The participants in our dialogue are continuing to discuss the FY 1991 Budget, including some ideas of Herbert Stein....

Q- Herbert Stein, presently a fellow at the American Enterprise Institute, shared his ideas about the FY1991 budget in a December, 1990 article in the Wall Street Journal. He started with his idea of an ideal budget which should allocate resources to investment, including education and provisions for the poor, without interfering with incentives to efficient production. He was glad that the tax increases enacted in the October 1990 compromise package would reduce consumption by the wealthy.

A- That is hard for me to understand since, aside from the luxury tax, most of the revenue comes from increases in excises on cigarettes, alcoholic beverages, air travel, gasoline and telephone---all consumed in large amounts by the poor.

Q- Don't forget itemized deductions were capped for those making over $100,000 and dependency exemptions were also taken away from higher income earners. Mr. Stein did remind me of your idea of a philosopher-king when he claimed "Reduction in the share of the national income devoted to producing and consuming those products will be helpful from the standpoint of health and safety." He praised the earned-income tax credit, child-care provisions and extension of medicaid benefits to a larger number of poor children as furthering the goal of providing for the poor.

Q-In his 1989 book, Governing the $5 Trillion Economy, Mr. Stein claims that our present budget process fails to allocate the nation's resources well because there is not enough accurate information readily available. Would you agree with that?

A- I've heard the bit about poor information from numerous qualified sources from all sides of the political spectrum. That, plus my own research experience makes me certain Mr. Stein is right in that contention. However "allocating well" seems to be a subjective evaluation and I would suggest that he would find little, to no doubt, that Americans, almost to a person, would agree that allocations are best made by individuals in the marketplace rather than by government. At least that is what other nations, many of whom are now asking for our leadership and advice in this area, have heard us advocate for two hundred years.

Q-Well I don't think Mr. Stein meant we should have a "planned economy" but that our politicians should take a more long range attitude when dealing with our federal budgets as well as policy decisions that affect millions of people and perhaps generations.

A- It would be hard to disagree with that, but a "should" doesn't mean it's feasible. The squabbles over budgets that I have witnessed members of congress indulging in over the years, reminds me more of children slinging mud at one another in a sandbox rather than statesmen with the ability to consider anything long range.

Q- I take it you haven't read his book.

A- Unfortunately, no.

Q- Well, I think I am giving you the wrong impression of what he is saying. He does favor budget process reforms such as you advocated in your own writing a few years ago---especially capital budgets.

Q- In your own writing a few years ago, you advocated some specific budget process reforms ---especially capital budgets.

A- We'd like to think if the general public had all the facts it would act rationally and preserve the politicians (and the nation) from both themselves and the influence of powerful groups vying for an ever bigger piece of the economic pie.

Unfortunately we canÕt test this premise because there are presently no accounting and reporting systems in place to accurately inform the public, or the politicians for that matter, about the financial health of the nation. That's where a capital budget comes in.

Q- I don't know a thing about capital budgets.

A- The idea is to separate the federal budget into two components; an operation budget, much like a private firmÕs profit and loss statement, and a capital budget, similar to private industryÕs balance sheets. This would give a much clearer picture of the true budget (and deficit). Borrowing to finance investments would be out in the open where it could be fairly considered.

Q- What does the government use now?

A- Right now the federal government doesnÕt follow generally accepted accounting principles (GAAP); it uses cash-basis accounting although it prohibits publicly traded corporations from doing so. In 1975 the federal government even predicated bailout loans to New York City on that CityÕs changing to accrual-basis accounting (GAAP). The 1988 reconciliation bill even barred large farms from using the cash method of accounting.

Q- Wouldn't things look a lot different if we used GAAP?

A- For one thing GAAP would show that in some instances the Reagan administration deficits were lower than those of the Carter administration. According to New York Congressman Joseph DioGuardi the cash basis deficit of President CarterÕs last year (1980) totaled $93.5 billion, whereas the estimated GAAP deficit for that same year was a whopping $408.3 billion. Ronald Reagan Òtook the heatÓ, as the Congressman put it, for the rise in the cash basis deficit from $93.5 billion to $185.3 billion whereas under GAAP the deficit actually declined by almost $75 billion, from $408.3 billion to $333.4 billion.

