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Archive for the ‘Subsidies’ Category

When writing about the Golden State, I generally focus on fiscal policy. After all, California is trying to become the France of America by imposing punitive tax rates and continuously expanding the burden of government spending.

And since this leads to the loss of jobs and competitiveness, California offers a helpful reminder that bad policy has consequences.

But let’s now look at another example of misguided policy in California. The state is suffering a drought, which obviously isn’t the fault of state lawmakers, but policies imposed by those lawmakers are turning the drought from a problem to a crisis.

The Wall Street Journal opines on the issue.

The liberals who run California have long purported that their green policies are a free (organic) lunch, but the bills are coming due. Lo, Governor Jerry Brown has mandated a 25% statewide reduction in water use. Consider this rationing a surcharge for decades of environmental excess. …During the last two winters amid the drought, regulators let more than 2.6 million acre-feet out into the bay. The reason: California lacked storage capacity north of the delta, and environmental rules restrict water pumping to reservoirs south. …no major water infrastructure project has been completed in California since the 1960s. Money is not the obstacle. Since 2000 voters have approved five bonds authorizing $22 billion in spending for water improvements. Environmental projects have been the biggest winners. …studies show that mandates and subsidies for low-flow appliances like California’s don’t work because people respond by changing their behavior (e.g., taking longer showers). Despite the diminishing returns, Mr. Brown has ordered more spending on water efficiency.

In other words, the government-run system for collecting and distributing water is suffering because of a failure to generate enough supply and because non-price mechanisms aren’t very effective at limiting demand.

So what would work?

The WSJ suggests market-based pricing.

And the good news is that it is a small part of the Governor’s new proposal.

The most proven strategy to reduce water consumption is market pricing with water rates increasing based on household use. …To his credit, the Governor has instructed the State Water Resources Control Board to develop pricing mechanisms… Not even Gov. Brown can make it rain, but he and other politicians can stop compounding the damage by putting water storage, transportation and market pricing above environmental obsessions.

By the way, it’s worth noting that market-based pricing is actually the most effective way of achieving the environmental goal of conservation.

So if you want more water for fish, make sure it’s priced appropriately.

To elaborate on this topic, Megan McArdle, writing for Bloomberg, explains that subsidized water encourages overuse.

California’s problem is not that it doesn’t have enough water to support its population. Rather, the problem is that its population uses more water than it has to. And the reason people do this is that water in California is seriously underpriced… While the new emergency rules do include provisions for local utilities to raise rates, that would still leave water in the state ludicrously mispriced. …the average household in San Diego pays less than 80 cents a day for the 150 gallons of water it uses. …Artificially cheap water encourages people to install lush, green lawns that need lots of watering instead of native plants more appropriate to the local climate. It means they don’t even look for information about the water efficiency of their fixtures and appliances. They take long showers and let the tap run while they’re on the phone with Mom. In a thousand ways, it creates demand far in excess of supply.

Megan agrees with the WSJ that market-based prices are far more effective in controlling demand than non-market restrictions and mandates.

Having artificially goosed demand, the government then tries to curb it by mandating efficiency levels and outlawing water-hogging landscaping. Unfortunately, this doesn’t work nearly as well as pricing water properly, then letting people figure out how they want to conserve it.

And while it may be a challenge to figure out the “market rate” when water is being provided by a government monopoly, it’s safe to say that this rate is a lot higher than it is today.

…we could set some minimum amount of water that would be sold at a very cheap rate, with any excess charged at market rates to reflect the actual supply and the cost of providing it. This would be hugely unpopular with homeowners who have big lawns as well as with farmers.

There’s a semi-famous saying that “if you want less of something, tax it; if you want more of something, subsidize it.”

I don’t know if somebody famous uttered that phrase, or something like it, but the point is correct.

The bottom line is that subsidies encourage over-utilization, inefficiency, and insensitivity to price. That’s true for health care and higher education, just as it’s true for water.

