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Archive for the ‘Subsidies’ Category

I’ve written before that Obama’s Solyndra-style handouts have been a grotesque waste of tax dollars.

I’ve argued that they destroy jobs rather than create jobs.

I’ve gone on TV to explain why government intervention in energy creates a cesspool of cronyism.

I’ve even shared a column from Obama’s hometown newspaper that criticizes the rank corruption in green-energy programs.

And it goes without saying that I’ve disseminated some good cartoons on the issue.

But even though green-energy programs are a disgusting boondoggle, American taxpayers and consumers should be thankful they’re not in Germany.

Our programs may be wasteful and corrupt, but we’re amateurs compared to what’s happening on the other side of the Atlantic.

Here are some passages from a must-read story in Der Spiegel.

The government predicts that the renewable energy surcharge added to every consumer’s electricity bill will increase from 5.3 cents today to between 6.2 and 6.5 cents per kilowatt hour — a 20-percent price hike. German consumers already pay the highest electricity prices in Europe. But because the government is failing to get the costs of its new energy policy under control, rising prices are already on the horizon. Electricity is becoming a luxury good in Germany.

As is so often the case with government intervention, the promises from politicians about low costs were a mirage.

Even well-informed citizens can no longer keep track of all the additional costs being imposed on them. According to government sources, the surcharge to finance the power grids will increase by 0.2 to 0.4 cents per kilowatt hour next year. On top of that, consumers pay a host of taxes, surcharges and fees that would make any consumer’s head spin. Former Environment Minister Jürgen Tritten of the Green Party once claimed that switching Germany to renewable energy wasn’t going to cost citizens more than one scoop of ice cream. Today his successor Altmaier admits consumers are paying enough to “eat everything on the ice cream menu.”

Perhaps the most shocking part of the story is that Germans are being forced to pay $26 billion in subsidies to get less than $4 billion of green energy.

For society as a whole, the costs have reached levels comparable only to the euro-zone bailouts. This year, German consumers will be forced to pay €20 billion ($26 billion) for electricity from solar, wind and biogas plants — electricity with a market price of just over €3 billion. Even the figure of €20 billion is disputable if you include all the unintended costs and collateral damage associated with the project. …On Thursday, a government-sanctioned commission plans to submit a special report called “Competition in Times of the Energy Transition.” The report is sharply critical, arguing that Germany’s current system actually rewards the most inefficient plants, doesn’t contribute to protecting the climate, jeopardizes the energy supply and puts the poor at a disadvantage.

Here’s what it means for ordinary people.

In the near future, an average three-person household will spend about €90 a month for electricity. That’s about twice as much as in 2000. Two-thirds of the price increase is due to new government fees, surcharges and taxes. …Today, more than 300,000 households a year are seeing their power shut off because of unpaid bills. Caritas and other charity groups call it “energy poverty.”

Not surprisingly, politically well-connected interest groups are the ones reaping the benefits.

…the renewable energy subsidies redistribute money from the poor to the more affluent, like when someone living in small rental apartment subsidizes a homeowner’s roof-mounted solar panels through his electricity bill. The SPD, which sees itself as the party of the working class, long ignored this regressive aspect of the system. The Greens, the party of higher earners, continue to do so. Germany’s renewable energy policy is particularly unfair with respect to the economy. About 2,300 businesses have managed to largely exempt themselves from the green energy surcharge by claiming, often with little justification, that they face tough international competition. Companies with less lobbying power, however, are required to pay the surcharge.

Let’s conclude with an ominous excerpt from the article. Even though prices already are very high, energy will get even more expensive in the future.

If the government sticks to its plans, the price of electricity will literally explode in the coming years. According to a current study for the federal government, electricity will cost up to 40 cents a kilowatt-hour by 2020, a 40-percent increase over today’s prices.

And isn’t it nice to know that Obama is doing everything he can to impose these policies in the United States?

This cartoon from Michael Ramirez is a perfect summary of Obama’s policy.

Ramirez Green Energy Cartoon

You can see why Ramirez won my political cartoonist contest.

P.S. I don’t like being the bearer of bad news, but green-energy subsidies are just one part of the statist/green agenda. The IMF, for instance, has recommended a huge carbon tax (about $5,500 per year for a family of four!) for the United States. A few gullible folks think this might not be a bad idea if the money gets used to lower other taxes, but they’re the same people who get suckered into buying oceanfront property in Kansas.

P.P.S. Germany may be more responsible (less irresponsible) than certain other European nations, but the country’s political elite is hopelessly statist. Even the supposedly pro-liberty political party tilts left and wants bigger government. Yet the Washington Post still thought it was appropriate and accurate to declare that Germany is “fiscally conservative.” Sure, and I’m a socialist.

P.P.P.S. But at least the mess in Europe has generated some amusing videos (here, here, and here), as well as a very funny set of maps.

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I sometimes make fun of Republicans for being the “Stupid Party,” but I get genuinely agitated when they’re the “Statist Party.”

You can forgive someone for not being intelligent, after all, but it’s much harder to look the other way when they deliberately and knowingly do the wrong thing.

And that seems to be a good description of how the GOP handled the recent farm bill.

Farm subsidiesFirst, some background. The farm bill traditionally has also been the legislation that funded food stamps. The special interests adopted this approach because it created an unholy alliance of big-city Democrats and farm-state Republicans, with both groups agreeing to support each other’s wasteful spending.

Advocates of smaller government have long objected to this arrangement for the simple reason that neither agriculture subsidies nor food subsidies are proper functions of the federal government.

So it seemed like good news when the House of Representatives defeated a $1 trillion farm bill last month. And it seemed like even better news when House GOP leaders announced that they would separate the farm subsidies and food stamps into separate pieces of legislation.

But here’s where we run into problems. The insiders and special interests who are cozy with the GOP used this new approach as an excuse to increase the role of the federal government!

I’m not joking. Darren Bakst of the Heritage Foundation explains what happened.

When the House leadership first announced it would separately consider the food stamp and farm components of the “farm” bill, it looked like they got the message that current farm policy was in dire need of reform. With separation, real reform to rein in market-distorting programs and special interest handouts could finally happen. But now that separation has occurred, they’ve forgotten the very reason why separation was needed in the first place. …With the passage of this bill, the House has gone even further to the left than the Senate bill. It would spend more money than Obama on the largest farm program, crop insurance. …In fact, they made this new bill even worse—by making sneaky changes to the bill text so that some of the costliest and most indefensible programs no longer expire after five years, but live on indefinitely. This means the sugar program that drives up food prices will be harder to change, because it doesn’t automatically expire. It also means the new and radical shallow loss program that covers even minor losses for farmers will indefinitely be a part of the law.

To be fair, there were a few changes that arguably moved the ball in the right direction.

Here’s what the Wall Street Journal opined.

The new farm bill still has more subsidies than is desirable, especially amid a booming agriculture economy and record land prices. The supports for prospering sugar and dairy farmers are especially dreary. Republicans defeated a proposal by Budget Chairman Paul Ryan to put income limits for receiving subsidies, so “farmers” with non-farm incomes of nearly $1 million a year can still dun taxpayers. But at least the bill spends $20 billion less over 10 years than current law. One major reform is the repeal of a 1949 law that reinstates New Deal-era production controls and price supports if Congress failed to pass a new bill.

I’m not an expert on agriculture subsidies, but I think the Heritage Foundation has a stronger argument. In any event, it’s unambiguously true that House Republicans didn’t use this opportunity to approve big, pro-market reforms.

Moreover, the Republicans have left themselves wide open to the charge that they’re perfectly happy to subsidize rich contributors while not subsidizing those with modest incomes.

Ross Douthat was very critical of the GOP ploy in his New York Times column.

It should go without saying that America’s agriculture policy has always been a terrible, stupid, counterproductive exercise in self-dealing cronyism. But when House Republicans severed the traditional connection, arbitrary but politically effective, between farm subsidies and food stamps, it briefly seemed like they were looking for an opportunity to put libertarian populist principle into practice, by separating both outlays in order to trim or reform both separately. But no — instead they were just making it easier for the party’s congressmen to vote for a bloated, awful big government program that benefits mostly-Republican states and interest groups, knowing that they weren’t also voting for something that pays out to the (mostly-Democratic) poor as well. This is egregious whatever you think of the food stamp program… Practically any conception of the common good, libertarian or communitarian or anywhere in between, would produce better policy than a factionally-driven approach of further subsidizing the rich.

Sort of confirms my argument that the worst people in Washington are GOP insiders.

Needless to say, this approach creates a big opening for the left, as illustrated by this cartoon.

Big Ag GOP

But the reason this cartoon is effective is that it is based on reality. Republicans did push through a wasteful farm bill. And they don’t have any plans to deal with the food stamp component.

And even though there will be some agreement on food stamps, the GOP has left itself open to the charge that they want handouts for their rich friends and nothing for the poor.

From a libertarian perspective, I don’t care if Republicans open themselves up to unflattering stereotypes.

But I do want to abolish the Department of Agriculture at some point. And I also want to clean up the cesspool of corruption in Washington by shrinking the size and scope of the federal government.

Unfortunately, we seem to be moving in the wrong direction and the farm bill is merely the latest example of a very bad trend.

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Let’s assume you didn’t understand how a garbage disposal worked and, for whatever reason, you decided to stick your arm in one and turn it on. You would do some serious injury to your hand.