Mr. CarterÕs total estimated GAAP deficits over the 1977-80 period were $56.5 billion higher than Mr. ReaganÕs total for 1981-84.ÉA significant portion of Mr. ReaganÕs cash-basis deficits were actually the liquidation of liabilities incurred by the Carter administration, but whose costs were not recorded at that time because of the cash-basis system.

Q- It seems that President Reagan spent more on capital items whose cost should be amortized over a period of years than did his predecessor. Why isnÕt this common knowledge? Where is everybody?!

A- Under accrual accounting (GAAP), used by all publicly-held companies, revenues and liabilities are put on the books as they are earned or incurred, rather than when the cash actually changes hands. A properly implemented capital budget would transform the budget process and officials would have a very much improved accounting, reporting, priority-setting and fiscal-policy tool providing a more accurate reflection of all government liabilities.

Q- How does the cash-accounting work?

A- Cash-basis accounting treats huge investment expenditures whose value is in the future as current expenses. It then disregards anticipated loan defaults, recording only net-losses on loans, ignores accounts receivable and accounts payable, provides no reserves for bad debt, treats the sale of assets as income and fails to depreciate capital assets entirely.

Of course it is difficult and results are at best highly speculative when it comes to evaluating assets and calculating future liabilities. It is impossible to plan intelligently under a cash-basis system. Everything may look like it is in tip-top shape because future liabilities are ignored.

Q- I would imagine the type of accounting skews the picture?

A- One accounting firm estimated by failing to use GAAP sixty percent of the true 1984 deficit was hidden because unfunded Social Security liabilities were excluded.

Social Security is a perfect example. As young Americans pay into the system the government accrues stupendous liabilities against the day when they will retire and collect the promised benefits. This claim against future taxpayers, according to the Department of Treasury, passed the eleven trillion dollar mark back in 1987 five years ago.

Q-I guess you can pull all sorts of shenanigans with accounting methods.

A- Under the present federal government accounting system the $40 billion in new loans that the federal agencies make each year are counted as outlays for that year.

There are more than 350 federal loan programs of one sort or another, all laudable and sound when enacted but many long since transformed by the need and greed of competing groups. Most of them do not show up Òon budgetÓ as normal credit activity because many federal agencies can make, even direct loans, completely Òoff budgetÓ.

The millions of loans made by private lenders and guaranteed by the federal government represent a contingent liability and one more burden for future taxpayers.

The federal government insures not only bank and thrift deposits (FDIC & FSLIC) but also private pension plans (PBGC). The federal government is the countryÕs largest insurer guaranteeing loans to home buyers, veterans, farmers, students, small business people and a multitude of other groups.

Q- Wouldn't they show up better on a capital budget?

A- It has been suggested that such loan guarantees be redesigned to require current-cash outlays thereby putting the subsidy explicitly on budget. Better still the federal government should be directed to purchase private loan insurance for borrowers rather than guaranteeing loans itself, on behalf of all taxpayers. Best of all, the federal government should clear out of the loan business and leave it to the private sector.

Q- Judging by default rates, the government hasn't been very selective lately anyway.

A- There are many organizations that would step in to take care of those who would not qualify for commercial banks loans. Even now religious, cultural or work-related organizations offer free (no interest) or low interest loans to members or act as guarantor in many instances.

Borrowing by the government, however, is another matter. If the borrowing is to finance public investments it need not be a sign of trouble. Deficit financing is common and although many government investments may prove worthless, synfuel as an example, most become assets, like highways. Deficit financing shifts the cost of paying for highways to future taxpayers who benefit from the roads when they are completed and in use.

Q- There doesn't seem to be much uniformity in the government's present system , at least as you describe it. I can see how that makes it possible for even the most well-meaning officials to make informed decisions.

A- There is no doubt we need uniformity and more openness so that better informed choices can be made. Although Special Analysis D of the federal budget separates investment and operating outlays, it is only used as information, having no policy significance of its own.

We have nonsense like oil and gas leases, categorized as Òoffsetting receiptsÓ and treated as outlays instead of revenue. We canÕt expect miracles from accounting and procedural changes in the law, but changes may make costs more visible and thereby provide an opportunity for more effective management of federal budgeting.

Q- I would think the government could at least make the switch from cash-basis accounting which seems to encourage deficit spending by underestimating the actual deficit.

A- You're right. As we have seen, cash-basis reporting and budgeting largely ignore depreciation, accounts payable and other long-term costs making it easier for officials to adopt programs that provide benefits up front without providing funding until years later when the appropriating official is long since gone.

