In this case, the best reformis not competitive sourcing but termination ofthis unneeded Pentagon office.

Privatization used to be considered a radi-cal reform, but dozens of countries have pur-sued major privatizations during the past twodecades. Governments on every continenthave been busy selling off assets, such as elec-tric utilities, airlines, oil companies, railroads,and other businesses. Even postal services arebeing privatized. Britain, Finland, Germany,the Netherlands, New Zealand, and Swedenhave either opened up postal services to pri-

vate competition or privatized their nationalmail companies.215 Unfortunately, Americanscontinue to be saddled with the 774,000-employee USPS and other inefficient govern-ment businesses.216

There has been the occasional reform effortin this country. Ronald Reagan established aPresident’s Commission on Privatization thatproposed modest reforms in a 1988 report,but Congress generally did not act on them. Afew federal entities have been sold off in recentdecades. Conrail, a freight railroad in theNortheast, was privatized in 1987. The AlaskaPower Administration was privatized in 1996.The U.S. Enrichment Corporation, which pro-vides enriched uranium to the nuclear indus-try, was privatized in 1998.

Today, privatization of federal assetsmakes even more sense than in the past for anumber of reasons. First, sales of federalassets would cut the budget deficit. Second,by reducing the responsibilities of the gov-ernment, members of Congress could focuson their core responsibilities, such as nation-al security. Third, other countries have hadexperience with privatization that could bedrawn on in pursuing reforms in the UnitedStates. Fourth, privatization would spur eco-nomic growth by opening new markets toentrepreneurs. For example, privatization ofUSPS and the repeal of its legal monopolywould bring major innovation to the mailbusiness, just as the breakup of AT&T’smonopoly in the 1980s brought innovationto the telecommunications business.

Some policymakers think that certainactivities, such as air traffic control, are “tooimportant” to leave to the private sector. Butthe reality is just the opposite. The govern-ment has shown itself to be a failure at pro-viding efficient and high-quality air trafficcontrol, passenger rail, and other services.Those industries are too important to missout on the innovations and likely greatersafety that private entrepreneurs could bringto them in open markets.217

Stand-Alone Businesses The federal government operates numer-

34

Governments onevery continenthave been busy

selling off assets,such as electric

utilities, airlines,oil companies,railroads, and

other businesses.Even postal

services are beingprivatized.

ous business enterprises, including the USPS,Amtrak, and a number of electric utilities,that could be converted into publicly tradedcorporations. The United States has laggedbehind other countries that now provide in-depth experience that Congress can learnfrom when it moves ahead with reforms.

• Postal Services. A report by a presiden-tial commission in 2003 and other stud-ies have concluded that the outlook forUSPS is bleak, with declining mail vol-ume and rising costs.218 The way ahead isto privatize the USPS and repeal the mailmonopoly that it currently holds.219

New Zealand and Germany have imple-mented bold reforms that Congressshould examine. Since 1998 NewZealand’s postal market has been opento private competition, with the resultthat postage rates have fallen and laborproductivity at New Zealand Post hasrisen markedly.220 Germany’s DeutschePost was privatized in 2000, with theresult that the company has greatlyimproved productivity and has expand-ed into new lines of business.221

• Electric Utilities. Unlike the industryin other countries, the U.S. electricityindustry has always been dominated bypublicly traded corporations. However,the federal government owns the hugeTennessee Valley Authority and fourPower Marketing Administrations,which sell power in 33 states. Those gov-ernment power companies have becomean anachronism as utility privatizationhas been pursued across the globe fromBritain to Brazil and Argentina toAustralia. TVA and PMA privatizationwould reduce the federal deficit, elimi-nate the artificially low TVA and PMApower rates that encourage overcon-sumption, and increase efficiency inutility operations and capital invest-ment.222 President Clinton proposed tosell off the four PMAs in his FY96 bud-get. It is time to dust off those plans andmove ahead with reform.

• Passenger Rail. Subsidies to Amtrakwere supposed to be temporary after thepassenger rail agency was created in 1970.That has not occurred, and Amtrak hasprovided second-rate passenger rail ser-vice for 30 years while consuming morethan $25 billion in federal subsidies.223

Reforms elsewhere show that private pas-senger rail can work. Full or partial railprivatization has occurred in Argentina,Australia, Britain, Germany, Japan, NewZealand, and other countries.

InfrastructureBefore the 20th century, transportation

infrastructure was often financed and builtby the private sector. For example, there weremore than 2,000 private companies that builtand operated private roads in America in the19th century.224 But during much of the 20thcentury, transportation infrastructure wasthought of as a government function. By the1980s that started to change, and govern-ments around the world began selling off, orletting private firms build, billions of dollarsworth of airports, highways, bridges, andother infrastructure.225

Just about any service that can be sup-ported by fees paid by consumers can be pri-vatized. A big advantage of privatized air-ports, air traffic control, highways, bridges,and other infrastructure is that private com-panies can freely tap debt and equity marketsfor capital expansion to meet rising con-sumer demand and reduce congestion.Today, infrastructure upgrades and modern-ization are constrained by reliance on avail-able government funding and lack of long-term government budget planning.

• Air Traffic Control. Numerous coun-tries have partly or fully privatized theirATC services. Canada’s reforms providea good model for the United States. In1996 Canada set up a fully private, non-profit ATC corporation, Nav Canada,which is self-supporting from chargespaid by aviation users. The newCanadian system has received rave

35

Privatized airports, air traffic control,highways,bridges, andother infrastruc-ture can freelytap debt andequity marketsfor capital expansion tomeet rising consumerdemand andreduce congestion.

reviews for investing in the latest tech-nology and reducing air congestion.226

Meanwhile, the Federal AviationAdministration has been struggling tomodernize U.S. air traffic control for twodecades. The FAA’s upgrade efforts havefrequently fallen behind schedule andgone over budget. The GAO found thatone FAA upgrade begun in 1983 was tobe completed by 1996 for $2.5 billion.227

But the completion date was pushedback to 2003, and the project ended upcosting $7.6 billion, with $1.5 billionwasted on activities that were ultimatelyscrapped. ATC is far too important forsuch government mismanagement.Privatization is long overdue.

• Highways. A number of states and for-eign countries have started experiment-ing with privately financed and operat-ed highways. The Dulles Greenway innorthern Virginia is a 14-mile privatehighway opened in 1995. It wasfinanced through private bond andequity issues and uses an electronic tollsystem to maximize efficiency for driv-ers. In Richmond, the 895 Connectorproject is being financed by private cap-ital and will be operated by a nonprofitfirm. Fluor Daniel, a leading engineer-ing company, has proposed buildingprivate highways in Virginia, includingwidening the Capital Beltway with fournew electronic toll lanes.228 The compa-ny also has a $1 billion plan to build tolllanes running 56 miles south fromWashington along an existing inter-state.229 Similar private road projects arebeing pursued in California, Texas,North Carolina, and South Carolina.230

There is clearly a strong private-sectorinterest in funding and building high-ways. Policymakers should pave the wayfor such entrepreneurs to help reducecongestion and save taxpayer money.

• Airports. Most major airports in theUnited States are owned by municipalgovernments, but the federal governmenthelps fund airport renovation and expan-

sion. Once again, the United States lagsbehind other countries on reforms.Airports have been fully or partially priva-tized in Auckland, Copenhagen, Frank-furt, London, Melbourne, Naples, Rome,Sydney, Vienna, and other cities. TheBritish led the way with the 1987 privati-zation of British Airports Authority,which owns London’s Heathrow andother airports. In the United States,Congress needs to take the lead on airportprivatization because there are numerousfederal roadblocks that make U.S. citieshesitant to proceed with reforms.231 Forexample, under current laws government-owned airports can issue tax-exempt debt,which gives them a financial advantageover private airports.

Loan ProgramsThe federal government runs a large array

of loan and loan guarantee programs forfarmers, students, small businesses, utilities,shipbuilders, weapons purchasers, exporters,fishermen, and other groups. There are atleast 59 federal loan programs and 70 loanguarantee programs.232 Loan guarantees arepromises to private creditors, such as banks,that the government will cover borrowerdefaults. At the end of 2003, there was $249billion in outstanding federal loans and $1.2trillion in loan guarantees.233

In the 1970s federal loans and loan guar-antees grew rapidly as members of Congressdiscovered that they could pay off specialinterests with loan programs, while not payingany political cost for directly supporting high-er spending.234 Like other federal programs,loan programs that make no economic sensecan survive by creating an “iron triangle” ofinterests that resist reform. Supporters of loanprograms include loan beneficiaries, financialinstitutions, federal loan administrators, andcongressional committees that authorize loanprograms.235

In the 1980s the Reagan administrationtried to cut federal loan programs but didnot have much success.236 Policymakersshould revive Reagan’s initiatives and begin

36

Most major airports in the

United States areowned by munici-pal governments,but airports have

been fully or partially

privatized inAuckland,

Copenhagen,Frankfurt,

London,Melbourne,

Naples, Rome,Sydney, Vienna,and other cities.

terminating or privatizing federal loan pro-grams. The provision of credit is a centuries-old institution that does not need govern-ment help, especially given the sophisticationand liquidity of financial markets today.

Some federal loan programs target borrow-ers who could have gotten private financing.In such cases, there is no need for governmentloans because they simply displace privateloans. Other loan programs target borrowerswho cannot secure private financing. In thatcase, federal loans support borrowers who arepoor credit risks, and taxpayer money is likelyto be wasted when loans are defaulted on.

The Washington Post recently provided anexample of the first type of loan program.237

It profiled the chief executive of a construc-tion consulting firm that is successfully win-ning projects. The company has goodprospects and is owned by an experiencedentrepreneur and accountant who apparent-ly would have little trouble obtaining regularbusiness loans from a bank. But the compa-ny received a Small Business Administration7(a) loan guarantee from the government. Inaddition, because the owner is a minority, thecompany is applying to the SBA 8(a) pro-gram for “disadvantaged” businesses in orderto obtain subsidies and favored access to fed-eral contracts. Taxpayers should not have tofoot the bill for handouts to such prosperousmembers of society.

Some federal loans are targeted at high-risk borrowers who perhaps should notreceive loans at all. For example, Farm ServiceAgency loans are aimed at farmers who areunable to obtain private credit at marketinterest rates. But such farmers might be badcredit risks with poor business prospects.Sure enough, default rates on FSA loans arehigher than on comparable private-sectorloans.238 Taxpayers lose about half a billiondollars each year because of defaults on farmloans.239 The delinquency rate for FSA directloans was 21 percent in 2000 (down from 41percent in 1995).240 By comparison, delin-quency rates on private farm loans, and othercommercial loans, is only about 3 percent.241

The FY05 federal budget says that govern-

ment loan programs are needed because pri-vate markets suffer from “imperfections,”such as lenders not having perfect informa-tion about borrowers.242 For example, banksmight be more hesitant to lend to start-upbusinesses because they do not have lengthycredit histories. However, that analysis isflawed. It is appropriate that start-up firmsface more scrutiny and pay higher interestrates when they access capital because oftheir higher risk of failure. Failure createseconomic waste; thus it is good that creditorsare more hesitant to lend to riskier business-es. Government loan subsidies result in toomany loans going to borrowers with exces-sively risky and low-value projects.

Certainly, market allocation of credit is farfrom perfect. But markets have developedsophisticated mechanisms for funding riskyendeavors. For example, venture capital and“angel” investment pump tens of billions ofdollars of investment into new businessesevery year. There is no need for the govern-ment to compete with such private financialmechanisms. Yet the government runs aSmall Business Investment Company ven-ture capital program at taxpayer expense.Taxpayers will be out $2 billion this yearbecause of recent investment losses of theSBIC, according to the federal budget.243

Instead of fixing loan market imperfec-tions, government intervention introducesnew distortions. For example, the EPAspends about $2.6 billion annually for waste-water treatment facilities.244 EPA fundingflows to state governments, which makeloans to local governments for new facilities.But the loans are set at artificially low inter-est rates, thus encouraging overinvestmentby local officials.

Federal loan guarantees also distort mar-kets. When financial institutions receive feder-al loan guarantees, they become overeager tolend to those with shaky credit because thegovernment will cover losses in case of default.For example, the SBA 7(a) loan guarantee pro-gram targets businesses that cannot obtain pri-vate financing and have high default rates. Thedefault rate on 7(a) preferred lender loans has

37

The provision of credit is a centuries-oldinstitution thatdoes not needgovernment help,especially giventhe sophistica-tion and liquidityof financial markets today.

averaged 14 percent in the last three years.245

Loans under this program are supposed to beused for small business expansion. But in thepast the GAO found that some SBA loans weregoing to pay off businesses’ prior debts, ratherthan being used for new investment.246

Federal loan programs are generally poor-ly managed. The Department of Educationhas about $100 billion in outstanding stu-dent loans under a variety of programs.247

Student loans have been on GAO’s high-risklist for waste, fraud, and abuse every yearsince 1990.248 Individuals, financial institu-tions, and administrators at educationalinstitutions all face incentives to make falseclaims to gain unjustified aid.249 Lax enforce-ment of student loan repayments has led tolarge losses from defaults, which cost taxpay-ers $28 billion during the 1990s.250

The federal government exposes taxpayersto losses on other types of financial commit-ments as well. The Pension Benefit GuarantyCorporation is a federal entity that bails outworkers in failed private pension plans.Currently, the PBGC is in financial distress,having recently reported the largest loss in itshistory.251 The PBGC could be terminated ifdistortions in the tax code that favor employ-er-based pensions were eliminated. Instead,taxes should be reduced on all savings, andretirement income should be the product ofindividual savings vehicles so that seniors arenot dependent on employer plans. If person-al savings were separated from employment,the PBGC could be phased out.252

Federal taxpayers also face financial expo-sure from the mortgage giants Fannie Maeand Freddie Mac. Those government-spon-sored enterprises (GSEs) are private firms,but experts believe that taxpayers maybecome responsible for their debts because oftheir close ties to the government. The valueof those ties created an implicit federal sub-sidy to the companies of $23 billion in 2003,according to the CBO.253 The large size of theGSEs creates the threat of a major financialcrisis should they run into trouble. Balancesheet liabilities of the GSEs grew from $374billion in 1992 to $2.3 trillion in 2002.254

Reforms should completely severe the tiesbetween the government and the GSEs.

Federal AssetsAt the end of FY03, the federal government

held about $1 trillion in buildings and equip-ment, $200 billion in inventory, $550 billion inland, and $650 billion in mineral rights.255

Many federal assets are neglected or abusedand would be better cared for in the private sec-tor. It is common to see government propertythat is in poor shape, with public housingbeing perhaps the most infamous federal eye-sore. The GAO finds that “many assets are inan alarming state of deterioration” and has putfederal property holdings on its high-risk wastelist.256 The solution is to sell federal assets thatare in excess of public needs and to better man-age the smaller set of remaining holdings.

The federal government owns about one-fourth of the land acreage in the UnitedStates and continues to accumulate moreholdings.257 Only a portion of that land is ofenvironmental significance, and the govern-ment has proven itself to be a poor land cus-todian. There are widely reported mainte-nance backlogs on lands controlled by theForest Service, Park Service, and Fish andWildlife Service. The solution is, not a largermaintenance budget, but to trim down hold-ings to fit limited taxpayer resources.

The ongoing process of federalizing thenation’s land should be reversed and low-pri-ority holdings sold back to citizens. However,federal agencies do not like to give up theirholdings. For example, the Washington Postrecently reported that the Bureau of LandManagement owns 23 acres of land in south-ern Maryland that have sat idle since 1994when a radio telescope installation was closeddown.258 BLM is currently trying to find othergovernment uses for the land, rather thantransfer it back to the private sector.

