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How the Government Protects America's Subways
In 2002, the STAR program (Supplemental Terrorist Activity Relief) authorized the Small Business Administration to guarantee loans to businesses that were "adversely affected" by the attacks of 9/11. At first the loans were not taken up because most businesses didn't think they were adversely affected but in true bureaucratic fashion the SBA wanted a bigger program so they announced:
...the SBA believes that a very large percentage of small business borrowers located in areas throughout the country may be eligible for the STAR program. In guaranteeing a STAR loan, the SBA will rely on the lender’s determination that a small business was adversely affected by the terrorist actions. When performing compliance or loan purchase reviews, the SBA will be looking only to verify that the lender documented its evaluation of the small business’ eligibility for the STAR program. The SBA has not established any requirements regarding the severity or duration of the adverse impact that the small business suffered. (italics added).
Are you surprised that Office of Inspector General could not find any terrorism connection to the vast majority of the loans? More than 3 billion dollars were guaranteed including millions for Subways. Protecting public transport, right? No, protecting America's sandwich demand. There was also $22 million for Dunkin Donut franchines in nine different states, and guarantees for a Salt Lake City "dog boutique," a South Dakota radio station, a Virgin Islands perfume shop and much else besides.
Posted by Alex Tabarrok on August 20, 2007 at 07:15 AM in Economics | Permalink
Comments
I can see how Subway might be negatively affected. More cops are on duty on overtime (in this hypothesis, I have no idea about fact!), cops on duty feel compelled to eat at donut shops due to peer pressure. These extra calories during OT are a substitute at the margin for meals that might otherwise have been eaten at Subway during off duty hours in civilian clothes. Therefore Subway has arguably been negatively affected by terrorism.
Another hypothesis is that stupid people (or stupid terrorists misinterpreting directions from their superiors) might think that when they hear on the news that subways might be targeted and are more dangerous now, they might start avoiding Subway at the margin.
:x
Posted by: happyjuggler0 at Aug 20, 2007 10:20:10 AM
You often hear liberal economists, like Dani Rodrik and Paul Krugman, say "Libertarians are entirely too pessimistic - the government has a positive role that it can and does play". A small part of me always wants to agree with them, but then I hear an anecdote like the one above and realize that libertarian cynicism is certainly well founded.
Oh well.
Posted by: Chris at Aug 20, 2007 10:28:29 AM
I'm not sure what lesson we are supposed to learn from this anecdote.
Is it that government bureaucrats want to see their domains get larger? Is this universally bad?
Is it that the audit functions of the government aren't working properly? If they aren't why not?
Who asked for the program in the first place? Why? Did the administration support it or oppose it? Why?
If the implication is that government can't be trusted and is open to corruption or self-dealing this only confirms the idea that humans are imperfect. There is nothing so commendable of about the performance of private firms over the past several decades.
Are we to believe that making a profit automatically makes the principles in the firm act more ethically?
All human organizations are subject to the same potential defects, to try and pin the problems on only a single sector is more ideology than evidence.
Posted by: robertdfeinman at Aug 20, 2007 11:34:01 AM
Are we to believe that making a profit automatically makes the principles in the firm act more ethically?
It is not the profit motive in and of itself - it is the competition (which government lacks). A breakdown in ethics closely follows a failure in competition.
Posted by: Jody at Aug 20, 2007 11:57:11 AM
Love this post, Alex!
Posted by: Matthew C. at Aug 20, 2007 12:28:11 PM
Why this 1950's era bureaucracy continues to soak up taxpayers' dollars is beyond me. This incident clearly indicates that old government programs never die or even fade away, they just go on forever.
Posted by: Ned at Aug 20, 2007 1:00:13 PM
Why this 1950's era bureaucracy continues to soak up taxpayers' dollars is beyond me. This incident clearly indicates that old government programs never die or even fade away, they just go on forever.
Posted by: Ned at Aug 20, 2007 1:00:34 PM
Jody:
I think you need to look at how much real competition there is in the US. In most big industries there are only a handful of firms. The differences between them are slight and whatever competition they engage in is mostly trying to snatch customers away from the other firms by means of marketing and promotion, not offering real product differences.