Now let’s look at a video that helps illustrate the damaging impact of subsidies.

It’s not completely applicable because water isn’t sold by profit-making companies, but this video from Marginal Revolution explains how consumers will demand a much greater quantity of a product when the price is artificially low because of subsidies.

Indeed, the video even uses California water as an example.

P.S. The MRU videos are superb tutorials. In prior posts, I’ve shared videos explaining how taxes destroy economic value and highlighting the valuable role of market-based prices, and they’re all worth a few minutes of your time.

P.P.S. Shifting from substance to California-specific humor, this Chuck Asay cartoon speculates on how future archaeologists will view California. This Michael Ramirez cartoon looks at the impact of the state’s class-warfare tax policy. And this joke about Texas, California, and a coyote is among my most-viewed blog posts.

P.P.P.S. Paul Krugman has tried to defend California’s economic performance, which has made him an easy target. I debunked him earlier this year, and I also linked to a superb Kevin Williamson takedown of Krugman at the bottom of this post.

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I’ve written many times about the shortcomings of government schools at the K-12 level. We spend more on our kids than any other nation, yet our test scores are comparatively dismal.

And one of my points, based on this very sobering chart from one of my Cato colleagues, is that America’s educational performance took a turn in the wrong direction when the federal government became more involved starting about 40-50 years ago.

Well, the same unhappy story exists in the higher-education sector. Simply stated, there’s been an explosion of spending, much of it from Washington, yet the rate of return appears to be negative.

Let’s take a closer look at this issue.

Writing for the New York Times, Professor Paul Campos of the University of Colorado begins his column by giving the conventional-wisdom explanation of why it costs so much to go to college.

Once upon a time in America, baby boomers paid for college with the money they made from their summer jobs. Then, over the course of the next few decades, public funding for higher education was slashed. These radical cuts forced universities to raise tuition year after year, which in turn forced the millennial generation to take on crushing educational debt loads, and everyone lived unhappily ever after. This is the story college administrators like to tell when they’re asked to explain why, over the past 35 years, college tuition at public universities has nearly quadrupled, to $9,139 in 2014 dollars.

That’s a compelling story, and it surely has convinced a lot of people, but it has one tiny little problem. It’s utter nonsense.

It is a fairy tale in the worst sense, in that it is not merely false, but rather almost the inverse of the truth. …In fact, public investment in higher education in America is vastly larger today, in inflation-adjusted dollars, than it was during the supposed golden age of public funding in the 1960s. Such spending has increased at a much faster rate than government spending in general. For example, the military’s budget is about 1.8 times higher today than it was in 1960, while legislative appropriations to higher education are more than 10 times higher. In other words, far from being caused by funding cuts, the astonishing rise in college tuition correlates closely with a huge increase in public subsidies for higher education. If over the past three decades car prices had gone up as fast as tuition, the average new car would cost more than $80,000.

Unfortunately, little of this money is being used for education.

…a major factor driving increasing costs is the constant expansion of university administration. According to the Department of Education data, administrative positions at colleges and universities grew by 60 percent between 1993 and 2009, which Bloomberg reported was 10 times the rate of growth of tenured faculty positions. Even more strikingly, an analysis by a professor at California Polytechnic University, Pomona, found that, while the total number of full-time faculty members in the C.S.U. system grew from 11,614 to 12,019 between 1975 and 2008, the total number of administrators grew from 3,800 to 12,183 — a 221 percent increase.

This is great news, but only if you’re a bureaucrat.

But if you think education dollars should be used to educate, it’s not very encouraging.

For example, check out this very depressing example of bureaucratic bloat at the University of California San Diego.

Now let’s zoom back out to the bigger issue. Professor Richard Vedder from Ohio University is even more critical of handouts for the higher-education sector. Here’s some of what he wrote for National Review.

