Archive for January, 2010
Private Sector Guts and Growth
The Wall Street Journal has an article today for people who think that we need government to thrust itself into the economy because major projects, like energy and technology projects, are too big or risky for private businesses. The article focuses on Chevron’s offshore oil development:
Chevron is leasing the Clear Leader, which floats in 4,300 feet of water in the Gulf of Mexico, to drill for oil through nearly five miles of rock. Big Oil never wanted to be here, in 4,300 feet of water far out in the Gulf of Mexico, drilling through nearly five miles of rock…
It is an expensive way to look for oil. Chevron Corp. is paying nearly $500,000 a day to the owner of the Clear Leader, one of the world’s newest and most powerful drilling rigs. The new well off the coast of Louisiana will connect to a huge platform floating nearby, which cost Chevron $650 million to build. The first phase of this oil-exploration project took more than 10 years and cost $2.7 billion — with no guarantee it would pay off….
“This is technology capable of going to the moon,” says Robin West, chairman of consulting firm PFC Energy, involving “extraordinary uncertainty, immense levels of information processing, staggering amounts of capital.” …
“What has enabled us to do that is technology,” says David Rainey, BP’s head of exploration for the Gulf of Mexico. “We have been pushing the limits of seismic-imaging technology and drilling technology.”…
The push into deeper water hasn’t always been smooth sailing. Offshore projects are expensive, time-consuming and prone to failure. Chevron boasts of a 45% exploration overall success rate in recent years, a remarkable run by industry standards, but one that also means the company has spent billions on projects that haven’t panned out.”
Bravo for gutsy and aggressive American capitalism! Chevron is taking huge investment risks, making remarkable technological advances, creating jobs, and finding new energy supplies to keep our homes bright and warm.
Political leaders in Washington should be encouraging such private business activities to pull the nation out of its slump. So rather than trying to hike taxes on multinational corporations and oil companies — as the Obama administration proposed in its budget last year — policymakers ought to be cutting corporate tax rates and making other pro-investment changes in federal tax and regulatory policies.
When Do We Go to War in Yemen?
That is the question posed at the National Journal‘s National Security experts blog.
My response:
We shouldn’t even be contemplating war in Yemen, but we should also understand that the proposed expansion of security assistance to the government there is likely to pay only meager dividends.
Steven Metz gets at the nub of this problem in his two thoughtful posts (here and here). We have an unreliable ally. We have minimal capacity for making them more reliable. Neither of these observations are unique to Yemen. The same could be said of many other countries. Accordingly, we should concentrate our limited resources in a proactive and strategic – as opposed to a reactive and haphazard — way.
Contrast that with Jim Carafano’s invocation of a new “axis of evil” and the implication that we have no choice but to deepen our involvement in Yemen (and Saudi Arabia and Somalia) while continuing to fight in Afghanistan and Pakistan. Oh, and let’s not forget that there are still about 110,000 U.S. troops in Iraq.
To wit: “Sorry we have to fight on so many fronts….but it beats battling them on the Tarmac in Detroit.”
Sorry, but that just doesn’t fly.
While impeding al Qaeda’s ability to carry out major terrorist attacks has and will entail multiple fronts in many countries, it is not obvious how this fight should be conducted, nor is it obvious that the fronts in Yemen and Somalia and Saudi Arabia (or Afghanistan and Pakistan, even) are instrumental to success or failure. Safe havens exist in many places, including stable democratic countries. Are we really committed to preventing any country from providing a safe haven? Does the concept of a physical safe haven even make sense in the virtual world of globalized communications and the Internet?
Leaving aside the dubious safe haven argument, Carfano’s either/or proposition (fight them there or fight them here) is equally flawed. We should think of security in layers. A man from Nigeria who trained in Yemen and attempted to detonate his underwear bomb in Detroit was thwarted by his own incompetence and the alertness of the airliner’s passengers. Too close for comfort, to be sure, and we have since learned of numerous points along the way where his travels could have been interdicted. But what we’ve learned about this failed attack doesn’t confirm that our only option is to focus on the one layer (Yemen = terrorist training ground) at the expense of the other layers. An equally compelling case could be made for ignoring Yemen, per se, and focusing on other means of interdicting terrorists that are not so heavily dependent upon unwilling and duplicitous allies, or that burden our overtaxed military with an open-ended mission in yet another failed state.
