Archive for September, 2010
High-Speed Rail Battle
Wisconsin has become a battleground over the Obama administration’s plan to create a national system of high-speed rail. Of the $8 billion in HSR grants awarded to the states in the stimulus bill, $810 million of it went toward a high-speed route between Milwaukee and Madison.
Ironically, this Wisconsin “high-speed” route would only achieve speeds of 79 mph initially and 110 mph by 2016. As a Cato essay on high-speed rail points out, HSR aficionados don’t even consider 110 mph to be true high-speed. In fact, passenger trains were being run at speeds of 110 mph or more back in the 1930s. And those “high-speed” trains didn’t prevent the decline of passenger trains after World War II.
The Cato essay also notes that the 85-mile line between Milwaukee and Madison “is only a tiny portion of the eventual planned route from Chicago to Minneapolis, and no one knows who will pay the billions necessary to complete that route.” In fact, to build a national system of true high-speed rail on the 12,800 mile network envisioned by the administration, the cost could be close to $1 trillion.
Where would the money come from? State governments are hoping that it would be all from federal taxpayers. As I recently discussed, the states’ interest in grabbing new federal HSR money has dropped now that Congress is requiring a 20 percent state match:
The states already have dedicated revenue sources for federal highway aid matching requirements (also 20 percent). With state tax revenues flat due to the recession, where would the money come from to pay for high-speed rail projects? Proposing new taxes to fund high-speed rail would probably be political suicide. And most state policymakers recognize that shifting money away from more popular programs to pay for high-speed rail won’t be any more politically rewarding.
The issue is even affecting elections in states that are in line to receive federal funding for high-speed rail. Scott Walker, a Republican candidate for governor in Wisconsin, recently said he’d send back the $810 million in stimulus funds the state has received for a rail line between Madison and Milwaukee. Walker appears to understand that his state has more pressing infrastructure needs and that high-speed rail could become a fiscal black hole.
Another Judicial Takings Case Headed to the Court
The Montana Supreme Court overturned more than 100 years of state property law concerning navigable waters by effectively converting the title in hundreds of miles of riverbeds to the State. The majority of that court ruled that the entirety of the Missouri, Clark Fork, and Madison rivers were navigable at the time of Montana’s statehood, producing a broad holding that eradicates property rights to the rivers and riverbanks that Montanans had enjoyed for over a century.
Before this case, the hydroelectric energy company PPL Montana and thousands of other private parties exercised their property rights over these non-navigable stretches that the state never claimed. Today, Cato joined a brief filed by the Montana Farm Bureau Federation supporting the PPL Montana’s request that the U.S. Supreme Court review the Montana high court’s ruling for possible Takings Clause violations under the Fifth Amendment.
We argue two main points. First, that the Court should adhere to its standard for navigability rights set out in Utah v. U.S. in 1933. Unlike the approach taken by the Montana Supreme Court’s majority — that entire rivers were navigable simply because certain reaches of the river were navigable — the U.S. Supreme Court in Utah used an approach of meticulously analyzing the rivers at issue section-by-section. Second, this arbitrary ruling against rights long protected by Montana law amounts to a “judicial taking,” as explained last term Stop the Beach Renourishment v. Florida Dept. of Environmental Protection (in which Cato also filed a brief). There, a plurality of the Court held that there is no “textual justification” for limiting takings claims deriving from executive or legislative action, thereby extending it to a judicial action of the same nature (and two other members of the Court found potential relief in the Fourteenth Amendment’s Due Process Clause). Here, the Montana court did exactly that, violating due process rights that the Montana legislature could not and further violating the procedural due process rights of the thousands harmed by the decision in not affording them notice or a hearing.
The U.S. Supreme Court should thus review the case to reinforce its Utah precedent and ensure that arbitrary judicial takings of this sort cannot continue. The name of the case is PPL Montana, LLC v. Montana. The Court will decide later this fall whether to take it up.
The Something-for-nothing Quandary
Most of the debate over extending the Bush tax cuts has focused on whether to extend slightly lower marginal rates for higher earners who already bear a huge burden. But at the other end of the income spectrum, a growing share of Americans don’t pay income taxes. Indeed, the Bush tax cuts increased the share of U.S. households that pay no income taxes.
