Programs that promote and regulate U.S. commerce at home and abroad include initiatives of the Small Business Administration (SBA), the Federal Housing Administration (FHA), the Postal Service, the Federal Deposit Insurance Corporation, and the Department of Commerce. Activities in function 370 provide trade assistance to promote U.S. products to overseas markets, fund small business loans, provide deposit insurance for banks and credit unions, and underwrite home mortgage guarantees. The Universal Service Fund, which supports affordable telecommunications services throughout the nation, is the function's largest program, with outlays for 2007 projected at $7.8 billion.

The Securities and Exchange Commission, the Federal Communications Commission (FCC), the Federal Trade Commission, and the Patent and Trademark Office, also included in function 370, generate fees that offset spending. Proceeds from spectrum auctions run by the FCC are recorded in budget function 950 (undistributed offsetting receipts); however, budget options involving those auctions are included in this section.

For 2007, outlays for this budget function are estimated to total $1.2 billion, about $5 billion (81 percent) less than in 2006. Generally, fluctuations in annual outlays for function 370 are caused by periodic revisions in the estimates of the cost of FHA and SBA credit programs.

The International Trade Administration (ITA) of the Department of Commerce runs a trade development program that assesses the competitiveness of U.S. industries and promotes exports. The ITA also operates the U.S. and foreign commercial services, which counsel U.S. businesses on issues related to exporting. The agency charges some fees for those services, but the fees do not cover the costs of all such activities.

This option includes two alternatives: Eliminate the ITA's trade promotion activities or charge the beneficiaries for those services. Either change would save $305 million in outlays in 2008 and a total of about $2.0 billion through 2012.

The principal rationale for this option is that business activities such as trade promotion are usually better left to the firms and industries that stand to benefit from those activities rather than to a government agency. Having the government engage in such activities (without charging the beneficiaries for their full cost) is an expensive means of helping the firms and industries because the benefits are partially passed on to foreigners in the form of lower prices for U.S. exports. Moreover, the lower prices could result in some products' being sold abroad for less than the cost of production and sales and, thus, could lower U.S. economic well-being. Further, in the most recent Program Assessment Rating Tool evaluation, the Office of Management and Budget concluded that businesses can obtain services similar to those of ITA's foreign commercial services from state, local, and private-sector entities.

An argument against eliminating the ITA's trade promotion activities is that such activities are subject to some economies of scale, so having one entity (the federal government) counsel exporters about foreign legal and other requirements, disseminate information about foreign markets, and promote U.S. products abroad might make sense. An alternative way to reduce net federal spending but continue the ITA's activities would be to charge the beneficiaries for their full costs. Fully funding the ITA's trade promotion activities through voluntary charges, however, could prove difficult or impossible. For example, in many cases, it would not be possible to promote the products of selected firms that were willing to pay for such promotion without also promoting the products of other firms in the same industry. In those circumstances, firms would have an incentive not to purchase such services because they would be likely to receive the benefits regardless of whether they paid for them. Consequently, if the federal government wanted to charge beneficiaries for the ITA's services, it might have to require that all firms in an industry (or the industry's national trade group) decide collectively whether to buy the services. If the firms opted to purchase the services, all firms in the industry would be required to pay according to some equitable formula.

In addition to its various research and development activities, the National Institute of Standards and Technology oversees two programs designed to improve the performance of U.S. businesses: the Hollings Manufacturing Extension Partnership (HMEP) and the Baldrige National Quality Program. The HMEP program consists primarily of a network of manufacturing extension centers that help small and midsize firms by providing expertise in the latest management practices and manufacturing techniques, as well as other knowledge. The nonprofit centers are not owned by the federal government but are partly funded by it. The National Quality Program consists mainly of the Malcolm Baldrige National Quality Award, which is given to companies (and, in recent years, to education and health care institutions) for achievements in quality and performance.