State Budgets and Employee Compensation
Today, Cato released a report on employee compensation in state and local governments. As states struggle to balance their budgets in coming months, they should look to find savings in employee compensation, which represents half of all state and local spending.
The particular issue of excessive state pensions is being probed by newspapers across the nation. Over at Reason, Nick Gillespie discusses the problem in his home state of Ohio. That state’s newspapers teamed up to pen a series of articles on government pensions, which are representative of the growing pension problems in many states.
There has been a parallel series of articles across the nation on “pay-to-play” state pension scandals. These scandals involve Wall Street firms bribing public officials to get a slice of the government’s financial business. There is pay-to-play corruption in California and pay-to-play corruption in New York and many other places.
The solution to both of these problems is the same: moving the nation’s 20 million state and local workers from defined-benefit to defined-contribution pension plans. That way, governments wouldn’t have to hold giant pools of pension investments, the benefit structure of government workers would be more transparent, and policymakers could more easily cut compensation to balance state budgets.
H&R Block and the IRS: An Unholy Alliance to Ransack Taxpayers
The late George Stigler, winner of the Nobel Prize in economics, is famous in part because of his work on “regulatory capture,” which occurs when interest groups use the coercive power of government to thwart competition and undeservedly line their own pockets. A perfect (and distasteful) example of this can be found in today’s Washington Post, which reports that the IRS plans to impose new regulations dictating who can prepare tax returns. Not surprisingly, the new rules have the support of big tax preparation shops such as H&R Block and Jackson Hewitt, which see this as an opportunity to squeeze smaller competitors out of the market. The IRS and the big firms claim more regulations are needed to protect consumers from shoddy work, but this is the usual rationale for licensing laws and other government-imposed barriers to entry and the Institute for Justice has repeatedly shown such rules are designed to benefit insiders rather than consumers.
Tax preparers do make many mistakes, to be sure, but that is a reflection of a nightmarish tax code, and the annual tax test conducted by Money magazine showed that even the most-skilled professionals — such as CPAs, tax lawyers, and enrolled agents — were unable to figure out how to correctly fill out a hypothetical family’s tax return. But since the IRS routinely makes major mistakes as well, perhaps the moral of the story is that we need fundamental tax reform, not IRS rules to create a cartel for the benefit of H&R Block and other big firms. Would any of this be an issue if we had a flat tax or national sales tax?
Tuesday Links
- Cato Vice President Gene Healy grades President Obama. (Hint: He doesn’t give him a “B+”).
- Afghanistan: A war we cannot afford. “Democrats say raise taxes. Republicans say no worries. The best policy would be to scale back America’s international commitments.”
- Doug Bandow: The war in Afghanistan was justified at the beginning, but to escalate now is the “geopolitical equivalent of shutting the barn doors after the horses have fled.”
- How U.S. membership in the World Trade Organization enhances the liberty and prosperity of all Americans.
- Podcast: “TARP: A Congressional Failure” featuring John Samples.
The Start of Interstate Carbon Tariffs?
Not content with waiting for federal legislation on the matter, it seems that Minnesota has introduced a “carbon fee” of $4-$34 per ton of carbon dioxide emissions on energy produced –mainly using coal — in North Dakota. The fee is scheduled to go into effect in 2012. (see here)
North Dakota plans to challenge the new tax, which it rightly says will discourage the purchase of North Dakota power (that is, indeed, the whole point of the tariff). I’m no constitutional scholar, but Article 1, section 10 of the Constitution says that “No State shall, without the consent of the Congress, lay any Imposts or Duties on Imports or Exports, except what may be absolutely necessary for executing its inspection laws…” so the Minnesota tariff appears to be unconstitutional (for whatever that’s worth these days…), at least unless and until Congress gives its consent for it.
On the one hand, the current political make-up of Congress would suggest that such consent might, disappointingly, be given. On the other, the cap-and-trade bill has stalled in Congress despite the wishes of the majority leadership and the administration, suggesting that the desire to regulate energy and greenhouse gas emissions is lacking crucial support.
In related news, another body supportive of carbon tariffs, the French government, has seen its plans thwarted recently after the Constitutional Court there struck down the proposed carbon tax as unconstitutional. President Sarkozy had intented to extend the carbon tax EU-wide so as to prevent adverse competitiveness effects on French industry, thus giving the EU the incentive to apply a trade bloc-wide tariff on imports from less regulated countries. So the setback in France is good news for those of us concerned about the damage that carbon tariffs would do.