From the Wall Street Journal:
Efforts to tame America’s ballooning budget deficit could soon confront a daunting reality: Nearly half of all Americans live in a household in which someone receives government benefits, more than at any time in history.
At the same time, the fraction of American households not paying federal income taxes has also grown—to an estimated 45% in 2010, from 39% five years ago, according to the Tax Policy Center, a nonpartisan research organization.
A little more than half don’t earn enough to be taxed; the rest take so many credits and deductions they don’t owe anything. Most still get hit with Medicare and Social Security payroll taxes, but 13% of all U.S. households pay neither federal income nor payroll taxes.
As the price of something drops, the demand increases. For a growing share of Americans, government services are effectively “free,” so they are demanding even more and policymakers are giving it to them.
As the following chart shows, federal payments to individuals as a share of the economy have reached an all-time high after seventy years of steady growth:
The Fraud From Basel
Despite every major US bank being declared by regulators as “well capitalized” prior to the financial crisis, we still found ourselves watching the government plow hundreds of billions of capital into said banks. How can this be? The answer is quite simple: we were lied to. Maybe that’s a little harsh, after all these banks did meet the regulatory definition of “well capitalized”. But when push came to shove, market participants rightly ignored regulatory capital. After all you cannot use things like “deferred tax losses” to pay your bills with.
It is hard to improve upon Martin Wolf’s observation in today’s Financial Times: “This amount of equity is far below levels markets would impose if investors did not continue to expect governments to bail out creditors in a crisis.” This point is best illustrated by the trend in bank capital over the last 100 years. Back when banks were actually subject to market forces and were not explicitly subjected to government capital standards, they held significantly more capital. In 1900 the average US bank capital ratio was close to 25%, now it’s closer to 5%. The trend is unmistakable: the more government has regulated bank capital, the less capital banks have ended up holding.
Despite the claims of the banking industry, what the bank regulators have just delivered with “Basel III” is simply another fraud upon the public and investors. Any framework that continues to treat say Greek or Fannie Mae debt as largely risk-free is a sham.
The real solution is to first end the various government bailouts, guarantees and subsidies behind the banking system, subjecting bank creditors to actual losses, while also abandoning the charade that is capital regulation. Sadly politicians (see the Dodd-Frank Act) and regulators continue to simply tweak a flawed and morally bankrupt system.
Rhee-buffeted?
We don’t know for certain that controversial DC Schools Chancellor Michelle Rhee will depart DC when her boss’s term ends — and it will end soon — but it seems very likely. Assuming she does leave, there is a big education lesson to be learned from Adrian Fenty’s re-election loss: Relying on crusading politicians to successfully and permanently reform a government schooling monopoly is a recipe for crushed hopes. Politics is simply too volatile — and enacting tough reforms too politically risky — for even good reforms to be sustained. It’s just another reason that the key to truly sustainable reform is school choice, in which parents control education funds, educators have to compete and perform for business, and children are no longer buffeted back and forth by the ever-changing winds of politics.
Attacking Rand Paul
Kentucky attorney general Jack Conway went on TV Tuesday with an ad attacking Rand Paul for . . . endorsing freedom. The ad shows a clip from a 2008 panel show in which, according to the Louisville Courier-Journal, there was a “wide-ranging discussion that involved such things as the wisdom of motorcycle helmet laws, the lottery and expanding gambling. In response to a question about whether he favors more gambling, Paul said he opposes ‘legislating morality’ and then added: ‘I’m for having … laws against things that are violent crimes, but things that are non-violent shouldn’t be against the law.’”
The ad features that last sentence and then cuts rapidly to uniformed sheriffs criticizing Paul’s position. But note that they never really criticize what Paul actually said. His comment came in the context of a discussion of motorcyle helmet laws, gambling, and the state lottery. The sheriffs suggest that Paul wants to legalize selling drugs to a minor, mortgage fraud, burglary, theft, and promoting prostitution — and they say that we should “treat criminals like criminals.” But of course, of the activities mentioned, “promoting prostitution” is the only one that a libertarian would be likely to legalize. (Paul has never said he would do that.) Burglary, theft, fraud, and selling drugs to children are clearly crimes, and it’s dishonest to suggest that Rand Paul would change those laws. Conway may be a slick Louisville lawyer, but he may find that Kentucky voters won’t find such claims credible.
