Archive for October, 2011
A Troubling Sign that Economic ‘Reform’ in Cuba Isn’t Working
The number of Cubans intercepted at sea trying to reach the coast of Florida more than doubled in the last fiscal year according to figures released by the Department of Homeland Security. In the previous fiscal year, 422 Cubans were intercepted at sea by the Coast Guard, while in the fiscal year 2011 (which just ended on September 30th), 1,000 Cubans were caught. Moreover, the number of Cubans who actually reached the U.S. shore increased by 70%, from 409 in fiscal year 2010 to 696 in fiscal year 2011. This is the first rise in illegal Cuban immigration by sea in 3 years according to authorities.
This is yet another sign that the much heralded economic “reforms” announced by Havana aren’t working. The massive layoffs of hundreds of thousands of public employees undertaken by the government of Raúl Castro were meant to be absorbed by Cuba’s almost non-existent private sector. The Communist regime tried to ease the pressure by allowing private employment in 178 economic activities, such as masseurs, clowns, shoemakers, locksmiths, and gardeners. However, as I warned over a year ago, it capped the number of permits for these private activities at 250,000 while also penalizing the new entrepreneurs with stiff tax rates. It doesn’t take a Nobel Prize winner in economics to realize that Cuba’s nascent private sector wouldn’t be able to make room for all of the newly unemployed. What then for these people?
Earlier this year I talked to an official from the U.S. Interest Section in Havana who told me that we shouldn’t be surprised if we see a steady increase of Cubans trying to escape the island towards the United States. Faced with a dilapidated economy, hundreds of thousands of unemployed, and growing social unrest, the Castro regime wouldn’t hesitate in letting more Cubans use the “escape valve” of emigration. We might be seeing the first signs of this.
Will Republicans Choose Sequester Savings or a Supercommittee Surrender?
The budget fights this year began with the “shutdown” battle, followed by the Ryan budget and then the debt limit. These fights have mostly led to uninspiring kiss-your-sister outcomes, which is hardly surprising given divided government.
Now the crowd in DC is squabbling over Obama’s latest stimulus/tax-the-rich scheme, though that’s really more of a test run by the White House to determine whether class warfare will be an effective theme for the 2012 campaign.
The real budget fight, the one we should be closely monitoring, is what will happen with the so-called Supercommittee.
To refresh your memory, this is the 12-member entity created as part of the debt limit legislation. Split evenly between Democrats and Republicans, the Supercommittee is supposed to recommend $1.2 trillion-$1.5 trillion of deficit reduction over the next 10 years. Assuming, of course, that 7 out of the 12 members can agree on anything.
There are two critical things to understand about the Supercommittee.
- The Democrats have openly stated that their top political goal is to seduce Republicans into capitulating to a tax hike.
- Harry Reid and Nancy Pelosi appointed hard-core leftists to the Supercommittee.
With these points in mind, it doesn’t take a genius to realize that the Supercommittee is designed — at least from the perspective of the left — to seduce gullible Republicans into going along with a tax hike.
Slovakian Libertarian Last Opponent of Bank Bailout?
Richard Sulik, the father of Slovakia’s flat tax reform, gets his copy of Losing Ground autographed by Charles Murray at Cato's May 2010 conference in Bratislava.
European leaders, for instance, did not count on one Richard Sulik, a dapper 43-year-old who is the speaker of parliament in this quaint capital nestled in the foothills of the Carpathian Mountains. Sulik’s Freedom and Solidarity Party calls the plan an unfair bailout of profligate Greeks and fat-cat German and French bankers that poor Slovaks can’t afford.
The Financial Times calls Sulik “one of the last of central Europe’s true believers in economic liberalism.” The Wall Street Journal describes him as the father of Slovakia’s flat-rate tax and a “free-market libertarian” and says that his party
won 22 seats in the Slovak 150-member parliament, making it the legislature’s third-largest party. It got there after campaigning for low taxes, a lean government, legalization of soft drugs, marihuana in particular, allowing same-sex civil unions and abolishing fees levied on all owners of television sets to finance the public broadcaster STV.
‘Health-Care Executive’s Medicare Fraud Scheme Included Lobbying Washington’
In a recent article, I explained:
Politicians routinely subvert anti-fraud measures to protect their constituents. When the federal government began poking around a Buffalo school district that billed Medicaid for speech therapy for 4,434 kids, the New York Times reported, “the Justice Department suspended its civil inquiry after complaints from Senator Charles E. Schumer, Democrat of New York, and other politicians”…
It’s not just the politicians. The Legal Aid Society is pushing back against a federal lawsuit charging that New York City overbilled Medicaid. Even conservatives fight anti-fraud measures, albeit in the name of preventing frivolous litigation, when they oppose expanding whistle-blower lawsuits, where private citizens who help the government win a case get to keep some of the penalty.
