• Please join us on Thursday, April 7 at 2:00 p.m. ET for “The Economic Impact of Government Spending,” featuring Sen. Bob Corker (R-TN), Sen. Mike Lee (R-UT), Rep. Kevin Brady (R-TX), former Sen. Phil Gramm, former IMF director of fiscal affairs department Vito Tanzi, and Ohio University economist and AEI adjunct scholar Richard Vedder. We encourage you to attend in person, but if you cannot, you can tune in online at our new live events hub.
• The last time we saw a green energy economy was in the 13th century.
• This isn’t quite what we meant by “defense spending.” For a refresher, see this itemized list of proposed cuts that could save taxpayers $150 billion annually.
• “Prosperity reigns where taxes are low and right to work prevails.”
• In case you missed it last Friday, check out Cato director of financial regulation studies Mark A. Calabria discussing the Federal Reserve on FOX News’s Glenn Beck show:

Wednesday Links is a post from Cato @ Liberty - Cato Institute Blog

As part of his ill-considered credentialing-to-compete initiative, President Obama wants to greatly increase both the size and availablity of Pell Grants. Under his proposed FY 2011 budget, the total pot of Pell aid would rise from $28.2 billion in 2009 to $34.8 billion in 2011; the maximum award would go from $5,350 to $5,710; and the number of students served would rise by around 1 million.  

A critical question, of course, is whether increasing Pell will ultimately make college more affordable or self-defeatingly fuel further tuition inflation. The New York Times took that up in yesterday’s Room for Debate blog.

Economist Richard Vedder has long educated people about the inflationary effect of student aid, and does so again with great clarity. It’s higher-ed analyst Art Hauptman, however, whom I think best captures what likely occurs when Pell is combined with all the cheap loans and other aid furnished by Washington, states, and schools themselves:

The degree to which student aid affects what colleges and universities charge varies between the Pell Grant and student loans. The Pell Grant has not had much effect on tuition levels in part because the amount of the awards does not vary with where a student enrolls. Institutions cannot affect how much a student receives, and the institutions that charge the most enroll the fewest Pell Grant recipients.

By contrast…there are several good reasons to believe that student loans have been a factor in the rising cost of a college education. Tuition has increased by twice the inflation rate for the past three decades while annual loan volume has increased tenfold in constant dollars.

Unlike Pell Grants…colleges have some control over how much students borrow as loan amounts. Moreover, just as one couldn’t imagine house prices being as high as they now are if mortgage financing were not available, it is difficult to believe that colleges and universities could have increased their charges so rapidly over time without the ready availability of students’ ability to borrow.

[W]e should worry…that increases in Pell Grants may lead institutions to reduce the amount of discounts they would otherwise have provided to the recipients, who are from poor families, and move the aid these students would have received to others. This possibility…is supported by the data showing that public and private institutions are now more likely to provide more aid to more middle-income students than low-income students.

So what’s likely going on? Cheap federal loans – which are available to students of all income levels and vary according to a college’s price – are probably the main direct tuition inflator. More indirectly, Pell probably encourages schools to move other aid from poorer to wealthier students, enabling the latter to pay ever-higher “sticker” prices. In other words, student aid powers tuition inflation!

Which brings me to a quick comment about the submission from College Board economist Sandy Baum, who trots out the standard “declining state appropriations”  to explain our college-price pain.

How many more times do I need to disprove this? Apparently, at least once more:

(Source: State Higher Education Executive Officers)

Public funding is a roller coaster and tuition revenue an incline. Over the last quarter century, per-pupil state and local funding for public colleges and universities went up and down, but dropped overall by a mere $8 per year. In contrast, public colleges’ per-pupil revenue from tuition (net of state and local student aid) rose more or less unabated, growing by about $73 per year. 

This – as well as the fact that private colleges are also guilty of huge price inflation — clearly belies the notion that colleges raise prices because skinflinty governments make them. That might be part of the explanation, but an even bigger part is almost certainly that colleges raise prices because, thanks to ever-growing student aid, they can.

Obama Ringing the Pell is a post from Cato @ Liberty - Cato Institute Blog

I dread my morning commute, largely because of awful D.C. traffic, but also because I never know when I’m going to hear something on the radio that’s (1) going to anger me, and (2) force me to alter my day’s plans so I can lay the smack down on some education report that begs for clarification.

Today, (2) happened, with a reporter from the Washington Business Journal touting a new study on the University of Maryland, College Park — Maryland’s flagship public university — as cause for Marylanders to be ecstatic about the taxes they pay to support the school. According to the WBJ’s online article about the report, the Free State gets $8 back for every $1 taxpayers “invest” in UMCP — a clear winner!

