Archive for August, 2011
‘Back to the Future,’ or: ‘The Math of Khan’
Oklahoma has just enacted a law that requires students to be held back a year if they are not reading on grade level by the end of 3rd grade. The inspiration is sound: poor readers cannot keep up with their classmates as the curriculum becomes more sophisticated and relies more heavily on reading comprehension across subjects. But this particular approach doesn’t begin to tackle the larger problem of age-based grading itself. Kids are not all identical widgets who learn every subject at the same rate. Individual children even learn different subjects at different rates. So the idea that all children should be grouped by age and, by default, moved through every subject at the same pace is ludicrous on its face.
More than that, it is a retrogression from the pedagogy of the early 1800s. In an early 19th century one-room schoolhouse, children of different ages and aptitudes progressed through the material at their own paces. It wasn’t unusual for an 11 year old girl to be on McGuffey’s or Elson’s 4th Reader while her older brother was still on the 3rd. It wasn’t unusual, and it wasn’t a problem. Age-based grading is a problem. Fortunately, technology will dump it on the scrapheap of history within a generation, as services like Khan Academy and software like Dreambox allow children to progress at their own rate through the material.
We can’t get back to the future soon enough.
Obama Supports VAT Sympathizer for Top Job at Council of Economic Advisers
The White House has announced that it is nominating Alan Krueger, a professor at Princeton, to be the new Chairman of the Council of Economic Advisers.
In a Freudian copy-editing slip, the Fox News story (at least as of 8:44 a.m.) says “Krueger’s job will be to provide policy prescriptions on ways to spur unemployment.”
That’s obviously tailor-made for a joke about the Obama Administration not needing any help when it comes to stimulating joblessness.
On a more serious note, though, I’m worried about Krueger’s sympathy for a value-added tax (VAT). Here’s what he wrote back in 2009.
…a 5 percent consumption tax would raise approximately $500 billion a year, and fill a considerable hole in the budget outlook. In addition, a consumption tax would encourage more saving in the long run. Many economists consider a consumption tax an efficient way of raising tax revenue, especially in a global economy. The prospect of greater revenue flowing into federal coffers would probably help lower long-term interest rates because the government would need to borrow less down the road, and further bolster the economy.
To be fair, Krueger was very careful to leave himself some wiggle room, even going so far as to write that, “I’m not sure it is the best way to go.”
But it seems rather obvious that Krueger, like other leftists, wants this giant new source of revenue. Heck, President Obama also has semi-endorsed a VAT, saying it is “something that has worked for other countries.”
The President’s assertion is especially foolish. After all, European nations imposed VATs about 40 years ago, which simply encouraged more spending and more debt — and now several nations are on the verge of bankruptcy.
If that’s “something that has worked,” I’d hate to see the President’s idea of failure.
The real lesson is that the United States should not copy Europe’s mistakes. This short video has the key arguments against this European-style national sales tax.
P.S. For a humorous perspective on the VAT, take a look at these clever cartoons (here, here, and here).
Obama Refinance Plan Sows Seeds for Another Bailout
I’ve already mentioned how the rumored Obama plan to re-finance existing underwater Fannie/Freddie loans with new mortgages at as low as 4 percent would not actually do much, if anything, positive for the economy. Even worse is that such a plan would likely require a massive infusion of taxpayer dollars into Fannie Mae and Freddie Mac.
First let us start with some basics about the Fannie Mae business. According to Fannie’s most recent 10-Q (see page 28), Fannie’s current interest-earning assets, mostly mortgages, yield the company 4.59%. However, Fannie has to fund those assets. The cost of Fannie’s total current interest-bearing funding is 3.99%, leaving the company a spread of 60 basis points to cover its non-interest expenses. What should be immediately obvious is that lowering the value of much of Fannie’s book to 4% will leave the companies with almost zero earnings. I’m not sure how that is supposed to get Fannie back on the path to repaying the taxpayer.
