Archive for December, 2010
This Week in Government Failure
Over at Downsizing the Federal Government, we focused on the following issues this week:
- Unfortunately, the president’s Fiscal Commission appears to have operated on the premise that the federal government should continue to do everything it now does.
- Getting Rep. Jeff Flake on appropriations is a step in the right direction, but his appointment can’t be a token gesture.
- A new study finds that policymakers needn’t fear spending cuts.
- House Republican leaders’ support for “Prince of Pork” Hal Rogers to chair the chamber’s appropriations committee is a slap in the face of voters who demanded change in November.
- Michigan Gov. Jennifer Granholm, whose state’s unemployment rate is almost 13 percent, has advice for Washington on how to create jobs. No, it’s not April 1st.
Bad Advice from Gov. Polar Star
In 2006, Michigan Gov. Jennifer Granholm told citizens, “In five years, you’re going to be blown away by the strength and diversity of Michigan’s transformed economy.” When those words were uttered, Michigan’s unemployment rate was 6.7 percent. It’s now almost 13 percent.
Although Michigan’s economic doldrums can’t entirely be pinned on Granholm, her fiscal policies have not helped, such as her higher taxes on businesses.
The Mackinac Center’s Michael LaFaive explains why Granholm’s grandiose proclamation in 2006 hasn’t panned out:
In this case, Gov. Granholm was promoting her administration and the Legislature’s massive expansion of discriminatory tax breaks and subsidies for a handful of corporations. The purpose and main effect of this policy is to provide “cover” for the refusal of the political class to adopt genuine tax, labor and regulatory reforms, which they shy away from because it would anger and diminish the privileges and rewards of unions and other powerful special interests.
LaFaive’s colleague James Hohman recently pointed out that “Michigan’s economy produced 8 percent less in 2009 than it did in 2000 when adjusted for inflation. The nation rose 15 percent during this period.”
Granholm has written an op-ed in Politico on how federal policymakers can “win the race for jobs.” This would be like Karl Rove penning an op-ed complaining about Obama spending too much. Oh wait, bad example.
Granholm advises federal policymakers to create a “Jobs Race to the Top” modeled after the president’s education Race to the Top, which as Neal McCluskey explains, has not worked as she claims. Granholm’s plan boils down to more federal subsidies to state and local governments and privileged businesses to develop “clean energy” industries.
Typical of the dreamers who believe that the government can effectively direct economic activity, Granholm never considers the costs of government handouts and central planning. A Cato essay on federal energy interventions explains:
The problem is that nobody knows which particular energy sources will make the most sense years and decades down the road. But this level of uncertainty is not unique to the energy industry—every industry faces similar issues of innovation in a rapidly changing world. In most industries, the policy solution is to allow the decentralized market efforts of entrepreneurs and early adopting consumers figure out the best route to the future. Government efforts to push markets in certain directions often end up wasting money, but they can also delay the development of superior alternatives that don’t receive subsidies.
Granholm recently received “Sweden’s Insignia of First Commander, Order of the Polar Star for her work in fostering relations between Michigan and Sweden to promote a clean energy economy” from His Majesty King Carl XVI Gustaf. Unfortunately, her prescription for economic growth would be a royal mistake.
The Barack Obama Tax Reform Plan?
In my fiscal policy speeches, I sometimes try to get a laugh out of audiences by including a Powerpoint slide with this image. Leading up to this slide, I talk about the Armey/Forbes flat tax and explain that it would eliminate the corrupt internal revenue code and replace it with a simple 10-line postcard. But I then warn that simplicity is not the same as low taxes and show the Obama slide.
But maybe jokes about Obama tax reform were a bit premature. According to the New York Times, the White House is giving serious consideration to a sweeping plan to streamline the tax system.
While administration officials cautioned on Thursday that no decisions have been made and that any debate in Congress could take years, Mr. Obama has directed his economic team and Treasury Department analysts to review options for closing loopholes and simplifying income taxes for corporations and individuals, though the study of the corporate tax system is farther along, officials said. The objective is to rid the code of its complex buildup of deductions, credits and exemptions, thereby broadening the base of taxes collected and allowing for lower rates — much like a bipartisan majority on Mr. Obama’s debt-reduction commission recommended last week in its final blueprint for reducing the debt through 2020. Doing so would offer not only an opportunity to begin confronting the growth in the national debt but also a way to address warnings by American business that corporate tax rates and the costs of complying with the tax code are cutting into their global competitiveness.