This option would eliminate the Hollings Manufacturing Extension Partnership and the Baldrige National Quality Program, reducing discretionary outlays by $15 million in 2008 and by $356 million through 2012.

Proponents of this option question whether it is appropriate or necessary for the government to provide technical assistance such as that offered by the HMEP program. Many professors of business, science, and engineering serve as consultants to private industry, and other ties between universities and private firms further facilitate the transfer of knowledge. For example, some of the centers that HMEP subsidizes predate the program. In the most recent Program Assessment Rating Tool evaluation, the Office of Management and Budget (OMB) noted that, according to a recent survey by the Modernization Forum, half of HMEP clients said that the services they obtained from the program were available from alternative sources, although at a higher cost.

HMEP's positive effect on productivity also is questionable. In many cases, federal spending for HMEP allows inefficient companies to remain in business, tying up capital, labor, and other resources that otherwise could be used more productively elsewhere. Moreover, according to OMB's evaluation, manufacturing extension centers originally were intended to become self-sufficient, supported entirely by fees and perhaps state contributions. However, the program still recovers only one-third of its costs through fees. To promote self-sufficiency, the President's budget requests in the recent past have recommended that individual centers be funded for no longer than six years. The President's 2008 budget proposes a reduction of more than 50 percent from the 2006 grant level.

Opponents of eliminating the HMEP program point to the economic importance of small and midsize companies, which they say produce more than half of U.S. output and employ two-thirds of U.S. manufacturing workers. They maintain that small firms often face limited budgets, lack of expertise, and other barriers to obtaining the sort of information that HMEP provides. Moreover, larger firms rely heavily on small and midsize companies for supplies and intermediate goods. For those reasons, opponents of the option say, the HMEP program promotes U.S. productivity and international competitiveness.

An argument for eliminating the Baldrige National Quality Program is that businesses need no government incentives to maintain the quality of their products and services—the threat of lost sales is sufficient. Furthermore, winners of the Baldrige Award often mention it in their advertising, which means that they value the award. If so, they should be willing to pay contest entry fees large enough to eliminate the need for federal funding. The primary argument for retaining the Baldrige National Quality Program is that it promotes U.S. competitiveness in the business, education, health care, and nonprofit sectors.

In 1993, the Federal Communications Commission (FCC) was first granted limited authority to use competitive bidding to assign licenses for use of the radio spectrum. The Balanced Budget Act of 1997 went further—not just permitting but requiring the FCC to auction licenses in all circumstances in which more than one private applicant sought a license. From 1994 through 2006, those auctions generated a total of about $35 billion in federal receipts.

This option would permanently extend the FCC's authority to auction spectrum licenses, which is set to expire at the end of 2011. Extending that authority would produce $1.25 billion in additional offsetting receipts (which are credited against direct spending) over the next 10 years. This policy would increase the FCC's direct spending for auction costs by about $35 million in 2012, but proceeds from those auctions probably would not be recorded until the following year. (The President's budget for 2008 includes a similar proposal.)

One rationale for such action is that the receipts raised by auctioning licenses compensate the public for private use of the radio spectrum. Moreover, competitive bidding directly places licenses in the hands of the parties that value them most—a more efficient outcome than that produced by lotteries or comparative hearings, the methods previously used to assign licenses. (In a comparative hearing, entities that wished to be granted a license made their case to the FCC in terms of the public-interest standard, an imprecise criterion by which authority to use the spectrum was supposed to go to the parties that would make the best use of it from society's point of view.)

Opponents of extending the FCC's authority maintain that, as currently constituted, the auctions no longer advance competition in the telecommunications-services markets. They argue that the prices auction winners pay for the right to use the radio spectrum in major cities are so high that only very large companies can afford those rights. The result is that new companies are unable to enter the highly concentrated markets that provide high-speed Internet access, much less compete with the local telephone and cable companies that dominate those markets. (Outside of the top markets, however, the winning bids for spectrum are much lower, permitting entry into smaller markets where the need for additional providers of broadband is greatest.)