The rest of us would wonder what motivated you to stick your arm down the drain in the first place, but we would feel sympathy because you didn’t realize bad things would happen.

But if you then told us that you were planning to do the same thing tomorrow, we would think you were crazy. Didn’t you learn anything, we would ask?

Seems like a preposterous scenario, but something very similar is now happening in Washington. The Obama Administration is proposing to once again put the economy at risk by subsidizing banks to give mortgages to people with poor credit.

“Let’s party like it’s 2006!”

Even though we’re still dealing with the economic and fiscal damage caused by the last episode of government housing subsidies!

Here are some of the unbelievable details from a report in the Washington Post.

The Obama administration is engaged in a broad push to make more home loans available to people with weaker credit…officials say they are working to get banks to lend to a wider range of borrowers by taking advantage of taxpayer-backed programs — including those offered by the Federal Housing Administration — that insure home loans against default. Housing officials are urging the Justice Department to provide assurances to banks, which have become increasingly cautious, that they will not face legal or financial recriminations if they make loans to riskier borrowers who meet government standards but later default.

Brings to mind the famous saying from George Santayana that, “Those who cannot remember the past are condemned to repeat it.”

But what’s especially amazing – and distressing – about this latest scheme is that “the past” was only a couple of years ago. Or, to recall my odd analogy, one of our hands is still mangled and bleeding and we’re thinking about putting our other hand in the disposal.

Some people understand this is a nutty idea.

…critics say encouraging banks to lend as broadly as the administration hopes will sow the seeds of another housing disaster and endanger taxpayer dollars. “If that were to come to pass, that would open the floodgates to highly excessive risk and would send us right back on the same path we were just trying to recover from,” said Ed Pinto, a resident fellow at the American Enterprise Institute.

What’s also discouraging is that the government already is deeply involved in the housing market – even though this is an area where there is no legitimate role for the federal intervention.

Deciding which borrowers get loans might seem like something that should be left up to the private market. But since the financial crisis in 2008, the government has shaped most of the housing market, insuring between 80 percent and 90 percent of all new loans, according to the industry publication Inside Mortgage Finance. It has done so primarily through the Federal Housing Administration, which is part of the executive branch, and taxpayer-backed mortgage giants Fannie Mae and Freddie Mac, run by an independent regulator.

So I guess the goal is to have taxpayers on the hook for 100 percent of loans.

“Don’t worry, it’s not our money”

Anybody want to guess whether this will end well?

By the way, this is bad policy even if we somehow avoid a new bubble and big taxpayer losses. Even in a”best case” scenario, the federal government will be distorting the allocation of capital by discouraging business investment and subsidizing residential real estate.

And as shown in this powerful chart, that will have adverse consequences for wages and living standards.

The part of the article that most nauseated me was a quote from the head bureaucrat at the Federal Housing Administration.

“My view is that there are lots of creditworthy borrowers that are below 720 or 700 — all the way down the credit-score spectrum,” Galante said. “It’s important you look at the totality of that borrower’s ability to pay.”

Gee, isn’t that nice that Ms. Galante thinks there are lots of borrowers with good “totality” measures? But here’s an interesting concept. Why doesn’t she put her money at risk instead of making me the involuntary guarantor on these dodgy loans?

I’ve already said on TV that we should dump Fannie Mae and Freddie Mac in the Potomac River. And I’ve  argued that the entire Department of Housing and Urban Development should be razed to the ground.

But perhaps this cartoon best shows the consequences of the Obama Administration’s new subsidy scheme.

P.S. We also should get rid of housing preference in the tax code. Our economy should cater to the underlying preferences of consumers, not the electoral interests of politicians.

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I have a serious question for readers. What’s worse, bailouts for government or bailouts for the private sector?

Yes, both are bad, but is it worse to bail out a bankrupt entitlement program, such as Social Security, or it is worse to bail out an industry, such as the financial sector?

Bailout gravy train cartoonTo bail out the housing sector, or to bail out Medicare? Fannie and Freddie, or GM and Chrysler?

All these examples involve huge amounts of money, and both private-sector and public-sector bailouts have perverse long-run effects, but which is worse?

And don’t forget there are lots of other bailouts in our future, as discussed on this interview for Fox Business News.

The interview took place before Christmas, but the topic is even more relevant today since the budget season is about to begin.

Most of the discussion was about government agencies and programs that may get more handouts, though bailouts for the Federal Housing Administration and the Pension Benefit Guaranty Corporation would be indirect bailouts for big business and housing.

So we’d get the worst of all worlds, more government spending and more cronyism.

Or, as they call it in Washington, a win-win situation.

But I call it legal corruption.

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Even though I knew some people would call me Scrooge, I wrote a few days ago about why we should get rid of the tax deduction for charitable contributions in exchange for lower tax rates.

Simply stated, I’m a big advocate of fundamental tax reform, and I would like to scrap the corrupt internal revenue code and replace it with a simple and fair flat tax.

Needless to say, that also means getting rid of tax preferences for housing. I make the case against the home mortgage interest deduction in this interview on the Fox Business Network.

Since a short TV interview doesn’t allow much time for a detailed and wonky analysis of tax policy, this is a good time to explain why tax reform doesn’t really change the tax treatment of housing. But also I’ll explain why it is a big change.

I realize that makes me sound like a politician, talking out of both sides of my mouth, but bear with me.

One of the key principles of tax reform is that there no longer should be any double taxation of income that is saved and invested. As you can see in this chart, people who live for today and immediately consume their after-tax income are basically spared any additional layers of tax. But if you save and invest your after-tax income (which is very good for future growth and necessary to boost workers’ wages), then the government tries to whack you with several additional layers of tax.

The solution is a system that taxes income only one time. And that means all saving and investment should be treated the way we currently treat individual retirement accounts. If you have a traditional IRA (or “front-ended” IRA), you get a deduction for any money you put in a retirement account, but then you pay tax on the money – including any earnings – when the money is withdrawn.

If you have a Roth IRA (or “back-ended” IRA), you pay tax on your income in the year that it is earned, but if you put the money in a retirement account, there is no additional tax on withdrawals or the subsequent earnings.

From an economic perspective, front-ended IRAs and back-ended IRAs generate the same result. Income that is saved and invested is treated the same as income that is immediately consumed. From a present-value perspective, front-ended IRAs and back-ended IRAs produce the same outcome. All that changes is the point at which the government imposes the single layer of tax.

So why am I boring you with all this arcane tax info? Because the home mortgage interest can be considered as a front-ended IRA involving more than one party. The interest paid by the homeowner is deductible, and the interest received by the mortgage company is taxable.

Under a flat tax, the system gets switched to something akin to a back-ended IRA. The homeowner no longer deducts the interest and the recipient of the interest no longer pays tax.

Some of you may be thinking that this is a good deal for financial institutions, but a ripoff for homeowners. But here are two very important points.

  • First, homeowners that already have mortgages presumably would be grandfathered, thus allowing them to continue taking the deduction. Tax reform interest ratesThey made a contract under the old rules and shouldn’t have the rug pulled out from under them.
  • Second, people taking out new mortgages would benefit since mortgage interest would get the same tax treatment now reserved for tax-free municipal bonds. And because there’s no federal income tax on municipal bonds, that means there’s no tax wedge built into the interest rate.

In other words, homeowners or homebuyers in the new system won’t be able to deduct mortgage interest, but they’ll benefit from lower interest rates. Six of one, half dozen of another.

So why, then, is the housing lobby against the flat tax?

In part, they don’t know what they’re talking about. But what about the smart ones, the ones who understand that there’s no meaningful change in the after-tax cost of getting a mortgage in a flat tax world? Why are they opposed to tax reform.

The answer is very simple. They understand that housing isn’t directly affected by a flat tax, but they are very concerned about the indirect impact. More specifically, they understand that the flat tax eliminates all forms of double taxation in the tax code, and that would mean a level playing field.

In other words, the housing sector is now taxed rationally, and other investments are taxed punitively. Under a flat tax, by contrast, all would be taxed rationally.  So the housing sector would lose its relative advantage. 

So if your industry or sector is the beneficiary of a tilted playing field, then it’s understandable that you’ll be worried about tax reform even if there’s no real change in how you get taxed.

And I suspect the impact of tax reform wouldn’t be trivial.

To get an idea about the potential impact, let’s look at some academic research. Professor Dale Jorgenson of Harvard and another economist from Yonsei University in South Korea estimate that most of the economic benefit of tax reform occurs because capital shifts out of owner-occupied housing and into business investment.

…progressivity of labor income taxation is another major source of inefficiency in the U.S. tax system. This produces marginal tax rates on labor income that are far in excess of average tax rates. A high marginal tax rate results in a large wedge between the wages and salaries paid by employers and those received by households. A proportional tax on labor income would equalize marginal and average tax rates and would sharply curtail the losses in economic efficiency due to high marginal rates. An important challenge for tax reform is to eliminate the barriers to efficient capital allocation arising from ―double‖ taxation of assets held in the corporate sector and the exclusion of owner-occupied housing from the tax base… If both income taxes and sales taxes are replaced by a Flat Tax, and a lump sum tax is used to compensate for the revenue shortfall, the welfare gains are very substantial, $5,111.8 billion U.S. dollars of 2011 for HR and $5,444.3 billion for AS. …Our overall conclusion is that the most substantial gains from tax reform are associated with equalizing tax burdens on all assets and all sectors and eliminating the progressive taxation of labor income… We have shown that the most popular Flat Tax proposals would generate substantial welfare gains.