Q- Why didn't the Reagan administration push harder for the enactment of accrual accounting (GAAP).

A- Probably because no elected official is anxious to have American citizens, let alone the rest of the world, take a look at what would be at least a doubling of our debt in one fell swoop through a change in accounting methods.

Q- I think we have had our fill of illusion and deception.

A- Maybe the people who know about it want change but not necessarily the politicians that have the same knowledge. Senator John Danforth admitted publicly that the Senate in 1986 had been looking at Òphony numbersÓ Ñ and knew it!

Senator James Exon told his colleagues in March 1987 that ÒWe knew last yearÕs numbers were phony...LetÕs get honest with ourselves.Ó If honesty is what theyÕre after you might think that the good Senators would be in favor of a capital budget (GAAP Ñ accrual accounting) but that is not necessarily true. Senator Paul Simon joined with Senator Exon at the Budget Mark-Up Committee (March 1987) to vigorously denounce accrual accounting.

Q- What were the objections?

A- Opponents argue that since the system is already prone to vast overspending, cash-basis budgets allow more control. If accrual accounting was adopted, the determination of whether outlays are placed on the capital or operating budget would be based on political considerations.

Imagine, if you will, politicians falling over one another in an attempt to have their pet projects classified as capital outlays so they will not have to be paid for by current taxes and would not ostentatiously add to the deficit. Such a classification could mean the difference between acceptance or rejection of a program. One could easily argue that more spending on education is an investment in the future; that agricultural subsidies are a long-term investment in a way of life.

Q- No one could deny that environmental issues fit the bill.

A- A fool-proof process has thus far eluded us. Under cash-basis accounting no financial statements are available for citizens to judge the actions of officials and under accrual accounting an official may have been replaced by the time his deeds are discovered. But as Senator Paul Simon has said so often during the 1988 presidential campaigns, I know we can do better than this!

A- Bush's FY1992 Budget was presented on February 4, 1991 and was greeted more favorably than any budget in recent memory although it called for a 2.6 percent increase over the FY1991 budget and showed no serious intentions to curb federal spending.

It included $22 billion in new spending for social service programs over five years. It slated 250 programs for an increase of $17.8 billion, 109 programs for a decrease of $8.3 billion and expressed an interest in terminating 238 programs along with their 3,591 specific projects for a savings of$4.6 billion.

Q- I hope some of the programs to be terminated are related to the Pentagon.

A- When President Bush was asked about a peace dividend in February, 1991 at an appearance before the Economic Club of New York, he said , "I thought dividends were given when there were profits. We have a deficit of over $300 billion"

As to his "new world order", he described it as a revitalized U. N. with tougher peace keeping functions. He explained that the use of the veto by the Soviets in the past has been one reason the peace keeping functions have been so impotent.

Q- Yes, but that is changed now.

A- Getting back to the administration's FY1992 budget proposal. Mr. Darman, a key architect of the proposal, wanted to see another $15 billion worth of programs turned over to the states. The ranking Republican on the Senate Budget Committee, Senator Pete Domenici of New Mexico, concurred. He thought the states would find more innovative and efficient ways of administering a lot of the programs.

Q-I bet the governors loved that!

A-Acceptance by Governors is not the problem, it is congress and its reluctance to relinquish control over the purse strings. Governors say that medicaid took 10 percent of state budgets in 1985, 14 percent in 1990 and will take 17 percent by 1995. 85 percent of all new state money is dedicated to federal mandates leaving the governors with discretion over only 15 percent of their budgets.

Q- I've heard economists worry that the shortfall in state and local revenues will add to the federal deficit. How is that possible?

A-Because states and local governments must balance their budgets they will likely increase their own income and property taxes. These taxes are deducted from federal taxes and so will further decrease federal revenue. Supply-siders have always said that income expand fastest where least taxed . This is borne out by the figures that show earnings above the social security tax cap are growing more rapidly than below.

Q-Of course you're hearing more and more people expressing a desire to lift the cap entirely and make 100 percent of everyone's income subject to the payroll tax.

A- That ranks right up there in the category of wrongheaded actions along with talk to disallow the deduction of state and local taxes from federal filings.

Q- Did the FY1992 budget include an increase for education?

