Archive for February, 2010
Symbols, Security, and Collectivism
The state of Nevada is one of few that is tripping over itself to comply with the REAL ID Act, the U.S. national ID law.
It’s worth taking a look at the sample license displayed in this news report, especially the gold star used on the license to indicate that it is federally approved.
The reasons for “improving” drivers’ licenses this way are complex. The nominal reason for REAL ID was to secure the country against terrorism. The presence of a gold star signals that this the card bears a correct identity and that watch-list checking has ensured the person is not a threat.
Don’t be too thrilled, though. The weakness of watch-listing was demonstrated again by the Christmas-day attempt on a Northwest airlines flight. The underpants bomber wasn’t listed, so checking his name against a watch-list didn’t do anything.
The real reason for REAL ID, though, was anti-immigrant fervor. If the driver licensing system distinguished between citizens and non-citizens, the theory goes, possession of a driver’s license can be used to regulate access not just to driving, but to working, financial services, health care, and anything else the government wants. Illegal presence in the country could be made unpleasant enough that illegal immigrants would leave.
Alas, human behavior isn’t that simple. If ‘driven’ to it—(I had to…)—people will get behind the wheel without licenses—and without the training that comes with licensing. Then they’ll crash. When the governor of New York briefly de-linked driver licensing and immigration status in 2007, he cited public safety and the likelihood that insurance rates would fall, to the benefit of New Yorkers. (When the state of New Mexico de-linked driver licensing and immigration status, uninsured vehicle rates in the state dropped from 33 percent to 17 percent.) But the governor suffered withering criticism from anti-immigrant groups and quickly reversed course.
Like linking immigration status and driving, linking immigration status and work through an ID system imposes costs on the law-abiding citizen. Complications and counterattacks raise costs on workers and employers while reducing the already small benefits of such programs. I articulated those in my paper on employment eligibility verification.
Son of the Stimulus
Like the sequel to a horror film, the politicians in Washington just passed another stimulus proposal. Only this time, they’re calling it a “jobs bill” in hopes that a different name will yield a better result.
But if past performance is any indicator of future results, this is bad news for taxpayers. By every possible measure, the first stimulus was a flop. But don’t take my word for it. Instead, look at what the White House said would happen.
The Administration early last year said that doing nothing would mean an unemployment rate of nine percent. Spending $787 billion, they said, was necessary to keep the unemployment rate at eight percent instead.
So what happened? As millions of Americans can painfully attest, the jobless rate actually climbed to 10 percent, a full percentage point higher than Obama claimed it would be if no bill was passed.
The President and his people also are arguing that the so-called stimulus is responsible for two million jobs. Yet according to the Department of Labor, total employment has dropped significantly — by more than three million — since the so-called stimulus was adopted. The White House wants us to believe this sow’s ear is really a silk purse by claiming that the economy actually would have lost more than five million jobs without all the new pork-barrel spending. This is the infamous “jobs saved or created” number. The advantage of this approach is that there are no objective benchmarks. Unemployment could climb to 15 percent, but Obama’s people can always say there would be two million fewer jobs without all the added government spending.
To be fair, this does not mean that Obama’s supposed stimulus caused unemployment to jump to 10 percent. In all likelihood, a big jump in unemployment was probably going to occur regardless of whether politicians squandered another $787 billion. The White House was foolish to make specific predictions that now can be used to discredit the stimulus, but it’s also true that Obama inherited a mess — and that mess seems to be worse than most people thought.
Moreover, it takes time for an Administration to implement changes and impact the economy’s performance. Reagan took office in early 1981 during an economic crisis, for instance, and it took about two years for his policies to rejuvenate the economy. It certainly seems fair to also give Obama time to get the economy moving again.
That being said, there is little reason to expect good results for Obama in the future. Reagan reversed the big-government policies of his predecessor. Obama, by contrast, is continuing Bush’s big-government approach. Heck, the only real difference in their economic policies is that Bush was a borrow-and-spender and Obama is a borrow-and-tax-and-spender.
