Monthly Archive for February, 2010

The Union Payoff

The Economist lists the Union payoff:

Mr Obama has revoked some Bush-era executive orders that unions hate and issued a few they adore. He has appointed union insiders to top jobs, allowed Congress to add “buy American” provisions to the stimulus bill, risked a trade war with China to please tyre-workers, let other trade deals wither and brazenly favoured unions when bailing out car firms. But his biggest favour has been green, foldable and borrowed. For example, he encourages the use of “Project Labour Agreements” on big federal construction projects, whereby contractors must recruit through a union hiring hall. Such agreements inflate costs by 12-18%, according to David Tuerck of Suffolk University, and were banned under Mr Bush. Even where PLAs are not in force, federal contractors are obliged to pay “prevailing” wages. That actually means something close to the union rates, which is nice for the workers in question but means that taxpayers get fewer roads and schools for their money.

More here.

Credit Card Economics

When Obama proposed his credit card regulations, economic theory predicted what would happen: harm those with less than perfect credit scores (primarily the poor). Bryan Caplan, professor of economics at George Mason University, explained it best when he wrote:

” When you make lending to high-risk people less attractive, the result is not worse terms for low-risk people who have been profitable all along. The result is that high-risk people get less credit. They used to be able to get credit despite their credit-unworthiness by paying extra; if the law forbids this, why lend to them?”

How did this prediction fare with reality? Very well, according to this Yahoo Finance article:

During the past nine months, credit card companies jacked up interest rates, created new fees and cut credit lines. They also closed down millions of accounts. So a law hailed as the most sweeping piece of consumer legislation in decades has helped make it more difficult for millions of Americans to get credit, and made that credit more expensive.

The only way this bill makes sense is in assuming that regulators, centered in Washington, know more about the cost/benefit analysis of the poor than the poor themselves do. An assumption that comes easy to politicians and technocrats in Washington.

Quote Of The Day

“Scientists now think that King Tut may have died of malaria….this is a good excuse to meditate on just how rich we are.  King Tut was probably the wealthiest man in the world during his time.  He died of something that wouldn’t kill the most abjectly immiserated welfare mother in the United States today, because of a combination of public health efforts, and cheap antimalarial drugs. You always need to factor in things like this when you talk about changes in living standards over time.  All the positive changes in society mean that the absolute difference between the income of Bill Gates and the man who valets his car is larger than it has ever been in history.  But the actual difference in comfort between the two of them is probably much smaller than the difference between JP Morgan and his stableboy.  And both Gates and the valet are almost immeasurably better off than their predecessors.” — Megan McArdle

Vouchers Make The World Safe For Charter Schools

I remember reading that Malcolm X, being the radical that he was, increased the support for Martin Luther King Jr.  In a world without a Malcolm X, MLK would have been the radical one. But with Malcolm X in the picture, it pushes people to compromise on a more ‘moderate’ person – and MLK fit right in.

Today, vouchers do the same for charter schools. Because vouchers are considered the ‘radical’ alternative, they make charter schools look moderate.

For example, in a debate over vouchers in the Chicago Tribune, the voucher opponent – after giving what I believe is the real reason many oppose vouchers, religious intolerance – concludes with:

Is there a compromise approach? Sure. Let’s continue to expand charter school programs and try out the most innovative ideas from private schools. But let’s not give up on public education.

In a world with vouchers as an alternative, charter schools seem much more reasonable. Greg Forster has more here.

Fiscal Stimulus And Hypocrisy

Many Democrats, including Obama, have criticized Republicans for both opposing the Stimulus bill and helping to direct some of that stimulus money to their districts.  They claim its hypocrisy. Greg Mankiw argues otherwise:

It seems perfectly reasonable to believe (1) that increasing government spending is not the best way to promote economic growth in a depressed economy, and (2) that if the government is going to spend gobs of money, those on whom it is spent will benefit.  In this case, the right thing for a congressman to do is to oppose the spending plans, but once the spending is inevitable, to try to ensure that the constituents he represents get their share.  So what exactly is the problem?

