Archive for February, 2009
High-Speed Stimulus
Over the past two decades, U.S. cities have wasted close to $200 billion on high-cost, low-performance rail transit projects. But that will nothing compared to the plans rail nuts have for high-speed intercity rail.
Last November, 52 percent of California voters approved $9 billion in funding for a San Francisco-to-Los Angeles high-speed rail plan. The total cost of the plan is expected to exceed $45 billion, and California expects Uncle Sam to pick up at least half the tab. If it does, Florida, Illinois, Texas, and a few dozen other states will all want federal funding for their own high-speed rail plans.
The House version of the stimulus package included no money for high-speed rail. The senate version included $2 billion. Thanks to Senator Harry Reid (D-NV), who wants a Las Vegas-to-Los Angeles high-speed rail line, the final version of the bill included $8 billion. (Conservatives have attempted to portray this as an earmark, but Reid says the $8 billion will be distributed through competitive grants.)
The Last Word on Fiscal Stimulus?
From “the best-selling Principles of Economics textbook [which] has been teaching students in a clear, unbiased way for 40 years.” Campbell R. McConnell, Economics: Principles, Problems, and Policies. McGraw-Hill, 7th edition, 1978.
The Last Word: The Impotence of Fiscal Policy
Some economists feel that fiscal policy is an impotent and unpredictable stabilization tool.
Well, as I wrote in a 1977 Tax Review article (reprinted 1w permission of the Tax Foundation, Inc.):
The real question is whether or not conventional fiscal policy works as advertised. If fiscal policy works, and its impact is properly measured by the size of the full employment deficit, then it should be possible to find some correlation between either the level or direction of the full employment budget and some measure of current or subsequent economic activity. George Terborgh tried to find some such link back in 1968, in The New Economics, but found only a weak correlation that turned out to be perverse. That is, larger full employment surpluses were associated with faster economic growth. More rigorous tests by economists at the St. Louis Fed, and again at Citibank, had no more luck in uncovering the magical properties of the full employment budget. A sharp shift toward larger full employment deficits did not prevent the recession of’ 1953-54, for example, nor the mini-recession of 1967. In 1946, a $60 billion reduction of Federal spending (equivalent to $400 billion today) was followed by a vigorous boom, and a combination of tax cuts and higher spending in 1948 (the equivalent of S75 billion today) was followed by a sharp recession.
The theory of fiscal policy is almost as messy as the evidence. If deficit spending is financed by borrowing from the private sector, there is no obvious stimulus-even to that undifferentiated thing called “demand.” Whoever buys the government securities surrenders exactly as much purchasing power as is received by the beneficiaries of Federal largess. There would be a net fiscal stimulus only if there were no private demand for the funds needed to cover the added Treasury borrowing. Otherwise, lendable funds are just diverted from market-determined uses to politically determined uses.
There may be a stimulus in some circumstances if the deficit is financed by a more rapid increase in the money supply, but this is really a monetary stimulus, not a purely fiscal effect.
In the long run, resources allocated through the government must displace those allocated through markets, and growth of government spending must be at the expense of the private sector. The government has only three sources of revenue — taxes, borrowing, and printing money — and increasing any one of those must reduce the private sector’s command over real resources. Although deficit spending may at times be a short-run stimulus to nominal demand, it is also a long-run drag on real supply-siphoning resources from uses that would otherwise augment the economy’s productive capacity, and instead diverting those resources into hand-to-mouth consumption through government salaries, subsidies, and transfer payments.
So, the theory and evidence suggests that fiscal policy is essentially impotent, or at least unpredictable, except as a device to promote inflationary monetary policy and/or to reduce investment and growth.
Historic and Transformational
Speaker Nancy Pelosi says that the massive spending bill Congress is about to pass is “historic and transformational.” She has a point. Here’s a visual of what it’s helping to do to the federal deficit:
(Source: Strategas Group via PowerlineBlog)
The federal budget is already plunging into deficit. It hardly seems the time to add another $800 billion of spending. Doing so may very well prove to be transformational, like pushing the economy over a cliff.
The Washington Post reports, “The Obama administration’s economic stimulus plan could end up wasting billions of dollars by attempting to spend money faster than an overburdened government acquisition system can manage and oversee it, according to documents and interviews with contracting specialists.”
And as noted here previously, lobbyists have loaded the bill down with special-interest provisions, such as “a controversial proposal for a magnetic-levitation rail line between Disneyland, in California, and Las Vegas,” a project favored by Harry Reid. A levitating train from Fantasyland to a city built on gambling. If that isn’t a metaphor for this bill, I don’t know what is.