An indispensable part of this fraud-protection scam are the lobbyists who work to enable fraud or block credible anti-fraud efforts. The Washington Post reports:
Miami health-care executive Larry Duran orchestrated one of the largest Medicare frauds in U.S. history, submitting more than $205 million in phony claims and landing a record-breaking 50-year prison sentence for his crimes.
But another piece of Duran’s scheme also caught the eye of prosecutors. They say he extended his fraud through his lobbying efforts, all aimed at getting official Washington to make it easier for mental health centers such as his to make money.
An advocacy group he helped set up, the National Association for Behavioral Health (NABH), has spent more than $750,000 on lobbying efforts over the past five years, including staging “fly-ins” on Capitol Hill and providing advice to group members on how to get around Medicare denials, according to the Justice Department. The group also held fundraisers for lawmakers…
“Duran did not stop with just committing a massive fraud on the Medicare program through his own companies. Duran franchised his fraud to others,” trial lawyer Jennifer Saulino wrote in a sentencing memo. The advocacy group he helped found, she said, “provided Duran a legitimate-looking vehicle to lobby Congress to allocate more money, through Medicare, to Duran and his co-conspirators for their fraudulent schemes”…
Duran said he pleaded guilty in the case to atone for his actions…
The basic scheme, records show, worked like this: Duran and Valera paid up to $400,000 a month in kickbacks to assisted living centers, halfway homes and others to procure a steady stream of patients for their clinics, which claimed to be providing group mental health treatment. Doctors frequently faked records or signed off on charts without seeing any patients.
Patients often suffered from Alzheimer’s disease, dementia or other conditions unsuited for therapy and were frequently left to urinate or defecate on themselves as they waited for treatment that never came, testimony showed…
Part of Duran’s strategy, prosecutors alleged, was to use his connections to push for policy changes to benefit his fraudulent business. Justice Department officials said in court testimony that Duran was an NABH founder, a board member and a leading financial contributor…“He had a very integral part of the lobbying role,” FBI agent Patrick Koeth testified during sentencing. “Basically, his involvement was to keep pushing for those lobbying efforts”…
The group boasts of its success in fighting for higher Medicare rates for partial hospitalization programs — the type of service Duran offered — and solicited money for a “policy defense fund” to fight proposed cuts.
Here’s the sound-and-pictures version of my article:
The basic theorem is this: market actors have greater incentives to prevent fraud, because it’s their own money on the line. Politicians are spending other people’s money, so their incentive to prevent fraud is far less. Therefore, fraud will always be higher in government programs than in similar market endeavors.
Surprise! Arts Center Predictions Flawed
The Washington Post reports that the financial projections for a government-funded arts center, Artisphere, in Arlington, Virginia, don’t seem to have panned out. Do they ever? The Post story sounds like all the previous stories about what happened after influential interest groups persuaded the taxpayers’ representatives to give them money on the basis of reams of economic projections:
The Arlington County-funded arts center, which opened Oct. 10 last year in the Newseum’s former space, projected it would have 300,000 visitors in its first year. As of the end of last month, it had hosted about 90,000. And the venue for art, theater, film, music and more, whose build-out cost $6.7 million, had to request an additional $800,000 to supplement the $3 million appropriated for its first annual operating budget.
“Our original business plan had very aggressive projections,” says Executive Director Jose Ortiz….“In terms of those expectations, no, we didn’t make those.”
“One of the projections was that every performance was going to be at capacity,” he says. “For a brand-new facility, that’s impossible.”
Deja vu for sure. These economic projections for subsidized stadiums are always vastly overstated. And the Cato Institute has published a number of studies over the years looking at the issue, mostly with respect to athletic stadiums. Dennis Coates and Brad Humphreys wrote in a 2004 Cato study criticizing the proposed subsidy for Nationals Park in the District of Columbia, “The wonder is that anyone finds such figures credible.”
In “Sports Pork: The Costly Relationship between Major League Sports and Government,” Raymond Keating finds:
The lone beneficiaries of sports subsidies are team owners and players. The existence of what economists call the “substitution effect” (in terms of the stadium game, leisure dollars will be spent one way or another whether a stadium exists or not), the dubiousness of the Keynesian multiplier, the offsetting impact of a negative multiplier, the inefficiency of government, and the negatives of higher taxes all argue against government sports subsidies. Indeed, the results of studies on changes in the economy resulting from the presence of stadiums, arenas, and sports teams show no positive economic impact from professional sports — or a possible negative effect.