Another argument against implementing the option is that the prospect of auction receipts has caused the FCC to allocate too little of the radio spectrum for unlicensed uses, such as wireless Internet access. (The use of unlicensed spectrum is especially attractive for Internet access in rural areas because it is difficult for service providers to acquire the right to use licensed spectrum in small quantities.) However, the agency has allocated additional spectrum for unlicensed uses several times since 1993 and is currently considering other allocations for such uses. The FCC also is looking into allowing more use of unlicensed low-power devices that can share parts of the spectrum primarily allocated for licensed use without causing significant interference.

Since the mid-1990s, the Federal Communications Commission (FCC) has used competitive auctions to assign licenses for providing wireless communications services. In conducting the auctions, the FCC has complied with a statutory obligation to ensure that small businesses are able to participate in the provision of such services. The FCC has fulfilled that obligation, in part, by offering preferences in wireless spectrum auctions that are intended to reduce the amount that small bidders must pay in order to win licenses. Preferences have included setting aside licenses for small bidders, offering bidding credits (that is, government subsidies of a fixed percentage of small bidders' winning bids), and allowing small bidders to pay for the licenses they win through installment payments at federally subsidized rates of interest.

This option would eliminate small-bidder preferences in future FCC auctions of wireless spectrum licenses. As a result, all auction participants would bid on the same set of licenses, and their bids would be treated equally in determining license winners. The Congressional Budget Office estimates that the option would yield savings of $100 million in 2008 and $140 million over five years. The estimate assumes that legislation making the change is enacted at least six months before the start of the auction of frequencies recovered as a result of the transition to digital television.

Advocates of this option argue that small-bidder preferences in wireless spectrum auctions are both economically inefficient and difficult to administer. They are economically inefficient because small businesses are less able than larger ones to establish and operate wireless communications networks. As a result, licenses won by small bidders through auction preferences often end up in the hands of larger wireless firms. Thus, it would be better simply to award licenses to those willing to pay the most for them at auction in the expectation that a higher bid would most likely reflect the higher revenue stream resulting from a more productive use of the license in the future.

Advocates of this option also argue that small-bidder preferences are difficult to administer and that large concerns regularly provide substantial financial support to small bidders. As a result, proponents claim, such small bidders effectively bid on behalf of the larger entities that back them. Supporters of the option also note that total receipts in recent auctions would have been 1 percent to 2 percent higher if those licenses won by small bidders had instead gone to the next-highest bidders not eligible for the credits. Finally, advocates of this change argue that there are other ways to improve the prospects of small businesses in FCC auctions, such as making licenses potentially more affordable to small bidders by reducing the amount of wireless spectrum, the geographic coverage area conveyed by a given license, or both.

Opponents of this option argue that facilitating small-bidder access to wireless spectrum licenses could make the resulting markets for communications services more competitive than they otherwise would be. Opponents also argue that federal savings from the option could be small or nonexistent because providing auction preferences to small bidders enables them to bid more effectively against larger businesses and thereby could raise the general level of winning bids, perhaps by enough to increase the government's net auction receipts.

The Telecommunications Development Fund (TDF) was established by the 1996 Telecommunications Act to provide capital and other assistance (such as financial advice and training) to small communications firms that otherwise would have difficulty finding investors. The TDF is financed through the following mechanism: businesses that wish to participate in auctions (conducted by the Federal Communications Commission, or FCC) for wireless spectrum licenses must pay "upfront" payments; the interest that accrues on those payments is channeled to the TDF. The amount of the upfront payment essentially determines the number and type of licenses on which a participant may bid. The FCC typically retains and collects interest on upfront payments for a period ranging from several weeks before the auction to 45 days after the auction's conclusion. The commission then applies each upfront payment (without interest) to the amount (if any) that the corresponding bidder owes for a winning bid and returns the remainder.