America’s colleges and universities are terribly inefficient and excessively expensive, foster relatively little learning and ability to think critically, and turn out too many graduates who end up underemployed. These and related problems have grown sharply in the half century since the Higher Education Act of 1965 heralded a major expansion of the federal role in higher education.

Rich correctly points out that the federal government has made matters worse.

Washington is far more the problem than the solution to the current afflictions of American higher education. …Tuition has skyrocketed in the era since federal student-loan and grant programs started to become large in the late 1970s. Colleges have effectively confiscated federal loan and grant money designated for students and used it to help fund an academic arms race that has given us climbing walls, lazy rivers, and million-dollar university presidents — but declining literacy among college students and a massive mismatch between students’ labor-market expectations and the realities of the job market.

And you won’t be surprised to learn that federal handouts have backfired against low-income students.

…the primary goal of the federal student-aid programs was to improve access to college for lower-income persons. Here, the record is one of total failure: A smaller percentage of recent college graduates come from the bottom quartile of the income distribution today than was the case in 1970, when federal student-assistance programs were in their infancy.

To close on a semi-optimistic note, Prof. Vedder highlights some intriguing incremental reforms advanced by Senator Lamar Alexander of Tennessee, including the notion that handouts should be linked to performance.

…he seems to embrace the idea that colleges should have “skin in the game”: They should face financial consequences for admitting, and then failing to graduate, students who default on loans and have marginal educational backgrounds indicating that they were clearly ill prepared for truly higher education. …Users and providers of university services need to feel the pain associated with academic non-performance. Growing federal involvement in higher education has brought rising prices, falling quality, and student underemployment. While it is perhaps politically impossible to radically change the federal student financial-aid programs now, the Alexander move is an important first step to rethinking how we finance higher education.

Ultimately, though, we won’t solve the problem unless the federal government’s role is abolished, which is yet another reason to shut down the Department of Education in Washington.

P.S. Here’s a great video from Learn Liberty explaining why subsidies have translated into higher tuition.

P.P.S. Some people have their fingers crossed that there’s a “tuition bubble” that’s about to pop. I hope that’s true, and it may be happening in a few sectors such as law, but I don’t think the overall higher-education bubble will pop until and unless we end government subsidies and handouts.

P.P.P.S. I’m even against subsidies and handouts for economists!

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In the grand scheme of things, the Export-Import Bank isn’t the worst government program or the one that most needs to be abolished.

Entitlement programs are a far bigger threat to America’s long-run fiscal stability the Ex-Im Bank, with Medicaid serving as a particularly sobering example.

Handouts to the Paris-based Organization for Economic Cooperation and Development, on a per-dollar-spent basis, do more damage than the Export-Import Bank.

There are entire departments of the federal government, such as Education or Housing and Urban Development, that should be abolished before we worry about the Ex-Im Bank.

But here’s the deal. Achieving any of the goals listed above would require approval of the House, approval of the Senate, and signed legislation from the President.

So I’m not exactly holding my breath for immediate victories.

In the case of the Export-Import Bank, though, victory is possible. Authorization for this odious form of corporate welfare automatically sunsets later this year.

In other words, so long as either the House or the Senate say no (which simply means choosing to do nothing), taxpayers win.

This is why getting rid of the Export-Import Bank is a real test of whether Republicans are serious about shrinking the size and scope of government.

And just in case you need a reminder of why this bit of cronyism should disappear, here’s some of what Veronique de Rugy recently wrote for The Hill.

Politicians are hoarders. Instead of filling up their homes with junk and refusing to throw any of it away, they surround themselves with bloated government programs and come up with excuses to not get rid of any of them.

And if you go down the rickety stairs to the mildew-filled basements of their homes, surrounded by dead mice, you’ll find the Ex-Im Bank.

