The U.S. Department of Agriculture (USDA) runs an array of rural subsidy programs, which are aside from the farm subsidy programs that it also runs. The rural programs are grouped within three agencies: the Rural Housing Service, the Rural Utilities Service, and the Rural Business-Cooperative Service.

The three agencies will spend $6.5 billion in 2016.¹ Here are the main activities of each:

• The Rural Housing Service (RHS) offers low-income rental aid, provides loans and loan guarantees, and runs programs for community development.
• The Rural Utilities Service (RUS) provides grants, loans, and loan guarantees for electricity, telecommunications, and water infrastructure.
• The Rural Business-Cooperative Service (RBS) provides grants and loans to a wide range of businesses.

A common feature of these agencies is that they provide services that local governments and the marketplace already provide. Whether it is the financing of housing, the funding of broadband Internet, or the provision of loans to electric utilities—these federal activities represent unneeded duplication.

The USDA’s rural agencies have subsidy tentacles into a wide range of activities, as illustrated by the following projects funded in 2015:²

• $10 million to Exela Pharma Sciences in North Carolina.
• $3.4 million for a sewer system in Geraldine, Alabama.
• $8.5 million for a college expansion in Pocahontas, Arkansas.
• $7,500 to an individual in Red Bluff, California, to fix his water well.
• $200,000 to “one of the largest clam producers in Florida.”
• $7.5 million to fix a dam in Idaho.
• $1 million to an automotive shop and other businesses in Du Quoin, Illinois.
• $63,000 to a biofuels company in Maine.
• $200,000 for a farmers market in Michigan.
• $651,000 for an arts center in Bozeman, Montana.
• $373,000 to a paper company in Nevada.
• $1.5 million to an apartment developer in Monticello, New York.
• $2 million for a vet clinic in North Dakota.
• $1.1 million for street improvements in Pittston, Pennsylvania.
• $113,000 to fix up an old theatre in Rutland, Vermont.
• $5.2 million for a fire station in Sweetwater County, Wyoming.

In the U.S. economy, these sorts of projects are usually funded by local governments and the private sector. So why should the USDA spend money on them? The assumption seems to be that the federal government can automatically boost local economies because it has a magical source of cost-free funds. But all the money for federal aid ultimately comes from taxpayers who live in the 50 states. So the USDA’s aid programs are a zero-sum game for the nation as a whole.

Indeed, the programs are worse than zero-sum because taxpayers have to pay for the bureaucratic middlemen who run the programs. The USDA employs 5,000 people to run its three rural agencies.³ The costs of wages, benefits, office space, travel, and supplies for these workers totaled $680 million in 2016.⁴ Thus more than 10 percent of the $6.5 billion cost of USDA’s rural programs gets consumed by the federal bureaucracy.

The USDA’s rural agencies have layers of bureaucracy in Washington, plus they have administrators in 500 offices across the nation.⁵ Each of the 50 states has a “state administrator” for the programs, who make an average annual salary of $135,000 plus benefits.⁶ That is generous compensation given that these folks mainly live in low-cost towns and cities.

Even if rural subsidy programs were administered efficiently, they represent an unfair redistribution of wealth. In many ways, rural Americans are better off than urban and suburban Americans. They enjoy cheaper housing, cleaner air, less congestion, and other advantages. So people who live in rural areas should not be a privileged class receiving special subsidies. Rural subsidies should be ended, and the RHS, RUS, and RBS should be closed down.

Rural Housing Service

The RHS provides more than $1 billion each year in rental subsidies to tenants living in rural areas. The agency also manages a portfolio of $120 billion in loans and loan guarantees that it has issued for financing single- and multifamily dwellings.⁷ In addition, the RHS provides financial aid to local community facilities. Total budget outlays for the RHS in 2016 will be $4.7 billion.⁸

The RHS had its origins in the Housing Act of 1949, which provided aid to farmers and farm workers.⁹ Over the years, Congress added USDA programs that covered rural nonfarmers as well. Rural America has vastly changed since these programs were created, and the types of problems that the RHS was set-up to tackle have been largely solved by economic growth. Back in 1960, the rural poverty rate of 33 percent was far higher than the urban poverty rate of 15 percent. But with growth, the rural poverty rate has plunged, and today at 18 percent it is only slightly higher than the urban rate of 15 percent.¹⁰