In Regulation magazine, (.pdf) Dennis Coates and Brad Humphreys found that the economic literature on stadium subsidies comes to consistent conclusions:
The evidence suggests that attracting a professional sports franchise to a city and building that franchise a new stadium or arena will have no effect on the growth rate of real per capita income and may reduce the level of real per capita income in that city.
And in that 2004 study, “Caught Stealing: Debunking the Economic Case for D.C. Baseball,” Coates and Humphreys looked specifically at the economics of the new baseball stadium in Washington, D.C., and found similar results:
Our conclusion, and that of nearly all academic economists studying this issue, is that professional sports generally have little, if any, positive effect on a city’s economy. The net economic impact of professional sports in Washington, D.C., and the 36 other cities that hosted professional sports teams over nearly 30 years, was a reduction in real per capita income over the entire metropolitan area.
And yet millionaire owners and mayors with Edifice Complexes keep commissioning these studies, and council members and editorial boards keep falling for them. The Artisphere project was approved by the Arlington County Board in July of 2009. Was the county flush with money at the time? Well, not surprisingly, county officials were wringing their hands about the need to make cuts in late 2008, including “A detailed review of every service to determine what is mandated, what is essential to the community and what is discretionary.” In February 2009 the Post reported budget cuts, including police positions. Maybe the next time Arlington County — or any other state or municipality — needs to cut its budget, it might think about cutting subsidies for money-losing venues before going after police officers, firefighters, and math teachers.
This Week in Government Failure
Over at Downsizing the Federal Government, we focused on the following issues this past week:
- When it comes to such things as infrastructure, education, and investing in “industries of the future,” the government should get out of the way and let entrepreneurs and markets drive America’s prosperity in the global economy.
- Entitlements versus Liberty.
- It seems that the more the government intervenes in society, the more it will work against both the people and itself.
- It’s Congress that needs to be doing the “page by page, line by line” review of the federal budget.
- We can spur growth by encouraging a culture of entrepreneurship, repealing barriers to entry, reducing taxes on risky investments, and simply getting out of the way of the next generation of Steve Jobses.
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Louisiana Man Wins $1.7 Million From EPA For Malicious Prosecution
The legal might of the U.S. government is usually enough to roll right over someone like Opelousas, La. plant manager Hubert Vidrine Jr. But last week the underdog had his day: a federal court awarded Vidrine $1.7 million for having been maliciously prosecuted by the federal Environmental Protection Agency. Our friends at the Washington Legal Foundation, who helped represent Vidrine, give details:
The just-resolved case started in 1996 when the Environmental Protection Agency (EPA) ordered its SWAT-like special operations team (equipped with M-16 rifles and police dogs) to raid the Canal Refinery, Mr. Vidrine’s workplace. The raid led to a criminal investigation against Mr. Vidrine for allegedly unlawful storage and disposal of hazardous wastes under the Resource Conservation and Recovery Act (RCRA).
When it discovered that evidence of the alleged offense was lacking, the feds refused to back off and in fact redoubled their zeal. In a scathing 142-page ruling, Judge Rebecca Doherty wrote that federal prosecutor Keith Phillips “set out with intent and reckless and callous disregard for anyone’s rights other than his own, and reckless disregard for the processes and power which had been bestowed on him, to effectively destroy another man’s life.”
A Greenwire dispatch published in the New York Times is at pains to present the Vidrine case (quoting a former enforcement official) an “isolated situation” arising from the actions of a “rogue” agent. As a local paper reported, “Phillips was accused of targeting Vidrine because of his outspokenness and choosing an investigation in Louisiana to be close to a woman with whom he was having a sexual affair.” The second of these motives, at least, presumably doesn’t figure very often in decisions to pursue federal criminal charges.
Cato readers have reason to be less than surprised when federal enforcers abuse their powers, especially at an agency as convinced of its own righteousness as the EPA. Nine years ago, Cato published James V. DeLong’s “Out of Bounds, Out of Control: Regulatory Enforcement at the EPA.” In 2009 congressional testimony, Cato’s Tim Lynch discussed troubling cases like that of Alaska railroad employee Edward Hanousek (“prosecuted under the Clean Water Act even though he was off duty and at home when the accident occurred”).
Yesterday, incidentally, brought another setback in court for the EPA: a federal judge slapped it down for flagrantly overstepping its legal charter by usurping the Army Corps of Engineers’s statutory role as part of its efforts to restrict coal mining in Appalachia. How many times do the agency and its enforcers have to overstep their authority before those incidents cease to be just ”isolated situation[s]“?
Who Should Bear the Burden of America’s Debts?
Over at PolicyMic Cato senior fellow and Harvard economist Jeffrey Miron discusses how America should tackle its massive debt. Miron argues the Obama-Buffett solution of taxing the rich is little more than political posturing, failing to achieve any real impact on curbing out-of-control spending and massive long-term entitlement liabilities.