Worse is that newly re-financed 4% mortgages, or mortgage-backed securities, would remain on Fannie’s balance sheet for years (assuming Fannie is still around). I cannot be the only one who believes rates are going up in the future — either due to inflation or the Fed raising rates to fight inflation. It is not hard to imagine, in say two years, Fannie stuck with a balance sheet of 4% assets, while having to pay 5% to fund those assets. It is also not hard to believe that the taxpayer would get stuck making up the difference. On a $3 trillion balance sheet, that’s $30 billion. Add in Freddie and you’ll get another $20 billion or so. And that’s at future funding costs of 5%. If Fannie’s funding costs hit 6% in the next few years, we could be looking at an annual shortfall of $100 billion.
Instead of helping dig Fannie and Freddie into a deeper hole, Obama should start offering a real plan to help repay the taxpayer for what they’ve already had to shell out for Fannie and Freddie.
Constitutional Structure Matters: A Response to Larry Tribe
SCOTUSblog’s symposium on the constitutionality of Obamacare — to which I contributed, as did Bob Levy – provides a glimpse at the astonishing views of the law’s supporters. It particularly shows how divorced the legal academy’s leading lights are not only from basic constitutional text and structure, but from jurisprudential reality.
Most prominently, in responding to the Eleventh Circuit’s decision striking down the individual mandate (and to Richard Epstein’s symposium essay), storied Harvard professor Laurence H. Tribe criticizes the court for “reflecting what appears to be a widely held public sentiment” that Congress cannot “mandate that individuals enter into contracts with private insurance companies for the purchase of an expensive product from the time they are born until the time they die.” That sentiment is a problem, according to Tribe, because it elevates form over substance. That is, just as it has done with Social Security, Congress could (under modern jurisprudence, which is wrong as a matter of first principle but not at issue in the Obamacare lawsuits) levy another income or payroll tax and use that revenue to provide health insurance and/or care for otherwise uninsured individuals:
Put otherwise, Congress may undoubtedly use its taxing power to mandate that individuals pay for coverage supplied by private insurers, so long as it acts in two steps: step 1, impose a tax, and step 2, use the proceeds of the tax to fund privately provided health insurance for each individual. If Congress may accomplish this objective in two steps, why not in one? No federalism or liberty-related concern, whether the dignity of the states or that of individuals, is served by denying Congress that authority.
Tribe’s reasoning echoes Justice Breyer’s reason (in dissent) for rejecting the notion that the Takings Clause applies when the Government orders an individual to pay another individual, in the case of Eastern Enterprises v. Apfel:
The dearth of Takings Clause authority is not surprising, for application of the Takings Clause here bristles with conceptual difficulties. If the Clause applies when the government simply orders A to pay B, why does it not apply when the government simply orders A to pay the government, i.e., when it assesses a tax?
But there is a very good reason why courts should deny Congress the power to compel individuals to purchase products from private parties or, for that matter, the power to order A to pay B — even if a similar result could be accomplished through the taxing power: political accountability. As Georgetown law professor (and Cato senior fellow) Randy Barnett explains:
Like mandates on states, economic mandates undermine political accountability, though in a different way. The public is acutely aware of tax increases. Rather than incur the political cost of imposing a general tax on the public using its tax powers, economic mandates allow Congress and the President to escape accountability for tax increases by compelling citizens to make payments directly to private companies.
Indeed, scholars as diverse as Richard Epstein and Cass Sunstein have argued that the Takings Clause requires just compensation precisely to preserve political accountability in the provision of public goods. As Justice Scalia explained in the case of Pennell v. City of San Jose:
The politically attractive feature of regulation is not that it permits wealth transfers to be achieved that could not be achieved otherwise; but rather that it permits them to be achieved “off budget,” with relative invisibility and thus relative immunity from normal democratic processes.
