Archive for September, 2010
Un-Stimulating Bureaucracy
An essay from economist Arnold Kling in the latest Cato Policy Report discusses what Kling calls the “knowledge-discrepancy problem.” This occurs when knowledge is dispersed but power is concentrated, and it is particularly acute in government.
In short, it’s impossible for government “experts” to aggregate the vast amount of knowledge that is dispersed throughout the economy in order to optimally direct economic activity. And as Kling notes, concentrating power over the economy in the hands of experts leads to ever more undesirable government interventions:
As we have seen, the expectations placed on government experts tend to be unrealistically high. This selects for experts with unusual hubris. The authority of the state gives government experts a dangerous level of power. And the absence of market discipline gives any errors that these experts make an opportunity to accumulate and compound almost without limit. In recent decades, this knowledge-power discrepancy has gotten worse. Knowledge has grown more dispersed, while government power has become more concentrated.
The failure of the administration’s stimulus plan illustrates the problem with empowering government experts to “fix” our incredibly diverse $14 trillion economy.
A Wall Street Journal article on the inability of government bureaucracies to utilize stimulus funds demonstrates the inherent inefficiency of government planning. For example, the stimulus provided $5 billion to the states for weatherization projects. But when a local official in Detroit began soliciting applications to weatherize houses, she ran into a buzz saw of federal and state red tape:
But on the same day in March 2009 that Shenetta Coleman picked up applications from 46 companies, she received an email from the Michigan Department of Human Services telling her she couldn’t award work to anyone.
The problem: Ms. Coleman hadn’t met requirements for her advertisement. Those included specifying the precise wages that contractors would have to pay, and posting the advertisement on a specific website. There were other rules—federal, state and local—for grant and contract-award processes, historic preservation and labor standards.
The bureaucratic obstacles Ms. Coleman hit took more than a year to clear. Some were mandated by the stimulus bill, the same legislation that was supposed to rapidly create jobs. For example, there is a union-backed provision that requires that weatherization workers receive the prevailing wages in the area.
The stimulus is also distorting employment by incentivizing workers to obtain job-skills on the basis of government planning. The WSJ article cites the example of an unemployed worker who enrolled in a weatherization training class when she learned that Detroit would be receiving $30 million in weatherization funds:
She studied energy-saving principles, practiced drilling holes into walls and blowing in insulation, and learned how to install windows. She graduated in March, at the top of her class. For the next four months, she couldn’t find work. “I was hanging on by a thread,” said Ms. Wallisch. In July, she was hired for energy-conservation work funded not by the stimulus plan, but by Michigan’s utility companies.
The recession, and consequent rise in unemployment, led to demands for the government to “create jobs.” However, merely throwing taxpayer money at government job-creating schemes, which was the solution the government’s “experts” came up with, was never a viable solution. The experts simply do not have the requisite knowledge to match millions of workers possessing diverse job-skills with the diverse needs of millions of employers.
From Kling:
What the issue of job creation illustrates is the problem of treating government experts as responsible for a problem that cannot be solved by a single person or a single organization.
Economic activity consists of patterns of trade and specialization. The creation of these patterns is a process too complex and subtle for government experts to be able to manage.
The issue also illustrates the way hubris drives out true expertise. The vast majority of economists would say that we have very little idea how much employment is created by additional government spending. However, the economists who receive the most media attention and who obtain the most powerful positions in Washington are those who claim to have the most precise knowledge of “multipliers.”
As I have previously discussed, the average citizen has become conditioned to reflexively turn to the government to in times of crisis. Government officials are only too happy to oblige as they are naturally inclined to operate on a short-term horizon (i.e., the next election). Fortunately, more and more Americans appear to be realizing that the government and its experts are the problem rather than the solution.
New Orwellian Tax Scheme in England Would Require All Paychecks Go Directly to the Tax Authority
Our tax system in America is an absurd nightmare, but at least we have some ability to monitor what is happening. We can’t get too aggressive (nobody wants the ogres at the IRS breathing down their necks), but at least we can adjust our withholding levels and control what gets put on our annual tax returns. The serfs in the United Kingdom are in much worse shape. To a large degree, the tax authority (Inland Revenue) decides everyone’s tax liability, and taxpayers have no role other than to meekly acquiesce. But now the statists over in London have decided to go one step farther and have proposed to require employers to send all paychecks directly to the government. The politicians and bureaucrats that comprise the ruling class then would decide how much to pass along to the people actually earning the money. Here’s a CNBC report on the issue.