A- Some, and how much depends on how you view the figures. Senator Paul Simon was quick to point out that $1.6 billion of the $2.7 billion increase in the education budget guarantees state loans. But nevertheless the education budget went from $24.8 billion in FY1991 to $27.5 billion in the FY1992 proposal an increase above the rate of inflation. Rather than focusing on education per se, Mr. Darman made a point of referring to children's programs.

The budget included $87 billion for children's programs--a 9.5 percent increase, which included $2.1 billion for Head Start, $732 million for child care, $690 million specified "for education" with $200 million of that for an incentive fund to encourage choice---especially Chapter One.

Q- How did the Senators from the farm belt accept the cuts in agriculture subsidies?

A-Surprisingly neither Senator Grassley of Iowa nor Senator Exon of Nebraska were adverse to the recommendations to cap farm subsidies.

Q-I understand one of the largest increases in the budget was for the adminstration of congress.

A- Absolutely correct. The congressional leaders asked for a 28 percent increase in their legislative budget or $500 million more than last year. The executive branch has only a ministerial role, with no discretion over the funds slated for congress.

Nevertheless Mr. Darman gave a courtesy phone call to the leaders and asked if the congress wished to go on record in this time of belt-tightening and sacrifices, as appropriating a 28 percent increase for themselves. He reminded them the rest of the budget was only getting a 2.6 percent hike. They trimmed the request to a 20 percent increase.

Q- Did you know that 81 staff members were making more than Senators before the Senate voted itself a pay raise in the summer of 1991?

A- Did you know that members of congress gave away 240 flags in 1950 and 114,151 flags in 1988? Little things like that add to the congressional budgets just as staff salaries do. As for the 46 senators who opposed the $23,000 pay raise only ten had definite plans to return it to the treasury or donate it to charity.

Q- Do you think it is hypocritical for the others who voted against the pay hike to now accept it?

A- Not at all. I figure if an official puts the country's interests before his own but doesn't succeed in getting the legislation that he would willing live with, that is all I would expect. The law applies to everyone. I doubt the motives of those who ostentatiously go "above and beyond the call of the duty". I think the comparison to martyrs and saints is, generally speaking, a calculated move, likely somehow, to find its way to the media's ear come election time.

Q-Did the war in the Gulf help Secretary of Defense Dick Cheney get the authorizations he wanted?

A-There was some discussion about the $4.6 billion requested for SDI--$5.3 billion was requested last year and the administration only received about $3 billion, otherwise the discussion centered on burden sharing by other countries and their contributions to the Gulf War.

Senator Paul Simon insisted that it is not wise to have a war we don't pay for--a war where we pass costs on to our children. He felt that troops shouldn't be the only Americans to sacrifice over Desert Storm. He made a definite plea for new taxes although the T word was never actually mentioned. In the same vein he thought it was terrible that medicare made up only ten percent of the total budget outlay and was being asked to take forty percent of the cuts in Bush's FY1992 proposed budget. Senator Simon then went on with a litany of "needs".

Senator Gramm of Texas ridiculed Senator Simon's "appetite to see taxpayers sacrifice" and asked why we don't reduce spending to compensate for Desert Storm instead of considering new taxes.

Q-What was the most popular aspect of the proposed budget?

A-Both Senator Gramm and Senator Wirth liked $76 billion for R&D (research and development) which is an $8.4 billion or 34 percent increase. Senator Wirth wanted more money for energy conservation which he said was cut by one third in the new budget--he said it was foolish to think we can keep on producing our way out of our energy problems.

Mr. Darman assured Senator Wirth there was a 34 percent increase in R&D (research and development) in the budget and a lot of it is directed towards energy--encouraging investment in high speed rail or mag-lev, better batteries for electric cars etc. $13 billion of the R & D budget is for basic research. Applied civilian R&D has lagged but Mr. Darman insisted he was not getting us into an industrial policy. The Texas Senator also favored the idea of not subsidizing people who make over $125,000.

Q- What about the Department of Housing and Urban Development? Did they get enough funds to finance the costly Cranston-D'Amato bill which was to provide affordable housing to the nation?

A- That didn't happen because HUD's budget was frozen at $2.4 billion until September of 1992. HUD received in the FY1992 authorizations, $4 billion over the previous year including salary and expenses of $825 million.

Q- But not enough funds to allocate to NAHA the Cranston-D'Amato bill.

