Archive for September, 2011
State Schools Kill Big East, Private Hoops in Critical Condition
A couple of years ago I predicted it (though I was hardly the only one): Darwinian conference predation, driven by football and the quest for television markets and money, would kill the Big East, and at least seriously hamstring the small, basketball-centric private colleges that made up so much of it. Huge, flagship public universities would consolidate power in service of football, I and others foresaw, and relatively small schools like Georgetown, Villanova, and St. John’s — which could never produce enough alums to regularly fill even close to 80,000-seat football stadiums — would be orphaned.
With the departure of the University of Pittsburgh and Syracuse to the Atlantic Coast Conference, that now seems almost unavoidable.
But this isn’t the fault of Pitt and Syracuse, or even the ACC (though perhaps the ACC deserves scorn for its 2003 raid of the Big East, and Pitt for its possible duplicity about its move). No, ultimately it’s the fault of a higher education system that gives flagship state schools massive size advantages over private institutions both physically and in terms of enrollment. (Though all of higher ed, of course, is awash in taxpayer dough.) This advantage is primarily thanks to taxpayer subsidies, which underwrite the schools’ gigantic enrollments and, too often, their athletics programs directly. So the ACC was largely reacting to moves by what’s now the PAC-12, the so-called Big 10 (which also has twelve members), and the impending destruction of the Big 12 thanks to the inability of two behemoths — the University of Texas and Texas A&M — to get along.
Indeed, in the grand scheme of big-time college sports, the ACC is the most friendly of the emerging ”superconferences” to private schools; with the addition of Syracuse it will have five of them, the others being Duke, Wake Forest, Boston College, and the University of Miami. But it will almost certainly be considered the weakest of the superconferences in football, and if you look at the latest Sagarin ratings of the ACC schools, note the cellar-dwellers: Wake, Duke and Boston College.
This is depressing if you enjoy high-level, private school hoops. Of course, a few football-free private schools do enjoy regular success — Xavier, Gonzaga, and most recently Butler — but their resources are significantly smaller than the members of the current Bowl Championship Series conference schools, with lucrative BCS television contracts tied, first and foremost, to football. So with the likely demise of the Big East, the going is likely about to get much tougher for the likes of Seton Hall, Providence, and other Big East, hoops-only schools, even if they are able to hang on to relevance.
Is federal anti-trust action needed to deal with this, as some have suggested? I’m no anti-trust expert, but I’d say absolutely not. For one thing, when this has been threatened before it has had little to do with fair competition, and much to do with federal legislators trying to get the flagships in their states in on the BCS. That will do private schools little good, and hardly seems motivated by a real desire for fair competition or justice. We should also hope that Congress will focus on other, more important things, like, say, getting Washington back to its proper constitutional size. And most important, attacking the BCS will do little to address the fundamental problem: As long as states furnish huge subsidies to public universities, those institutions will always have a massive size advantage is the world of college sports.
So good-bye, Big East. Government schools have killed you.
Europe’s Debt Problem in Microcosm
Rachel Donadio reports in the New York Times:
COMITINI, Italy — With only 960 residents and a handful of roads, this tiny hilltop village in the arid, sulfurous hills of southern Sicily does not appear to have major traffic problems. But that does not prevent it from having one full-time traffic officer — and eight auxiliaries.
The auxiliaries, who earn a respectable 800 euros a month, or $1,100, to work 20 hours a week, are among about 64 Comitini residents employed by the town, the product of an entrenched jobs-for-votes system pervasive in Italian politics at all levels.
She goes on to explain that much local spending comes from the national government, which is now in dire straits:
But what may be saving Comitini’s economy is precisely what is strangling Italy’s and other ailing economies throughout Europe. Public spending has driven up the public debt to 120 percent of gross domestic product, the highest percentage in the euro zone after Greece’s.
CPAs Celebrate as Obama Proposes to Create a Turbo-Charged Alternative Minimum Tax
Wow, this is remarkable. The alternative minimum tax (AMT) is one of the most-hated features of the tax code. It is such a nightmare of complexity that even Democrats routinely have supported “patches” and “band-aids” to protect millions of additional households from getting trapped in this surreal parallel tax universe – one that requires taxpayers to calculate their taxes two different ways, with the IRS getting the maximum amount of money from the two returns. (Hong Kong, by contrast, give taxpayers the option of calculating their taxes two different ways, but they’re allowed to pay the smaller of the two amounts.)
Notwithstanding the AMT’s status as arguably the worst feature of the internal revenue code, President Obama apparently wants to double down on this horrific policy by creating a new version of this nightmarish provision.
