The Old Chopping Block

If Iran Can Cut Subsidies, So Can We

2010-12-19T13:45:00.003-05:00

A short Associated Press article in today's Washington Post print version (more detail online) reports that Iran's government is rolling back $30 billion of subsidies for food and energy starting today:

Iran's president on Saturday announced the start of a plan to slash energy and food subsidies as part of government efforts to boost the nation's ailing economy.

In an interview with state television, Mahmoud Ahmadinejad said the deep cuts to the subsidies "will start beginning Sunday" and vowed to fully cut all subsidies by the end of his term in 2013.

Economists say the unpopular plan could stoke inflation unofficially estimated to top 20 percent. The cuts also are widely seen as placing added burdens on Iranians, whose country is weighed down by international sanctions imposed on Tehran over its nuclear program.

Analysts say Iran pays about $30 billion in subsidies annually.

First, the suggestion that cuts in subsidies will lead to an increase in inflation is wrong. Inflation happens when the stock of money grows faster than the economy. Period. Food and energy prices are likely to go up, of course, but that will likely be offset by lower prices elsewhere in the economy.

Second, this was the right decision. It's painful to have life's necessities become more expensive, but subsidies and taxes obscure the true cost of the products, leading to resource misallocation and reducing economic efficiency. Although the article didn't address this, hopefully Tehran is pairing these measures with policies to increase economic freedom. An unambiguous lesson of history is that economic freedom leads to higher living standards, which makes adjusting to policy changes much easier.

Finally, America needs to cut subsidies too. The federal government spends about $30 billion a year in farm subsidies, $98 billion in food subsidies, $17 billion in various energy subsidies (as of 2007), among regulations that effectively subsidize various producers and consumers. Many would balk at eliminating these $145 billion in subsidies immediately, but phasing them out over a few years as the economy recovers is not unrealistic.

Five Years Later, Loss of Friend in Iraq Still Haunts

2010-10-03T23:08:00.004-04:00

This past Tuesday marked five years since my friend Eric Slebodnik was killed in Iraq. We were good friends from college, drawn together by a number of mutual friends, but especially James Iman. We used to all eat lunch or dinner together several times a week (among lots of other things), and we'd have vigorous discussions about a whole range of topics, from evolution to politics to where the best food on campus was and to whether the social sciences or the arts was the best way to understand what it means to be human.

Eric had more integrity and sense of purpose than almost anyone else I've ever known. Even when we disagreed, I knew that his views were shaped by a sense of principle and righteousness that still resonates with me.

We didn't stay in touch very well after I graduated in 2004 and went to find my way in the world. But the news of his death hit me like a ton of bricks. Eric wasn't the first friend I had lost, but the others were accidents. The maliciousness of Eric's was entirely different.

I've gone back and forth on the wisdom of this conflict. In winter 2002/2003 I was part of the protests opposing the U.S. invasion (but was turned off by the socialist worldview of most of the others), and organized an interdisciplinary forum at my university to help students understand the context of the situation. It couldn't have been timed better--it was scheduled to and did take place on March 20, 2003.

While studying abroad in the subsequent months, criticism directed at the U.S. from my European friends stirred up stoked my patriotism in support of the efforts. I defended it as a just war (according to St. Thomas Aquinas' criteria) in a political philosophy final even though my excellent professor John Sitton had a different view, and I even expressed this to French reporters at a 2004 election party. And after Eric was killed, I wanted desperately to believe that his sacrifice wasn't in vain and because I wanted to honor his support for the mission, which he once expressed in a letter to the NY Times editor. The impulse remains but I can't do it.

This conflict doesn't make sense. It never did. So what if they had weapons of mass destruction (which they didn't)? We deter every other country with the threat of raining Hell down on them. Why was Iraq any different?

How about promoting democracy and freedom (which the Bush administration pivoted to when no WMDs were found)? Sure, they're free of a brutal dictator, but at what cost to them in lives, injuries, displacement, the tattered social fabric, and so on? Is Iraq anywhere close to being a functioning democratic state? Have other regimes in the region improved the treatment of their citizens?

What about us? What bounty has been won by the lives lost, the soldiers wounded and maimed, the vast expenditures, and the civil liberties encroachments? Has our geopolitical position improved as the result of Operation Iraqi Freedom or are we weaker as a result?

The Iraq mission was a mistake of historic proportions. Our politicians wasted Eric's life and the lives of many others with their incompetence over foreign policy and national security.

I miss Eric. He should be teaching history or doing military intel and thinking about starting a family. It sickens me that his fate was otherwise. It always will.

R.I.P. Eric Slebodnik, August 3, 1984-September 28, 2005.

An Agenda for State Governments

2010-09-29T22:13:00.003-04:00

In "Let's reform state government" in yesterday's Politico, GOPAC chairman Frank Donatelli laid out his proposed agenda for state government reform (read the whole thing). His four suggestions are right at the top of my list too:

Public pension reform. State liabilities for pension funds have reached an astounding $5.2 trillion, with an additional $3 trillion shortfall. Many states provide inflation-protected, guaranteed benefits to government workers who retire as early as age 55. However, private-sector workers, who pay for this, have not done so well. Millions have lost jobs, and virtually all have seen their 401(k)’s shrink.

We need some tough reforms to control public pension costs, including changing the defined-benefit plans into defined-contribution plans, barring part-time government workers from receiving full benefits and ensuring that all enrollees contribute to their own retirement and health care plans. Republicans should follow the courageous example of New Jersey Gov. Chris Christie, who is seeking to bring these soaring costs under control.

Growth-oriented economic policies. While federal policies delay job growth, states can create more business-friendly environments to encourage private-sector job creation and economic growth. The quickest and most effective way for governors to boost their economies would be to reduce state income and investment income tax rates and to provide state tax credits so employers and small businesses can hire workers and expand. These governors could also provide more certainty for business on regulations and fees.

In addition, states must limit the destructive effects of Obamacare. Increased federal mandates have already caused premium hikes, averaging 9 percent for small businesses and individuals. States should look to scale back their own health care mandates to help moderate these costs to business.

Zero-based budgeting. States should conduct top-down assessments of every taxpayer dollar spent, to identify areas of waste, duplication and inefficiency. Just this year, Gov. Bob McDonnell of Virginia avoided a tax increase and balanced the budget by subjecting every state department and agency to strict scrutiny and performance reviews.

Many government departments and structures are badly outdated, incapable of delivering essential services efficiently. Each governor should consider setting up blue-ribbon commissions to conduct top-down reviews of state and local government programs and expenditures and then recommend solutions. States must be creative in delivering health care services through Medicaid, a program whose costs are scheduled to explode in the wake of Obamacare. Mandating the use of generic drugs, whenever possible, and creating health savings accounts, as proposed by Gov. Mitch Daniels of Indiana, could help moderate state health care costs.

Educational excellence. Even as state spending on education increases, student and teacher performance lags. States need to regain control from the U.S. Department of Education and demand better performance at the local level. School curricula should be redesigned to create a stronger connection between education and the skills needed for employment. States must also create an environment that allows parents to choose among competing educational opportunities. Charter schools, vouchers and other competition-focused programs are among the best ways to guarantee greater accountability and better-performing students.

Here's what I'd add:

De-unionize the public sector. The traditional rationales for unions--unsafe working conditions, exploitation of surplus unskilled labor, and so forth--don't apply to the public sector. On the other hand, the collective force of big labor special interests is pushing state budgets to the brink of insolvency. In addition to the unfunded liabilities of public pensions noted above, union heft pushes up government worker compensation and benefits, advocates for more workers than needed, and blocks cost savers like privatization and contracting.

Tort reform for civil litigation. Not the Texas variety with arbitrary caps on punative damages. I'm talking about limiting jurisdiction shopping to either the location of the alleged injury or the residence of the plaintiff, Daubert rules for the admissability of expert testimony, and "loser-pays" rules. "Loser pays" simply means that whoever loses pays the court costs and the other side's attorney's fees in addition to whatever damages might be awarded. Pretty much all other developed countries do this, but we don't have a good example here in the U.S., although some states dabble in it. One of the keys to making it work abroad is tort insurance, so if you have a good case but lose, you're only out the risk-rated premium. The plaintiff's attorney often pays for the tort insurance anyway abroad.