There’s actually much to like in the Administration’s potential plan. Lower tax rates will help the economy by improving incentives for productive behavior. And getting rid of distortions will further enhance growth since people no longer would have an incentive to make inefficient decisions just for tax purposes. And simplification could have a profound impact on cleaning up the horrible mess at the IRS. Moreover, a plan that trades lower tax rates for fewer tax distortions would be a welcome change from the poisonous soak-the-rich tax policy the White House has been pursuing.
This sounds like good news, but there’s a catch. The White House is looking at this exercise as a way to not only clean up the tax code, but also as a way of getting more money for politicians. This blog post explains why this is the wrong approach from an economic perspective, but politics will be an even bigger obstacle.
The American people want tax reform, but they don’t want more of their money going to Washington. And most Republican politicians have wisely pledged not to support legislation that increases the overall tax burden.
So the ball is in Obama’s court. If he genuinely wants to make America more prosperous and competitive, he should move forward with plans to lower tax rates and eliminate tax distortions, but he needs to tell his staff that tax reform should not a Trojan Horse for a tax increase.
Media Miss Real News in Latest Trade Report
This morning’s report from the U.S. Department of Commerce that the pesky trade deficit shrank unexpectedly in October is being hailed in the media as “good news” for the economy, while the real news behind the numbers remains buried.
According to the latest monthly trade report, exports of U.S. goods rose in October compared to September, while imports declined slightly. Rising exports are good news in anybody’s book, but according to the conventional Keynesian and mercantilist logic, falling imports must also be good for the economy because that means consumers are spending more on domestically produced goods, right? Wrong.
In the real world, that assumption is almost always false, as I did my best to document a few weeks back in an op-ed titled, “Are rising imports a boon or bane to the economy?”
The real news in the report is the spectacular rise of U.S. exports to China. Year to date, U.S. exports to China are up 34 percent compared to the same period in 2009. That compares to a 21 percent increase in U.S. exports to the rest of the world excluding China. China is now the no. 3 market for U.S. exports, behind only our NAFTA partners Canada and Mexico, and by far the fastest growing major market.
The politically inflammatory bilateral trade deficit with China is also up 20 percent so far this year, but our trade deficit with the rest of the world excluding China is up 38 percent.
Yet Sens. Chuck Schumer, D-N.Y., and Lindsey Graham, R-S.C., are still talking about pushing a bill during the lame-duck session that would authorized the same Commerce Department to assess duties on imports from China because of its undervalued currency. A cheaper Chinese currency relative to the U.S. dollar supposedly inhibits U.S. exports to China while tempting American consumers to buy even more of those useful consumer goods assembled in China. [For the record, U.S. imports from China so far this year have grown, too, but at a rate slightly below imports from the rest of the world.]
To anyone taking an objective look at the numbers, this morning’s trade report shows that whatever the wisdom of China’s currency policy, it has not been a real obstacle to robust U.S. export growth, nor has it fueled an extraordinary growth in our bilateral trade balance with China. Members of Congress should drop their obsession with China trade and move on to more urgent matters.
Rise of an Imperial City, Cont’d
From time to time my colleague David Boaz posts about the many ongoing ways in which the economy of Washington, D.C. continues to outpace that of the rest of the country, thanks to a well-paid and layoff-resistant workforce of federal employees and contractors, a thriving lobbying sector, and so forth. Thus David noted this week that the Washington, D.C. metro area has now attained the highest family median income of any major city, and last month that, according to Census Bureau figures analyzed by Newsweek, “seven of the 10 richest counties in America, including the top three, are in the Washington area.” I thought I’d add three more data points to this picture:
- Even as most of the country remains mired in serious housing recession, the capital has bounced back smartly: “The District claims the top ranking on the agency’s state-by-state list of annual price appreciation, with 5.29 percent growth since the third quarter of last year,” compared with a 3.2 percent decline nationally. Virginia and Maryland did less well, but most of both states’ population lives outside the D.C. orbit. [Washington Post]
- Commercial rents in downtown Washington have likewise defied the steep national slump, as the federal government expands its demand for office space: “The rise has been so dramatic that for the first time in five years, the average asking rent in D.C. is higher than in New York City, according to CoStar and a new report of third-quarter activity by commercial real estate firm Cassidy Turley…. ‘The federal government has created a smooth but slow rise in rents [in D.C.],’” noted one real estate economist. [Washington Post again]
- A business boom — in journalism? Even as veteran reporters elsewhere scrounge for work, talent and money continue to pour into Washington’s specialized news-gathering business, most particularly the sorts of newsletters that (for a subscription price in the thousands of dollars) will bring you fresh and fine-grained news of the doings of federal regulatory agencies in fields like energy, pharmaceuticals, securities and telecommunications. “[B]y dint of its regulatory powers, its executive orders, its judicial decisions, its ability to conjure money out of thin air, and its budget-making authority, Washington dictates who can do business and how,” writes Jack Shafer. “… Although $5,700 for a subscription to Bloomberg Government might sound steep to you, it’s chump change for businessmen who become the first in their cohort to read Line 125 in a pending bit of legislation and can place a bet on — or against — it in the market.” [Slate]
I Thought Higher Education Was about Pursuing Truth?
