When Government Goes Into Business

The sequester is kicking in, and the consequences are upon us: airplanes are falling out of the sky, furloughed FBI agents commiserate over donuts, sea levels keep rising. Help, however, is on the way. Increasingly, federal agencies are funding themselves from sources other than appropriations. Not a few have turned into profit centers for the Congress.

Just last week, the Federal Reserve proposed a fee schedule for its banking oversight “services,” pursuant to section 318 of Dodd-Frank and to the tune of $440 million. (That’s what the exercise supposedly costs the government. What it costs the banks and the economy, no one knows.) Not everyone is happy with the NPR—see here.

Also last week, the Food and Drug Administration proposed to beef up its elaborate “user fee” structure. The FDA is a million miles behind on implementing the 2011 Food Safety Modernization Act. I feel their pain. The FSMA is so stupid, I can’t imagine how anyone can write a rule under it that could survive arbitrary and capricious review. Be that as it may, the agency has gotten whacked for missing a bunch of statutory deadlines: Center for Food Safety v. Hamburg, 4:12-cv-04529 (ND CA 2013). Plus, FDA complains about being sequestered at a very bad time. So it is proposing—consistent with the President’s budget plan—to ramp up inspection fees, under what appears to be a non-existent regulatory system. Section 107 of the FSMA authorizes the fees. (If you have to see the guidance document on how they work, it’s here.)

Still, FDA’s latest proposal to hike and restructure the fees has again caused a great deal of consternation and complaining, along with confusion as to whether the agency might actually need additional congressional authorization. Heaven forefend.

Call me a crank, but I’m getting increasingly worried about users fees, assessments, taxes, legal settlements, fines, and other means of “self-funding” agencies. It’s even more troublesome when these outfits start making money—e.g., through FCC spectrum auctions. There are at least three things to worry about.

First, it would be good to know, feel, and vote on the true cost of government. That’s not actually possible when it comes to the regulatory state: the private costs are necessarily off-budget. That’s all the m ore reason to at least keep the enforcement costs on budget.

Second, agencies that don’t need congressional appropriations will go into business for themselves. And when agencies send money to Congress (rather than the other way around), oversight is bound to become either meaningless or positively harmful (“how much money have you made us lately”?).

Third, many “self-funding” devices create very bad incentives. In a lot of areas, from consumer fraud to financial disclosure, illegality is poorly defined, and the agencies have only the foggiest notion of directing their enforcement activity in a productive direction. When agencies get to keep the proceeds, that problem solves itself—but in a very bad way: the agency will seek to maximize fines and settlements, net of the cost of detection and prosecution. You can show on a blackboard why that’s crazy from a public policy standpoint.

Alas, I know all too little about this netherworld. This blog is little more than an announcement of my summer research agenda. Meanwhile, I have an idea for the Department of Defense (which really has been hit hard by the sequester): rent out the 102nd Airborne.