Education reform. Increasing choices for students can take many forms. Many states do not allow private or home schooled kids to participate in extracurricular activities at public schools even though their parents pay property taxes just like everyone else. That should change. Education tax credits are a great way to leverage additional private investment in education, taking the burden off taxpayers for expanding and running expensive public school systems, while also increasing choices for parents. Even letting families easily choose among public schools instead of being assigned to them could do some good.

Focus on core functions. State governments do many things that could be done at least as well in the private sector or that ought not be done at all. State and local policymakers should scour their budgets and lawbooks for things to put on the old chopping block. If there isn't a compelling reason why the relevant level of government must do something, then it probably shouldn't.

Much more could and should be done, of course, including in health care, transportation, taxes and spending policy, government transparency, privacy, criminal justice, and on and on. This is a historic moment, one that is ripe with the possibility of reform. It would be a shame to waste it.

Cutting Politicians' Pay Over Deficits May Backfire

2010-09-24T20:49:00.009-04:00

Yesterday at Cato@Liberty Marian Tupy blogged:

Having inherited an 8 percent budget deficit from the previous socialist government, the new conservative-liberal government of Slovakia has come up with a novel way of keeping budget deficits under control in the future. Starting in 2011, salaries of government ministers will rise and fall depending on the evolution of the fiscus. Thus, a budget deficit of 5 percent will translate to a 10 percent decrease in salaries, while an (unlikely) budget surplus of 5 percent will translate into a 10 percent rise in salaries, etc. It will be interesting to see if this new measure will truly result in a more responsible fiscal policy in the years to come.

Maybe, but it might backfire. Here's how:

Politicans who favor deficits--for whatever reason--may be able to claim the moral high ground by playing the martyr. The financial harm they do themselves by deficit-induced salary cuts could allow them signal their commitment to the public good.

Rather than making hard choices about whose political favors to reduce or eliminate, they could effectively be off the hook as long as the pay cuts are less important to them than maintaining and expanding their political power (especially rich, big government types). Deficits could get worse if this dynamic further weakens the remaining constraints on politicians to run deficits.

I could be wrong. It depends on the combination of formal institutions, informal rules of conduct, culture, etc, in Slovakia. Which I know nothing about. So we'll watch and learn.

Still, it wouldn't be near the top of my list of effective ways to constrain government budgets.

Surprise! A Political Cheap Shot from "Think Progress"

2010-09-15T16:30:00.005-04:00

Matt Yglesias opines:

Conservative Senators are currently saying that they will filibuster a middle class tax cut unless that tax cut is paired with tax cuts that exclusively benefit rich people. That’s because they care—a lot—about reducing taxes on rich people. If they cared about reducing the deficit they could threaten to filibuster tax cuts unless paired with spending cuts. But they’re not doing that because they don’t care about the deficit.

What’s more, conservative columnists could urge them to do this. So could Fox News hosts and conservative talk radio stars. So could the Heritage Foundation, the American Action Network, the American Enterprise Institute, or the Cato Institute. But none of them are doing so. It’s true, again, that they separately say they favor cutting spending but none of them are urging members of congress to make tax cuts contingent on offsetting spending reductions.

It’s a question of scope. Tax policy is a huge issue in itself, as is EACH of the big spending cuts favored by supporters of limited government. Policymakers can only grapple with so much at a time, and since the tax debate is occurring now, they’re focused on taxes.

Improving incentives for savings and investment is key to long-term growth. High-earners (i.e., high-producers) tend to save more and be more sensitive to tax rate changes than others (not to mention bearing the greatest direct burden of taxes). It is therefore good tax policy to reduce rates especially at the top, not for whatever goes to the rich, but because of the benefits to the rest of us from greater investment and productivity.

When this tax debate has passed, I expect free-market people will be happy to discuss spending cuts. But one thing at a time.

Why the Spending Fetish?

2010-09-13T21:43:00.002-04:00

A headline on Bloomberg.com today blares, "Rich Americans Save Tax Cuts Instead of Spending, Moody's Says."

Timothy Homan reports:

Hand the wealthiest Americans a tax cut and history suggests they will save the money rather than spend it.
Tax cuts in 2001 and 2003 under President George W. Bush were followed by increases in the saving rate among the rich, according to data from Moody’s Analytics Inc. When taxes were raised under Bill Clinton, the saving rate fell.
The findings may weaken arguments by Republicans and some Democrats in Congress who say allowing the Bush-era tax cuts for the wealthiest Americans to lapse will prompt them to reduce their spending, harming the economy.

Later in the article, economist Chris Cornell is quoted, "Spending by the top 5 percent of households seems much more closely tied to business- cycle issues than it does to tax-cut issues."

The entire article is based on a false premise. Why is it that we should care only what the wealthy spend?

What they save, after all, can become business investment, which is what has been hammered during this recession and especially by the extreme regime uncertainty that has characterized the past two years. The images below from this recent post by Cato scholar Mark Calabria reveals that consumption is back to normal, while fixed private investment is down by 20%. The fixation on spending reflects flawed neo-Keynesian reliance on over-aggregation and mythical "multipliers."

On the empirical point about the wealthy saving much of tax cuts, that seems consistent with the permanent income hypothesis, which postulates that we try to smooth consumption over our lives. Something that changes expectations of lifetime wealth tends to affect consumption patterns.

Tax cuts that are expected to be temporary, therefore, would mostly be saved, while those expected to be permanent would be mostly spent. If the wealthy save tax cuts, it's a clear sign they expect them to be raised again when the bills come due for the current government spending binge.

Debt and Deficits: Only the Tip of the Angry Iceberg

2010-09-04T07:28:00.007-04:00

Barely had I published my last entry, when the Washington Post came out with a story about how many Democrats are adding fiscal austerity pledges to their campaign platform. I'm unimpressed.

On one hand, it's good that politicians of both parties have finally come to understand that Americans are fed up with deficits and debt. On the other, Democrats in general and many Republicans are missing the bigger picture: the American people want a reevaluation of the proper role of government and how that role should be distributed among the levels of government.

It's not just about the money; it's about being accountability. And if private enterprise cannot successfully undertake some collective action and government can do better, it should be the most local government that can address it, which also happens to be the level most accountable to the people. Suggesting that a congressman from Ohio can be held accountable for education quality in Florida, or a senator from New York for road congestion in California, is simply preposterous.

It's also about being left alone. The decennial census is supposed to count inhabitants for the purpose of apportioning members of the House of Representatives, nothing more. Yet it has morphed into a vast treasure trove for social science researchers. It sounds benign, but besides the privacy issues, the conclusions of that research provide justification for any number of wasteful and often counterproductive interventions.

Americans want more than cheap talk about the federal budget. They want their national political representatives to fundamentally reconsider the role of the federal government, eliminating, privatizing, or transferring to the states those activities that are not within its proper scope.

Gerry Connolly (D-VA-11) is Fiscally Reckless

2010-09-03T21:40:00.004-04:00

Over the past few weeks, I've received a number of snazzy glossy flyers--booklets, really--from the office of Congressman Gerry Connolly (D-Fairfax, VA) touting his fiscally conservative bonafides. His campaign site make similar claims with issues section including headings of "Fighting Wasteful Spending and Budget Deficits" and "Holding the Line on Taxes."

[Begin tangent: The flyers, by the way, apparently meet the guidelines of the House Franking Commission, the congressional body that oversees mailings from representatives to the people they represent to make sure they're constituent service rather than campaign materials. They're obviously campaign materials--I've only received them this summer, despite being "represented" by Mr. Connolly since January 3, 2009. Just another example of the incumbent protection scheme our leaders have established. For our own good, of course. End tangent]

So I wondered, just how fiscally responsible is Mr. Connolly? Let's look at his votes on the big issues. Did he come down on the side of taxpayers? ("No" means he voted "yes," that is, not fiscally responsible.)
- The failed "stimulus" bill: no and no.
- The spendthrift Fiscal Year 2010 Budget Resolution: no, no, and no.
- Cap-and-tax: no.
- A toothless pay-go (touted in his mailers): sure. A decent pay-go: no.
- EFCA, the union payback: no vote, but Connolly is a cosponsor.
- Obamacare: no, no, no.
- The "Homestar Energy Retrofit Act" boondoggle: no.
- "Deeming" the Fiscal Year 2011 budget passed instead of actually passing a budget: no.
- The teacher union bailout: no.
- A resolution to prevent Congress from passing major legislation during a post-election lame duck session, once the voters have rejected the Obama-Reid-Pelosi radical agenda: well, it wasn't a recorded vote, but no.

