NC House gives a lesson in fungibility

Most introductory economics classes teach students about fungibility--the simple insight is that money is money. If you give people money for one purpose, they can easily spend it for another.

I usually teach this with an example of a grandparent's gift to a student to buy books. Suppose that a student has $1,000 in her budget at the start of the semester, which she has to allocate between books and her other expenses (Starbucks, new shoes, pizza, etc.). The student's grandmother sends $100 to be used exclusively for books. Will the student's book expenditures go up by $100? Probably not. If the student was already going to spend some money to buy books, she can use her grandmother's gift to offset those expenditures, and use the freed up money to buy other things. The student can abide by the letter of her grandmother's wishes by spending the $100 on books, but the student might go against the spirit of those wishes by increasing her overall book spending by less than $100 (or perhaps not increasing her book spending at all). At the end of the day, $1,000 in unrestricted money plus $100 in restricted money leads to choices that are similar to or the same as $1,100 in unrestricted money--$1,100 is $1,100.

The North Carolina House of Representative is offering a much better (and bitter) lesson than my dry classroom example. The Charlotte Observer reports that the House is proposing to play a similar shell game with money that the state will be receiving from the large legal settlement with mortgage companies and that was supposed to go to help homeowners hurt by mortgage shenanigans.

The North Carolina House budget, which was approved Wednesday, could use nearly $23 million from a blockbuster legal settlement with the nation’s largest mortgage servicers to plug budget gaps, joining dozens of states in redirecting money intended to help struggling homeowners.

Though law enforcement and housing advocates will still receive the millions directed to them in the settlement, the House budget also encourages state agencies to use settlement dollars to make up for cuts in other places.

In total, about one-third of the money sent to the North Carolina state government could be used to fill holes in the $20.3 billion budget introduced Tuesday.

So how does the House's shell game work? Consider the NC Housing Finance Agency. Under the terms of the settlement with the mortgage companies, $30.6 million in settlement funds was to go to this agency to help pay for counselors and legal representation to help struggling homeowners avoid foreclosure. Under the House plan, North Carolina would technically keep its end of the bargain, adding $30.6 million to the agency's budget. However, the House has also proposed cutting $4.3 million from another part of the agency's budget and using that money for other purposes. The net result is that only $26.3 million is actually added to the budget.

Another $2.9 million was supposed to boost the ability of the State Bureau of Investigation to investigate financial crimes. However, through the magic of fungibility, the $2.9 million that is added to that part of the SBI's budget will be offset with an equal-sized cut, and the freed-up money will be used to cover a new earmarked crime lab in Henderson County. The net result will be no additional capability to go after the criminals who prey on homeowners.

Effectively, the House is proposing to tax the funds that are slated to help homeowners. Of the $49 million in restricted funds that were supposed to help homeowners, the House would claw back $7.5 million or about 15 percent of the take. And that amount is on top of $16 million that was already going to general purposes in the state budget.

The House's message to homeowners? You've been helped quite enough, thank you.

That didn't take long

The Washington Post reports

Only three days after GOP senators and senators-elect renounced earmarks, Arizona Sen. Jon Kyl, the No. 2 Senate Republican, got himself a whopping $200 million to settle an Arizona Indian tribe's water rights claim against the government.

More earmark reforms

Yesterday, Democratic leaders in the House of Representatives decided to ban earmarks going to for-profit companies.

Today, the House Republican conference has upped the Democrats by deciding that its members won't ask for any earmarks at all for this year.

I seldom agree with the "Party of No," but a "no" to earmarks is a good thing.

Some welcome earmark reforms

The Democratic leaders of the House Appropriations Committee and Defense Appropriations Subcommittee have taken the welcome, albeit modest, step of prohibiting Congressional earmarks going to for-profit companies.

House Democratic leaders on Wednesday banned budget earmarks to private industry, ending a practice that has steered billions of dollars in no-bid contracts to companies and set off corruption scandals.

The ban is the most forceful step yet in a three-year effort in Congress to curb abuses in the use of earmarks, which allow individual lawmakers to award financing for pet projects to groups and businesses, many of them campaign donors.

But House Republicans, in a quick round of political one-upmanship, tried to outmaneuver Democrats by calling for a ban on earmarks across the board, not just to for-profit companies. Republicans, who expect an intra-party vote on the issue Thursday, called earmarks “a symbol of a broken Washington.”

The Democrats' decision is one of several that addresses the earmark mess that had exploded under the previous Republican leadership. Reforms in the last three years have made the process more transparent (prior to FY 2008, the number and amount of earmarks could not be reliably tracked; earmarks and their sponsors can now be monitored) and also appear to have curbed earmark spending.

The Democrats' most recent step probably owes more to ongoing, bubbling scandals (several involving earmarks) than any new-found virtue. The Democrats may have also been trying to stay one step ahead of House Republicans, who are considering a unilateral blanket ban on earmark requests. To the extent that Republicans align more closely with business concerns, the Democrats' move tilts not so subtly in their own favor.

The impact of this particular step may end up being modest. Other Democrats in the House are complaining, and Democrats and Republicans in the Senate have rediscovered bipartisanship in completely dismissing the idea.

Democratic appropriators in the Senate and House are fighting over a ban on earmarks to for-profit companies, throwing a wrench in a House attempt to burnish its ethics record before the midterm elections.

Sen. Daniel Inouye (D-Hawaii), the chairman of the Senate’s Appropriations Committee, slammed House Appropriations Chairman David Obey’s (D-Wis.) moratorium on earmarks to for-profit companies mere hours after Obey announced it on Wednesday.

The House Democrats' reform is modest in other ways. It still allows for earmarks to non-profits, such as universities (including this one). Representatives can also continue to press for parochial spending through other means, such as defense items that happen to be produced by certain companies or in certain districts.

At the same time, the Democrats' move could yield bigger dividends if it ignites an inter-party competition over earmark and ethical reforms. Let's hope that such a competition arises.

Earmarks anyone?

The Washington Post asked several Congress people and analysts about earmarks. Consider this vigorous defense by one lefty Representative:

To fight earmarks is to fight for an even more powerful executive branch. It is popular these days to condemn earmarks in the name of fiscal conservatism. The truth is that they account for less than 2 percent of the spending bill just passed. And even if all earmarks were removed from the budget overall, no money would be saved. That money would instead go to the executive branch to spend as it sees fit. Congress has the power of the purse. It is the constitutional responsibility of members to earmark, or designate, where funds should go, rather than to simply deliver a lump sum to the president.

Earmarks actually provide a level of transparency and accountability to federal spending. Consider the $350 billion that was recently given to the Treasury Department for the Troubled Assets Relief Program. The Treasury has not been forthcoming about where much of that ended up. If every bit of it had been earmarked, at least we would know something about how it was spent.

You would expect this sort of defense from someone who sponsored or co-sponsored a total of $75 million in earmarks in the recent omnibus spending bill (this put the 9th highest total among representatives; see http://www.taxpayer.net/). In a delightfully hypocritcal twist though, this same Representative voted against the bill.

At Slate, Timothy Noah points out that 6 of the 10 largest earmark hauls in the Senate also went to Republicans.