Archive for August, 2011
State Public Pension Liabilities
I suspect not everyone looks forward to the latest issue of the Journal of Finance to the same extent I do. After all, most of the articles are fairly technical and generally lack a direct connection to public policy (my primary interest). The August issue, however, was a real exception, having a number of articles on issues related to the financial crisis. More importantly was a paper by Robert Novy-Marx and Joshua Rauh. The paper provides estimates for the unfunded liabilities inherent in our state public employee pension system.
Under fairly reasonable assumptions, the authors calculate that the net present value of unfunded liabilities is between $3.2 and $4.4 trillion. While that might seem small compared to the unfunded liabilities inherent in Medicare and Social Security, it is still a massive number compared to either the size of the economy or state budgets.
The authors do not offer a set of policy proposals. They simply give us a reasonable estimate of the size of the problem. Needless to say, this is a problem that isn’t going anyway and will only get worse the longer we refuse to address it.
The Kennedy View of Wealth
In a column bemoaning Ayn Rand’s influence in America, Kathleen Kennedy Townsend writes:
I also see a moral issue with Ayn Rand’s insistence that all of us, CEOs included, should be totally free of the ties that bind. I especially disagree when it comes to CEOs. As I wrote here a few months ago, the wealthy have a special responsibility. Much will be asked of those to whom much has been given. Participating in government and civic life, serving in war, helping the less fortunate, and–yes–paying a fair share of taxes are inescapable responsibilities for all Americans, especially for those who have realized the American dream that inspires us all. (emphasis added)
I hear this idea a lot, and of course it can be traced to the words of Jesus: “For unto whomsoever much is given, of him shall be much required.” (King James Version, Luke 12:48) But something struck me in its being quoted by Kathleen Kennedy Townsend. Much has been given to her, and to her relatives. And thus wealth has always seemed to her something that falls like manna from heaven. Townsend is the granddaughter of Joseph P. Kennedy and of coal magnate George Skakel. Wikipedia sums up the charmed life her grandparents’ wealth gave her:
Townsend was born in Greenwich, Connecticut….She spent most of her childhood in McLean, Virginia and attended Stone Ridge School in nearby Bethesda, Maryland. She graduated from The Putney School in Vermont. She attended Radcliffe College (which later became part of Harvard University), receiving her bachelor’s degree in history and literature with honors in 1974.
It’s a wonderful life. To her and her family, much was given — by the hard work of an earlier generation. But most CEOs are not given anything. They have to create wealth. The ones who get the richest, the entrepreneurs, typically work very hard for years. They invent things — cars, copying processes, software systems, computers, business practices. Sam Walton became fabulously wealthy by delivering mundane items a few pennies cheaper to tens of millions of people, Ray Kroc by standardizing the cheap and efficient delivery of reliable hamburgers. Sure, some CEOs inherit their jobs, but they still have to work to update their products and keep up with the competition. A person who makes money doesn’t feel that “much has been given” to him, though rich Americans do nevertheless give a great deal to charity.
Perhaps we might change Kennedy Townsend’s mantra to
To those from whom we have received much — the incredible standard of living that investors and businesspeople have helped us all to achieve — much gratitude is owed. And if they also devote some of their own wealth to charitable endeavors, they are doubly beneficent.
HUD Subsidizes Wealthier Indiana County
The Indianapolis Star recently ran an article on a relatively wealthy county in Indiana that has received $3 million in HUD Community Development Block Grant funding since 2005. I lived in Hamilton County for three years and it has a well-deserved reputation in Indiana as being the home of the state’s hoity-toity. I don’t believe the federal government should be subsidizing community development for any locality, but subsidizing wealthier areas of the country is extra ridiculous.
From the article:
Hamilton County, which automatically qualifies for the Community Development Block Grant program funding despite having one of the lowest poverty rates in the nation, has followed federal guidelines in spending its allocation…
The poverty rate in Hamilton County was 5.6 percent in 2009, compared with a 14 percent rate in Indiana and nationally. The county’s per-capita income was $38,298, 60 percent higher than the state’s.