HT: Scott Lincicome
Census Paves the Way for Subsidies
Our bloated government does a lot of things it shouldn’t, but the decennial census is one of the handful of federal activities the Constitution approves of. The census was intended simply to determine the number of seats each state would have in the House of Representatives. Today, census data is plugged into government formulas to determine how more than $400 billion in subsidies from the federal welfare state are allocated to state and local governments.
The impetus to grab federal dollars caused controversy back in December when the National Association of Latino Elected Officials distributed a census promo that read, “This is how Jesus was born…Joseph and Mary participated in the Census.” The group’s website says that, “For each uncounted Latino, more than $11,000 [in federal funding] will be lost over the next decade.” Jesus did get stuck being born in a manger because Joseph and Mary couldn’t find proper shelter, but the Bible doesn’t say that the census led to Bethlehem receiving more affordable housing subsidies from Rome.
I just received a newsletter from the town where I reside. It says that my town was named the best place in the state to raise kids by BusinessWeek, 11th best place in America to move by Forbes, and one of the top 100 best places to live in America according to Relocate America. Sounds like my town’s doing pretty good on its own, but on page six I’m hit with a plea to make sure I participate in the census so the town can grab federal dollars:
When you fill out the census form in April, you’re making a statement about what resources [the town] needs going forward…Accurate data reflecting changes in our community are crucial in deciding how more than $400 billion per year is allocated for projects like hospitals, public works projects, infrastructure improvement, senior centers, schools and emergency services. That’s more than $4 trillion over a ten year period for things like new roads and schools, and services like job training centers.
Not a single item listed by the newsletter is anything the federal government is empowered to fund. There’s no practical or moral reason why my thriving town should receive money from taxpayers in other locals across the country. Nor should taxpayers in my town be forced to send a portion of their paycheck to Washington so politicians can play Santa Claus to their parochial interests. As such, the pork politics surrounding the census is another reminder that a return to fiscal federalism is desperately needed.
Can the GOP Recover Its Principles?
Today, Politico Arena asks:
How helpful is it to the GOP to have its chairman say the party’s “credibility snapped” while in power and it became “just another party of Big Government?”
My response:
If GOP chairman Michael Steele means it, it’s very helpful for him to say that the party’s “credibility snapped” while in power and it became “just another party of Big Government?” You first have to recognize a problem if you want to solve it.
For better or worse, we’ve had two major parties for most of our history, and that’s not likely to change any time soon. At least since the New Deal, the Democratic Party has been the party of government, especially over economic affairs. By contrast, since the Goldwater revolution of 1964, the Republican Party has claimed to be the party of individual liberty and limited government, although that claim was often undermined by calls for restricting certain personal liberties, and the party was slow, as were parts of the Democratic Party, in supporting the civil rights movement. But broadly speaking, in our recent history the two parties have been distinguished, nominally, by their different conceptions of the proper role of government.
At no time was that contrast more sharply drawn than during the Reagan administration. Yet even then there were internal struggles between the Reagan people and the Bush people. Recall that when Bush ’41 became president, he called for a “kinder and gentler nation,” which was a slap at Reagan’s limited government principles. And eventually, of course, he broke his “no new taxes” pledge.
After Bush lost the presidency, the Gingrich “Contract with America,” leading to the Republican take-over of Congress for the first time in 40 years, was supposed to return the party to a principled, limited government path. It did so briefly, in those heady days of 1995, but by the end of the year the siren song of government power was calling and the party started its slow slide, at the end of which it was barely distinguishable from the Democratic Party.
Thus, it was no accident that in 2000 the party selected as its standard-bearer George W. Bush, who had been utterly absent from the intellectual ferment of the Goldwater-Reagan years. Not unlike his father, Bush ’43 stood for “compassionate conservatism,” a slogan ripe with promise for government programs. And the Republican Congress, now rudderless, was anxious to supply them. If the party stood for anything, it was incumbency protection. What better example than the McCain-Feingold campaign finance “reform” bill, which Bush signed while saying he thought it was unconstitutional. What’s the Constitution among friends?