The government also owns billions of dol-lars worth of excess buildings. The GAO findsthat the government has “many assets it doesnot need,” including 30 vacant Veterans Affairsbuildings and 1,200 excess Department ofEnergy facilities.259 The Pentagon estimates

38

Many federalassets are

neglected orabused and

would be bettercared for in the

private sector.

that it spends up to $4 billion each year main-taining its excess facilities.260 The departmentowns excess supply depots, training facilities,medical facilities, research labs, and otherinstallations. Federal asset sales would helpreduce the deficit, allow improved mainte-nance of remaining assets, and improve eco-nomic efficiency by putting assets into moreproductive private employment.

Conclusion

Congress and the Bush administrationneed to pursue bold fiscal reforms. Theadministration should propose cuts indefense, education, Medicare, and other pro-grams rather than always push for increases.Leaders in Congress need to restrain theappropriators and oppose spending increas-es sought by the administration. All policy-makers need to end their selfish jostling tofund favored programs because the loomingentitlement crisis will require that the entirebudget be scoured for cuts.

Cutting the federal budget will not beeasy. It will take a sustained effort to rein inthe big spenders in both parties. When cam-paigning in 1980, Ronald Reagan said clearlythat his election would be “a mandate toreduce the size of government and theamount of federal spending.”261 So far, thatclarity of purpose has been absent in theBush administration. Bush’s modest effortsat improving government efficiency will havelittle long-term impact. Indeed, Jimmy Carterbelieved in similar efficiency reforms, but hemade no headway in cutting the budget.262

Instead, it took Reagan’s more fundamen-tal challenge to achieve even modest reforms inthe welfare state. The 1982 Economic Report ofthe President argued that “income redistributionis not a compelling justification in the 1980sfor federal taxing and spending programs.”263

It also stated that “this administration rejectspaternalism as a basis for policy.”264 That typeof principled approach to policy is needed tomake headway against today’s overgrown fed-eral government.

Strong political leadership can restrainwhat Thomas Jefferson called “the naturalprogress of things . . . for liberty to yield andgovernment to gain ground.”265 Consider this1982 assessment of Reagan’s federalism by theUrban Institute: “His proposal to turn back$90 billion of domestic programs to the stateswas [originally] treated as an extremist gaffe. Itis a tribute to the president’s ability to framenational policy debate that . . . his prescriptionfor the future of federalism now commandsauthority, if not general assent.”266

Fiscal conservatives can make progressagainst out-of-control federal spending, butthey need to articulate a clear and consistentvision. The cuts proposed in this study pro-vide consistent Reagan-style solutions. Nowthe nation needs Reagan-style political lead-ership to make it happen.

Appendix: Description ofSelected Budget Cuts

This section provides descriptions, orga-nized by department, of selected budget cutsproposed in Table 3. All spending data givenare outlays from the Budget of the U.S.Government, FY2005. The proposed cuts in thisstudy are not a comprehensive list of possiblebudget reforms. Indeed, major reforms arealso needed in defense and entitlement pro-grams, as discussed in other Cato studies.267

Department of AgricultureThis department provides both cash subsi-

dies to farm businesses and indirect subsidiessuch as marketing and loan services. It alsoimposes an array of legal restrictions and tar-iffs on agricultural goods that raise prices andimpede markets. The USDA has 110,000employees and 7,400 offices scatteredthroughout the country.268 No other industryis as coddled as agriculture.

Farm programs damage the economy andunfairly redistribute wealth from taxpayersand consumers to farm businesses. For exam-ple, sugar prices are three times higher in theUnited States than elsewhere because of feder-

39

Fiscal conserva-tives can makeprogress againstout-of-controlfederal spending,but they need toarticulate a clearand consistentvision.

al controls. The effect is to damage U.S. con-sumers and U.S. candy companies that rely onsugar.269 Agriculture subsidies and controlsare also an impediment to world trade negoti-ations, which are designed to bring greaterprosperity to every country.270 All farm sub-sidy programs should be abolished.

Crop Subsidies. Direct crop subsidies bythe Farm Service Agency will cost taxpayers$17 billion in FY04. More than 90 percent ofthose subsidies go to farmers who raise justfive crops—wheat, corn, soybeans, rice, andcotton.271 Commodities that are eligible forfederal payments account for 36 percent ofU.S. farm production, while commoditiesthat survive without federal subsidies, suchas fruits and vegetables, account for 64 per-cent of production.

It is widely recognized that agriculturecontrols and subsidies cause overproductionand inflate land prices. Such inefficiencieshad prompted Congress to reform and cutfarm programs in 1996 under the “Freedomto Farm” law. However, the administrationand Congress reversed course with the 2002farm bill, which reintroduced price supportsand retained high subsidy levels.

In addition to damaging the economy,farm subsidies unfairly redistribute wealth.While politicians love to discuss the plight ofthe “small farmer,” the bulk of farm subsidiesgo to the largest farms. For example, thelargest 7 percent of farms received 45 percentof farm subsidy payments in 1999.272 USDAfigures show that the average farm house-hold income was $61,307 in 2000, or 7.5 per-cent higher than the national average house-hold income of $57,045.273

Commercial Services for Farmers. TheUSDA provides an array of commercial ser-vices to farmers, including loans, marketingservices, and research. Those programsshould be ended, and farmers should pur-chase such services in the marketplace, as dobusinesses in other industries. USDA com-mercial services are generally poorly run. Forexample, the GAO has found that more than$2 billion in Farm Service Agency loans isdelinquent.274

One egregious business subsidy is theUSDA Market Access Program. It hands outmore than $100 million annually to farm-related businesses to pay for their foreignmarketing expenses such as advertising.275

This program received a doubling of fundsunder the Republican farm subsidy law of2002.276 Table 4 lists the subsidy recipients in2003.277 One would think that wealthy wineproducers could market their own productsinstead of asking taxpayers to pay $3.7 mil-lion to the Wine Institute. Instead of bilkingtaxpayers, perhaps the Wine Institute couldcut its president’s $595,000 salary to freefunds for wine marketing.278

Rural Subsidy Programs. The USDA oper-ates a range of general rural subsidy pro-grams. For example, the Rural CommunityAdvancement program funds everythingfrom fire protection to waste disposal proj-ects under a complex grant process.279 TheRural Business-Cooperative Service providesgrants and loans for projects such as theNational Sheep Industry ImprovementCenter.280 The Rural Utilities Service providessubsidized loans to electric, telephone, andwater utilities in rural areas. The RuralHousing and Community DevelopmentService provides loans to apartment develop-ers and families through 1,700 offices acrossthe country.281

Many studies have found that USDA ruralsubsidy programs are inefficient and mis-managed.282 More important, those subsidiesare unjust redistributions of wealth, especial-ly given that rural dwellers are better off thanother Americans in many ways. For example,home ownership in rural areas is 10 percenthigher than the national average, yet theUSDA subsidizes rural home loans.283

Americans who live in rural areas should notbe a privileged class deemed more importantthan other Americans. USDA rural subsidiesshould be ended.

Department of CommerceThis department operates numerous “cor-

porate welfare” programs that reformers havelong targeted for termination. Republicans in

40

Farm programsdamage the

economy andunfairly

redistributewealth from

taxpayers andconsumers to

farm businesses.

the mid-1990s targeted the entire departmentfor closure, with some of its functions movedto other departments. Given the large federaldeficit, today is a good time for policymakersto reconsider downsizing Commerce.

Economic Development Administration.This agency provides grants and loans tostate and local governments, nonprofitgroups, and private businesses in regions

with high unemployment. The GAO findsthat EDA grants do not significantly affectprivate-sector employment levels, despiteEDA’s claims of job creation.284 Governmenthandouts are not a solution for underper-forming local economies. Instead, any U.S.region can become more prosperous by free-ing the economy through tax cuts, regulato-ry reforms, tort reform, right-to-work laws,

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Table 4Your Tax Dollars at Work: USDA Market Access Program, FY03 Subsidies

Subsidy Recipient Amount Subsidy Recipient Amount

Alaska Seafood Marketing Institute $2,721,428 National Dry Bean Council $549,192 American Forest & Paper Association $5,979,825 National Honey Board $130,533 American Peanut Council $1,185,877 National Potato Promotion Board $2,331,169 American Seafood Institute $750,515 National Renderers Association $337,183American Seed Trade Association/ National Sunflower Association $868,864

Oregon Seed Council $354,451 National Watermelon Promotion Board $134,665 American Sheep Industry Association $276,916 New York Wine and Grape Foundation $170,759American Soybean Association $3,431,438 North American Export Grain Blue Diamond Growers/Almond Association $75,226

Board of California $1,214,877 Northwest Wine Promotion Coalition $438,114California Agricultural Export Council $618,066 Organic Trade Association $73,573 California Asparagus Commission $244,922 Pear Bureau Northwest $1,398,786 California Cling Peach Growers Pet Food Institute $864,327

Advisory Board $316,958 Raisin Administrative Committee $1,835,893 California Kiwifruit Commission $132,747 Southern United States Trade Association $4,644,176California Pistachio Commission $771,698 Sunkist Growers, Inc $1,775,869 California Prune Board $2,184,878 Texas Produce Export Association $72,053 California Strawberry Commission $552,809 The Catfish Institute $303,268 California Table Grape Commission $2,253,608 The Popcorn Board $250,835 California Tomato Commission/Florida U.S. Apple Association $497,763

Tomato Committee $614,285 U.S. Dairy Export Council $2,161,513California Tree Fruit Agreement $1,150,782 U.S. Grains Council $3,536,255California Walnut Commission $2,812,106 U.S. Highbush Blueberry Council $106,331Cherry Marketing Institute $122,265 U.S. Livestock Genetics Export, Inc. $754,338Chocolate Manufacturers U.S. Meat Export Federation $10,138,190

Association $989,423 U.S. Wheat Associates $2,458,897Cotton Council International $8,406,098 USA Dry Pea and Lentil Council $478,213 Cranberry Marketing Committee $736,959 USA Poultry and Egg Export Council $2,709,601Florida Department of Citrus $3,998,895 USA Rice Federation/U.S. Rice Producers Food Export USA Northeast $4,366,864 Association $2,620,887Ginseng Board of Wisconsin $28,559 WA State Fruit Commission/CA CherryHawaii Papaya Industry Association $61,105 Advisory Board $801,734Hop Growers of America $87,081 Washington Apple Commission $1,814,050Intertribal Agriculture Council $444,794 Welch's Food $535,458Mid-America International Agri-Trade Western United States Agricultural Trade

Council $6,056,818 Association $6,643,513Mohair Council of America $36,859 Wine Institute $3,758,831National Association of State Reserve $250,000

Departments of Agriculture $1,576,035 Total $110,000,000

Source: USDA, press release, June 6, 2003, www.usda.gov/news/releases.

and other reductions in burdens on busi-nesses and entrepreneurs.

International Trade Administration. Thisagency promotes exports and works withcompanies to develop strategies for sellingabroad. But the GAO has reported that theITA has been unable to show success in help-ing businesses enter foreign markets.285 Itmakes little sense that career bureaucrats,who may never have worked in private indus-try, could provide essential help for exporters.Most U.S. exporters are successful withoutgovernment help. Producers should foot thebill for their own trade activities.286

Federal Technology Programs. A number ofbusiness subsidy programs try to create tech-nological advances in U.S. industry. TheAdvanced Technology Program is supposed togive grants to companies that cannot get pri-vate funding. However, the GAO has foundthat most companies that applied for ATPgrants never even looked for private capital.287

The ATP and similar programs have nevermade sense and are even more obsolete todaybecause of the large amounts of private financ-ing available for technology firms, including“angel” investment and venture capital. Forexample, venture capitalists invested $18 bil-lion in U.S. growth companies in 2003.288

The government’s Small Business Inno-vative Research program is also supposed to“stimulate technological innovation” byhanding out grants to businesses.289 But theprogram simply displaces private researchmoney that firms would have otherwise spent.One study found that for every dollar of SBIRmoney received, firms reduce their ownresearch funding by a dollar.290

Experience in the United States, Japan,and Europe has shown that government aidand strategic advice to technology companiesdo not work.291 The most famous govern-ment technology agency was Japan’s MITI,which was thought to be in the vanguard inthe 1980s. MITI turned out to be a big fail-ure. MITI advised Honda to stick to motor-cycles and not get into cars; its FifthGeneration computing initiative was a flop;it famously gave bad advice to Sony.292 What

then explained Japan’s industrial success upuntil the 1980s? Japan succeeded because ofhigh levels of domestic competition, notbecause of industrial policy. The most suc-cessful Japanese industries, including auto-mobiles, motorcycles, steel, robotics, andconsumer electronics, had high numbers offirms competing intensely.

A number of U.S. states have tried to createtechnology agencies with similarly little suc-cess. For example, Virginia has spent morethan $100 million during the last decade on aCenter for Innovative Technology, which has afancy glass office tower near Dulles airport.293

But the CIT is finally being closed downbecause it accomplished little and few peopleunderstood what it was trying to do. The fed-eral government should do the same with itstechnology agencies.

Manufacturing Extension Partnership.This program provides grants to extensioncenters that assist small- and medium-sizedfirms in making use of new production tech-nologies. However, the regular workings ofthe market help disseminate new productionknowledge, and federal subsidies are notneeded. For example, skilled engineers oftenmove back and forth between firms, andbetween firms and universities, thus spread-ing knowledge of the latest techniques.

Fisheries Subsidies. The National Oceanicand Atmospheric Administration funds a vari-ety of subsidies for the fishing industry.NOAA’s National Marine Fisheries Serviceprovides industry statistics, promotes exports,and gives operating assistance. Those activitiesshould be paid for by the industry itself.

Department of EducationWhile campaigning for president in 1980,

Ronald Reagan labeled the recently createdDepartment of Education “President Carter’snew bureaucratic boondoggle.”294 FollowingReagan’s lead, the Republican House budgetfor FY96 proposed to eliminate the depart-ment. But it lives and continues to grow. ByFY04 it had become President Bush’s $63 bil-lion boondoggle. The department is poorlymanaged and has not received a clean bill of

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Experience in theUnited States,

Japan, andEurope hasshown that

government aidand strategic

advice to technology

companies do not work.

health for its finances from the GAO since1997.295 Congress should challenge the presi-dent’s obsession with federalizing educationand start shutting down the department.

Elementary and Secondary Education. Totalspending on K–12 education rose from $4,505per pupil in 1970 to $9,354 in 2002, measuredin constant 2002 dollars.296 Statistical studieshave examined the relationship between pub-lic school spending and educational achieve-ment and have found none: higher spendingdoes not lead to higher test scores.297

The federal government has greatlyexpanded its role in K–12 education in recentdecades, yet school performance has notimproved. The average Scholastic AssessmentTest score fell from 1049 in 1970 to 1026 in2003.298 National Assessment of EducationProgress test scores are also unimpressive. In2001 the share of 12th grade students scoring“below basic” on writing, history, and geogra-phy was 22 percent, 57 percent, and 29 per-cent, respectively.299

The experiment with federal control overthe nation’s schools has failed. Educationshould be left to the states and the privatesector.300 For their part, the states shouldinnovate with voucher programs and othertools to inject competition and diversity intothe public schools.

