MONTH IN REVIEW

MINIMAL CUTBACKS IN CORPORATE WELFARE

Federal subsidies to 35 of the "least defensible" corporate welfare programs were cut 15 percent in the 1996 budget, according to a just-released study by the Cato Institute.

Cato researchers Stephen Moore and Dean Stansel selected and tracked the 35 most egregious programs from among an estimated 125 corporate subsidies and tax breaks which benefit some companies and industries at the expense of other businesses and taxpayers

Here are some of their findings:

• The total cost of all subsidies and tax preferences for 125 programs is about $75 billion a year.

• Of the 35 programs studied, 29 had their budgets trimmed by about $2.8 billion, or 15 percent, from 1995.

• Had all of the 125 programs identified as corporate boondoggles suffered the same 15 percent loss of funding, the savings to the fiscal 1996 budget would have exceeded $10 billion.

The size of the cuts ranged from total elimination of some programs to very modest reductions in funding of others.

• Demonstration projects for the Federal Highway Administration -- a $352 million boondoggle for private contractors last year -- were eliminated this year.

• The U. S. Travel and Tourism Administration -- which duplicates the efforts of private companies in promoting U. S. tourism abroad --was abolished for a $16 million savings.

• However, the Agriculture Department's Market Promotion Program -- which pays for foreign advertising of American farm goods -- saw its budget actually increase from about $86 million last year to $90 million this year, thereby helping such needy, threadbare recipients as Gallo Wineries and McDonald's.

The House Budget Committee initially pushed for $74.5 billion in cuts in all business subsidy programs over seven years. The savings were to come through elimination of the Small Business Administration, the Commerce Department and other agencies.

But shifting coalitions of Democrats and moderate Republicans deep-sixed these efforts. The White House also bears much of the blame, according to Cato. President C1inton's original budget proposal for fiscal 1996 would actually have increased spending for the 35 worst programs by 0.3 percent.

Source: Perspective, "Nibbling Around the Edges," Investor's Business Daily, June 4, 1996.

THE SORRY RECORD OF FOREIGN AID FUNDS

The Agency for International Development and the Overseas Private Investment Corporation have established a score of so-called investment funds, providing them with $2 billion in grants and guarantees. Unfortunately, the Clinton administration has increased this kind of taxpayer exposure more than ten-fold.

The funds -- designed to provide investment capital to emerging companies in developing countries -- are attracting criticism on grounds ranging from lack of local expertise to sloppy records and inaccurate bookkeeping. Fund managers and directors are required to know nothing about venture capital and nothing about the local markets their funds invest in. Their operating guidelines seem almost perversely designed to court trouble.

For example, the Polish-American Enterprise Fund's 1994 report stated, "It is our clear mission to offer finance and support where it is least available," including, "to people with little or no business experience."

The most commonly accepted business practices are routinely ignored:

• In real venture capital funds, promoters have their own money at risk, enter markets they are intimately familiar with, limit overhead and ultimately liquidate their investment in order to repay investors.

• But according to an AID Inspector General audit last year, "there are no agreed-upon specific objectives and measures" by which to judge the funds.

• Critics charge that fund employees steadfastly resist outside monitoring despite the fact that several of the funds have operating expenses far above the industry averages.

• It has also been reported that financial statements from firms are often missing, inadequate, inconsistent and even inaccurate.

As a result, all of the funds would be insolvent by now were they in the private market.

• The African Growth Fund, for example, lost $2.8 million between 1989 and 1992, forcing it to rely on an AID subsidy of $1.4 million and to consume $1.4 million more in capital.

• With the exception of one fund during one year, the returns for four European funds have all been negative.

• The $65 million Czech-Slovak Fund has had to set aside an increasing portion of its portfolio to offset bad debts -- 37 percent of assets as of last year.

Experts argue that even if the funds were not wasting taxpayers' money, they are making no measurable difference in national development, which is supposed to be their goal. Improvement will only come when poorer states create a domestic climate that fosters private capital markets and entrepreneurship.

Source: Doug Bandow (Cato Institute), "Uncle Sam, the World's Worst Fund Manager," Wall Street Journal, June 4, 1996.

SKYROCKETING COSTS OF GOVERNMENT

In this election year, critics of government spending are reminding voters of warnings contained in a bipartisan report issued early last year: federal spending will grow from 22 percent of gross domestic product to 37 percent in 2030, unless something is done.

The January 1995 report of the Bipartisan Commission on Entitlement and Tax Reform warned that:

• State and local outlays would add another 10 percent to the 37 percent figure -- meaning that taxpayers would be forking over 47 percent of GDP to all levels of government by 2030.

• Medicare's share of GDP alone will rise to 7.39 percent from 2.69 percent.

• Social Security will grow to 6.42 percent of GDP from 4.68 percent.

• Spending on pensions and compensation for veterans and civil servants will bloat the total even further.

• Without changes in the laws that dictate spending, federal payroll and income taxes will have to rise 70 percent. But the effect won't be financial only, experts warn. There could be severe social repercussions. Without reform, politics could soon consist of three competing groups.

• Retirees will be demanding full payment for the social programs they have paid into over the years.

• A growing underclass, further burdened by ballooning taxes, will insist on more welfare relief.

• Sandwiched in the middle will be sullen wage-earners, wondering why they even bother to show up for work.

Meanwhile, President Clinton has vetoed bills that would prevent Washington's bite of the economy from nearly doubling during peacetime. Cuts are needed just to keep taxes and federal spending at current levels. Without a radical change in direction, historians in 2030 will look back on our era to determine the cause of our irresponsibility, political scientists warn.

Source: Stuart Sweet (Capitol Analysts Network), "Big Government: The Stakes in '96," Investor's Business Daily, June 25, 1996.