Let me offer an analogy.  Many Democratic congressmen opposed the Bush tax cuts.  That was based, I presume, on an honest assessment of the policy.  But once these tax cuts were passed, I bet these congressmen paid lower taxes.  I bet they did not offer to hand the Treasury the extra taxes they would have owed at the previous tax rates.  Would it make sense for the GOP to suggest that these Democrats were disingenuous or hypocritical?  I don’t think so.  Many times, we as individuals benefit from policies we opposed.  There is nothing wrong about that.

The full post can be found here.

Quote Of The Day

“If you did a simple cost-benefit comparison, the Obama plan vs. a simple extension of Medicaid, more R&D through the NIH, and some targeted public health expenditures, I believe the latter would win hands down.  And the latter seems more politically feasible too.  It avoids the mandate, the unworkable and ridiculously low penalties for those who don’t sign up for insurance, and the awkwardly high implicit marginal tax rates imposed by the subsidy scheme.  It probably involves fewer corporate and “back room” deals….When it comes to the Obama plan, the easy targets are stupid or hypocritical Republicans.  The hard target is why the plan should beat the alternative reforms I’ve outlined above or perhaps other ways of spending the money.  I’d like to see more people take on the hard target rather than the easy.” — Tyler Cowen

Bailouts In Perspective

Megan McArdle gives the loss breakdown:

It’s looking increasingly like Fannie Mae and Freddie Mac are going to cost the US government much more than AIG.  In its latest long-term budget outlook released in late January, the CBO projected that the AIG bailout would ultimately cost the Treasury $9 billion dollars.  Indeed, the entire private financial industry bailout is ultimately expected to cost less than $30 billion; of the $99 billion that the CBO expects we will ultimately lose on TARP, half of the loss comes not from helping the “banksters”, but from the Obama administration’s decision to bail out the automakers.  A further $20 billion will be spent on the Home Affordable Mortgage Program, aka the administration’s mortgage modification plan.

By contrast, the nationalization of the Government Sponsored Entities is expected to cost the Federal government $64 billion between 2011 and 2020, on top of the $110 billion we’ve already spent.  Fannie and Freddie have long defended themselves on the grounds that their underwriting standards weren’t nearly as bad as those in the private sector.  But they’ve certainly been better at socializing their losses; firms that controlled maybe half of the mortgage market will end up costing the taxpayer four times as much as the other troubled financial institutions.

The full article can be found here. Matthew Yglesias has more.

Affirmative Action – Not Win-Win

Duke University professors Peter Arcidiacono and Jacob Vigdor have a forthcoming paper in Economic Inquiry “Does the River Spill Over? Estimating the Economic Returns to Attending a Racially Diverse College”, Mark Perry provides a summary:

“Do white and Asian students at elite schools benefit from the presence of Under- Represented Minority students on campus or in the college classroom? While not all the evidence in this article suggests that interracial exposure is uniformly negative, it strongly suggests that the predominant policy tool designed to increase the representation of minority groups, affirmative action, has a negative net impact on students not directly targeted by the program.

Using data on graduates of 30 selective universities, we find only weak evidence of any relationship between collegiate racial composition and the postgraduation outcomes of white or Asian students. Our empirical results cover a broad range of outcomes, including earnings, educational attainment, and satisfaction with both one’s life and one’s job. Across these varying specifications, we fail to find any significant evidence that white or Asian students who attend more diverse colleges do better later in life. Moreover, the strongest evidence we uncover suggests that increasing minority representation by lowering admission standards is unlikely to produce benefits and may in fact cause harm by reducing the representation of minority students on less selective campuses.

Further analysis suggests that affirmative action is actually counterproductive, if its goal is to improve the productivity of majority race students. Preferential admissions for certain groups may still have a role in higher education, but they should be understood for what they are: redistributive mechanisms that create benefits for the targeted racial groups but costs for others.”