But it’s not the only one. The Post also notes funding for lithium batteries, Filipino veteran payments, small shipyards, North Carolina-made TSA uniforms, and “clean coal.”
Given all that, it’s especially disappointing that President Obama and Congress continue to ignore his campaign promise to let all legislation be publicly available for five days before he signs it. In this case, even members of Congress had trouble getting their hands on the actual $790 billion bill they were expected to vote on. Congress should listen to Bill Niskanen:
This is the fifth time in my adult life that the president has asked for or asserted unprecedented authority on an expedited basis with little or no congressional review. Each of the prior occasions turned out to be a disaster.
One Last Dig
Barring a miracle, the porcine juggernaut known as “The Stimulus” is going to become law, and with it around $100 billion in new education spending. At this point I can’t point to much more evidence than I already have to demonstrate how educationally worthless this will be, but I want to add a couple of bits just to make myself feel a little better.
First, for about the trillionth time, I’ve run into a statement suggesting that all that public schools ever see are funding cuts. The quote below is from an article in this morning’s Los Angeles Times about the windfall states are poised to get when the stimulus passes:
“It’s one of the most exciting things we’ve heard about in a long time,” said Chris Eftychiou, spokesman for the nearly 90,000-student Long Beach Unified School District, which stands to gain tens of millions of dollars over the next two years.
“Usually, it’s just cuts, not additional revenue.”
Come now, LBUSD! While I could only find data for current per-pupil expenditures (which do not include capital costs) going back to 1998-99, the district’s expenditure trend, shown in the chart below, has clearly been upward. (I adjusted for inflation the data found on this California Department of Education site for LBUSD. To access the original data, all you have to do is select the report “Financial Reports for District,” go to the “general fund” tab, scroll all the way to the bottom of the page, hit the ”pop-trends” link, then select “$/student(ADA).” Simple!)
So where are these constant cuts?
Moving to higher education, the State Higher Education Executive Officers just released its FY 2008 state and local higher education funding numbers. Once again, they give the lie to the notion that public colleges perpetually face government budget axes and have to raise tuition just to make up the loss. As the chart below shows, inflation-adjusted state and local appropriations per full-time-equivalent student rose by $41 between FY 2007 and FY 2008, while tuition revenue grew by $57. Nonetheless, ivory tower denizens have been crying out for financial help, and they’ll get it — the House and Senate compromise bill appears to offer lots of cash for our “poor” ol’ public colleges.
You know what? Now I actually feel a little worse…
The Cost per Family of the Deficit Spending Bill
WashingtonWatch.com has run the numbers on the deficit spending bill formerly known as economic stimulus, which is being debated in the House and Senate today. Here’s the skinny:
The bill costs the average U.S. family about $3,300, and it raises the national debt by about $7,700 per family.
Let’s go through that.
The bill spends about $5,500 per family, or $1,750 per person.
It reduces taxes by about $2,200 per family, or $700 per person.
Total cost (using our methodology): $3,300 per family, or $1,050 per person.
Added to national debt: $7,700 per family, or $2,450 per person.
Henrietta Hughes, HUD, and the Ft. Myers Public Housing Authority
Henrietta Hughes, the southwest Florida woman who was singled out this week by President Obama at a “stimulus” rally in Ft. Myers, Fl., is being labeled by the press as “the face of the economic crisis.”
According to ABC News, Hughes told the president in front of the crowd, “I have an urgent need, unemployment and homelessness, a very small vehicle for my family and I to live in…. The housing authority has two years’ waiting lists, and we need something more than the vehicle and the parks to go to. We need our own kitchen and our own bathroom. Please help.” President Obama gave her a kiss on the cheek, and told her, ‘We’re going to do everything we can to help you, but there are a lot of people like you.”
An uproar has ensued between left and right factions of the blogosphere. There have been accusations that Hughes was planted at the rally by the president’s handlers. There have been questions regarding a house she apparently owned and sold. And yesterday a local news outlet reported that a local faith-based nonprofit had offered Hughes and her son living arrangements, which she turned down.
I have no idea what is or isn’t true, but I don’t doubt this woman and her son are in a tough spot. What caught my eye was Hughes’ accusation that the Ft. Myers Public Housing Authority has a two-year waiting list. Whether planted or not, the president was handed a convenient prop to stir public opinion in favor of the so-called “stimulus.” The implied message was: “Pass this stimulus so people like Henrietta Hughes and her son will have a home.”
