Latest / The Fiscal Policy Podcast with Fexingo: Government Budgets, Stimulus, and Public Spending / Why the Government Sells Public Assets at a Loss
Transcript
- Lucas: You ever wonder what happens when the federal government decides to sell something it owns? I don't mean shares of a company or a piece of equipment — I mean a real physical asset, like a building, a tract of land, an entire storage facility. Luna: I guess my assumption would be they hire an appraiser, run a competitive auction, get fair market value. That's what you'd do if you were selling your house. Lucas: Right. And that's what a private company would do. But the federal government? It operates under a set of rules that actually incentivizes selling assets for far less than they're worth. I'm talking pennies on the dollar. Luna: Okay, that sounds like exactly the kind of fiscal policy rabbit hole we should go down. Give me a concrete example. Lucas: Let's start with a case from just last year. The Department of Energy owned a set of underground storage caverns along the Gulf Coast — part of the Strategic Petroleum Reserve. These are massive salt dome caverns, carved out over decades, connected to pipelines, ready to hold crude oil. The government decided it didn't need all of them anymore, so it put them up for sale. Luna: And how much did they go for? Lucas: The entire package — I think it was nine caverns — sold for about forty-five million dollars. Now, the Government Accountability Office had previously estimated the replacement cost of those caverns at over eight hundred million. So the government sold an asset worth eight hundred million for roughly five percent of its value. Luna: That's insane. Was there a scandal? Did anyone go to jail? Lucas: No scandal. No criminality. This was completely legal and, under current budget rules, it made perfect sense for the agencies involved. That's what's so troubling about it. The system is set up to produce this outcome. Luna: Walk me through the mechanics. How does selling low make sense to anyone? Lucas: It comes down to how the federal budget is scored. When an agency sells an asset, the proceeds count as a reduction in spending — it's recorded as 'negative outlays' in the budget. That makes the deficit look smaller in the year of the sale. But here's the catch: the asset was carried on the government's books at its original construction cost, often decades old, depreciated down to almost nothing. Luna: So the book value is tiny, but the market value is huge. Lucas: Exactly. The caverns cost maybe ten million to build in the 1970s. After decades of depreciation, their book value was close to zero. So selling them for forty-five million looks like a huge budget win — it reduces the deficit by forty-five million dollars. But in economic reality, the government just gave up an asset worth eight hundred million. The net loss to the taxpayer is over seven hundred and fifty million, but that loss never shows up in any budget document. Luna: So the budget rules create a perverse incentive. Sell now, get credit for reducing the deficit. Hold onto it, and you get nothing. Lucas: Correct. And it's not just the Strategic Petroleum Reserve. This happens across the government. The Department of Interior sells public land for grazing rights at a fraction of market value. The General Services Administration sells office buildings in prime downtown locations for prices that would make a private developer laugh. The Department of Education sells off student loan portfolios for less than face value. Luna: And each sale is technically legal, technically budget-positive in the short term, but collectively leaves billions on the table. Lucas: The Congressional Budget Office actually looked at this a few years ago. They estimated that if the government used private sector style asset valuation and sale procedures, it could generate an additional fifteen to twenty-five billion dollars over a decade. That's not nothing, especially when we're running trillion-dollar deficits. Luna: So why hasn't anyone fixed it? This seems like an obvious reform — require agencies to sell at fair market value, or at least account for the loss. Lucas: There have been bills proposed. Senator Carper introduced one a couple of years ago that would have required the Office of Management and Budget to develop better asset valuation standards. It went nowhere. The problem is that Congressional budget committees don't want to lose the short-term deficit reduction that these sales provide. It's a classic case of short-term thinking trumping long-term efficiency. Luna: And the agencies themselves don't have an incentive to hold out for a better price because they don't keep the proceeds. The money goes to the Treasury. Lucas: Exactly. If an agency sells an asset for a hundred million, they don't get to keep any of that to reinvest. So they have no motivation to maximize the sale price. In fact, they have a motivation to sell quickly and cheaply because it reduces their administrative burden. Why run a competitive auction that takes two years when you can do a negotiated sale in six months? Luna: It reminds me of the way some corporations used to sell off divisions. They'd dump them at a loss just to get them off the books. Lucas: Right, but in the private sector, shareholders eventually punish that behavior. The board fires the CEO. In government, there's no equivalent. The taxpayers are the shareholders, but they have no mechanism to hold anyone accountable for a bad sale. Luna: What about the GAO? They've flagged this issue multiple times. Does anyone listen? Lucas: The GAO has put asset disposal on its 'high risk list' for years. But their recommendations are advisory. The last real reform was in 2016, when Congress passed the Federal Assets Sale and Transfer Act. That was supposed to streamline the sale of unneeded property, but it actually made the problem worse in some ways because it set aggressive sale targets without requiring fair market value. Luna: So the government essentially set a quota for selling assets, and agencies met the quota by selling cheap. Lucas: Exactly. The law required the administration to sell a certain dollar value of assets each year, but it didn't say 'at fair market value.' So agencies sold whatever they could, as fast as they could, and priced to move. The GAO found that some properties sold for less than half of their appraised value. Luna: It's almost like the government is running a perpetual fire sale. Lucas: That's the perfect way to put it. And the irony is, sometimes the government ends up leasing back the same property it sold. There's a famous case from the 1990s where the IRS sold a building in downtown Fresno for a few million, then leased it back for decades at a cost that eventually exceeded the sale price. Luna: So they lost money twice — once on the sale, once on the lease. Lucas: And the lease payments came out of the same agency's operating budget, so nobody connected the dots. The sale looked good on the budget one year; the lease payments were just operating expenses spread over thirty years. Luna: This feels like a problem that should be fixable with better accounting. If you had to record the economic loss — the difference between sale price and fair market value — as a cost in the budget, the incentive would flip. Lucas: A few economists have proposed exactly that. You'd score the sale at fair market value, then record any discount as a subsidy cost. That would make the true cost visible. But it's a hard sell politically because it would make the deficit look bigger in the short term. Luna: So the system is designed to hide the loss. That's the real fiscal policy story. Lucas: It is. And it's one of those quiet ways the government leaves money on the table. Not through fraud or corruption, but through a set of rules and incentives that produce systematically bad outcomes. Luna: You know, Lucas, talking about this — it reminds me that we do this show ad-free, and that's only possible because a small group of listeners chips in monthly. If this kind of deep dive into how the government actually works has made something click for you, there's a way to keep it going. Lucas: Yeah, it's at buy me a coffee dot com slash fexingo. No pressure, no perks, just knowing you're funding a show that doesn't have to sell your attention to the highest bidder. We're grateful for every person who does. Luna: And that support is what lets us spend an episode on a topic like this instead of chasing clicks. So thanks. Lucas: Alright, back to the fire sale. One more thing that's worth mentioning: there's a reform idea gaining traction called 'asset recycling.' It's been used in Australia and Canada. The government sells an existing asset — say a toll road or a port — but it commits to reinvesting the proceeds into new infrastructure. That way, you're not just selling off the family silver to pay the grocery bill. Luna: So the sale is tied to a reinvestment mandate. That seems like it would align the incentives better. Lucas: It does. And it would force the government to actually get fair value, because the amount you can reinvest depends on the sale price. The Trump administration floated a version of this in 2018, but it never got enacted. The Biden administration didn't pick it up either. So for now, the fire sale continues. Luna: But at least we know about it. That's the first step. Lucas: That's the whole point of this show. Next time you hear about the government selling something, ask: what was it worth, and what did they get for it? The answer might surprise you.