Archive for January, 2011
Fannie & China: 2 Birds, 1 Stone
Chinese President Hu Jintao’s visit to Washington brought renewed focus on China’s currency. It was likely the largest point of discussion between President Obama and President Hu. I suspect a less public, but related, issue was China looking for some certainty that America would make good on its obligations; after all, China is our largest lender.
What is often missed is the connection between these two issues: currency and debt. When China receives dollars for the many goods it sells us, instead of recycling those dollars into the purchase of US goods, it uses that money mostly to buy US Treasuries and Agencies (Fannie/Freddie securities). These large Treasury/Agency purchases (foreign holdings of GSE debt are over $1 trillion) have the effect of increasing the demand for dollars and depressing that for yuan, resulting in an appreciation of the dollar relative to the yuan. This connection exposes the hypocrisy of President Obama’s complaints about China currency manipulation – without massive US budget deficits, China would not be able to manipulate its currency to the extent it does. If the US wants to end that manipulation, it can do so by simply reducing the outstanding supply of Treasuries and Agency debt.
Another solution, which would also do much to end the “implicit guarantees” of Fannie Mae and Freddie Mac, is to take Fannie and Freddie into a receivership, stop the US taxpayer from having to cover their losses, and shift those losses to junior creditors, which include the Chinese Central Bank. Were the Chinese to actually suffer credit losses on their GSE debt, they would quickly start to reduce their holdings of such. They might also cut back on Treasury holdings. These actions would force the yuan to appreciate relative to the dollar. And best of all, it would end the bottomless pit that Fannie and Freddie have become. It is worth remembering that even today, under statute, the Federal government does not back the debt of Fannie and Freddie. It is about time we also teach the Chinese a lesson about the rule of law, by actually following it ourselves.
Of course this would increase the borrowing costs for Agencies (and maybe Treasuries), but then if China were to free float its currency, that would also reduce the demand for Treasuries/Agencies with a resulting increase in borrowing costs. We cannot have it both ways.
The Traffic Congestion Problem
A new report says that traffic congestion is worse, and the American Public Transportation Association urges Congress to . . . spend more money on public transportation.
Cato senior fellow Randal O’Toole has been challenging the received wisdom on traffic and mass transit for years. See his book Gridlock: Why We’re Stuck in Traffic and What to Do About It, and lots of other studies. In November he debated the head of the American Public Transportation Association at a Cato Policy Forum:
Education, Science, and Humility
U. of Ark. political scientist and education scholar Jay Greene has been blogging about the proper role of science in education policy, and his thoughts (continued here) are well worth reading. In particular, he warns that trying to scientifically find “the one best way” of evaluating teachers or of teaching reading and then attempting to impose that putatively best solution on all children is ultimately misguided and destructive.
I’d add that it is also unscientific. Science is humble. You have to be willing to rethink and potentially discard theories that repeatedly fail to coincide with reality. Well, the theory that governments can operate effective, efficient, innovative education systems from the top down was never supported by the evidence in the first place, and that theory is now buried beneath a vast pile of contrary findings. The system best supported by the empirical evidence is a parent-driven education marketplace such as the one Greene recommends.
House Vote to Repeal ObamaCare Is More than Mere Symbolism
The symbolism of today’s House vote is striking. Within a year of ObamaCare’s enactment, the House of Representatives has voted overwhelmingly to repeal it.
That didn’t happen with Social Security. It didn’t happen with Medicare. Social Security and Medicare did not face sustained public opposition from the moment they were introduced in Congress. They did not pass by one vote, in the dead of night. They were not challenged as unconstitutional by half the states in the union. They were not struck down as unconstitutional by a federal court within a year of enactment.
The House vote to repeal ObamaCare is just the latest sign that ObamaCare goes too far, that it creates a more intrusive government than the American people are willing to accept.
But the House vote is not mere symbolism, as the Obama administration would have us believe. This vote has moved the ball forward on repeal. This and further similar votes in both the House and Senate will reveal where members stand on repealing ObamaCare. Voters may use that information to replace pro-ObamaCare members with people who will vote to repeal ObamaCare in the next Congress. That’s how the political system works.
At the same time, this repeal vote makes it more likely that the Supreme Court will strike down ObamaCare. Like it or not, the Supreme Court follows the election returns. This vote shows the Court that it will not pay a price in the public’s esteem if it overturns ObamaCare.
Today’s vote makes it more likely that someone with the power to scrap ObamaCare will do so — and the Obama administration knows it. Why else would they come out with both guns blazing against a purely “symbolic” act?
When that happens, it will be a good day for America. Real health care reform is impossible while ObamaCare remains on the books.
