2009-09-17

Government Waste vs. Job Creation

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(Gravina Island Bridge aka the bridge to nowhere)

I do not understand why politicians focus on job creation. Ok that’s not entirely true, I don’t understand why we let them get away with it. I mean, aren't business cycles more important after all?

Take, for example, Bill Clinton’s record in the 90’s. Dems tout this as though the dot-com boom wouldn’t have happened without him, yet I fail to see how Washington influenced a bunch of computer nerds out in Silicon Valley to create jobs. Conversely, George W has one of the worst records of job creation since the dawn of time (at least according to MSNBC), yet he presided over the dot-com bust, the fallout from Enron, 9-11, and the mortgage crisis. Sure he's partly culpable for that last point, but I strongly doubt any other politician would've applied the brakes on the housing bubble before it was too late.

And now we have continuing jobless claims remaining fairly constant at > 500k, with an administration claiming to have saved millions of jobs. It all seems like a bunch of nonsense doesn't it?

I say all of this to lead into today's news that the government is planning to save billions of dollars take over the student loan industry (color coded to the appropriate talking points):
[Obama's] plan is to do away with a system in which the Federal Government subsidizes banks and other private finance companies like Sallie Mae to lend money to students. The Administration essentially wants to cut such companies out of the game and run the system itself. Democrats claim the move will save $87 billion over 10 years, which can be used for a laundry list of education priorities, including increasing the maximum amount of Pell Grants, expanding Perkins Loans and investing in community colleges and other programs.

Educational institutions currently have two ways to offer federal loans to students. In the Federal Family Education Loan (FFEL, pronounced "fell") program, the government pays subsidies to banks and lenders to dole out money to borrowers and reimburses companies up to 97% of the cost of any loan that is not paid back. The second way is the direct-loan program, created in 1993 as an alternate option, in which the government cuts out the middle man, lends money directly and gets all the profits.

"Ultimately, what they are trying to create here is the Post Office of student lending — you've got no choice," says Jack Remondi, vice chairman and CFO of Sallie Mae, the nation's largest lender, referring to Obama's Aug. 11 comments that questioned the efficiency of American letter carriers. "And this is the President's initiative on health care: if you create competition, that should drive down costs and save people money."

The loan industry estimates that up to 35,000 jobs might be lost by the transfer from FFEL to direct-loan. Members of Congress who represent states that employ a large portion of the industry workforce, like moderate Democratic Senator Ben Nelson of Nebraska, have opposed the measure for that reason. But the Department of Education (which would run the new and expanded program) maintains that... the total amount of jobs lost will actually be much less.

Approximately three-quarters of the FFEL loans in the 2008-09 academic year were already in the hands of the government.

Personally, I'd like to see both the costs associated with these two programs as well as their respective default rates before I make a final decision, but keeping wasteful programs afloat simply to appease angry Senators seems, how do I say this nicely, just a tad fiscally irresponsible.

Similarly, I was surprised to hear a few months ago that Senator John Cornyn voted for the F-22 boondoggle that even the Defense Department deemed wasteful. That was until I received my monthly newsletter from Senator Cornyn explaining that cutting the program would lead to the loss of valuable jobs in Texas. I guess I should've known.

So I ask you, the humble blog reader, where do we draw the line between government spending that is wasteful and government spending that is essential for job growth? Because I'm confused.

---------------
UPDATE: Matt Yglesias lays out the benefits of this move by the White House.

6 comments:

Leah on 17/9/09 said...

I just heard a snippet about this on the radio. Unbelievable. I usually put my foot in my mouth when I go on a rant, but I won't let it stop me.

In my personal opinion, it shouldn't be the government's role to create jobs in the first place. Yes, some govt jobs are necessary. SOME.

Another entity like the post office, which operates at a multi-million dollar deficit, is the last thing this country needs.

This summer my mom sent Matt an AMEX gift card for his birthday, which ended up getting stolen out of the envelope. The envelope was delivered to us, but the gift card was not inside. (Not blaming anyone, but the only people who touched it between the time that she dropped in the mail and the time we picked it up, would have been post office employees.) She bought the gift card at Walgreens. When we tried to figure out if we could get it replaced, Walgreens and AMEX both were working to try to replace the card - they even communicated with each other to see if they could figure out the card number, and called back to update my mom and Matt several times on the issue. My mom and Matt also both reported the incident to the post office. No returned calls for my mom, and the guy at our local post office basically told Matt that it wasn't his problem. But what are we going to do? Complain? To who? And do you think this dude's boss would actually fire him for bad customer service, or reprimand him AT ALL for that matter?

Several people deal with similar frustrations when they have to get a new driver's license, a passport, etc.

A private company would never be able to get away with that - at least not without losing some business. (A private company also can't get away with mailing letters for $.41 or however much it is now; they don't have the convenience of being kept afloat by the government- oh wait, actually that is changing, but typically they don't and SHOULDN'T.)

