The Fallacy of Federal Funding

I’ve always been suspicious of federal funding of local development--transportation systems, convention centers, urban renewal projects.

Standing in front of a shiny, newly built facility makes politicians look good. As a result, they spend too much time trying to get federal funds and too little time thinking about other things that matter. Because politicians cannot get the same amount of attention from making sure that schools are painted and maintained, or cutting the costs of city government, they prefer, instead, to seek federal funds.

The federal government is happy to accommodate this system. We pay taxes and they get to decide who gets the money. Control over the allocation of tax dollars gives them power to tell us how to do things. The constraints that accompany federal allocations mean that even if we get the money, we can’t use it in ways that best benefit the community.

Matching grants change the relative cost of alternative city projects. Let’s say what you really want is police and police cars, but you can get matching grants for urban renewal projects that will make developers and contractors happy. If both cost the same, a subsidy to urban renewal projects biases the decision toward that type of spending. The result is fewer police and more urban renewal projects. It is a subtle distortion, but it means that all local governments in this country end up providing a mix of services that differs from their original preferences. And we are all spending our own money.

Los Angeles’ fixation on a public transportation system is a perfect example of the distracting lure of federal funds. Every study ever done by impartial researchers argues against fixed rail in favor of cheaper, more flexible, buses. Does this stop politicians? The lure of a 50% federal contribution has led us knee-deep into a transportation sinkhole.

When a privately funded Ventura Freeway trolley was proposed not too long ago, County Supervisor Zev Yaroslavsky expressed the concern that stopping to examine the privately funded rail project would slow the flow of hundreds of millions of dollars in state and federal construction funding to Los Angeles for the existing Metropolitan Transportation Authority-approved plan.

Yaroslavsky should reread his criticism of the private trolley and think about it in the context of the publicly funded system he favors. He said of the proposed private plan: It would require “some untold amount of operating subsidies . . . to ensure that fares remained at affordable and competitive levels.” He said, “Such ventures don’t pencil out.” He talked about the inconvenience to commuters and the surrounding community. How is the MTA project exempt from this criticism? The MTA project suffers from all the same problems and then some.

In its July 20 issue, the Economist magazine ran a story on Cleveland. It describes the huge subsidies from federal, state and local taxpayers that went into the construction of the $90-million Rock and Roll Hall of Fame and Museum, a $7-million federally funded railway, a $435-million sports complex, $125 million in federal Urban Development Area Grant funds, $90 million in federal empowerment zone grants, and more. The Economist asks whether taxpayers will benefit from this spending. Cleveland itself continues to shrink. Its schools are in disarray, with high dropout rates and major financial woes. Cleveland might look good to a tourist, but how has this spending helped the local residents?

Los Angeles should take a lesson from Cleveland. Efforts to attain empowerment-zone status or to secure federal and state funds for transportation or urban renewal projects sap resources from productive projects the city really needs. If the city permitting process were improved, we could create jobs on our own. If all schools were allowed the autonomy to contract privately with painters, electricians and gardeners (as charter schools are allowed to do), they might become the key to the urban renewal that eludes us.

Every year we pay taxes. But when the money comes back, it is a “grant.”

Studies of federal fund allocation across states suggest the political nature of the process. Even more frustrating is that much of the money gets lost in the round trip. Every time we cycle a dollar through the state and federal governments, public agencies take a large cut before the money ever returns to our community. How much money did we send to Washington in exchange for these “grants”?

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We’ve been fooling ourselves thinking that building more highways or rail lines will resolve congestion or that publicly funded urban renewal projects can help the economically disadvantaged. Congestion is solved by raising the cost of getting on the road. Urban decay is harder to fight; it requires changing the educational system--allowing choice and competition among schools. It requires local action to reduce barriers to job creation and increase access to jobs by making private van and bus service legal. The encouraging thing about these solutions is that none require that the government spend money. It’s clear why politicians are not excited about these options.

We need to get our priorities straight. The good news is that Congress has proposed legislation to reduce a major federally funded program--highway construction. The legislation calls for a simultaneous reduction in the federal motor-fuel tax. Taking a lead from this proposal, other federal and state programs that fund local transportation systems or grand urban renewal projects should be shut down and taxes reduced by an equal amount.

Without the distortions and distractions caused by federal subsidies, local representatives could turn their attention to such uninspired things as maintaining city streets and public facilities and reducing crime. Perhaps, when the smoke screen of promise offered by federal funds has evaporated, they will even see fit to attempt regulatory reforms that enhance job creation. These efforts would make the Valley a more pleasant and attractive place to live.