I have no love of for-profit colleges and universities — they are as greedy at the public trough as any other higher ed sector — but it is becoming increasingly difficult to not get very angry about the treatment they’re receiving in Washington.
Just one day after it was revealed that the GAO had substantially revised a report used back in August to smear proprietary colleges, Sen. Tom Harkin (D-Iowa) — the driving force, along with the U.S. Department of Education, behind the war on profits — released a new report alleging that for-profit schools are ripping off G.I. Bill-using veterans. At least, that’s what the media stories are suggesting. Unfortunately, I haven’t been able to verify the actual content of the report because as of the time I’m writing this, Harkin hasn’t yet made it publicly available — at least not by clearly posting it on his website. Unfortunately, as with the GAO report and almost everything else that’s gone on with this, the strategy seems to be demonize first, let for-profit schools defend themselves later.
Fortunately, you have a chance to enjoy some rational, informed debate about the for-profit college situation. On November 30, Cato hosted a forum on for-profit higher education, with numerous sides of the debate represented. There was no convict-first approach, and the panelists checked demagoguery at the door. Unfortunately, the same cannot be said of Sen. Harkin and the other grand inquisitors of for-profit schools.
More on Columbia’s Abuse of Property Rights
Six weeks ago, Cato filed an amicus brief supporting a challenge to Columbia University’s strong-armed attempt to condemn and take over certain land in Upper Manhattan. Tomorrow, the Supreme Court will consider the cert petition our brief supports, with a decision on whether it hears the case expected Monday.
In what is probably not a coincidence, then, the Columbia Spectator today came out with a lengthy feature story examining the story behind the dispute, controversial “blight” designations and all. This is excellent student journalism — heck, excellent journalism, period — and here are some key excerpts (full disclosure: the author interviewed me for the piece):
Since it proposed the expansion, Columbia has rapidly made deals with property owners and gained control over nearly every lot in the zone — except for two who have fought to hold on to their land….
And Columbia has repeatedly said that those parcels, which represent a total of around nine percent of the expansion zone, are vital to the vision.
Eminent domain — the process by which the state seizes private property for the “public good,” providing just compensation for the owner — officially came into the picture in 2004, when the University asked the state to consider condemnation.
And here’s the crux of the legal dispute:
Some neighborhood tenants and owners — most no longer in Manhattanville as Columbia continues to break ground and demolish properties — have strongly contested this blight label.
Nuss remembers a community vibrant enough to support his improvisational group — the No-Neck Blues Band — local businesses, and his family. He raised his daughter in the Hint House….
But it’s sometimes hard to believe Nuss is talking about the same area as other residents who say they agree with the determination of blight….
This disparity in views on Manhattanville’s conditions touches upon a fundamental question when evaluating the process that paved the way for Columbia’s expansion: Was the neighborhood really blighted, and given the process by which the criteria of blight were determined, was the state’s designation of blight an appropriate justification for the use of eminent domain for a private university?
My sense is that whatever ”blight” there is was caused by Columbia itself:
“It’s akin to the kid who kills his parents and begs the court’s mercy for being an orphan,” says Ilya Shapiro, senior fellow with the Cato Institute, which filed an amicus brief to the U.S. Supreme Court supporting the Manhattanville property owners. “You’re creating your own blight. It doesn’t pass the smell test.”
