October 27, 2015 | Commentary on Federal Spending, United States Government

Congress eyes a new pot of money

History proves that the U.S. Congress consistently excels in at least one thing: spending other people's money. Lawmakers regularly budget to spend more than they collect, and it rarely occurs to them that they should spend less.

The latest example is the U.S. Senate's plan to "save" the highway trust fund. Congress has mishandled the fund — which, technically, isn't even a fund — for decades. In addition to squandering highway funds on pet nonhighway projects, they've spent plenty on highways that serve no national purpose. As a result, the trust fund has been running in the red for seven consecutive years.

So what's lawmakers' solution? Find another source of revenue, of course.

Unsurprisingly, they've picked an easy target: banks. After all, that's where the money is, and no one much likes those "fat cats" anyway, right?

The plan is to reduce the annual dividend that the Federal Reserve pays to member banks and give the "saved" amount to Congress. (In typical fashion, the Senate proposal is a six-year spending plan with three years' worth of funding, so it does nothing to really solve the highway funding problem.)

The 6 percent dividend has been in place since the Fed was created in 1913. It compensates member banks for the shares of stock they are required to buy as a condition of joining the Federal Reserve System. Banks can't sell the stock or use it as collateral. Essentially it's a deposit, not an investment.

But some in Congress want to reduce the dividend rate for large banks to 1.5 percent, claiming that 6 percent is "overly generous." It that's the case, it would be better to tie the dividend to some risk-free market rate. But no one in Congress is discussing this sort of change; they're just focused on getting their hands on that money.

As always, we're supposed to believe that skimming the bank dividend won't hurt consumers. But banks don't bear costs, people do.

An analyst at Guggenheim Securities LLC estimates the dividend grab would lower the industry's annual profits by some 4 percent. Since banks have to earn profits to stay in business, they would have to respond to this hit with some combination of price increases and cost reductions.

That's what they did with the advent of Dodd-Frank. To help offset its regulatory costs, banks have increased fees on basic checking accounts, ATM transactions and overdrafts. If you're still lucky enough to have free checking, it likely won't last much longer.

And if you're waiting for your bank to start paying higher interest on your savings account, reducing this dividend payment isn't going to speed that up.

The timing is also rather bizarre. Members of Congress have been fixated on shoring up the safety of our financial system; now they're itching to take billions away from banks. It makes little sense economically.

This change would also set a terrible precedent. The Federal Reserve was never intended to serve as a piggy bank for Congress. What part of it will lawmakers dip into the next time one of our so-called trust funds runs low?

And where are all the senators who recently argued that Congress should stay out of the Fed's business? They claimed that auditing the Fed or imposing rules to direct monetary policy would undermine the central bank's independence. But if those policies go too far, surely forcing the Fed to turn over more money to the Treasury violates central bank independence.

Either way, tapping banks for highways makes a complete mockery of the "user pays" principle that is supposed to guide highway spending.

If Congress wants to change the dividend, that's certainly its prerogative. But first, there should be a full debate over the costs and benefits of Federal Reserve System membership. Otherwise, reducing the dividend amounts to nothing more than a shortsighted policy designed to increase federal spending. And we already have enough of those.

-Norbert Michel is a research fellow specializing in financial regulation at the Heritage Foundation's Roe Institute for Economic Policy Studies.

About the Author

Norbert J. Michel, Ph.D. Research Fellow in Financial Regulations
Thomas A. Roe Institute for Economic Policy Studies

This article originally appeared in the Washington Times