So I decided to look into what sort of federal money the U.S. Department of Housing & Urban Development (HUD) has been pumping into Ft. Myers and surrounding Lee County, Fl. The government’s USAspending.gov website is a useful, if imperfect, tool for uncovering who and where our tax dollars are going.
Can Anyone Find a Cure?
Stimulus plan supporters are using words such as “jumpstart” and “shovel-ready” to create an aura of rapid and productive action from their $787 billion bill heading for passage in Congress.
The CBO just released some details of the plan, which includes $575 billion in new spending and $212 billion in (mainly silly) tax cuts. Even if you believe in Keynesian jumpstart theory, a full 41% of the spending ($236 billion) will not occur until 2011 and after. Thus, even from a Keynesian perspective, $236 billion ought to be cut out of the package because it won’t be spent on ”shovel-ready” projects.
And by the way, even according to the CBO’s Keynesian-style model, the stimulus package will produce a negative effect on GDP in 2014 and all subsequent years.
In the end, if didn’t really matter what even Congress’s own economists said — today’s politicians simply love to spend money and will jump on any excuse to do so. It is an obsessive-compulsive disorder for which we have yet to find a cure.
Charter Schools’ Fine Print: “Made in Troy”?
A New York City charter school run by the highly-regarded KIPP network is bracing for a fight over the desire of many of its teachers to unionize, reports the New York Times. Unionization would surely bring work rules that would constrain the school leadership’s ability to peretuate its successful KIPP model.
Charter schools were one of the earliest incarnations of the modern U.S. school choice movement. Enjoying somewhat greater autonomy but generally lower funding than conventional public schools, they were intended to bring to the field of education some of the benefits of free markets. Overall, they tend to perform a bit better and more efficiently than regular public schools, but do not show the more consistent or significant advantages that genuine education markets demonstrate over public school monopolies.
But charter schools have a bigger problem than not quite having what it takes to create a free education maketplace. The great danger of charter schooling is that it could well prove to be a Trojan horse for the expansion of the existing 90% government school monopoly. Charter schools not only draw students away from the existing independent school sector, some are themselves former private schools that have opted to come under the umbrella of government charter status out of financial expediency. If, after absorbing students from the truly independent private sector, charter schools then lose what little autonomy they currently have, it will lead to the expansion of the existing state school monopoly.
That has long seemed to me to be their most likely outcome, and recent events are doing nothing to brighten that dismal prognosis. States and policymakers who want to innoculate themselves against the risk of charter schools gutting the independent sector while expanding the state school monopoly should adopt policies like education tax credits that give families easier access to truly independent schools.
Week In Review: Massive Spending, Nat Hentoff, Salary Caps and the Mexican Drug War
Deal Reached on Massive Spending Bill
The Washington Post reports, “A day after settling on the details of a nearly $790 billion economic stimulus package, congressional leaders moved to hold final votes on the plan tomorrow in hopes of sending it to President Obama to sign into law by his Presidents’ Day deadline.”
The House and Senate say they have agreed on a bill that will cost taxpayers $790 billion. But numbers can be deceiving, says Chris Edwards, Cato’s director of tax policy studies:
A huge threat from the $800 billion stimulus plan in front of Congress this week is that much of the spending may morph into a permanent expansion of government. If the bill is signed into law, lobbyists will immediately start pressing for the long-term extension of all the new spending on health care, transportation, education and other items.
Edwards calculates the actual cost of the spending bill will be about $3 trillion. “It’s madness,” he says.
Cato ran a full page ad in major newspapers nationwide showing that hundreds of economists agree that reducing the burden of government is the best way to overcome the current financial crisis. Cato released an online video about the ad, which made Cato’s YouTube channel the most viewed non-profit channel this week.
William Niskanen, Cato chairman emeritus and senior economist, sees no need to rush on the massive spending bill. “This is the fifth time in my adult life that the president has asked for or asserted unprecedented authority on an expedited basis with little or no congressional review,” he writes. “Each of the prior occasions turned out to be a disaster.”
On the campaign trail, Barack Obama promised that all non-emergency bills would sit for five days so the public could read, analyze and comment on them before he signed them into law. Surely five days won’t make a difference on the spending bill, says Jim Harper, Cato’s director of information policy studies. In a Cato Daily Podcast, Harper examines Obama’s pledge for transparency and says Obama should post the spending bill online for the public to see before signing it.