Are Tea Partiers Anti-trade?
Where will the new Tea-Party-backed members of Congress come down on trade issues, such as the newly revised trade agreement with South Korea or the next farm bill?
Those elected to the House are the biggest question marks because very few of them have had to think much about trade, never mind actually cast a vote on it. In an op-ed in the Philadelphia Inquirer this week, I try to discern what direction the new members will take the generally pro-trade Republican Party, and which direction they should take it in light of the movement’s free-market, limited-government principles.
For my full take, see “Are Tea Partiers Anti-trade?”
Is There an Inflation-Unemployment Trade-off?
Much of what drives the policy choices of Ben Bernanke and the Federal Reserve is a belief in the ability to trade higher inflation for lower unemployment, known within the economics profession as the “Phillips curve.” But does this trade-off actually exist?
While its true that many have found a negative correlation between inflation and unemployment prior to 1960, looking at U.S. data, this relationship appears to have broken down in the mid-1960s, just about the time policy-makers thought they could exploit it (Lucas critique anyone?).
It is hard, looking at the graph, which displays the annual change in consumer prices over the previous year and unemployment, to see much of a relationship. In fact, since 1960, the correlation between changes in CPI and unemployment has been positive. We have generally seen rising unemployment along with rising inflation. Of course, one might be concerned that the stagflation of the 1970s is driving this result. But looking at the data since 1980, there still remains a positive correlation between inflation and unemployment. While I am not arguing that inflation causes unemployment (after all, correlation is not causation), it should be clear from the data that there is not some exploitable trade-off that policymakers get to choose.
The Richmond Fed also has a great history of the Phillips curve that is well worth the read. Perhaps Fed President Jeff Lacker should bring copies to the next FOMC meeting.
DREAM Act a Low-Risk, High-Return Option
In a perfect world, we wouldn’t need to consider bills such as the DREAM Act, approved by the House last evening and on tap for a vote in the Senate as early as today.
The Development, Relief and Education for Alien Minors Act would offer legal status to students who came to the United States illegally before they turned 16 and have lived here for more than five years. To gain legal status they would need to complete high school, and then two years of college or military service. Once implemented the act would legalize about 65,000 students a year.
If our immigration policy was more in line with what I’ve been advocating for years, we would not have the large population of illegal immigrants that we do today because more legal alternatives would have been available. And access to in-state tuition would not be such a big deal if our education policies more closely reflected the sound arguments of my colleagues at Cato’s Center for Educational Freedom. Alas, that is not the world we live in yet.
The DREAM Act would improve a less-than-ideal situation by legalizing a population that is primed to live the American dream, and is virtually guaranteed to bestow real blessings on our economy and society.
Critics of the DREAM Act, such as Rep. Dana Rohrbacher (R-CA), paint these kids as nothing but expensive liabilities and the act as nothing but a backdoor amnesty. Both charges are false.
Young immigrants eligible for the DREAM Act are a low-risk, high-return addition to America. Because they came here at a young age, they almost all speak English fluently and are at home in American society. The fact that they have completed high school and will be attending college makes it likely they and their descendants will pay more in taxes than they consume in government services during their lifetimes. With the U.S. birthrate hovering at the replacement level, these assimilated, immigrant students at the beginning of their careers will help the United States maintain a healthy growth rate in our workforce.
It is wrong to label the DREAM ACT “amnesty.” These kids did nothing wrong. In fact, most of them simply obeyed their parents when the family immigrated to the United States. They should not be punished for the actions of their parents.
The DREAM Act, like most other immigration-related bills, has become charged with partisanship. House Democrats voted overwhelmingly in favor of the bill last evening, Republicans lopsidedly against. Democratic leaders in Congress are certainly open to the charge that they are using the bill to attract Hispanic voters even though the chances of it passing the Senate and becoming law are, at the moment, slim. But Republicans are open to the more serious charge that they are ignoring the more optimistic and inclusive vision of our country articulated by former President Ronald Reagan.
‘Prince of Pork’ to Chair Appropriations
House Republican leaders went with Rep. Hal Rogers (R-KY) – a.k.a. “The Prince of Pork” – to chair the House Appropriations Committee. As I wrote last week, the prospect of Rogers chairing Appropriations is about as inspiring as re-heated meatloaf when it comes to his potential for pushing serious spending reforms.