Student Grants and Loans. Loan programsfor postsecondary education have been on theGAO list of high-risk programs for waste,fraud, and abuse since 1990.301 About $22 bil-lion of student loans remains in default, morethan when the GAO began calling for specialscrutiny 14 years ago.302 Individuals, financialinstitutions, and administrators at shadyinstitutions have made billions of dollars offalse claims for federal aid.303 Those programsshould be devolved to the states and the pri-vate sector. College students should rely onthe private sector for financing of higher edu-cation. After all, students are the ones whogain from the higher salaries and better jobsthat follow receipt of a college degree. Indeed,those with a college education will earn, onaverage, 75 percent more during their lifetimesthan those with just high school degrees.304

Grants for School Programs. The Depart-ment of Education overflows with duplicativeand wasteful grant programs for K–12schools. The Safe and Drug-Free Schools andCommunities program funds grants to reducesubstance abuse by youth. That is a worthycause, but studies have found that the grantsare ineffective.305 The OMB concludes that theprogram is “fundamentally flawed.”306 In thisprogram, federal money is sent to the states,which in turn give grants to local school sys-tems. It would be more efficient if school sys-tems designed their own programs and fund-ed them locally.

A common problem is that diversity insolutions is discouraged by the flow of feder-al money and regulations. For example, theBilingual and Immigrant Education pro-gram gives funds to school districts forinstruction of foreign language students.Some analysts think that the program doesmore harm than good by imposing top-down rules on local officials.307 A similarsquelching of flexibility occurs under theEducation for the Disadvantaged program,which provides grants to help low-incomestudents.308

Other Ineffective Programs. The TRIO pro-gram is supposed to increase the college enroll-ment rates of low-income students. However,the OMB concludes that the program “has notbeen effective in increasing college preparationand enrollment.”309 The Even Start programfunds educational services for low-income,poorly educated families. However, the OMBrates the program as “ineffective” because ithas no measurable impact on the children it isdesigned to help.310

Department of EnergyThis department is one of the largest

sources of federal business subsidies. Like theagriculture industry, the energy industry hasbeen coddled and regulated by the governmentfor decades to the detriment of taxpayers andthe economy. Many energy subsidy programshave been rated “ineffective” by the OMB.311

The department has also been poorlymanaged. The GAO has reported that many

43

College studentsshould rely onthe private sectorfor financing ofhigher education.After all, studentsare the ones whogain from thehigher salariesand better jobsthat followreceipt of a college degree.

big energy projects have schedule delays andlarge cost overruns.”312 Also, classifiednuclear weapons information from thedepartment’s laboratories has been acquiredby the Chinese.313 A 1999 House of Represen-tatives report concluded, “Despite repeatedPRC thefts of the most sophisticated U.S.nuclear weapons technology, security at ournational nuclear weapons laboratories doesnot meet even minimal standards.”314 A high-level administration panel investigating thescandals condemned the department as a“dysfunctional bureaucracy” where “organi-zational disarray, managerial neglect, and aculture of arrogance . . . conspired to createan espionage scandal waiting to happen.”315

Energy Supply Research and Development.This program aims to develop new technolo-gies by funding university research, thenational laboratories, and public-privatepartnerships. Research topics range fromsolar power to nuclear energy. This programalso funds the administration’s new hydro-gen power initiative. That promises to throwbillions of taxpayer dollars down a blackhole, given that the National Academy ofSciences finds that hydrogen vehicles maynot arrive on America’s roads until 2050.316

The private sector is wholly capable of fund-ing new energy technologies by itself whenthere is market potential.

Fossil Energy Research and Development.This program also aims to develop energytechnologies by funding university research,the national laboratories, and public-privatepartnerships. Research areas include cleanfuels, oil technology, natural gas, and fuel cells.Federal fossil energy research has a poorrecord. The CBO has concluded: “Federal pro-grams have had a long history of funding fos-sil-fuel technologies that . . . had little chanceof commercial implementation. As a result,much of the federal spending has not beenproductive.”317 That is a polite way of sayingthat those programs have been a big waste oftaxpayer money.

Energy Conservation. Numerous wastefuland unjustified handouts are funded underthe rubric of energy conservation. For exam-

ple, solar, wind, and other renewable fuels havebeen receiving federal subsidies for decades. Itis time for those energy sources to stand ontheir own and succeed or fail in the market.This budget category also includes such subsi-dies as a $228 million grant program to helphomeowners install weather stripping.

Energy conservation funding will also bespent on the FreedomCar corporate subsidyprogram.318 The Bush administration replacedthe Clinton administration’s Partner-ship for aNew Generation of Vehicles subsidy withFreedomCAR. The PNGV handed out $1.5 bil-lion over eight years to U.S. automakers fordevelopment of hybrid cars.319 Despite the sub-sidies, U.S. automakers did not deliver a hybridcar, while unsubsidized Honda and Toyotaintroduced the Insight and Prius hybrids,respectively. FreedomCAR subsidies are forfuel cell technologies. The FY03 budget saidthat while PNGV had a “misguided focus,” thenew FreedomCAR would have “clear goals”and an “accountable manager.”320 That seemsdoubtful: were any federal managers heldaccountable for wasting $1.5 billion in taxpay-er money on PNGV?

Clean Coal Technology. This program fundspublic-private demonstration projects fortechnologies that burn coal in an environ-mentally friendly way. But even environmentalgroups do not like this subsidy for energycompanies.321 The GAO has found that manyof the clean coal projects have “experienceddelays, cost overruns, bankruptcies, and per-formance problems.”322 In 2000 the GAOexamined 13 projects and found that “8 hadserious delays or financial problems, 6 werebehind their original schedules by 2 to 7 years,and 2 projects were bankrupt.”323

Energy Information Administration. TheEIA collects data on energy sources, prices,supply and demand and related information.With a $78 million budget, the EIA is a bloat-ed jobs program for economists. The agencyshould be terminated. To the extent that theEIA data are valuable to users, private firmsshould be able to collect that informationand charge fees for its distribution in privatemarkets.

44

Like the agri-culture industry,

the energy industry has

been coddled and regulated by thegovernment for

decades to thedetriment of

taxpayers and theeconomy.

Power Marketing Administrations. Thefederal government generates electric powerat more than 120 federal dams under theauthority of four Power Marketing Adminis-trations: Bonneville, Southeastern, South-western, and Western. Electricity is sold toutilities and cooperatives in 33 states, gener-ally at far below market rates.324 Those lowrates distort the economy and encourageoverconsumption by consumers and thelarge industrial users of PMA power.325

President Clinton proposed selling offSoutheastern, Southwestern, and Western inhis FY96 budget.326 Those plans should berevived. The CBO estimates that the sale ofthe Southeastern Power Administrationalone would raise $1.9 billion, which could beused to reduce federal debt.327 Privatizationwould eliminate artificially low power ratesand increase efficiency in utility operationsand capital investment.328 A fifth PMA, theAlaska Power Administration, was privatizedin the 1990s.

Department of Health and HumanServices

HHS is the largest federal department,responsible for Medicare, Medicaid, and hun-dreds of smaller programs. As every policy-maker should know, federal health care spend-ing is headed for a major financial crisis incoming years. Growth in Medicare spending isthe single biggest problem facing the federalbudget. One recent estimate placed the pro-gram’s long-term financial imbalance at $37trillion, and that was before Congress passedthe big spending increase for prescriptiondrugs in 2003.329 That imbalance implies thattomorrow’s young workers face a huge taxthreat unless the program is reformed.

Medicare. Medicare and other HHS pro-grams are rife with waste, fraud, and abuse.Medicare has been on GAO’s high-risk wastelist for more than a decade, and the programmakes erroneous payments of at least $13billion every year.330 The GAO noted that“the sheer size and complexity of theMedicare program makes it highly vulnera-ble to fraud, waste, and abuse.”331 Indeed, the

system pays about 900 million claims eachyear within a complex regulatory structurewith price controls on 7,000 services and110,000 pages of regulations.332 Health carefor the elderly should be moved away fromtop-down planning toward individual deci-sionmaking. In another study, I discussoptions for major Medicare reforms.333

Even before major reforms, Congress canenact more modest taxpayer savings. One ideais to increase Part B premiums and reduce tax-payer contributions. Half of Part B expenseswere originally supposed to be paid by theelderly through premiums, but premiumscover only about 25 percent of costs today.334

The CBO estimates that raising the premiumsfor Part B to 30 percent of costs would savetaxpayers about $75 billion over 10 years.335

Another idea is for Medicare to eliminate the10 percent bonus given to doctors who pro-vide services in areas designated as under-served. This program is ineffective for a num-ber of reasons.336 The CBO’s “BudgetOptions” report provides other examples ofmodest cost savings for Medicare.337

Medicaid. Medicaid spending is out of con-trol—outlays have increased more than 10percent annually the past three years, on aver-age.338 Like Medicare’s, Medicaid’s basicstructure encourages overspending andwaste. The GAO has warned that “Medicaid isat risk for billions of dollars in improper pay-ments.”339 Recent investigations have foundthat there is $1 billion of fraud in California’sportion of Medicaid alone.340

The federal-state structure of the programcauses irresponsible overspending by thestates. The federal government matches stateMedicaid spending by between 50 and 83percent.341 That provides states an incentiveto expand their programs beyond reasonablelevels because only part of the cost falls onstate taxpayers. State governments have con-cocted a variety of abusive schemes to inap-propriately boost federal grants by billions ofdollars a year.342 For example, some statesinstituted taxes on health care providers thatwere rebated to the providers. The effect wasto increase reported state Medicaid spending

45

Privatizationwould eliminateartificially lowpower rates and increase efficiency in utility operationsand capitalinvestment.

and boost federal matching funds.343 Stateshave continued operating such schemesdespite a decade of scrutiny by the federalgovernment.344

Another problem common to all federalhandout programs is that ineligible individu-als find ways to gain unjustified benefits. Forexample, middle- and upper-income retireesuse Medicaid to pay for their long-term healthcare, a benefit that is supposed to be for low-income seniors. A cottage industry of lawyershas sprung up to help seniors get aroundMedicaid income limits and receive benefits.345

A good first reform step is to turn Medicaidinto a block grant and close off the open-endedgrowth in federal costs. Block grants were suc-cessfully implemented with welfare reforms in1996. The idea is to give states lump-sum fed-eral funding so that they are encouraged toimplement cost-cutting controls.

Turning Medicaid into a block grant pro-gram was proposed in 1981 by the Reaganadministration. That plan would have put 25health care grants into one big block grantand capped growth at 5 percent annually.346

Congressional Republicans proposed similarMedicaid reforms in the FY96 budget resolu-tion. That proposal would have turnedMedicaid into a block grant and reduced theannual growth rate from 10 percent to 4 per-cent to cut costs $182 billion over sevenyears.347 Unfortunately, President Clintonblocked the plan.

One option examined by the CBO is turn-ing Medicaid acute care into a block grant.Acute care accounts for about two-thirds ofMedicaid expenses and includes hospitalcare, doctor visits, and drugs. The CBO esti-mates that this option would save federal tax-payers $318 billion over 10 years.348

Beyond turning Medicaid into a blockgrant, reforms should aim to create moreconsumer-driven health coverage. Medicaid’sdefined benefit structure could be replacedby a defined contribution structure.349

Funding would flow to individuals in theform of tax credits or vouchers that would beused to pay for health insurance in privatemarkets. Under such a structure, federal

costs could be controlled and much ofMedicaid’s huge regulatory apparatus couldbe eliminated.

National Institutes for Health. NIH’s budg-et doubled from $12 billion in FY98 to $24billion in FY04.350 NIH funds both basic andapplied medical research. Private industryalso performs basic and applied research, butit is the former that is considered to have thebetter argument for taxpayer support.Funding for NIH’s applied research shouldbe ended, generating taxpayer savings ofmore than $12 billion annually.351 Appliedresearch creates direct benefits for privatebusinesses such as pharmaceutical firms;thus it can be left to companies to fund with-out taxpayer help.

Substance Abuse and Mental HealthServices. Each year this agency costs taxpay-ers $2 billion, which is mainly spent ongrants to the states. Many of its functions areperformed by other federal agencies and pri-vate organizations. The program has beenrated “ineffective” by the OMB because its“formula for distributing funds does not cor-respond with the prevalence of substanceabuse” and it has not shown progress towardits long-term goals.352

Department of Homeland SecurityTransportation Security Administration.

After the terrorist attacks in 2001, legislationwas passed that enabled the federal govern-ment to take over screening of passengersand baggage at all U.S. commercial airports.That policy, which created 45,000 new feder-al bureaucrats, was a big mistake.353 Recentanalyses by the GAO and the DHS inspectorgeneral (IG) found that TSA is excessivelybureaucratic and unresponsive.354 In April2004 the IG found that U.S. airports withfederal screeners and the few U.S. airportswith private screeners do an equally poorjob.355 The difference is that if private securi-ty services do a poor job, they can bereformed quickly or terminated.

While the United States nationalized itsairport screening, other countries moved inthe opposite direction. Many large airports in

46

Another problemcommon to all

federal handoutprograms is that

ineligible individ-uals find ways togain unjustified

benefits.

Europe have shifted from government work-ers for passenger and baggage screening toprivate security firms. In those airports, thegovernment sets performance standards andprovides contractor oversight. Prior to 9/11,U.S. airports generally used low-bid contrac-tors for passenger screening instead of focus-ing on high-quality services. U.S. airports, airtraffic control, and airport security should beprivatized so that firms can compete to pro-vide the safest and best quality services to airtravelers.

Department of Housing and UrbanDevelopment

The surest way to meet the housing needsof Americans is to deregulate housing mar-kets and allow entrepreneurs to providehousing for people at all income levels. Afterall, private businesses provide food, clothing,and thousands of other products for peopleof all incomes and tastes. In housing mar-kets, decades of government interferencethrough rent controls, zoning regulations,import barriers on lumber, and other ruleshave distorted markets and pushed up prices,creating the housing problems that HUDtries to address.

A free and competitive market in housingwould make HUD’s programs redundant.Howard Husock, a housing expert at theManhattan Institute, argues that it is a mythstarted by a Lyndon Johnson housing com-mission that private markets cannot providedecent housing for the urban poor.356

Federal housing policy is a history of bigblunders, which have been “profoundlydestructive,” according to Husock.357 Themost infamous disaster was the mass con-struction of high-rise public housing in themid-20th century and related “urban renew-al” programs. Government housing has beenpoorly built and maintained, and it created,concentrated, and sustained pockets ofpoverty and hopelessness in America’s cities.

HUD programs continue to create socialproblems. For example, means-tested housingprograms discourage participants fromimproving their positions in life and graduat-

ing from dependence on government sub-sides.358 Other HUD programs simply dupli-cate services that are readily available in privatemarkets, such as mortgage insurance.

In addition to pursuing dubious policies,HUD has been one of the most mismanageddepartments in the government. In the 1980sHUD was rocked by scandals caused by influ-ence peddling, payoffs, and fraud involvingbillions of dollars.359 Some HUD programshave been on the GAO high-risk list for waste,fraud, and abuse since 1994.360 As a result oferror and fraud, the department overpays itsrental assistance subsidies by $2 billion everyyear.361 HUD spending is also rife with waste-ful pork. For all those reasons, the entiredepartment should be terminated and theremaining public housing stock privatized.