I don’t pay much attention to the estimates in the study about an extra $5 trillion-plus of wealth. That number is very sensitive to the structure of the model and the underlying assumptions.

But I do agree that tax reform will generate big benefits and that much of the gain will occur because there will be less tax-induced over-investment in housing and more growth-generating investment in business capital.

But as I note in the interview, that’s a good thing. It means more prosperity for the American people and a more competitive American economy.

Government shouldn’t be trying to lure us into making economically irrational decisions because of tax or regulatory interventions. Didn’t we learn anything from the Fannie Mae-Freddie Mac fiasco?

The clowns in Washington have been mucking around in the economy for decades and they keep making things worse. Perhaps, just for a change of pace, we should try free markets and small government and see what happens.

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Since I want to shut down the Department of Agriculture, that obviously means getting rid of the various subsidy programs that line the pockets of politically connected agri-businesses.

To get an idea of how these corrupt programs operate, I strongly encourage you to read Paul Moreno’s column in National Review. Here’s a sampling of his expose on dairy subsidies, starting with some history.

…Dairy farmers were pioneers in interest-group politics. They have long been adept at using the power of government… The dairy lobby’s first target was margarine… Dairy farmers organized to drive oleo from the market. They claimed that oleo was harmful — manufactured, they charged, from “dead horses, dead hogs, dead dogs, mad dogs, and drowned sheep.” They alleged that an “oleo trust” was not only driving dairy farmers to the wall, but also impairing the marriage market, because “women are no longer a necessary adjunct to the farmer lads to help them create wealth, owing to the oleo-cotton-oil-soap-fat combine.” …The dairymen finally got Congress to enact a two-cent-per-pound excise tax on oleo in 1886. This was the first time that Congress had used its internal taxing power for regulatory purposes, rather than to raise revenue. …Organized dairy’s next target was “filled milk.” This was skim milk to which vegetable oil was added to give the texture of whole milk. Although it provided all of the protein and most of the vitamins of whole milk at a much lower price (and with fewer cardiovascular hazards), the dairy lobby claimed that it was unhealthful. They even resorted to racism, noting that cow’s milk was a pillar of Western civilization, superior to the “oriental” menace of coconut oil. Congress prohibited the shipment of filled milk in interstate commerce in 1923.

But some of those forms of intervention are ancient history, only interesting to those of us who study the corrupt nexus of big government and various sleazy interest groups.

But Paul explains how the current morass of dairy subsidies came about.

Milk baths are good for the skin, but bad for the wallet

Perhaps the most egregious exercise of dairy power was a New York State law of 1933 that declared that milk was a business “affected with a public interest” and allowed the state to set dairy prices. The New York board set 9 cents per quart as the minimum retail price of milk. A Rochester grocer, Leo Nebbia, was prosecuted for selling two quarts of milk and a loaf of bread for 18 cents. Why, in the midst of the distress and privation of the early 1930s, did New York want to raise the price of milk? The idea was that this would raise the income of dairy farmers, who would then purchase more industrial goods, thus stimulating the economy. The Supreme Court accepted this reasoning, giving state governments virtually unlimited power to enact economic regulations. Such counterintuitive trickle-up economic theory helped to turn the 1929 recession into the prolonged Great Depression. Ever since, the federal government has been trying to keep small dairy farmers in business through an elaborate price-support system.

Isn’t that just wonderful. The politicians justified a corrupt form of intervention by citing the crackpot theory of Keynesian economics.

Sort of reminds me of clueless Nancy Pelosi saying the best way to create jobs was paying people not to work.

With every passing day, I realize this famous poster is actually an understatement.

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Notwithstanding the title of this post, perhaps nobody deserves blame.

Sometimes, a good or service rises in price solely as a result of changes in supply and demand. And if the price of something climbs because of market forces, then it’s merely a reflection of unfettered exchanges between buyers and sellers.

But politicians and bureaucrats often distort market forces with subsidies. And even though consumers ostensibly benefit when government helps to pay for something, intervention can have very costly consequences.

I’ve already shared an amazing chart and a very powerful video to help explain how government subsidies in health care have created a third-party payer problem that has resulted in rapidly rising prices and considerable inefficiency in that sector.

Well, the good intentions of government also are causing problems for higher education.

Here’s a superb video from Learn Liberty, explaining why college expenses are skyrocketing.

The first part of the video shows that a college degree has become more valuable, so it’s understandable that the relative price of higher education has risen.

But then, beginning at about 1:55, the video discusses the role of subsidies. Echoing points I’ve made in the past, the professor explains how subsidies have simply generated higher prices. In other words, colleges have captured all the benefits, not students.

Business Week recently published a story that provides some glaring example of how universities have wasted all the additional money. Here are some remarkable excerpts.

“I have no idea what these people do,” says the biomedical engineering professor. Purdue has a $313,000-a-year acting provost and six vice and associate vice provosts, including a $198,000-a-year chief diversity officer. Among its 16 deans and 11 vice presidents are a $253,000 marketing officer and a $433,000 business school chief. The average full professor at the public university in West Lafayette, Ind., makes $125,000. The number of Purdue administrators has jumped 54 percent in the past decade—almost eight times the growth rate of tenured and tenure-track faculty. “We’re here to deliver a high-quality education at as low a price as possible,” says Robinson. “Why is it that we can’t find any money for more faculty, but there seems to be an almost unlimited budget for administrators?” …Purdue is typical: At universities nationwide, employment of administrators jumped 60 percent from 1993 to 2009, 10 times the growth rate for tenured faculty. “Administrative bloat is clearly contributing to the overall cost of higher education,” says Jay Greene, an education professor at the University of Arkansas. In a 2010 study, Greene found that from 1993 to 2007, spending on administration rose almost twice as fast as funding for research and teaching at 198 leading U.S. universities. …Trustees at the University of Connecticut are reviewing administrative salaries at the school’s main campus in Storrs, following a controversy over the compensation of the school’s former police chief, who received $256,000 annually—more than New York City’s police commissioner. …Mitch Daniels, a fiscal hawk who will become [Purdue's] president when his term expires in January…says he wants to take a look at administrative costs that he suspects are “marbled” throughout the university—beginning with his office. In anticipation of his arrival in January, and without his knowledge, the school renovated the president’s 4,000-square-foot suite. The cost was $355,000, enough to send 15 Indiana residents to Purdue for a year.

Wow. Reminds me of this post about politically correct featherbedding at the University of California at San Diego. I can see why college administrators like this system. But it’s definitely bad news for students who get stuck on a treadmill of higher tuition and more debt.

P.S. At 2:18, the video has a discussion of how subsidies lead to higher costs, which then leads to more demands for additional subsidies. Hmmm…bad government policy leads to more bad government policy. Seems like there’s a term for that phenomenon.

P.P.S. I highly recommend the Learn Liberty videos. Here’s one on protectionism, one on the legality of Obamacare, and here’s another about how excessive federal spending is America’s real fiscal problem.

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If you read through Article I, Section VIII, of the Constitution, it says nothing about Congress having the power to subsidize or pay for disaster relief.

But I realize very few people care about the Constitution, so I’m going to make a utilitarian argument against Federal Emergency Management Agency (FEMA) and other forms of federal involvement in natural disasters.

Best of all, I don’t really need to do any heavy lifting. Someone else already has put together a very strong indictment, using Dauphin Island in Alabama as a case study.

Here are some excerpts from a great bit of reporting and analysis in the Austin Statesman, except in the second sentence I would replace “inertia” with “stupidity.”

Congratulations, you’re subsidizing the luxury vacation homes of the rich

Even in the off season, the pastel beach houses lining a skinny strip of sand here are a testament to the good life. They are also a monument to the generosity, and perhaps to the inertia, of the federal government… The western end of this Gulf Coast island has proved to be one of the most hazardous places in the country for waterfront property. Since 1979, nearly a dozen hurricanes and large storms have rolled in and knocked down houses, chewed up sewers and water pipes and hurled sand onto the roads. Yet time and again, checks from Washington have allowed the town to put itself back together. Across the nation, tens of billions of tax dollars have been spent on subsidizing coastal reconstruction in the aftermath of storms, usually with little consideration of whether it actually makes sense to keep rebuilding in disaster-prone areas. If history is any guide, a large fraction of the federal money allotted to New York, New Jersey and other states recovering from Hurricane Sandy — an amount that could exceed $30 billion — will be used the same way. Tax money will go toward putting things back as they were, essentially duplicating the vulnerability laid bare by the hurricane.  …Like many other beachfront towns, [Dauphin Island] has benefited from the Stafford Act, a federal law that taps the U.S. Treasury for 75 percent or more of the cost of fixing storm-damaged infrastructure, like roads and utilities. At least $80 million, adjusted for inflation, has gone into patching up this one island since 1979 — more than $60,000 for every permanent resident. That does not include payments of $72 million to homeowners from the highly subsidized federal flood insurance program.

Conservatives often complain about welfare programs that pay single mothers to have children out of wedlock. That’s a legitimate complaint since the welfare state has failed both poor people and taxpayers. But they should apply the same analysis and apply even more moral outrage to handouts that encourage rich people to keep rebuilding in disaster-prone areas.