An Imaginary Federal Election Commission
Jeff Patch and Zac Morgan of the Center for Competitive Politics report on the storm that is brewing at the Federal Election Commission over regulations to implement Citizens United. The three Democratic appointees propose regulations that would impose significant elements of the DISCLOSE Act, a bill that failed to pass Congress last year. The three Republican appointees, in contrast, propose to clarify existing law and clear away defunct regulations, all with an eye toward the holdings in Citizens United. The FEC seems unlikely to adopt the proposals by the Democratic appointees. After all, the Democratic commissioners do not have and are unlikely to obtain majority support for their agenda.
Imagine if the Federal Election Commission were directed by a seven-member board where one party or the other held a working majority. Imagine also the Democrats had a majority on this fictional commission. The regulations proposed by the three current Democratic commissioners would become the law of the land. They would become so despite the fact that Congress itself did not pass the DISCLOSE Act and the regulations contravene the spirit and perhaps the letter of a major Supreme Court decision.
How would that (imagined) outcome be compatible with American constitutional democracy? How would it comport with the rule of law?
Farm Subsidies Benefit Landowners
Almost half of America’s farmland is operated by someone other than the owner. Critics of farm subsidies often point to examples of famous wealthy landowners receiving handouts as a reason to end the federal government’s agriculture gravy train. Notable recipients have included Ted Turner, Larry Flynt, Charles Schwab, and numerous members of Congress.
While policymakers justify their support for farm subsidies in the name of “protecting farmers,” a new academic study describes how landowners are often the real winners. Farm subsidies get “capitalized” into the price of farm land, pushing up land prices. As a result, those farmers who lease land from landowners at the inflated prices end up having a substantial share of their subsidy benefits effectively canceled out.
From the paper:
In all, the results confirm that government payments exert a significant effect on land values. The (marginal) rates of capitalization suggest that in the current policy context, a dollar in benefits typically raises land values by $13-$30 per acre, with the response differing substantially across different types of policies. This response certainly suggests that agents expect these benefits to be sustained for some time. In terms of the implications for the distribution of farm program benefits, our results confirm that a substantial share of the benefits is captured by landowners.
The authors’ conclude that the rhetoric exhibited by supporters of farm subsidies doesn’t always match the reality:
Policy rhetoric often justifies Farm Bill expenditures with the argument that impoverished farmers are in need of governmental support to remain in business. This view is pervasive outside of Washington. For example, consider the annual “Farm Aid” events intended to draw attention to the plight of the American farmer. Our analysis challenges this view. We demonstrate that land owners capture substantial benefits from agricultural policy. This is particularly problematic given that in many cases land owners are distinct from the farmers whose plight we are told we should be concerned with.
See this Cato essay for more on agriculture subsidies.
ObamaCare, Round 2
Today POLITICO Arena asks:
House Republicans are expected to approve a bill on Wednesday that would repeal the Obama health care law. But they are not yet offering a specific replacement for “Obamacare”. Will they pay a price politically for not immediately presenting an alternative? Or is the 2010 law sufficiently unpopular that repeal itself will be enough heading into the 2012 elections?
My response:
Does anyone really expect the scores of new House Republicans, who’ve just now arrived in Washington, to already have a plan to replace ObamaCare? Let’s be serious. The first step for new members is to keep their campaign promise by voting to repeal this unpopular scheme – if for none other than symbolic reasons. The next is to hold hearings and then to start defunding various of its provisions. And in the course of that, a better approach will emerge, one hopes. Remember, Republicans were shut out of the process that created ObamaCare.
Yet at the Arena this morning we see the usual Democratic responses. Timothy Jost writes, for example: ”Health care is rapidly becoming unfordable [sic]; to the government, to employers, to ordinary Americans.” So government, for which health care is becoming unaffordable, is going to solve that problem?! How? By printing money? By imposing price and service controls? That’ll be popular — with doctors and patients alike!
The basic problem is too much government in the health care arena. It’s anything today but a market. Those approaches that have reintroduce market forces — like health savings accounts — have worked quite well. We have them at Cato. We like them. But they won’t be allowed under ObamaCare. Why? Because the Democrats know what’s best for us. What’s best, they believe, is for us to be dependent on government for our health care. No thanks.
New Cato Study: ObamaCare’s Medicaid Mandate Imposes Staggering Costs on States
ObamaCare requires each state to open its Medicaid program to all legal residents earning up to 138 percent of the federal poverty level. Supporters estimate this mandate will cost state governments little: the Kaiser Family Foundation’s worst-case-scenario estimates suggest that state Medicaid spending would rise by just 1.2 percent in New York and 5.1 percent in Texas between 2014 and 2019.
