Network News

X My Profile
View More Activity
Posted at 11:47 AM ET, 02/18/2011

Less spending on government doesn't mean less government spending

By Ezra Klein

Last night, House Republicans cut $131 million from the budget of the Securities and Exchange Commission. Another proposal would slash a billion dollars from Social Security administrative budget. It fits the GOP's broader approach to cutting federal spending: the best way to shrink government to, well, shrink government. Fire the people who run it. And they're not exempting themselves. They've proposed cutting Congress's budget for the remainder of the fiscal year by about $100 million.

But the money they'll save in the next year with these cuts might end up dwarfed by the money we'll spend over the next decade because of these cuts. Looking back, the absolute best investment the federal government could have made between 2000 and 2005 would've been regulators able to see and stop what was happening on Wall Street. Missing the bubble and the build-up of risk cost us trillions.

Same goes for Social Security. You could imagine a number of reforms that would reduce the program's long-term spending. But cutting its administrative budget -- which is already extremely lean -- doesn't mean less spending. It probably means more fraud, as there are fewer inspectors able to check up on questionable disability claims.

Similarly, it's hard to write legislation well without the necessary staff. If members of Congress have to cut staff or cut staff pay, that means either less staff, or worse staff. But it doesn't mean that constituents and interest groups and party organizations will want less legislation overall. The answer? Lower-quality legislation, with more technical mistakes, unintended consequences and missed targets. Congress might've saved a few bucks by hiring a couple fewer legislative aides, but we might spend a lot more than that to clean up the shoddy work that comes from an overworked, underpaid office.

This is budget cutting for show: It's about ostentatious displays of belt tightening now rather than intelligent decisions that will reduce spending later. But like an ill patient who tries to save a few bucks by skipping a prescription only to end up in the hospital with much larger bills, we may well come to regret it.

By Ezra Klein  | February 18, 2011; 11:47 AM ET
Categories:  Budget  
Save & Share:  Send E-mail   Facebook   Twitter   Digg   Yahoo Buzz   Del.icio.us   StumbleUpon   Technorati   Google Buzz   Previous: How online retail is starving states
Next: What is actually being proposed in Wisconsin?

Comments

"remainder of the fiscal year by about $100 million..."

I think you meant $100 billion?

Posted by: jasonr3 | February 18, 2011 12:10 PM | Report abuse

"Looking back, the absolute best investment the federal government could have made between 2000 and 2005 would've been regulators able to see and stop what was happening on Wall Street. Missing the bubble and the build-up of risk cost us trillions."

We had people who were tasked with that job in an alphabet soup of regulatory agencies. The government was actively involved in directing massive amounts of credit to the housing sector. Many of the moral hazards were also of government design (low capital requirements for AAA securities, artificially low interest rates driving search for yield, the very structure of the security rating industry). We also had the Fed as an active participant in providing the credit necessary for the bubble in the first place.

A few more warm bodies wasn't going to make a difference. Wall Street made mistakes, but the government shouldn't be enabling it or bailing it out.

Posted by: justin84 | February 18, 2011 12:12 PM | Report abuse

I think the end result would be that the legislative function moves to lobbyists and corporations who can afford to fund the think tanks that write the legislation. Well, more so than it is now.

Posted by: donhalljobs | February 18, 2011 12:13 PM | Report abuse

My first thought was the same as donhalljobs's, and he said it better and more concisely than I would have:

"I think the end result would be that the legislative function moves to lobbyists and corporations who can afford to fund the think tanks that write the legislation. Well, more so than it is now."

Posted by: sanjait | February 18, 2011 12:23 PM | Report abuse

Granted, there is a large element of knee-jerk ideology in Republican plans.

Your post, however, is not one iota better. You provide not one word of evidence that SS is "extremely lean" (not just lean, but extremely!), nor do you bother to present a shred of evidence that the level of Congressional staff is now just right or too low.

Cuts! Your knee jerks! You're against them! Big surprise.

Posted by: ostap666 | February 18, 2011 12:38 PM | Report abuse

-------"We had people who were tasked with that job in an alphabet soup of regulatory agencies." ---------
Except Bush and Republicans directed those people to not do their jobs and hired people who didn't even believe in doing their jobs.