Paul might have been been wiser to use a term like “victimless crimes” or “actions that don’t violate anyone’s rights” in discussing “things that . . . shouldn’t be against the law.” Obviously burglary and theft violate rights and have victims, while gambling and riding a motorcycle without a helmet don’t. And libertarian legal theorists might question the wisdom of putting nonviolent offenders in jail; it would often make more sense to demand restitution and fines for economic crimes, for instance, rather than putting the offenders in expensive and overcrowded prisons.
But Rand Paul was making sense in 2008 when he said that a free society shouldn’t punish people who aren’t harming other people. And the attorney general of the Commonwealth of Kentucky should be embarrassed to broadcast such a dishonest twisting of Paul’s statements. If Conway thinks people should be imprisoned for gambling and riding a motorcycle without a helmet — the issues Paul was discussing — let him put up an ad saying so. And then see whose side the people are on in an honest debate.
It’s actually striking that in a conservative state, Conway did not mention any of the normal “victimless crimes” — not gambling or helmetless riding, not pot smoking, not even pornography. He apparently thought he could only win this issue by claiming that Rand Paul held the ridiculous position that burglary, theft, and fraud shouldn’t be illegal. Let’s give two cheers for the social progress that his decision reveals.
ObamaCare: a Downward Spiral of Rising Costs and Deteriorating Quality
Here’s my contribution to a “one-minute debate” on ObamaCare in the Christian Science Monitor:
The new health-care law’s mandates are already causing health insurance premiums to rise 3 to 9 percent more than they otherwise would. Its price controls are pushing insurers to abandon the market for child-only coverage and will soon begin rationing care to Medicare patients, partly by driving nearly 1 in 6 hospitals and other providers out of the program.
Starting in 2014, when the full law takes effect, things will get really ugly. ObamaCare’s “individual mandate” will drive premiums even higher – assuming the courts have not declared it unconstitutional, as they should. Because the penalty for violating the mandate is a fraction of those premiums, healthy people will wait until they are sick to buy coverage, driving premiums higher still. This is already happening in Massachusetts, which enacted a nearly identical law in 2006. ObamaCare’s price controls will force insurers to cover sick patients at artificially low premiums, guaranteeing that insurers will avoid, mistreat, and dump the sick, because that’s what the price controls reward. ObamaCare’s private health-insurance subsidies will expose low-wage workers to implicit tax rates higher than 100 percent, potentially trapping millions in poverty.
With real reforms like Medicare vouchers and large health savings accounts, and letting consumers purchase health insurance across state lines, a free market would reduce costs and improve quality through innovations such as integrated health systems, nurse-practitioner-staffed primary care clinics, telemedicine, and insurance that offers even sick patients a total satisfaction guarantee.
But until Congress or the courts discard ObamaCare’s mandates, price controls, and new entitlement spending, there is literally nothing that can arrest this downward spiral of rising costs and deteriorating quality.
The above link will also take you to a counter-point by Kavita Patel of the New America Foundation.
Would the Schools Work Better If They Outlawed All Competitors?
In the Washington Post, columnist Courtland Milloy praises the “profound egalitarian insights” and “radical oneness” of D.C. Schools Chancellor Michelle Rhee (and billionaire Warren Buffett):
“I believe we can solve the problems of urban education in our lifetimes and actualize education’s power to reverse generational poverty,” Rhee wrote. “But I am learning that it is a radical concept to even suggest this. Warren Buffett [the billionaire investor] framed the problem for me once in a way that clarified how basic our most stubborn obstacles are. He said it would be easy to solve today’s problems in urban education. ‘Make private schools illegal,’ he said, ‘and assign every child to a public school by random lottery.’ “
Milloy’s not satisfied that Rhee is taking on entrenched interests, firing principals and teachers who aren’t doing a good job, and apparently actually improving the schools in the District of Columbia. No, he’s attracted to the “radical concept” of outlawing private schools and forcing everyone in the District into the same schools, with no hope of escape. There would be one method of escape, of course: moving to the suburbs. And you can bet that lots more people would do that if Milloy and Rhee got their way.