A Cato essay on community development subsidies notes that the CDBG program has gone from targeting poorer areas to subsidizing wealthier areas as well:
CDBG spending has gradually shifted from poorer to wealthier communities over time. For that reason, the Bush administration rated the CDBG program “ineffective” due to its “weak targeting of funds.” It noted, for example, that wealthy Greenwich, Connecticut, received five times more funding per low-income resident than poorer Camden, New Jersey. It should not be the role of the federal government to redistribute income between regions, but even if it was, the CDBG program is not very good at it.
The reason why this has happened is simple: more congressional districts receiving subsidies means more congressional support for the program.
The Star article notes that “Of the approximately $3 million the county has received from 2005 through 2009, the largest chunks were spent on program administration ($677,589) and sidewalks ($598,751). The Cato essay points out that much of the money gets lost to the multiple bureaucracies:
One result of involving all three levels of government in funding local projects is rampant bureaucracy. Local governments that receive CDBG funds spend 17 percent on administration, on average, according to the Government Accountability Office. For the portion of CDBG funds that flow to state governments, state-level bureaucracies are an additional cost. The GAO found that state government administration consumed 8 percent of CDBG funds. On top of those costs are federal administration costs, which are about 5 percent of the value of grants.
After the government bureaucracies take their share, CDBG monies get distributed to the private businesses and organizations that carry out funded projects. Federal rules usually specify the share of funding that may be used by recipients for administrative costs, and 10 percent seems to be common. Thus, considering all the administrative costs at all layers of government and private organizations, a large share of the CDBG budget disappears before any actual work is done.
The official in charge of Hamilton County’s CDBG program blames the high administrative cost on federal red tape:
McConaghy said the program allows for high administration costs because “when you’re dealing with federal funds, there are a lot of additional steps that you have to go through,” including creating an annual action plan.
The official’s excuse isn’t completely without merit. As the Cato essay notes, “One cause of high administration costs in grant programs is that governments and private groups must comply with complex federal regulations.”
The reporter is to be commended for critically examining a prominent federal subsidy for state and local government. Too often local reporters treat the receipt of federal funds as a free lunch to be celebrated. However, like all federal subsidies, the CDBG program does not create economic activity – it merely redirects it according to political and bureaucratic whims. Contrary to what the folks in Washington say, there’s no such thing as a free lunch.
Lawyers and Their Licenses
What do the New York Times, the Brookings Institution, and the Cato Institute have in common? Turns out we agree on deregulating the legal profession.
From a Times editorial: “Another step is to allow nonlawyers into the mix. The American Bar Association has insisted that only lawyers can provide legal services, but there are many things nonlawyers should be able to handle, like processing uncontested divorces. ”
From a Brookings op-ed: “It would be better to deregulate the provision of legal services. This would lower prices for clients and lead to more jobs.”
From a Cato paper: “Every state except Arizona prohibits the unauthorized practice of law (UPL); a person must possess an attorney’s license to hold himself out as a lawyer. UPL prohibitions restrict the right to pursue a legitimate occupation and the right to contract with others. By imposing a costly barrier to entry, they distort the market for legal services. Consequently, consumers face higher prices and fewer choices.”
It’s unanimous. Get going state lawmakers—deregulate the legal profession.
The Morality of Business Enterprise
John Mackey, co-founder and co-CEO of a substantial wealth-creating business enterprise, explains the moral significance of business. A longer interview with Mackey, along with other thinkers, can be found in The Morality of Capitalism, available here. (The book is being distributed by the Atlas Network and Students for Liberty.)
Is Obama Really Going to Propose Another Keynesian Stimulus?
Just last week, I made fun of Paul Krugman after he publicly said that a fake threat from invading aliens would be good for the economy since the earth would waste a bunch of money on pointless defense outlays.
Yesterday, there were rumors that Krugman stated that it would have been stimulative if the earthquake had been stronger and done more damage, but he exposed this as a prank (though it is understandable that many people — including me, I’m embarrassed to admit — initially assumed it was true since he did write that the 9-11 terrorist attacks boosted growth).
But while Krugman is owed an apology by whoever pulled that stunt, the real problem is that President Obama and his advisers actually take Keynesian alchemy seriously.
And since President Obama is promising to unveil another “jobs plan” after his vacation, that almost certainly means more faux stimulus.