This option would terminate financial support for the Telecommunications Development Fund. As a result, interest collected on the upfront payments of bidders in FCC wireless spectrum auctions would offset other federal spending. According to the Congressional Budget Office's estimates, the option would save $3 million in 2008 and $26 million over the 2008-2012 period.

Advocates of this option argue that capital markets should be sufficient to finance commercially viable small firms and that it should not be necessary for the government to supply venture capital. Supporters maintain that the TDF's investment in small communications firms has actually been modest, falling below the amounts paid for salaries and other expenses. Finally, proponents of the option argue that government programs already exist to support both small businesses and the application and development of advanced technologies, such as those programs administered by the Small Business Administration and the Department of Commerce (including the Manufacturing Extension Partnership and the Advanced Technology Program).

Opponents of implementing the option argue that funding from the TDF helps remedy imperfections in capital markets that can make it difficult for small firms to raise capital. A related argument is that the advice and training the TDF provides to small communications firms to help them improve their ability to access capital markets can improve the allocation of financial resources in those markets by increasing the likelihood of a good match between private investors and small firms in search of financing.

The High-Cost Program of the Universal Service Fund, which operates under the authority of the Federal Communications Commission (FCC), provides funding to eligible telecommunications carriers in rural and other high-cost areas to reduce the prices that consumers pay for supported telecommunications services. Under current policy, the fund provides financial support for as many telecommunications connections as households in rural and high-cost areas wish to buy.

This option would allow consumers served by the High-Cost Program to choose only one subsidized connection (for instance, a wireline connection) per household and require them to pay an unsubsidized price for each additional connection (for example, a wireless connection). Restricting the number of subsidized connections to a single connection per household would reduce spending by the Universal Service Fund by about $1.3 billion in 2008 and by $7.9 billion over the 2008-2012 time frame. Implementing the option, however, would not reduce the federal deficit because the Universal Service Fund is financed through dedicated telephone fees designed to balance the fund's spending. Consequently, reductions in spending by the fund would be offset by reduced revenues. (However, the burden the program places on the economy would be correspondingly reduced.)

A rationale for this option is that the growth in payments to wireless carriers—who provide what are most likely second or third telephone connections to customers who are already buying supported wireline service—has been a major factor driving the fund's growth in spending. In 2000, the fund was disbursing no support to wireless providers, but by 2006 that support had grown to $985 million. In February 2004, the Federal-State Joint Board on Universal Service, an entity that advises the FCC about universal service, recommended that the fund support only a single connection per household as a way to control spending. However, the Congress inserted language in the FCC's appropriation laws for 2005 and 2006 forbidding the agency from spending appropriated funds to carry out the joint board's recommendation.

The joint board concluded that the single-connection option was more consistent with the goals of the law that established the fund than current policy. In particular, the board noted that the second and third connections being supported under the current system often are used for services not currently eligible for support under Universal Service—for example, faxing, Internet access, and mobile communications. Furthermore, the board stated that supporting a single connection per household would fulfill the statutory principle of sufficiency included in current law, noting, "The Joint Board and the [Federal Communications] Commission have defined sufficiency as enough support to achieve relevant universal service goals without unnecessarily burdening all consumers for the benefit of support beneficiaries." By increasing the funding for high-cost connections, the joint board reasoned, the fund would be raising costs for all other consumers beyond the necessary level and possibly pricing some current telephone subscribers out of the market.

Opponents of implementing the option argue that the Communications Act sets forth a vision of universal service in which telecommunication services and prices in rural and other high-cost areas would be roughly comparable to those in urban areas. Urban households, they reason, are not limited to one telecommunications connection at affordable rates, and rural households should have the same opportunity.