The UK’s tax collection agency is putting forth a proposal that all employers send employee paychecks to the government, after which the government would deduct what it deems as the appropriate tax and pay the employees by bank transfer. The proposal by Her Majesty’s Revenue and Customs (HMRC) stresses the need for employers to provide real-time information to the government so that it can monitor all payments and make a better assessment of whether the correct tax is being paid. …George Bull, head of Tax at Baker Tilly, told CNBC.com. “If HMRC has direct access to employees’ bank accounts and makes a mistake, people are going to feel very exposed and vulnerable,” Bull said. And the chance of widespread mistakes could be high, according to Bull. HMRC does not have a good track record of handling large computer systems and has suffered high-profile errors with data, he said. …the cost of implementing the new system would be “phenomenal,” Bull pointed out. …The Institute of Directors (IoD), a UK organization created to promote the business agenda of directors and entreprenuers, said in a press release it had major concerns about the proposal to allow employees’ pay to be paid directly to HMRC.
This is withholding on steroids. Politicians love pay-as-you-earn (as it’s called on the other side of the ocean), largely because it disguises the burden of government. Many workers never realize how much of their paychecks are confiscated by politicians. Indeed, they probably think greedy companies are to blame when higher tax burdens result in less take-home pay. This new system could have an even more corrosive effect. It presumably would become more difficult for taxpayers to know how much government is costing them, and some people might even begin to think that their pay is the result of political kindness. After all, zoo animals often feel gratitude to the keepers that feed (and enslave) them.
Interview on Libertarians and Election 2010
I answer a few questions from Jason Pye of UnitedLiberty in a 16-minute podcast here.
Protectionist Candidates Firing Blanks So Far
The early returns are in on the Democratic tactic of making trade an issue in the 2010 campaign, and the results are not encouraging for those who want to blame trade agreements for the state of the economy.
In a column this morning for the Wall Street Journal (“Ohio’s Test of Protectionist Rage”), Gerald Seib reports from Ohio that two Republican candidates have been unscathed so far by Democratic attacks on their past support for major trade agreements.
In races for U.S. Senate and governor, Democrats have unleashed hard-hitting ads accusing their GOP opponents of supporting trade deals “that shipped tens of thousands of Ohio jobs overseas.” So far the attacks have failed to draw blood. According to Seib:
Right now, both Republican contenders in those races—Rob Portman for the Senate and John Kasich for governor—are coming under fire for their past support of free trade. The fact that both enjoy big poll leads right now suggests the attacks have had limited effect so far.
A key question in the campaign stretch run, both for Ohio and for policy making in Washington after the election, is whether that remains the case.
Blaming trade for Ohio’s economic woes is wrong on substance, as I noted in 2008 when the issue came up in the state’s Democratic presidential primary. Politically it has proven to be a non-factor. As keen as I am to promote free trade, I’ll admit that it is probably not a big vote-getter on Election Day, but neither is it a vote-loser.
Candidates who support our freedom to trade with the rest of the world should not abandon that sound position under the desperate fire of their opponents.
ObamaCare’s First Adverse-Selection Death Spiral
This is what happens when government price controls limit insurance companies’ ability to set premiums according to risk:
Note that this adverse-selection death spiral happened before ObamaCare‘s price controls on child-only coverage even took effect. (Of course, President Obama never calls them price controls. He calls them “consumer protections.” Some protection.)
ObamaCare supporters are in full-blown denial:
“We’re just days away from a new era when insurance companies must stop denying coverage to kids just because they are sick, and now some of the biggest changed their minds,” Ethan Rome, executive director of Health Care for America Now, an advocacy group, said in a statement. “[It] is immoral, and to blame their appalling behavior on the new law is patently dishonest.”
I’d say that brave new world is already here.
ObamaCare supporters can take comfort in this: since it might take healthy people a while to figure out that they’re better off financially if they drop their coverage and pay the individual-mandate penalty, ObamaCare’s health insurance exchanges might not collapse before their January 1, 2014, launch date. They could last until January 2.