Under modern jurisprudence, essentially the only check on Congress’s taxing and spending powers under the General Welfare Clause (as opposed to its regulatory power under the Commerce Clause) is political. So yes, Professor Tribe, there is a constitutional reason for depriving Congress of the power to do in one step what it could surely do in two other steps: to maintain that remaining constitutional qua political check. Indeed, the very reason why Congress adopted the individual mandate was because it lacked the political will — it feared political accountability too much — to impose single-payer universal coverage, where the government would first impose a tax on everyone and then provide health care (at this point it’s no longer “insurance”) to everyone.
To accomplish the same result without having to impose significant new taxes — as President Obama famously promised there would not be – Congress tried to evade political accountability through the individual-mandate mechanism. That’s why the Eleventh Circuit wisely declined to grant Congress the power to move a significant part of its spending “off budget” and “mandate that individuals enter into contracts with private insurance companies for the purchase of an expensive product from the time they are born until the time they die.”
Cato legal associate Chaim Gordon co-authored this blogpost.
Hurricane Irene as Economic Stimulus
Oh, dear. Oh, dear. No matter how many times economists debunk the broken window fallacy, not a natural disaster goes by that journalists don’t try to cheer us up by saying “at least it will stimulate economic growth.” This time it’s Josh Boak (no relation!), the economics reporter (!) at Politico, who was “educated at Princeton and Columbia.” And Sunday afternoon he posted this story:
Irene: An economic blow or boost?The power outages and shuttered airports may stop the engines of commerce for several days, but Hurricane Irene might have provided some short-term economic stimulus as billions of dollars will likely be spent to repair the damage to the East Coast over the weekend.
Cumberland Advisors Chairman David Kotok saw the storm as likely jolting employment in construction, an industry paralyzed by the bursting of the real estate bubble in 2008.
“We are now upping our estimate of fourth-quarter GDP in the U.S. economy,” he said in an email Sunday. “Billions will be spent on rebuilding and recovery. That will put some people back to work, at least temporarily.”
Kotok expects GDP growth — which limped along at less than a percentage point for the first half of the year — to exceed 2 percent in the last three months of the year and potentially reach 3 percent.
Mark Merritt, president of crisis-management consulting firm Witt Associates, said the hurricane should provide a bump in economic activity over the next few months.
“After a disaster, there’s always a definite short-term increase,” Merritt said. “There will be furniture bought, homes repaired, new carpet, new flooring, all the things affected by flooding.”
The story quotes no economist, who might have pointed out that the destruction of homes, businesses, and other property cannot actually be good for the economy. As economist Sandy Ikeda summed it up last year, the argument is that “paying $100 to replace a broken window somehow creates more prosperity than having an intact window and spending that $100 on something else.” He goes on to ask, as many economists have: If destruction is so good for an economy, why wait for a hurricane or a bombing raid? Why not just bomb your own cities?
As Frederic Bastiat explained the “broken window fallacy,” a boy breaks a shop window. Villagers gather around and deplore the boy’s vandalism. But then one of the more sophisticated townspeople, perhaps one who has been to college and read Keynes, says, “Maybe the boy isn’t so destructive after all. Now the shopkeeper will have to buy a new window. The glassmaker will then have money to buy a table. The furniture maker will be able to hire an assistant or buy a new suit. And so on. The boy has actually benefited our town!”
But as Bastiat noted, “Your theory stops at what is seen. It does not take account of what is not seen.” If the shopkeeper has to buy a new window, then he can’t hire a delivery boy or buy a new suit. Money is shuffled around, but it isn’t created. And indeed, wealth has been destroyed. The village now has one less window than it did, and it must spend resources to get back to the position it was in before the window broke. As Bastiat said, “Society loses the value of objects unnecessarily destroyed.”
In the comic strip “Pearls Before Swine,” the nefarious Rat used the destruction-as-stimulus argument to defend his client’s blowing up downtown:
But that’s a comic strip. Journalists should do better. Please, call one of these economists. They can tell you that destruction is destructive. When property is destroyed, people have less wealth. The money they had been saving for a new business or a new computer or a college education, now they have to spend it on rebuilding what they had. That is not “a bump in economic activity.”
