Uncle Sam the Middleman

April 27, 2016
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The federal government funds hundreds of subsidy programs for state, local, and private activities, such as programs for housing and economic development. State and local governments, businesses, charities, and individuals could fund such local activities by themselves without federal aid. But America is increasingly kicking local activities up to the federal government, and so Uncle Sam the Middleman keeps growing.

How much does Uncle Sam the Middleman cost? As a rough estimate, the federal bureaucracy represents about 10 percent of the costs of the projects it gets involved in.

I described how U.S. Department of Agriculture (USDA) rural programs fund such activities as local broadband, clam fishing, energy projects, apartment construction, and street paving. USDA rural programs will cost federal taxpayers $6.5 billion in 2016. Most of the money will go to the people and businesses that are subsidized, but a portion will end up in the hands of federal bureaucrats.

The federal budget appendix shows that there are 5,000 workers in the USDA’s Rural Housing Service, Rural Utilities Services, and Rural Business Cooperative Service. Based on data in the appendix, they earn an average annual salary of about $73,000 and receive benefits of $25,000. They earn less than other federal workers, but still far more, on average, than private sector workers. Fun fact: these 50 rural program administrators earn an average annual salary of about $135,000.

All and all, workers in the three rural agencies impose an annual cost on taxpayers of about $490 million. But these folks need office space, telephones, travel expenses, and supplies to do their paperwork. Based on data in the appendix, that cost is roughly $38,000 per worker for the rural programs, or $190 million a year.

Thus, of the $6.5 billion taxpayer cost of the rural programs, roughly $680 million does not get to the broadband companies, the clam fisherman, and street paving contractors—it goes into the pockets of the federal middlemen.

Why is this important? Because politicians and federal program supporters often talk as if federal funding of local activities is a free boost to the economy. But it is not free for a lot of reasons. Most directly, federal programs are not free because Uncle Sam the Middleman carves off for itself about 10 percent of the money flowing through it.

The USDA rural programs spent $651,000 on an arts center in Bozeman. But about $65,000 would not have gotten to the arts center; it would have been consumed by the federal bureaucracy. Rather than raising the money locally, Bozeman citizens essentially filled in their 1040s, sent their income tax money to Washington, and then had to lobby federal officials to get some of it back for their arts center. Such roundabout financing of local projects makes no sense.

For more on the problems of America’s roundabout financing system, see here.

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