Government-sponsored enterprises (GSEs)—private financial institutions chartered by the federal government—promote the flow of credit for targeted uses, primarily within the housing and agriculture sectors. To do that, they raise funds in the capital markets partly on the strength of an implied federal guarantee, which reduces their borrowing costs and enables them to borrow larger sums than would be available to other borrowers while holding less capital. The federal government also exempts GSEs from paying state and local income taxes. In addition, four GSEs—Fannie Mae, Freddie Mac, the Federal Home Loan Bank System, and the Farm Credit System—are exempt from provisions of the Securities Act of 1933, which requires publicly traded companies to register the securities they issue with the Securities and Exchange Commission (SEC).

This option would repeal those GSEs' exemption from SEC rules, requiring them to pay registration fees and to disclose information about their securities under the Securities Act of 1933. (A fifth GSE, Farmer Mac, is already subject to SEC requirements.) Such a change would increase federal offsetting collections (which are credited against discretionary spending) by about $100 million in 2008 and by about $720 million over five years. (Of those amounts, the registration of mortgage-backed securities, or MBSs, would account for about $65 million in 2008 and $460 million over five years.) Those estimates assume that the GSEs will pay the same registration fees as other firms: about 0.52 basis points (0.0052 percent of the securities' value) in 2008. The estimates also assume that the statutory basis of SEC fees will be changed. Under current law, the SEC sets rates for registration fees in order to collect target amounts spelled out in law ($234 million in 2008, for example). Under this option, the SEC would be authorized to collect the target amounts plus additional amounts from registering GSE securities.

The main argument for this option is that it would help level the playing field between the GSEs and other firms that issue securities, including issuers of private MBSs. In addition, the disclosures required by the SEC might provide additional information about MBSs. Those disclosures could help investors predict more accurately the speed at which the underlying mortgages were paid off—a key factor affecting the value of the related MBSs. In fact, in 2006, the SEC adopted new rules to address the registration, disclosure, and reporting requirements for private asset-backed and mortgage-backed securities, although the rules do not extend to Fannie Mae and Freddie Mac.

The main argument against this option is that registration could provide little additional information to investors. In accord with recommendations made by a multiagency task force in January 2003, the GSEs have already increased their disclosures about their MBSs. Similarly, Fannie Mae voluntarily registered its common stock in March 2003 under the Securities Exchange Act of 1934. A majority of the Federal Home Loan Banks have also registered their stock after being required to do so by the Federal Housing Finance Board, their regulator. Freddie Mac and the remaining Federal Home Loan Banks plan to do so as soon as they can issue timely financial statements. Voluntary registration of stock under the Securities Exchange Act of 1934 results in the same disclosures to stock and bond investors (but not purchasers of MBSs) that would accompany registration under the Securities Act of 1933, but registrants under the 1934 law pay no fees to the SEC. Further, registration fees would impose costs on home buyers. If the fees were fully passed on to borrowers, the closing costs on a $300,000 mortgage in 2008 would increase by about $16.

The Federal Housing Administration's (FHA's) Home Equity Conversion Mortgage (HECM) program facilitates the supply of reverse mortgages to homeowners who are at least 62 years old by absorbing virtually all risk associated with those loans. Lenders provide cash to homeowners in a single payment, a line of credit, or an annuity—secured by the equity in their homes. Under the HECM program, a borrower makes no payments for the life of the loan. Instead, interest accrues on the loan balance at the one-year Treasury rate plus 1.5 percent until the house is sold (by the borrower, surviving spouse, or estate of the owner), and the loan is paid off from the proceeds. FHA insurance protects lenders from the risk that the loan balance and interest will exceed the sale price of the home. FHA absorbs that risk in two ways: either by paying the lender any shortfall between the sale price and the amount due or by purchasing the mortgage from the lender when the loan balance reaches a specified limit. FHA also insures the borrower against failure by the lender to provide funds according to the agreement.

This option would increase FHA's fees and require borrowers to pay a portion up front. Raising the initial fee from 2 percent to 2.5 percent and collecting the 0.5 percentage-point increase in cash would increase federal offsetting collections (which are credited against discretionary spending) by $50 million in 2008 and by $272 million over five years, under an assumption that the program will continue to be authorized at 2007 levels.