This lack of accountability and the outstanding job security in the public sector is why our govt is so inefficient and wasteful. (i.e. billions of dollars supposedly being wasted in Medicare, and we haven't done anything about it till we need to get healthcare legislation passed? What a fraud.)

And maybe I am just an idiot, but our government is BROKE. What business do they have loaning money to anyone anyway? Seems like common sense to me.

I think you may have struck a cord.

Clayton on 18/9/09 said...

Well said. We are toast. Our leaders do not have the political will to do the right thing.

We legislate ethanol for
"environmental reasons", creating a net energy and carbon loss in every gallon produced versus MTBE.

We usurp decades of bankruptcy law and gift GM & Chrysler to the auto unions that helped destroy them.

We oogle over battery powered cars and potential "green collar jobs", yet we won't even consider building nuclear power plants. Can't wait to see those windmills turning overtime when everyone plugs their Chevy Volt into the grid all at once! I could go on and on, but Leah covered the bases nicely.

Bottom line - and Mike, you know me - I'm a super optimistic person... it's only a matter of time until our country's balance sheet is ruined. Each household's share of the government debt is $670,000. Unbelieveable. And to think that only the people over $250,000 will pay for that. If the American people buy that, then we deserve this bill of goods.

Mike on 21/9/09 said...

Leah,
That stinks about the amex card. Andrea and I have a somewhat similar story involving our road bikes getting lost by DHL on our way to a triathlon. The critical difference though is that I ended up playing a part in getting OfficeMax (who we shipped the bikes through) to end their relationship with DHL, and I'm proud to say that now DHL is bankrupt. Score one for the free market.

As far as the loans go, I'd only add that banks don't really have much incentive to loan money to college kids at low interest rates, which is why the government incentivizes them in the first place (to put it simply). If you think that is a valid usage of funds then you are left with two choices; continue to pay this fee to the banks or loan the money directly.

Personally, I have no problem with cutting out this extra cost as long as their is some recourse against the note holder upon default. In theory, this should translate to more student loans (which are paid back) and more kids able to afford higher education. And I realize this probably sounds naive, but the issue isn't higher government spending, it's cutting our wasteful spending.

And in my opinion the analogy isn't the Post Office, as it sounds more like sending in the US Military vs. paying private contractors to do the job for you. At the end of the day you probably get to the same point, but the latter option will cost you more.

Mike on 21/9/09 said...

Clayton,
Great comment. I've never understood our government's insistence on subsidizing corn either. Rest assured that you won't find any pro-Farm bill posts here anytime soon.

And though I'm not the biggest proponent of nuclear energy (I happen to think the waste issue is real), I did learn recently that France somehow developed a solution to this back in the 1970's, even though they are mostly powered by nuclear energy. A fact that both surprised and depressed me as I realized that learning from their experience
would require some politicians to acknowledge that France occasionally gets things right.

Here's the link

Clayton on 22/9/09 said...

Mike, thanks for the article. I wasn't aware of the history of reprocessing. Sounds like Jimmy Carter was really thinking clearly back then, too... yikes! I also don't know if nuclear is the answer, but I think it deserves consideration - and we're not getting anything close to that by those in currently in power.

To me, this issue is kind of like tort reform being completely left out of the healthcare legislation. It is as if the Democrats aren't even considering it because they have some sort of interest group/constituency that talk of either one would significantly alienate.

This is the definition of a conflict of interest. This is also why I believe our founding fathers had it right in limiting government's power. Sure, there are drawbacks to that, but look at how easy it is, for example, to assuage our government with lobby money to legislate something as silly as ethanol. Is that how constitutional democracy was supposed to work?

Today, it is hard to find a dollar spent by an organization that has a higher return than a lobbying dollar. Just look at D.C.'s unemployment rate versus the rest of the country!

The President was supposed to bring about a new age without rule by special interests. So far his signature initiatives have been essentially authored by lobbyists.

Sorry to rant (and please don't tell my wife I'm writing b/c she'll take away my internet privileges), but I am so tired of people not being skeptical of politicians. I want to encourage your millions of readers to eschew obfuscation, read between the lines, don't drink anyone's kool-aid (including your own). Dang, I stayed up past midnight again. Later bud.

Mike on 22/9/09 said...

Well said, though I'm assuming by "millions" you meant "dozens".

And I hope I make it clear that this blog is less an exercise is broadcasting my views to the blogosphere, than a personal journey to better understand what I would otherwise just reflexively assume to be true (based on my own preconceived notions of right vs. wrong). In other words to "eschew obfuscation."

Though I must admit I had to look up what exactly you meant by that. Surprisingly it turns out that "confusion" was both the correct and ironic response to that phrase. Here's Wikipedia:

"Literally, the phrase means "avoid ambiguity, adopt clarity", but the use of relatively uncommon words causes confusion, making the phrase an example of irony, and more precisely a heterological or hypocritical phrase (it does not embody its own advice)."

Keep the comments coming!

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