Businesses Cite Government as the Problem
According to the latest Small Business Economic Trends survey conducted by the National Federation of Independent Businesses, 31 percent of respondents said the single most important problem facing small businesses is “poor sales.” “Taxes” and “Government Regulations and Red Tape” came in second and third place at 22 percent and 13 percent respectively. Combining the two, the biggest problem facing small businesses according to respondents is government.
Unfortunately, when the media discusses the NFIB survey, it conveniently ignores this fact. Take for example this February 11th post from The Economist’s Free Exchange blog:
What’s the biggest problem?
‘Small business owners entered 2010 the same way they left 2009, depressed,’ said William Dunkelberg, NFIB chief economist. ‘The biggest problem continues to be a shortage of customers.’
That will tend to make life hard on a businessman. Of course, that biggest of problems won’t be going away until the economy begins adding more jobs than it’s destroying, and obviously small businesses aren’t there yet. The Obama administration is betting that by creating an incentive to hire, it will change the math—firms will move from cutting jobs on net to adding jobs on net, which will increase the number of customers out there, which will, in turn, feed more hiring. Hopefully, that will be enough, but the proposed $33 billion looks awfully small given the 15 million unemployed.
Free Exchange, which cheerleads almost daily for more government spending, somehow sees in the NFIB survey a need for more government. But in the survey’s write-up, the NFIB makes it perfectly clear that its membership doesn’t view more government spending as part of the solution:
Instead, Congress is focusing on a health care bill that features crippling taxes and mandates for small firms, fully expecting to have it in place and implemented (10 years of taxes, seven years of “reform”) this year with unemployment at 10 percent and expected by many to rise. Lawmakers also allowed the minimum wage to rise by nearly 11 percent in July 2009, catapulting teen job loss to over 500,000 and an unemployment rate of 27 percent in the second half even though the economy started growing. This was double the loss in the first half when GDP growth was plummeting. If the administration wants to count “jobs created and saved” it should also be accountable for “jobs destroyed or prevented.
On top of all that bad news, small business owners fear Washington will then feel the need to “stimulate” us with even more spending and larger government (and taxes), the death knell for private sector vitality…The loss of a lock on 60 Senate votes for the Democrats may be encouraging to some owners, but the President and Congressional leaders still sound like they plan to press on with their agenda, not good news for small business owners.
The NFIB released a new report yesterday that surveyed small businesses on their ability to obtain credit. 51 percent of respondents cited slow or declining sales as their principle problem. Only 8 percent cited access to credit. Although taxes and regulations weren’t choices, the second largest problem (21 percent) cited by respondents was “the unpredictability of business conditions.”
From the report:
The second most cited immediate problem (21%) is the unpredictability of business conditions. Virtually the same level (23%) of concern with predictability was expressed one year ago. Data produced elsewhere suggest that the nature of unpredictability (certainty) may be shifting somewhat from economic to political concerns, such as new taxes. Regardless of its cause however, the risk to investment rises during periods of unpredictability, making investment less likely to occur at that time. Confidence matters. Small Business Economic Trends, for example, shows capital investment over the last several months bouncing around record low levels and staying there.
Thus, we have more evidence that “regime uncertainty” is contributing to the economic downturn. But reading the Washington Post’s write-up on the NFIB report, one will find zero mention of the concern small businesses have with government fiscal policies. The Post article merely says this:
William J. Dennis Jr., the NFIB senior research fellow who headed the survey, said recent administration proposals, including $30 billion in new federal aid for community banks, were not likely to help. But he also said the NFIB was at a rare loss for ideas on what the government should do instead. ‘We’re really in a quandary right now,’ Dennis said.
Speaking of that $30 billion in federal TARP subsidies to community banks, the Washington Post also reports that Treasury officials are considering excluding the small business-lending initiative from oversight by Neil M. Barofsky, the special inspector general for the TARP bailout. Gee, might that have anything to do with the unflattering reports on TARP from Barofsky’s office?