The full post can be found here.

Republican HealthCare Points

Economist Arnold Kling gives what should be the Republican healthcare points in their upcoming healthcare summit with Obama:

1. All Medicare savings must be used to shore up Medicare. None of those savings can be used to fund new insurance subsidies or entitlements. Medicare is unsustainable, and it is going to need every dollar that we can save, and more. There is nothing to spare for a new entitlement.

2. Medical savings accounts must not be killed.

3. Catastrophic health insurance must not be killed or heavily disadvantaged relative to comprehensive insurance.

4. All new subsidies that enable people to purchase health insurance must be on budget, rather than through insurance company regulations that are likely to result in cost-shifting.

5. The bill must provide for at least one of the following:

a. Interstate competition in health insurance.

b. greatly reduce (preferably eliminate) the tax inequity between obtaining health insurance on your own and getting it through your employer.

The full post can be found here.

The Problems With Pell Grants

I admit it, I get uneasy feelings when people congratulate Obama for increasing Pell Grants. I don’t see it as the universal positive that many others do. For three reasons.

First, Pell grants are politically cheap. Increasing funding for Pell grants takes little courage and comes with no political cost. Who disagrees with more funding for poor people to go to college? Certainly only the heartless. Whats more, it doesn’t come out of Obama’s own pocket, it’s after all, the tax payers money. And what politician doesn’t like being generous with other peoples money?

Second, it can make the problem worse. Richard Vedder, director of the Center of College Affordability and Productivity and professor of economics at Ohio University explains:

Work done at my research center reinforces findings of others that exploding student loan programs have contributed to higher tuition charges, and if Pell Grants grow more inclusive and generous, the same effect will occur with them…

The demand for higher education grows with rising federal financial assistance, but the supply grows less rapidly, pushing up prices (tuition fees). Supply is comparatively rigid because the so-called best schools attain their lofty reputation by turning away customers: college rankings are enhanced by taking very qualified bright kids who likely will graduate (and are disproportionately affluent). Dropping money out of airplanes over the houses of college students (or its equivalent) is not the solution.

Normally, this shouldn’t be a difficult concept to understand. After all, who doubts that the spread of low cost mortgage financing helped fuel the housing bubble? Its the same concept here: low cost Pell grants, and especially low cost student loans, are a primary cause of University tuition increases. It’s standard subsidy economics.

Third, it crowds out the private sector. The more the government funds it the less private donors will feel the need to, and thus, you replace private charity with public charity. And because public charity is less scrupulous than private charity, you make the grants less efficient. Which helps to explain why most pell grant recipients do not earn a college degree.

Arthur M. Hauptman, from the Center For American progress, explains:

Instead, we should worry more 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 of a substitution effect 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.

In short, I see Pell grants as a way for Obama to escape real education reform by throwing us crumbs, just enough for us to shut up, and many do.

For more on this see this see here and here.

Obama On Education

Jay P. Greene, professor of education reform at the University of Arkansas, writes on Obama’s Education policies:

In a major address last March, President Obama declared that his administration would “use only one test when deciding what ideas to support with your precious tax dollars: It’s not whether an idea is liberal or conservative, but whether it works.” Unfortunately, the test that seems to guide the administration’s education priorities is not whether a policy works, but whether it serves a political constituency.

Consider the administration’s treatment of two federally funded programs: The D.C. voucher program, which it is helping to kill, and Head Start, on which it has bestowed billions more dollars. If the administration actually did care about results, its positions would be just the opposite.

If you look at Obama’s education policies from the point of view of what works you will come out seriously disappointed. The way to make sense of his education policies is not to look at what works and what doesn’t work but what serves the interest of one of his strongest constituencies: the teachers unions. Sure, Head Start doesn’t work but what matters is whether it benefits the teachers union. And because Head Start – like universal preschool, smaller classrooms, and higher pay for teachers – means more teachers, directly benefiting the teachers union, Obama and Democrats in general will support it.