Here are some excerpts from the Wall Street Journal‘s coverage, including a key observation that Obama’s scheme is just another version of the AMT.
The administration’s principle resembles the Alternative Minimum Tax, which was first adopted in 1969 and was intended to hit the superwealthy. The AMT has been hitting an increasing number of the middle class because it wasn’t indexed for inflation, and Congress has continually wrestled with how to get rid of it.
The WSJ article also notes that a glaring inconsistency in the White House’s rhetoric. the plan is supposed to be a “very significant” tax hike, but doubling the tax burden on millionaires would only raise $19 billion per year. In other words, the Administration’s class-warfare rhetoric is probably just cover for a tax hike that actually will hit a lot of people with far more modest incomes.
The proposal also could apply to a broader selection of taxpayers—all households with incomes of more than $1 million. Those earners are expected to pay an average of $845,000 this year, according to the nonpartisan Tax Policy Center. Assuming the households in the group of 22,000 pay that amount, even doubling their tax burden would raise just $19 billion a year at a time when deficit reduction is being measured in trillions of dollars. That doesn’t take into effect any change in taxpayer behavior prompted by a new tax regime. A senior administration official said that depending on where the minimum rate is set, the plan could be a “very significant” revenue raiser. The official wouldn’t provide details. …Some conservative economists say such a proposal could put a drag on capital markets and ignores the fact that many companies have already paid tax on the income before it is distributed to owners as dividends or capital gains.
The New York Times, to its credit, provides a fair description of the issue (including a much-needed acknowledgement that Warren Buffett may not have been honest and/or accurate), and also suggests that Obama may be proposing to replace the existing AMT with this new version (though that presumably would negate its impact as a revenue-raiser).
Mr. Obama will not specify a rate or other details, and it is unclear how much revenue his plan would raise. But his idea of a millionaires’ minimum tax will be prominent in the broad plan for long-term deficit reduction that he will outline at the White House on Monday. Mr. Obama’s proposal is certain to draw opposition from Republicans, who have staunchly opposed raising taxes on the affluent because, they say, it would discourage investment. It could also invite scrutiny from some economists who have disputed Mr. Buffett’s assertion that the megarich pay a lower tax rate over all. Mr. Buffett’s critics say many of the rich actually make more from wages than from investments. …The administration wants such a tax to replace the alternative minimum tax, which was created decades ago to make sure the richest taxpayers with plentiful deductions and credits did not avoid income taxes, but which now hits millions of Americans who are considered upper middle class.
Actually, the AMT also hits lots of middle-class families since having kids is considered a “preference” for tax purposes.
But that’s just an insult layered on top of injury. What makes Obama’s new scheme so destructive is that it would (though the White House has not explained the details) somehow classify dividends and capital gains as “preference” items – even though everyone acknowledges that such income already is double taxed!
In other words, Obama claims to be concerned about jobs, but he is proposing a big tax hike on the saving and investment that is necessary to create jobs. Amazing.
Regular readers will recognize this video about Obama’s class-warfare tax policy. But if you haven’t seen it, five reasons are presented to explain why it will backfire.
But look at the bright side. At least accountants and tax lawyers (and don’t forget bankruptcy specialists) will get more business if Obama’s plan is implemented.
Let the Market Cut Medicare?
The center-right consensus is that in order to balance the budget and improve health care, Congress needs to overhaul Medicare using some form of voucher or premium support. Whereas the current program offers an essentially unlimited subsidy for medical care, under these options Congress would give each enrollee a fixed subsidy with which they could purchase private health insurance. But how should Congress determine the size of these fixed subsidies?
The House GOP approved a budget under which Congress would pick the amount. Beginning in 2022, all new enrollees would receive a voucher. The average voucher amount would be equal to the average amount Medicare currently spends per enrollee in 2011, adjusted for overall inflation. Congress would adjust the actual voucher amount for each enrollee based on health status and income, so some enrollees would receive larger and some would receive smaller vouchers. But since the average voucher would grow at the rate of inflation (i.e., about 2.5 percentage points slower than per-enrollee Medicare spending currently grows), this approach would reduce Medicare spending over time.
A drawback of this approach is that opponents can (and do) demagogue it, claiming that the vouchers would be insufficient and seniors would die for lack of medical care. This demagoguery ignores two important factors.