Alas, Washington doesn’t appear to be listening to what small businesses and the American people are saying they want: less taxes, spending, and regulations. Instead, in a vain effort to end a recession that government policies helped foster, policymakers continue to throw trillions of taxpayer dollars off the wall in the hopes that something sticks.
Note: See Chris Edwards’ recent testimony before the Senate Finance Committee on taxes and small business job creation.
A New Fed-Treasury Accord
Charles Plosser, President of the Federal Reserve Bank of Philadelphia, gave an important speech last week. He mounted a strong defense of what is known as Fed independence. “Central bank independence means the central bank can make monetary policy decisions without fear of direct political interference.”
Toward the end of the speech, Plosser admitted the Fed had brought criticism down on itself by blurring the line between monetary and fiscal policy. In the process, the central bank greatly expanded its balance sheet and substituted “less liquid, long-term assets, such as securities backed by mortgages guaranteed by Fannie Mae and Freddie Mac, for the short-term securities it typically held before the crisis.”
To extricate itself from conducting fiscal policy and get back to doing conventional monetary policy, Plosser called for a new Fed-Treasury Accord. (He harkened back to the Accord of 1951, which ended the Fed’s wartime obligation to support the prices of Treasury bonds.) Under the proposal, the Fed would swap out its illiquid assets for Treasury obligations. Responsibility for public support of housing would revert to Treasury and be subject to Congressional appropriations.
Additionally, and very importantly, Plosser recommended ending or severely curtailing the Fed’s expanded lending authority, which enabled it to balloon its balance sheet and conduct fiscal policy. (That is the section 13(3) authority.) “Never again” is the message of Plosser’s speech.
It was a landmark speech by a high Fed official.
Taxes and Small Business
I testified to the Senate Finance Committee today regarding taxes and small business. My testimony is posted here.
President Obama plans to raise the top two individual income tax rates. That will not be good for business or the economy. A little more than half of all business income in the United States is reported on individual returns, not corporate returns. Of the business income reported on individual returns, 44 percent is in the top two income tax brackets.
My testimony pointed out that while Congress cut the top individual rate by 5 percentage points this past decade, the average top rate in the 30 OECD countries also fell by 5 percentage points, as shown in the chart below.
If the top federal rate rises to 40 percent next year, the United States will have the ninth highest top individual rate in the OECD, including state-level taxes. We’ve already got the second-highest corporate tax rate in the OECD.
A nation that has been a relative bastion of market capitalism and individual achievement has a tax code that is becoming very hostile to high-earners, entrepreneurs, and businesses of all types.
You Always Lose with Top-Down Standards
Yesterday, Andrew Coulson and I wrote a bit on President Obama’s little talk with the nation’s governors about potential changes to federal education policy. The root of the President’s proposal — and we’ve probably only seen fragments of what will eventually come out – is a requirement that states adopt common “college- and career-readiness standards” to qualify for large chunks of federal money.
This certainly puts in place the “standards” part of “standards and accountability” reform, which has dominated education for roughly the last fifteen years. But where’s the ”accountability” part?
So far, nowhere. Yes, a state would have to adopt common standards — or, interestingly, somehow work with universities to certify its standards as college- and career-ready — but the administration has offered nothing by way of accountabilty for academic outcomes. Indeed, it has emphasized a move away from the “corrective” actions that No Child Left Behind imposes on laggard schools and has instead pushed getting extra resources (of course!) to those institutions.
This must be alarming to reformers who think the only way to fix education is to have government “get tough” on its schools. And the no-accountability approach certainly doesn’t make much intuitive sense. Without potential punishments or rewards for outcomes, what incentives do districts and schools have to meet standards, national or otherwise?