A- Don't give me that "never enough"! As I said earlier, senators on the FY1992 budget committee praised it for its relatively honest numbers and good faith. Mr. Darman pointed to a thirty year trend where the growth has been in mandatory programs which now account for 52 percent of the budget.

Q- What do you mean by "mandatory"?

A- When pressed to define "mandatory programs", Mr. Darman told senators the new term refers to automatic spending not subject to annual appropriations and consists mainly of direct spending, generally payments to individuals.

Q- That sounds like "entitlements" to me.

A- Right. "An entitlement, by any other name, is just as expensive." Mr. Darman showed with charts, the dispersal of all revenue after money has been taken out for defense and interest expenses. Another set of charts showed how core spending (what the founding fathers would have considered to be a legitimate role of government) stayed level over thirty years-- how long term investments like spending on infrastructure, capital , both physical and human capital and prevention programs all declined--- and how short term investment, like transfer payments or current consumption increased. The Bush Administration made a conscious effort to slant the FY 1992 budget towards long term investments.

Q- I'm convinced we've got a problem with government controlling too much of the nation's resources. Now what? I'm not one that's convinced that recognizing the problem is half the solution. What constructive ideas do you have?

A-Besides working for a balanced budget amendment, which we've discussed, I'd work hard at cutting spending, and begin by freezing all expenditures at current levels in real dollars. (Except debt service, of course.)

Q- You mean no more colas---cost of living adjustments?

A- That's right. If that's too simple and leaves politicians with nothing to do, they could cut 25 percent from each department's budget and return it to a general pool for reallocation according to shifting priorities and emergency demands.

Q- I hope one of those priorities would be reducing the cost of carrying the debt---an annual cost nearing the $300 billion mark.

A- Anyone outside the beltway can readily see that turning off the spigot (interest cost) would be the best way to get dollars that are needed in other areas. Cutting spending goes hand in hand with cutting government's control over our lives, and that is what I really want to get at.

Next I would look for alternatives to the present way we do things. Contracting-out almost always results in better service at lower costs but does not automatically guarantee lower taxes or smaller government. Politicians are famous for earmarking savings for new programs and ever expanding needs.

Q- Maybe tax limits and program-spending ceilings could be imposed on all levels of government. Otherwise what's to prevent groups from lobbying even private providers?

A- What's wrong with lobbying--just as long as it's not bribery? I understand that there has to be a well thought out bidding process and that a concerted effort should be made to distribute tax dollars as widely as possible to minimize the influence lobbyists could have in encouraging increased spending on programs from which they could benefit.

Q- Couldn't the tax code and deregulation be used as an incentive to induce private bidders to provide the services formerly offered by government?

A- The problem is not only efficiency, but whether government should be undertaking the broad range of services it now provides via tax dollars in the first place. The question I would like to see asked initially, is whether this is government's role, and then if it is, consideration should be given to ways to have the private sector provide the service. Smaller government, free markets and greater choices are important goals to foster, and coincidentaly, they are almost inevitably more efficient if government can be made to show its true cost.

Q- What's the difference between contracting out and privatizing?

A- When the government pays but the service is provided by the private sector, it is called contracting out. When government neither pays nor provides, but only regulates, oversees, or stays completely out of the picture (which is highly unlikely today) then we have a privatized system.

Q-What about selling government assets to the private sector?

A- That's staying completely out of the picture and is called privatizing. It's not a new idea. In fact we have a long and successful history of privatization in order to reduce debt. To retire the debt accumulated from the Revolutionary War and the War of 1812, Treasury Secretary Albert Gallatin devised a plan. A sinking fund was started in 1817 to retire the debt through land and other asset sales. By 1835 the entire federal debt had been paid off.

Q- What's a sinking fund?

A- The term simply refers to assets and their earnings which are earmarked for the retirement of bonds or other long-term obligations

In 1986, the Office of Management and Budget, headed by James Miller III, proposed eliminating the federal deficit by selling major federal dams and power systems, privatizing the postal system, the FHA and other functions that government does not do well and has no business performing in the first place.

Forgetting the deficit and even putting aside ideology for a minute, the sale of federal assets makes sense because these assets require subsidies which drain taxpayers. Additionally government owned and subsidized entities end up competing against unsubsidized private citizens.

When opponents suggest that privatization is selling our "legacy" they should remember that they are referring to not only the blessings, but also the burdens of public ownership.