Community Development Block Grants.The CDBG program would be perhaps thesingle best cut to make in the budget. Theactivities it supports are of purely state, local,and private concern. Some grants go directlyto local governments, while others trickledown through the states to local govern-ments. Many CDBG projects are of dubiousvalue, and others subsidize businesses. Forexample, CDBG money has been spent onrevitalizing shopping malls in California andbuilding parking lots in New York.362

The CDBG program was instituted to aidlow-income regions, but a substantial share ofthe spending goes to wealthy jurisdictions. Forexample, Greenwich, Connecticut, receives fivetimes more funding per low-income residentthan Camden, New Jersey. Greenwich has aper capita income six times higher thanCamden’s.363 Recent budgets have continuedto shift funding from poorer to wealthiercommunities.364 The program has been rated“ineffective” by the OMB because of its “lackof clarity” and “weak targeting of funds.”365

Federal Housing Administration Subsidies.The Federal Housing Administration providesmortgage insurance to moderate-incomehomebuyers. Those subsidies are unwarrantedbecause there is a large private mortgage insur-ance industry that could fill the void in FHA’sabsence. FHA has been rocked by scandal in the

47

Federal housingpolicy is a historyof big blunders,which have been“profoundlydestructive.”

past and is vulnerable to political decisions tofollow financially unsound lending practices.366

Department of the InteriorThis department carries out a wide range

of activities, from managing millions of acresof land, to overseeing programs for AmericanIndians, to collecting earth science data.Many activities are poorly managed, andmany could be privatized. The OMB has gen-erally given the department poor grades onmanagement performance.367

Bureau of Reclamation. This agency con-structs and operates water projects to providepower, irrigation, and flood control in thewestern United States. The agency provideswater at subsidized prices to cities and farmersand thus encourages overconsumption, and itconstructs huge taxpayer-financed projectsthat make no economic sense. For example, theAnimas–La Plata project in southwesternColorado redirects the flow of the AnimasRiver to irrigate low-value crops, and the proj-ect has angered environmentalists.368 The proj-ect’s official cost estimate jumped from $338million in 1999 to $500 million in 2003.369

Many of the agency’s dams and pipelines andmuch of its other infrastructure can be priva-tized or transferred to state and local owner-ship. Like other commodities, water should bepriced by supply and demand to ensure effi-cient usage.

U.S. Geological Survey. This agency dis-seminates scientific data on the nation’swater, land, and mineral resources. Thosedata are used by a wide variety of privategroups such as mining and oil companies.With new technologies like inexpensive glob-al positioning systems, the private sector canmap and analyze the nation more cheaplyand accurately than ever before. This agencyshould be privatized and research funded bythe users of geological data.

Bureau of Indian Affairs. BIA is responsi-ble for the management of land held forAmerican Indians, which totals about 56 mil-lion acres. The BIA conducts a wide variety ofactivities including educating about 48,000children. With regard to education, the GAO

has concluded that “the academic achieve-ment of many BIA students as measured bytheir performance on standardized tests andother measures is far below the performanceof students in public schools.”370

BIA is perhaps the worst-run agency in thegovernment. In the ongoing “Indian Enron”scandal, the BIA has mismanaged billions ofdollars in Indian trust funds. Former specialtrustee of BIA Thomas Slonaker testified toCongress that the BIA is incapable of reform,unwilling to follow the law, and does not holdmanagers accountable.371 Special trustee PaulHoman testified that the “vast majority ofupper and middle management at the BIA areincompetent.”372 In a recent court case, BIAmanagement was described by U.S. DistrictCourt Judge Royce Lamberth as “fiscal andgovernmental irresponsibility in its purestform.”373 He also said that BIA “has served as agold standard for mismanagement by the fed-eral government for over a century.”374

Forest Service. This agency has subsidizedthe cutting of vast stretches of forests by payingfor the construction of 380,000 miles of log-ging roads and spending more on its timberharvest program than it collects in chargespaid by timber companies.375 For example, anenvironmental group figures that the agency’scosts to aid timber companies in Alaska’sTongass National Forest exceed federal chargespaid by them by about $30 million per year.376

Department of JusticeLike many federal agencies in recent

decades, this department has expanded itspower over traditional state and local activities.Budget savings can be found by ending activi-ties that encroach on state law enforcementand ending the enforcement of unneeded laws.

Community Oriented Policing Services.This anti-crime program funds state grants toput police officers into community patrols.There is no solid evidence that this programhas helped to reduce crime.377 More impor-tant, policing is a classic responsibility of localgovernment and should remain so. Top-downWashington solutions for policing make nosense because police priorities and tactics vary

48

BIA is perhapsthe worst-runagency in the

government. Inthe ongoing

“Indian Enron”scandal, the BIAhas mismanaged

billions of dollarsin Indian trust

funds.

from community to community. Besides, fed-eral grants to local governments make no fis-cal sense because local governments boostedby rising property taxes have been more flushwith cash than the federal government inrecent years.

Antitrust Enforcement. The DOJ and theFederal Trade Commission spend more than$200 million per year on antitrust enforce-ment.378 But antitrust laws, which are sup-posed to ensure competitive markets, are asolution in search of a problem. The govern-ment simply does not know how markets inmany particular cases should best be orga-nized to maximize consumer welfare. Forexample, it is usually not clear whether partic-ular business mergers are good or bad, yetantitrust cops try to make such determina-tions. A recent study by Brookings Institutionscholars found that antitrust laws have amixed record at best and have often prevent-ed mergers that could have increased con-sumer welfare.379

Juvenile Justice Grants. These grants aresupposed to help states improve juvenile jus-tice systems. But the programs funded by thegrants have not led to any measurable impacton juvenile crime. The OMB has rated the pro-gram “ineffective” and asked that its fundingbe eliminated.380

Department of LaborMany programs in this department are

either ineffective, actively damaging to labormarkets, or designed to solve problems thatthe market economy solves by itself. Minimumwage laws raise unemployment. Governmenttraining programs are generally ineffective andduplicate activities that workers and compa-nies undertake for themselves. The Davis-Bacon law sets wages on federal constructionprojects too high, which wastes taxpayermoney and excludes less-skilled workers fromemployment on federal projects.

Employment and Training Programs. Thedepartment’s numerous training programshave generally proven to be ineffective. Thereare no fewer than 44 federal programs run bynine different agencies for employment and

training services.381 Multiple programsdesigned to achieve similar outcomes createoverlap and waste. Federal training programsare unnecessary because workers and compa-nies have strong incentives to spend on train-ing themselves. Indeed, one study found thatU.S. businesses spent about $373 billionannually on employee training, includingpayments for formal training courses, wagesfor training time, and other expenses.382

Federal government attempts to train work-ers have been a failure and should be aban-doned.

Trade Adjustment Assistance. This pro-gram hands out benefits, including exten-sion of unemployment insurance, job searchand relocation allowances, and subsidizededucation and training, to workers who havelost their jobs because of trade liberalization.However, it makes no sense that people wholose their jobs because of foreign competitionshould receive special benefits not received bythose who lose their jobs because of domesticcompetition. Further, the program does notsolve the more important problem of mak-ing American workers and businesses morecompetitive.383 The OMB has labeled thisprogram “ineffective” because it favors asmall group of workers who are already eligi-ble for other benefits.384 Unfortunately, asthe Bush administration has searched forsome election year talking points, the presi-dent has recently been considering a costlyexpansion of the program.385

Senior Community Service Employment.This $440 million grant program enrollsolder Americans in community service activi-ties. The program makes little sense because,if seniors are adding value in the jobs they areperforming, then employers should be ableto pay them market wages. Of course, mil-lions of seniors continue working produc-tively in private markets without help fromthis program, which has been rated “ineffec-tive” by the OMB because of weaknesses inaccountability, design, and delivery.386

Davis-Bacon Act. This law requires thatcompanies pay “prevailing wages” for workon federally funded construction, such as

49

Antitrust laws,which are supposed toensure competi-tive markets, area solution insearch of a problem.

highways and transit projects.387 That meanshigher, union-level wages in many cases, cre-ating an added burden on federal taxpayers.For individuals, the law unfairly excludesless-skilled workers from a fair chance atgaining employment on federal projects.

Department of TransportationThe Department of Transportation

employs 59,000 workers and has a budget of$58 billion. The department’s main functionis to send federal taxpayer dollars to the statesfor highways, transit systems, airports, andother facilities. The department should be rad-ically downsized and its activities either movedback to the states or privatized. Currently, thefederal government acts as an unneeded mid-dleman that misallocates transportationresources in accord with political pressuresand imposes top-down planning on the states.Americans do not need more “highways tonowhere” in the districts of important mem-bers of Congress. Nor do Americans need thelarge cost overruns that come with federaltransportation projects, such as Boston’s BigDig. Instead, Americans need a more efficienttransportation system based on state controland state, local, and private financing.

Air Traffic Control. The Bush administra-tion supports making the Federal AviationAdministration’s ATC system more businessoriented, but the ATC system should be fullyprivatized.388 A privatized system would like-ly improve safety, cut costs, and allow accessto private capital for infrastructure upgrad-ing.389 The sooner major reforms are imple-mented, the better because operational safetyunder the current government system hasactually worsened in recent years.390

The United States lags behind othermajor nations on ATC reform. During thepast 15 years, more than a dozen countrieshave partly or fully privatized ATC. Canadahas created a private nonprofit corporationfor its ATC services, which could be a goodmodel for U.S. reforms. Nav Canada was setup in 1996 and is self-supporting fromcharges paid by aviation users. The Canadiansystem has received rave reviews for investing

in technology and reducing air congestion.391

It is a world leader in new ATC technologies,has one of the best safety records in theworld, and has cut Canadian airspace con-gestion in half.392

In Britain, air traffic control has been movedto the National Air Traffic Services company,NATS. NATS has a public-private corporatestructure with shares owned by airlines, the gov-ernment, and employees. Like Canada’s system,NATS is self-supporting from fees and charges.Germany has created a self-supporting govern-ment corporation for ATC.

The United States should be a leaderrather than a laggard in air traffic control,especially given this country’s history of avia-tion innovation. Privatized ATC can helpreduce congestion, save taxpayer money, andprovide Americans with greater safety byspeeding the adoption of new technologies.

Essential Air Service. EAS was created in1978 as a “temporary” program to ensure thatair service was continued in rural communi-ties during airline deregulation. The programprovides subsidies to air carriers that serve cer-tain rural markets. Today, the air travel marketis more advanced than it was in the 1970s,with airlines providing service to more mar-kets. Regarding EAS, the GAO finds that “pro-gram costs have tripled since 1995, and fewerpassengers use the subsidized local service.Most choose to drive to their destination or tofly to and from another nearby airport withmore service or lower fares.”393

Grants-in-Aid for Airports. This programprovides grants to airports to fund expan-sion, terminal improvements, and noise mit-igation. This program should be ended, andthe nation’s airports, which are generallyowned by local governments, should be pri-vatized. Once again, the United States lagsbehind other countries on reforms. Airportshave been fully or partially privatized inAuckland, Copenhagen, Frankfurt, London,Melbourne, Naples, Rome, Sydney, Vienna,and other cities. Privatized airports can raiserevenues from charges on airlines and airportusers and can access financing in private debtand equity markets for expansions and

50

Privatized ATCcan help reduce

congestion, savetaxpayer money,

and provideAmericans with

greater safety byspeeding the

adoption of newtechnologies.

improvements. Putting the burden of airportcosts on federal taxpayers is both inefficientand unnecessary.

Federal Highway Administration. The feder-al government should move full responsibilityfor highways to state governments and the pri-vate sector. State governments can balance thecosts and benefits of highway building betterthan can appropriators and bureaucrats inWashington. When gasoline tax dollars forhighways go through Congress, powerfulpoliticians steer the money to their own statesrather than the states most in need. For exam-ple, Senate Appropriations Committee chair-man Ted Stevens has ensured that his state ofAlaska receives five times more highwaymoney than Alaska residents pay in gastaxes.394

In addition to politics, formulas used inallocating highway dollars make winners andlosers of different states. The GAO notes thatthe FHA “allocates funds among the statesbased on their historic share of funding. Thisapproach reflects antiquated indicators ofhighway needs, such as postal road miles andthe land area of the state.”395 While somestates are shortchanged, others get overbuilthighways that are little used.

Highway spending is one of the biggestpork-barrel machines in Washington. Spendingis earmarked for favored congressional districtswith “demonstration” or “high-priority” proj-ects.396 The number of earmarked projectssoared from 152 in the 1987 highway bill to1,850 in the TEA-21 highway bill in 1998.397

The Washington Post ran a series of storiesin 1998 and 1999 about the corrupt mannerin which former House TransportationCommittee chairman Bud Shuster (R-PA)dished out highway pork in exchange for mil-lions of dollars in campaign donations.398

Instead of ensuring that taxpayer money wasspent efficiently, Shuster lived a high-spend-ing lifestyle jetting around the country toraise campaign cash and hand out highwayprojects based on political calculations.

When such scandals hit the newspapers,there are usually calls for some limitedreforms. But the best reform is to repeal the

federal gasoline tax and terminate federalhighway spending. That would stem the flowof money to corrupt federal politicians.States could fund highways according tolocal demands, and they would be free toexperiment with new alternatives such as pri-vately financed highways.

Maritime Administration. MARAD fundsa number of subsidy programs designed toprop up the shipping industry. Like othercorporate welfare programs, MARAD’s pro-grams create unsavory ties between the gov-ernment and industry. For example, the TitleXI loan guarantee program for U.S. ship-builders has been involved in scandal inrecent years. American Classic Voyagesreceived a $1.1 billion loan guarantee to buildtwo cruise ships in Sen. Trent Lott’s (R-MS)hometown.399 But before completion, thecompany went bankrupt and left taxpayerswith a $200 million tab. The GAO has foundthat MARAD’s loan programs are not oper-ated in a businesslike fashion and are vulner-able to fraud, abuse, and mismanagement.400

Another subsidy program is MARAD’soperating differential program, which wasestablished to sustain a private U.S. merchantfleet. The problem is that, by shielding U.S.shippers from foreign competition, the subsi-dies allow them to run higher-cost, less-effi-cient operations. Taxpayers should not have topick up the tab for this industry’s inefficiency;maritime subsidies should be ended.

Amtrak. Amtrak was created in 1971 to bea self-supporting business with initial tax-payer subsidies to be phased out over time.That has not occurred. Amtrak has con-sumed more than $25 billion in subsidiesover the years and provided second-rate pas-senger rail service to Americans.401 In recentyears, Amtrak’s debt has been rising and itson-time performance falling.402

As other countries proceeded to privatizetheir rail systems, Congress created theAmtrak Reform Council in 1997 to studymajor reforms. ARC proposed a plan thatwould end Amtrak’s monopoly on passengerservice, spin off its Northeast Corridor infra-structure, and permit states and private enti-

51

State governments can balance the costsand benefits ofhighway buildingbetter than canappropriatorsand bureaucratsin Washington.

ties to bid for Amtrak routes. Congress hasnot yet moved forward on those proposals,and it continues to resist the Bush adminis-tration’s reform efforts.

Privatization is the way ahead for U.S. pas-senger rail, as it has been in other countries.Australia and its states sold off much of thegovernment’s freight and passenger railinfrastructure. Japan National Railways wasbroken up into seven companies in a 1997privatization, with the government holding aminority and declining block of ownershipshares. The German government is preparingto privatize Deutsche Bahn in 2005 or 2006.The head of Deutsche Bahn says he is eagerto get rid of the “civil service mentality” in theGerman rail company.403 Britain, NewZealand, and other countries have also priva-tized their rail systems.

Congress should study those foreign expe-riences and move ahead with Amtrak privati-zation. A key advantage of privatization is theflexibility a corporation has in raising debtand equity for capital investment. By contrast,government ownership often creates a finan-cial bottleneck as a result of short-term politi-cal horizons and federal budget uncertainty.Amtrak should probably be sold as a singleunit including operations, stations, rails, andtrains. Congress should give Amtrak the need-ed flexibility to drop unneeded routes, cutcosts, and maximize profits. Currently, a smallhandful of routes with few riders create largelosses for the system.404 How extensive a ser-vice Amtrak, or future competitors, mightprovide should be up to transportation con-sumers, not Congress.