First Circuit Affirms Right to Record the Police
Right to Record, a website devoted to the legal aspects of recording police officers, has the scoop. A panel of the First Circuit Court of Appeals affirmed the right of citizens to openly record police officers.
Gathering information about government officials in a form that can readily be disseminated to others serves a cardinal First Amendment interest in protecting and promoting “the free discussion of governmental affairs.” Moreover, as the Court has noted, “[f]reedom of expression has particular significance with respect to government because ‘[i]t is here that the state has a special incentive to repress opposition and often wields a more effective power of suppression.’” This is particularly true of law enforcement officials, who are granted substantial discretion that may be misused to deprive individuals of their liberties. Ensuring the public’s right to gather information about their officials not only aids in the uncovering of abuses, but also may have a salutary effect on the functioning of government more generally.
Read the whole thing. It provides a great discussion of the developing legal landscape, as well as some juicy details — like the fact that the attorney defending the statute for Massachusetts wrote her student note about how the Massachusetts wiretapping law is unconstitutional.
This decision is a big deal. The case comes from Massachusetts, one of two states (the other being Illinois) that continues to criminalize recording audio in public. It’s the latest in a string of victories against the Massachusetts wiretapping law that has become a useful tool for police who want to shield their actions from public scrutiny. A Massachusetts District Attorney recently refused to proceed with charges against a woman who recorded a vicious police beating, the D.A. declaring that police officers have no reasonable expectation of privacy while on duty and in public. Cop Block founders Pete Eyre and Adam Mueller were just acquitted on felony wiretapping charges for openly recording their encounter with police officers Massachusetts.
Moving on to the other holdout, Illinois, a woman who surreptitiously recorded Chicago Police Internal Affairs officers trying to persuade her not to file a sexual harassment complaint against police officers was acquitted of felony wiretapping charges. All of this sets the stage for the ACLU v. Alvarez, a lawsuit seeking to prevent future wiretapping charges against citizens who record on-duty police in public.
For more Cato work on the right to record police, take a look at this video and this post on Anthony Graber’s victory over abuse of the Maryland wiretapping statute. Speaking of which, Right to Record provides a page on the Maryland wiretapping statute, supplying the decision in Graber’s case for anyone who faces similar charges in the future.
Why Stop at $20 Billion, Senator?
Congressional Quarterly reported on Monday [subscription required] that Sen. Dianne Feinstein (D, Calif.) has called for $20 billion worth of increased lending to U.S. manufacturers through a new targeted program of the Export-Import Bank of the United States (“the Ex-Im Bank”).
Sen. Dianne Feinstein called Monday for a new initiative to promote lending to U.S. manufacturers in an effort to spur job creation and shrink the U.S. trade deficit.
The California Democrat proposed authorizing the U.S. Export-Import Bank to use $20 billion of unobligated authority to lend directly to domestic manufacturing companies that are competing with foreign competitors subsidized by their own governments…
Feinstein said her proposal would not be costly because of the offsetting collections priced in to the structure of the bank’s transactions.
To be eligible for the lending program, companies would be required to demonstrate the number of jobs that would be created; that they are competing directly with subsidized, foreign firms; that the project would contribute to the expansion of the domestic workforce and manufacturing capability; and that it would have a net positive impact on the U.S.trade balance.
“In today’s global economy, the federal government must more actively partner with the business community,” Feinstein wrote. “Manufacturing is a proven source of well-paying jobs for those of all educational levels and we must have a thriving manufacturing sector in order to address our chronic trade imbalance and return our economy to sustainable growth.” [emphases added]
Where to begin? First, there is no earthly reason why “we must have a thriving manufacturing sector in order to address our chronic trade imbalance.” We could bring our trade account into balance through services or agricultural exports if “addressing our chronic trade imbalance” is what keeps you awake at night. (Here’s more on the trade deficit from my colleague Dan Griswold.)