We don’t know what will be in this new package, but there are rumors of an infrastructure bank, which doubtlessly would be a subsidy for state and local governments. The only thing “shovel ready” about this proposal is that tax dollars will be shoveled to interest groups.
The other idea that seems to have traction is extending the current payroll tax holiday, which lowers the “employee share” of the payroll tax from 6.2 percent to 4.2 percent. The good news is that the tax holiday doesn’t increase the burden of government spending. The bad news is that temporary tax rate reductions probably have very little positive effect on economic output.
Lower tax rates are the right approach, to be sure (particularly compared to useless rebates, such as those pushed by the Bush White House in 2001 and 2008), but workers, investors, and entrepreneurs are unlikely to be strongly incentivized by something that might be seen as a one-year gimmick. Though I suppose if the holiday keeps getting extended, people may begin to think it is a semi-durable feature of the tax code, so maybe there will be some pro-growth impact.
In any event, we will see what the President unveils next month. I’ll be particularly interested in how his supposed short-run jobs proposal fits in with his long-run plan for dealing with red ink. He has been advocating for a “balanced approach” and “shared sacrifice” – but that’s Obama-speak for higher taxes, and we know that’s a damper on job creation and new investment.
As you can tell, I’m not optimistic. The best thing for growth would be to get the government out of the way. The Obama White House, though, thinks bigger government is good for the economy.
This stimulus video was produced last year and was designed for another jobs plan concocted by the Administration, but the message is still very appropriate.
A Congressional Tutorial on the Benefits of Free Trade
A survey released this week found that almost 80 percent of members of Congress have no academic training in business or economics. Yet they debate and pass all kinds of legislation seeking to steer the economy, business and trade in one direction or another.
For those four out of five members, my column in the Washington Times this morning, “Free Trade 101 for members of Congress,” offers a crash course in the benefits of free trade and globalization for Americans. Here’s an excerpt from the lecture, er, column:
Protectionism is really a tax on the poor. Our highest remaining trade barriers unfairly tax products made and grown by poor people abroad and consumed disproportionately by poor families at home. We still impose unconscionably high tariffs on imported food, clothing, and shoes — the basics of a poor family’s budget. The $26 billion we collect each year from duties on imports represent the federal government’s most regressive tax. Free trade is a tax cut for the poor.
Trade is not about more jobs or fewer jobs; it’s about better jobs. Trade only accounts for 3 percent of job displacement. Technology and internal competition displace far more workers. Just ask folks laid off from Borders, Blockbuster or Kodak. (Bought any film lately?) Our high unemployment today has nothing to do with trade but with our “Made in the USA” housing bubble and failed stimulus.
Members of Congress who have any questions are welcome to visit with me during my normal office hours.
Don’t Nationalize the Past
Recent decades have seen the rise of a new “antiquities law” in which museums and private collectors have come under legal pressures to hand over (“repatriate”) ancient artifacts and archaeological finds to governments, Indian tribes and other officially constituted bodies, even when those artifacts have been in legitimate collector hands for 100 or more years with no hint of force or fraud. Some advocates frankly advance the view that government should entirely ban the private ownership of antiquities or limit it to authorized nonprofit institutions. The latest victim of the trend are numismatists, as the 1983 Convention on Cultural Property Implementation Act authorizes the federal government to restrict importation of some ancient coins based on the expressed wishes of countries that participate in the convention. A federal judge has just rejected a challenge to the law, which — as I argue in a recent op-ed in the Examiner — should not put an end to the controversy.
Paternalism and Parks
Or, as Timothy Egan titles it at the New York Times: “Nature Without the Nanny State.” After reporting on a higher level of deaths this year at Yosemite, and an increased level of warnings and lawsuits, Egan notes:
My experience, purely anecdotal, is that the more rangers try to bring the nanny state to public lands, the more careless, and dependent, people become.
That point might have broader application than national parks.
Rick Perry’s Spending Record
In his run for the Republican nomination, Texas Governor Rick Perry is positioning himself as a staunch fiscal conservative. Does his spending record match his recent campaign language in favor of smaller government?
I awarded Mr. Perry grades of “B” in the last two Cato governor report cards. My analyses revealed a pretty good tax and spending record, but Perry certainly fell short of the reform-minded zeal shown by former “A” governor, Mark Sanford of South Carolina. Recent articles by Shikha Dalmia of Reason and Aman Batheja of the Fort Worth Star-Telegram suggest that Perry’s fiscal record is a mixed bag.
