Archive for July, 2011
‘Cut, Cap and Balance,’ the Debt Ceiling and Federal Spending
Cato Institute scholars Daniel J. Mitchell and Chris Edwards evaluate the plans offered by Republicans for lowering federal spending using a so-called “Cut, Cap and Balance” proposal that would make small cuts to federal spending in the short run, cap federal spending, and balance the federal budget using a tax-limited balanced budget amendment to the Constitution.
The Frightening Philosophy of Public Schooling, in a Nutshell
From a New York Times article on wealthy suburbanites opposing charter schools in their districts:
Millburn offers Mandarin only in high school, fueling the arguments of those seeking the new charters. “Kids are like sponges,” said Yanbin Ma, a Hanyu founder. “There are so many things they can absorb and become good at, and I feel that our public schools haven’t done enough to take advantage of that.”
But to Mr. Stewart, a leader in a growing opposition that includes Livingston mothers who have helped collect more than 800 petition signatures, this sounds “selfish.”
“Public education is basically a social contract — we all pool our money, so I don’t think I should be able to custom-design it to my needs,” he said, noting that he pays $15,000 a year in property taxes. “With these charter schools, people are trying to say, ‘I want a custom-tailored education for my children, and I want you, as my neighbor, to pay for it.’ ”
Could there be a philosophy of education any less compatible with a free society — or any society composed of unique individuals — than the one-size-must-fit-all, communal model championed by Mr. Stewart ? No way — yet that is exactly what we’ve got.
Obama Drops Elizabeth Warren for Former Ohio AG
Bloomberg is reporting that President Obama will nominate former Ohio Attorney General Richard Cordray to be the first director of the Consumer Financial Protection Bureau (CFPB), removing former Harvard Law Professor Elizabeth Warren from contention. Of course this nomination might not amount to anything, as Senate Republicans continue to oppose any nominee until changes are made to the CFPB to improve its accountability and transparency.
Cordray is still somewhat an unknown. His service as Ohio AG was relatively short, filling in the remaining term of the previous AG who left under scandal. Cordray was then defeated by former Sen. Mike DeWine.
One of Cordray’s first actions as AG was to abandon a baseless and misguided suit against paint-makers for long-ago lead paint violations. After Rhode Island’s Supreme Court threw out a similar suit, Ohio remained the last hope of the trial bar’s shakedown of the paint manufacturers. But then one of the defendants was Ohio’s Sherwin Williams, so at least Cordray knows not to mess with the politically powerful (so he’ll be a perfect fit in the Obama administration).
Cordray did his best to bring the Ohio foreclosure process to a near standstill, with repeated litigation against lenders. So it should be no surprise that as CFPB director he will make sure that no borrower ever has to repay any obligation ever again (OK, a little exaggeration there). He also managed to go one step beyond the usual practice of state AG’s outsourcing “justice” to the trial bar and invited non-profits, like ACORN, to supplement Ohio’s consumer complaint process. As if Ohio didn’t have enough legitimate consumer complaints to handle.
All this aside, the problem with the CFPB is less who runs it than its flawed structure and basis. In all likelihood, the CFPB will help do for consumer credit what the federal government has done to the mortgage market, which is screw it up royally and leave the taxpayer holding the bag.
Campus Show Trials
Harvey Silverglate, co-founder and chairman of the board of the Foundation for Individual Rights in Education (FIRE) and a Cato adjunct scholar, has an excellent op-ed in today’s Wall Street Journal highlighting the emerging problem of due process violations on college campuses. As Ilya Shapiro has written about previously, the Department of Education’s Office of Civil Rights recently sent out a letter outlining new procedural requirements for dealing with claims of sexual harassment and assault. Despite its cordial opening — it begins with the words “Dear Colleague” — the letter carries the de facto force of law: universities that receive public funds (nearly all of them) may have their funding stripped if they don’t follow the new guidelines.