Q-What do you think about privatizing the Naval Petroleum Reserves, which consist of oil fields in Elk Hills, California and Teapot Dome, Wyoming?

A- I think it is a good feasible idea. The oil produced there is currently sold to private buyers for half the actual market price. The government doesn't need it as there is already emergency oil stored in the salt domes in the Gulf Coast. If the oil had been sold for its true worth on the open market it would have reduced our national debt and saved some interest expense over the years.

Q-The Carter administration suggested selling the four federal weather satellites, an idea which was picked up by the Reagan Administration.

A- But congress stood in the way. Taxpayers spend a billion dollars to gather, analyze and disseminate weather information every year; information that is freely given to media customers like newspapers, radio and TV stations who retail it to the public.

COMSTAT (Communications Satellite Corp.), a federally chartered, stockholder-owned company, offered to purchase the weather satellites along with Landsat, remote-sensing satellites that produce photos of crop and geological formations. The government would buy data under prearranged prices.

The taxpayers would have benefited first because money would have been saved by the efficiencies of consolidating the ground-sensing and weather stations and developing dual-purpose satellites, secondly by shedding the $150 million annual it cost government to operate the satellites and third, having a tax-paying private company provide the $1 billion needed for technological improvements. Any sale would have provided for priority use by the Defense Department.

To further counter any argument that the Pentagon needed access, the Navy was already using COMSTAT satellites. As for those who claimed the sale to COMSTAT would create a monopoly , already numerous companies are competing in satellite communications. There would be several competitors in the space launch field if government would only step aside.

Q- Competition in all areas is healthy.

A- An example I love is the prediction of a New York City snowstorm in 1987 by Accu-Weather, Inc. of State College, Pennyslvania. Using the same data as the National Weather Service, the private firm predicted the storm four days in advance and saved its client, New York City's Sanitation Department, thousands of dollars, while the National Weather Service scoffed at the prediction. This experience should make us wonder why we need a government service? Competition is always beneficial.

Q- I suppose you have examples in other areas?

A- At Human Resource Associates in Hastings, Minnesota, emotionally disturbed teenagers are treated at home rather than at residential centers. The costs are half those of publicly operated residential centers and the percentage of teenagers ending up in trouble again is less than half the rate of public programs.

In late 1986, congress voted to lease the two airports servicing the nation's capitol to a regional authority formed by the State of Virginia for $47 million to be paid over 50 years. This despite offers of $2 billion by private groups to purchase the airports outright. The lease simply transferred the burden from one set of taxpayers to another----and for what reason? Virginia's taxpayers had to come up with $700 million in needed improvements and what did they get for it?

When attempts were made to privatize FHA the Mortgage Bankers Association lobbied against the idea because that government agency was willing to take insurer risks that the private sector was anxious to avoid.

Q- Why rock the boat and wreck a good thing?

A- Right! FHA was continued as a responsibility of taxpayers despite evidence of fraud, including the issuance of loans to people whose incomes were too low to qualify for insurance from private mortgage companies.

Q- Didn't Senator Moynihan suggest selling some government assets awhile ago?

A- You're right. Senator Moynihan wanted the federal government to sell off its nearly $1 trillion loan portfolio, which he estimated would save taxpayers about $200 billion over a seven year period, when the avoidance of future debt service was considered.

The sale would have also drawn attention to the mismanagement of all government lending programs, showing more clearly the extent of taxpayer subsidies hidden in many loans.

As a side benefit, privatization would have removed government as a competitor with the private sector. Amazingly, the Senator, a Democrat, was voted down by a Republican controlled Senate budget committee. Their excuse: loan sales would postpone the day of reckoning!

Q- I know about home mortgages and student loans but other than that I didn't know the federal government was so heavily in the loan market.

A- There are over 350 federal loan programs which are subsidized by taxpayers via low interest rates and long repayment periods not to mention the cost of defaults.

Q- Somebody told me that 25 percent of the American population, mostly in northwestern states, gets cheap power subsidized by the other 75 percent of the population.

A- That was in reference to Power Marketing Administrations---government power plants, first started during the New Deal with the Tennessee Valley Authority and the Bonneville Power Administration in the Pacific Northwest. Rural electrification programs (REAs) began as unemployment relief in the Depression, when very few farms had electricity. By the 1960s virtually all farms had electricity and that should have been the end of the subsidies.