Obama’s Shock Doctrine
At the Guardian, I argue that President Obama and Rahm Emanuel are carrying out just what Naomi Klein predicted in The Shock Doctrine. Except that, as usual, it’s not deregulation and budget cutting that governments turn to in times of crisis. It’s more money and more power:
Last year the US economy was hit with one shock after another: the Bear Stearns bail-out, the Indymac collapse, the implosion of Fannie Mae and Freddie Mac, the AIG nationalisation, the biggest stock market drop ever, the $700bn Wall Street bail-out and more — all accompanied by a steady drumbeat of apocalyptic language from political leaders.
And what happened? Did the Republican administration summon up the spirit of Milton Friedman and cut government spending? Did it deregulate and privatise?
No.
It did what governments actually do in a crisis — it seized new powers over the economy. It dramatically expanded the regulatory powers of the Federal Reserve and injected a trillion dollars of inflationary credit into the banking system. It partially nationalised the biggest banks. It appropriated $700bn with which to intervene in the economy. It made General Motors and Chrysler wards of the federal government. It wrote a bail-out bill giving the secretary of the treasury extraordinary powers that could not be reviewed by courts or other government agencies.
Now the Obama administration is continuing this drive toward centralisation and government domination of the economy. And its key players are explicitly referring to their own version of the shock doctrine. Rahm Emanuel, the White House chief of staff, said the economic crisis facing the country is “an opportunity for us”. After all, he said: “You never want a serious crisis to go to waste. And this crisis provides the opportunity for us to do things that you could not do before” such as taking control of the financial, energy, information and healthcare industries….
Occasionally, around the world, there have been instances where a crisis led to free-market reforms, such as the economic reforms in Britain and New Zealand in response to deteriorating economic conditions. Generally, though, governments seek to expand their power, and they take advantage of crises to do so. But they rarely spell their intentions out as clearly as Rahm Emanuel did.
Taking Cues from Terrorist Playbooks
Tony Blankley writes in today’s Washington Times that we need to emulate the federal Office of Censorship employed in World War II and screen all press outlets for pieces ostensibly favoring those that oppose us in our fight against terrorism. Apparently, things have gone too far when newspapers allow a representative of Hamas to publish an op-ed and media outlets publish sensitive information about government programs. As he puts it, “American newspapers should foster a free debate on government policies, not act as agents of enemy sabotage.”
I am unclear as to how requiring Uncle Sam’s say-so on any controversial discussion of national security policy is a “free debate.” I am even less certain that all of this would be constitutional.
Worse yet, broad restriction of liberty is the response that terrorists want. Terrorists don’t fear government overreaction; they bait it and incite it. They need it. With broad measures that restrict the freedom of movement of the population and tax our every move, they portray themselves as patriots and freedom fighters. Talk of Wars on [a Noun] and “existential threats” only enhances the rhetoric of our enemies and incites public hysteria.
Don’t take my word for it. Carlos Marighella, Brazilian insurgent and author of the Mini-Manual of the Urban Guerrilla, said as much decades ago:
The government has no alternative except to intensify its repression. The police networks, house searches, the arrest of suspects and innocent persons, and the closing off of streets make life in the city unbearable. The military dictatorship embarks on massive political persecution … [t]he armed forces, the navy and the air force are mobilized to undertake routine police functions… [t]he political situation in the country is transformed into a military situation in which the “gorillas” appear more and more to be the ones responsible for violence, while the lives of the people grow worse.
Instead of calling for censorship, Mr. Blankley ought to limit his response to criticizing the newspaper or countering the op-ed directly. This is infinitely better targeted at his enemies and, let’s be honest, it isn’t hard to find contradictions between Hamas’s actions and whatever whitewash they put in an op-ed.
Mr. Blankley also points to the alleged probability of a nuclear bomb being set off in an American city within the next five years. Benjamin Friedman has already debunked this unfounded claim in great detail.
As for protection of secret information, the abuse of the State Secrets privilege often has little to do with national security, and a lot to do with governmental liability.
Stop Hiding the Stimulus Bill
Here’s Paul Blumenthal of the Sunlight Foundation on the closed process being used to ram through the deficit-spending/economic stimulus bill:
[I]t is not just Republicans who are being denied access to the bill. Reporters, bloggers, and the general public are being denied an opportunity to review one of the most important pieces of legislation sent through Congress in a long time. Anyone who wants should express that, whatever the partisan reasons for denying access to the bill, the American people deserve a right to review this legislation. Slamming it through without letting anyone see, save for 7 or 8 congressmen and some staff, is not fair to the public or the legislative process.
This is a dangerous practice that the Democrats ran against in 2006 and now, in the majority, are unfortunately using to block their opposition’s attacks. The majority Democrats should maintain their previous position on running the most open and honest government by allowing the public to review this legislation. Anything less is unacceptable.
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