The answer, of course, is none. But don’t fret: Whether there are accountability measures for performance or not, in government-run schooling the outcome will be the same. Unfortunately, ”the same” always means ”poor.”
Why inevitably poor? Because the people employed in education — teachers, school administrators, bureaucrats — have hugely disproportionate power over education politics, and hence a tremendous ability to bend the system to their will. And what do they prefer from the system? The same thing you or I would ideally get from our jobs: as much money as possible with no accountability for what we produce. The impotence of NCLB is exhibit A of this.
With that political reality firmly in mind, the final result for any potential combination of standards and accountability becomes clear: No meaningful improvement. The handy matrix below lays it out:
So let’s give this to President Obama: His move to further federalize education authority is very troubling, but at least he doesn’t see the need for the accountability charade. Or so, anyway, it seems for the moment.
Unions, Productivity, and the 2010 Economic Report of the President
I’ve become a fan over the years of the annual Economic Report of the President, released around this time each year by the Council of Economic Advisers. The more than 100 tables in the back of the book provide an invaluable picture of the economy over many decades, covering all the major indicators from output and employment to interest rates and trade. Each report also contains chapters explaining the economic thinking behind administration policies.
Chapter 10 of the latest report focuses on “Fostering Productivity Growth through Innovation and Trade.” For critics of trade, it offers sound economic reasons why trade raises U.S. productivity and, thus, over the long run, U.S. living standards.
One of ways trade promotes growth is “Firm Productivity.” Economists have come to appreciate that firms within an industry will differ in their productivity. Those that are more productive will tend to grow and prosper in larger and more competitive global markets. As a result,
when a country opens to trade, more productive firms grow relative to less productive firms, thus shifting labor and other resources to the better organized firms and increasing overall productivity. Even if workers do not switch industries, they move from firms that are either poorly managed or that use less advanced technology and production processes toward the more productive firms.
The report doesn’t mention this, but one reason why firms differ in their productivity is unionization. As I spell out in an “Economic Watch” column in today’s Washington Times, and explore in more detail in the latest Cato Journal, unionized firms tend to lose market share to non-unionized firms:
The weight of evidence indicates that, for most firms in most sectors, unionization leaves companies less able to compete successfully. The core problem is that unions cause compensation to rise faster than productivity, eroding profits while at the same time reducing the ability of firms to remain price-competitive. The result over time is that unionized firms have tended to lose market share to non-unionized firms, in domestic as well as international markets.
Compared to equivalent non-unionized competitors, unionized firms are associated with lower profits, less investment in physical capital, and less spending on research and development. By exposing an industry (say, automobiles) to more vigorous international competition, trade accelerates the shift from less competitive unionized firms to more competitive non-unionized firms.
Economists serving a Democratic administration would be understandably reluctant to say such a thing explicitly, but it is certainly there between the lines in Chapter 10 of the new Economic Report of the President.
Tuesday Links
- Price controls have failed in the past and there is no reason to think they will work now. So why is the president proposing price controls on health care? Michael Tanner: “Attempts to control prices by government fiat ignore basic economic laws — and the result could be disastrous for the American health-care system.”
- Does this federal government policy make me look fat? Be honest. (Yes).
- So, President Obama wants a presidential commission on the budget deficit. Isn’t that a little bit like W.C. Fields asking for a commission on sobriety?
- Podcast: “POTUS and Price Controls in Health Care” featuring Michael F. Cannon.
Filed under: General; Government and Politics; Health Care; Regulatory Studies
DC Shouldn’t Subsidize Parking Garages
The District of Columbia is providing tax incentives for a parking garage at a new Harris Teeter grocery store. This follows a District subsidized parking garage boondoggle that opened at a Columbia Heights mall in 2008. Whether it’s a parking garage, bike rack, or any other commercial transportation activity, government should remain neutral. If Harris Teeter believes a 150-car parking garage is in the best interests of the company’s bottom line, it should pay for it itself. Taxpayers shouldn’t be on the hook. If the District or any other city wants to encourage economic development, it should seek lower taxes across the board, and remove costly regulatory barriers.
