Responding to a Critic

Economist Dean Baker, who blogs for The American Prospect, takes issue with last week's installment in The Post's ongoing Harvesting Cash series. (Read today's editorial about the Post series and former President Jimmy Carter's op-ed piece about farm subsidies.) Baker argues that the article indicts the Agriculture Department's loan program for rural development without sufficient cause or evidence. In his piece, Gilbert M. Gaul reported that the loan program has endured nearly $1.5 billion in losses while backing almost $14 billion in guarantees to private banks. "More than three decades after the loan program was created," Gaul wrote, "USDA officials still don't know whether it works."

Read on for Gaul's reply to Baker:

Gilbert M. Gaul replies:

"Dear Dean Baker: Where I come from a billion or two billion dollars is still a lot of money - especially when it belongs to taxpayers.

In one of his recent blogs for The American Prospect, Baker contends that my article misrepresented the losses plaguing USDA's Business & Industry Guarantee loan program. I'm all for starting a larger conversation about USDA's economic development efforts, and getting folks thinking about whether they work or don't work.

Right now, USDA doesn't have meaningful benchmarks to measure its successes and failures in its loan and grant programs for businesses. The guaranteed loan program has operated for three decades without any standards other than counting (but not always verifying) the number of jobs recipients say they have 'created or saved.' USDA only recently hired an economist to help it develop a more sophisticated yardstick for examining the thousands of private loans it backs. We all look forward to the results.

Dean questions whether a nearly 11 percent loss rate on nearly $14 billion in loans is bad: 'Sounds much better than Citigroup and the Wall Street boys do on their SIVs, CDOs, and other exotic instruments.' So let's see if I have this right. Dean thinks I am illogical to compare the default rate to that of other government lending programs and federally insured commercial loans (which, by the way is what USDA compares itself against). But it is logical to compare USDA's default rate with what are by definition some of the riskiest (and one might argue reckless) loans and other financial instruments on Wall Street? And let's not forget, exotic instruments come with warnings of investor risk; a government loan guarantee is a risk made on the back of taxpayers. Dean's smart enough to know that no commercial bank could exist with an 11 percent default rate. In fact, their loss rates on traditional commercial loans average less than one percent, according to the FDIC.

Moreover, Dean argues that 'this loss rate is not a scandal as the article implies' because the program's point is to promote economic development. But where is the development, if three-quarters of the jobs it claims to 'create or save' already existed?

Dean acknowledges that the story provided examples of 'clearly inappropriate and/or fraudulent loans.' But he says he doesn't know what this is supposed to mean and asks if The Post has data on the percentage of loans that were - his words - inappropriate. It's an interesting question, but I'm not aware that any federal or congressional agencies have ever taken a broad look at the waste, inefficiency or fraud in the program. In fact, The Post's analysis was the first attempt to do that, to the best of my knowledge.

Dean was not impressed with my example of how a USDA-backed loan to a new movie theater complex in Smithfield, N.C., hurt an older, existing movie theater. That's the way the economy works, he noted. Sure. But what Dean doesn't address is the role the government plays in this scenario. Would the other developer even have gotten a loan without the guarantee? Does the USDA, in effect, end up favoring some businesses and punishing others? These are all interesting questions that are left ignored.

A scandal - Dean's word, not mine - is in the eye of the beholder. But a government program that doles out billions with little or no accountability, that does not do its own due diligence, that is susceptible to waste and fraud, that has no benchmarks for knowing its loans and grants work, that loses far more than comparable government and private lending programs, seems worth examining to me. It may only be, as Dean notes, a fraction of the federal budget. But as the old saw goes: A billion here and a billion there and after a while we're talking real money."

By The Editors |  December 10, 2007; 11:44 AM ET Farm Subsidies
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