President Obama’s solution to America’s deficit woes is to make the rich pay higher taxes. Using Warren Buffet as his prop, the President has repeatedly asserted that we must not balance the budget on the backs of the neediest, but instead make the rich pay their “fair” share. The President’s perspective is misguided at every level…. In contrast to Buffet’s view that the rich pay less in federal taxes than the middle class, the facts show otherwise. According to the Tax Policy Center, the top 1% of the income distribution pays 30.4% of its income in federal taxes while the middle fifth pays 14.1%. That may be less redistribution than Obama and Buffet would like, but it is hardly the perverse pattern that Buffet asserts.
Leave a comment on his post at PolicyMic in the next 2 days, and Professor Miron will reply personally to the most up-voted and thoughtful responses. Click here to go there.
Now Why’d You Have to Go and Say That?
House Minority Leader Nancy Pelosi (D-CA) says of the 2009 stimulus bill et alia:
Without the Recovery Act and accompanying federal interventions, whether from the Fed, or Cash for Clunkers, or other initiatives, the unemployment rate last year at the time of the election would have been fourteen and a half percent, not nine and a half percent.
The Obama administration predicted that if Congress didn’t enact the 2009 stimulus bill, then unemployment would hit 8.8 percent. They enacted it, and unemployment is now stuck at 9.1 percent.
So if history is any guide, Pelosi’s prediction means that the unemployment rate will soon exceed 14.5 percent. Thanks.
Steve Jobs and Charity
Morally, it’s rather despicable for some news outlets to be essentially questioning the value of Steve Job’s life based on how much he did or didn’t give to charities, as the Washington Post does today.
Economically, it doesn’t make any sense either. My piece in the Daily Caller yesterday described the many ways that entrepreneurs like Jobs help society attain higher levels of income. But it really comes down to one thing: Jobs helped generate large profits for a major corporation in a competitive industry. Profits are net returns on investment. They are a beacon to producers and innovators that their hard work is paying off. As profits steer money and efforts toward their best uses, standards of living rise as the production of goods and services becomes ever more efficient.
Indeed, the benefits to society of Steve Jobs is far more than the cumulative sum of profits he was left with, apparently about $8 billion. Because Jobs was a high-tech entrepreneur, we’ve all probably enjoyed huge positive externalities from his innovations. Jobs and Apple shareholders probably only captured a tiny fraction of the broad social benefits generated by the firm’s investments.
The economic problem with charitable investments is that there is no solid way to know whether they pay off. If a wealthy person gives $1 million to a charitable group, presumably it will create some positive benefits. But how much is hard to measure. If the benefits are low, society is worse off because the investment could have produced a higher return elsewhere. But we don’t have the transparency or discipline in charitable markets that profits create in business markets, so it’s likely that a fair bit of charitable investment is wasted.
On #OccupyWallStreet
Here’s some superlative, independent reporting and thinking about the “Occupy Wall Street” movement.
GSE Loan Limits Decline: Taxpayer 1, Special Interests 0
On October 1st, the maximum mortgage size that can be purchased by those two financial wonders, Fannie Mae and Freddie Mac, declined in higher-cost housing markets from $729,750 to $625,500. The surprise is that the scheduled decline occurred despite the fact that the entire real estate and mortgage industry were lobbying for an extension. Even the banks that might normally compete with Fannie and Freddie wanted an extension. No one, except of course the taxpayer, was going to benefit from letting this ceiling drop. Yet it happened anyway. Perhaps there is some hope for Washington.
For those who will whine that this spells the end of the mortgage market, the facts speak otherwise. As I have detailed elsewhere, there is plenty of capacity in the banking industry to absorb this small decline in the GSEs’ footprint. If anything, we should be lowering this limit even more. And if data and analysis aren’t enough for you, I personally was just approved for a mortgage in D.C. that is over the new $625,500 limit. (Yes, housing here in D.C. is quite expensive.) The difference in cost? A fourth of a percentage point. I, for one, am more than willing to pay an extra 25 basis points to get Fannie and Freddie out of the pocket of the taxpayer.
A common defense of the higher limit is that it isn’t fair to higher-cost areas like sunny California. Setting aside the fact that these areas are higher-cost due to their own regulations that restrict the supply of housing, anyone who can afford a mortgage above $625,500 can also afford to get that mortgage without having to be subsidized by the taxpayer. Of course, a simple solution—other than the obvious one of getting rid of Fannie and Freddie altogether—is to eliminate the loan limits altogether and tie eligibility to income. If this is about helping the “middle class,” then let’s limit the benefit to the middle class.
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