I wonder what a total government monopoly on education would look like. Are Buffett and Rhee right that a government monopoly forced on every citizen would work well? Would work so well that it would “solve the problems of urban education . . . and reverse generational poverty”?
Well, one answer might be glimpsed on the same page B3 where part of Milloy’s column appeared. In an adjacent column, columnist John Kelly discussed his “Kafkaesque” five-hour visit to the state of Maryland’s Motor Vehicle Administration:
I was at the MVA. I was in Hell.
I know that complaining about the MVA or the DMV is the last refuge of a scoundrel columnist, but I don’t care. You don’t know what it was like. You weren’t there, man. I spent five hours at the Beltsville MVA on Thursday. Five hours. I could have driven to New York in that time….
I thought: Can this really be happening? Can I really have stepped into a Kafka story? Shouldn’t every counter be filled with employees working as fast as possible? Shouldn’t management be out there helping, and Maryland state troopers, too? This is the Katrina of waiting, people.
The MVA, of course, is a monopoly government bureaucracy. Everyone must go there — CEOs, diplomats, even Washington Post columnists. And yet, somehow, that has not led to the MVA equivalent of solving problems and reversing poverty. Five hours to get a drivers’ license just might be worse performance than that of the public schools.
It’s the system, Mr. Milloy and Ms. Rhee. Monopolies don’t have much incentive to improve. Give everyone the chance to go to a different supplier, and then you’ll see improvement. Giant Food wouldn’t last long if it took five hours to buy your groceries — because it has competitors. But as long as the schools are a near-monopoly, and the MVA or DMV is a total monopoly, don’t expect real improvement.
Cuba Needs A Swift Transition Towards Capitalism
Confirming Fidel Castro’s recent confession that “the Cuban model doesn’t even works for us anymore” (did it ever work?), Havana has announced the massive layoff of 500,000 state workers in the upcoming months. This is approximately 12 percent of the government workforce (and 10 percent of the total labor force).
The big question is whether the meager non-state sector can absorb such an influx of workers in such a short period of time. My take is that the only way Cuba can accomplish this is by aggressively liberalizing its economy: privatizing most industries and farmland, cutting red tape, freeing prices, lowering taxes (which fall heavily on the tiny private sector), and getting rid of thousands of restrictions on private businesses that currently thwart entrepreneurship. This, of course, means abandoning altogether the current communist model and moving towards a capitalist system. So far, the reforms introduced by Raúl Castro since becoming president three years ago have been far too timid and in some instances even counterproductive.
As Oleh Havrylyshyn, former Ukrainian deputy minister of finance, wrote in a paper published by Cato three years ago on the transformation of post-communist economies, rapid reforms (as opposed to gradual ones) bring about better results in terms of higher growth rates, lower unemployment, higher investment, etc. Interestingly, Havrylyshyn also found that “all of the rapid reformers developed into liberal democracies, whereas in many of the gradual reformers… small groups of super-wealthy oligarchs captured the state and dominated its economic decisionmaking.”
The Cuban ruling elite cannot afford to waste time. Very soon, hundreds of thousands of Cubans will be looking for a job in the dilapidated private sector. Social unrest could easily erupt if their search for a job or occupation goes unfulfilled. In the end, only a swift transition towards capitalism can rescue the Cuban people.
Another Speech, Another Chip out of Freedom
As predicted, President Obama’s second annual back to school address – yes, the address is now “annual” — was relatively uncontroversial. It did give the President a caring, motivator-in-chief photo-op, which is certainly to his politicial benefit, but this time around there were no inappropriate study guides to go with the speech, nor did the president belittle profit-making endeavors. It was pretty much just trite, “work hard and be nice” fluff.