Other Agencies and ProgramsAgency for International Development.

USAID is the main U.S. foreign aid agency. Inrecent years, there has been a growing realiza-tion that traditional foreign aid does not workvery well. Much aid from Western countrieshas simply propped up corrupt regimes andacted to delay serious economic reforms thatare the basis of sustained growth. Aid that ispoured into countries that do not have secureproperty rights, market economies, or political

stability goes into a black hole and does littleto help the needy.

Another problem with government aid isthe inefficiency of delivery. While funding issupposed to help the poor, much money getsswallowed up by high-paid consultants andtheir expenses including plane flights, hotels,and restaurant costs. The GAO notes that, likemany federal agencies, USAID has “long-stand-ing financial management weaknesses.”405

The heavy USAID bureaucracy and thefailed approach of giving money to socialistand corrupt countries led to the creation ofthe Bush administration’s MillenniumChallenge Account agency.406 That agency issupposed to avoid USAID’s heavy bureaucra-cy, restrictive legislative burdens, and con-flicting objectives.407 Unfortunately, theMCA program will be costing taxpayers anadditional $5 billion annually by 2006.408

Instead, U.S. foreign aid should be left toprivate charitable groups, which have a muchbetter track record of maximizing theirimpact with limited resources. Also, privateinvestment capital is vast compared to aidmoney and is more likely to go into produc-tive activities in developing countries.Countries with sensible economic policiescan attract private investment flows to spurgrowth and reduce poverty without aid.

Appalachian Regional Commission. Thisagency was established in 1965 to encourageeconomic development in rural areas in 13Appalachian states. Congress has recentlyadded the similar Denali Commission andDelta Regional Authority to hand out subsidiesto Alaska and areas along the Mississippi River,respectively.409 Those programs make unjusttransfers of wealth from some Americans toothers in politically favored regions. Evenaccepting the dubious claim that such pro-grams create jobs in the targeted regions, jobsare certainly destroyed in the rest of the countryfrom which the tax money is extracted.

Army Corps of Engineers. The Army Corpsof Engineers builds and operates infrastruc-ture such as dams and harbors. For example,the agency spends about $1 billion annuallyon construction and maintenance of com-

52

A key advantageof privatization is

the flexibility acorporation

has in raisingdebt and equity

for capital investment. By

contrast, government

ownership oftencreates a financial

bottleneck as aresult of federal

budget uncertainty.

mercial harbors.410 Such activities have clearbeneficiaries, such as harbor users, and thuscould be easily privatized. The Army Corpshydroelectric power projects could also beprivatized. Other Army Corps activities are ofdubious value and should be left to state andlocal governments, such as beach replace-ment, which costs $100 million annually.411

The Army Corps has been rocked withscandal in recent years. It was found to be fal-sifying data to justify large and unneededconstruction projects.412 In 2000 it was dis-covered that the agency’s top managersmanipulated economic studies to providesupport for a wasteful $1 billion MississippiRiver project.413 A similar scandal eruptedover a $311 million project to dredge theDelaware River.414 The agency is frequentlycriticized for pouring billions of dollars intothe districts of powerful members ofCongress and supporting environmentallydamaging projects.

The Army Corps has a strong pro-spend-ing bias because it does the economic analy-ses of proposed projects it later constructs ifapproved. To make matters worse, theWashington Post notes that “powerful mem-bers of Congress dictate the selection, pace,and price tag for major projects” of the ArmyCorps.415 Indeed, even after the scandal brokeregarding the Mississippi River project,Mississippi Sen. Christopher Bond “vowed tomake sure the projects are funded no matterwhat the economics studies ultimately con-clude.”416 To end the corruption and ineffi-ciency, the Army Corps should be privatized.

Cargo Preference Program. The CargoPreference Act of 1904 requires that certaingovernment-owned or government-financedcargo be shipped only by vessels registered inthe United States. The law pushes up costsbecause it is more expensive to register a shipin the United States than in most foreigncountries. The CBO estimates that about$443 million would be saved annually ifCongress repealed this wasteful law and thegovernment shipped cargo at market rates.417

Corporation for Public Broadcasting. TheCPB gives grants to public television and

radio stations across the country. Taxpayersupport is just a small portion of support forpublic broadcasting; most funds come fromprivate contributions. That suggests thatCPB could probably survive the end of feder-al subsidies. After all, a number of public TVprograms, such as Sesame Street, generate mil-lions of dollars in merchandise sales and for-eign broadcasting revenue. CPB is a business,and it should be set free from its governmentties to function as one.

Export Subsidies. A variety of federal pro-grams provide subsidies for exporting com-panies. The Export-Import Bank makesloans to foreigners, guarantees the loans offinancial institutions, and provides exportcredit insurance. The amount of trade activi-ty underwritten by Ex-Im Bank is very small—only about 1 percent of exports—so it isunlikely that the agency affects overall salesof U.S. goods.418 Ex-Im activities mainlyduplicate services that private marketsalready perform for exporters. Ex-Im subsi-dies go to some of the biggest Fortune 500companies, such as Boeing, which can surelyfind private financing instead of imposingcosts on taxpayers.419

The federal Overseas Private InvestmentCorporation provides direct loans, guaranteedloans, and insurance to U.S. firms that investin developing countries. During the 1990s, Ex-Im Bank loaned Enron $650 million andOPIC loaned it $750 million for risky andsometimes environmentally damaging proj-ects.420 For example, the Chiquitano Forestpipeline, financed by OPIC, was run throughone of the most valuable and unscathedregions of forest in South America.421 That is aglaring example of corporate welfare waste.

The Trade and Development Agency per-forms a variety of subsidy activities for busi-nesses such as funding export feasibilitystudies. TDA subsidies go to large compa-nies, such as General Electric, and to foreigngovernments and private investors whoengage in commerce with American busi-nesses. The TDA, Ex-Im Bank, OPIC, andother similar agencies should be terminated.

Foreign Military Financing and Sales. The

53

The Army Corpshas been rockedwith scandal inrecent years. Itwas found to befalsifying data tojustify large andunneeded construction projects.

Foreign Military Financing program fundsweapon purchases by foreign governments.This policy seems contrary to weapons non-proliferation policy and poses a risk if weaponbuyers are not U.S. allies in the future. Theprogram supports grants and loans to morethan two dozen countries, with the bulk goingto Egypt and Israel. The Foreign Military Salesprogram facilitates government-to-govern-ment sales of arms with the Pentagon actingas a broker, negotiating deals, and collectingpayments for arms contractors. As a result ofthese two programs, more than half of U.S.arms sales are financed by U.S. taxpayers.422

Private lenders and defense producers shouldhandle foreign military sales on their own. TheU.S. government should get out of the armsexport business.

National Aeronautics and Space Admini-stration. NASA is one of the most misman-aged agencies in the government. The officialreport on the Columbia disaster in 2003found that NASA management had ineffec-tive leadership, flawed analysis, and a safetyculture that was reactive and complacent.423

It noted that the mistakes on Columbia were“not isolated failures, but are indicative ofsystematic flaws” in the agency.424 The 1986Challenger disaster was also traced to failedNASA management.425 The Mars PolarLander failure was caused by one NASA pro-ject team using metric and another NASAteam using English measurements.426

A big problem with NASA, which is com-mon to many federal agencies, is that largeprojects go far over budget and lag far behindschedule. The GAO concludes that theagency has “debilitating weaknesses” in itsmanagement of large projects.427 For exam-ple, the International Space Station’s con-struction costs have skyrocketed from $17billion in 1995 to $30 billion today, and it isfour years behind schedule.428 Scrapping thatproject alone would save taxpayers $70 bil-lion over the next 12 years.429

Congress shares the blame for NASA’swaste, since it funds white-elephant projects,such as the space station, that have no clearpolicy goals. Americans do not need NASA in

order to further advance the space age. Spaceshould be opened up to private entrepreneurseager to move forward with space tourism andother space businesses of the future.430

Small Business Administration. The SBAprovides a variety of loan programs and otherservices to small businesses. Yet most of thenation’s 25 million small businesses arefounded and grown without government sub-sidies.

Government loan programs for smallbusinesses make no economic sense. If asmall business has a sound business planwith solid prospects, it should be able to raisedebt and equity capital in private markets. Ifa small business has shaky finances and poorprospects, it will be denied private capital,which is a good thing because such loanswould be economically wasteful. SBA’s histo-ry of high loan delinquency rates suggeststhat companies with poor prospects are theones lining up for aid. The default rate on7(a) preferred lender loans has averaged 14percent the last three years.431

In addition to the dubious economics ofSBA programs, the agency is poorly man-aged. The GAO notes that in the SBA “inef-fective lines of communication; confusionover the mission of district offices; compli-cated, overlapping organizational relation-ships; and a field structure not consistentlymatched with mission requirements com-bine to impede the effective delivery of ser-vices.”432 The SBA should be terminated.

Tennessee Valley Authority. TVA is thelargest electricity producer in the UnitedStates. It has been mismanaged, has overin-vested in nuclear plants, and has sunk deepinto debt.433 It is also subject to many of thesame inefficiencies as the four PowerMarketing Administrations discussed above.Those businesses, along with federal subsidiesfor cooperative and municipal utilities, are outof step with the new environment of electrici-ty competition.434

Government-owned electric utilities origi-nally had two justifications. First, it wasthought that private companies would not findenough profit in electrifying rural America,

54

A big problemwith NASA,

which is commonto many federalagencies, is that

large projects gofar over budget

and lag farbehind schedule.

thus requiring government to step in. Second, itwas thought that government could providepower to consumers at lower prices than privatecompanies because it could set prices “at cost”without worrying about profits.

The first justification is now irrelevantbecause rural America has been thoroughlyelectrified. Indeed, 60 percent of rural Americais serviced by investor-owned utilities. The sec-ond justification—that government powerwould be cheap—was socialist pie-in-the-skythinking. Government electricity generationhas proven to be costly and inefficient.

The United States lags behind other coun-tries in freeing itself from government powergeneration. Australia, Britain, Canada,Germany, and other countries have priva-tized their electric utilities. The goals of pri-vatization are to improve utility efficiency,allow prices to be set by supply and demand,and reduce government debt with privatiza-tion proceeds. All those goals are applicableto the United States. The sale of all federalpower enterprises could raise $20 billion ormore that could be used to reduce the feder-al debt.435

U.S. Postal Service. There is no good rea-son for Americans to continue to be stuckwith the stagnant $69 billion and 774,000-worker USPS and its legally enforced monop-oly.436 Other countries, including Finland,Germany, the Netherlands, New Zealand,and Sweden, have either opened their postalservices to competition or privatized theirmail companies.437 There is no reason whyAmerica should not be a leader in postalreform rather than a laggard.438

Fast, reliable, and cost-efficient communi-cation is vital to today’s lifestyles and businessworld. The government postal service does notprovide such communications, nor is it everlikely to. In fact, USPS’s performance is deteri-orating. The average delivery time today for afirst-class letter is 1.9 days, up from 1.6 days in1981, despite all the new technology that isavailable to USPS.439 The GAO concludes thatthe USPS “has an outdated and inflexiblebusiness model amid a rapidly changingpostal landscape.”440 It has put USPS on its

high-risk list because of its growing financialand operational difficulties.

Americans have turned to e-mail and pri-vate package carriers for many of their impor-tant communications today, but the USPSstill holds a legal monopoly on first-class let-ters and other items. The monopoly needs tobe ended. At the same time, the USPS shouldbe privatized in order to compete with anexpected rush of new mail companies.

NotesJason LaFond contributed to this report.

1. Congressional Budget Office (CBO), “TheBudget and Economic Outlook: Fiscal Years 2005to 2014,” January 2004, www.cbo.org. Cited here-after as CBO, January 2004.

2. The Army Corps of Engineers, the Bureau ofIndian Affairs, the Department of Energy, andNASA are discussed in the body of this report. FBImismanagement during the past decade led to afailure to avert the 9/11 disaster. See Peter Lance,1000 Years for Revenge: International Terrorism andthe FBI—The Untold Story (New York: HarperCollins–Regan Books, 2003).

3. The National Academy of Sciences released areport in February finding failures “at all levels”in zoo management leading to animal deaths,crumbling facilities, and other problems. SeeKarlyn Barker and James V. Grimaldi, “NationalZoo Director Quits over Lapses,” Washington Post,February 26, 2004, p. A1. This was one in a seriesof reports on the zoo’s failures by the WashingtonPost in recent months.

4. Budget of the United States Government, Fiscal Year2005 (Washington: Government Printing Office,2004), p. 51.

5. Senate Committee on Government Affairs,“Government at the Brink,” vol. 1, June 2001, p. 1,www.senate.gov/~gov_affairs/vol1.pdf.

6. For entitlements, see Chris Edwards and TadDeHaven, “War between the Generations: FederalSpending on the Elderly Set to Explode,” CatoInstitute Policy Analysis no. 488, September 16,2003. For detailed resources on Social Securityreform, see Cato’s project at www.socialsecurity.org. For defense downsizing ideas, see Ted GalenCarpenter, “Clearing the Decks for War,” CatoHandbook for the 108th Congress (Washington: CatoInstitute, 2003), chap. 4.

55

7. George E. Peterson, “The State and LocalSector,” in The Reagan Experiment, ed. John L.Palmer and Isabel V. Sawhill (Washington: UrbanInstitute, 1982), p. 157.

8. Congressional Quarterly Almanac 1995 51 (1996):2-22. See also Stephen Moore and StephenSlivinski, “The Return of the Living Dead: FederalPrograms That Survived the RepublicanRevolution,” Cato Institute Policy Analysis no. 375,July 24, 2000. Table 1 in the study provides a list ofproposed terminations.

9. Alice Rivlin and Isabel Sawhill, eds., RestoringFiscal Sanity: How to Balance the Budget (Washington:Brookings Institution, 2004), p. 7. Note that theHeritage Foundation also produces a budgetreform plan at the beginning of each Congress.See Angela Antonelli and Peter Sperry, eds., ABudget for America (Washington: HeritageFoundation, 2001).

10. Table 3 shows cuts totaling $300 billion basedon budget figures for FY04. Those cuts would beequal to cuts of $340 billion in FY09, assumingthat those programs would have grown at the CBObaseline discretionary growth rate. Cuts are phasedin at $68 billion per year to hit $340 billion by FY09and thereafter grown at CBO’s discretionaryspending growth rate. Also, federal outlays arereduced by the author’s estimated reduction in fed-eral interest costs as the deficit falls.

11. CBO, “An Analysis of the President’sBudgetary Proposals for Fiscal Year 2005,” March2004, p. 3. Cited hereafter as CBO, March 2004.

12. Ibid., pp. 3, 20.

13. General Accounting Office (GAO), “FY2003U.S. Government Financial Statements,” GAO-04-477T, March 3, 2004, www.gao.gov. Secondand subsequent references to GAO publicationsare to GAO publication number.

14. In Figure 2 the data for “Transfer Paymentsand Subsidies” and “Government Purchases” areFY04 figures reported as part of the NationalIncome and Product Accounts. See Bureau ofEconomic Analysis, Survey of Current Business,March 2004, p. 14, www.bea.gov/bea/pubs.htm.See also NIPA Table 3.2 online at www.bea.gov/bea/dn/nipaweb. The data for “Regulations” arefrom Clyde Wayne Crews Jr., “Ten ThousandCommandments: An Annual Snapshot of theFederal Regulatory State,” Cato Institute, 2003.All other data in Figure 2 are from Budget of the U.S.Government, Fiscal Year 2005. Note that data for“The Federal Bureaucracy” do not include the774,000 U.S. Postal Service workers.