H/T Chris Moody
Government Program Competes with First-Time Home Buyers
If there should ever be a great time to be a first-time home buyer — it should be now. Mortgage rates are at historic lows. Prices have fallen almost 30% across the country since the peak. Builders continue to add supply into already saturated markets. Yet, as the Wall Street Journal reports, potential first time home buyers are facing stiff competition from investors…and from the government.
Congress has appropriated about $6 billion to local and state governments to buy foreclosed properties. President Obama is proposing to add another $1.5 billion that could be used for similar purposes. The argument is supposed to be that these funds would eliminate the negative impact of foreclosures on communities, while also providing shelter to needy families. Part of the program’s rationale is that local governments’ will select a better group of tenants and purchasers that would private investors (the history of public housing should rebut that assumption).
With the exception of cities like Detroit, Cleveland and Buffalo, many of the country’s boom areas still have significant population and other amenities (like sunny weather). Many people would continue to choose to live in these areas, if only they were more affordable. After all these years of massive subsidies for home-ownership, there seems a great irony in having the government now be one of the largest barriers to families achieving home-ownership — by using tax dollars to bid up and compete away existing homes.
Europe: Either Bismarck or the Euro, but Not Both
The Maastricht Treaty requires countries in the eurozone not to exceed a public debt of 60% of GDP. Well, now almost all of them have an official debt exceeding that ceiling. But the situation is immensely worse because European states also have huge, and largely hidden, unfunded liabilities arising from their pension and health systems. According to a 2009 study by my colleague Jagadeesh Gokhale, the true debt of the 25 European countries is, on average, 434% of GDP. And the treaties that underpin European integration do not say a word about such debt.
Greece’s true debt is 875% of GDP and its current problems are just the first act of the coming fiscal bankruptcy of Europe. In my 2004 essay “Will the Pension Time Bomb Sink the Euro?”, I concluded that Europe would end up facing a critical crossroads: either leave the Euro or abandon the Bismarckian welfare state paradigm. As it turns out, the DNA of the pay-as-you-go system allows for political manipulation and the consequent inflation of pension and health “rights.” This, exacerbated by falling fertility rates and increasing life expectancy, will lead to increasing fiscal deficits, unpayable debt, state insolvency, defaults, covert age wars, and the failure of the Eurozone project.
The welfare state has really become an arbitrary “entitlement state,” where everyone uses the state to rob someone else, and politicians from the right and the left play the transfer game to win elections. This crisis may serve to reveal the true nature and enormous flaws of the welfare state. Sooner or later, Europe will have to dismantle it and move toward a paradigm of personal responsability — that is, a system of personal accounts for pensions, health and unemployment benefits.
Yeeow? Ayipioeeay?
And when we say
Yeeow! Ayipioeeay!
We’re only sayin’
You’re doin’ fine, Oklahoma!
Oklahoma O.K. — Oscar Hammerstein, Oklahoma
And when you’re not doing fine?
I was asked recently by Brandon Dutcher of the Oklahoma Council of Public Affairs to investigate the relationship between spending and student achievement in his state, and to chart the results as I’ve done for U.S. school spending and student achievement. Here it is:
For reasons I’ve never understood, the NAEP test results for students at the end of high-school have never been broken down by state–they’re only reported nationwide–so for the achievement measure I used the ACT. Oklahoma’s participation rate in the ACT is high (between the mid 60s and low 70s), hasn’t fluctuated wildly over time, and is not significantly correlated with its actual scores (I ran a regression to find out), so it’s a reasonable measure. I’ve only carried it back to 1990 because the ACT was redesigned in that year, making the scores discontinuous.
When they see the chart, maybe Oklahoma taxpayers can say: “Owwww! AiYaiYai!”
Cato on Facebook
Cato on Twitter
Cato on Google+
Cato on YouTube