But rudderless, unprincipled government could not go on forever, and so in time it came crashing down upon the Republican time-servers — and the real party of government took over. Immutable principles, however, such as you can’t get something for nothing, favor no party, and so Democrats too are facing, or will soon face, the harsh realities that flow from abandoning political and economic discipline. If the Republican Party can recover the fundamental principles that are captured in the nation’s founding documents, and take them to the people, it will then fall to us to decide what we want. And if we too believe in something for nothing, we will have no one to blame but ourselves for the consequences that follow. But at least we will have had a choice, which we have not had in recent years. So, yes, Mr. Steele’s call for a return to principle is helpful.
Did the Fed Buying MBS Make a Difference?
Recent years have witnessed a multitude of new Federal Reserve programs aimed at bringing stability to our financial markets. One of the largest programs has been the Fed’s purchase of Fannie Mae and Freddie Mac guaranteed mortgage-backed securities (MBS). The program was initially announced in November 2008 with the goal of buying up to $500 billion, later expanded to $1.25 trillion. Clearly we are talking a lot of money.
The ultimate objective of the FED MBS purchase program was, in the words of the Fed, to reduce mortgage rates “relative to what they otherwise would have been.” Did the Fed meet this objective? According to a new study by Stanford University Economists Johannes Stroebel and John Taylor the Fed did not.
More specificially, the professors “find that the MBS program has no significant effect. Movements in prepayment risk and default risk explain virtually all of the movements in mortgage spreads.” So while it is clear that mortgage rates declined over the time the Fed has operated the MBS purchase program, those declines were due to factors outside of the Fed’s control.
Professors Stroebel and Taylor only look at the claimed benefits of the Fed’s MBS purchase program, leaving aside the issue of cost. Since any losses on MBS purchased by the Fed reduces the amount of funds transferred from the Fed to Treasury, these losses are ultimately borne by the taxpayer, as that reduction will have to be made up elsewhere. With close to a trillion in purchases, even minor declines in value can result in large losses for the taxpayer. For instance, a 5% loss in value would translate to $50 billion loss to the taxpayer. Another good reason to audit the Fed.
Bodyscanning Captain Underpants
I probably should’ve predicted that a huge story implicating national security surveillance policy would break just as I was boarding a flight to Madrid for the holidays. Jim Harper & c. have by now covered most of the bases admirably, but there are one or two points I feel it can’t hurt to emphasize.
First, there’s been a lot of talk about millimeter wave body imaging scanners in the wake of the attempted Christmas bombing; the New York Times headlined a story about the machines “Technology that Might Have Helped.” Really, that should read “Might Have Helped Had It Been Installed in Lagos,” which might have underscored the weirdness of some of the ensuing discussion. Because the awesome next-gen spytech you’ve got at the most advanced 20% or 50% or 90% of airports matters a lot less than the situation in the bottom 1%, where a global adversary is going to focus their efforts. At a couple hundred thou each, we’re talking about a pretty pricey solution if they’ve got to be near-ubiquitous to work.
The press have set up a familiar security/privacy debate over body imaging, but this strikes me largely as a sideshow. If no records of the scans are kept, and software is used to obscure body contour details while preserving resolution for objects concealed on the person, and the scans are reviewed by analysts in another room who don’t simultaneously see the subject, then it’s hard to see how they’re substantially more intrusive than x-rays of carry-on baggage. (Though I would, of course, want to insist on those three privacy measures.) The real questions to raise about the tech are entirely on the security side.
First, experts have raised serious doubt about the assertion that millimeter wave scanners would have detected the device involved in the Christmas attempt. It’s hard to imagine a dumber way to blow a few hundred million bucks than on high-tech measures that wouldn’t even work against current terrorist methods, especially when alternative measures like chemical swabs—far cheaper, though without the gee-golly Total Recall factor—are on the menu. But you also have to assume that if it were effective against current methods, terrorists would switch methods—either by selecting different targets or looking for other means of hitting the same targets. Now, forcing that kind of shift can clearly be a benefit: As Jim has noted, the kind of device they had to use to circumvent metal detectors and baggage x-rays was clearly less reliable than a bomb in a suitcase could’ve been, making it possible for passengers to foil the attempt. The question is whether the countermeasures they take in response to the body scanners require them to incur marginal liabilities that justify the cost. It seems awfully doubtful, frankly.