Whose Axe Made Your Axe? You Better Find Out
For the second time in two years, federal agents from the U.S. Fish and Wildlife Service have raided two Tennessee factories that make iconic Gibson guitars. The government alleges that Gibson imported woods in violation of the Lacey Act, a century-old law that makes it a federal crime to trade in plants, wildlife, or timber that have been harvested in violation of “any foreign law.”
While this seems simple enough, and the anti-poaching/conservation impulses behind the law are certainly commendable, the Lacey Act has become one of many federal statutes that create invisible minefields of federal regulations into which anyone can stumble unknowingly.
A Gibson Les Paul
In the Wall Street Journal today, Eric Felten discusses the Gibson raid and points out just how dangerous and overblown the Lacey Act has become. Since plants and timber were added to the act in 2008, even individual owners of vintage guitars can run afoul of the act. Felten writes:
If you are the lucky owner of a 1920s Martin guitar, it may well be made, in part, of Brazilian rosewood. Cross an international border with an instrument made of that now-restricted wood, and you better have correct and complete documentation proving the age of the instrument. Otherwise, you could lose it to a zealous customs agent—not to mention face fines and prosecution.
In addition, all the confusing forms must be filled out completely and perfectly, or you could face heavy penalties.
As a guitarist with an appreciation for vintage gear, as well as a Gibson fan, I’ve been following these stories with both a personal and professional interest. Perhaps Gibson has committed bona fide violations of the Lacey Act and perhaps not. I would guess, given the incentives the law creates, that Gibson has done its best to comply. But complying with a law that requires interpreting the interaction of vague foreign laws with vague domestic laws is easier said than done. Like a legal Heisenberg Uncertainty Principle, the laws may not exist until federal prosecutors observe them.
One of the most heartbreaking stories of federal prosecutors running amok with the Lacey Act is the story of Abner Schoenwetter, a grandfatherly Miami seafood importer who spent six years in a federal prison for importing lobster tails that violated the laws of Honduras. Except they didn’t. Honduras filed briefs and testified on behalf of Schoenwetter and his co-defendants, pointing out that what federal prosecutors thought to be Honduran law was not actually Honduran law. Federal prosecutors were unperturbed, however, determined to wipe this menace to society from our streets. (You can read the full, sad story of the case here.)
This Week in Government Failure
Over at Downsizing the Federal Government, we focused on the following issues this past week:
- Small Business Administration supporters have cultivated a myth that being against the agency is equivalent to being against small businesses. In reality, the great majority of American small businesses have thrived without government subsidies.
- Chris Edwards looks at the spending record of Texas governor Rick Perry.
- Too often local reporters treat the receipt of federal funds as a free lunch to be celebrated. However, like all federal subsidies, HUD’s Community Development Block Grant program does not create economic activity — it merely redirects it according to political and bureaucratic whims.
- A budget plan promises to cut federal spending by 25 percent per year and has been endorsed by seven Republicans running for president. Too bad it’s the dumbest budget “plan” yet.
- Pundits like Rachel Maddow never seem to worry about the quality of government “investments.” And they seem blissfully unaware of the history of damage caused by governments that have thought big on infrastructure.
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Nat Hentoff on Perry, Obama
There has been increasing attention this week on Texas governor and Republican presidential candidate Rick Perry, as well as his book Fed Up! and his record in Texas. With respect to criminal justice, most of the talk concerns the number of executions on Perry’s watch.
In a recent column, Cato senior fellow Nat Hentoff notes that Perry has brought enlightening reforms to the juvenile justice system in that state — the gist being more focus on concentrated rehabilitation instead of prison isolation — and that this aspect of Perry’s record ought to be part of the conversation.
And where is Nat Hentoff on Mr. Obama and his record?
I don’t ask President Barack Obama for any change I can believe in, except to clear out his office and make room in the White House for a real president.
That may be too harsh. Obama has made some mistakes, to be sure, but at least he ended the wars and has the government on a sound financial footing.