There is no reason to subsidize rural housing costs. Housing costs are higher in urban areas than rural areas, and urban households spend substantially more on rental housing and owner-occupied homes than do rural households.¹¹ Also, the home ownership rate is much higher in rural areas (83 percent) than urban areas (63 percent), which undercuts the idea that rural home ownership ought to be subsidized.¹²

Even if it made sense to subsidize rural America, RHS programs have lost their focus on rural poverty. The Government Accountability Office (GAO) reports, “RHS can operate in virtually all areas of the United States,” with at least 37 percent of the U.S. population now eligible for its programs.¹³ The Washington Post has reported on wealthy seacoast towns that receive USDA “rural” subsidies.¹⁴ Another concern is that RHS housing programs overlap with the activities of the Department of Housing and Urban Development and other federal agencies.

The primary RHS rental subsidy program is the 521 program.¹⁵ Federal audits have found that the program pays out millions of dollars in subsidies to recipients who are not legally eligible.¹⁶ The GAO noted that RHS oversight of its loan portfolio is weak, and the program lacks safeguards that similar programs in other agencies have.¹⁷

The primary RHS homeownership program is the 502 guaranteed loan program. It guarantees up to $24 billion in loans a year. Private lenders provide the principal, but the government guarantees the loans should they default. The RUS also has a direct loan program.

RHS loans are supposed to be for people who cannot otherwise get them. But such borrowers are probably not very creditworthy, and thus not suitable for the risks involved with a large debt obligation. Alternatively, RHS loan recipients who have stronger finances could have borrowed privately without subsidies. In that case, RHS loans have simply crowded out private lenders.

Federal efforts to subsidize home ownership were a key factor in the housing boom and bust that led to the Great Recession. After that damaging experience, the government should have learned a lesson and ended its home lending subsidies. Instead, in the aftermath of the recession, Congress quadrupled the annual loan authorization limit for the RHS guaranteed program from $6 billion to $24 billion, and the limit has remained at that high level since.¹⁸

RUS loan programs have high default rates. Loan subsidies induce people with shaky finances to buy homes that they cannot afford. The default rate for the 502 guaranteed loan program is double the rate of similar lending programs in the Federal Housing Administration.¹⁹ The default rate for the RUS direct loan program is even higher than that. As one scholar noted, RUS loans induce borrowing by people who provide no down payment, have limited income history, and mediocre credit history.²⁰ Not surprisingly, the RHS has had trouble recovering losses on its programs.²¹

USDA’s rural loan programs make less sense than ever because of the increasing sophistication of U.S. financial markets. People and businesses with good credit should be able to get private loans, no matter where they are located. USDA housing programs should be closed down, and rural and urban homeowners and developers should borrow in private markets.

Rural Utilities Service

The Rural Utilities Service (RUS) provides grants, loans, and loan guarantees to electric, water, and telecommunications utilities. The agency’s outlays in 2016 were $1.2 billion.²²

The origins of the RUS were in the 1930s. Congress passed legislation in 1936 creating the Rural Electrification Administration (REA) to bring electricity to rural farming communities. Many rural families did not have access to electric power. But by the 1950s, the share of rural households with electricity matched that of suburban households, and by 1975 more than 99 percent of all farms had electricity.²³

With rural America wired to the grid, one might think that Congress would have disbanded the REA. Instead, Congress broadened its mandate to include telephone service. By the 1980s, telephone penetration in rural areas had topped 95 percent, and so the agency was tasked with other new activities. Reflecting the mission creep, Congress changed the REA’s name to the Rural Utilities Service in 1994.

In 2002 Congress created the Rural Broadband Access loan and loan guarantee program within RUS. Since then the program has pumped out more than $2 billion in subsidies to build broadband networks. The 2009 economic stimulus bill pumped an additional $3 billion into rural broadband.²⁴ Meanwhile, the private sector has vastly expanded the reach of broadband across the nation by investing an average of about $70 billion each year over the past two decades.²⁵

Numerous examples illustrate that RUS broadband projects are excessively costly. The USDA said that it spent $3 billion from the 2009 stimulus bill for projects that provided broadband to 260,000 houses and 19,400 other facilities.²⁶ That works out to a huge cost of about $10,000 for each location. That seems like a very high cost because basic plans for satellite-based Internet cost only about $60 per month or $720 a year.