Want something more rigorous and systematic? Fine. In the first session of the 111th Congress, Gerry Connolly scored a grade of "F" on the National Taxpayers Union congressional report card with a whopping 6%.

Let's face it: glossy flyers notwithstanding, Gerry Connolly is not being responsible with taxpayer dollars. To my fellow residents of Virginia's 11th congressional district, let's encourage him to make a career change after November 2nd.

Putting the "Auto" in Automobile

2010-08-10T21:44:00.004-04:00

"Civilization advances by extending the number of important operations which we can perform without thinking about them."
- A. N. Whitehead (in F.A. Hayek, The Constitution of Liberty)

A little more than a year ago, my friend and colleague Randal O'Toole sent me a draft of a paper he was working on with a section on driverless cars. Although it didn't make the final cut of that paper, it got a full chapter in his excellent new book, Gridlock: Why We're Stuck in Traffic and What to Do About It. Initially skeptical, I've since become mildly obsessed.

In summary, it is now possible for cars to drive themselves under certain conditions. Adaptive cruise control, lane keep, and self-parking options already exist in a variety of higher end cars. As the technology improves, hardware and software become cheaper, and the public becomes more aware of the possibilities, it's becoming hard to envision a future without autos on autopilot.

Why should I care, you ask?

Lower pollution. Less congestion. Less of a need to increase expensive lane miles of roads, which means less construction. Less time on the road; more time for everything else. Using the commute or other driving to do something fun or productive. Less stress. Less road rage.

Increased mobility for the elderly, the young, and the handicapped. Getting drunks home safely (for themselves and everyone else on the road). No more teen-texting-crash tragedies. An end to driver error from distraction or fatigue. The list goes on.

Even as technical demonstrations proceed, the concept seems to be getting more attention in the press. Erik Morris over at the NYT Freakonomics blog has twice waxed enthusiastic (with promises of more to come), and it's been picked up in a variety of news articles throughout the country.

In addition to the links above, check out this Capitol Hill briefing we did with Volkswagen's Director of Research, Randal's WSJ piece "Taking the Driver Out of the Car," or just Google it.

"Anyone who fights for the future, lives in it today."
- Ayn Rand (The Romantic Manifesto)

If only.

Constitutional Reform Needed Soon

2010-05-18T21:07:00.004-04:00

It's been almost four months since I last blogged, courtesy of a rather heavy reading list for the final lap of grad school.

Twenty books and many discussions later, my grasp of constitutional economics has never been better. In a nutshell, constitutional economics has to do with how the basic rules of governance lead to different political and economic outcomes. The basic challenge is to escape anarchy or despotism by establishing the protective (military, police, courts) and productive (basic infrastructure, environmental protection, monetary policy) functions while constraining the ability of political actors to use the power of the state to redistribute. As it turns out, no advanced country seems to have figured out how to constrain redistribution very well.

In thinking about these issues, I've come to a few tentative conclusions. Politics as usual hasn't been very successful at limiting government. It looks like we need to think about constitutional reforms, such as
- Term limits (5 terms House, 2 terms Senate)
- Spending limits (inflation + population growth)
- Balanced budget requirements (spending = revenue two years before)
- Prohibition on new debt issue
- Two-year budgeting (budget odd years, oversight even years)
- Zero-base budgeting (all programs reconsidered each time)
- Periodic automatic program sunsets (without congressional reapproval, they go away)
- Putting all implicit debts (unfunded Social Security, Medicare, Medicaid, and pension liabilities) on the official annual budget

All of these are aimed at limiting the discretion of politicians. They're our employees, after all, so why do we let them get away with acting like our masters? Government doesn't give us meaning, it's just an instrument to accomplish those necessary things that cannot by provided by voluntary action.

Forcing government to live within its means would stop the intergenerational theft that has run rampant for the last eighty years and force politicians to make choices about priorities. It would also make it easier to say 'no' to the special interests.

How these reforms could be implemented is unclear. But unless Greece's situation looks like fun, we better figure it out soon.

What Kind of Labor Market Do You Support?

2010-01-26T20:35:00.003-05:00

If you live in the DC area and ever wondered whether the businesses you patronize have unionized workforces, here's the link for you. It lists the "companies represented by UFCW [United Food and Commercial Workers] Local 400."

You can find the UCFW affiliate in your area at http://www.ufcw.org/.

The phrase "companies represented by UFCW Local X" strikes me as pretty misleading. They may represent some workers, but certainly not customers, suppliers, management, or shareholders (as Ben Stein calls them, "widows and orphans").

Anyway, I was interested to find out that several places I shop are unionized--CVS, Macy's, and Safeway--and others--Walmart, Whole Foods, Target, Wegman's, among many more--presumably are not.

Whatever your preferences, it's good to know.

P.S. Incidentally, a report from the Bureau of Labor Statistics last week noted that public employees made up a greater share of union membership than private sector workers in 2009--the first year that's ever happened. Federal, state, and local government workers were 37.4% unionized (7.9 million workers), while only 7.2% (7.4 million) private sector workers belonged to unions. Apparently union membership hasn't been this low since 1900.

P.P.S. Also, the new Cato Journal seeks to answer the question, "Are unions good for America?" I haven't had a chance to dig in yet, but it looks like an interesting read.

Checks and Balances Are Back

2010-01-19T21:00:00.002-05:00

With the just-declared victory of Republican Scott Brown in Massachusetts, checks and balances have finally been restored after a year of Democratic dominance in Washington. And that means the pace of their big spending, big government agenda will slow down dramatically.

Not that unified Republican control several years ago was a picnic. Those years brought us massive federal encroachment into K-12 education, a major expansion of an already unsustainable entitlement program, corruption, continued government meddling in all variety of personal matters, a bloody and expensive war of choice, a spending explosion, and the abandonment of the limited government (aka freedom) agenda that was supposed to be the heart and soul of the conservative movement.

But Democratic control has--in only one year--brought an escalation of the war in Afghanistan, the continuation of Bush-era violations of civil liberties and opaque budget processes, even greater recklessness with our fiscal future, the attempted nationalization of our health care system, increasing the burden of taxes and regulations, and pushing a pork-laden energy bill that even greens have rejected.

This country is better served when checks and balances exist, as when Clinton was balanced by a Republican House from 1995 to 2001. Sure, the internal tensions within the Democrat caucus provided some impediments, but at the end of the day, leadership has an awful lot of clout and can force (and has forced) much down the throats of the rank and file.

This should serve as a wake up call. As Gerald Seib pointed out on WSJ today, Americans' political preferences have stayed remarkably constant over the years. A successful governing agenda is not one that tacks hard to the left or right, but one that is essentially a free market, socially tolerant agenda of "live and let live."

The Democrats still hold the White House, 256 of 435 House seats, and 59 seats in the Senate. But at least the filibuster is back.

If this is a harbinger of things to come, November will be very, very interesting. Stay tuned.

America Subsidizes European Welfare States

2010-01-18T19:39:00.004-05:00

Late last week a hearty debate broke out in the blogosphere regarding whether Americans or Europeans have a higher standard of living. Paul Krugman started it, and Greg Mankiw, Dan Mitchell, and many others responded.

Krugman argued that European economies are no less dynamic than America's and standards of living are comparable even though social welfare spending is higher. Mitchell explodes the idea that Europeans and Americans are similarly wealthy--average American consumption is much higher--while Mankiw suggests a number of factors that may account for the differences in per capita consumption and unemployment.

My own humble contribution is merely to point out that the U.S. subsidizes Europe (and others) in at least two significant ways: defense spending and medical innovation.

In a recent paper on medical innovation published by the Cato Institute, Glen Whitman and Raymond Raad point out that America leads the world in three of four general categories of innovation--basic science, diagnostics, and therapeutics--while the fourth category of business model innovation lacks sufficient data to draw clear conclusions.

Politicians and pundits often argue that we'll fall behind if innovations don't take place here. Not so. Once an invention happens, those who have carried none of the burden of its development--the diversion of resources from production to research, the costs of many dead-ends, and the risks of failure--can take as much advantage of it as those who sacrificed for it. It's the classic free rider problem: most of the beneficiaries carry virtually none of the cost. Clearly, expanding the frontiers of knowledge and productivity is necessary for continued progress, but the costs and benefits are not evenly distributed.

And so it is with healthcare and other sectors where American innovation predominates. America's disturbing distorted health care system at least provides incentives for individuals and organizations to develop better ways of treating illnesses and promoting wellness. U.S. taxpayers and consumers foot the research bill, and Europeans and the rest of the world benefit from the disproportionately American advances.