Republican leaders in the House chose to ignore the concerns of tea party activists and other proponents of limited government, who were more supportive of Rep. Jack Kingston’s (R-GA) dark-horse push for the chairmanship. Kingston’s plan to “change the culture” on Appropriations offered a lot of positive ideas suggesting that he was more in tune with the voters that gave Republicans the majority.
Politico reported that Kingston received “the cold shoulder” from the House leadership in his bid to chair appropriations. Instead, presumptive Speaker of the House John Boehner supported spending-hawk Jeff Flake’s (R-AZ) bid for a seat on the committee. That’s nice, but Flake himself appears to recognize that his appointment could amount to a token gesture if old bull spenders end up ruling the roost:
“If it’s just putting a few conservatives on the committee, and leaving the current structure pretty much in place, that’s not enough.”
Some congressional Republicans have defended Rogers’ chairmanship, saying that he’ll be fine if he sticks to what he says he’s going to do. A long-time champion of earmarking, Rogers did agree to go along with a ban on the tawdry practice a few weeks ago, which was convenient timing.
Will the leopard change his spots?
The left-wing Think Progress blog recently used a FOIA request to obtain a letter Rogers sent to the Department of Health and Human Services requesting ObamaCare money for a community service center in his district. No earmarks? No problem for Hal Rogers. He can just go the time-honored route of policymakers heckling federal agencies for pork. Earmarks represent just one of many ways that parochial-minded members steer benefits to their districts at the expense of taxpayers and the general public good.
According to Bloomberg, Kentucky’s Lexington Herald-Leader called Rogers “the very model of an old-fashioned pork-barrel politician who builds an empire out of government spending.” Roger’s website contains numerous pictures of him attending local photo-ops for projects he helped fund with federal taxpayers’ money. (I suppose one argument in his favor is that lifting all those ceremonial spades means he’s probably in good shape to handle the rigors of chairmanship.)
The support for Rogers from House Republican leaders is a slap in the face of voters who demanded change in Washington—change from the big-spending ways of both Democrats and Republicans.
War on For-Profit Colleges Reeks Even Worse
As I’ve pointed out repeatedly, though the sector is no doubt rife with waste and home to some dirty-dealers, attacks on for-profit colleges are almost certainly driven by politics and ideology, not educational concerns. Were it otherwise, all of higher education would be taking a beating for its bankrupting waste and widespread failure.
A recent symptom of anti-profit witch-huntery was the misrepresentation of GAO reporting on what “secret shoppers” found while visiting select for-profit institutions. At the time the findings were released I thought the main problem was that members of the media and Sen. Tom Harkin (D-Iowa) — who has been leading the crusade against for-profit schools — were using the results to smear the whole proprietary sector when the GAO was clear about examining a nonrepresentative sample of schools. Unfortunately, it turns out the GAO might actually be in on the demonization.
On November 30 — without making any announcement that I could find on its website — the GAO released a modified version of its report, and according to a comparison between the old report and new one by the Coalition for Educational Success, the new version contains several changes that cast its for-profit targets in better light than they first appeared.
One vignette, for instance, originally said that a school’s admissions representative told an undercover applicant that she “should” take out maximum federal loans even if she didn’t need all the money. The change says the representative told the applicant that she “could” take maximum loans — a pretty big difference.
Another section went from only reporting that a representative told an applicant that the school has graduates making $120,000 to $130,000 in a job that, according to the GAO, typically makes less than $70,00 a year, to reporting that the representative also informed the applicant that she “could expect a job with a likely starting salary of $13-$14 per hour or $15 if the applicant was lucky.” $15 an hour translates into about $30,000 a year, and completely changes the tenor of the vignette.
According to Stephen Burd of the Center for American Progress, career colleges have been self-servingly crying – or at least whispering — foul over the GAO report for months now. Burd has been a leading for-profit basher, but I’d have been inclined to give only limited credence to concerns about dirty pool, too, until this latest revelation trickled out.
Now, though much needs to be determined about why the myriad changes to the report were made, I wouldn’t be terribly surprised to learn that people at the GAO have actually been in on the crusade to demonize proprietary colleges. I also, unfortunately, won’t be surprised if no one pays attention to any of this, and the shameless, responsibility-dodging war on for-profits continues unabated.
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