15. The Urban Institute had an interesting 1989

book that described the government’s “tools,”which I have called tentacles. See BeyondPrivatization: The Tools of Government Action, ed.Lester M. Salamon (Washington: Urban InstitutePress, 1989). Other “tools” not discussed hereinclude vouchers, franchises, licenses, control ofreal estate, publicity and threats of action, and theFederal Reserve Board. Each tool can have sub-tools. For example, regulation can include pricecontrols, trade restrictions, and other restraints.

16. Lester M. Salamon, “The Changing Tools ofGovernment Action: An Overview,” in BeyondPrivatization, p. 17.

17. Paul C. Light, “Fact Sheet on the New TrueSize of Government,” September 5, 2003, www.brook.edu/gs/cps/light20030905.pdf. See alsoPaul C. Light, The True Size of Government (Wash-ington: Brookings Institution Press, 1999).

18. Budget of the U.S. Government, Fiscal Year 2005,Analytical Perspectives, p. 350.

19. Dana Milbank and Paul Blustein, “WhiteHouse Aided Enron in Dispute,” Washington Post,January 19, 2002, p. A1.

20. Ibid. The two federal agencies providing loanswere the Export-Import Bank and the OverseasPrivate Investment Corporation.

21. Dan Eggen, “GAO Criticizes System forTracking Terrorists,” Washington Post, April 30,2003, p. A21.

22. Ibid.

23. “Post-9/11 Reforms Haven’t Fixed IntelligenceFailings,” editorial, USA Today, April 16, 2004.

24. Dana Priest, “Congressional Oversight ofIntelligence Criticized,” Washington Post, April 27,2004, p. A1.

25. CBO, March 2004, p. 3.

26. With Bush’s tax cuts in place, the deficit fallsto 1.6 percent of GDP by 2014. See ibid.

27. The 2003 Annual Report of the Board of Trustees ofthe Federal Old-Age and Survivors Insurance and theFederal Disability Insurance Trust Funds (Washing-ton: Government Printing Office, March 17,2003), p. 82.

28. CBO, January 2004, p. 50.

29. Edwards and DeHaven, “War between theGenerations,” p. 5.

30. GAO-04-477T, p. 14.

56

31. For a general discussion see Chris Edwards,“Economic Benefits of Personal Income Tax RateReductions,” U.S. Congress, Joint EconomicCommittee, April 2001. For particular estimates,see Edgar Browning, “On the Marginal WelfareCost of Taxation,” American Economic Review 77(March 1987): 11–23; and see Martin Feldstein,“Tax Avoidance and the Deadweight Loss of theIncome Tax,” National Bureau of EconomicResearch, Working Paper no. 5055, March 1995.

32. I have summarized the academic research inEdwards, “Economic Benefits of Personal IncomeTax Rate Reductions.”

33. Martin Feldstein, “How Big ShouldGovernment Be?” National Tax Journal 50, no. 2(June 1997): 197–213.

34. This is the FY04 outlay for the Farm ServiceAgency.

35. In United States v. Lopez, 514 U.S. 549, 549(1995), Chief Justice William Rehnquist stated:“We start with first principles. The Constitutionestablishes a government of enumerated powers.”

36. Roger Pilon, “Congress, the Courts, and theConstitution,” Cato Handbook for the 108th Congress(Washington: Cato Institute, 2003), p. 27.

37. Lopez.

38. Roger Pilon, “Violence Against Women ActExceeds Federal Authority,” Cato DailyCommentary, April 5, 2000.

39. Ibid., p. 26. See also Roger Pilon, The Purposeand Limits of Government, Cato’s Letter no. 13(Washington: Cato Institute, 1999), p. 29.

40. The Export-Import Bank loaned Enron $650million, while the Overseas Private InvestmentCorporation loaned Enron $750 million. See NeilKing Jr., “Questioning the Books: Senator Urges aProbe of Enron and Ex-Im Bank,” Wall StreetJournal, April 3, 2002, p. C1.

41. Aaron Lukas and Ian Vásquez, “Rethinkingthe Export-Import Bank,” Cato Institute TradeBriefing Paper no. 15, March 12, 2002, p. 14.

42. Note that reported net budget outlays ofthese agencies are near zero because they collectfees that are counted as offsetting receipts.

43. The Federal Highway and Federal TransitAdministrations are listed as “n/a” in Table 3because I propose that both the spending andgasoline tax revenue that supports them be termi-nated, which would have a roughly neutral effecton the deficit. Federal spending would be reduced

by a further $32 billion for the FHA and $6 billionfor the FTA on top of the $300 billion listed.

44. In a 2001 book, former Cato director of defensepolicy studies Ivan Eland argued that the defensebudget should be cut by about 40 percent with amajor reorganization of U.S. national security pol-icy. Ivan Eland, Putting “Defense” Back into U.S.Defense Policy (Westport, CN: Praeger, 2001). Notethat I have included savings from another round ofmilitary base closings in this study.

45. Chris Edwards, “Controlling Defense Costs,”Cato Institute Tax & Budget Bulletin no. 8, May2002. Also, see GAO, “High-Risk Series: AnUpdate,” GAO-03-119, January 2003.

46. See Office of the Deputy Under Secretary ofDefense, “Military Housing Privatization,” www.acq.osd.mil/housing/.

47. GAO-03-119.

48. GAO, “Federal Budget: Opportunities forOversight and Improved Use of Taxpayer Funds,”GAO-03-922T, June 18, 2003, p. 7.

49. Senate Committee on Government Affairs,vol. 2, p. 49.

50. GAO-03-922T, p. 9.

51. GAO, “Opportunities for Oversight andImproved Use of Taxpayer Funds: Examples fromSelected GAO Work,” GAO-03-1006, August2003, p. 152.

52. Michelle Higgins, “Getting Poor on Purpose,”Wall Street Journal, February 25, 2003, p. D1. Thestory notes that up to 22 percent of Medicaid’s$47 billion in annual benefits goes illegally towell-heeled seniors.

53. GAO-03-922T, p. 10. See also GAO, “Medicaid:HCFA Reversed Its Position and ApprovedAdditional State Financing Schemes,” GAO-02-147, October 2001, p. 1.

54. Senate Committee on Government Affairs,vol. 1, pp. 4, 31.

55. GAO-03-922T, p. 22.

56. Ibid., p. 13.

57. Ibid, p. 17.


59. “Living Well off the Poor,” editorial, WashingtonPost, April 25, 2004. One-third of United Planning

57

Organization’s budget is funded from the federalCommunity Service Block Grant.

60. Budget of the U.S. Government, Fiscal Year 2005,Appendix, p. 858.

61. Chuck Neubauer and Richard T. Cooper, “AsAlaska Business Ventures Benefited, So DidStevens,” Washington Post, December 19, 2003, p.A35. (Originally appeared in the Los Angeles Times).

62. Ibid.

63. Renae Merle, “Rumsfeld Pledges to FindTruth on Tankers,” Washington Post, February 5,2004, p. A17.

64. R. Jeffrey Smith, “U.S. Deal to Lease TankersCriticized,” Washington Post, April 1, 2004, p. B1.

65. GAO, “Federal Assistance: Grant SystemContinues to be Highly Fragmented,” GAO-03-718T, April 29, 2003, pp. 6, 7. See also GAO,“Multiple Employment and Training Programs,”GAO-03-589, April 2003, p. 2.

66. Senate Committee on Government Affairs,vol. 1, pp. 54–67.


68. Steven Radelet, “The Millennium ChallengeAccount,” Testimony to the Senate ForeignRelations Committee, March 4, 2003, p. 5.

69. Ibid.



72. National Venture Capital Association, “LatestIndustry Statistics,” undated, www.nvca.org.Investment peaked at $106 billion in 2000 buthas fallen sharply the last few years.

73. Edward Hudgins, ed., Space: The Free MarketFrontier (Washington: Cato Institute, 2002), p. xxi.

74. Paul Blustein, “White House Warms Up toWorker Aid,” Washington Post, March 13, 2004, p.A1.

75. Ronald Bailey, “The Monopoly That Blocksthe Way to Mars,” Wall Street Journal, January 20,2004, p. D7. See also Hudgins, ed., Space, pp. xx,xxiii.

76. Chris Edwards, “Entrepreneurial Dynamism

and the Success of U.S. High-Tech,” U.S.Congress, Joint Economic Committee, October1999, p. 25.

77. Ibid., p. 25.

78. Howard Husock, “Let’s End HousingVouchers,” City Journal, Autumn 2000, www.city-journal.org.

79. GAO-04-477T.

80. Ibid., p. 10.

81. GAO, “Major Management Challenges andProgram Risks: Department of Defense,” GAO-01-244, January 2001. See also the update report,GAO, GAO-03-98, January 2003.

82. NASA, Columbia Accident Investigation Board,vol. 1 (Washington: NASA, August 2003), pp. 170,180, 185, www.caib.us.

83. Light, The True Size of Government, p. 162.

84. GAO, “Space Station: Actions Underway toManage Costs but Significant ChallengesRemain,” GAO-02-735, July 17, 2002, p. 1.

85. GAO, “NASA: Compliance with Cost Limits,”GAO-04-648R, April 2, 2004.

86. See Lance.

87. Thomas Slonaker, Testimony before theSenate Committee on Indian Affairs, September24, 2002.

88. Paul Homan, Testimony before the SenateCommittee on Indian Affairs, September 24,2002.

89. Carol Leonnig, “Interior Dept. Is Denounced,”Washington Post, April 7, 2004, p. A7.

90. Eric Pianin and Christopher Lee, “Corps ofEngineers Chief Drafts Plan to ReorganizeAgency,” Washington Post, September 24, 2003, p.A27. See also Michael Grunwald and Mike Allen,“Corps of Engineers’ Civilian Chief Ousted,”Washington Post, March 7, 2002, p. A1.

91. Michael Grunwald, “Army Corps DelaysStudy over Flawed Forecasts,” Washington Post,October 5, 2000, p. A33.

92. Michael Grunwald, “Army Corps SuspendsDel. River Project,” Washington Post, April 24, 2002,p. A27.

93. U.S. House of Representatives, Select Committeeon U.S. National Security and Military/Commercial

58

Concerns with the People’s Republic of China,House Report 105-851, May 25, 1999, p. v.

94. Ibid., p. x.

95. Cited in Senate Committee on GovernmentReform, vol. 2, pp. 30, 31.

96. See Chris Edwards, “Government SchemesCost More Than Promised,” Cato Tax & BudgetBulletin no. 17, September 2003.

97. See the Boston Globe’s “Easy Pass” series ofreports by Raphael Lewis and Sean Murphy, www.boston.com/globe/metro/packages/bechtel.

98. Alan Altshuler and David Luberoff, Megaproj-ects (Washington: Brookings Institution Press,2003), p. 167.

99. Michael Shear, “Springfield InterchangeProject Is Defended,” Washington Post, November26, 2002, p. B1.


101. Edwards, “Government Schemes Cost MoreThan Promised.”

102. GAO, “Cost and Oversight of MajorHighway and Bridge Projects: Issues andOptions,” GAO-03-764T, May 8, 2003, p. 6.

103. Senate Committee on Government Affairs,vol. 1, pp. 37–47.

104. Curt Anderson, “FBI Nears Completion ofComputer Upgrade,” Associated Press, March 26,2004.

105. Cited in Senate Committee on GovernmentAffairs, vol. 2, p. 31.

106. Edwards, “Government Schemes Cost MoreThan Promised.”

107. Amy Goldstein, “Official Says He Was Toldto Withhold Medicare Data,” Washington Post,March 13, 2004, p. A1.

108. A top executive of the United Way of theNational Capital Area, Oral Suer, recently pleadedguilty to skimming $1.5 million by charging per-sonal expenses to the organization and otherscams. See Jerry Markon and Jacqueline Salmon,“Ex-United Way Official Rejects Court Bargain,”Washington Post, March 4, 2004, p. B5.

109. Christopher Lee, “Homeland SecurityRethinks Personnel System,” Washington Post,February 14, 2004, p. A10.

110. Richard Morin, “The Spillover Effect,”Washington Post, August 18, 2002, p. B5.

111. Chris Edwards and Tad DeHaven, “FederalGovernment Should Increase Firing Rate,” CatoTax & Budget Bulletin no. 10, November 2002.

112. Ibid. Involuntary separations include firingand layoffs.

113. Office of Personnel Management, “PoorPerformers in Government: A Quest for a TrueStory,” January 1999, p. 1.

114. Ibid., pp. 3, 11.

115. Brookings Institution survey of federal work-ers summarized in Ben White, “Poor WorkTolerated, Employees Say,” Washington Post,October 30, 2001, p. A19.

116. Merit Systems Protection Board, “FederalSupervisors and Poor Performers,” July 1999, p. 12.

117. Office of Personnel Management, “PoorPerformers in Government,” p. 10.

118. Merit Systems Protection Board, “TheFederal Merit Promotion Program,” December2001, pp. x, 7.

119. Office of Personnel Management, “A FreshStart for Federal Pay: The Case for Modernization,”April 2002, p. 17.

120. Associated Press, “Glance at Survey ofFederal Workers,” April 3, 2003.

121. GAO-04-477T, p. 13.


123. Guy Gugliotta, “New Predator in Yellow-stone Reshapes Park’s Entire Ecosystem,” Washing-ton Post, January 26, 2004.

124. Husock, “Let’s End Housing Vouchers.”

125. Ibid.

126. Jonathan Weisman, “Bush Economic AideSays Government Lacks Vision,” Washington Post,December 13, 2003, p. A1.

127. See “Message from the Deputy Administra-tor” at www.reeusda.gov/ecs/ecs.htm.


129. See overview in Chris Edwards, “Entrepre-

59

neurs Creating the New Economy,” U.S. Congress,Joint Economic Committee, November 2000.

130. In my view, there are many items labeled“market failures” by some economists that are notmarket failures at all. For an overview of publicgoods theory, see Harvey Rosen, Public Finance,6th ed. (New York: McGraw-Hill Irwin, 2002), p.55. Economists define public goods as those thathave nonrivalrous and nonexcludable consump-tion. For example, one person’s benefit fromnational defense spending is not reduced even asothers benefit. Also, once national defense is putin place, residents cannot be excluded from theprotection it provides.

131. Mark McClellan and Jonathan Skinner, “TheIncidence of Medicare,” National Bureau ofEconomic Research Working Paper 6013, April1997, p. 47. That conclusion is tempered howeverbecause the insurance value of Medicare is proba-bly higher than just the dollar transfers suggest.

132. Jennifer Cheeseman Day and Eric C.Newburger, “The Big Payoff: Educational Attain-ment and Synthetic Estimates of Work-LifeEarnings,” Special Studies, U.S. Bureau of theCensus, July 2002. See also Rosen, p. 102.

133. Chris Edwards and Tad DeHaven, “FarmSubsidies at Record Levels As Congress ConsidersNew Farm Bill,” Cato Institute Briefing Paper no.70, October 18, 2001.

134. Chris Edwards and Tad DeHaven,“Corporate Welfare Update,” Cato Tax & BudgetBulletin no. 7, May 2002. This differs from theestimate in Figure 2, which was based on Bureauof Economic Analysis data.