First, as Peter Orszag and President Obama themselves loved reminding us during the ObamaCare debate, there is lots of wasteful spending in the Medicare program. Orszag frequently cites the Dartmouth Atlas, which estimates that one third of Medicare spending is pure waste. Since the amount of the House GOP’s vouchers would be based on per-enrollee Medicare spending, they would essentially give Medicare enrollees 50 percent more money than they would need to purchase all the beneficial medical care that Medicare currently provides. The vast amount of wasteful Medicare spending is a disgrace. But when converting to a voucher system it’s an absolute boon, because it provides a huge margin of safety. It means that enrollees could reduce their medical consumption by one third without harming their health.
Second, the anti-reform demagogues presume that vouchers would do absolutely nothing to make health care more efficient. Vouchers would make the nation’s 50 million heaviest consumers of medical care cost-conscious in a way they have never been before. Like an old man trying to send back soup at a deli, they will force providers to cut costs and thereby make their vouchers go farther.
It is because of this second factor that Yuval Levin proposes a different way of setting the voucher amount(s). Levin proposes to use a competitive-bidding process. Under this approach, everyone in Medicare would receive a voucher equal to the second-lowest bid that health plans submit to provide a standard package of benefits. Enrollees could then apply their voucher to any private plan or even a government-run plan. Under this approach, enrollees would still be cost-conscious: if the health insurance policies they choose cost more than the voucher amount, they would have to make up the difference; if the policies cost less, they would keep the savings. Levin argues that this cost-consciousness would also lead enrollees to put pressure on providers to cut costs, and therefore the amount of the second-lowest bid would automatically grow at a slower rate than per-enrollee spending under the current Medicare program. ”In such a system,” Levin writes, “the premium-support benefit would grow exactly as quickly as required to provide a comprehensive insurance benefit, since the growth rate would be determined by a market process rather than a preset formula. ” Voila! The competitive forces of the market would cut Medicare spending.
The best evidence that competitive bidding will reduce Medicare spending is that the durable medical equipment manufacturers have fought efforts to impose it on them. So while I’m not hostile to the idea, I don’t think it’s an improvement over the House GOP plan.
First, Levin calls competitive-bidding “the Confident Market Solution” because he is confident that markets will reduce the cost of health care. I’m confident of that too. But I’m also confident that rent-seeking will be present in Medicare, no matter what reforms Congress enacts. I am far less confident that markets will reduce costs faster than rent-seeking will increase them. My sense is that politicians will be much more likely to hold the line on rent-seeking if they actually draw one.
Second, House Budget Committee chairman Paul Ryan (R-WI) crafted a House budget that proposed to reduce the growth of Medicare spending using hard, score-able numbers. Hundreds of House members likewise stuck their necks out by voting for it. The Confident Market Solution essentially undercuts those folks by telling them they should not have done something so bold and courageous. Levin is no doubt correct that a competitive-bidding process that doesn’t specifically commit Congress to reducing Medicare spending growth is more politically feasible than a voucher plan that does. When politicians choose the more politically perilous option, however, reformers should tell the world why that was the right thing to do.
Third, Levin would include a public option in the competitive-bidding system. I am also confident that the government would heavily subsidize that health plan until it drove private insurers (and any hope of cost-cutting innovations) out of the market.
I’ve discussed what I think is a better approach to Medicare reform here and here.
America Debates the Constitution
Today is Constitution Day, marking the day in 1787 when the Framers signed the document they’d spent that long hot summer drafting and sent it out to the states for ratification. In a striking change from not that many years ago, this morning’s papers bring us two significant articles about the current debate over the document.
In The New York Times, Kate Zernike’s “On Day Devoted to Constitution, a Fight Over It” notes how the Tea Party has made the Constitution sexy again, but how doing so has become occasion for battle. Progressive groups, she writes, “accusing the Tea Party of selectively reading the founding document, have responded with a campaign to ‘take back the Constitution’”—the very cry we’ve heard from the Tea Party since its inception three years ago.
Meanwhile, in this morning’s Washington Post, David A. Fahrenthold’s “Congress finds, and lists, meaning in Constitution” focuses on the pledge House Republicans took last January to cite the constitutional authority for any measure they introduced and on how that pledge has played out since then. Not surprisingly, it’s a mixed record, as he details.
But the larger lesson to be drawn from both articles should not be missed. We are again talking about the Constitution. And as Zernike writes, “In one respect, the Tea Party has already won. When groups on the left talk about the Constitution, they are increasingly emphasizing the original text — as the originalists do — rather than the Supreme Court decisions that have upheld programs like Social Security.” That is a distinction we at Cato’s Center for Constitutional Studies have long drawn, namely, that there’s all the difference in the world between modern “constitutional law”—the post-New Deal Supreme Court decisions we live under today—and the Constitution itself.