The new guidelines threaten to turn the campus courts at some of our most august institutions into “kangaroo courts” that ignore basic rights of the accused, such as the right to confront accusers. Most disturbingly, universities are now commanded to use a “preponderance of the evidence” standard in adjudicating claims of sexual assault, including rape. The preponderance of the evidence standard is little more than a hunch, and is often described as a simple 50.01% probability of guilt.
In 1970, in the case of In re Winshop, the Supreme Court ruled that a standard of proof “beyond a reasonable doubt” is constitutionally required in criminal cases. The Court wrote:
The requirement of proof beyond a reasonable doubt has this vital role in our criminal procedure for cogent reasons. The accused, during a criminal prosecution, has at stake interests of immense importance, both because of the possibility that he may lose his liberty upon conviction and because of the certainty that he would be stigmatized by the conviction. Accordingly, a society that values the good name and freedom of every individual should not condemn a man for commission of a crime when there is reasonable doubt about his guilt.
Moreover, use of the reasonable doubt standard is indispensable to command the respect and confidence of the community in applications of the criminal law. It is critical that the moral force of the criminal law not be diluted by a standard of proof that leaves people in doubt whether innocent men are being condemned. It is also important in our free society that every individual going about his ordinary affairs have confidence that his government cannot adjudge him guilty of a criminal offense without convincing a proper factfinder of his guilt with utmost certainty.
While universities are not putting anyone in jail, merely being accused of a rape, much less being convicted by your university, has many of the same concerns as a criminal trial. As if to supply an object lesson that illustrates the Supreme Court’s well-articulated concerns, Silverglate opens his op-ed with the following harrowing story:
This Week in Government Failure
Over at Downsizing the Federal Government, we focused on the following issues this past week:
- People here in Washington are now considering military spending cuts that they thought strategically unwise and politically impossible just a few years ago. And conservatives are joining in.
- Federally funded spaceflight is the quintessential neoconservative project: a giant, wasteful crusade designed to fill Americans’ supposedly empty lives with meaning.
- The Obama administration wants to send bureaucrats from federal agencies that are notorious for wasting other people’s money to help local bureaucrats do a more “efficient” job of spending other people’s money.
- President Obama’s Fiscal Commission handed Republicans ready-made spending cuts on a silver platter — Republicans will never get better political cover for insisting on spending cuts than now.
- $500 billion in cuts and a $500 billion debt increase would certainly be better than Senator McConnell’s chicken-out plan.
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Two Pictures that Perfectly Capture the Rise and Fall of the Welfare State
In my speeches, especially when talking about the fiscal crisis in Europe (or the future fiscal crisis in America), I often warn that the welfare state reaches a point of no return when the people riding in the welfare wagon begins to outnumber the people pulling the wagon.
To be more specific, if more than 50 percent of the population is dependent on government (employed in the bureaucracy, living off welfare, receiving public pensions, etc.), it becomes difficult for taxpayers to form a majority coalition to fix the mess. This may explain why Greek politicians have resisted significant reforms, even though the nation faces a fiscal death spiral.
But you don’t need me to explain this relationship. One of our Cato interns, Silvia Morandotti, used her artistic skills to create two images (click pictures for better resolution) that show what a welfare state looks like when it first begins and what it eventually becomes.
Debt-Limit Deal: $500 Billion Cut Option
Charles Krauthammer is absolutely right that Republicans must call President Obama’s bluff on the debt-limit vote. I suggested that the House GOP pass $2 trillion in cuts tied to a $2 trillion debt increase, thus handing the matter over to the Senate and the president and refusing to budge.
Krauthammer has the same idea, but with $500 billion in cuts and a $500 billion debt increase. That would certainly be better than Senator McConnell’s chicken-out plan, and it would have the advantage of being so modest in size that I think it would ultimately get large support in the Senate from moderates.
