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Another Wave of Plague

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This week a bill sits on the president's desk, which, when he signs it, will bring us one step closer to a national financial apocalypse. The bill authorizes more subsidies. The federal government is near bankruptcy and yet Congress and the president are creating new subsidies. Totally unnecessary subsidies!

The bill on the president's desk looks innocent enough. It authorizes the U.S. Army Corps of Engineers to undertake projects to maintain our navigable waterways from San Francisco Bay to the Mississippi River to New York Harbor. Nothing wrong with that.

But, as is often the case with Congress, there is more to it than that.

For the last year, as it wended its way through Congress, the bill that is now on the president's desk was called the Water Resources Development Act. A few weeks ago, Congress added the word "reform" to make us think that they were actually doing something about our dysfunctional government. No real reform, of course; they just used the word "reform." So now it's the Water Resources Reform and Development Act. (WRRDA)

Embedded in this Bill is an obscure section that has absolutely nothing to do with the Army Corps of Engineers. This section actually amends the part of the Clean Water Act that deals with the most successful environmental finance program on this planet, called the Clean Water State Revolving Fund (SRF). This fund has been around since 1987 and now has net assets of $40+ billion.

As successful as this fund is, its one major failing is its already massive, unnecessary subsidies. So, now the Congress and the president are making things worse by adding yet another layer of subsidies.

Most states already offer subsidized interest rates on their Clean Water SRF loans that are about 50% of market rates. So, in today's world, that's about 2%. Vermont outdoes itself by offering 0% interest loans, which, of course, means that every day we have inflation -- which is every day of the year -- they are losing money. The problem with these loans is that governments get the subsidies, not people. The language of the bill on the president's desk says explicitly that subsidies shall be provided to "a municipality, or intermunicipal, interstate or state agency."

Here's the problem with these subsidies.

Loudoun County, Virginia -- a bedroom community of Washington, D.C. -- is the wealthiest place in America. It has a median household income of $119,000+. Last year Loudon County got a $7.3 million wastewater loan from the Clean Water SRF in Virginia. The loan had a subsidized interest rate!

What's wrong? A subsidized loan to the wealthiest county in the country! That's what's wrong.

Here lies the crux of the problem. It's people who can't pay their bills, not governments. Economists call below-market-rate loans to Loudoun County "general, supply-based subsidies." They are given out to all regardless of need. They are a plague on our country because they wind up subsidizing the wealthy.

Are there people in Loudoun County who can't pay their sewer bills? Of course. Intuitively there must be some. Maybe even 1% or 2% of the total. If so, and if the subsidies were tightly focused -- what the economists call "targeted, demand-based subsidies" -- all those who can't pay their bills could be helped; meanwhile 98-99% of the subsidy could be saved.

Take the reverse case of Buffalo County, South Dakota. This is one of the poorest places in the United States. Here Median Household Income is the lowest in the country, just over $20,000. If 98 -99% of the households there couldn't pay their bills, then they should get subsidies. But at least the other 1-2% would be saved.

To give them some credit, Congress did add some needs testing to their new round of subsidies. To that extent, they are marginally better than the old subsidies. But these needs tests are for not for people; they are for local governments and wastewater agencies. They won't distinguish the wealthy homes from the poor. And so, at least part of the subsidy money will wind up in the pockets of the rich.

Congressional Republicans? Subsidies? Never!

Democrats? Subsidies for the rich? Never!

The bill on the president's desk -- passed by both Houses of Congress -- a bill that he surely will sign -- gives us both!