Just to give you some examples: the (global) music business is down to five firms. The US cell phone industry is down to four, none of them offers features available in Japan or Korea. The auto industry has about six major players in the western countries. Major broadcast and media firms in the US are also under ten.
In most industries what we have in actuality is a shared monopoly, not competition. It is all well and good to claim that in the ideal situation competition "works", but we don't have it in practice.
The claim that government is inefficient because of a lack of competition is one of the statements that is frequently made, but the data is seldom provided. To give only one counter example: Medicare runs at a 3% overhead level. Private insurance take about 30% of the premiums for overhead, profits and other expenses.
If you want to claim that government is inefficient you need to provide more than anecdotal evidence.
Posted by: robertdfeinman at Aug 20, 2007 4:42:12 PM
Robertdfeinman: "whatever competition they engage in is mostly trying to snatch customers away from the other firms by means of marketing and promotion, not offering real product differences."
What do you mean by this? that Toyota's hybrid engines were not an innovation for the U.S.? that 60 inch flat screen televisions are just about the same as 27 inch tube sets? that oversized titanium golf clubs perform no better than the tiny persimmon wood clubs of 20 years ago? that GPS features on phones and automobiles are trivial? that Boeings 787 differs so little from previous aircraft that they cannot sell the plane?
I don't understand your claim that the U.S. auto industry is not competitive. In the first place, there are 8 viable competitors, not 6. Hyundai and Kia are growing at double-digit rates and represent a significant part of the market. The hold of the Big Three automakers has continued to drop. The variety of vehicles being sold today - from Hummers to to Prius's to mini-Coopers - is greater than ever in my lifetime of 56 years.
What measure do you use to determine an industry is not competitive?
Posted by: John Dewey at Aug 20, 2007 7:40:10 PM
"Medicare only runs at 3% overhead while private insurance runs at 30% overhead" is definitely one of those tropes that indicates that the speaker doesn't know what they are talking about or how to analyze numbers.
First, even in a perfectly competitive market, you will see a positive rate of accounting profit, to reflect the opportunity cost of capital.
There IS an opportunity cost of capital in running Medicare, even if it's not explicitly recorded, so that adds at least 7% (probably more) to the true overhead costs right there.
In addition, Medicare gets to slough off part of their overhead costs in that they have the government bearing the cost of collecting their "premiums."
It's quite possible that Medicare has lower admin costs than private insurance, but you won't know that just by mindlessly repeating some context-free numbers like Feinman does.
In addition, some of the desirable moves that Medicare is making, such as refusing to reimburse hospitals for care that results from hospital error, will undoubtedly incur higher overhead costs. That doesn't mean that's a bad decision. It just means that some overhead costs are actually good, because they lower fraud and abuse and increase accountability.
But then that makes the exercise of comparing overhead costs even dicier.
Posted by: Keith at Aug 20, 2007 9:14:05 PM
Oh, and let's not forget the deadweight costs of the taxes used the fund Medicare. That should get included in any comparison.
Posted by: Keith at Aug 21, 2007 9:12:07 AM
Incidentally SBA is also one of the biggest disbursers of 'aid' post-disaster (natural)
Posted by: Patrix at Aug 21, 2007 2:06:56 PM
It's a typical example of government finding a vacuum to fill when one does not present itself directly.
Posted by: Elliot Essman at Aug 21, 2007 5:52:20 PM
Governments have hundreds of conflicting and even self-contradictory goals, because their goals reflect our goals. Corporations have one goal, shareholder profit.
I'm pretty sure if you take that into account, efficiency differences wouldn't be very impressive. Certainly I've seen that (non-corrupted) government can be very effective as long as they have very specific goals and good intrisic motivation. For instance in such things as appraising the quality of various foreign aid development projects. We have a government agency for that here, NORAD, and they are much, much better informed than the average charity contributor on which projects actually have merit. It's staffed by very well-educated and conscientous people, because those are the people attracted to such a job.
I also recently met one guy from a rich family who by his own account had a safe, comfy no-work-really-needed job in an insurance company. In the same conversation he complained about lazy government employees. It was hard not to smile.
Anecdotes don't prove anything, except that there are at least some exceptions. Less prejudices would be nice in any case.
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