Unfortunately, the address has given some members of the media the chance to whitewash last year’s speech controversy, again working in the political favor of the President. Noting the absence of rancor this time around, some reporters portrayed last year’s brouhaha as if it were just the result of petty Republican partisanship, not mentioning at all the U.S. Department of Education lesson plans that kicked the whole thing off. It’s been a bit like reporting on World War I without mentioning the assassination of Franz Ferdinand.
More disheartening is the “annual” part of all this, because it seems the nation has quietly resigned itself to yet another chip being taken out of federalism. It doesn’t matter that the president has no constitutional authority to kick off each new school year with an address to the nation’s kids, or that it opens up the very real possibility of serious politicization as the address becomes increasingly ensconsed. Right now the speech seems to do no harm, so no one wants to fight it.
There is one final reason this is discouraging. As a writer over at Pileus Blog laments, the speech is yet further evidence of “the way in which politics creeps into every nook and cranny of our world, leaving little space for us to breathe the fresh air of private life.” Indeed, now not even our children are able to breathe free.
Cash 4 Clunkers Fails Again
In a new study, economists Atif Mian and Amir Sufi find that the government’s “cash for clunkers” program “had no long run effect on auto purchases.”
C4C was supposed to stimulate the struggling automobile industry – and thus the economy – by inducing people to purchase autos today that they might otherwise have purchased in the future. However, whereas the White House’s Council of Economic Advisors claimed that C4C “pulled forward” purchases that would have occurred five years into the future, Mian and Sufi found that it merely pulled forward purchases that would have been made in the next seven months.
From the study:
In the subsequent ten months after the program (September 2009 through June 2010), high clunker cities purchased significantly fewer automobiles than low clunker cities. By the end of March 2010, seven months after the program, the cumulative purchases of high and low clunker cities from July 2009 to March 2010 were almost the same. In other words, the relative impact of the program on high clunker cities was almost completely reversed in just seven months.
Mian and Sufi also looked at whether C4C had a positive effect on other aspects of the economy. The answer is pretty much “no”:
Cities with high CARS exposure show no noticeable difference in economic outcomes from before the program to after the program relative to cities with low CARS exposure. We also examine economic outcomes for cities that have a high number of employees working in the auto industry. There is some evidence that high auto employment share cities had a relative increase in employment after the CARS program, but there is no noticeable effect on either house prices or household defaults. We should caution however that the effect of CARS on employment in the automobile industry is difficult to separate from the federal bailouts of General Motors and Chrysler in early 2009.
As we recently noted, short-term measures implemented by policymakers to “fix” the economy have introduced unwelcome economic distortions. For example, because auto purchasers benefiting from C4C were required to turn in their used cars for destruction, the supply of used cars decreased. The result is that prices of used cars increased, which has hurt low-income families and others struggling through the recession.
Policymakers should stop trying to “fix” economic problems with short-term gimmicks, especially since it was ill-advised government policies that facilitated the present economic downturn. Given that these “fixes” are only driving up already dangerous levels of debt, policymakers should reverse course and pursue policies that would facilitate long-term economic growth such as eliminating burdensome programs and regulations.
Austrian Government Moves to Undermine Freedom of Movement in Europe
The European Union was meant to create a common market with free movement of goods, services, capital and people. The citizens of the “new” member states, such as the Czech Republic, should have been free to work in the “old” member states, such as Austria, from the date of accession of the “new” members to the EU on May 1, 2004. The Austrian government managed to postpone the horror of having laborers from ex-communist countries offer cheaper services to the Austrian citizenry until 2011.
With the 2011 deadline looming, Austrian politicians came up with an ingenious way to make it more difficult for the Czechs and other hoi polloi to enter the Austrian labor market. Beginning next year, it will be “illegal” for Austrian employers to pay less to a foreign laborer than they would to an Austrian. I am looking forward to seeing how this is to be accomplished without further wage regulations (collective bargaining and wage minimums in different sectors of the economy are widely used) and accompanying corruption.
I hope that the Czechs take the Austrian government to the European Court of Justice and pronto. If the Austrian measure is allowed to stand, it will undermine one of the four freedoms, and destroy an important source of competition and wealth creation in Europe.
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