FHA's losses are paid from premiums, which currently consist of a one-time charge of 2 percent of the value of the loan amount at the origination of the reverse mortgage and an annual fee of 0.5 percent of the current balance. On the basis of those fees and the outlook for interest rates and house prices, for every $100 of a loan that the program guarantees, FHA expects to earn between $1 and $2 over the life of the loan, on average. That is, the HECM program has a "negative" budget cost.

The main rationale for an increase in the HECM program's fees is to charge borrowers for some of the cost of risk now imposed on taxpayers. Losses or gains on the insurance are expected to vary with the overall state of the economy, including the uncertain future paths of interest rates and house prices. For example, according to estimates by Abt Associates, a 1 percentage-point increase in mortgage interest rates could convert the negative subsidy into a cost to the government of more than 2 percent of the amount insured (which, by the Congressional Budget Office's calculations, would shift a projected $54 million gain to a $111 million loss), while a 1 percentage-point decrease could result in a negative subsidy of 4 percent to 5 percent. An increase in fees might also encourage private lenders to increase the supply of reverse mortgages not guaranteed by FHA. At present, the agency insures over 90 percent of all reverse mortgages.

The primary disadvantage of increasing the HECM program's fees is that it would increase the cost of reverse mortgages to elderly homeowners, who tend to have greater wealth but less income than the general population. Moreover, higher fees could reduce the attractiveness of those mortgages, which allow the elderly to tap their home equity without selling their homes. Accordingly, the estimated budgetary effect shown here assumes a 10 percent decline in the level of insurance that FHA provides through the HECM program; a much larger decline could also result in a reduction rather than an increase in federal collections.

Through its 7(a) program, the Small Business Administration (SBA) guarantees 50 percent to 85 percent of the principal amount of qualifying loans to small businesses. Banks and other lenders often pool the guaranteed portions of such loans and then sell to investors trust certificates that represent claims to the cash flows. That is, the guaranteed portions of the loans are turned into tradable securities, or "securitized." Under authority provided in the Small Business Secondary Market Improvement Act of 1984, SBA provides a secondary guarantee of the trust certificates—guaranteeing timely payments on the certificates if the borrowers' payments are late. Consequently, through the Secondary Market Guarantee Program, SBA is taking on risk in addition to the initial guarantee of payment of the principal and interest in the event that borrowers default and the agency purchases the loans. That additional guarantee makes the securities more valuable to investors, who are, as a result, willing to pay more for them. Under current law, SBA charges no fee for the 100 percent secondary market guarantee.

This option would impose an annual charge of 10 basis points (10 cents per $100 of principal) on the out-standing guaranteed principal for SBA's new secondary market guarantees. On the basis of the loan volume reported by SBA for 2006, the proposed charge would increase federal offsetting collections (which are credited against discretionary spending) by $5 million in 2008 and by $27 million over five years.

The main advantage of this option is that it would provide SBA with funding to cover the cost of honoring secondary market guarantees. Specifically, when a borrower is late in making a loan payment, SBA makes the payment on schedule to the holders of the trust certificates, but in doing so, the agency incurs an interest expense for which it receives no offsetting revenues. To make those payments, SBA has drawn from funds intended for repayments of principal that must eventually be made to trust certificate holders, along with accrued interest. Thus, the Secondary Market Guarantee Program has a budgetary shortfall, which apparently derives from SBA's investment of deferred payments of principal to certificate holders in risk-free Treasury securities while those balances are accruing interest at the higher certificate rate. Another advantage of the option is that it would level the playing field with other federally guaranteed securities, such as those insured for timely payment by the Government National Mortgage Association, or Ginnie Mae, for which a fee is collected.

A disadvantage of this option is that it could decrease the attractiveness of SBA loans to lenders and thereby inhibit the flow of funds to small businesses.