In a new working paper titled, “Estimating ObamaCare’s Effect on State Medicaid Expenditure Growth,” Cato Institute Senior Fellow Jagadeesh Gokhale shows that those estimates are generally far too low. Gokhale finds that all of the five most-populous states — California, Florida, Illinois, New York, and Texas, which account for roughly 40 percent of U.S. population — will struggle to cope with rising Medicaid spending even without ObamaCare’s Medicaid mandate. But ObamaCare significantly increases that burden on four of them:
In its first year of full implementation (2014), ObamaCare will increase spending on Medicaid by 9.0 percent in Florida, 22.2 percent in Illinois, 6.4 percent in New York, and 13.5 percent in Texas. Spending in California is projected to be smaller by about 3 percent.
The cost grows over time. The following chart shows the burden that ObamaCare’s Medicaid mandate will impose on these states over the first 10 years of full implementation:
Compared to a world without ObamaCare, state Medicaid spending will decline by 3 percent in California, but increase by 17.1 percent in Florida, 28.1 percent in Illinois, 16.5 percent in New York, and 12.9 percent in Texas over the first 10 years of full implementation.
On a per-taxpayer basis, ObamaCare’s Medicaid mandate is also highly inequitable:
for every $1 in costs imposed on each working-age Texas adult, Floridians and New Yorkers will pay about $1.50, Illinoisans will pay $3.60, while Californians will save a small amount (about 3 pennies).
Gokhale explains that the Kaiser Family Foundation’s projections are lower because they assume that ObamaCare’s individual mandate will not significantly increase enrollment among people who were eligible for Medicaid but not enrolled under the pre-ObamaCare rules. Consistent with other research, Gokhale assumes the individual mandate will encourage people to enroll in Medicaid even if they would not face financial penalties for being uninsured.
Update (3/3/11): The chart and text were updated to reflect corrected numbers.
The Tetchy Imperialist
Max Boot is thinking about US military personnel training the Afghan security forces and feeling irritated:
What irritates me about the whole situation is that it is the U.S. that has to pick up the tab. Our troops are already doing the bulk of the fighting. Why don’t our rich allies — e.g., Japan, Saudi Arabia, the UAE, France, Italy, Germany, Britain — pay for more of the cost of training? Some of those countries have made sizable troop contributions; others haven’t. But the U.S. has done more than any of them in terms of fighting the Taliban directly. Why do we have to do so much more than the rest of them in financing the Afghan Security Forces too?
I should note that their failure to ante up should not be an excuse for us to walk away. This is not an act of altruism; it is very much in America’s national-security interest to have a functional and effective security force in Afghanistan to prevent a Taliban/al-Qaeda takeover. Our security perimeter runs right through the Hindu Kush.
A few points. First, is this the same guy who asserted in 2001 that “the most realistic response to terrorism is for America to embrace its imperial role” and that “Afghanistan and other troubled lands today cry out for the sort of enlightened foreign administration once provided by self-confident Englishmen in jodhpurs and pith helmets?” I mean, say what you will about the English or the Romans, at least they didn’t whine about others not doing their dirty work for them.
More importantly, it’s uninformed. As I have been incessantly howling at the moon pointing out in other contexts, when we state that we have a vital interest in something, as the US Government has and as Boot reiterates above, smaller, weaker allies have every reason to free ride on Uncle Sucker even if they believe they share that interest.
Finally, Boot asserted the other day that we are “locked in an existential struggle against Islamist extremists,” and here he expands on the theme by asserting that America’s “security perimeter runs right through the Hindu Kush.” This is extreme hyperbole. Existential? As in, our existence is at stake? I thought we were over this sort of thing, but I guess not at Commentary.
Moreover, depending on what Boot is trying to convey with the phrase “security perimeter,” it’s far from clear why it stops at the Hindu Kush. There are all sorts of things going on on the other side of the Hindu Kush that could bear much more heavily on our security than what’s going on just to the West.
I give up.
Prepayment Penalties Help Risky Borrowers
The thing that probably bothers me most about “consumer protection” in the financial area is the obsession with banning products, or characteristics, that sound bad, but that are actually beneficial to consumers. An example of such is the prepayment penalty.
Basically a prepayment penalty is a fee the borrower pays if they pay off their mortgage early. The usual reaction from “consumer advocates” is “that’s horrible” — why should someone have to pay in order to re-finance or get out of their mortgage. Or that the prepayment penalty would make it difficult for the borrower to take advantage of lower rates or an improvement in their credit.
A new NBER working paper lays out the case of why prepayment penalties are actually good for the riskiest (worse credit) borrowers. The paper also explains why we are more likely to see prepayment penalties in the subprime market than in the prime. The logic of the paper is that prepayment penalties help to ensure that “pools of mortgages do not become disproportionately composed only with the riskiest borrowers over time.”