The cuts–small “trims” really–could be taken right from Obama’s own Fiscal Commission report. The table below illustrates how modest and limited are the reforms needed to hit $500 billion in savings over 10 years. Indeed, the data from the commission only covers a nine-year period and includes just some of the proposed entitlement savings.
| Obama Fiscal Commission Entitlement Trims | $Billions |
| Trim Health Care Subsidies | |
| Reduce subsidies for medical education | $60 |
| Expand Medicare cost sharing | $110 |
| Enact tort reform | $17 |
| Reduce Medicaid tax gaming | $44 |
| Reform Tricare | $38 |
| Trim Social Security Growth | |
| Increase benefits by chained CPI | $89 |
| Trim Growth in Other Entitlements | |
| Increase other entitlements by chained CPI | $43 |
| Reform federal retirement benefits | $73 |
| Reduce farm subsidies | $10 |
| Reduce student loan interest subsidies | $43 |
| Total Trims, 2012-2020 | $527 |
It would be blindingly obvious to most voters that Obama would be responsible for a debt default if he couldn’t bring himself to sign such modest cuts that were proposed by his own fiscal commission. Then, when the government runs up against the debt limit again five months from now, the GOP should have another package of cuts ready to be passed. This next time they could perhaps focus on discretionary program terminations, some of which I’ve proposed here.
The CAP-AEI Fannie Mae Food Fight
It’s probably never wise to inject oneself into the middle of a food fight, but since I think both sides actually have something right and something wrong, its been a worthwhile debate to follow. That is the ongoing debate between Peter Wallison at the American Enterprise Institute and David Min at the Center for American Progress (at least we can all agree we love America) on the role of Fannie Mae (and Freddie Mac) in the financial crisis. If you can’t guess, Peter says Fannie/Freddie caused the crisis, David says they didn’t.
David makes an interesting point, one I’ve actually argued, in his latest retort. That is, this wasn’t exclusively a housing crisis/bubble. Other sectors, like commercial real estate, boomed and then went bust; other countries, with different housing policies, also had bubbles. True from what I can tell. I will also add that the U.S. office market actually peaked and fell before the housing market, so we can safely say there wasn’t contagion from housing to other parts of the real estate market.
But the problem with this argument, at least for David, is that it undercuts the Dodd-Frank Act, which he has regularly defended. The implicit premise of Dodd-Frank is that predatory mortgage lending caused the crisis, so now we need Elizabeth Warren to save us from evil lenders. But how does predatory lending explain the office market bubble? Do we really believe that deals between sophisticated parties, poured over by lawyers, were driven by predatory lending practices? Do we also believe that other countries were also plagued by bad mortgage brokers? Again, I think David is right about the problem being beyond housing, but he can’t have it both ways.
What is the common factor driving bubbles in commercial real estate, housing, and foreign real estate markets? Maybe interest rates. This was a credit bubble after all. Especially since the Fed basically sets interest rate policy for the world. It is hard for me to believe that three years (2002–2004) of a negative real federal funds rate isn’t going to end badly. This is what I think Peter misses, the critical role of the Federal Reserve in helping blow the bubble. But Dodd-Frank does nothing to change this.
Now there are a ton of things I think both still miss. We could argue all day about what a subprime mortgage is. I think the definitions used by Wallison (and Pinto) are reasonable. There is also a degree, a large one, to which David and Peter are just talking past each other. For instance, there is something special about the U.S. housing market that transfers much of the risk to the taxpayer. In contrast, the bust in the office market didn’t leave the taxpayer to pick up the tab. That has to count for something, unless one just doesn’t care about the taxpayer.
There are a few other issues that make Fannie/Freddie uniquely important in the crisis, but I lack the space to go into them here. Instead, I’ll wrap up by saying that their role in the overnight repurchase (re-po) market is under-appreciated and their ability to essentially neuter the Fed was critical in keeping the bubble going. What’s for dessert?