--------The government was actively involved in directing massive amounts of credit to the housing sector.------------
I hear this a lot, though never accompanied with any proof or numbers.

-------Many of the moral hazards were also of government design (low capital requirements for AAA securities,-------
We can thank deregulation for that one.

--------artificially low interest rates driving search for yield,-------------
Low interest rates had nothing to do with the housing bubble or financial crisses.


America could of easily avoided the housing bubble and the resulting finical crisses, by simply not deregulating the whole industry. Many progressives warned against the effect of deregulation and in the end they were sadly proven correct. Luckily for Canada they weren't gung ho and kept their finical regulations intact which accounts for the fact that they didn't see a housing bubble or a finical crisis.

Posted by: blueman3 | February 18, 2011 12:38 PM | Report abuse

Jasonr3 - Ezra's post deals with Congress' budget, not the Federal government's budget. The proposal is to cut $100 Mil from the costs of running Congress.

Which would have the same monetary effect of picking up a penny for the average person.

Posted by: ChicagoIndependant | February 18, 2011 12:47 PM | Report abuse

hi justin84: Just a quick response to your comment: "A few more warm bodies wasn't going to make a difference. Wall Street made mistakes, but the government shouldn't be enabling it or bailing it out."

I think you're right insofar as Ezra's statement was a little bit of an oversimplification. You can have all the "warm bodies" on Earth, but if they're not looking for (or don't care to look for) the right things, it's a total waste. Evidence keeps showing that the regulators had all the warning signs (not to mention whistleblowers, etc.), but were asleep at the switch.

I think Ezra's broader argument in this post is on point, however: Supposedly --- and I'm not holding my breath --- Dodd-Franks adds all sorts of mechanisms to combat fraud and abuse and plug at least some of the gaping loopholes that led to the financial crisis (we can debate whether they're inherently effective or not). By slashing SEC funding, it makes it more likely that Dodd-Franks measures will be underfunded and the loopholes unclosed. I don't have a problem with regulating the financial industry, but I'm not in favor of regulation for regulation's sake. Regs. need teeth, or they're just B/S hurdles.

I wasn't a fan of the bailout or TARP -- I'd bet you would disagree with me, but my feeling was that if we were going to bailout the banks we should have had "more strings" attached not fewer. But regardless, whether we should or shouldn't "bailout" anyone, a fully funded regulatory program (unlike a hapless and defunded SEC) is presumably more likely to help us catch a problem before it snowballs into a full-blown financial crisis (and thus, the possibility that a bailout would even be on the table).

Posted by: pbasso_khan | February 18, 2011 1:10 PM | Report abuse

ostap666,

According to a CATO study, SS administration costs are 0.39% of total assets. That is "extremely lean". 75% of these deal with disability. Ezra has cited such things in the past, I don't think he needs to repeat them every time he writes a blog post. Source :
http://www.cato.org/pubs/ssps/ssp-15es.html

On the issue of regulator pay, the SEC budget is $1.2 billion. That sounds like a lot, but Goldman alone had $17.5 billion in bonuses last year. The financial crisis was estimated to add 40% of gdp to the debt ($5.5 trillion), not to mention continuing ill effects. Given these numbers, we should probably be willing to spend a several orders of magnitude more on regulation/enforcement if it helped to prevent another crisis and restore some semblance of rule of law.

Posted by: anggna | February 18, 2011 2:08 PM | Report abuse

"Except Bush and Republicans directed those people to not do their jobs and hired people who didn't even believe in doing their jobs."

If you believe that having the wrong politicians in power makes regulators worthless, then the argument for having regulators at all is destroyed. The crisis will simply be delayed until the wrong politicians get into power. All the while, various government intrusions into the market encourage excessive risk taking.

Then again, the "right" politicians were led by Barney "roll the dice in favor of subsidized housing" Frank. Hardly inspiring.

Profit and loss are great regulators. Firms which don't balance their risks well will no longer exist.

"I hear this a lot, though never accompanied with any proof or numbers."

Look at house prices from 1998-2003, and in particular for low income households vs. high income households. Prices soared in absolute numbers, but they also grew by more for low income households, despite far higher income growth for the wealthier households over that period. I wonder how that happend? Oh, the GSEs doubled their purchases of mortgages to low income households, that might have had something to do with it.