Aside from being costly, many of the federal broadband projects have been in areas that private broadband providers were already serving. Subsidizing new providers in such areas is unfair to existing providers. The New York Times reported that an 11-student elementary school near Denver already had two high-speed lines, but then the stimulus bill subsidized another company to come in with a line.²⁷

The RUS continues to subsidize the electricity industry, even though rural America has long been electrified. The RUS provides subsidized loans to more than 800 rural electric cooperatives, which creates unfair competition with other businesses. The Washington Post reported that the co-ops operate a wide range of nonelectricity businesses, including gas stations and ice cream shops.²⁸ It also found that the RUS “is using taxpayer money to provide billions of dollars in low-interest loans to build coal plants even as Congress seeks ways to limit greenhouse gas emissions.”²⁹

Even if it made sense for the federal government to subsidize rural areas, RUS programs often subsidize areas that are not very rural. Close to 200 of the counties in which RUS subsidizes loans to electric co-ops have populations of more than 1 million.³⁰ Only 24 percent of the counties served by RUS borrowers are completely rural.³¹

Electricity, telephone, and Internet services are the last things that we need the government to subsidize in today’s advanced economy. The RUS should be eliminated as an unneeded relic of the New Deal era.

Rural Business-Cooperative Service

The Rural Business-Cooperative Service (RBS) was created in 1994 to consolidate various USDA programs that provided loans, grants, and other subsidies to rural businesses. Today RBS programs include: Rural Business Investment, Rural Cooperative Development Grants, Rural Energy for America, Energy Assistance Payments, BioRefinery Assistance, and Rural Economic Development Loans.³² RBS outlays in 2016 were about $225 million.³³

RBS programs are supposed to encourage economic development in areas where access to capital is supposedly lacking. However, according to the USDA, rural areas do not exhibit restricted access to capital today, as may have been the case in prior decades.³⁴ New sources of equity have emerged in rural areas, making federal subsidies even less needed.³⁵

USDA’s own data suggest that RBS programs are not very cost effective. According to one report, the Business and Industry Guaranteed Loan Program committed $766 million in one year to “create” or “save” 14,837 jobs.³⁶ That represents a cost of $51,628 for each job created or saved. Or consider that the USDA’s Renewable Energy Loan Program provided $24 million to generate a claimed 170 jobs, which works out to $141,176 per job.

Businesses that receive RBS subsidies should fund their activities privately. The RBS funds projects such as movie theaters, shopping centers, and grocery stores, but such projects are routinely funded privately across the nation.

A 2016 RBS report listed about 100 loans and grants that flowed through to private businesses. This is pure corporate welfare, as these examples indicate:³⁷

• $1 million to the South Kentucky Rural Electric Cooperative Corporation to lend to an automobile company to purchase equipment.
• $1 million to the Escambia River Electric Cooperative in Florida to lend to a tractor company.
• $770,000 to Jo-Carroll Energy in Illinois to lend to a company to build a fueling station.
• $1 million to the Shelby Electric Cooperative in Illinois to lend to an automotive parts company.
• $1 million to the Three River Electric Cooperative in Missouri to lend to a windows manufacturing company.
• $300,000 to the Caddo Electric Cooperative in Oklahoma to lend to a carwash and laundry facility.
• $1 million to the Edgecombe-Martin Electric Membership Corporation in North Carolina to lend to a yarn-spinning facility.
• $1 million to the City of Sevierville in Tennessee to lend to a sausage-making company.

Those all sound like useful projects. If the recipient businesses were creditworthy, they should have been able to attract private financing without the need for subsidies. The best way to promote a strong rural economy is not to subsidize businesses, but to free them up to invest and compete vigorously in open markets.

If the sorts of projects that the RHS, RUS, and RBS fund make economic sense, then private developers, investors, and entrepreneurs would pursue them. Congress should repeal subsidies for rural communities, and instead enact tax and regulatory reforms that would spur more private investment in both rural and urban America.

Stephen Slivinski is Senior Research Fellow, Center for the Study of Economic Liberty, Arizona State University.