U.S. subsidies to Europe (and Japan, South Korea, Australia, and many other places) also take the form of our picking up some of the tab for their defense. According to the CIA World Factbook, the U.S. significantly outspends most European nations in terms of percentage of GDP, and that's with a higher per capita GDP, as noted above.

For those that spend a greater share of domestic output--Macedonia, Turkey, Bosnia and Herzegovina, and Greece--I have three words by way of explanation: location, location, location.

Here are the big six: UK (2.40%), France (2.60%), Spain (1.20%), Italy (1.80%), Germany (1.50%), and Poland (1.71%). None of them are even close to the U.S.

If those are the levels that they think are appropriate given their threat environment, fine, but that seems unlikely. The United States are bordered by two gigantic oceans and two weak and friendly nations and haven't been invaded by a foreign power since the 19th century. Europe is proximate to the Middle East and Africa and has a history of continent-wide wars.

And one suspects that Europeans rightly view the 78,000 U.S troops stationed there and ongoing commitments to the NATO alliance as a signal that they don't need to fully fund their defense needs. The U.S. will be there to bail them out.

Needing to spend less on their defense permits them to spend more on social services. It's that simple.

Even if Krugman were correct about similar standards of living in Western Europe and the United States, the fact remains that the U.S. is massively subsidizing the European welfare state through our defense umbrella of that continent and by producing a disproportionately high share of the world's innovation (especially medical) here. Absent those subsidies, Europe's current 'generosity' would be unsustainable.

Dear NYT: Yes, Health Care Coverage Should Differ

2010-01-14T13:34:00.003-05:00

"Should someone in Idaho or Nevada have significantly different health care coverage from someone in Massachusetts? That, essentially, is one of the biggest questions Congress will be wrestling with as it tries to meld House and Senate bills into a single law to revamp the nation's health care system," the New York Times reports.

Yes. And so should my neighbors, my friends, and my coworkers. Our health insurance coverage (or lack thereof) practices ought to be individual decisions consistent with our particular values and preferences.

There's no good reason for politicians, bureaucrats, or, for that matter, employers to make these decisions: none of them can adequately cater to individual wants and needs. The market isn't perfect either, but it's far better and keeps improving.

The Light at the End Nears

2010-01-08T13:40:00.004-05:00

My final class of grad school--Constitutional Economics--is this term, so I'll walk in May.

Why this one? Utility maximizer that I am, it's simply my best available option. Of the evening classes offered this spring, this one seemed the most interesting and thought-provoking. I might have opted for Law & Economics if it were offered (depending on the syllabus), since I'm more policy oriented than philosophical.

The only thing between me and graduation is some assignments, a final, and a paper. Oh, and this gargantuan reading list. And yes, the 21 italicized items are books (and one of those is in three volumes). Apologies if you don't hear much from me for a while.

• James M. Buchanan, “Economics as a Public Science”
• Albert Hirschman, The Passions and the Interests
• Adam Smith, The Wealth of Nations, book 5
• Ludwig von Mises, Liberalism
• Milton Friedman, Capitalism and Freedom
• Milton and Rose Friedman, Free to Choose
• F.A. Hayek, The Road to Serfdom
• F.A. Hayek, The Constitution of Liberty
• F.A. Hayek, Law Legislation and Liberty (3 vols.)
• James M. Buchanan, The Logical Foundations of Constitutional Liberty (vol. 1 of Collected Works)
• James M. Buchanan & Gordon Tullock, The Calculus of Consent
• James M. Buchanan, The Limits of Liberty
• James M. Buchanan & Geoffrey Brennan, The Reason of Rules
• Vincent Ostrom, The Meaning of Democracy and the Vulnerabilities of Democracies
• Elinor Ostrom, Understanding Institutional Diversity
• Paul Aligica and Peter Boettke, Challenging Institutional Analysis and Development
• Daron Acemoglu and James Robinson, Economic Origins of Dictatorship and
Democracy
• Mancur Olson, “Dictatorship, Democracy and Development,” APSR, 1993
• Douglass North, John Wallis and Barry Weingast, Violence and Social Order
• Edward Stringham (ed.), Anarchy and the Law

Television

2010-01-07T21:59:00.002-05:00

I've started to really dislike television. The whole concept, not just the programming. There are definitely shows I enjoy watching, and that's the problem.

It's just too easy to get sucked into episode after episode of "My Name is Earl" or "The Office" instead of doing more productive things, such as spending quality time with Liz and Beatrice, writing, working out, being involved with my community, or being in touch with family and friends.

After working all day and commuting back and forth from Fairfax to the District, I want the few hours that I have at home to count for something. When I look back on my week, I don't want to have to realize that I burned precious hours being a passive consumer of mass media.

There's just so much more to life.

Interior to Restrict Mountaintop Coal Mining

2009-11-22T23:02:00.003-05:00

Late last week the Department of the Interior announced that it was going to conduct stricter oversight of mountaintop coal mining, a process by which coal seams under mountaintops are exposed to mining equipment by dumping the rock and soil above it into lower-elevation areas nearby. This practice is common in the Appalachian Mountains.

I suspected something was underway a few months ago when I discovered that the Office of Surface Mining Reclamation and Enforcement scrubbed post-reclamation photos of such sites. It turns out that the flat land created by this practice is actually often welcomed by locals as something with economic benefits.

It's true that disrupting that much rock and earth has environmental consequences. When rock is newly exposed to rainwater, soluble minerals including heavy metals will leach out until they've been depleted. Mountaintop mining can be disruptive to seasonal and minor streams and can diminish the water quality of larger streams and rivers.

But water pollution is primarily a local issue. Yes, water flows, but only in one direction. It's not clear why states, alone or acting jointly, couldn't deal with these issues in most cases.

Mountaintop mining is, however, a big deal for environmentalists for at least two reasons. First, they dislike the local effects--disruption of natural landscapes, water pollution, et cetera.

Perhaps more importantly, however, coal is the declared enemy of environmentalists. Burning it is carbon intensive and can produce unpleasant pollution (carbon dioxide is not a pollutant).

But coal-produced electricity is cheap, and electricity runs the modern world. For most people, it's a tradeoff worth making. For the most radical of environmentalists, those who pine for a world unsullied by man, it's not.

Fortunately for the rest of us, there aren't that many of them. Unfortunately for us, they currently have friends in high places.

A Lesson in Marginal Utility

2009-11-08T22:03:00.002-05:00

We're finally replacing our current basic cable with Verizon FIOS (with DVR) on Tuesday! The channel lineup is outstanding and diverse, so kudos to Verizon for catering to its customers.

Having studied in Germany (Trier) back in 2003, I was happy to see that FIOS offers two German language channels: Deutsche Welle and ProSiebenSat 1 Welt. It would be good to refresh those language skills after six years of disuse.

But not so good that I'd pay $14.99 per month. I'd probably be willing to pay about a third of that. Especially since I can get a lot of content online through Netflix and otherwise.

On Health Bill, Lone GOP Supporter Got Played

2009-11-08T08:16:00.004-05:00

One of the most surprising aspects of last night's House vote on the Democrats' plan to deepen the distortions in the health care sector was the lone Republican vote for it.

That vote came from none other than first-term Rep. Anh "Joseph" Cao (R-LA-02). He got played. The Democrats--including personal entreaties by the President--secured his vote by promising him lots of goodies to take home to his constituents.

He doubtless hopes it'll get him reelected. Remember, the first priority for the vast majority of elected officials is...to get reelected. And keeping the people who vote for you happy is the best way to do that.

But Louisiana's 2nd district has a Cook Partisan Voter Index Rating of D+25. That's a "safe seat" for Democrats. The only reason Cao won last year is that he was running against a deeply corrupt incumbent. He's a one-termer, plain and simple.

So why do I say he got played? Because his vote makes it marginally more likely for Democrats to be successful in the Senate without really affecting his likely defeat next year. One of the moderate Senate Democrats is Mary Landrieu of Louisiana, whose reelection victory margin last year was underwhelming in the Year of Obama.

Now, Landrieu is only one of several moderate Democrat holdouts in the Senate who may ultimately prevent comprehensive healthcare legislation this year--despite their supposed filibuster-proof majority--but the bipartisan patina Democrats will now be able to claim can only make their efforts easier.