So once low income home prices are rising by 10%/yr, it's a lot easier to justify getting into the subprime business - the apparent risk looks a lot smaller.

Once the bubble was in full bloom, the GSEs expanded the market for subprime by purchasing those securities.

The GSEs were also buying plenty of homes with 95%+ LTVs. Not only does this put pressure on the bubble, but imagine you are a private issuer trying to compete. What do you do?

http://cafehayek.com/2010/05/two-mysteries.html#

http://cafehayek.com/site/wp-content/uploads/2010/05/BelowMedian2.jpg

"We can thank deregulation for that one."

Basel capital regulations and federal regulation of the rating agencies are not examples of deregulation.

"Low interest rates had nothing to do with the housing bubble or financial crisses."

You really believe the housing bubble would have still occurred if mortgage rates hadn't fallen? How?

Posted by: justin84 | February 18, 2011 2:13 PM | Report abuse

"I don't have a problem with regulating the financial industry, but I'm not in favor of regulation for regulation's sake. Regs. need teeth, or they're just B/S hurdles."

I agree that regulations, if they exist, should be simple and purposeful. As an example, a minimum requirement of 20% down on a home should effectively put a stop to housing bubbles (and while there are ways to game such a regulation, it's probably easier to enforce than more complicated regulations).

Failure is a huge incentive for a firm to minimize its risks - in a sense, failure is a regulator. Moreover, it doesn't require an army of near perfect human regulators to make the system work. People usually - but of course not always - take fewer risks when there is no safety net to catch them.

"By slashing SEC funding, it makes it more likely that Dodd-Franks measures will be underfunded and the loopholes unclosed."

Pouring money into the SEC didn't accomplish a whole lot. From 1997-2005, the SEC budget tripled from $300 million to $900 million. During the late 1990s, roughly 3,000 people were on full-time staff with the SEC. From 2003-2005, that average was more like 3,800 people. Can you name any major successes in the SEC had from 2000-2008 (i.e. stopping a major fraudulent scheme before it is in the process of collapsing in on itself)?

http://mises.org/daily/3273

"I wasn't a fan of the bailout or TARP -- I'd bet you would disagree with me, but my feeling was that if we were going to bailout the banks we should have had "more strings" attached not fewer."

I actually don't disagree with the reasoning. My view is that failing firms shouldn't be bailed out. That said, I agree giving failed firms money but no oversight is worse than giving them money with oversight.

"But regardless, whether we should or shouldn't "bailout" anyone, a fully funded regulatory program (unlike a hapless and defunded SEC) is presumably more likely to help us catch a problem before it snowballs into a full-blown financial crisis (and thus, the possibility that a bailout would even be on the table)."

All else being equal, I agree, but I still feel that failure is the best regulator overall. It is free, and there are no costly bailouts. You don't have to worry about regulatory capture, or the awful Republicans running the show for another six years, just plain incompetence, etc.

Posted by: justin84 | February 18, 2011 2:43 PM | Report abuse

justin84, you said, "Profit and loss are great regulators. Firms which don't balance their risks well will no longer exist."

Of course, that's true in principle, but again you're presuming markets and market players are rational and you're not taking into account all kinds of market failures that come into play. Neither the private or public sectors are run by automatons. Very real human qualities (and human incentives, foibles and shortcomings) animate both business and government.

You also said, "If you believe that having the wrong politicians in power makes regulators worthless, then the argument for having regulators at all is destroyed."

That's quite a sweeping statement and I don't think it necessarily follows. Our regulatory scheme is obviously subject to democratic whims. Sometimes the "thing" to be regulated is not regulated because times change, priorities change, politics changes, etc. For example, let's say hypothetically in 2000, regulating Altoids seemed like a great and necessary idea for the fresh-breath-desiring public good; in 2011, the politics of bad breath changes, and regulating Altoids seems like less of a priority so Congress appropriates less money toward regulating Altoids. That doesn't mean "having regulators" is a waste, it's just part of the natural cycle of politics and time in action.