And there’s no question that federal handouts and giveaways are a driving force. You also won’t be surprised that one of America’s worst Presidents also has a role in this story.

Dauphin Island is a case study in the way the federal subsidies have enabled repetitive risk taking. Orrin Pilkey, an emeritus professor at Duke University who is renowned for his research in coastal zones, described the situation there as a “scandal.” The island, four miles off the Alabama coast, was for centuries the site of a small fishing and farming village reachable only by boat. But in the 1950s, the Chamber of Commerce in nearby Mobile decided to link it to the mainland by bridge and sell lots for vacation homes. Then Hurricane Frederic struck in 1979, ravaging the island and destroying the bridge. President Jimmy Carter flew over to inspect the damage. Rex Rainer, the Alabama highway director at the time, recalled several years later that the president “told us to build everything back just like it was and send him the bill.” With $33 million of federal money, local leaders built a fancier, higher bridge that encouraged more development in the 1980s. Much of that construction occurred on the island’s western end, a long, narrow sand bar sitting only a few feet above the Gulf of Mexico. “You can always look back and say, ‘Maybe we shouldn’t have done that,’ ” said Mayor Jeff Collier, who noted that many of the decisions were made before he took office more than a decade ago. “But we can’t turn the clock back.”

I have just one message for Mayor Collier. I don’t care about your damn clock. Your people should be free to rebuild, but don’t ask me to pay for it.

We do have a tiny bit of good news to report, thanks to libertarians and some of their allies.

A coalition in Washington called SmarterSafer.org, made up of environmentalists, libertarians and budget watchdogs, contends that the subsidies have essentially become a destructive, unaffordable entitlement. …This argument might be gaining some traction. Earlier this year, Congress passed changes to the federal flood insurance program that are supposed to raise historically low premiums and reduce homeowner incentives for rebuilding in the most hazardous areas.

But we need to do more than get rid of federal flood insurance subsidies.

Less widely known about than flood insurance are the subsidies from the Stafford Act, the federal law governing the response to emergencies like hurricanes, wildfires and tornadoes. It kicks in when the president declares a federal disaster that exceeds the response capacity of state and local governments. Experts say the law is at least as important as the flood program in motivating reconstruction after storms. In the same way flood insurance shields families from the financial consequences of rebuilding in risky areas, the Stafford Act shields local and state governments from the full implications of their decisions on land use. Under the law, the federal government committed more than $80 billion to disaster recovery from 2004 to 2011, according to a report from the Government Accountability Office. While billions of dollars went to relieve immediate suffering, including cash payments to families left homeless by storms, nearly half of the money was spent helping state and local governments clean and restore damaged areas and rebuild infrastructure.

Finally, I can’t resist sharing this one last excerpt from the story.

People here have formed strong emotional attachments to their island. “There’s a lot of wildlife and a lot of bird life, and it’s just a great place to relax,” said Jay Minus, a lawyer in Mobile who owns two homes on the western end. “You can sit on the porch and watch the dolphins swim past your house.”

Gee, I’m overjoyed that Mr. Minus has a nice view of dolphins. But it strikes me as very perverse that ordinary taxpayers around America are getting raped so this representative of the top 1 percent can enjoy nice views.

This is obviously a perfect example of where my ethical bleeding heart rule should apply.

So what’s the answer? Simple, end the federal government’s role, including getting rid of FEMA. Shikha Dalmia of the Reason Foundation explains why in the Washington Examiner.

A New York Times editorial declared that the impending storm proved that the country needs FEMA-style “Big Government” solutions more than ever. Salon, New Republic and other liberal outfits heartily agreed. Why do liberals love FEMA so much? Certainly not for its glorious track record. Rather, FEMA has been a great vehicle for expanding the welfare state. …So how did the new and improved FEMA perform post-Sandy, a storm for which it had lots of advance warning? Not so well. It didn’t set up its first relief center until four days after Sandy hit — only to run out of drinking water on the same day. It couldn’t put sufficient boots on the ground to protect Queens residents from roving looters. The Red Cross — on whom FEMA depends for delivering basic goods — left Staten Island stranded for nearly a week, prompting borough President Jim Molinaro to fume that America was not a Third World country. But FEMA’s most egregious gaffe was that it arranged for 24 million gallons of free gas for Sandy’s victims, but most of them couldn’t lay their hands on it.

What’s most amazing is that FEMA doesn’t even play a role in emergency response, even though the politicians and bureaucrats always imply that the Agency exists to be a rapid-relief “first responder.”

But if you think FEMA’s inability to provide rapid relief subverts the core reason for its existence, think again. A few days after the Times’ valentine, FEMA head W. Craig Fugate told the newspaper that the agency’s rapid response role is really a fallacy. “The general public assumes we are part of the response team that will be there the first couple of days,” he said. But it is really designed to deal with disasters several days after the fact. How does FEMA do that? By indiscriminately writing checks — a task at which it evidently excels.

Yes, we finally find something FEMA does with considerable skill. It can waste money.

FEMA administrator Elizabeth Zimmerman testified before Congress last year that between 2005 and 2009, 14.5 percent of the agency’s $10 billion-plus disaster aid budget was handed to people who didn’t qualify. The agency tried to get 154,000 of these people to return the money (on average, each had received about $5,000), but they filed a class action lawsuit forcing FEMA to pay them a multimillion settlement. And it forgave the debt of every one with an income below $90,000. …The bigger problem is not with who gets FEMA money, but why. Less than a sixth of Alabama’s $566 million allotment after Katrina financed legitimate government functions such as debris removal, repairing damaged infrastructure and restoring public utilities. The rest was all handouts: food stamps, subsidies for trailer homes and low-interest loans for small businesses. The FEMA website is already advertising goodies for Sandy victims, including 26 weeks of unemployment benefits and up to $200,000 worth of low-interest loans for home repairs not covered by insurance. In addition, it wants to hand out $2 million loans to small businesses and nonprofits (of all sizes) experiencing “cash flow problems.” Farmers and ranchers could likewise qualify for $500,000 in loans to cover production and property losses. Anyone in Sandy’s path can latch on to the FEMA teat. This is not disaster relief but disaster socialism. It is one thing for the government to provide emergency housing, health care and food; it is quite another to compensate victims for every loss. If people knocked down by a storm deserve such federal largesse, why not open the coffers to anyone who suffers a car crash, a death in the family or a broken heart?

Or what if your house burns down? We instinctively know it would be stupid for the government to pay people to rebuild their houses after a fire because then they’ll decide it no longer makes sense to be responsible.

So why, then, does it make sense to subsidize irresponsibility on a broader scale? Particularly when it encourages people to make decisions that could place their lives in danger.

The bottom line is that the federal government shouldn’t take over roles that are better handled by the private sector (such as market-priced homeowner’s insurance) or state and local government (such as emergency response and infrastructure repair and maintenance).

FEMA does more harm than good. It encourages passivity on the part of both people in the private sector and state and local government officials. It’s damaging to the national character when people learn an entitlement mentality and sit around waiting for the federal government to give them freebies.

And how can anyone forget the spectacular incompetence of Louisiana Governor Kathleen Blanco and New Orleans Mayor Ray Nagin during and after Katrina in 2005. Both of them seemed to think it was appropriate to curl up in fetal positions and let Uncle Sam do their jobs.

P.S. I can think of two exceptions to the notion that there should be no federal involvement in disaster relief. First, Washington has a legitimate role in disasters resulting from foreign attack. So some sort of involvement after the 9-11 attacks was appropriate. Second, even a curmudgeon like me wouldn’t get bent out of shape about short-run emergency response. FEMA obviously doesn’t do that, so I’m thinking hypothetically. Perhaps if a hurricane hit a community and a nearby military base had heavy equipment that could help with the immediate clean-up.

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Sometimes it’s no fun to be an economist. Or, to be more specific, it’s rather frustrating to understand Bastiat’s insight about the “seen” and the “unseen” and to always be asking “at what cost?” and “to what effect?” when politicians make inane statements.

The GM bailout is a good example. Politicians want us to believe that it was a success because the company is still in business. Heck, the Vice President’s favorite campaign statement is that “Osama bin Laden is dead and General Motors is alive

But if you’re the type of person who recognizes the importance of tradeoffs and incentives, then it’s easy to see how a political success can be an economic failure. Which is the message of this new video from the Center for Freedom and Prosperity Foundation.

This is music to my ears. I’ve been saying for years that any company can be kept afloat indefinitely with taxpayers subsidies. So if that’s the definition of success, we can party until we hit the fiscal brick wall. But that wall won’t feel good, as we can see from the fiscal chaos in Greece and other European welfare states.

But this issue involves more than just inefficient subsidies. I’m also concerned about the corruption that inevitably exists when cronyism replaces capitalism.

It’s quite likely, after all, that GM is spending lots of money on the Chevy Volt because of pressure from Washington rather than demand from consumers. And when you have a car company executive endorsing higher gas taxes, it’s reasonable to think that he’s currying favor with the political masters in DC rather than looking out for the best interests of drivers.

The GM bailout may be a win-win situation for politicians and lobbyists, but it’s a lose-lose proposition for taxpayers and the economy.

P.S. If you want some auto bailout humor, here’s a spoof on the Chevy Volt, an advertisement for the new GM Obummer, a couple of good political cartoons, and a very funny video on the Pelosi GTxi SS/RT.

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I’ve previously shared an amazing chart that shows how more government spending on public schools has yielded zero positive results.