And we’ll take credit too for helping to bring this debate back to life, because when the Center was created 22 years ago, we took it as central to our mission to revive that debate—in particular, to help change the climate of ideas to one more conducive to reviving the Framers’ Constitution of liberty through limited government. Toward that end, two days ago we held our tenth annual Constitution Day conference, releasing there our tenth annual Cato Supreme Court Review.
Read this morning’s articles. Then go here for answers to many of the questions they raise.
One Reason Obama Wants Another State Bailout
I recently discussed why the additional federal subsidies for state and local government that President Obama is proposing as part of his “job plan” are a bad idea. A new study from two Harvard economists suggests that the president’s affinity for these subsidies might have something to do with the fact that the aid would be particularly helpful to states with more left-leaning legislators and strong public sector unions.
The study from Daniel J. Nadler and Sounman Hong (see here) found that states with stronger public sector unions and a higher proportion of left-leaning state legislators face higher borrowing costs:
We find that, all things being equal, states with weaker unions, weaker collective bargaining rights, and fewer left-leaning state legislators pay less in borrowing costs at similar levels of debt and similar levels of unexpected budget deficits than do states with stronger unions and more left-leaning legislators. More practically, these findings suggest that the strength of public sector unions has become among the most important factors in bond market perceptions of a state’s risk of financial collapse.
Why do these states face higher borrowing costs? Nadler and Hong explain:
These “political” factors might signify to the bond market whether a state government has the willingness and capacity to initiate needed fiscal adjustments and austerity measures during the state fiscal crises that followed the financial crisis, and thus might provide some information to market participants about the likeliness that a given state government will choose to default on its debt instead of making politically difficult or undesirable budget cuts. Similarly, public sector labor environment variables, such as union strength, might signify to market participants the degree of organized political opposition state lawmakers would have to overcome to implement such austerity measures.
Somebody Deserves a Raise at the Ford Motor Company
From Fall 2008 through Summer 2009—the most intense months of the “Bailruptcy Era”—I ventured on occasion to question Ford’s near total silence in the face of an unprecedented intervention to rescue its chief rivals from a hard-earned fate. In pondering whether Ford would defend its interests, I wrote:
There is probably no company in America that stands to lose more from taxpayer subsidization of GM and Chrysler…
If GM and Chrysler were no longer producing, Ford would be able to pick up market share and productive assets from the others, and ultimately improve its own long term prospects. By keeping GM and Chrysler afloat with subsidies, the government is implicitly taxing Ford. Ford is facing unfair, government-subsidized competition, of the sort alleged against foreign producers all the time. But in this case, the subsidies are real, direct, quantifiable, and large.
Well, Ford did remain silent about the rescue operation (for reasons I never found particularly compelling).
Fast forward to Ford’s Summer 2011 television advertising campaign, which includes commercials featuring Ford customers giving press conferences to answer questions about why they chose Ford. One of those commercials (this one, HT Gene Healy) has the customer explaining that he’d never buy a car from a company that was bailed out by our goverment, which, as it turns out, is a compelling determinant of demand these days.
In branding itself as the unbailed-out Detroit producer, Ford has politely ended its silence on the matter of the GM and Chrysler bail-ruptcies, in a very smart, respectable manner. And by using actors instead of executives to speak ill of the auto intervention, Ford keeps its own bailout raincheck in a safe place, should the inclination to redeem it ever become irresistable.
Somebody at Ford deserves a raise.
This Week in Government Failure
Over at Downsizing the Federal Government, we focused on the following issues this past week:
- Federal Davis-Bacon rules could increase the price tag for Washington D.C.’s CityCenter development by $20 million.
- The U.S. Postal Service is running on fumes. What will Congress do?
- The President’s jobs bill would do nothing for education and would hurt the economy.
- The Budget Control Act will likely produce either a minuscule defense cut in the near term or no cuts at all.
- As the political circus over the Solyndra loan unfolds, let’s not lose sight of the fact that the more important question is whether taxpayers should be forced to subsidize energy companies to begin with. They shouldn’t.
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Interesting Thoughts on Postal Reform
Postal expert Alan Robinson’s Courier, Express, and Postal Observer blog is always an interesting read, but his latest two posts are particularly worthwhile.
The U.S. Postal Service’s financial woes are starting to attract commentary from prominent thinkers. In the first post, Robinson looks at recent articles from Felix Salmon, Gary Becker, and Richard Posner and concludes that while their analyses are incomplete, their observations deserve further consideration. The three pieces share a common theme: a government postal service micromanaged by Congress and regulators is no longer workable. Thus, it is time to consider reforms such as deregulation and privatization.