The more insidious problem, as I see it, is the conflict of interests that emerge when the people appointing/funding regulators (or regulators themselves) are "insiders" of the "thing" to be regulated. Not that a regulator shouldn't have experience in the "thing" to be regulated, but when the former CFO of Altoids is the regulator who is supposed to crack down on Altoids -- and doesn't believe we should even be cracking down on Altoids at all -- that undermines the democratic choice that Altoids is a "thing" to be regulated. And unfortunately, I don't believe our system does enough to counteract this type of government/political failure.

(Apologies to Altoids for using them in my hypothetical).

Posted by: pbasso_khan | February 18, 2011 2:53 PM | Report abuse

I presume you are writing this to progressives? Surely you know (though from your past admissions I don't think you truely do) that the conservative mind has been epistemically closed and they are totally impervious to all of these facts.

It seems to me that they simply live in an alternative reality where tax cuts and deregulation actually do solve all problems. The effect of this in the reality-based world is that they seem to be trying to cause maximum chaos and the worst possible outcome on all levels.

Posted by: quarkgluonsoup | February 18, 2011 4:07 PM | Report abuse

"Of course, that's true in principle, but again you're presuming markets and market players are rational and you're not taking into account all kinds of market failures that come into play. Neither the private or public sectors are run by automatons. Very real human qualities (and human incentives, foibles and shortcomings) animate both business and government."

I don't presume that all actors are rational - I simply presume that failure increases the cost of being irrational, and practices which are prone to failure will be purged from the system.

It's much like biological evolution - many individual mutations will be bad, but natural selection will weed those out, with the remaining population being well suited to the environment. Of course, the environment is always changing, and mutations continue to occur even when the species is well adapted to the current environment, but it is a self regulating process that by and large keeps species well adapted over time.

In finance, we had imperfect regulators, which combined with a government which was hostile to regulation, combined with various government programs and incentives which enabled risk taking by many parties.

As for market failure, I agree it happens. However, it is far more rare that markets permanently fail. Often, market failure provides an incentive for entrepreneurs to discover solutions. Moreover, there are competitive pressures in markets which don't exist in government (and as you note, human failings are present in both government and market actors).

http://www.ideasinactiontv.com/tcs_daily/2007/10/so-you-want-to-be-a-masonomist.html

"That's quite a sweeping statement and I don't think it necessarily follows. Our regulatory scheme is obviously subject to democratic whims. Sometimes the "thing" to be regulated is not regulated because times change, priorities change, politics changes, etc. For example, let's say hypothetically in 2000, regulating Altoids seemed like a great and necessary idea for the fresh-breath-desiring public good; in 2011, the politics of bad breath changes, and regulating Altoids seems like less of a priority so Congress appropriates less money toward regulating Altoids. That doesn't mean "having regulators" is a waste, it's just part of the natural cycle of politics and time in action."

I'll give you that the statement was sweeping and probably wrong in the sense that it implied zero benefit of regulation, but if the benefit isn't zero it's quite close.

In the "we have to regulate but also cushion markets" worldview, having 50% regulation and 100% cushion gives you all of the moral hazard, all of the bill, and half of the oversight. You get all of your crises - crises amped up on moral hazard and bad incentives - but they occur after the regulators have been captured, have their budgets cut, or just plain screwed up despite the best of intentions.

Posted by: justin84 | February 18, 2011 5:25 PM | Report abuse

"I agree that regulations, if they exist, should be simple and purposeful. As an example, a minimum requirement of 20% down on a home should effectively put a stop to housing bubbles (and while there are ways to game such a regulation, it's probably easier to enforce than more complicated regulations). "

Better yet, we could implement the following single regulation, and probably accomplish more than all of our current financial regulations combined:

"Thou shalt not lever more than ten-fold"

Leverage is the key to all bubbles. Limit it, and you limit the carnage.

Posted by: brickcha | February 18, 2011 11:33 PM | Report abuse

Post a Comment

We encourage users to analyze, comment on and even challenge washingtonpost.com's articles, blogs, reviews and multimedia features.

User reviews and comments that include profanity or personal attacks or other inappropriate comments or material will be removed from the site. Additionally, entries that are unsigned or contain "signatures" by someone other than the actual author will be removed. Finally, we will take steps to block users who violate any of our posting standards, terms of use or privacy policies or any other policies governing this site. Please review the full rules governing commentaries and discussions.




characters remaining

 
 
RSS Feed
Subscribe to The Post

© 2011 The Washington Post Company