Well, it seems that government spending on colleges and universities also leaves a lot to be desired.

Three academics investigated the relationship between higher-education spending and economic performance and it turns out that this perverse form of redistribution from poor to rich is counterproductive. Here’s the key sentence from the abstract.

Results from a series of fixed-effects regressions using a 1992-2002 panel of state-level data indicate that increased spending on higher education generally exhibits a relatively large negative effect on private sector employment or gross state product growth when the increase in education spending is financed through own-source revenue.

Yet Obama and most of the other politicians in Washington want to increase the subsidies for colleges and universities – even though the macroeconomic effects are dismal.

But I guess that doesn’t matter since politicians seem more concerned about creating more comfortable lives for unproductive professors and bloated school bureaucracies.

By the way, let’s not forget that students also suffer. As the federal government has squandered more money on higher education, colleges and universities have responded by jacking up tuition and fees, leaving more and more students deeply in debt.

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While I often complain about government waste and stupidity, I’m not even sure what to say about this grim bit of news from Reuters.

General Motors Co sold a record number of Chevrolet Volt sedans in August — but that probably isn’t a good thing for the automaker’s bottom line. Nearly two years after the introduction of the path-breaking plug-in hybrid, GM is still losing as much as $49,000 on each Volt it builds, according to estimates provided to Reuters by industry analysts and manufacturing experts. Cheap Volt lease offers meant to drive more customers to Chevy showrooms this summer may have pushed that loss even higher. There are some Americans paying just $5,050 to drive around for two years in a vehicle that cost as much as $89,000 to produce. …The weak sales are forcing GM to idle the Detroit-Hamtramck assembly plant that makes the Chevrolet Volt for four weeks from September 17, according to plant suppliers and union sources. It is the second time GM has had to call a Volt production halt this year. GM acknowledges the Volt continues to lose money, and suggests it might not reach break even until the next-generation model is launched in about three years.

Gee, it’s almost as if everything that critics have said all along is right.

But not to worry, taxpayers are underwriting the costs. So if bigger subsidies are the price of buying support from the UAW and allowing fat-cat incompetent managers to stay on the job, that just means a bigger tab to pay for the rest of us.

How comforting.

P.S. If you’re a taxpayer and need to be cheered up, these cartoons may help.

P.P.S. This spoof video on the Volt may be even funnier.

P.P.P.S. Last but not least, Government Motors plans to build on the success of the Volt with the Obummer. It was due in 2011, but standard government incompetence has pushed back the release date.

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I’m reluctant to disagree with two excellent economists, but I’m rather disappointed that Gary Becker and James Heckman have a piece in today’s Wall Street Journal arguing that the federal government should subsidize economic research.

With the burden of government spending at record levels, every beneficiary of federal largesse should be willing to back away from the trough.

They obviously have a different perspective. Let’s look at some excerpts from their column.

…the great majority of economists have long agreed that the federal government should have an important role in the sponsorship of basic research. …Yet recent actions by Congress have threatened to restrict funding for basic research that focuses on economics. We believe such actions are misplaced… We cannot expect the market alone to support basic economic and social research, including data collection, since they are public goods that are difficult to appropriate privately. In cutting out the considerable fat from the public diet we should not cut the muscle that has helped make our economy the largest and strongest in history.

Much of their column is dedicated to examples of academic research that have yielded benefit for the rest of society. But even if we assume their examples are completely accurate, that doesn’t necessarily mean that federal subsidies generate a good rate of return.

I’m sure there must be examples of people who took welfare money, managed to avoid the trap of dependency, and then went on to live very productive lives. That doesn’t mean that welfare programs, on net, have a positive impact on the economy.

Likewise, there must be tens of thousands of people who became entrepreneurs, investors, and business owners after getting government grants and other subsidies to attend college. But that doesn’t mean that those success stories aren’t outweighed by costs such as diversion of capital, tuition hikes driven by third-party payer, and excessive student debt.

Should you pay higher taxes to subsidize me?

This doesn’t mean that spending on economic research is necessarily counterproductive, but it does mean that a few positive examples are not enough to settle the debate. Likewise, if I had an intern find examples of government-funded economic research that was either frivolous or destructive, that wouldn’t prove such spending is automatically wasteful.

Let’s close this post by suggesting where there could be consensus. As I noted in my Rahn Curve video, there are some forms of government spending that are associated with better economic performance. Examples of such “public goods” include expenditures to maintain the rule of law, uphold property rights, and enforce contracts.

I’m skeptical about whether economic research is a public good that requires government subsidies, but Becker and Heckman are right in the column when they note that our fiscal problems are due to the “growth of entitlement spending.”

So let’s all agree that we should reform entitlements and shut down useless federal departments.

Then we can have a good debate about spending for “major public physical capital investment” and “conduct of research and development,” which I’ve previously explained amount to less than 10 percent of the federal budget.

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Chuck Asay produces some really good cartoons that include very important economics insights. Here are some of my favorites.

Here’s another one that is worth sharing.

But I don’t want to give Asay all the credit. Other cartoonists also produce funny cartoons with very good messages about economics.

P.S. While I like all of these cartoon and urge you to share them widely, I also hope that you can utilize my educational videos on topics such as tax competition, government spending, and the Laffer Curve. Not everything can be explained in a picture.

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Republicans are telling voters that they’ve learned the hard lessons from the 2006 and 2008 elections and that they are back on the side of taxpayers. I’m not convinced, which is why I’ve outlined some key tests that will demonstrate whether the GOP genuinely supports limited government.

o No tax increases, since more money for Washington will encourage a bigger burden of government and undermine prosperity.

o To stop bailouts for Europe’s decrepit welfare states, no more money for the International Monetary Fund.

o Reform the biased number-crunching methodology at the Congressional Budget Office and Joint Committee on Taxation.

o No more money from American taxpayers to subsidize the left-wing bureaucrats at the Paris-based Organization for Economic Cooperation and Development.

I have another item to add to this list, and it’s one that may actually go the right way.

It appears that there’s a chance to end a major source of corporate welfare known as the Export-Import Bank. As the irreplaceable Tim Carney notes, a handful of Republicans are standing up for free markets over corrupt cronyism.

Ex-Im reauthorization typically passes easily. But after the Wall Street bailouts, Fannie Mae’s bailout, Solyndra’s collapse, and the rise of the Tea Party, many conservatives in Washington have grown hostile to corporate welfare. The free-enterprise Club for Growth, which was central in 2010 in helping conservatives and hurting moderate Republicans, blasted Ex-Im as “nothing more than a corporate welfare slush fund for companies with the best lobbyists.”

You won’t be surprised to learn that the President wants to expand this honeypot of corporate welfare. Here’s some of what George Will wrote about Obama’s plan to divert more capital to subsidize the well-connected.

This looks like a promise to compound market distortions by further politicizing credit markets, while enunciating no limiting principle. Obama is directing the bank to offer United Airlines a subsidy to match any subsidy Canada offers to persuade United to choose the Montreal-made Bombardier as United chooses between it, Boeing and Airbus. So American taxpayers will subsidize United to subsidize Boeing, which is already being subsidized in ways injurious to Delta and others.

Other than self-interested companies with their snouts in the trough – and the politicians and lobbyists they finance, it is very difficult to find any legitimate argument for this cesspool of cronyism.

One of the few self-professed conservatives to support the program is Hugh Hewitt, though I’m befuddled how anybody who supports corporate welfare (and Mitt Romney) can call himself a conservative.

But let’s set that aside. Hewitt’s main argument is that exports are good and that the federal government should subsidize good things. If that argument sounds familiar, it’s probably because you’ve heard Barack Obama say that health insurance is good and that the federal government should subsidize good things.

If you think I’m being unfair, I invite you to read the column. You’ll be especially amused by this passage.

Hamilton argued for a trading empire, a robust union deploying its combined power and resources to advance the nation’s interests abroad to the benefit of its merchants and thus its people at home.

Sounds reasonable, but Hewitt fails to mention that Hamilton’s view of “a robust union” did not include subsidized exports. Heck, Hewitt notes earlier in his column didn’t exist until it was created during the New Deal – about 130 years after Hamilton’s death!

Besides, the Export-Import Bank doesn’t even have an impact on trade balances, as explained by my colleague Sallie James, so mercantilists are barking up the wrong tree.

The Ex-Im Bank at best recreates, and at worst misallocates, private financial behavior. And to what end? The U.S. General Accounting Office (now the Government Accounting Office) has pointed out that“export promotion programs cannot produce a substantial change in the U.S. trade balance.” A country’s trade balance is driven largely by underlying macroeconomic factors, such as the ratio of savings to investment.  …rather than authorizing an increase in the Ex-Im Bank’s operating bud-get, or expanding its role in the U.S. economy,Congress should recognize that the alleged justifications for the Ex-Im Bank’s existence are hollow and abolish the agency completely.

Let’s also address the argument of Frank Gaffney, who normally is sensible about public policy. He makes the claim that the Export-Import bank is a profitable activity for the Treasury.

the Export-Import Bank is a money-making activity for the U.S. government.  According to the U.S. Chamber of Commerce, since 2005, Ex-Im loans, guarantees and insurance programs have returned $3.4 billion over and above its costs and loss reserves, with a default rate of less than 2%.  That includes $400 million in 2011 alone.