If you’ll forgive a bit of frank cynicism, I predict we’ll end up debating body imagers because they’re big, flashy, sexy tech with lots of cool scifi visuals for the weekly newsmags and cable news shows to use. The anchors get to say “naked” a lot, and air travelers get to feel like they’re being protected by cyborgs from the future. Meanwhile, measures that actually enhance security, like reinforced cockpit doors, tend to be rather more boring and invisible to the average person. So, for instance, probably Umar Farouk Abdulmutallab should have at least been pulled aside for additional screening. It’s not that it should have been enough, in isolation, that his father had contacted the American embassy with concerns about his son (intel agencies are drowning in vague tips, which is one reason there are half a million people on the terror watchlist, only a handful of whom are actually a threat; you can’t feasibly ground all of them) or that he bought a one-way ticket with cash or that he was traveling without baggage, or that there was chatter about a potential bombing attempt by a Nigerian. Rather, you’d think the combination of those things would have triggered a closer look at the airport. But that’s a question of abstruse and partly classified back-end data sharing procedures, which aren’t nearly as fun to talk about on Meet the Press.
Congress Chooses the Low Road. Again.
In 2009, congressional Democrats fashioned their health care legislation out of public view. That enabled them to avoid some public intra-party spats; to hide maybe 60 percent of the cost of the legislation and otherwise game the Congressional Budget Office’s scoring rules; to deny the public enough time to learn about how the legislation would work; and to cram the legislation through the Senate the day before Christmas. Senate Majority Leader Harry Reid’s backroom negotiations are rightfully infamous.
Now comes word that, rather than follow the usual conference procedure that we all learned about as children, House and Senate Democrats will conduct informal negotiations — behind closed doors, all by themselves, with no C-SPAN cameras — in the hope of crafting the bill that can command 218 votes in one chamber and 60 votes in the other.
Let me be clear that Democrats are not violating any rules of which I am aware. But one senses that the object here is not the sort of good government or open government that the Left claims to seek. Rather, the object is power. As my colleague Will Wilkinson writes, “They seem interested primarily in how a temporary majority can do more, faster, now.” And a key tactic is to hide from the public as much of the process as possible.
Trade Not to Blame for a ‘Lost Decade’
For American workers and families trying to get ahead, the decade just behind us was a stinker. As a front-page Washington Post story over the long weekend summarized:
For most of the past 70 years, the U.S. economy has grown at a steady clip, generating perpetually higher incomes and wealth for American households. But since 2000, the story is starkly different. …
According to the story, the Aughts (2000-09) were the first decade since World War Two with no net job creation, and the first in which median household income was actually lower at the end than at the beginning.
It won’t be long before critics of trade will try to blame the poor economic performance on trade agreements and globalization. This has been a standard line of attack, and I address it at length in my new Cato book, Mad about Trade: Why Main Street America Should Embrace Globalization. For now, just a few quick-hit observations:
The two recessions that book-ended the past decade were both “Made in the USA.” The first was triggered by the popping of the dot-com bubble, the second by the bursting of the housing bubble. Trade was not the cause of either recession. In fact, trade and globalization were charging ahead full steam in the 1990s, when everybody agreed the economy was doing well.
There is also the temptation to extrapolate short and medium trends into a long-term decline in living standards. As the Post reporter Neil Irwin rightly noted,
The miserable economic track record is, in part, a quirk of timing. The 1990s ended near the top of a stock market and investment bubble. Three months after champagne corks popped to celebrate the dawn of the year 2000, the market turned south, a recession soon following. The decade finished near the trough of a severe recession.
The U.S. economy has endured equally long stretches of poor performance in the past. For example, the Dow Jones Industrial Average was actually lower in 1982 as it was in 1966—16 years stuck in neutral. Real median household income was lower in 1983 than it was in 1969—14 years of no net gains. Yet the economy recovered and scaled new heights.
During difficult economic times, trade helps us weather the storm by offering lower prices and more choice to consumers struggling to make ends meet. When domestic demand sags, U.S. companies can find customers and profits in more robust markets abroad. Foreign investment in the United States helps to keep interest rates down, keeping more Americans in their homes and keeping credit markets open.
Our policy makers will only make our economy worse if they reach for the snake oil of higher trade barriers.
Cato on Facebook
Cato on Twitter
Cato on Google+
Cato on YouTube