How’s Our ADA Compliance? Dial 1-800-HIRE-SOTS
It seems that Old Dominion Freight Line, Inc., an interstate trucking company, doesn’t want to put drivers with a history of drinking problems behind the wheel. According to a press release issued last week by the federal Equal Employment Opportunity Commission (EEOC) (hat tip: Roger Clegg), that’s a violation of the drivers’ rights under the Americans With Disabilities Act:
[Per the EEOC's suit] the driver at the Fort Smith location had worked for the company for five years without incident. In late June 2009, the employee reported to the company that he believed he had an alcohol problem. Under U.S. Department of Transportation regulations, the employer suspended the employee from his driving position and referred him for substance abuse counseling. However, the employer also informed the driver that the employer would never return him to a driving position, even upon the successful completion of a counseling program. …
Alcoholism is a recognized disability under the Americans With Disabilities Act (ADA), and disability discrimination violates this federal law. The EEOC said that the company violated both the ADA and the Americans With Disabilities Act Amendment Act of 2008 (ADAAA) by conditioning reassignment to non-driving positions on the enrollment in an alcohol treatment program. In addition, the EEOC argued that Old Dominion’s policy that bans any driver who self-reports alcohol abuse from ever driving again also violates the ADA.
Even well-run alcohol rehab programs are known for having high relapse rates, and Old Dominion would almost certainly face legal liability following a calamitous highway collision caused by a driver’s relapse. But according to the EEOC’s interpretation, requiring the driver to accept permanent reassignment to a less safety-sensitive position (let alone terminating him entirely) is also grounds for liability.
For years the ADA has provided legal muscle to employees terminated for alcohol problems — just the other day, for example, a Florida State University administrator dismissed after frictions with staff sued the university for not accommodating his alcohol abuse. But that’s just the academic setting, where many administrators can glide by in a bit of a haze for years without causing real problems. (UCLA’s Steve Bainbridge quips that the college official’s description of drinking as a “handicap” is off base: “it’s always come in handy for me.”) Are we really required to take chances with 18-wheelers on the highway?
An Amazing Indictment of Obamanomics: Banks That Don’t Want Deposits
I’ve commented on the failure of Obamanomics, with special focus on how both banks and corporations are sitting on money because the investment climate is so grim. Not exactly flattering to the White House.
Using Minneapolis Federal Reserve data, I’ve compared the current recovery with the expansion of the early 1980s. Once again, not good news for the Obama administration.
And I’ve shared a couple of cartoons — here and here — that use humor to show the impact of bad public policy.
But here’s a Bloomberg story that provides what may be the most damning evidence that the President’s big government agenda is a failure:
U.S. regulators have asked some banks to take more deposits from large investors even if it’s unprofitable, and lenders in return are seeking relief on insurance premiums and leverage ratios, according to six people with knowledge of the talks.
Deposits are flooding into the biggest U.S. banks as customers seek shelter from Europe’s debt crisis and falling stock prices. That forces lenders to raise capital for a growing balance sheet and saddles them with the higher deposit insurance payments. With short-term interest rates so low, it’s hard for financial firms to reinvest the new money profitably.
…At least one firm, Bank of New York Mellon Corp., tried to recoup some of the costs by charging depositors 13 basis points, or 0.13 percent, for holding unusually high balances.
Let’s think about what this article is really saying. Banks normally make money by attracting deposits and then lending that money to people and businesses that have productive uses for the funds.
Yet the economy is so weak that banks are leery of taking more money. The story is complicated by other factors, including capital flight from Europe, taxes (or premiums) imposed by the Federal Deposit Insurance Corporation, and various regulatory issues. But even with these caveats, it’s still remarkable that banks want to turn down money — or charge people for making deposits. That’s sort of like McDonald’s turning away customers because the firm loses money by selling Big Macs and french fries. Or, better yet, like McDonald’s turning away free goods from suppliers because not enough people want to buy the final product.
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