Since defenders of Fannie Mae and Freddie Mac made the same claims up until the eve of the financial crisis, this is not exactly a compelling claim. And deposit insurance premiums were a money-maker for the federal government prior to the Savings & Loan crisis about 20 years ago.

It’s possible, of course, that the Ex-Im Bank avoids losses in the future, but that’s not the key point. The real issue is whether the allocation of capital should be distorted by government subsidies. I imagine the government could “profit” by giving sweetheart loans to selected big companies, which would allow those firms to undercut their competitors. Such a scheme might generate some revenue, but it would still undermine prosperity and foment corruption.

Last but not least, don’t forget the moral component. This is a debate about whether ordinary Americans should directly and indirectly pay for a program that enriches some of the biggest companies and richest shareholders in America.

This galls me so much that I’m motivated to create another narcissistic poster (adding to Mitchell’s Law and Mitchell’s Golden Rule), which I’ll call Mitchell’s Guide to an Ethical Bleeding Heart.

This is a formalized version of something I wrote when writing last year about a disgraceful welfare queen.

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I’ve already explained that the Obamacare contraception-coverage controversy is about economics and religious liberty, not birth control.

But now that the debate has been transformed by the remarks of a Georgetown student, this cartoon seems rather appropriate.

The bubble quotes in the cartoon do a good job of capturing the statist mentality. They want me to leave them alone (which I’m happy to do), but they won’t leave me alone.

So here’s a deal for Ms. Fluke and her fellow travelers. I’ll agree to you doing whatever you want behind closed doors (heck, you can even leave the doors open, as far as I’m concerned). But, in exchange, I want you to leave me alone, which means I don’t want to pay higher taxes OR higher insurance premiums to subsidize your birth control.

In a nutshell, this is the non-aggression principle that motivates libertarianism.

I’m quite disappointed, by the way, that the cartoon portrays the student in an unflattering light. This is the mistake Rush made (not for the first time), and it enables the left to deflect attention from the real issue of whether the government should be mandating subsidies.

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I’ve written before about the perverse impact of the unemployment insurance program, and I’ve even cited how left-wing economists such as Paul Krugman and Larry Summers admit that you get more joblessness when you pay people for not working.

I’ve even shared a very good cartoon making the same point. And who can forget Nancy Pelosi’s mindless comments about unemployment benefits being a great way to stimulate job creation.

But sometimes it helps to have real-world anecdotes, and this letter-to-the-editor from a newspaper in Ohio is very educational. Here are key excerpts.

Little did I know that attempting to hire the employees needed, which I had thought to be the easiest part, would turn out to be a nightmare if not impossible. …Before 2009 if our company advertised for an open position, on average we would get 20 to 30 applications, interview six to eight of the applicants, and hire one or two, based on the quality and potential of the candidates. This process has been deteriorating dramatically since 2009 and now at the end of 2011 it has completely hit bottom. Of all the applications that we have received this year, when asked why they were seeking a job with us, one out of three answered: my unemployment is running out and I have to go back to work. Earlier this year after I hired two new full-time employees, went through our company’s orientation process, fitted them with our work clothing and booked them to start within a week, they both quit. One called ahead of the start date to apologize but wanted to inform us he would not be coming in because the government had just extended unemployment benefits again. The second one just did not show on his first day and when I called him he said he couldn’t come in now because unemployment had been extended and he was making almost as much as we were planning to start him out with.  …Our government is considering extending unemployment benefits again soon. The final absurdity might be that extending unemployment is the only thing that both the Democratic and Republican majorities both agree on.

By the way, here’s a post with a similar real-world story from Detroit.

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Even though leftist economists such as Paul Krugman and Larry Summers have admitted that unemployment insurance benefits are a recipe for more joblessness, the White House is arguing that Congress should enact legislation to further subsidize unemployment.

It’s understandable that the Obama Administration is concerned about the issue. These four charts show that the labor market is in terrible shape.

But how can we convince the President that more government is just making a bad situation even worse? What will it take to educate him about the need to reduce government-imposed barriers to job creation?

Perhaps this cartoon will do the trick

And if statists learn from this cartoon, then maybe we should show them another cartoon showing the link between unemployment insurance benefits and joblessness.

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Remember my post from a week ago when I said I was not a Republican even though Ronald Reagan and Calvin Coolidge are two of my heroes?

Well, now I have another reason to despise the GOP. Those reprehensible statists just voted to expand federal housing subsidies.

Here are some excerpts from an excellent National Review column by Andrew McCarthy.

Almost two weeks ago, when they figured no one was watching, the Republican-dominated House of Representatives, by an overwhelming 292–121 margin, voted to increase funding for the Federal Housing Administration. Just as government debt hit $15 trillion, edging closer to 100 percent of GDP, these self-proclaimed scourges of spending decided Uncle Sam should continue subsidizing mini-mansion mortgage loans — up to nearly three-quarters of a million dollars.  Given the straits that the mortgage crisis has left us in, to say nothing of the government’s central role in getting us there, one might think Republicans would be asking whether the government should be in the housing business at all. …the Republican House — installed by the Tea Party in a sea-change election to be the antidote to Obamanomics — decided the taxpayers should guarantee FHA loans up to $729,750. Had they not acted, the public obligation would have been reduced to “only” $625,500 per FHA loan — couldn’t have that, right? …thanks to GOP leadership’s good offices, this government mortgage guarantor now sports expanding portfolios, capital reserves acknowledged only in the breach, and the potential for hundreds of billions of dollars in losses. …If Republicans really thought the growth of government was unsustainable, they’d stop growing it.

I complained last month when 8 Republican senators voted to expand housing subsidies via Fannie and Freddie. Well, 17 GOP senators voted for destructive FHA subsidies, along with 133 Republican representatives.

So let’s recap. Everyone knows that government intervention caused the housing crisis, which is why Republicans should be voting to shut down the Department of Housing and Urban Development and enacting legislation to get government out of the housing sector.

But they decided instead that campaign loot from the corrupt housing lobbies was more important than doing the right thing.

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Over and over again, I tell people to ignore whether politicians have a D or an R after their names. That’s because Democrats sometimes do the right thing and Republicans often do the wrong thing.

My latest example of Republicans doing the wrong thing come from Florida, where GOP politicians decided that free markets should not be allowed to function and that all taxpayers should be put at risk to subsidize hurricane insurance (primarily benefiting upper-income people).

The Wall Street Journal opined today on why this is a mistake.

…evidence continues to build that the state’s taxpayers will get walloped sooner or later. The state’s own hurricane reinsurer now admits its 12-month funding shortfall for claims is $3.2 billion. That estimate is based on the taxpayer-backed Florida Hurricane Catastrophic Fund’s cash on hand, its investment income and the amount banks estimate the fund could raise in municipal bond markets, if needed. Uh-oh. The Cat Fund was supposed to be a reinsurer of last resort but was expanded far beyond a prudent size in 2007, thanks to former Governor Charlie Crist. …Florida consumers will ultimately pay the bill. If the Cat Fund must issue bonds, it levies “assessments”—a code name for a tax—on the state’s property and casualty insurance holders to pay interest and repay principal. Only workers’ compensation and medical malpractice insurance holders are exempt—Mr. Crist’s nod to the tort bar. Lest you think $14 billion is enough, consider that Category 5 Hurricane Andrew caused $26.5 billion in damage in 1992, according to the National Hurricane Center. Wilma, which hit in 2005 as a Category 3, cost $21 billion. If the fund couldn’t pay its claims, some of the state’s insurers would likely go bust. The Cat Fund’s chief operating officer, Jack Nicholson, characterizes that problem as potentially “significant.” He is promoting legislation to reduce the fund’s size and shore up its finances. The time to do that is before the next big one hits, but Florida’s ruling Republicans continue to behave as if this is someone else’s problem.

I’ll go one step farther than Mr. Nicholson. Florida politicians shouldn’t just “shore up” the Fund. They should abolish it.

Private markets should determine the cost of insuring beach houses, resort hotels, and other properties susceptible to hurricane damage.

Yes, small subsidies don’t do as much damage as big subsidies, but you wouldn’t want a doctor to remove only 50 percent of a tumor during a cancer operation. That would be a big mistake, creating a much bigger risk that the growth would return to its original size.

The same principle exists with government interventions. Once politicians decide that it is okay to provide special favors for one group of people (usually big campaign contributors), it is very difficult to limit the size of the handouts.

But the moral of the story is that big government is a mistake – even when (or especially when) bad policy is being imposed by Republicans.

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I have no idea whether George Santayana was a good philosopher, but he certainly was right when he wrote, “Those who do not learn from history are doomed to repeat it.”

Consider the fools in the U.S. Senate. They just voted to expand Fannie Mae and Freddie Mac subsidies, apparently thinking that re-inflating the housing bubble would be a good idea when every sensible person thinks we should abolish these government-created entities.

Here are some blurbs from the Business Week story.

The U.S. Senate adopted a measure that would raise the maximum size of a home loan backed by mortgage companies Fannie Mae, Freddie Mac and the Federal Housing Administration to $729,750. Senator Robert Menendez, a New Jersey Democrat, offered the increase as an amendment to a spending bill today. The measure was approved less than a month after the limit on so-called conforming loans was automatically reduced to $625,500. …The Senate adopted the amendment 60-31. The amendment required 60 votes for approval and was offered during the chamber’s consideration of a package of spending measures. If the Senate passes the underlying bill, the House would then have to vote for it to become law. …The limits, which vary by locale, apply to loans backed by the FHA and government-controlled mortgage companies Fannie Mae and Freddie Mac, which together buy or guarantee about 90 percent of all residential home loans.