This is why I have long given up hope of any real education reform coming from the Democrat side.

More here.

Quote Of The Day

“Apparently, the administration has issued rules requiring parity for mental health treatment with other illnesses.  They’ll take effect July 1st.  If you want to know why health insurance costs keep marching upward seemingly uncontrolled, this is why:  mandating new benefits is always popular, and the government doesn’t have to pay for them.” — Megan McArdle

Quote Of The Day

“As has been voluminously documented here, one of the most notable aspects of the first year of the Obama presidency has been how many previously controversial Bush/Cheney policies in the terrorism and civil liberties realms have been embraced.  Even Obama’s most loyal defenders often acknowledge that, as Micheal Tomasky recently put it, “the civil liberties area has been [Obama’s] worst.  This is the one area in which the president’s actions don’t remotely match the candidate’s promises.”  From indefinite detention and renditions to denial of habeas rights, from military commissions and secrecy obsessions to state secrets abuses, many of the defining Bush/Cheney policies continue unabated under its successor administration.” — Glenn Greenwald, writing in Salon

Winning The Lottery

[youtube:http://www.youtube.com/watch?v=kMzt7YGxLjg&feature=player_embedded]

The Lottery, a documentary due out May 7, follows four New York City families hoping to win the lottery to enroll their children in a Harlem charter school”. Via Joanne Jacobs.

Eliot Spitzer On The Recent Supreme Court Decision

Eliot Spitzer on the Supreme Court decision that struck down the heart of campaign finance reform:

As an elected official who often tangled with wealthy corporations, I recognize that there is a superficial appeal in the prospect of being able to silence their political voices. Of course that is precisely why the First Amendment protects them and why I find myself sympathetic to the First Amendment absolutists in this case. What distinguishes what Citizens United did and what Bill O’Reilly on Fox News—Rachel Maddow on MSNBC—does every day? Fox and MSNBC are corporations bombarding the airwaves with political rhetoric, from the right and left, that is as close to “electioneering communications” as anything I can imagine. The McCain-Feingold statute excluded “media companies” from its limitations, a distinction that makes no logical sense. The constitutionality of Citizens United’s speech should have nothing to do with what else may or may not go on at the corporation it is part of.

It is not surprising that the ACLU, wearing its First Amendment fundamentalist hat, and the NRA and the Chamber of Commerce, trying to protect corporate power and speech rights, are urging the court to find the provision unconstitutional.

The full article can be found here.

The Real Bush Deficit

Obama is fond of saying that he ‘inherited’ a $1.3 trillion budget deficit and is merely ‘only increasing it to $1.4 trillion in 2009 and to $1.6 trillion in 2010’.

Dick Morris gets behind the numbers and tells the part that Obama left out:

In 2008, Bush ran a deficit of $485 billion. By the time the fiscal year started on October 1, 2008, it had gone up by another $100 billion due to increased recession-related spending and depressed revenues. So it was $600 billion. That was the real Bush deficit.

But when the fiscal crisis hit, Bush had to pass TARP in the final months of his presidency which cost $700 billion. Under the federal budget rules, a loan and a grant are treated the same. So the $700 billion pushed the deficit — officially — up to $1.3 trillion. But not really. The $700 billion was a short term loan. $500 billion of it has already been repaid.

So what was the real deficit Obama inherited? The $600 billion deficit Bush was running plus the $200 billion of TARP money that probably won’t be repaid (mainly AIG and Fannie Mae and Freddie Mac). That totals $800 billion. That was the real deficit Obama inherited.

Then…he added $300 billion in his stimulus package, bringing the deficit to $1.1 trillion. And falling revenues and other increased welfare spending pushed it up to $1.4 trillion.

So, effectively, Obama came close to doubling the deficit.

More at the link here.