135. North American Development Bank,Community Adjustment and Investment Pro-gram,Newsletter 3, no. 1, (June 2003), www.dcci. com/caip/.

136. Risk Management Agency, “About the RiskManagement Agency,” June 2003, www.rma.usda.gov/aboutrma/.

137. Michael Schroeder, “Sugar Growers Hold UpPush for Free Trade,” Wall Street Journal, February3, 2004; and “Sweet Sabotage,” editorial, WallStreet Journal, February 3, 2004.

138. See Stephen Moore, ed., Restoring the Dream:The Bold New Plan by House Republicans (New York:Times Books, 1995), pp. 124–26.

139. See Moore and Slivinski.

140. Quoted in Edward Alden and Nancy Dunne,“Business Uneasy with New Administration’sRevenue Plans,” Financial Times, March 6, 2001, p. 4.

141. Quoted in Richard Wolffe, “Bush Set forBattle over Spending and Tax Cuts,” FinancialTimes, March 1, 2001, p. 1.

142. Cited in Jeffrey Ball, “Car Makers Split overTiming of Hydrogen-Powered Vehicles,” WallStreet Journal, February 26, 2004, p. B1.

143. John Porretto, “Lott: Cruise Ship Loss MayTop $200M,” Associated Press, January 12, 2002.

144. Chris Edwards, “Save the Farms—End theSubsidies,” Washington Post, March 3, 2002.

145. Federated Farmers of New Zealand, “Life afterSubsidies,” www.fedfarm.org.nz/homepage. html.

146. Crews.

147. Ibid., p. 2.

148. The net outlays reported for these agencies inthe federal budget are near zero because the feesthey collect are counted as offsetting receipts.

149. Robert W. Crandall and Clifford Winston,“Does Antitrust Policy Improve ConsumerWelfare? Assessing the Evidence,” Journal ofEconomic Perspectives 17, no. 4 (Fall 2003): 4.

150. Discussed in Edwards, “EntrepreneurialDynamism and the Success of U.S. High-Tech,” p. 13.

151. Gary Anthes, “What Microsoft Could Learnfrom U.S. vs. IBM,” Computerworld, March 2, 1998.

152. This is a guesstimate from Crandall andWinston.

153. Crews, p. 9.

154. Henry Miller, “Dying for FDA Reform,”Washington Times, March 10, 2004.

155. Dr. David Gratzer, “Wanted: Leadership atthe FDA,” March 2, 2004, www.nationalreview.com.

156. Doug Bandow summarizes the research in“Demonizing Drugmakers: The Political Assaulton the Pharmaceutical Industry,” Cato InstitutePolicy Analysis no. 475, May 8, 2003, pp. 32–35.

157. Robert Higgs, “Wrecking Ball: FDARegulation of Medical Devices,” Cato InstitutePolicy Analysis no. 235, August 7, 1995. See alsoCharles Homsy, “How FDA Regulation andInjury Litigation Cripple the Medical DeviceIndustry,” Cato Institute Policy Analysis no. 412,August 28, 2001.

158. Patrick J. Michaels, “A DEA Crackdown

60

That’s Going to Hurt Those in Pain,” WashingtonPost, February 29, 2004, p. B2.

159. “Federal Assault on Painkiller Abuse MakesPatients Suffer,” editorial, USA Today, March 11,2004.


161. In its FY04 budget, the administration pro-posed turning Section 8 into a state block grant.In its FY05 budget, the administration proposedbypassing the states and giving lump-sum pay-ments directly to local governments. See AmyGoldstein, “Bush Aims to Localize Rent Aid,”Washington Post, April 13, 2004, p. A1.

162. Howard Husock, “We Don’t NeedSubsidized Housing,” City Journal, Winter 1997,www.city-journal.org. See also Howard Husock,“The Inherent Flaws of HUD,” Cato InstitutePolicy Analysis no. 292, December 22, 1997.

163. Howard Husock, “How Public HousingHarms Cities,” City Journal, Winter 2003,www.city-journal.org.

164. The CBO finds that the Forest Servicespends more on the timber program than itcharges companies harvesting timber, which maylead to excessive depletion of timber and destruc-tion of forests that have recreational value. SeeCBO, “Budget Options,” March 2003, p. 72.

165. Ibid., p. 64. See also GAO-03-1006, p. 61.

166. James V. Grimaldi, “Enron Pipeline LeavesScar on South America,” Washington Post, May 6,2002, p. A1.

167. Ibid.

168. Jim Carlton, “Is Water Too Cheap?” WallStreet Journal, March 17, 2004, p. B1. See alsoGreen Scissors Campaign, “Green Scissors 2003:Cutting Wasteful and Environmentally HarmfulSpending,” May 8, 2003, www.greenscissors.com,pp. 14, 25.

169. U.S. Department of the Interior, Bureau ofReclamation, “Animas–La Plata Project Construc-tion Cost Estimates,” November 26, 2003.

170. The Green Scissors Campaign annual reportis a good place to find pro-green budget reforms.

171. Budget of the U.S. Government, Fiscal Year 2005,Analytical Perspectives, p. 113. For general back-ground on federal grants to the states, see GAO-03-718T.

172. Ibid.

173. Analysis of the Catalog of Federal DomesticAssistance (www.cfda.gov) by the Office ofManagement and Budget, Budget Analysis andSystems Division, February 18, 2004. In addition,the OMB analysis found 347 other grant pro-grams that were aimed at individuals, nonprofits,or businesses and not state and local govern-ments. For other information on grants, seewww.grants.org.

174. Federal Grants and Contracts Weekly (CapitolPublications, Arlington, VA), November 17, 2003,p. 3.

175. GAO-03-718T. The GAO notes that theyhave been pointing out the chronic problems offederal grants since at least 1975. See p. 6.

176. Ibid., p. 9.

177. Budget of the U.S. Government, Fiscal Year 1983,“Budget Message of the President,” p. M22.

178. Economists favoring centralization of spend-ing and taxing power argue that provision of pub-lic services will be “too low” if left to the statesbecause of interstate tax competition. This view ischallenged in the international context in ChrisEdwards and Veronique de Rugy, “InternationalTax Competition: A 21st-Century Restraint onGovernment,” Cato Institute Policy Analysis no.431, April 12, 2002.

179. Salamon, “The Changing Tools of GovernmentAction,” p. 16.

180. Donald Haider, “Grants as a Tool of PublicPolicy,” in Beyond Privatization, p. 114.

181. CBO, “Budget Options,” March 2003, p. 108.

182. Budget of the U.S. Government, Fiscal Year 2003(Washington: Government Printing Office,February 2002), p. 175.

183. Nora Gordon, “Do Federal Grants BoostSchool Spending? Evidence from Title I,” WorkingPaper, Department of Economics, University ofCalifornia, San Diego, September 2002.

184. Peterson, pp. 165, 174.

185. GAO-02-147, p. 1.

186. GAO-03-1006, p. 146.

187. Haider, p. 110.

188. Budget of the U.S. Government, Fiscal Year 2005,Analytical Perspectives, pp. 114, 119.

189. Eric Rich, “Crime Agency’s Ex-Chief Indicated

61

on Md. Grant Use,” Washington Post, March 18,2004, p. B1.

190. Federal Highway Administration, “HighwayStatistics 2002,” November 2003, Table FE-221,www.fhwa.dot.gov/policy/ohim/hs02/fe221.htm.


192. White House, “Barriers to Community-BasedOrganizations and Other Small and NewcomerOrganizations,” news release, August 16, 2001,www.whitehouse.gov/news/releases/2001/08/.

193. This figure is the budget authority for thestate grants part of the program in FY04. SeeBudget of the U.S. Government, Fiscal Year 2005,Appendix, p. 349.

194. Budget of the U.S. Government, Fiscal Year 2005,Analytical Perspectives, p. 91. See also CBO, “BudgetOptions,” March 2003, p. 117.

195. Alice Lipowicz, “Tired of Waiting, CitiesLaunch Push for Direct Homeland SecurityFunding,” Congressional Quarterly, March 4, 2004.

196. House Select Committee on HomelandSecurity, “An Analysis of First Responder GrantFunding,” April 27, 2004.

197. Ibid., p. 6.

198. Ibid.

199. National Journal, “Firefighters Lobby to KeepFirst Responder Grants,” Congress Daily, March 16,2004.


201. Budget of the U.S. Government, Fiscal Year 2005,p. 181.

202. John L. Palmer and Isabel V. Sawhill,“Perspectives on the Reagan Experiment,” in TheReagan Experiment, p. 12.

203. Donald M. Rothberg, “Reagan Urges NewWeapon to Overcome U.S.-Soviet Military Gap,”Associated Press, May 5, 1980.

204. Haider, p. 105. See also Palmer and Sawhill,p. 25. Before Reagan, Nixon and Ford had alsopursued New Federalism reforms.

205. GAO, “Federal-State-Local Relations: Trendsof the Past Decade and Emerging Issues,”GAO/HRD-90-34, March 1990, p. 15.

206. Palmer and Sawhill, pp. 12, 16.


208. Congressional Quarterly Almanac 1995, p. 2-22.

209. Dan Morgan and Helen Dewar, “GOPDishes Out Pork in Growing Portions,” Washing-ton Post, November 24, 2003, p. A19.

210. The National Academy of Sciences reportedin February that it found failures “at all levels” inzoo management leading to animal deaths, crum-bling facilities, and other problems. See Barkerand Grimaldi.

211. Marc Fisher, “Privatizing Zoo Would RescueIt, For a Modest Fee,” Washington Post, December 9,2003, p. B1. Fisher notes that about 40 percent ofU.S. zoos, including the top-notch San Diego andBronx zoos, are run by private, nonprofit groupsand that private ownership seems to have a superi-or record. Note that private zoos, nonetheless,often receive some level of government subsidy.


213. Ibid., p. 45.

214. Jerry Markon, “2 Pentagon Officials Get 24Years in Fraud,” Washington Post, December 13,2003, p. B3.

215. Rick Geddes, “The Structure and Effect ofInternational Postal Reform,” Postal Reform Papers,American Enterprise Institute, April 29, 2003.

216. Employee count for 2004 from Budget of theU.S. Government, Fiscal Year 2005, AnalyticalPerspectives, p. 352.

217. Private ATC would probably be safer becauseprivate firms can access capital markets to raisefunds for investment in the newest technologies.Also, current government work rules can reducethe safety consciousness of controllers. See SenateGovernment Affairs Committee, vol. 1, p. 12.

218. For a summary of the issue, see ChristopherLee, “Postal Services Finances Bleak,” WashingtonPost, March 23, 2004, p. A17.

219. For a detailed discussion of postal servicereform, see Edward L. Hudgins, ed., Mail @ theMillennium: Will the Postal Service Go Private?(Washington: Cato Institute, 2000).

220. Geddes.

221. Ibid.

222. GAO-03-1006, p. 58. The GAO notes that the

62

PMAs have inefficient levels of capital investmentbecause of the unreliability of federal funding.

223. Joseph Vranich and Edward Hudgins, “HelpPassenger Rail by Privatizing Amtrak,” CatoInstitute Policy Analysis no. 419, November 1,2001.

224. Daniel B. Klein, “Private Highways inAmerica, 1792–1916,” The Freeman: Ideas onLiberty, February 1994, www.fee.org. Certainly,state governments intervened extensively in infra-structure projects such as canals and railroads.Such government intervention often ended incorruption scandals. See James Rolph Edwards,“How Nineteenth-Century Americans Respondedto Government Corruption,” The Freeman: Ideas onLiberty, April 2004, p. 24.

225. Eduardo Engel, Ron Fischer, and AlexanderGaletovic, “A New Approach to Private Roads,”Regulation, Fall 2002, p. 18.

226. Joel Bagnole, “How Canada Gets Jets acrossthe Sea,” Wall Street Journal, May 9, 2002, p. A12.See also “The Unfriendly Skies,” editorial, WallStreet Journal, July 17, 2001, p. A18; and Robert W.Poole and Viggo Butler, “How to CommercializeAir Traffic Control,” Reason Public PolicyInstitute, Policy Study no. 278, February 2001.

227. GAO, “Air Traffic Control: Evolution andStatus of FAA’s Automation Program,” GAO/T-RCED/AIMD-98-85, March 5, 1998.

228. Michael Shear, “Toll Plan Proposed to WidenBeltway,” Washington Post, July 13, 2002, p. B1. Seealso Reason Public Policy Institute, “Privatization2002: 16th Annual Report on Privatization,”April 2002, www.rppi.org/apr2002.html.

229. Lisa Rein, “Toll Lane Proposals Pick UpMomentum,” Washington Post, March 17, 2004, p.B1.

230. CBO, “Innovative Financing of Highways:An Analysis of Proposals,” January 1998. See alsoFred Bayles, “Toll Lanes: A Freer Ride, for a Price,”USA Today, April 8, 2004, p. 3A.

231. See Jerry Ellig, “The $7.7 Billion Mistake:Federal Barriers to State and Local Privatization,”U.S. Congress, Joint Economic Committee,February 1996.

232. Author’s count of loan programs in theBudget of the U.S. Government, Fiscal Year 2005,Federal Credit Supplement.

233. Budget of the U.S. Government, Fiscal Year 2005,Analytical Perspectives, pp. 75, 98. Note that theoutlay amounts for loans in the federal budget are

the net subsidy amounts, which are the presentvalues of the net taxpayer costs. This treatment,established by the Federal Credit Reform Act of1990, allows comparison of the costs of loans andother federal programs.

234. Salamon, p. 17.

235. Michael Lund, “Between Welfare and theMarket: Loan Guarantees as a Policy Tool,” inBeyond Privatization, p. 131.

236. Ibid., p. 130.

237. Susan Straight, “Women Expand Niche inOwning Construction Firms,” Washington Post,February 21, 2004, p. F1.

238. Budget of the U.S. Government, Fiscal Year 2005,Analytical Perspectives, p. 89

239. GAO, “Farm Loan Programs,” GAO-01-732T,May 16, 2001, p. 1.

240. Ibid., p. 2.

241. U.S. Bureau of the Census, Statistical Abstractof the United States, 2002 (Washington: U.S. Bureauof the Census, 2002), Table 1152.

242. Budget of the U.S. Government, Fiscal Year 2005,Analytical Perspectives, p. 75

243. Ibid., p. 87


245. GAO-03-1006, p. 102.

246. Lund, p. 147.


248. GAO-03-119.

249. Senate Committee on Government Affairs,vol. 1, p. 24. See also GAO-03-922T, p. 16.

250. GAO-03-922T, p. 26.

251. Albert Crenshaw, “U.S. Pension Agency Goes$11 Billion in Red,” Washington Post, January 31,2003, p. E1.

252. Chris Edwards, “Replacing the Scandal-Plagued Corporate Income Tax with a Cash-FlowTax,” Cato Institute Policy Analysis no. 484, August14, 2003.

253. David Hilzenrath, “Lenders’ Subsidy Grows,CBO Says,” Washington Post, April 13, 2004, p. E1.

63


255. Ibid., p. 188.

256. GAO-03-119, p. 23.

257. GAO-03-922T, p. 30.

258. Joshua Partlow, “Radio Telescopes’ Time inthe Sun Has Passed,” Washington Post, April 12,2004, p. B3.

259. GAO, “High-Risk Series: Federal RealProperty,” GAO-03-122, January 1, 2003, pp. 8, 9.

260. Ibid., p. 11.

261. Rothberg.

262. Palmer and Sawhill, p. 25. However, PresidentCarter did have a number of successes on regula-tory reform, including airline and trucking dereg-ulation.