For what it’s worth, every Democrat voted for the measure, as well as these Republicans.

Blunt – Missouri

Brown – Massachusetts

Chambliss – Georgia

Graham – South Carolina

Heller – Nevada

Isakson – Georgia

Murkowski – Alaska

Snowe – Maine

Maybe these feckless and irresponsible jokers should spend a bit of time reading Peter Wallison’s work. And here’s a George Will column if they can’t comprehend anything longer than 800 words.

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I’m not an expert on addiction, but it’s probably safe to assume that one would never treat an alcoholic by giving him more booze. Or treat an addict by giving him more drugs.

So you won’t be surprised to learn that I’m opposed to bailouts. I’m against bailing out banks. I’m against bailing out car companies. I’m against bailing out governments.

And I’m against bailing out international bureaucracies that are running short on cash because they’ve been busy engaging in bailouts, which is the point I make in this Fox News interview.

I wish there was more time in the interview to expand on the issue of corrupt investors and financial institutions that love to make big profits when a bubble is expanding, but want handouts, subsidies, and bailouts when a bubble bursts.

This is why short-term blips in the stock market are not necessarily a good indicator of the economy’s long-run health.

Another point worth making is that failure is (or should be) part of the market process. One of my favorite lines, which I should have used in the interview, is that “capitalism without bankruptcy is like religion without hell.”

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I’ll start with an important caveat and state that Ford is far from a perfect company. It has its snout in the trough for boondoggles such as green energy programs. And it happily benefits from protectionist restrictions on foreign pickup trucks and SUVs.

That having been said, there is an enormous difference between Ford, which did not get bailout cash, and the moochers and looters at GM and Chrysler. Which is why I said on TV last year that all ethical people should boycott the latter two companies.

And I’m very proud that other Americans feel the same way. Here are some excerpts from a story in the UK-based Daily Mail.

The Rasmussen Poll asked likely voters: “Have You or Anyone in Family Bought Car from Ford Because Didn’t Take Government Bailout?” 19% said yes, including 33% of the people 18-29 — and 28% of black voters — and 32% of government workers. …25% said yes when asked “Has Bailout and Government Takeover of GM Caused You or Anyone You Know to Avoid Buying GM Car?” …Rasmussen also asked: “Does Fact that GM Took Bailout Money Make You More/Less Likely to Buy GM Car?” 50% said less likely — just 4% said more likely. To the question “Ford Didn’t Take Bailout Funding. Make You More/Less Likely to Buy from Ford?” — 51% said more likely and 12% said less likely.

Here is an ad that Ford apparently is not using anymore because of pressure from the Obama Administration. But please share this link so more people can see it. Kudos to Chris, a patriot in the finest sense.

By the way, some statists are arguing that the bailouts are a success because GM and Chrysler are still alive. But as I’ve explained before, any money-losing entity can be kept alive in perpetuity (or at least ’til the point of Greek-style collapse) by raping and pillaging taxpayers.

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The Center for Freedom and Prosperity has released another “Economics 101″ video, and this one has a very powerful message about the federal government’s so-called War on Poverty.

As explained by Hadley Heath of the Independent Women’s Forum, the various income redistribution schemes being imposed by Washington are bad for taxpayers – and bad for poor people.

The video has a plethora of useful information, but the data on the poverty rate is particularly compelling. Prior to the War on Poverty, the United States was getting more prosperous with each passing year and there were dramatic reductions in the level of destitution.

But once the federal government got involved in the mid-1960s, the good news evaporated. Indeed, the poverty rate has basically stagnated for the past 40-plus years, usually hovering around 13 percent depending on economic conditions.

Another remarkable finding in the video is that poor people in America rarely suffer from material deprivation. Indeed, they have wide access to consumer goods that used to be considered luxuries – and they also have more housing space than the average European (and with Europe falling apart, the comparisons presumably will become even more noteworthy).

The most important message of the video, however, is that small government and economic freedom are the best answers for poverty. As Hadley explains, poor people can be liberated to live meaningful, self-reliant lives if we can reduce the heavy burden of the federal government.

Last but not least, the video doesn’t address every issue in great detail, and there are three additional points that should be added to any discussion of poverty.

1. The biggest beneficiaries of the current system are the army of bureaucrats that receive very comfortable salaries administering various programs.

2. The Obama Administration is looking to re-define poverty in a way that would expand the welfare state and increase the burden of redistribution programs.

3. The welfare reform legislation of the 1990s was a small step in the right direction because it eliminated a federal entitlement and shifted responsibility back to the state level. This success story should be replicated for programs such as Medicaid.

This last point is worth emphasizing because it is also one of the core messages of the video. The federal government has done a terrible job dealing with poverty. The time has come to get Washington out of the racket of income redistribution.

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During his 1976 campaign for the GOP presidential nomination, Ronald Reagan popularized the notion of “welfare queens” who bilked redistribution programs for thousands of dollars.

It has since become non-PC to use such a term, but that’s never stopped me. Here’s a report of a wretched welfare queen who is mooching off taxpayers and should be deeply ashamed of her behavior.

The Queen was paid more than £224,000 in EU subsidies for her Windsor farm estate last year, according to figures obtained by The Mail on Sunday. …The subsidy for the 500-acre dairy and cereal farm, which was founded by Queen Victoria’s husband Prince Albert, has increased by almost £40,000 since 2009.  Similar amounts are thought to have been paid to the Monarch to support her estates in Sandringham and Balmoral, but the Government refused to release this information. …A Palace spokesman said the rise was due to an increase in EU subsidy rates.

Keep in mind 224,000 British pounds is about $350,000 – and that’s not even counting the handouts and subsidies that the royal family may be receiving from other estates.

That’s downright disgusting, and should be Example A in the argument to get rid of Europe’s corrupt Common Agricultural Policy – much as the United States Department of Agriculture should be abolished as quickly as possible.

But there’s another point worth making. Government-coerced redistribution is never a good idea, particularly when done by a central government. But there are degrees of wrong. Taking from rich people to give to poor people is wrong. But as I’ve noted before, taking from poor people to line the pockets of rich people is utterly reprehensible.

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I’ve commented on the corruption of the Solyndra scandal, but it’s important to understand this is not just a story of sleaze.

From an economic perspective, the real problem is that green-energy programs cause a misallocation of capital. Simply stated, government intervention diverts resources from more productive uses.

Here are a couple of examples, explained in videos put together by Senator Jim DeMint’s office.

The first video shows how a subsidiary of Coca-Cola used White House favoritism to subsidize its energy costs.

And the second video explains how a Spanish company, thanks to the Obama White House, benefited from industrial policy.

And what’s the economic impact of these forms of crony capitalism? I did a back-of-the-envelope calculation, estimating that there’s about $160,000 of investment for every real job in the private sector.

Click here to listen to the list of green-energy programs that create jobs more efficiently.

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The Center for Budget and Policy Priorities is a left-wing group in Washington that advocates for bigger government and higher taxes. In an effort to promote more redistribution, they recently put together a map showing how welfare benefits varied by state.

We’re supposed to look at the map and conclude that welfare benefits are too low, but I draw the opposite conclusion. I’m stunned that some states are providing welfare checks greater than 30 percent of the poverty level. And some are even sending out checks greater than 40 percent of the poverty level.

The folks at CBPP conveniently neglect to mention two critical pieces of information.

1. The poverty line is set considerably above a level that would indicate material deprivation. According to Census Bureau data, for instance, a single person with income of $11,139 is considered in poverty and a family of four with income of $22,113. That’s far above the average level of income in most nations of the world.

2. Welfare checks are just one of many forms of redistribution, and the data used to create the map do not count food stamps, Medicaid, housing subsidies and a plethora of other means-tested programs. As Robert Rector of the Heritage Foundation has documented, poor people experience surprisingly high levels of consumption.

This is not to say that life is easy for people living off the government. But it also true that the left is being disingenuous when they try to convince people that more redistribution is necessary to keep people from third world-style suffering.

The real tragedy of the welfare state, however, goes well beyond the fiscal burden. The human toll is far worse, as redistribution subsidizes dysfunctional behavior and traps people in dependency.

The problem could be partially fixed by getting the federal government out of the business of income redistribution. Welfare reform in the 1990s moved the ball in the right direction, and that success could be replicated by block-granting Medicaid and adopting other policies that put state and local governments back in charge.

But federalism is only part of the answer. The best way of dealing with poverty is economic growth, which is the point I make in this online video debate for PBS.

But welfare bureaucracies don’t have much incentive to actually reduce poverty. After all, as Walter Williams has explained, the so-called War on Poverty is a great gig for the tens of thousands of bureaucrats who get to oversee the programs.

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The President’s “green energy” loan program has turned into an embarrassment for the White House, in part because of the sordid corruption associated with the bankruptcy of Solyndra.

But the subsidy program also has attracted some negative attention for its failure to create jobs – even from media outlets that normally are sympathetic to big government.

Here’s a passage from a story in today’s Washington Post.

