“REA is a fine example of private enterprise”

In Through the Looking Glass, Alice discovered that words can be rather slippery things:

“When / use a word,” Humpty Dumpty said in rather a scornful tone, “it means just what I choose it to mean — neither more nor less.”

“The question is,” said Alice, “whether you can make words mean different things.”

Some readers recently were as startled as Alice on seeing how familiar words were used by the National Rural Electric Cooperative Association in a full-page advertisement given nationwide circulation. The ad pictures the skyrocketing growth of rural electric systems as an outstanding example of “free enterprise.” It asserts that “4S4 million people own rural electrics — more than any other business,” more than A. T. & T.’s 1,900,000 shareholders, General Motors’ 746,803, and Standard Oil of New Jersey’s 526,610.

The thousand or so rural electric systems under discussion are “nonprofit groups ??? usually cooperatives.” They have a lot of shareholders. Unlike corporations organized for profit, they typically require a membership fee — the purchase of one share — as a condition for providing service; thus, 434 million is more genuinely descriptive of the aggregate number of customers than of the spread of ownership. The shares are of little investment value for they pay no dividends per se. The “profit” for the shareholder lies in access to power below its true cost. The cooperatives spare themselves from income taxes by avoiding realization of profits in the ordinary, legal sense. Further, the Rural Electrification Administration, supported out of the Federal Treasury, gives them a pipeline to the taxes paid by everybody else, including their competitors. The NRECA is too modest in toting up the number of owners of the “rural electrics”; a hundred million taxpayers have investments in them, involuntary and unprofitable but nevertheless real.

In 1961, the Congressional Joint Economic Committee published a report on “Subsidy and Subsidy-like Programs of the U.S. Government.” This document does not develop a picture of the electric cooperatives as “free enterprise.” It does not find the capital contributions of the beneficiaries important enough to mention. The REA, included in a chapter on “Agricultural Subsidy Programs,” is described as extending loans to cover the full cost of constructing power lines and other facilities:

The Rural Electrification Administration makes loans for the purpose of financing electric systems and telephone service to rural areas. By such loans it has made possible the extension of electric power and telephone service to many farms at an earlier date and at lower cost than would otherwise have been possible. In the field of rural electrification, which the REA has undertaken since 1935, the REA makes loans to qualified borrowers, with preference to nonprofit and cooperative associations and to public bodies. Loans cover the full cost of constructing powerlines and other facilities to serve persons in rural areas who are without central station electric service. They bear 2 per cent interest and are repaid over a maximum period of 35 years. . . .

The report gave an estimate of REA loans less repayments as of June 30, 1961: $4.4 billion loans for electric service and beyond $700 million for telephones. The total rises every year and will continue to do so as the cooperatives expand outside farm areas, take on commercial and industrial customers, build generating capacity, and extend telephone services. Against these aggregates of $4 to $5 billion, the “ownership” represented in membership fees of beneficiaries — at $5 or so apiece — is a drop in the bucket. It takes care of less than one per cent of the total investment.

It is true that the cooperatives pay interest on borrowed money. But there is a continuing subsidy in the fact that the REA lends at 2 per cent while the Treasury has to pay an average of 3 per cent on the public debt [1961]. In the original Rural Electrification Act of 1936, the intent of Congress was that “all such loans . . . shall bear interest at a rate equal to the average rate of interest payable by the United States of America on its obligations, having a maturity of ten or more years. . . .”

In 1944, when the Treasury was paying an average of 1.93 per cent on the public debt, the Congress fixed the REA lending rate at 2 per cent.

In his budget message of January, 1959, President Eisenhower proposed that: “The present statutory interest rate of 2 per cent for loans made by the Rural Electrification Administration be replaced by a rate which will cover the current cost to the Treasury of equivalent-term borrowing and other reasonable costs.” On this formula the REA would be charging upwards of 4 per cent. That is what the Treasury would have to pay today on long-term bond issues [1961].

Mr. Eisenhower’s plan drew a barrage of criticism and was never adopted. Yet the principle he set out seems reasonable:

Ideally, in a Federally sponsored and financed under taking, it should be possible for the government to step progressively aside as they reach the stage of self-sufficiency which enables them to move forward under their own sound management, ownership, and financing.

Consolidated income statements of investor-owned electric power companies and REA cooperatives make it possible to figure the subsidy elements. The cooperatives pay 3 per cent of their revenues in taxes instead of 24 per cent for the private utilities and 2 per cent on borrowed money instead of 41,4 to 5 per cent. In 1959, when their operating revenues were $618 million, the REA cooperatives would have needed $164 million more revenues to raise their tax payments to the private utility average, and perhaps $50 million besides if they had been required to meet the market on money costs. In other words, the cooperatives might have had to raise their rates around 35 per cent.

The flourishing development of the rural electric systems raises the question whether they are not now strong and enterprising enough to take their places as full-fledged, dues-paying members of the corporate society. Through subsidies and tax exemptions, we create powerful incentives for the establishment and growth of nonprofit organizations. But the hard fact is that the vast Federal government machinery demands a huge flow of taxable income and profits. It would grind to a halt, or fling itself apart in wild inflation, if we all went cooperative.

The ad treats the 4 3/4 million as participants in one single business and says that “a finer example of private enterprise . . . would be hard to find.” The business in question must be the REA of which the “rural electrics” are common dependents or subsidiaries. It is, indeed, a topsy-turvy world when the REA system gets identified as private enterprise.

Pretty soon, as Humpty Dumpty might have been moved to mention, we may begin calling the private utilities public enterprises. After all, they are public utilities, serving everybody in the whole land. And they do turn the greater part of their profits over to the government.

Rich people, meanwhile, can come to be known as public servants. After all, they do spend most of their time working for the government. Maybe we’re suffering from the effects of “living backwards.” As the White Queen once told Alice, “It always makes one a little giddy at first.”

From the Monthly Letter of the First National City Bank of New York, August, 1961.