Um, not so fast, WBJ! These kinds of too-good-to-be-true impact studies are usually just that — too good to be true. There are often many problems with them, but most important is that unless the analysts looked at opportunity costs — what would have been produced by the tax dollars had they been left with taxpayers — there is no way to say that Marylanders should be eternally grateful for having to fear the turtle. It is entirely possible, as economist Richard Vedder has demonstrated, that taxpayers would have gotten a better return had they kept their money rather than having to hand it over to  students and profs.

Of course, before I posted this objection, I had to check out the report to see if it is forthcoming about opportunity costs. Unfortunately, despite the university touting the findings yesterday and the WBJ reporting on them this morning, all I could find was the 2008 impact report, both looking on the site of the group that commissioned the study — the University of Maryland College Park Foundation — and the outfit that conducted the research. As a result, I can’t say with absolute certainty that the 2009 study doesn’t consider opportunity costs. If the 2009 report is like 2008′s, however, Marylanders have no cause for rejoicing. There’s zero reason to believe that they wouldn’t have been better off if they had just been able to keep their hard-earned ducats.

MD Taxpayers Should Still Fear the Turtle is a post from Cato @ Liberty - Cato Institute Blog

Steve Moore and Art Laffer have an excellent column in today’s Wall Street Journal. They explain that high-tax states drive repel entrepreneurs and investors, leading to a pronounced Laffer Curve effect. Productive people either leave the state or choose to earn and report less taxable income. And because growth is weaker than in low-tax states, there also is a negative impact on lower-income and middle-class people:

Here’s the problem for states that want to pry more money out of the wallets of rich people. It never works because people, investment capital and businesses are mobile: They can leave tax-unfriendly states and move to tax-friendly states. …Updating some research from Richard Vedder of Ohio University, we found that from 1998 to 2007, more than 1,100 people every day including Sundays and holidays moved from the nine highest income-tax states such as California, New Jersey, New York and Ohio and relocated mostly to the nine tax-haven states with no income tax, including Florida, Nevada, New Hampshire and Texas. We also found that over these same years the no-income tax states created 89% more jobs and had 32% faster personal income growth than their high-tax counterparts. …Dozens of academic studies — old and new — have found clear and irrefutable statistical evidence that high state and local taxes repel jobs and businesses. …Examining IRS tax return data by state, E.J. McMahon, a fiscal expert at the Manhattan Institute, measured the impact of large income-tax rate increases on the rich ($200,000 income or more) in Connecticut, which raised its tax rate in 2003 to 5% from 4.5%; in New Jersey, which raised its rate in 2004 to 8.97% from 6.35%; and in New York, which raised its tax rate in 2003 to 7.7% from 6.85%. Over the period 2002-2005, in each of these states the “soak the rich” tax hike was followed by a significant reduction in the number of rich people paying taxes in these states relative to the national average.

Interestingly, the Baltimore Sun last week published an article noting that the soak-the-rich tax imposed last year is backfiring. There are fewer rich people, less taxable income, and lower tax revenue. To be sure, some of this is the result of a nationwide downturn, but the research cited by Moore and Laffer certainly suggest that the state revenue shortfall will continue even after than national economy recovers:

A year ago, Maryland became one of the first states in the nation to create a higher tax bracket for millionaires as part of a broader package of maneuvers intended to help balance the state’s finances and make the tax code more progressive. But as the state comptroller’s office sifts through this year’s returns, it is finding that the number of Marylanders with more than $1 million in taxable income who filed by the end of April has fallen by one-third, to about 2,000. Taxes collected from those returns as of last month have declined by roughly $100 million. …Karen Syrylo, a tax expert with the Maryland Chamber of Commerce, which lobbied against the millionaire bracket, said she has heard from colleagues who are attorneys and accountants that their clients moved out of state to avoid the new tax rate. She said that some Maryland jurisdictions boast some of the highest combined state and local income tax burdens in the country. “Maryland is such a small state, and it is so easy to move a few miles south to Virginia or a few miles north to Pennsylvania,” Syrylo said. “So there are millionaires who are no longer going to be filing Maryland tax returns.”

With President Obama proposing higher tax rates for the entire nation, perhaps this is a good time to remind people about the three-part video series on the Laffer Curve that I narrated. If you have not yet had a chance to watch them, the videos are embedded here for your viewing pleasure:

Revenge of the Laffer Curve is a post from Cato @ Liberty - Cato Institute Blog