How Sweden Profits from For-Profit Schools
The brass ring of education reform is to find a way to ensure that the best schools routinely scale-up to serve large audiences, crowding out the mediocre and bad ones. Over the past twenty years, the United States and Sweden have taken two very different approaches to achieving that goal, which I wrote about in a recent op-ed.
In the U.S., our main strategy has been for philanthropists to fund the replication of what they deem to be the academically highest-performing networks of charter schools. In a recent statistical analysis of California, the state with the most charter schools, I discovered that this is not working out particularly well for us. There is no correlation between charter school networks’ academic performance and the philanthropic funding they’ve raised. And, at any rate, charter schools still enroll less than 3 percent of the nation’s students.
In 1992, Sweden introduced a nation-wide public and private school choice program. Private schools went from enrolling virtually no one to enrolling about 11 percent of the entire student population–a figure that continues to grow with each passing year. Moreover, recent research finds that these new private schools outperform the public schools. And which private schools are growing the fastest? The chains of for-profit schools that are in greatest demand, and that have an incentive to respond to that demand by opening new locations. The popular non-profit private schools tend not to expand much over time.
Given that Sweden is universally regarded as a liberal nation, and the U.S. is seen as a bastion of capitalism, one wonders why they got to the brass ring first, and why it is taking us so very long to get there now that they’ve shown us the way.
Vive La Revolution?
Today is the 222nd anniversary of the storming of the Bastille on July 14, 1789, the date usually recognized as the beginning of the French Revolution. I’ll be speaking this weekend at FreedomFest on the topic, “Liberty, Equality, Fraternity: A Libertarian Version.” I previewed part of my talk at this week’s Britannica Blog column. So what should libertarians think about the French Revolution? The great Henny Youngman, when asked “How’s your wife?” answered, “Compared to what?”
Compared to the American Revolution, the French Revolution is very disappointing to libertarians. Compared to the Russian Revolution, it looks pretty good. And it also looks good, at least in the long view, compared to the ancien regime that preceded it….
Lord Acton wrote that for decades before the revolution “the Church was oppressed, the Protestants persecuted or exiled, . . . the people exhausted by taxes and wars.” The rise of absolutism had centralized power and led to the growth of administrative bureaucracies on top of the feudal land monopolies and restrictive guilds….
The results of that philosophical error—that the state is the embodiment of the “general will,” which is sovereign and thus unconstrained—have often been disastrous, and conservatives point to the Reign of Terror in 1793-94 as the precursor of similar terrors in totalitarian countries from the Soviet Union to Pol Pot’s Cambodia.
In Europe the results of creating democratic but essentially unconstrained governments have been far different but still disappointing to liberals….
Still, as Constant celebrated in 1816, in England, France, and the United States, liberty
is the right to be subjected only to the laws, and to be neither arrested, detained, put to death or maltreated in any way by the arbitrary will of one or more individuals. It is the right of everyone to express their opinion, choose a profession and practice it, to dispose of property, and even to abuse it; to come and go without permission, and without having to account for their motives or undertakings. It is everyone’s right to associate with other individuals, either to discuss their interests, or to profess the religion which they and their associates prefer, or even simply to occupy their days or hours in a way which is most compatible with their inclinations or whims.
Compared to the ancien regime of monarchy, aristocracy, class, monopoly, mercantilism, religious uniformity, and arbitrary power, that’s the triumph of liberalism.
New Study from Swedish Economists Allows Us to Quantify the Cost of the Bush-Obama Spending Binge
The United States has been on a decade-long spending binge. Thanks to the profligate policies of both Bush and Obama, the burden of federal spending has climbed to about 25 percent of economic output, up from 18.2 percent of GDP when Bill Clinton left office.
The political class tells us that more government is good for the economy since it an “investment” and/or a “stimulus.”
The academic research, however, tells a different story. Here are some brief excerpts from a recent study by two Swedish economists, including a critically important observation about the impact of bigger government on economic performance.