Despite having been played, Cao is no fool. Rather, his vote last night is symptomatic of the corrosive power-at-any-cost mentality that plagues political life. Instead of gracefully accepting his brief stint in Congress, he has abandoned principle in the vain hope of prolonging his tenure.

Ramming a Climate Bill Through Senate Committee is Politically Risky

2009-11-05T10:05:00.002-05:00

This morning the Senate Environment and Public Works Committee reported the Kerry-Boxer climate bill (S. 1733: "Clean Energy Jobs and American Power Act) in a rather unusual fashion. Committee Republicans were insisting on further economic analysis of the legislation--a courtesy they extended to Democrats several years ago during the ultimately unsuccessful Clean Skies debate--before moving to mark up the bill. Chairman Boxer refused to wait and forced the bill through the committee despite a GOP boycott of the markup.

The 12 committee Democrats voted 10-1-1 to report the bill: Baucus (D-MT) voted against it, and Carper (D-DE) didn't make it to the vote.
The following committee Democrats voted for it: Barbara Boxer (CA), Frank Lautenberg (NJ), Benjamin Cardin (MD), Bernie Sanders (VT), Amy Klobuchar (MN), Sheldon Whitehouse (RI), Tom Udall (NM), Jeff Merkley (OR), Kirsten Gillibrand (NY), and Arlen Specter (PA).

Without getting into the minimal benefits and large costs of the legislation, this vote appears to carry significant political risk for several committee members.

Baucus, Lautenberg, Merkley, and Udall aren't up for reelection until 2014, so this vote is unlikely to have much significance by then. The same is probably true for the 2012 class--Cardin, Klobuchar, Sanders, and Whitehouse--except in the (hopefully) unlikely event that the economy fails to recover by then.

For those up in 2010, however, facing the very real possibility that recovery will be slow and unemployment remain high for the next year, this vote is a bit of a gamble: whether the base energizing effects on turnout will outweigh the loss of swing voters, most of whom quite reasonably are more concerned about employment at the moment.

And then there's the inconvenient truth that global surface temperatures have been stable for the last decade and this year has been rather cold in the United States. Note that I'm making no claim regarding the future of global temperatures, simply laying out the factors that will affect voter perceptions at the polls next fall.

CQ Politics Race Ratings for 2010 Senate Races considers Boxer's California seat to be "safe", Gillbrand's New York seat as "Likely Democrat", and Specter's in Pennsylvania as "Leans Democrat." Yet polling on Real Clear Politics has Specter slightly behind fmr. Rep. Pat Toomey, and that's before his primary with Rep. Joe Sestak (and a former admiral), which is likely to force Specter further to the left.

In New York, Gillibrand could plausibly be defeated by either former Governor George Pataki or former NYC mayor Rudy Giuliani. Neither has officially entered the race.

Boxer seems to be in the best shape of the three, although her advantage over presumed GOP challenger and former HP CEO Carly Fiorina has narrowed significantly in recent months.

Of couse, a year in politics is a very long time, and a lot could happen between now and then. Nonetheless, when reelection or early retirement can depend on a few points, a vote on a bill that many voters rightly perceive to damage American competitiveness and productivity is highly unlikely to improve these senators' prospects.

And to have the vote within 48 hours of major Republican victories in New Jersey and Virginia seems bizarre. Then again, maybe the writing on the wall says if they don't get it done now, they never will.

Germany's Fusionist Election

2009-09-27T20:53:00.004-04:00

Even as America's political class expands its dominance over the U.S. economy, German voters sent the opposite signal to Berlin in today's parliamentary elections.

Since Germany has proportional voting, the Bundestag has representation from five different parties. At the risk of major oversimplification, the major parties are roughly equivalent to the Republicans (Christian Democrats), Democrats (Social Democrats), Greens, Libertarians (Free Democrats, aka "Die Liberalen"), and Socialists. Of course, the latter three parties, though technically minor parties compared to the first two, bear little resemblance to their American brethren. Simply put, U.S. third parties have no prospect of attaining political power, so they radicalize much more than those in Germany and other proportional representation systems.

In any case, this election marks the end of the 'grand coaltion' of Social Democrats and Christian Democrats--a tenuous and relatively non-reformist coalition. The coming Christian Democrat and Liberal Democrat coalition is essentially a fusionist (in the Frank Meyer sense) coalition of conservatives and libertarians.

It's too soon to tell what policies they'll pursue, but tax relief and improving the business climate have been major parts of their platforms. This means casting off those regulations that are harmful, cutting spending, cutting taxes, and otherwise reducing the burden of government.

One hopes that they've learned from the Republicans that tax cuts without spending cuts doesn't really cut taxes, it just shifts that burden to the future. (Yes, my supply-side friends, I know that the dynamic effects of tax cuts can make up for part of the revenue loss, but rare is the tax cut that fully pays for itself.) Fortunately for Merkel and company, Germany's flabby welfare state offers plenty of fat to cut out.

Zum Wohl and viel Gluck!

Health IT from the Bottom Up

2009-09-22T21:36:00.003-04:00

Today I attended the event "Explaining International Health IT Leadership" at The Information Technology and Innovation Foundation to release an ITIF report by the same name. In addition to the ITIF scholar who authored the report, the panel included experts from the small, relatively homogenous nation-states of Finland and Denmark.

The panel discussion focused on government initiatives to spur development of electronic medical records, telemedicine, and other innovations that Information Age consumers expect in many other sectors of the economy. One got the impression that the primary impediment to broad penetration of these technological advances is a lack of political leadership.

But if health care consumers want these things, why doesn't the market provide them? Well, to a certain extent, it does, but probably not as much as people want.

The vast majority of private sector health plans are purchased through an employer. This has at least two effects with respect to health IT.

First, employment decisions are generally made based on total compensation, which includes wages, benefits (medical and otherwise), and intangibles like opportunities for advancement, prestige, enjoyability of work, and so forth. This bundling prevents workers from exploring alternatives and selecting something that fits them best, as we do when we choose universities, automobiles, and homes. Instead, employee demands on health care providers are mediated by insurance companies AND employers, neither of whom can efficiently communicate the individual preferences of workers. As a result, neither the insurance market nor the providers face sufficient competition to drive the rapid innovation seen in other sectors.

Second, the linkage of employment to health insurance means that insurance coverage is very likely to change every time a worker changes employment. Electronic medical records may be a worthwhile investment when long-term relationships exist, and perhaps less so in a market with contractual instability.

Medical records also raise concerns about privacy. What is the appropriate level of privacy protection? No 'correct' answer exists--demand for privacy varies subjectively with individuals. Any one-size-fits-all standard will in fact not fit all, but will leave many people unhappy--both those who want more privacy and those who are willing to trade off some privacy for other benefits (like individually tailored advertisements).

Concerns are also raised about interoperability and standards. This is an important point, but one that markets have resolved time and time again--railroad track gauges and PC operating systems, just to name a few. Far better to encourage experimentation that gets us to the medical records equivalent of modern operating systems instead of locking us into something like Windows 3.1--once state-of-the-art, now completely obsolete.

Giving individuals more control over their health care dollars ought to force insurance companies and medical providers to innovate and offer these products and invent others simply to attract and retain customers. It's not at all clear that government leadership is the only way to get there.

Where are the Real Health Care Reforms?

2009-09-20T22:08:00.003-04:00

For all of the rhetoric about reforming health care in the United States, Senator Baucus' proposal—like the other Democrat bills—is striking in how little reform it incorporates, at least in the right direction.

The root cause of many problems facing American health care today is the reliance on third party payment for medical expenses. Currently the government pays for about half of U.S. medical expenses. Roughly forty percent is paid by employers and insurance companies. Only about ten percent comes directly from health care consumers.

At the time of care, patients on average bear only about a tenth of the cost directly—the rest of the episode's cost comes from others: the insurance company to which the patient pays premiums or the government. Spending other people's money on oneself does not diminish a patient's concerns about quality, but incentives to be cost-conscious are weak. The result is excessive consumption of marginally useful or even potentially harmful procedures.

While risk sharing is an appropriate strategy for unexpected and potentially catastrophic care episodes, such insulation from having to confront the costs and benefits of alternative options systematically biases patients towards accepting more expensive and risky procedures with little or no net benefit than they otherwise would.

Would the Democrats' proposals help to properly realign the incentives facing consumers? No, they would make the problem worse.