As Robinson notes at the outset, “any postal reform measure has to go beyond fixing retiree obligations or restructuring operations to reduce costs.” Robinson believes that a failure by policymakers to address three issues in particular will probably force Congress to re-examine the USPS’s business model again in a few years (I know, Congress kicking the can down the road? Shocking.):
1. Profit must be an explicit goal for the organization and profit must reflect a sufficient operating margin to ensure cash is generated to make capital investments needed to improve service once the current financial difficulties pass. There is no excuse for the Postal Service to be the only large national post suffering major losses in the Euro Zone, North America, and Oceana and Australia.
2. The Postal Service has to be granted significant relief from both congressional and Postal Regulatory Commission oversight. To the extent that either law or regulatory precedent freezes the status quo and prevents market-based pricing and market-based service quality, that law and those regulations must be removed. In particular both restrictions on distance-based and regional pricing for commercial mailers need to be lifted in order to develop market-based and not cost-based prices.
3. Transition of the Postal Service to an entity that operates under standard corporate business, employment, and contract law must occur within a reasonable period. During this period, the privatization of the Postal Service as a public utility providing delivery services must be seriously examined.
Malcolm Wallop, RIP
Former U.S. senator Malcolm Wallop (R-Wyoming) passed away on Wednesday at age 78. The Washington Post obit for him has a quote from one of his Cato appearances:
Sen. Wallop was unapologetically conservative as a Republican, a position that sometimes drew ire from members of his own party.
“Too many Republicans prefer to be a Democrat Lite,” he said in a speech at the Cato Institute in 1994. “As any beer connoisseur can tell you, Lite is a tasteless, repugnant concoction.”
Way before the Tea Party came along, he penned a scathing and wide-ranging critique of the expansive growth of the federal government in the February 1994 issue of National Review, “Can Conservatives Take America Back?” That article is well worth rereading. Unfortunately, no on-line link seems to be available, but perhaps that will change soon.
Wallop also spoke out against federal power-grabs that came in antiterrorism packaging.
The Perks of Local Government
The Washington Examiner reports:
Six of [the Washington-area mass transit system] Metro’s top executives are assigned agency-owned vehicles that they can drive home, the transit system acknowledged Tuesday, one day after saying none of them had take-home vehicles.
That is in addition to the 116 Metro employees who receive take-home vehicles, including 88 managers and superintendents, first reported by The Washington Examiner.
I wonder if executives and managers at automobile companies get free subway passes?
Does PPACA’s Mandate ‘Carry into Execution’ the Commerce Power?
The Obama administration contends that its mandate to purchase health insurance is “necessary and proper” to effect PPACA’s comprehensive scheme of interstate health care regulation. The constitutional argument is two-part: First, the Commerce Clause empowers Congress to regulate interstate health care. Second, the Necessary & Proper Clause empowers Congress to implement health care regulation by directing individuals to acquire medical insurance or pay a penalty. The administration concedes that the underlying purpose of the mandate is to subsidize insurance companies so they can afford to cover pre-existing conditions, which PPACA commands.
Consider the text of the Necessary & Proper Clause. It authorizes Congress “To make all Laws which shall be necessary and proper for carrying into Execution … all other Powers vested by this Constitution in the Government of the United States.” For example, Congress’s power to spend—which is not expressly mentioned in the Constitution—is necessary for carrying into execution numerous other powers that entail the expenditure of money. Also, the Supreme Court has determined that Congress’s power to regulate intrastate commerce may occasionally be necessary for carrying into execution Congress’s enumerated power “To regulate Commerce among the several States.” Similarly, Congress’s power to establish a federal penal system may be necessary for carrying into execution Congress’s enumerated power “To provide for the Punishment of counterfeiting” and certain other crimes.
All those implied powers are instrumental. They afford a means by which other express powers can be carried into execution. By contrast, PPACA’s health insurance mandate does not carry into execution any express power, including the Commerce Power to regulate interstate health care. Indeed, health care regulation—even with its requirement that insurers cover pre-existing conditions—could have been implemented without the mandate, in which case insurance companies would have been compelled to raise premiums, cut other costs, or accept lower profits.
Instead of carrying health care regulation into execution, the mandate is designed solely to produce a specified outcome for the benefit of private insurers—i.e., to subsidize insurers so they don’t have to raise premiums, cut other costs, or accept lower profits. In other words, the mandate is simply a cost distribution scheme: a policy judgment having nothing to do with facilitating execution and everything to do with who pays the bill. Because the mandate relates to outcome and not process, it cannot be prerequisite for carrying into execution the Commerce Power. Accordingly, it cannot be authorized under the Necessary & Proper Clause, the sole purpose of which is to carry other powers into execution.
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