263. Quoted in Palmer and Sawhill, p. 26.

264. Quoted in George C. Eads and Michael Fix,“Regulatory Policy,” in The Reagan Experiment, p. 131.

265. Letter from Thomas Jefferson to EdwardCarrington, May 27, 1788, in The Writings of ThomasJefferson, ed. Andrew A. Lipscomb and Albert ElleryBergh (Washington: Thomas Jefferson MemorialAssociation of the United States, 1903–04), vol. 7,p. 37.

266. Peterson, p. 167.

267. For entitlements, see Edwards and DeHaven,“War between the Generations.” For defense down-sizing ideas, see Carpenter.


269. Schroeder; and “Sweet Sabotage.”

270. “The Unkept Promise,” editorial, New YorkTimes, December 30, 2003, p. A20.

271. Edwards and DeHaven, “Farm Subsidies atRecord Levels As Congress Considers New FarmBill.”

272. Ibid., p. 7.

273. Chris Edwards and Tad DeHaven, “FarmReform Reversal,” Cato Tax & Budget Bulletin no.2, March 2002.

274. GAO-01-732T, p. 1.


276. GAO-03-1006, p. 82.

277. USDA, “USDA Announces $110 million toPromote U.S. Food and Agricultural ProductsOverseas,” news release, June 6, 2003, www.usda.gov/news/releases.

278. “What Associations Paid Their Chiefs,”National Journal, February 21, 2004, p. 533.


280. See www.rurdev.usda.gov/rbs/coops/cssheep.htm.

281. Antonelli and Sperry, p. 65.

282. For example, see GAO, “Rural HousingService: Opportunities to Improve Management,”GAO-03-911T, June 19, 2003, p. 7.

283. Ibid., p. 2.

284. GAO, “Economic Development: ObservationsRegarding the Economic Development Adminis-tration’s May 1998 Final Report on Its PublicWorks Program,” RCED-99-11R, March 23, 1999,p. 2.

285. GAO, “Major Management Challenges andProgram Risks: Department of Commerce,”GAO-01-243, January 2001, p. 8.

286. See discussion in CBO, “Budget Options,”March 2003, p. 91.

287. GAO, “Measuring Performance: The AdvancedTechnology Program and Private-Sector Funding,”GAO/RECD-96-47, January 1996, p. 3.

288. National Venture Capital Association, “LatestIndustry Statistics,” undated, www.nvca. org.

289. Quoted in Scott J. Wallsten, “The R&DBoondoggle,” Regulation 23, no. 4 (Winter 2000–2001): 13.

290. Ibid., pp. 14–15.

291. For a discussion, see Edwards, “EntrepreneursCreating the New Economy.”

292. Ibid.

293. Ellen McCarthy, “Technology CenterModifies Its Focus to Secure Funding,” WashingtonPost, March 18, 2004, p. E1. The CIT is still fightingto revive its taxpayer funding.

294. Rothberg.

64

295. GAO-03-119.

296. U.S. Department of Education, Digest ofEducation Statistics 2002, Table 166, http://nces.ed.gov/programs/digest/.

297. For an analysis of spending and perfor-mance, see Andrew LeFevre and Rea Hederman,“Report Card on American Education: A State-by-State Analysis 1976–2001,” American LegislativeExchange Council, October 2002, www.alec.org/meSWFiles/pdf/Education_Report_Card.pdf.

298. U.S. Department of Education, Digest of EducationStatistics 2002, Table 134, http://nces.ed.gov/programs/digest. These data are from the recentered scale.

299. U.S. Department of Education, NationalCenter for Education Statistics. See the NationalAssessment of Educational Progress results athttp://nces.ed.gov/nationsreportcard/.

300. For an overview of federal K–12 spending, seeNeal McCluskey, “A Lesson in Waste: EvaluatingFederal K-12 Education Spending,” CatoInstitute Policy Analysis, forthcoming 2004.

301. GAO-03-119.

302. GAO-03-922T, p. 17.

303. Senate Committee on Government Affairs,vol. 1, p. 24. See also GAO-03-922T, p. 16.

304. Day and Newburger. See also Rosen, p. 102.


306. Budget of the U.S. Government, Fiscal Year 2005,“Program Assessment Rating Tool, ProgramSummaries,” p. 91.


308. Ibid., p. 131.


310. Ibid., p. 74.

311. Ibid., pp. 126, 130.

312. GAO, “National Ignition Facility: Manage-ment and Oversight Failures Caused Major CostOverruns and Schedule Delays,” RCED-00-141,August 8, 2000, p. 5.

313. U.S. House of Representatives, p. v.

314. Ibid., p. x.

315. Cited in Senate Committee on GovernmentReform, vol. 2, pp. 30, 31.

316. Cited in Ball, p. B1.


318. Budget of the U.S. Government Fiscal Year 2005,Appendix, p. 397.

319. Edwards and DeHaven, “Corporate WelfareUpdate.”

320. Ibid.

321. See Green Scissors Campaign, www.green-scissors.org/energy/cleancoal.htm.

322. GAO, “Fossil Fuel R&D: Lessons Learned inthe Clean Coal Technology Program,” GAO-01-854T, June 12, 2001, p. 2.

323. Ibid., pp. 2–4.

324. CBO, “Budget Options,” March 2003, p. 64.See also GAO-03-922T, p. 61.


326. Budget of the U.S. Government, Fiscal Year 1996(Washington: Government Printing Office,1995), p. 196.


328. GAO-03-1006, p. 58. The GAO notes that thePMAs have inefficient capital investment becauseof the swings in federal budgeting.

329. Jagadeesh Gokhale and Kent Smetters, Fiscaland Generational Imbalances (Washington: AmericanEnterprise Institute, 2003), p. 3.

330. U.S. Congress, House Budget Committee,“Examples of Government Waste,” August 2003,www.house.gov/budget/wastefind.htm.

331. GAO-03-922T, p. 7.

332. Robert Moffit, “Improving and PreservingMedicare for Tomorrow’s Seniors,” in Priorities forthe President (Washington: Heritage Foundation,January 2001), p. 2.

333. Edwards and DeHaven, “War between theGenerations.”

334. Julie Lee, Mark McClellan, and JonathanSkinner, “The Distributional Effects ofMedicare,” National Bureau of EconomicResearch, Working Paper no. 6910, January 1999,p. 5.

65


336. GAO-03-1006, pp. 157–58.


338. CBO, January 2004, p. 50. Measured fromFY01 to FY04.

339. GAO, “Medicaid: State Efforts to ControlImproper Payments Vary,” GAO-01-662, June 7,2001, p. 4. See also GAO-03-119, p. 25.

340. GAO-03-1006, p. 152.


342. GAO-02-147, p. 1. See also GAO-03-1006, p. 146.

343. Richard Teske, “Abolishing the MedicaidGhetto: Putting Patients First,” American LegislativeExchange Council, April 2002, p. 4. See also CBO,“Budget Options,” March 2003, pp. 132, 133.

344. GAO-03-1006, p. 146.

345. Teske, p. 10.

346. Congressional Quarterly Almanac 1995, p. 7-16.

347. Ibid., p. 2-31.


349. See Teske.

350. Budget of the U.S. Government, Fiscal Year 2005,Historical Tables, p. 180.

351. American Association for the Advancement ofScience, “Research Holds, Development Gains in2005 Budget,” March 16, 2004, www.aaas.org/spp/rd/prel05p.htm.


353. Robert W. Poole Jr., “Revisiting FederalizedPassenger Screening,” Reason Public PolicyInstitute Policy Study no. 298, August 2002.

354. Tom Ramstack, “Airport Screeners PerformPoorly,” Washington Times, April 23, 2004, p. A1.

355. Ibid. The few private screening companieswork for the TSA, not for the airports, as they didprior to 9/11.


357. Husock, “We Don’t Need Subsidized Housing.”


359. Guy Gugliotta, “Kemp Helped AgencyRecover Self-Respect,” Washington Post, December29, 1992, p. A13.

360. GAO-03-119, p. 11.

361. Ibid.

362. Moore and Slivinski, p. 14.

363. GAO-03-1006, p. 232




367. Budget of the U.S. Government, Fiscal Year 2005,“Program Assessment Rating Tool, ProgramSummaries,” pp. 218–47.

368. For a discussion of this project, see the GreenScissors Campaign at www.greenscissors.org.

369. U.S. Department of the Interior.

370. GAO, “BIA and DOD Schools: StudentAchievement and Other Characteristics OftenDiffer from Public Schools,” GAO-01-934,September 28, 2001, p. 2.

371. Slonaker.

372. Homan.

373. Cobell v. Babbitt, 91 F. Supp. 2d 1 (1999).

374. Cobell v. Norton, 226 F. Supp. 2d 1 (2002).

375. The Congressional Budget Office finds thatthe Forest Service spends more on the timber pro-gram than it charges companies harvesting tim-ber, thus possibly leading to excessive harvestingand destruction of forests that have recreationalvalue. See CBO, “Budget Options,” March 2003,p. 72.

376. Southeast Alaska Conservation Council,How Tongass Rainforest Logging Costs TaxpayersMillions (Juneau: Southeast Alaska ConservationCouncil, 2003), p. 3.


378. Net outlays for these agencies reported in thebudget are near zero because the fees they collectare counted as offsetting receipts.

66

379. Crandall and Winston.


381. GAO-03-589, p. 2.

382. Anita Hattiangadi, “Upgrading WorkplaceSkills,” Employment Policy Foundation, IssueBackgrounder, April 10, 2000.

383. GAO, “Trade Adjustment Assistance:Improvements Necessary, but Programs CannotSolve Communities’ Long-Term Problems,” GAO-01-988T, July 20, 2001, p. 3.


385. Paul Bluestein, “White House Warms Up toWorker Aid,” Washington Post, March 13, 2004, p. A1.

386. Budget of the U.S. Government, Fiscal Year 2005,“Program Assessment Rating Tool, ProgramSummaries,” p. 267. See also GAO, “SeniorCommunity Service Employment: Program Re-authorization Issues That Affect Serving Dis-advantaged Seniors,” GAO/T-HEHS-99-126, May19, 1999.

387. For a discussion, see CBO, “Budget Options,”March 2003, p. 129.

388. Robert W. Poole Jr. and Viggo Butler, “How toCommercialize Air Traffic Control,” Reason PublicPolicy Institute Policy Study no. 278, February2001.

389. Ibid.


391. Bagnole. See also “The Unfriendly Skies.”

392. The Nav Canada website has some back-ground on the system at www.navcanada.ca.

393. GAO, “Commercial Aviation: Issues RegardingFederal Assistance for Enhancing Air Service toSmall Communities,” GAO-03-540T, March 11,2003, Executive Summary.

394. Federal Highway Administration, “HighwayStatistics 2002,” November 2003, Table FE-221,www.fhwa.dot.gov/policy/ohim/hs02/fe221.htm.

395. GAO-03-1006, p. 232.

396. See discussion in CBO, “Budget Options,”

March 2003, p. 102.

397. Taxpayers for Common Sense and Friends ofthe Earth, “Road to Ruin,” April 1999, p. 4, www.taxpayer.net/TCS/RoadRuin/.

398. Eric Pianin and Charles Babcock, “EasyStreet: The Shuster Interchange,” Washington PostMagazine, April 5, 1998.

399. John Porretto, “Lott: Cruise Ship Loss MayTop $200M,” Associated Press, January 12, 2002.

400. GAO, “Maritime Administration: WeaknessesIdentified in Management of the Title XI LoanGuarantee Program,” GAO-03-728T, May 15,2003, Executive Summary.

401. Joseph Vranich and Edward L. Hudgins, “HelpPassenger Rail by Privatizing Amtrak,” CatoInstitute Policy Analysis no. 419, November 1, 2001.


403. Anthony O’Connor, “Deutsche Bahn Moves to-wards Privatisation,” August 12, 2003, www.janes. com.


405. GAO, “Major Management Challenges andProgram Risks: U.S. Agency for InternationalDevelopment,” GAO-03-99, January 2003, ExecutiveSummary. See also GAO, “Financial Management:Sustained Effort Needed to Resolve Long-StandingProblems at U.S. Agency for InternationalDevelopment,” GAO-03-1170T, September 24,2003, Executive Summary.

406. Steven Radelet, “The Millennium ChallengeAccount,” Testimony to the Senate ForeignRelations Committee, March 4, 2003.

407. Ibid., p. 5.


409. See discussion in CBO, “Budget Options,”March 2003, p. 107.

410. Ibid., p. 79.

411. Ibid., p. 81.

412. Pianin and Lee. See also Grunwald and Allen.

413. Grunwald, “Army Corps Delays Study overFlawed Forecasts.”

414. Grunwald, “Army Corps Suspends Del. RiverProject.”

67

415. Pianin and Lee. See also Grunwald and Allen.

416. Grunwald, “Army Corps Delays Study.”

417. CBO, “Budget Options,” March 2003, p. 191.This is the annual average of CBO’s 10-year esti-mate.

418. Lukas and Vásquez, p. 5.

419. Ibid., p. 9.

420. Neil King Jr., “Questioning the Books:Senator Urges a Probe of Enron and Ex-Im Bank,”Wall Street Journal, April 3, 2002.

421. Ibid.

422. William D. Hartung, “Corporate Welfare forWeapons Makers: The Hidden Costs of Spendingon Defense and Foreign Aid,” Cato InstitutePolicy Analysis no. 350, August 12, 1999, p. 5.

423. NASA.

424. Ibid., pp. 170, 180, 185.

425. Light, The True Size of Government, p. 162.


427. GAO, “Major Management Challenges andProgram Risks: NASA,” GAO-03-114, January 2003,p. 16.

428. GAO-02-735, p. 1.

429. CBO, “Budget Options,” February 2001, p. 198.

430. For a detailed discussion, see Hudgins, ed., Space.

431. GAO-03-1006, p. 102.

432. GAO, “Small Business Administration:Current Structure Presents Challenges for ServiceDelivery,” GAO-02-17, October 26, 2001, p. 2. Seealso GAO-03-1006, p. 100.


434. For a discussion, see GAO, “Federal Power:The Role of the Power Marketing Administrationsin a Restructured Electricity Industry,” AIMD-99-229, June 24, 1999.

435. “Privatization,” in Cato Handbook for the 108thCongress, chap. 32, p. 332.

436. Revenues from USPS, “Postal Facts,” www.usps.com/communications/organization/postalfacts.htm. Employment from Budget of the U.S.Government, Fiscal Year 2005, Analytical Perspectives,p. 352.

437. Geddes.

438. For a detailed discussion of postal reform,see Hudgins, ed., Mail @ the Millennium.

439. Ruth Y. Goldway, Postal Rate Commission,Testimony to the President’s Commission on theU.S. Postal Service, February 3, 2003, www.prc.gov/tsp/113/comments.doc.

440. GAO, “U.S. Postal Service: Bold ActionNeeded to Continue Progress on PostalTransformation,” GAO-04-108T, November 5,2003, Executive Summary.

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Published by the Cato Institute, Policy Analysis is a regular series evaluating government policies and offer-ing proposals for reform. Nothing in Policy Analysis should be construed as necessarily reflecting the viewsof the Cato Institute or as an attempt to aid or hinder the passage of any bill before congress. Contact theCato Institute for reprint permission. Additional copies of Policy Analysis are $6.00 each ($3.00 each for fiveor more). To order, or for a complete listing of available studies, write the Cato Institute, 1000 MassachusettsAve., N.W., Washington, D.C. 20001, call toll free 1-800-767-1241 (noon - 9 p.m. eastern time), fax (202) 842-3490, or visit our website at www.cato.org.

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