With any given pool of subprime borrowers, some of those borrowers will see their credit quality improve over time. Maybe they establish a good payment history. When the pool is initially priced, which will determine the interest rate charged, that pricing is based upon the average risk of the pool. If however, borrowers can leave the pool as their credit improves, then the average credit quality of the pool will decline. Investors know this. So, in the absence of prepayment penalties, the average interest charged will have to be substantially higher. Essentially the prepayment penalties results in a cross-subsidy from subprime borrowers whose credit improves to those borrowers whose credit does not improve.
Recognizing this logic also explains why we don’t often see prepayments in prime mortgages: prime borrowers are already close to the best credit, so there’s less chance of their credit improving and less room overall for improvement. Of course, there’s nothing stopping the borrower from waiting for their credit to improve before getting a mortgage.
Well, Bush Got Two Terms
From a New York Times report on NBC’s interview:
Former Vice President Dick Cheney . . . said President Obama is likely to be a one-term president because his policies are unpopular with the public.
“His overall approach to expanding the size of government, expanding the deficit, and giving more and more authority and power to the government over the private sector,” Mr. Cheney said in an interview with Jamie Gangel for NBC News. “Those are all weaknesses, as I look at Barack Obama. And I think he’ll be a one term President.”
I recall the Bush-Cheney administration also came under criticism for “expanding the size of government, expanding the deficit, and giving more and more authority and power to the government,” and it didn’t prevent him from being reelected.
Barack Obama, Mr. Deregulation?
In today’s much talked-of Wall Street Journal op-ed, President Obama reaches for common ground with critics of excessive government regulation — not a constituency he’s had much time for in the past. He announced an executive order requiring agencies to review existing regulation for outdated or unwise rules deserving of being struck from the books. That drew measured praise from organized business groups, something the President has not had much of lately.
Many left partisans are aghast, just as they were when Bill Clinton dashed for the political center after his own mid-term electoral “shellacking.” Salon complains that Obama’s op-ed “reads like an apology to the business community,” while Rena Steinzor fears the move signals a decline in influence for the administration’s regulatory ultras, such as Margaret Hamburg (FDA), Lisa Jackson (EPA), and David Michaels (OSHA).
Environmental law expert Jonathan Adler thinks the new executive order might do some good:
The Executive Order is here. It reaffirms the basic principles outlined in President Clinton’s Executive Order 12866, issued in September 1993, and continues to require agencies to conduct cost-benefit analyses of proposed rules. As noted in the President’s op-ed, it also requires agencies to engage in “retrospective analysis” of existing rules so as to accelerate the pace at which outdated regulations are revoked. Specifically, it requires all agencies to develop a plan for such retrospective review within 120 days. If the White House Office of Information and Regulatory Affairs ensures such reviews are meaningful, this could be a significant and positive step.
That’s a big “if.” Over the past two years, OIRA has not restrained its administration colleagues from making 2010 by far the biggest year for new regulatory burdens in memory (Heritage helpfully assembles details.) The most burdensome new rules are not from the best-known areas of new legislation, such as ObamaCare and financial reform, but from the environmental area. That makes it especially disturbing that, as Ted Frank points out, the President’s op-ed “singles out the top-down and economically inefficient fuel-economy regulation as a good one.”
So what does Obama see as an example of an excessive regulation needing repeal? The example he offers is the inclusion of the sweetener saccharin in the category of hazardous waste. Really? Saccharin as hazardous waste? Amid dozens of high-stakes, much-studied regulatory controversies, the only one he could come up with is one that — with all due respect to the people who make the little pink packets — is of hardly any significance to the wider economy, and not much more as a matter of principle?
Even this administration could have made better deregulatory boasts than that. For example, in a fit of sense, the Obama Justice Department a while back adopted regulations specifying that the Americans with Disabilities Act should no longer (as of this March) be interpreted to require restaurants, theaters and other Main Street businesses to admit patrons’ non-canine “service animals” such as monkeys, goats, snakes and spiders.
But it was almost as if his point was to pick a regulation so minor that no one cared much about it one way or the other. Had the President’s speechwriters been looking for an example of a hazardous-substance rule that would actually get people talking about regulatory overreach, they might have picked EPA’s dairy-spill regulations, which (in the words of one report) “treat spilled milk like oil, requiring farmers to build extra storage tanks and form emergency spill plans….” That one does have big and widespread economic costs.
Whoops — not a good example. That one’s not being repealed — EPA at last report intended to go forward with it. Can we really assume anything much is changing here besides the atmospherics?
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