Has Obama Lost the Confidence of Black Citizens on Education Reform?
Polls consistently indicate that President Obama has lost proportionally more ground on job approval with white and Hispanic than with black Americans.
But data from question-experiments within the yearly Education Next/Harvard poll suggest the opposite in regard to Obama’s influence on education policy opinions. Obama’s policy influence with black respondents has dropped significantly more than it has with respondents overall; Obama’s position on vouchers and merit pay has no impact on black opinion.
In 2009, informing respondents that Obama supported merit pay for teachers increased the margin of black support for the policy by 30 points. Obama’s opposition to vouchers dampened the margin of black support for them by 26 points. And for the full sample, the shift in support was 19 and 21 respectively. But this year, mentioning that Obama supports merit pay actually decreases the black margin of support by a couple of points and his opposition to voucher increases the margin of black support by a few points.
The number of black respondents is small (just 280), but no discernable impact?
The intersection of race and politics is a complicated place; a jumble of socio-economic, ideological, and Party differences. Black Americans are predominantly Democratic, are more liberal than the general population on many issues (although more conservative on some), and on average have lower incomes. All of these characteristics have a major impact on an individual’s political opinions, and they are highly correlated with race in America. What this confluence of correlations translates into is overwhelming support for Democratic Presidents in general and President Obama in particular; 88 percent approval compared to 54 percent from Hispanics and 38 percent from whites.
These data make sense. What is surprising is that Obama’s policy preferences on education reform no longer appear to influence the policy preferences of a largely Democratic demographic that still overwhelmingly approves of his performance.
What’s going on behind these crosstabs? Does Obama’s policy endorsement no longer have an impact on Democrats in general? Why the disconnect between support for the President and his ability to move opinion on policy? Are we seeing through a race/Party social-desirability impact here?
ObamaCare’s Premium Refunds: Bad News for the Sick
USA Today and Politico Pulse report that ObamaCare has prompted BlueCross BlueShield of North Carolina to rebate $156 million to its customers in the individual market. This may seem like good news. It’s actually bad news, particularly for BCBS’s sickest customers.
Pre-ObamaCare, BCBS’s customers – whether healthy or sick – had coverage with an insurer that had already pre-funded their future medical needs. Competition protected them from BCBS skimping on care: if BCBS got a reputation for skimping, it would have a hard time enrolling new customers.
Post-ObamaCare, BCBS no longer needs that pile of cash, so they’re returning it to their customers. That hurts sick enrollees because BCBS is doling it out to all enrollees – not just the sick enrollees whom that money is supposed to serve. This cash-out is actually a transfer from the sick to the healthy.
Also, every BCBS customer who is sick or becomes sick in the future will have less protection against their insurer skimping on care. Competition used to discourage insurers from providing lousy access to care, but under ObamaCare competition will reward skimping. Under ObamaCare’s price controls, insurers that gain a reputation for providing quality coverage to the sick will attract sick people and go out of business. Insurers that gain a reputation for providing lousy access to care will drive away sick people and thrive.
Russian Government Announces 20 Percent Reduction in Number of Bureaucrats
Russia will cut its army of bureaucrats by more than 100,000 within the next three years, saving 43 billion rubles ($1.5 billion), Finance Minister Alexei Kudrin said on Monday. “We assume more than 100,000 federal state civil jobs will be cut within three years. The government has already included a schedule for cutting the number of federal civil servants in the draft budget for the next three years and coordinated it with ministries and agencies,” Kudrin told President Dmitry Medvedev, who in June ordered a 20 percent cut in the number of bureaucrats. Under the government plan, ministries and agencies will have to sack five percent of their staff in 2011 and 2012, and 10 percent in 2013. …In the last three years, the number of bureaucrats in the federal government had increased by nearly 20,000, in regional governments by 60,000 and at municipalities by 50,000, he said.
Recession Over?
As an economist I am the first to admit that sometimes the methods and practices of economics can end up creating confusion rather than understanding. The National Bureau of Economic Research’s (NBER) recent announcement that the recession ended in June 2009 is one such example.
