Our View - Saturday

GOVERNMENT TAB FINALLY PAID
July 16 was Cost of Government Day

   In the midst of a campaign in which both major-party candidates are merrily promising more things the government is going to do for you and solemnly delineating the real and (mostly) imagined threats from which government is going to protect you, it might be useful to step back and develop a little perspective.

   According to Grover Norquist, president of Americans for Tax Reform, Wednesday, July 16, was Cost of Government Day. That is, the average American had to work until July 16 to pay his or her share of all the costs government imposes on us. This is the latest in the year that the day has fallen since 1992.

   Spending and regulation together, then, consume 53.9 percent of national income.

   It is not uncommon for people to complain or celebrate ironically about Tax Freedom Day, the day when we would (finally) be finished paying all our taxes to the national, state and local governments if government had taken every single bit of our income until that day. It usually falls sometime in May. But Mr. Norquist and his organization have refined the calculation a bit by including the extra costs the government imposes on us through regulations, price supports, tariffs and a whole host of interventions into the economy that reduce efficiency and cost us money.

   Thus Americans for Tax Reform calculates that, at current levels, federal spending will cost us 83.7 days of the 365 days in a year, while state and local spending will cost us 50.5 days. Federal regulations, however, cost us 41.7 days a year, while state and local regulations cost 20.9 days, bringing the total to 196.8 days. And, as Mr. Norquist puts it, "the spending data is precise, the regulatory burdens are understated," which is almost certainly true.

   As compared with when President Bush assumed office in 2001, federal spending consumes three more days of your life, while federal regulations (which had remained stable for the previous four years) take another full day. State and local spending consume another six days just since 2003.

   Here's the kicker. The economy has grown by $2.9 trillion since 2003, and tax revenues have increased by $785 billion. But spending has grown much more sharply. "Had the federal government limited federal spending to grow only as rapidly as the economy since 2000, Mr. Norquist writes, "the budget would have been balanced by 2006 and in surplus today."

   Can government that takes more than half the national income produced by productive and hard-working people be sustained much longer? We thought spending was too high in 2000.

FREDDIE AND FANNIE PROBLEMS

   So what happened the night of July 13, when Treasury Secretary Henry Paulson and Federal Reserve chairman Ben Bernanke announced that Fannie Mae and Freddie Mac would get government backing to keep them from failing? It seems to have prevented a major meltdown of the two government-sponsored enterprises (GSEs), but it's a short-term fix that could fall apart, especially if the housing market continues to decline and defaults increase.

   The Federal National Mortgage Corporation (Fannie Mae) was founded in 1938 as a government agency to provide liquidity to the mortgage market by purchasing mortgages from primary lenders, reselling packages of them to investors and collecting fees on the transactions. In 1968 it was converted to a "private" corporation, and in 1970 the Federal Home Loan Mortgage Corporation (which goes by the not-so-obvious acronym of Freddie Mac) was formed to provide competition in the secondary mortgage market.

   Until Sunday, it was never explicit that the two firms would have direct access to government money in case of serious trouble, but most people in the financial markets figured the government considered them "too big to fail." So they were considered safe investments, and the "spread" between the mortgages they bought and those they resold was fairly small.

   Fannie and Freddie own or guarantee $5 trillion in mortgages, have contracts with other institutions to hedge risks on $2 trillion more, and have debts of $1.5 trillion.

   However, as the subprime mortgage market began to collapse, leading to defaults and the bottom falling out of the housing market, both companies got into serious trouble - on top of accounting scandals in the early years of the decade.

   Last week their stock prices fell more than 50 percent and government offcials ?gured that if they really collapsed the ripples would cascade through international financial markets, raise the government's cost of borrowing, put downward pressure on the dollar and bring mortgage underwriting to a screeching halt.

   So last Sunday night, Treasury Secretary Henry Paulson announced that the two entities would immediately have access to the Federal Reserve's discount lending window, and that the skids were greased for legislation to allow the Treasury Department to offer loans or even to buy stock in the two companies. The hope is that neither lending authority will have to be used, but that the government's involvement would calm the financial markets.

   We talked to Peter Wallison, an economist at the American Enterprise Institute who follows these issues closely. He told us the emergency procedure worked, at least for now. Freddie Mac was able to sell $3 billion of debt in a sale that had been scheduled for Monday, and while the stock price of both companies declined Monday and Tuesday, it didn't amount to a meltdown.

   In the long run, Mr. Wallison says, there are three options: privatizing the two companies for real, nationalizing them, or muddling through. He favors the first, since it "would subject them to market discipline, which is much more effective than regulation at deterring unsafe behavior," but thinks it's a long shot. If the housing market continues to erode, however, it could become a more politically realistic option.

ONE OF THE GOOD DIES YOUNG

   Perhaps it was foreshadowed when we learned a few years ago that Tony Snow had colon cancer, but it was still a shock to learn that the former newspaper columnist, TV news moderator and White House press secretary had died July 12 at the age of 53. That he left a wife and three children whose development into adults he will not be able to see and enjoy makes it even sadder.

   Partisans in the often cutthroat yet curiously insular world of Washington are often as nasty in private toward adversaries as their televised skirmishes would suggest. But by all accounts Tony Snow had the knack of putting partisanship aside and developing friendships based on mutual respect.

   Perhaps he knew something when he left the White House to make more money for his family out on the speaking circuit, where the market offers what seem to us ordinary folk like absurd fees for those who have been in the public eye and can attract audiences. We hope he made enough that his family will never want. But we wish he had stayed around a bit longer.

   In a political world increasingly defined by those eager to take offense at the mildest manifestations of humor, satire or criticism, Tony Snow was unfailingly civil, often quite funny, and never seemed to lose his smile, even as he faced the most wrenching of personal circumstances. May it sustain his family in this time of sorrow and loss.