…most recent studies typically find a negative correlation between total government size and economic growth. …the most convincing studies are those most recently published. …In general, research has come very close to a consensus that in rich countries there is a negative correlation between total government size and growth. It appears fair to say that an increase in total government size of ten percentage points in tax revenue or expenditure as a share of GDP is on average associated with an annual lower growth rate of between one-half and one percentage point.
Let’s focus on the last sentence of the excerpt and contemplate the implications. The research cited above tells us that annual growth is 0.5 percentage point-1.0 percentage point lower if the burden of government rises by 10 percentage points of GDP. Well, the burden of federal spending has jumped by more than 5 percentage points of GDP during the Bush-Obama years, indicating that annual growth in America is now 0.25 percentage point-0.5 percentage point lower than it otherwise would be.
Now let’s take the best-case scenario, and assume that annual growth has only dropped by 0.25 percentage points, and consider what that means. It may not sound like much, but even small differences in growth rates become very important over time. For an average household over a 25-year period, the loss of 0.25 percentage points of growth means annual income will rise, but the total increase will be about $5,000 smaller by the 25th year.
The budgetary implications of growth also are rather important. According to the Congressional Budget Office, the economy’s performance has a large impact on tax receipts (more growth means higher incomes and more taxpayers) and a small effect on government spending (more growth means fewer people at the public trough). CBO even publishes a “sensitivity table” with specific estimates (Table B-1).
If we once again use the best-case scenario and assume the Bush-Obama spending binge has reduced annual growth by only 0.25 percentage points, the CBO numbers show this means more than $750 billion of additional red ink. This is something to keep in mind as the White House argues that job-killing class-warfare tax hikes will somehow improve the budget situation.
Let’s now return to the academic research. The authors included a very helpful table showing the results of recent studies on the relationship between the size of government and economic performance. Click on the image for a full-size look at how the majority of scholarly research this century confirms that big government is bad for prosperity.
For all intents and purposes, all this research shows that developed nations are on the downward-sloping portion of the Rahn Curve. Named after my Cato colleague Richard Rahn and explained in the video below, the Rahn Curve is sort of a spending version of the Laffer Curve.
It shows that growth is maximized by small governments that focus on core “public goods” like rule of law and protection of property rights. But when governments expand beyond a certain growth-maximizing level (the research says about 20 percent of GDP, by I explain in the video why the right number is probably much smaller), the result is slower growth and less prosperity.
With the exception of high-growth Hong Kong and Singapore, all developed nation have public sectors that consume at least 30 percent of economic output. This means that government spending is undermining prosperity all around the world. And since the burden of government spending is close to 40 percent of GDP in the United States…well, you can fill in the blanks.
Overregulation: The View From a Helicopter Cockpit
Philip Greenspun discovers that an FAA inspector is happy to march a little helicopter charter outfit run by a single owner/pilot through the same paperwork slog that a much busier operation would face:
Finally, the FAA inspector looked at my random drug testing program to make sure that everything was in place. I’m subject to the same drug testing requirements as United Airlines. I am the drug testing coordinator for our company, so I am responsible for scheduling drug tests and surprising employees when it is their turn to be tested. As it happens, I’m also the only “safety-sensitive employee” subject to drug testing, so basically I’m responsible for periodically surprising myself with a random drug test. As a supervisor, I need to take training so that I can recognize when an employee is on drugs. But I’m also the only employee, so really this is training so that I can figure out if I myself am on drugs. As an employee, I need to take a second training course so that I learn about all of the ways that my employer might surprise me with a random drug test and find out about drug use. But I’m also the employer so really I’m learning about how I might trap myself. … Five minutes after the FAA inspector left, I received a phone call. “I’m from the FAA and we’d like to schedule an audit of your drug testing program.”
Things proceed to get crazier from there. And none of the craziness is likely to change so long as being worried about regulatory overkill is construed in Washington as being Against Air (or Food or Toy or Drug) Safety.
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