Compelling all Americans to purchase insurance either through an employer or individual mandate—especially when combined with guaranteed issue, community rating, and minimum benefit requirements—would further entrench this overconsumption cost death spiral, as would more explicit government takeovers such as single-payer, government insurance, and co-ops. And since medical services would no longer be rationed by price, they would ultimately have to be rationed by quality degradations like long waiting times and denial of care.

When politicians and bureaucrats direct the allocation of resources, they are spending other people's money on other people, which gives them insufficient reason to monitor quality or cost as carefully as private actors spending their own money.

Another approach would empower consumers to make their health care decisions with full knowledge of the relevant costs and benefits. They would be free to choose the kind of plan that best fits their preferences, whether that would take the form of fee-for-service, prepayment (the health maintenance organization model), or catastrophic insurance with out-of-pocket payment for routine and expected care. After all, ‘government funds’ come from taxes, and ‘employer contributions’ mostly come out of employee compensation, so why not just let individual consumers control the money that funds their medical needs?

Two major (and many minor) obstacles prevent this consumer-driven market from becoming a reality: the preferential tax treatment of employer-provided health insurance purchases and poorly designed government programs.

Since employers can deduct health benefits from their taxable income but individuals cannot, workers are pushed into accepting whatever plan their employer happens to offer. Giving individually purchased health coverage the same tax treatment as employers receive would allow workers who prefer a different type of plan to cash out the portion of their compensation that employers currently divert into the so-called employer contribution to their workers’ health care. Policymakers have several options: tax credits, tax deductions, or, even better, large HSAs.

Government programs fail to give their beneficiaries ownership of the funds that finance their care. Giving Medicare recipients the option to choose a health-status-adjusted voucher and allowing states more flexibility in serving needy populations would further develop an individual insurance market.

Removing barriers to interstate competition in health insurance could also spur lower costs, more innovation, and more regulatory competition between the states.

Unfortunately none of the Democrats' proposals would empower health care consumers in these ways or much otherwise. They would instead consolidate the status quo of third-party payment for routine expenses and further concentrate the power of the political class.

Palin Case Highlights Need for Tort Reform

2009-07-05T09:44:00.003-04:00

Today's Washington Post has a very fair article about Sarah Palin's resignation from Alaska's office of governor. For the most part, she was sick of the attacks on her and her children. What a shocker: a decent, small-town person gets thrown into the national political spotlight and recoils at the viciousness of the modern political arena.

What jumped out at me though, is that her new-found fame or notoriety (depending on your perspective) has attracted a series of lawsuits that have put her family $500,000 in debt. I can't speculate on the merits of those lawsuits, unfamiliar as I am with the details, but suppose they're all frivolous and the Palins are exonerated in every case. They win, but they're still out hundreds of thousands of dollars in legal fees. Is that justice?

The need for tort reform couldn't be clearer. The answer is for states to switch to a loser-pays rule, where the victor has no liability for his/her legal fees (and the federal government should stay out of it). Alaska has taken steps in this direction. Virtually every other developed nation has rightly adopted this rule. It would discourage frivolous lawsuits, while ensuring that injured parties can still obtain justice.

Some--like the trial lawyers associations--will claim that this would prevent legitimate cases from being undertaken. Not so. Where loser-pays exists, a competitive market for tort insurance is available at premiums that depend on the potential size of the payout and the probability of success. Most of the time, the law firm--not the plaintiff--will cover the premium.

It doesn't make sense to clog the courts with cases that lack merit or to subject innocent parties to ruinous legal fees because someone doesn't like their politics. If the Palins are found to be liable in one or more cases, they should justly pay. But if they are found to have no culpability, for them to be saddled with debt from legal fees will be a miscarriage of justice.

Another Problem with Employer-Provided Health Insurance

2009-03-29T22:12:00.003-04:00

As my wife and I prepare for the birth of our first child, we've become familiar with some of the truly marvelous technology that has emerged over the last few decades.

Among the most astonishing and promising possibilities is the harvesting of blood from the umbilical cord just after the baby is born. The stem cells contained in the cord blood already have the potential to treat or cure a host of diseases, not only for the child, but also for the mother and her close relatives.

The price of collecting the blood typically exceeds $1000 with an annual storage fee of over $100. Considering their potential benefits, investing in preserving these cells strikes me as a heck of a bargain.

Since the potential to save money in the long run is quite substantial, you would expect health insurers to pick up part of the tab.

I was surprised to learn that my wife's employer-based health coverage does not include this, except in the limited circumstances where a potential beneficiary already has an applicable condition.

In other words, unless a close relative is afflicted by something nasty at the time of the infant's birth, the parents get to pick up the full tab or go without. And should the cord blood not be preserved, the insurance company could later be on the hook for a more expensive alternative.

Businesspeople are not stupid (or at least they don't leave money on the table). If health insurance companies actually expected to save money on cord blood therapies, they would doubtless cover and even promote it.

What's going on? Is the potential effectiveness of cord blood exaggerated? No--the current benefits are quite impressive--but that's irrelevant.

Young workers typically change jobs every few years, which means their health insurance coverage changes as well. If the chances of coming down with something (the sum of the probabilities of cord-blood-treatable ailments over the remaining years of coverage) and the resulting savings from cord blood therapies outweights the cost of cord blood collection and storage, insurers will cover it.

That they don't suggests that the benefits do not exceed the costs to the insurance companies over the time horizon they expect their beneficiaries to be with them.

What's to be done? Mandating coverage of this option would solve this problem, but only by increasing costs to other people and introducing other unintended consequences.

Perhaps the emergence of additional treatments would push the insurance cost-benefit estimation over the tipping point, making a policy response irrelevant.

In the final analysis, however, the linkage between employment and health coverage prevents insurance portability, which prevents the insurers' incentives from being aligned with our long-term health status. Equalizing the tax treatment of health care for all purchasers and removing other institutional barriers to a more competitive health insurance marketplace would go a long way towards getting our insurers to worry about preventive measures.

In our current world of distorted incentives, however, my wife's insurance won't cover this potential life-saver. So we will. After all, it's our baby.

Obama's Fresh Start with Iran

2009-03-20T07:56:00.003-04:00

I've been less than impressed with President Obama's approach to economic issues, but there may be some hope for him yet on foreign policy.

CNN reports that Obama "reached out to Iran on Friday -- the start of the Iranian New Year -- in a video message offering 'the promise of a new beginning' that is 'grounded in mutual respect.'"

Of course, no one wants Iran to possess nuclear weapons--the major recent impediment to normalizing relations--but can we live with it? Do the U.S. Army, Navy, Marine Corps, Air Force, and nuclear arsenal represent a sufficient deterrent to bad action?

And while most people don't want a nuclear Iran, we do want a peaceful and prosperous democratic republic to emerge in the heartland of the former Persian empire.

Most of that task falls to Iran's leaders, but U.S. policymakers can make a difference.

If normalizing relations reduces their fear of U.S. military action, they'll be less likely to elect hardliners and focus on other issues, the economy first among them. Robust cultural exchange can help promote understanding and economic partnerships. Reducing trade barriers (to zero?) would enhance bilateral commerce and facilitate both of our economic growth.

Obama's on right track with Iran. Let's hope he follows through.

The Ever Expanding Backpack of State

2009-03-05T21:46:00.004-05:00

It strikes me that government is something like a backpack.

If you're planning to take an all-day hike, you'll want to take some essentials: a Swiss army knife, some snacks, a compass, and a few other things, depending on where you are and how long you'll be out.

But if you're only going to be out for a day, there's no need to bring a tent, sleeping bag, cooking gear, and waders (unless you're going fishing). That stuff would just weigh you down.

There's a sweet spot between carrying too little and too much, depending the nature of the trip and what the hiker is willing to risk lacking versus unneccessarily lugging around. Too little can leave you in a bind, while too much slows the hiker down and makes the journey less pleasant.

So too with government and the productive sector. The core functions are right there in the Constitution: national security, courts for adjudicating disputes, regulating money, preventing restrictions on intrastate trade, and so forth. The benefits far outweigh the burdens for these.

Corporate welfare, earmarks, and the criminalization of just about everything represent the dead weight. The benefits for the few special interests are dwarfed by the burdens for the rest of us.

You can also get too much of a good thing--like a hiker with 50 pounds of food or a government that maintains armaments far greater than necessary to ensure self-government and the protection of vital interests. And there's the grey area.