A $38.6 billion loan guarantee program that the Obama administration promised would create or save 65,000 jobs has created just a few thousand jobs two years after it began, government records show. The program — designed to jump-start the nation’s clean technology industry by giving energy companies access to low-cost, government-backed loans — has directly created 3,545 new, permanent jobs after giving out almost half the allocated amount, according to Energy Department tallies.

Wow, more than $19 billion lent out, and only 3,545 jobs created.  I’m not a math genius, but that seems to be more than $5 million per job.

But let’s suspend reality and accept the Administration’s nonsensical projections that the full $38.6 billion will lead to more than 60,000 jobs. That still works out to be in the neighborhood of $600,000 per job.

Even using that ultra-optimistic scenario, this certainly seems to be a case of government spending far too much money to achieve a particular goal.

But this analysis is grossly inadequate, and White House critics are understating the argument against the scandal-tainted green energy program.

You don’t measure the job impact of a government program simply by dividing the number of jobs into the amount of money that has been spent. That only gives you part of the answer.

You also have to estimate how many jobs would have been created if the $19 billion (or full $38.6 billion) had been left in the private sector rather than being diverted by the heavy hand of government.

In other words, to paraphrase Bastiat, we want to look not only as the “seen” of government spending, but we also want to look at the “unseen” of how the money otherwise would have been allocated. What modern economists sometimes refer to as the “opportunity cost.”

It is not easy, of course, to estimate the number of jobs that would have been created if the government wasn’t diverting money into a green energy program. Ask 10 economists and you’ll get 15 answers.

But we know these effects are real.

To understand what this means, let’s create a rough-and-ready rule of thumb.

According to Tables B-102 and B-103 of the Federal Reserve’s Flow of Funds report, the combined non-financial capital of non-farm businesses is about $20.7 trillion. And the Labor Department says we have close to 140 million people employed, which means the average amount of capital per job is about $155,000.

You can also take a different approach and look at the non-financial capital of households from Table B-100, which is a bit over $23 trillion. Using that number, the average amount of capital is about $165,000 per job.

In either case, it’s quite obvious that the private sector utilizes capital far more efficiently than government. Instead of using $5 million of capital to create a job, as has been the case so far with the Administration’s green energy program, the private sector requires about $160 thousand.

But let’s not forget that we want to give the White House the benefit of the doubt, so we will use the Administration’s future projection that each job will cost “only” $600,000. That’s still almost four times as much as it costs to create a job in the private sector.

Keeping in mind that good analysis requires us to measure the “seen” and “unseen,” let’s now look at net job creation, which is where the rubber meets the road. The federal government is going to divert $38.6 billion from private capital markets for its green energy program, and the Administration claims this will lead to 60,000-65,000 jobs.

However, based on the existing ratio of non-financial capital to employment, that same $38.6 billion, if left in the productive sector of the economy, would create about 240,000 jobs.

In other words, for every one job “created” by the government, almost four jobs will be foregone. The Obama White House isn’t defending a program that spends a lot of money to create very few jobs. The Administration is defending a program that spends a lot of money and – as a result – reduces total jobs by perhaps 180,000.

P.S. This analysis, by the way, is incomplete. You also should estimate how many jobs might be lost because of secondary economic effects such as the expectation of higher taxes caused by additional red ink. And what about the tertiary effects such as companies and investors responding to big government by inefficiently allocating  resources to lobby for DC handouts.

P.P.S. This analysis applies to all government spending, whether it is for short-run Keynesian stimulus or long-run entitlement programs. The relevant question, from an economic perspective, is whether the government can utilize resources more efficiently and productively than the private sector. Needless to say, there are not many types of government spending that meet this test. This is why the academic research, as explained in this video, shows that we would be much more prosperous if government was much smaller.

P.P.P.S There are any number of ways one can measure the amount of capital per job. Very broad measures, such as total net worth in the economy, would push the number higher, but presumably would overstate the amount of capital needed to create an average job in the private sector. Narrower measures, such as the value of business equipment and structures, would generate a much smaller number, but presumably understate the amount of capital needed to create an average job in the private sector. Or, instead of looking at the stock of capital and the total number of jobs, we could look at incremental flows of capital and incremental employment changes. I don’t pretend that my rule-of-thumb estimate is ideal. The goal is simply to create an example so we can understand why it is important to consider both the “seen” and the “unseen.” And using that approach helps explain why the economy gets weaker as the government gets bigger.

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I’ve already explained why the Department of Housing and Urban Development should be eliminated, but a superb column in the Wall Street Journal by my old friend Jim Bovard has my blood boiling.

After reading Jim’s piece, I no longer want to merely abolish HUD. I want to bulldoze the building, cover the ground with six feet of broken glass and rusty nails, and then add a foot of salt to make sure nothing can possibly spring forth again.

In the 1990s, the feds were embarrassed by skyrocketing crime rates in public housing—up to 10 times the national average, according to HUD studies and many newspaper reports. The government’s response was to hand out vouchers to residents…, dispersing them to safer and more upscale locales. Section 8′s budget soared to $19 billion this year from $7 billion in 1994. HUD now picks up the rent for more than two million households nationwide; tenants pay 30% of their income toward rent and utilities while the feds pay the rest. Section 8 recipients receive monthly rental subsidies of up to $2,851 in the Stamford-Norwalk, Conn., area, $2,764 in Honolulu and $2,582 in Columbia, Md. But the dispersal of public housing residents to quieter neighborhoods has failed to weed out the criminal element that made life miserable for most residents of the projects. “Homicide was simply moved to a new location, not eliminated,” concluded University of Louisville criminologist Geetha Suresh in a 2009 article in Homicide Studies. In Louisville, Memphis, and other cities, violent crime skyrocketed in neighborhoods where Section 8 recipients resettled. After a four-year investigation, the Indianapolis Housing Authority (IHA) in 2006 linked 80% of criminal homicides in Marion County, Ind., to individuals fraudulently obtaining federal assistance “in either the public housing program or the Section 8 program administered by the agency.”

In other words, the federal government decided that it wasn’t doing enough damage by being a slumlord. It then decided to directly subsidize rents (often at scandalously high levels), often for the benefit of criminals.

Not surprisingly, proponents of big government are playing the race card, claiming that opposition to rental subsidies is a form of discrimination since a disproportionate share of recipients are minorities. Yet this controversy actually pits law-abiding people, regardless of color, against social-engineering bureaucrats.

…middle-class blacks are the program’s least inhibited critics. Sheldon Carter of Antelope Valley, Calif., testified at a recent public hearing on local Section 8 controversies: “This is not a racial issue. It is a color issue. The color is green and it’s my dollars.” Shirlee Bolds told Iowa’s Dubuque Telegraph Herald in 2009: “I moved away from the city to get away from all this crap. Dubuque’s getting rough. I think it’s turning into a little Chicago, like they’re bringing the street rep here.” Remarkably, HUD seems bent on creating a new civil right—the right to raise hell in subsidized housing in nice neighborhoods.

The bureaucracy’s perverse definition of civil rights is not a recent development, as illustrated by this previous post critiquing HUD’s bean-counting mentality.

The moral of the story, though, is that the federal government has no business being involved in housing. Jim’s closing sentences are a pretty good summary of this outrageous situation.

The Obama administration is now launching a pilot program giving local housing authorities wide discretion to pay higher rent subsidies to allow Section 8 beneficiaries to move into even more affluent zip codes. Hasn’t this program helped wreck enough neighborhoods?

Heck, let’s also add arsenic, lead, and strychnine to the glass, nails, and salt. Maybe some radioactive material as well. No sense taking any chances.

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The Beacon Hill Institute in Massachusetts has just released a very good – but very depressing study. The research finds that costs have jumped under Romneycare, but that’s not surprising. After all, politicians always underestimate the cost of new entitlements.

The important revelation in this new research is the degree to which the system has been propped up by the federal government (i.e., taxpayers in the rest of the nation).

That’s probably good news for Bay State politicians, who get to shift a fiscal burden to people outside the state, And it’s probably good news for Mitt Romney, because it somewhat disguises the magnitude of the disaster he imposed on the taxpayers of his state.

But it doesn’t bode well for the United States. Who will be available to bail out Obamacare? The Chinese? Martians? The Federal Reserve creating money out of thin air?

While you ponder those questions, here are some key excerpts from the study.

In this study, the Beacon Hill Institute at Suffolk University (BHI) attempts to fill the gap by calculating the effect of health care reform on state and federal governments and the private health insurance markets, including employee contributions to their private insurance plans. We find that, under health care reform:

• State health care expenditures have risen by $414 million over the period;

• Private health insurance costs have risen by $4.311 billion over the period;

• The federal government has spent an additional $2.418 billion on Medicaid for Massachusetts.

• Over this period, Medicare expenditures increased by $1.426 billion;

• For a total cumulative cost of $8.569 billion over the period; and

• The state has been able to shift the majority of the costs to the federal government.

The federal government continues to absorb a significant cost of health care reform through enhanced Medicaid payments and the Medicare program. …We estimate the effects of health care reform by comparing the actual value of each variable with the value it would have had, based on recent trends, had health care reform not been implemented.

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Here’s a recent interview with Neil Cavuto about bailouts for Fannie Mae, one of the government-created entities used by Barney Frank, et al, to subsidize housing (and line the pockets of well-connected political insiders).

My main concern is not the bailouts, which surely are odious, but whether we can at least limit future damage by getting the government out of the business of misallocating capital and distorting markets.

When in a hole, put down the %*#(& shovel and stop digging!

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