Q-I suppose it's not that easy to break up a thirty year old bureaucracy.

A- Right you are. REAs took on the mission of granting low-interest loans for the construction of new generating-plants. Of course as market interest rates soared in the seventies demand for REA lending rose by 760 percent.

Q-Surprise, surprise!

A- The REAs loaned out close to $10 billion in tax money and collected only $5.2 billion in principal and interest during the seventies.

Q- Who did they lend the money to and why did they need subsidized loans?

A- The borrowers were smart business people who knew a good deal when they saw one. Maybe they didn't need the subsidized interest rates any more than the next guy, but if the REA managed to keep itself on the taxpayer dole by handing out such nifty loans, anyone who knew about them would have to be stupid to pass up the opportunity. Co-ops were formed which were in better financial shape than were private-sector municipal or privately owned utilities that had to make do with unsubsidized loans.

Q- Of course those responsible for giving wrong signals and distorting the marketplace are the first to cry that the free market doesn't work.

A- Not only that, we've got the familiar problem of government not following its own mandates. One study found the TVA in compliance with EPA pollution standards at only 16 percent of its facilities, compared to about 74 percent compliance among privately owned electric utilities.

There are now six PMAs that operate 174 hydroelectric plants. The power generated by these plants is priced, on average, one-third less than what private-power companies must charge.

Q- That doesn't make sense when the government is so short of funds.

A- Worse than that, the PMAs were, by law, supposed to repay the cost of their facilities and investments to the U.S. Treasury within fifty years of being established.

Q- You mean they are charging far less than market rates despite owing the Treasury money?

A- Five of the PMAs have repaid almost twenty percent of the $16 billion lent them by the federal government. The sixth, PMA, Bonneville, instead of paying $1 billion as scheduled, came up with only $2 million and then in 1985 borrowed an additional $394 million from federal taxpayers.

Q- Uncle Sam is quite a lender. If a borrower fails to keep its commitment--paying only $2 million and reneging on the other $998 million---what's Uncle Lender to do? Why sure---just lend that borrower another $394 million!

A- Experts estimate revenue of $70 billion from privatizing the PMAs and if the Tennessee Valley Authority were included the revenue could top $100 billion.

Q- Who or what could afford to buy them?

A- One idea is to incorporate each PMA and offer shares on the stock market. That would get the federal government out of the business of producing electricity, where it had no business being in the first place. Besides we would get new revenue from the private corporations which would be subject to taxation where the government-owned and operated utilities were not.

Q- Weren't Privatization and deregulation were hallmarks of the Reagan administration?

A- That's right. In 1987 President Reagan formed a Commission of Privatization, chaired by University of Chicago Economics Professor David Linowes. The commission was to review all federal activities and recommend, in a six month period, ways to eliminate unfair government competition.

Q- In the tradition of the 1983 Grace Commission which uncovered government waste.

A- That's a good comparison. I bet if you asked the man-on-the-street what large government agency competes unfairly against preferred private-sector providers he would answer. . .

Q- The post office!

A- A 14-year old boy earned $10 an hour by delivering wedding invitations on his bike; a 25 year old started a citywide delivery service and had 357 regular customers, mostly law firms; and a middle-aged man delivered messages to members of Congress at one-fourth the postal service cost and twice the speed. All were shut down for interfering with the legal monopoly of the post office.

An inefficient taxpayer subsidized system is allowed to stay in business while an efficient taxpaying system is shut down.

Q- Why?

A- The three real-life people in my illustration were guilty of being more competent than government at serving the needs of the public.

In 1845 private express statutes prohibited persons or businesses from carrying letters for hire. In 1860 the monopoly was extended and the law was tightened to get rid of the Pony Express and other private delivery alternatives that had wormed their way through loopholes in the original law.

Q- Then United Parcel Service---UPS--- came on the scene.

A- When the postal service lost half its parcel volume to UPS it spent $1 billion on twenty-one centralized bulk-mail centers around the country in an attempt to defeat a private company. UPS survived because it incurs less damage, makes faster more reliable deliveries and charges less. It still makes a profit while the government service looses money.

Q-And now the postal service is competing with your local florists. I just picked up a colored brochure at my local post office showing a variety of floral arrangements that can be sent as gifts just by calling their 800 number.