Let’s look at the numbers. Rick Perry came into office in December 2000, which was in the middle of Texas fiscal year 2001. Texas general fund spending has risen from $29 billion that first Perry year to $41 billion by fiscal 2011, which works out to an average annual increase of 3.5 percent. (Data from NASBO).
Dalmia and Batheja compare Perry’s spending increases to increases under prior governor George W. Bush. But a better comparison is Perry versus the average spending increases of governors in all the 50 states over the last decade.
Here is NASBO data showing increases in state general fund spending between fiscal 2001 and fiscal 2011:
- Texas, Perry: $29 billion to $41 billion, a 41 percent increase.
- Total of 50 states: $506 billion to $651 billion, a 29 percent increase.
However, the Texas population has grown faster than the U.S. population, so let’s put these figures on a per-capita basis.
- Texas, Perry: $1,360 per capita to $1,598 per capita, an 18 percent increase.
- Total of 50 states: $1,774 per capita to $2,091 per capita, an 18 percent increase.
Thus, Mr. Perry has been Mr. Average on state spending. Over the past decade, per capita state general fund spending rose the same amount in Texas as the nation as a whole.
Note that total Texas state spending has risen substantially faster than just the general fund part of the Texas budget over the last decade (see Figure 16 in here). However, governors have more control over the general fund part of their budgets, so that is probably the best measure of a governors’ spending performance. (Still, Mr. Perry might want to explain to primary voters why the overall Texas budget has grown so quickly).
In sum, Perry’s spending record appears rather centrist, but no one set of numbers can tell the whole fiscal story. Fiscal conservatives fear another big-spending Bush-style Republican winning the White House, so we should further probe the records of all the GOP hopefuls.
Fed Up with Phony Federalism
My Washington Examiner column this week is on Rick Perry’s 2010 book Fed Up! Stylistically, if Conscience of a Conservative is Merle Haggard, Perry’s manifesto is Lee Greenwood. Still, like Goldwater’s book, it contains some fairly radical ideas, coming from a top-tier candidate. As Ezra Klein puts it, the book’s big idea is that “most everything the federal government does is unconstitutional.”
And, indeed, most of what it does is unconstitutional — no surprise to those familiar with Cato’s constitutional work. Still, it’s surprising to hear a major national candidate indict the New Deal, call Social Security “a Ponzi scheme,” and identify — correctly, I think — the combination of the 16th and 17th amendments as a death blow to robust federalism.
Interestingly, Perry all but promises that as president, he wouldn’t prosecute medical marijuana violations in states where it’s been legalized (which would be an improvement on Obama’s record).
“If you don’t like medicinal marijuana and gay marriage, don’t move to California,” Perry writes. He complains that the Raich case made clear that “the federal government has the full prerogative to intervene in your private home if you are engaged in any activity that has some minimal relationship to the exchange of goods.” He calls the medical marijuana movement “a movement I disagree with, while appreciating the desire of Californians to decide for themselves.”
Would he stick to that? I’d bet not — it took him all of a couple of days to perform a Romney-style double-axel backflip on gay marriage. As I note in my column, his campaign is already backing off of what the Governor wrote about Social Security.
What Perry says about federalism and enumerated powers sounds sincere. Of course, Obama made all the right noises about civil liberties before he was elected. Is this sort of thing just cultural signaling to constituent groups?
In any event, it’d be a better world if promises of constitutional fidelity were taken even half as seriously by the candidates as are no-new-taxes pledges.
School Reform’s Shaky Foundations?
Philanthropy Daily has just published the most interesting review to date of my recent charter school philanthropy study (“The Other Lottery“). Scott Walter, an expert in charitable giving in the field of education, looks not only at the central finding (that there is no link between charter networks’ performance and the amount of grant funding they’ve received) but also extrapolates to what the findings imply about the nation’s top education foundations.
I’m curious to know if anyone else shares his interest in seeing the numbers crunched to allow education foundations to be ranked in terms of the performance of the charter school networks they have backed. Ping me on Facebook if you’d like to see that.
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