Power failure; rural electric and telephone programs show that good government programs never die - they just get more expensive.

• Author: Bennet, James

Power Failure

The outlook has only gotten rosier for Alltel, a telephone holding company headquartered in Ohio, since Forbes called it "the industry's most dramatically improved company for 1986." Sticking with a strategy of snapping up smaller, independent telephone companies, it's managed to grow and grow, expanding service to suburban communities across the country. In 1989, its stock split 3-for-2 for the second year in a row; dividends to stockholders jumped 10 percent--the 29th consecutive annual increase. And with a Moody's bond rating of "A" ("many favorable investment attributes"), Alltel's not likely to have trouble finding lenders to back its future growth. Think you might want to invest in this sure thing? Well, as a taxpayer, you already have. The catch is that you're guaranteed to lose money. For some reason, kindly old Uncle Sam, too strapped to boost funding for VISTA volunteers or school lunch programs, dug deep into his pockets over time and came up with $304 million in loans below market rates to make sure that Alltel could continue to scrape by--as it did last year, when it pulled in over a billion dollars.

A couple of decades back, the Rural Electrification Administration--the source of Alltel's loans--was perhaps the clearest example of what government at its best can do. Franklin Roosevelt created the REA at the height of the Great Depression, when the vast majority of American farmers didn't have electricity. In rural communities where private lenders and utilities had seen only the great risks and turned away, the federal government saw the urgent needs and invented a way to meet them. The REA offered advice and loans, at about the same rate of interest the government had to pay, to cooperatives that would electrify farms still relying on kerosene for light, wood for heat, and elbow grease for all their other energy needs. Fifteen years later, the REA's mission was expanded to include giving a boost to the tiny co-ops and independent companies that would offer telephone service to these isolated homes for the first time. By 1953, 90.8 percent of farms had electricity; by 1975, 90 percent of them had telephones. Mission accomplished.

In 1990, when 98.8 percent of farms have electricity and 96 percent have phones--compared with 93 percent of households overall--the REA's work somehow doesn't seem so necessary anymore. In fact, these days it's giving 25 percent of its telephone loans to five enormous holding companies like Alltel and losing money in the bargain. On the electric side, the REA has subsidized companies that provide power to resorts like Hilton Head, Aspen, and Vail. The REA's work "was done a long, long, long time ago," says Harold Hunter, the agency's administrator from 1981 to 1988, today a farmer near Enid, Oklahoma. "Yet it has continued now for so many years--like so many federal agencies do." This is why the history of the REA also sheds some light on how the American government functions at its worst--on how we ran up a $160 billion deficit in the first place, and on why Congress and the White House, trying to address it today, will do anything they can (monkey with the numbers, raise hidden taxes, maybe open a lemonade stand) to avoid cutting programs.

All the demons that have pushed the budget so far out of balance can be seen at work propping up the REA: The borrowers, though few in number, are widely dispersed over many congressional districts; they have grown up over the years and developed sophisticated lobbies in Washington that jealously guard their benefits; the regulations governing the programs have become arcane and complex, mastered only by their staunchest congressional defenders; the programs once served a noble purpose, so attacking them today is considered heretical; and they are small enough ("concentrated benefits and diffuse costs," as one analyst puts it) that few congressmen are willing to take the political heat involved in trying to fight them. "It's a classic case of how a program gets started and everyone agrees with the intention--and to this day I think it was a good program--but once the benefits start to flow and the beneficiaries get used to them, it's virtually impossible to terminate," says Randy Davis, who was an associate director of the Office of Management and Budget under Reagan.

The result is that 10 years of administration efforts to cut or scale back the REA have gone nowhere. When Frederick Khedouri, another former associate director of OMB, talks about going up against the lending programs' backers, it sounds like he's describing a mugging: "There were so many. . . . They had support everywhere. . . . It was hopeless." "They were quite successful," Davis says of the electric and telephone lobbies, "in beating my head in whenever they got the chance." "That's one of the reasons I left OMB," says another former official. "You bang your head against the wall and you finally realize you're not going to get anywhere. . . . They're just so powerful." Frustration over the REA, he says, "is probably one of the things that led to my divorce." It's not as if OMB fought this good fight to the death, however. "You look at the limited resources you have to do your political negotiations on the Hill, and you have to focus on the higher-priced items," says a Reagan administration official. The REA just wasn't pricey enough to be considered a priority. "From my standpoint," he continues, "that was a mistake, because I think these are some of the most abusive programs in the United States government."

It's certainly true that the REA by itself isn't a budget buster: Even if Congress killed all the lending programs, it would save only about $5 billion over the next five years, which is small change inside the Beltway. That's no reason to preserve a bad program, however. And, equally important, small change can add up. The budget is stuffed with REAs and--despite OMB's "focus on the higher-priced items"--with larger wasteful programs that are pinned in place by the same sort of interlocking interests. Recall the congressional gridlock over cutting even a few superfluous military bases. Look at how Cheney's efforts to give up a handful of procurement programs last year, like the F-14 fighter, were stymied by representatives trying to preserve any federal spending on their turf. And consider the array of perverse regulations, subsidies, and price supports by which Americans pay their farmers not to cultivate their land and their dairy farmers to kill their cows in order to drive up everyone's food bills. These agriculture programs are basically the REA writ large: revered for their early work, consecrated by time, protected by fierce interest groups, and almost impossible to understand. They were first jury-rigged under Roosevelt as "temporary emergency measures." From a high of $5.6 billion...