At the heart of this confusion is a difference in how the public sees a recession and how NBER defines it. Most importantly, NBER views recessions as contractions. Simply, “Is the economy growing or not?” NBER uses that framework to then date business cycles from their peak to their trough. For this reason, NBER will often date the beginning of a recession during a time when the economy feels strong (at its peak) and date the end of a recession when it feels weak (when it’s at the bottom).
Since this method seems at odds with how the public views the economy, why do economists use it? Quite simply, it is a lot easier to spot, and agree on, turning points in the economy than it is to agree on when growth moves from weak to moderate to strong.
OK, enough on definitions. Did we actually hit bottom in Summer 2009? Looking at a variety of economic measures, I think it’s clear we hit bottom earlier–more like Spring 2009. Again, I must emphasize: Hitting bottom is not the same thing as “everything is fine” – just ask anyone who’s personally hit bottom. Just two examples of why I believe the contraction ended in early 2009; first: consumption, as one can see from the chart, actually hit bottom hear the end of 2008.
One of the defining characteristics of the current recession has been continued weakness in the labor market. I would go as far as to say there has almost been a disconnect of the labor market from the general economy. All that said, looking at the trend in layoffs and discharges indicates that separations from the labor force peaked near the end of 2008. The graph below also illustrates why some are worried about a double-dip, as layoffs spiked again in the middle of 2010, although most of that is driven by the 2010 Census hires.
The point to all this is not to argue that the economy isn’t weak. It obviously still is. However, the economy has been growing, for at least a year, and under many measures, longer. Interestingly enough, most measures of the economy hit bottom before a dime of stimulus money was spent. The above charts are from the Federal Reserve of St. Louis FRED website. Don’t take my word on these two charts. Look at lots of other measures. Not all, but most other measures seem to tell the same story.
GOP Sore-Loser Syndrome
Today POLITICO Arena asks:
Does the Republican Party have a sore-loser problem?
My response:
Lisa Murkowski is Exhibit A of the GOP sore-loser syndrome. Poor little thing: She thought she was entitled to the seat. After all, Daddy gave it to her.
But she’s not alone: Charlie Crist, Bill McCollum, Bob Bennett, Bob Inglis, Mike Castle, Dede Scozzafava — all sitting on the sidelines, running against the primary opponents who beat them, or even endorsing the Democrat in the race. They confirm the Tea Party contention: They have no clue about the changes taking place beneath their feet. Lisa Murkowski talks about the bacon she’s brought back to Alaska. But unlike the people marching in Paris to protest moving the retirement age from 60 to 62, the growing Tea Party movement is marching across America with signs that say “We Want Less!” In other words, get out of the way so we can be free to plan and live our own lives.
Matt Kibbe of FreedomWorks, co-author with Dick Armey of the new book Give Us Liberty: A Tea Party Manifesto, has it exactly right when he says: “What you’re seeing in the Republican primaries amounts to a hostile takeover of the Republican Party – and I mean that in the technical sense of replacing a failed management and tired ideas.” It began, one could say, with slowly growing opposition to the two Bushes, who squandered the Reagan Revolution. It continued with the rejection, ultimately, of the Republican Congress that came to office in 1995, which in time forgot why it was elected as members grew far too comfortable in office. Today, the opposition to “business as usual” — to Republicans as “Democrat Lite” — has a full head of steam. A two-party system works only if the parties are distinct, standing on different principles. It’s taken a long time — since the New Deal — but that’s what we’re moving toward, and that’s good, because it gives voters a real choice.
And Of Course They Won’t, No Not Until The Next Time
Here is the test of whether we still live in a society governed by the rule of law: Will anyone at the FBI be fired over the latest report out of the Office of the Inspector General?
Let’s review. Earlier this year, a comprehensive OIG report revealed that for years the FBI had ignored the paper-thin procedures demanded by our National Security Letter statutes to obtain sensitive telecommunications records of thousands of Americans, not just without a court order—because apparently we’re fine with that now—but without any kind of legitimate process at all. With nothing more elaborate than a Post-It Note requesting the data. As far as the public record is concerned, nobody has suffered any consequences for this massive abuse of the public trust.
