Earmark Reform
Congressman Ron Paul
U.S. House of Representatives
April 10, 2008
Madame Speaker, abuses of the earmark process by members of both parties demonstrate the need for reform. However earmarks are hardly the most serious problem facing this country. In fact, many, if not most of the problems with earmarks can be fixed by taking simple steps to bring greater transparency to the appropriations process. While I support reforms designed to shine greater sunlight on the process by which members seek earmarks, I fear that some of my colleagues have forgotten that the abuses of the earmarking process are a symptom of the problems with Washington, not the cause. The root of the problem is an out-of-control federal budget. I am also concerned that some reforms proposed by critics of earmarking undermine the separation of powers by eroding the constitutional role Congress plays in determining how federal funds are spent.
Contrary to popular belief, adding earmarks to a bill does not increase federal spending by even one penny. Spending levels for the appropriation bills are set before Congress adds a single earmark to a bill. The question of whether or not the way the money is spent is determined by earmarks or by another means does not effect the total amount of spending.
Since reforming, limiting, or even eliminating earmarks does nothing to reduce federal spending, I have regarded the battle over earmarks as a distraction from the real issue– the need to reduce the size of government. Recently, opponents of earmarks have embraced an approach to earmark reform that undermines the constitutional separation of powers by encouraging the president to issue an executive order authorizing federal agencies to disregard congressional earmarks placed in committee reports.
Since the president’s executive order would not reduce federal spending, the practical result of such an executive order would be to transfer power over the determination of how federal funds are spent from Congress to unelected federal bureaucrats. Since most earmarks are generated by requests from our constituents, including local elected officials, such as mayors, this executive order has the practical effect of limiting taxpayers’ ability to influence the ways the federal government spends tax dollars.
Madame Speaker, the drafters of the Constitution gave Congress the powers of the purse because the drafters feared that allowing the branch of government charged with executing the laws to also write the federal budget would concentrate too much power in one branch of government. The founders correctly viewed the separation of law-making and law-enforcement powers as a vital safeguard of liberty. Whenever the president blatantly disregards orders from Congress as to how federal funds should be spent, he is undermining the constitutional separation of powers.
Congress has already all but ceded its authority to declare war to the executive branch. Now we are giving away our power of the purse. Madame Speaker, the logical conclusion of the arguments that it is somehow illegitimate for members of Congress to control the distribution of federal funds in their district is that Congress should only meet one week a year to appropriate a lump sum to be given to the president for him to allocate to the federal government as he sees fit.
Madame Speaker, all members should support efforts to bring greater transparency to the earmarking process. However, we must not allow earmarking reform to distract us from what should be our main priority–restricting federal spending by returning the government to its constitutional limitations. I also urge my colleagues not to allow the current hysteria over earmarks to justify further erosion of our constitutional authority to control the federal budget.
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March 27-29, 2009
The Free Market, Financial Style
How the Scam Works
By MICHAEL HUDSON
Newspaper reports seem surprised at how high banks are bidding for the junk mortgages that Treasury Secretary Geithner is now bidding for, having mobilized the FDIC and Fed to transfer yet more public funds to the banks. Bank stocks are soaring – thereby bidding up the Dow Jones Industrial Average, as if the “financial industry” really were part of the industrial economy.
Why are the very worst offenders – Bank of America (now owner of the Countrywide crooks) and Citibank the largest buyers? As the worst abusers and packagers of CDOs, shouldn’t they be in the best position to see how worthless their junk mortgages are?
That turns out to be the key! Obviously, the government has failed to protect itself – deliberately, intentionally failed to do so – in order to let the banks pull off the following scam.
Suppose a bank is sitting on a $10 million package of collateralized debt obligations (CDOs) that was put together by, say, Countrywide out of junk mortgages. Given the high proportion of fraud (and a recent Fitch study found that every package it examined was rife with financial fraud), this package may be worth at most only $2 million as defaults loom on Alt-A “liars’ loan” mortgages and subprime mortgages where the mortgage brokers also have lied in filling out the forms for hapless borrowers or witting operators taking out mortgages at far more than properties were worth and pocketing the excess.
The bank now offers $3 million to buy back this mortgage. What the hell, the more they bid, the more they get from the government. So why not bid $5 million. (In practice, friendly banks may bid for each other’s junk CDOs.) The government – that is, the hapless FDIC – puts up 85 per cent of $5 million to buy this – namely, $4,250,000. The bank only needs to put up 15 per cent – namely, $750,000.
Here’s the rip-off as I see it. For an outlay of $750,000, the bank rids its books of a mortgage worth $2 million, for which it receives $4,250,000. It gets twice as much as the junk is worth.
The more the banks holding junk mortgages pay for this toxic waste, the more the government will pay as part of its 85 per cent. So the strategy is to overpay, overpay, and overpay. Paying 15 per cent is a small price to pay for getting the government to put in 85 per cent to take the most toxic waste off your books.
The free market at work, financial style.
Michael Hudson is a former Wall Street economist. A Distinguished Research Professor at University of Missouri, Kansas City (UMKC), he is the author of many books, including Super Imperialism: The Economic Strategy of American Empire (new ed., Pluto Press, 2002) He can be reached at mh@michael-hudson.com
I ask 3 things:
1. Where, without reading the entire bills, can a list be seen showing the names, state, amount and purpose for “earmarks” in each bill?
2. Given the current Fed. spending (earkmarks included) what are the ratios by state of tax money rec’d and $ spent in that state?
3. Taxes are for spending both at the fed level (defense) and the local level (bridges). Without the “hidden” process of earmarks how better could we spend our money locally? I suggest the Feds “skim” a known % for the defense et al issues and then return the difference paid in by state to the state to spend as they see fit based on the ratios in #2 above.
[...] Here’s a link I found which describes Ron Paul’s position quite [...]
I want to know why you talk about earmark and you have and you have millions of earmarks. Is this pay back for campaign contributions? T Carroll
It is obviously not payback for campaign contributions. Earmarks provide transparency of spending. They allow people to know exactly how the funds are being spent. It’s not like Representatives just “earmark” a lump sum of cash to disburse at their discretion. Nope, that’s the job of the Federal governement. Did you read RP’s speech?
RP is doing 2 things: fighting for reform, and in the meantime playing the game to win. In the current landcape of politics, the fed taxes everyone, skims some money off the top, and then redistributes their money back them. RP says this shouldn’t be happening, thus eliminate the income tax. However, seeing as that isn’t happening anytime soon, he has to represent and support his constiuents by earmarking their money back to them.
It’s the unfortunate truth, he could not earmark out of principle that the fed shouldn’t be taxing people anyways, but that would screw his state over. He has to play the game to win until such time as he is successful in changing the way dollars flow to goverment.
the real big problem with earmarks is that congress for the most part(rp and a few will)do not read earmark bills but just pass them! they are the most transparent, and they should always be there but need to be read through! the omnibus bill has set aside tattoo removal mission hills ca.! that is a bad earmark! i hope i am coming off right in how i am saying it but more earmarks is great, but make sure they are truely needed!
I only wish RP would articulate in this debate on earmarks his position on local authority of tax collection, and reduction of taxes provided to the fed. The American tax payer sees such a small amount of their federal dollars actually made available back to them because of federal overhead, the central spending in various programs, etc. If all the federal programs that were reallocated back to the states were instead just taxed at the local level, more money would actually be spent in the local infrastructure instead of lost to the fed in operating costs and various social and military programs (or some best friend’s contract award).
It’s not the earmarks that are the problem, its the fact that the fed has claimed power to distribute funds that the states should be collecting themselves. That of course then inherently passes the power from the states to the fed.