A- I believe using public money to compete with private firms is absolutely no-holes barred wrong!

Q- I have a hard time knowing why a monopoly needs to take out full page ads and advertise on television.

A- We've got to do something about this nonsense!

Between 1981-85 postal employees won $3 billion in new wage concessions, stamp prices were raised 12 percent a year while the consumer price index was rising at a 4 percent rate. In 1986 postal employees became the highest paid semi-skilled workers in the history of the world and salaries accounted for 84 percent of the agency's $26 billion annual budget.

In that same year, postal employees increased from 702,000 to 746,000, postage went from 20 cents to 22 cents and loses were $251 million. The next year postage went up another 5 cents to 27 cents in order to fund a new federal retirement program for postal workers costing $1 billion a year.

Q- I heard recently that the top postal service brass took bonuses totaling $20 million while the agency was floundering in $1.5 billion debt and consequently was forced to raise postage rates on its employer---the American citizen. I understand that on average, postal service compensation is one-third higher than for comparable jobs in the private sector.

A- I believe it. Postal Service janitors were making $10.89 an hour at a time when privately contracted janitors used in other federal-agency offices were making $4.44 an hour. Why? Unions hold the threat of slowing down the mail. Generous wages are supposed to ensure efficiency.

Q- So why aren't citizens clamoring for privatizing the post office?

A- In a way they are. You thought of the post office right off as a perfect candidate for privatization. But there is strong opposition aside from the three-quarters of a million employees themselves. Also opponents believe that if the system were privatized, rural routes would receive reduced service.

Q- Those are discredited fears. Rural services were served just fine by the new providers that emerged in the wake or airline and trucking deregulation. Telephone service, and truck and bus lines, before deregulation, were all cartelized for reasons now given in defense of the postal monopoly.

A- If we started with the rural areas maybe that would dispel old fears. Rural carrier routes could be put out to bid over a period of years as a first step, then processing, delivery and retail functions could slowly be contracted out. Privatizing rural delivery and nothing else could save $6 billion a year.

Q- I'll bet members of congress have prevented legislation to privatize the post office.

A- You're absolutely right. Representative Phil Crane from Illinois has tried for years to make private mail delivery legal, with no success. Citizens for a Sound Economy figures $1 billion could be saved annually just from contracting-out retail functions such as stamp sales and window services; allowing nonprofit groups to deliver their own mail; giving utility companies the authority to use mail boxes for on-the-spot billing which would save money on utility bills; contracting-out rural and urban delivery routes and turning over the processing and pre-sorting of mail to private contractors. The Heritage Foundation has suggested breaking up the system into private companies on a regional basis.

Q- Milton Friedman has suggested giving each citizen one or more shares of stock in a new private corporation. He says, "It should not be a federal crime to provide better service than the government." Let me get this straight now. We've been talking about privatization---what about examples of contracting out?

A- Vance Air Force Base in Oklahoma is a prime example of what contracting out is all about. In the mid eighties about 1,000 employees from Northrop Aircraft Service did what took twice the number of military and other government workers to do on other bases.

The secret lies in using multi-skilled workers. "At the warehouse, the same employee mops the floor, stocks the shelves and delivers supplies. Two employes do carpentry, painting, electrical and mechanical work which would normally be designated to an entire team of "specialists".

The Northrop employees perform 17 services at a cost 22 percent below costs at similar bases. Vance was a successful 1960 experiment which should have been immediately duplicated throughout the government. The opportunities for savings and efficiencies that have been missed in over thirty years is appalling.

Q- I've heard this bidding thing is tricky and not always a straight forward comparison between a private sector bid and a government bid.

A- You're right. For instance, at Fort. Sheridan, Illinois, competition for audio visual services resulted in a $3.5 million in-house bid and $1.8 million from a private contractor. The government then began adding new costs, such as excessive severance pay, to the private bid, while underestimating in-house costs of supplies until Fort. Sheridan was able to declare itself the winner. The following are common manipulations to frustrate the intent of A-76:

Q- There you go again----what in the heck is A-76?

A- In 1955 President Eisenhower endorsed contracting-out, in a directive known as A-76. It directed federal agencies to contract everything "that can be procured more economically from a commercial source." Ronald Reagan revived A-76 when he became president.

Q- I can see why government employees would want to thwart A-76---it puts their jobs in jeopardy---but how do they do it?

A- I'll give you a few examples: