Friday, March 28, 2014

Department of Stupid: Congress to consider a bill comparing public and private lending

Via Center on Budget and Policy Priorities: 

The House will consider three bills in the coming weeks that would make the budget process more complicated, less transparent, and less credible. One of these is the Budget and Accounting Transparency Act (H.R. 1872), which would add an extra amount to the recorded budgetary cost of federal credit programs, beyond their actual cost to the government, to reflect what private lenders would charge if they issued the loans and loan guarantees.  By artificially inflating federal lending costs, this change would disadvantage direct loans and loan guarantees relative to other federal programs and expose them to a greater likelihood of cuts.
H.R. 1872 would change the accounting for credit programs such as Federal Housing Administration and veterans’ mortgage guarantees, student loans, small business loans, and rural electric loan guarantees by adding anextra amount to their recorded budgetary cost.  This extra amount would reflect what private lenders would charge if they, rather than the federal government, issued the loans or loan guarantees.  
The proposal is not based on a contention that current estimates of federal credit programs understate their cost to the government.  Therefore, the proposal would distort the budget by making federal credit programs appear more expensive than their actual cost to the government.  It would also undercut one of the key purposes of the budget, which is to provide a meaningful comparison of the cost to the federal Treasury of different programs.  
The bill also would make federal loan programs likelier targets for deficit reduction measures, since they would appear to cost more than unbiased projections show they actually would cost.  In the area of student loans, for example, this could result in higher costs for borrowers or less access to loans.  The size of the student loan program and how much of the cost students should bear are valid policy questions, but policymakers should not distort these issues by artificially inflating the program’s cost.

This idea is dumb enough even for those who don't understand monetary sovereignty...but for those of us that do, its just mind mindbogglingly stupid. CBPP does state that:

The concerns for the federal budget, however, are different from the concerns of private-sector investors.  The federal budget is a straight record of the cash flowing into and out of the Treasury; the deficit or surplus equals the difference between the money actually spent and the money actually collected.  That is what the existing credit rules ask the Congressional Budget Office (CBO) and the Office of Management and Budget (OMB) to estimate.  If the estimates are unbiased and take all possible factors into account, including expected defaults and their likelihood, then the overestimates and underestimates should net to zero over the long term.  Adding a penalty because private investors are loss averse should have nothing to do with government budgeting and accounting. 

However, they don't go far enough, and say that the government's risk of default as a currency issuer is zero, and thus should never be compared to any private entity with inherent, nonzero credit risk. If a borrower of a federal loan defaults, this does not affect the federal government's credit/spending ability by one penny. There is therefore no reason to price this risk in any federal budget-scoring mechanism.


Tom Hickey said...

The thing is that this would discourage government loans and would help get rid of government loans to the private sector. "Government loan" is an oxymoron economically.

Why should the government loan money at interest when it has no need of interest, which acts as a tax, and no need to get the funds back. Government has the capacity to fund public purpose at any level and to control inflation using tax policy. You know, functional finance v. sound finance. The exchange model is built on sound finance.

The proper model is a grants model rather than an exchange model. See Kenneth Boulding on grants economics, in particular his short book, The Economy of Love and Fear: A Preface to the Grants Economy (19730, and Randy Wray's article, Kenneth's Bouldings' Grants Economics (1994).

Ralph Musgrave said...

I’ve got some sympathy with the Budgetary and Accounting Transparency Act. Reason is that when it comes to borrowing, governments have an unfair advantage: they can extract money by force from citizens to pay interest (that’s called “tax”). Plus governments can print money.

The “Off the Charts” article claims “Therefore, the proposal would distort the budget by making federal credit programs appear more expensive than their actual cost to the government.” That’s true, but “actual cost to the government” is no a realistic cost. I.e. the distortion to which the Off the Charts article refers would ideally undo an existing distortion.

That argument was doing the rounds in the UK a few years ago. I can’t remember who won, but it was certainly widely recognised that governments have an unfair advantage when it comes to borrowing.

But this is a complicated area because there is “government” as currency issuer. And there is “government” as owner and operator of various assets, like roads and bridges. I agree with Warren Mosler who said that government as currency issuer should not issue any liabilities on which it pays interest.

On the other hand government as operator of roads and bridges should charge road and bridge users an amount that reflects what a private road or bridge user would have had to pay to borrow money to construct a road or bridge.

Tom Hickey said...

On the other hand government as operator of roads and bridges should charge road and bridge users an amount that reflects what a private road or bridge user would have had to pay to borrow money to construct a road or bridge.

Makes no sense. Tolls are a regressive tax.

In the US there is a road paralleling the New Jersey Turnpike. The pike is a toll road. The alternative route is for poor people.


Unknown said...


I know that you understand functional finance. So which of the 3 pillars of FF do you see as being fulfilled by toll roads?

1) Establish a baseline value for a fiat currency

2) Control inflation

3) Social engineering (includes income inequality taxes, pollution and sin taxes, everything)

#1 we've obviously got covered without toll roads.

#2 Don't you think toll roads are a poor inflation hedge?

#3 Why would you want to discourage otherwise free road usage with tolls?

Unknown said...


Govts are not in competition with the private sector. The Govt does things that society wants it to do. These choices always encompass public decisions about public vs private.

Society obviously likes social insurance schemes. If they didn't we wouldn't have any.

Does the fact that We have collectively decided to fund a portion of our retirement via public means vs private inherently mean an "unfair advantage"?

Should all prisons be privately owned because Govt run prisons are unfair to businesspeople?

What about military?

Basically, what in the world are you talking about? I'd expect to see statements like that coming out of retard libertarian types, not someone like you.

Ryan Harris said...

Our freeways are now based on the freemium model: The far two left lanes are for people that pay or those with multiple passengers. The convenience express fee is enough to pay for the entire highway, upkeep and development of new tollways. I think its great, I never take the expressway and freeload off their largesse. Roads have never been better maintained and they are flooded with money and not enough roads to spend it on.

Peter Pan said...

Where do you live, Ryan?

Ryan Harris said...