But as the government burden increases, the private (productive) sector strains more and more under the weight, its (metaphorical) steps slowing. Hong Kong becomes the United States, which becomes Germany, which becomes India, which becomes Zimbabwe, Haiti, or North Korea, each of which is in almost utter collapse.

No wonder that the markets continue to tank: accumulating burdens with no prospects of relief in sight.

Fairfax Budget Blues & School Choice

2009-03-04T22:52:00.004-05:00

The County of Fairfax in which I now live is facing large budget deficits. I've just started to go through the Proposed FY2010 Budget, but I was struck by this image of proposed expenditures.

Spending on schools is a huge portion of the budget: $1.79 billion, or 54% of 3.31 billion, and that figure may exclude some relevant costs.

The projected enrollment for the current 2008-2009 school year is 168,384. If enrollment doesn't change that much, that works out to almost $11,000 per student per year.

Some have touted vouchers and education tax credits as the silver bullet to education quality problems, but they seem to be overlooked in budget discussions. We usually assume that spending less gets you less--and shortchanging our children's futures is obviously unacceptable--but isn't it possible that at least some of the spending isn't adding much to their education?

Andrew Coulson over at Cato crunched the numbers to see what would happen if Illinois, Texas, Wisconsin, and New York adopted an education tax credit, and he finds massive cost savings.

If savings in Fairfax County are anything comparable, something like this could take care of the budget crunch, improve choice, and enhance educational quality all at once. At least it's worth a look.

More budget analysis to come...

Free Market Environmentalism

2009-03-01T10:36:00.003-05:00

Utah Governor Huntsman has been calling for Republicans to be more moderate on environmental issues, apparently putting him at odds with the bulk of his party.

What is it about environmental issues that so turns off conservatives? After all, many of them are outdoor recreationists, and all of us value clean air and water.

Most likely, conservatives recoil from the redistributionist, anti-market, anti-corporate, and collectivist strains within the modern environmentalist movement that impose bureaucratic micromanagement on private decision making.

Current environmental statutes impose heavy burdens on the private sector, but some of them have significant public benefits as well--especially those that reduce air pollution.

Is it possible to have more effective protection of air, water, soil, biodiversity, and climate while reducing the costs of those efforts? Absolutely yes.

What to do:
- Transfer control over local problems to local authorities. It makes no sense to restore land to agriculture quality (as Superfund requires), when it's intended to be redeveloped into a factory, a shopping center, or a parking lot. When 'federal' money is at stake, no one cares about the cost, but more local decisions would better weigh costs and benefits.
- Replace current pollution control requirements with a pollution fees. This allows emitters to decide how best to reduce pollution and gives them a continuing incentive to reduce emissions. To maintain international competitiveness, the funds from these fees should be used to reduce taxes on investment.
- Address climate change first through 'no-regret' policies, then through emissions fees that pay for reduced taxation of savings and investment. No-regret policies are good economic policies that have the side benefit of reducing greenhouse gas emissions. These include ending all subsidies for agriculture (including fishing and forestry), energy (fossil AND alternatives), and rural and coastal development; removing all trade barriers; encouraging adoption of tradable water permits, especially in the West; and moving towards privatization of transportation infrastructure.

This list is hardly comprehensive, but it's a good starting point. Current laws to protect the environment are horribly inefficient and counterproductive, and many bear the stamp of political opportunism rather than sober policy analysis. Environmental protection can also be fiscally responsible and economically wise.

Governor Huntsman is quite correct if he means that Republicans would be wise to adopt a free market environmentalism.

Democrats could keep their political edge on those issues by beating Republicans to the punch on adopting incentive-based environmental policies. Of course, that would mean giving up micromanagement of the private sector.

Markets v. Government: What Works?

2009-03-01T09:43:00.007-05:00

In the wake of the financial crisis, I keep hearing claims about the discrediting of free markets. To begin with, there's a compelling narrative that the financial crisis was caused by government intervention rather than free market excess.

As to whether government intervention can get us out of this mess, it may well be that individuals and businesses--especially in the financial sector--need to reduce the amount of debt they carry. This podcast argues that this process of deleveraging (reducing debt) is necessary and may take years, but that government policy is trying to prevent this. But delaying spring cleaning keeps the house dirty.

The turmoil in heavily regulated financial markets sheds light on some important questions: which parts of the economy are we happiest with and which make us miserable, and does any link exist between government involvement and our level of satisfaction?

As a middle-class consumer, what works well for me?
- The internet.
- Retailing.
- Reading material like books and magazines.
- Restaurants

What drives me crazy?
- The post office (a government monopoly on first class mail).
- Flying (government owns the airports and air traffic control system, runs the security).
- Health care (government uses tax dollars to pay for half, tilts playing field against individual coverage, regulates health provision and insurance, and on and on).
- Commuting to work (government ownership precludes road expansion or other ways to reduce congestion, such as variable rate tolls).

Now, is there a pattern, or am I just cherry picking?

Well, whenever I've come across something that doesn't work the way it should, I've almost always found that politicians have messed up the incentives for producers to respond appropriately to their customers.

Does greater intervention yield greater dissatisfaction? I have no doubt.

Politicians: Missing the Point, Again

2009-02-23T20:00:00.003-05:00

Ohio Congresswoman Marcy Kaptur (D-OH-Toledo) gave a speech on the House floor a few minutes ago lamenting the power that China, OPEC countries, and other unpleasant governments in Africa, Latin America, and Asia possess over the United States.

The source of that power? Their decision whether to buy U.S. government-issued debt. Here’s the argument: by selling off their accumulated U.S. Treasury Bonds or by simply refusing to buy more, they could cause the value of the dollar to crash relative to other currencies. They can supposedly use this leverage to influence U.S. policy.

Leaving aside the fact that a weak U.S. dollar would increase our exports (a policy she favors) because U.S.-produced goods would be cheaper for foreigners, it was striking that she railed against the symptom without even mentioning the cause.

If not for persistent deficits (column D), our government would have no need to issue debt in the form of bonds. Of course, eliminating the deficit requires cutting spending (the reasonable course), raising taxes (an especially bad idea during a recession), or some of both.

But then again, most politicians are known better for empty rhetoric than for making real decisions.

Ending the Western Water Game

2008-08-28T21:32:00.002-04:00

Last week, Senator McCain upset a lot of people in Colorado when he mused about renegotiating an agreement that allocates water usage from the Colorado River to various interests in the West.

The 86-year-old water compact says that Arizona, Nevada and California can take 7.5 million acre feet of water from the river annually. The rest is split among Colorado, Utah, New Mexico and Wyoming. The four up-river states worry that the more populous southerly trio would use a renegotiation to quench its ever-increasing thirst at their expense.

The intesity of feeling about water is strange to those of us from the eastern portion of the United States, where water is so abundant that a staggering number of dams are used simply to prevent downstream flooding. Pittsburgh, for example, receives 3.1 inches of precipitation per month on average with a July high average of 3.8 inches and a February low of 2.4 inches. Denver averages 1.3 inches and ranges from 0.5 to 2.4 inches. Other Colorado River users include Las Vegas (.37, 0.1-0.5) and Yuma (.28, 0.0-0.6). Water is scarce in the West, and scarcity breeds conflict, as Mr. McCain recently discovered.

As long as water resources are allocated by political methods, their allocation will be insecure and subject to intense feelings. But this compact was finalized in 1922, and water needs have clearly changed since my grandmother was born. Water is too expensive in some places and too cheap in others.

An ideal solution would not only allow water to flow (physically and metaphorically) to its highest-valued use, but it would also draw the political venom out of the issue. The answer seems obvious: convert historical water allocations into water rights that can be bought and sold in normal markets. The rights must granted to individuals and businesses, and state governments must be prohibited from owning them.

This system would not force anyone to give up their water, but if they decide they're better off selling or leasing all or part of their right, they would be free to do so. Nothing would prevent conservation groups from purchasing the quantities of water to ensure ecosystem preservation goals.

Waste and inefficiency would be greatly reduced, users would have true choices, and the issue would be much less contentious. Propose that, Senator McCain!

Alabama's Health Transformation

2008-08-28T21:04:00.003-04:00

From the Associated Press last week:

Alabama, pushed to second in national obesity rankings by deep-fried Southern favorites, is cracking down on state workers who are too fat.

The state has given its 37,527 employees a year to start getting fit -- or they'll pay $25 a month for insurance that otherwise is free.

Alabama will be the first state to charge overweight state workers who don't work on slimming down, while a handful of other states reward employees who adopt healthy behaviors.

Alabama already charges workers who smoke -- and has seen some success in getting them to quit -- but now has turned its attention to a problem that plagues many in the Deep South: obesity.

There's nothing wrong with people having the incentives to be healthy, but this proposal is a rather crude attempt to go about it. It could be thought of as part of the employer-employee contract, but it misses the point of that relationship: to produce something of value for the employer. Being concerned with workers' health distracts from and takes resources away from fulfilling the mission of the organization. Employee health should be left to the individual.

Since health care costs are "free" to Alabama state employees, however, and at taxpayer expense, it's reasonable for the state to seek ways to manage its labor costs. If that includes charging more to cover additional projected expenses based on health indicators, that might be okay. But block fees for two particular unhealthy habits? Aside from the resources diverted to compliance, these fees are likely to undermine collegiality and trust at work.

A better, less intrusive approach to improving the health of state employees (and saving taxpayer money) is to empower them to take care of themselves. A possible first step would be to convert each person’s health benefit into a high-deductible insurance plan (like an HSA), where the monthly premiums are individually rated (underwritten) based on physical examinations of the covered persons. If a worker decides that higher premiums are worth paying to continue smoking, to avoid losing weight, or otherwise risking their health, individuals should be free to make that decision, but at their own expense.

How GPS Saved My Marriage ;)

2008-08-21T22:12:00.003-04:00

I love reading maps. Sitting quietly perusing an atlas is an infrequent but fulfilling way to spend a rainy afternoon. My car has at least half a dozen fold-up maps in addition to a North American road atlas, and I literally have a stack of them in my desk at home.

So why would I ever want one of those new-fangled, electronic GPS units?

Shortly before Liz and I went on vacation in Canada, we spent about $150 on a TomTom One (the new version), which comes preloaded with maps of the U.S. and Canada. True to my gender, I consider myself a master of directions, so I thought it was unnecessary. Liz wanted it so we wouldn't waste time trying to figure out where we would be and how to get where we were going. And so no matter what, we'd be able to find our way back somewhere.

She proved to be the wiser. Not only did it guide our path and provide rapid reroute instructions when I made the inevitable wrong turns, but it also contains addresses for a variety of "Points Of Interest," such as restaurants, gas stations, beaches, police stations, movie theaters, etc.

And it made our trip more pleasant in other ways, especially by reducing stress levels. When you don't have to figure out where something is, there's no conflict over what the best way to get there is, leaving more brain capacity for conversation and having fun. And when you're really hungry and don't know where you are, you don't have to resort to the first convenience store you see. It also avoided the clutter of printed maps and provided dynamic information about time and distance to points along the way.

And the technology is cool. The unit receives position signals from satellites and triangulates your position anywhere on the surface of the Earth. As long as you have a clear view of the sky, that is. The signal is lost among tunnels and under a dense canopy of trees. Fortunately there aren't many turns in those places. Much better for on-the-go navigation.

Not that I'm giving up my maps. Maps contain a variety of rich detail about cultural, historical, and ecological amenities that GPS devices (or at least this one) lack, and paper has a certain aesthetic to it. But when it comes to going new places, I'll always bring the GPS too.

Militant Canadians?

2008-08-17T11:59:00.004-04:00

During a recent vacation to Canada, my wife and I were struck by the level of patriotism (or whatever connotative term you prefer) our neighbors to the north display. Our route (yes, we drove) took us past Niagra Falls, around Lake Ontario, and through western Toronto on our way to Horseshoe Valley, which lies between Barrie and Orillia.

Crossing the Rainbow Bridge between the U.S. and Canada right at Niagra Falls, one can't help but notice more Canadian flags in Niagra Falls, Ontario, than U.S. flags in Niagra Falls, New York. There are also more U.S. flags in Canada than Canadian flags in the U.S., but that's probably to attract U.S. tourist dollars. Or maybe Canadians just generally like flags more.

Travelling deeper into Ontario, we observed that Canadians seem to display their flag on their homes and businesses roughly as frequently as we 'Americans' do. (I somewhat dislike describing U.S. citizens as "Americans," since, technically, all inhabitants of North and South America can claim that title, although I consider the founding principles of the United States to be far more "American" than the populist socialism of some of our southern neighbors.)

My treetop trekking tour guide--a businessman retraining as a pilot who's having a last 'fun' summer before entering flight school--was generally supportive of the Afghanistan mission and the Canadian efforts there, despite reservations about Iraq. And while on a jog around Horseshoe Valley, I noticed a bumper sticker stating "If You Don't Stand Behind Our Troops, Please Feel Free to Stand in Front of Them." And the truck had Ontario plates and a Canadian flag, so it wasn't a visiting U.S. citizen.

It's worth nothing that my non-U.S. basis for comparison is the time I've spent in Germany (2 weeks in Bavaria, 4 months mostly in Trier) and Austria (3 weeks in Vienna), where the inhabitants are more cautious about nationalism for historical and geographic reasons.

Overall, however, U.S. citizens still seem to express their patriotism more fervently than Canadians. Perhaps there are deeper cultural reasons, but maybe it's simply because of greater U.S. commitments abroad. Or maybe we weren't their long enough or in the right context (we didn't visit Ottawa or watch the Canadian version of C-SPAN).

In any case, it's good to see that love for country does not require excessive entanglements abroad.

Congress Misdiagnoses Housing Sickness

2008-08-05T20:40:00.003-04:00

Last week, Congress passed and the President signed a bill to deal with the so-called housing crisis. My wife and I--first-time homebuyers--are (hopefully) in the final stages of purchasing a foreclosed townhouse. One would think I'd be happy about the housing bill, since it contains a $7,500 first-time-homebuyers tax credit, and that incentive hasn't been capitalized into the value of homes yet. It has to be repaid over 15 years, so it works out to a 15-year 0% loan (actually negative when you factor in inflation). But I'm far from

Anyway, this bill is a disaster. Instead of fixing the problems that caused the housing bubble in the first place, Congress has made things worse. One policy change ends Freddie Mac and Fannie Mae's free riding on the American taxpayer; to continue their special line of credit with the U.S. Treasury, they now face greater regulation and scrutiny. Unfortunately, it would have been far better to remove their special preferences, shrink them down, and spin them off as fully privatized companies. Alas, such a remedy will have to wait. Incidentally, The Cato Institute has warned about this for years (just do a quick search on their website).

Yet even as these companies get bailed out at taxpayer expense, the legislation also taxes them to create an "Affordable Housing Trust Fund," which is essentially a slush fund for big-government special interests. It also provides funds to the states for buying, fixing, and reselling distressed properties. It's a band-aid solution to the symptoms of two major underlying problems: unfocused monetary policy and land use restrictions. Both are more than sufficient for their own post, so I'll abstain from carrying on now.

Congress should have eliminated special preferences for Freddie and Fannie, focused the Federal Reserve's mandate to only target inflation (and not concern itself with variations in employment or output), and ended transfers to the states to fund planning offices that usually do more harm than good.

J. Craig Venter's Energy Confusion

2008-08-02T09:39:00.000-04:00

In a recent interview with Popular Mechanics, geneticist J. Craig Venter offers his thoughts on energy and climate change. He displays an interesting contradiction.

On the one hand, he claims that "Had we followed intellectually where we were back in the Carter era, we wouldn't have a lot of the problems we do today. We've had a lot of short-term thinking from administrations that basically trades off the health of the planet for economic gain for the business community—and for their own re-election. We don't reward our leaders for making long-term beneficial decisions for society. It's like the stock market—all that matters is the next quarter, not where you are 10 years from now."

In practically the next breath when asked about a sort of "X-Prize" for advanced batteries, Venter responds, "Industry is very motivated to make new batteries. Whoever makes a better battery is going to make a fortune, and having a government incentive to do that doesn't necessarily move it along. In fact, if it's like the human genome project, it could just slow it down."

Indeed. But should policymakers incentivize alternative fuels? It would seem that researchers in the private sector and the academic community have every incentive to find and develop market-competitive alternatives, as an MIT team may have just done with solar.

The current energy situation is unlike the supply shocks of the 1970s. True, political forces unnaturally constrain supply and subsidize demand and monetary policy exacerbates the effects for Americans, but growing demand as the developing world exits poverty and the exhaustion of many low-cost sources of traditional fuels means that high prices are likely to persist.

When government action distracts intelligent, creative, productive people from their activities, it hinders progress and makes us all poorer.