Now we learn that an FBI supervisor, in an exercise of spectacularly poor judgment, sent a rookie out to monitor an antiwar rally—evading the charge of monitoring Americans based exclusively on the basis of First Amendment protected activity only because of the laughable pretext that said rookie was there to eye the crowd for any international terrorists who might be in attendance. Fine. But when Congress got wind of this and began to inquire into why this had occurred—and why said rookie had filed a report on “antiwar activity” that focused on whether any persons of apparent “Middle Eastern descent” had been involved—the OIG found that someone at the FBI had utterly fabricated a retroactive justification for the investigation, involving dubious “terror suspects” that nobody had actually believed at the time might be present at this rally.
According to the FBI, this fabrication was then offered up by FBI Director Robert Mueller before the Bureau’s overseers in Congress. This leaves us with a limited number of possibilities. One is that the head of the FBI was aware of and welcomed what the OIG determined to be a complete invention designed to cover up for an improper investigation. If that’s what happened, the head of the FBI committed perjury and should be prosecuted for it. But the OIG doesn’t believe that’s how it went, and I’m inclined to believe them: It would be irrational to risk perjuring oneself before the Senate Judiciary Committee over a minor error like this, however foolish.
But then someone gave the FBI director a pack of lies to feed to Congress, and the OIG was inexplicably unable to trace this fabrication to its source—which even allowing for the FBI’s massively dysfunctional computer systems seems implausible. So now we have a pressing question: If we don’t think the head of the FBI decided to lie to Congress, who concocted the lies he told them? Are we to believe that the nation’s top cops are either so inept or so indifferent to the question that they can’t answer it? I suspect they very well could find out if they were so inclined. If they don’t, and if there are no consequences for this clumsy cover-up, why should we believe that congressional oversight of intelligence will ever discover or check abuse of investigative power? The message will be clear: Concoct lies to protect your bosses, and your colleagues will wink at your deception, perhaps grateful for having been spared the obligation of making up their own lies. One lie out of a hundred might be called out in an OIG report—they only have so much time and so many resources—but even if it is, no harm will come of it. The investigators will be mysteriously unable to identify the liar, and everything will blow over. Why risk telling the truth? The initial fuss will subside, and Americans will soon enough be distracted by the next episode of Jersey Shore.
I think we’ve had quite enough of that. Someone at the FBI decided that it was a good idea to lie to Congress in order to cover up improper monitoring of an unpopular political group. In this case, it was pacifists, but who knows who’ll be next. If brazen lies aren’t punished the one case out of a dozen or a hundred that draw the attention of the overseers, why should they ever bother to observe the rules? So watch the Department of Justice. If someone is fired over this, maybe we still live in a country governed by the rule of law. If not, they’re convinced we’re so dim and besotted by reruns of Friends that they no longer even feel obliged to put up a good show.
Obama’s Wants a 23.9% Capital Gains Tax, but the Rate Actually Will Be Much Higher Because of Inflation
Thanks to the Obamacare legislation, we already know there will be a new 3.9 percent payroll tax on all investment income earned by so-called rich taxpayers beginning in 2013. And the capital gains tax rate will jump to 20 percent next year if the President gets his way. This sounds bad (and it is), but the news is even worse than you think. Here’s a new video from the Center for Freedom and Prosperity that exposes the atrociously unfair practice of imposing this levy on inflationary gains.
The mini-documentary uses a simple but powerful example of what happens to an investor who bought an asset 10 years ago for $5,000 and sold it this year for $6,000. The IRS will want 15 percent of the $1,000 gain (Obama wants the tax burden on capital gains to climb to 23.9 percent, but that’s a separate issue). Some people may think that a 15 percent tax is reasonable, but how many of those people understand that inflation during the past 10 years was more than 27 percent, and $6,000 today is actually worth only about $4,700 after adjusting for the falling value of the dollar? I’m not a math genius, but if the government imposes a $150 tax (15 percent of $1,000) on an investor who lost nearly $300 ($5,000 became $4,700), that translates into an infinite tax rate. And if Obama pushed the tax rate to almost 24 percent, that infinite tax rate gets…um…even more infinite.
The right capital gains tax, of course, is zero.
Cato on Facebook
Cato on Twitter
Cato on Google+
Cato on YouTube