Ex-Im simply isn’t the job creator that it claims to be. The bank itself reported that only 16 percent of its beneficiaries were seeking to overcome limitations in private sector export financing. And in cases where the private sector didn’t think it was a good idea to finance a deal, why should taxpayers have backed it instead? The truth is that the bulk of Ex-Im’s activities benefit large, politically connected companies. Indeed, over 65 percent of Ex-IM Bank’s loan guarantee program benefits aerospace giant Boeing, which currently has a market cap of $106 billion. …the Congressional Budget Office projects that taxpayers will have to shoulder $2 billion in losses over the next decade. Even when there aren’t losses, it merely shows that the private sector could have handled the financing. Second, Ex-Im places the 99.96 percent of U.S. small businesses that it doesn’t subsidize at a competitive disadvantage because the subsidies artificially lower costs for privileged competitors.

Indeed. You should watch this excellent video from Mercatus to learn more about the destructive economic impact of the Export-Import Bank.

Defenders of the program say it’s necessary for American exports, but only a tiny share of exports get these subsidies.

And here’s a look at export-related jobs. As you can see, it’s preposterous to claim the Ex-Im Bank plays a big role.

And remember, by the way, that this chart looks at the “seen” jobs. If you count the “unseen” jobs destroyed by subsidies and intervention, the overall impact would be very negative.

You can peruse lots of additional evidence at this Mercatus link. The bottom line is that the only argument for the Export-Import Bank is that it helps to perpetuate a corrupt insider scam.

But if you’re not a lobbyist, cronyist, corporate fat cat, or other form of insider, the Ex-Im Bank is a lose-lose proposition.

P.S. If you support the Export-Import Bank and you want to raise your children to have the same warped view of the world, here are some toys you can get them for their birthdays.

P.P.S. Senator Elizabeth Warren pretends to be the scourge of politically connected fat cats, but compare her miserable record to that of a real taxpayer hero who actually believes in free markets rather than big business.

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Remember Solyndra, the festering symbol of green-energy corruption that resulted in hundreds of millions of dollars of taxpayer money being flushed down the toilet?

And that was just one example. Based on the ratio of energy produced compared to insider enrichment, the entire green-energy racket is a sleazy boondoggle.

For taxpayers, this is a lose-lose situation. They pay to line the pockets of green donors, and they also suffer as government intervention diverts resources in ways that reduce jobs and economic output.

But look at the bright side. Every so often, some of the insider crooks get caught with their hands in the cookie jar.

In a column for the Washington Examiner, the invaluable Tim Carney highlights some of the insider sleaze that led to the resignation of Oregon’s Democratic Governor.

When a love affair begins with shared dreams of solar panels and fantasies of switchgrass, it shouldn’t surprise us that it leads to tears, resignation and federal investigations. Such is the love story of Oregon’s former governor John Kitzhaber and his fiancée, Cylvia Hayes.

Yup, it appears that Ms. Hayes cashed in on her relationship with the governor.

Hayes…described herself as a “policy adviser to Gov. John Kitzhaber on the issue of clean energy and economic development.” Hayes simultaneously ran a consulting firm called 3E Strategies….Demos was pushing governments to use a new measure of the economy — the Genuine Progress Indicator — in place of Gross Domestic Product. They hired Hayes to aid in this push. Soon, Kitzhaber adopted GPI as a new measure for state policies.

Sounds like pay-to-play, which is so typical of government.

But the GPI scam is just the tip of the iceberg.

…federal investigators are looking into Hayes’s work for companies that profited from Kitzhaber’s green policies. …Green energy deserves more scrutiny than the average industry, because so many of its technologies, being unprofitable and inefficient, depend on government subsidies for their very survival. One Hayes client was a California-based company called Waste to Energy Group. Hayes picked up Waste to Energy as a client in 2011 — after becoming first lady — as the company sought a contract for converting landfill gas into energy. …Mary Rowinski, a governor’s office employee, worked for Hayes. Hayes used Rowinski to set up her meetings with Waste to Energy. …Federal investigators probing the Hayes and Kitzhaber case are also seeking state agency contacts with the Oregon Business Council. The Business Council is a corporate lobby group, and a client of Hayes. …The important lesson is that the more you intertwine business and government, the more opportunities you create for cronyism. And green energy is fertile ground for such problems.

Tim’s lesson is spot on.

When you get big government, you get big corruption.

So how do we reduce sleaze in the political system.

Jay Cost, writing for the 2017 Project, urges an aggressive focus on fighting corruption.

…an anticorruption agenda should be integral to reform conservatism. First, reform conservatism is self-consciously oriented to the middle class, and political corruption works against the interests of the middle class. Usually the product of connections between interests and politicians, it favors the well-connected. The typical insurance agent, bakery owner, or office manager lacks such contacts. Second, an anticorruption agenda challenges the liberal belief that ever more government is good for the middle class. The left wishes to cast itself as defender of middle America and conservatives as champions of the elite. A full-throated attack on cronyism in the distribution of public favors would help conservatives fend off this accusation.

And he recognizes that “legal” corruption is just as big of a problem – perhaps even bigger – than “illegal” corruption.

…there is another form of corruption, an “honest” kind. Politicians see an opportunity to use their public authority to favor some private interest—be it the lobby for some commercial group, a wealthy donor, maybe themselves—and they take it. Often, no law is broken, but the public trust is nevertheless violated. James Madison understood corruption from this perspective—as including but not limited to illegal and venal activity.

So what’s the solution to the legal and illegal sleaze in Washington?

Cost seems to recognize that big government has enabled more corruption.

The legislative power has expanded most in three areas not prominently considered by the Founders: the promotion of economic development, the regulation of the economy, and the provision of social welfare benefits. For Congress, developing the national economy has long meant pork barrel politics. Members love to send money back to the district for improvements to rivers and harbors, for roads, railroads, airports, and so on. They want defense spending similarly distributed. The tax code is another place where Congress, in the name of economic growth, favors special interests. …And on top of this, a vast array of corporate welfare programs, like the Export-Import Bank, pay off various groups.

But he seems to think big government is now inevitable, and perhaps even desirable.

…one of the premises of the new reform conservatism is an acknowledgment that the federal government has a legitimate and potentially beneficial role to play in economic development, health care, education, and so on.

So his proposed reforms are rather tepid.

One goal should be to make it harder for members of Congress to cut deals with special interests. …Committee and subcommittee chairs should be required to obey stricter rules concerning conflicts of interest. They should not be allowed to accept money from interest groups with business before their committees. …the temporary lobbying ban on former members of Congress, now two years, should be extended and its loopholes closed. …Given the highly technical work that senior legislative staffers perform, they are grossly underpaid compared with their private counterparts. …The most skilled staffers should be paid appropriately… Similarly, Congress should increase the size of staffs—perhaps substantially.

Having worked on Capitol Hill, I have to say that I’m underwhelmed by these proposals.

More regulations, more staff, and higher pay are not going to change the culture of Washington.

I’m not sure if Mr. Cost sees himself as a reform conservative, or whether he’s merely offering advice to the so-called reformicons. In any event, his proposals symbolize what’s good and bad about reform conservatism: A recognition that government is causing problems, but solutions that are sometimes too tepid to actually solve problems.

The bottom line is that you can’t fix the corruption problems caused by big government unless you’re actually willing to get rid of big government.

P.S. If it’s true that misery loves company, then we can take solace in the fact that other nations have wasteful and corrupt green energy programs.

P.P.S. In keeping with our tradition, let’s close with a link to some amusing material about green-energy boondoggles.

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When I discuss corporate welfare, my first example is usually the Export-Import Bank. It galls me that taxpayers are coerced into subsidizing some of the world’s biggest corporations.

And since I’m an economist, I also don’t like how these subsidies undermine the overall economy.

But the Export-Import Bank is just the tip of the iceberg. Politically connected corporations now treat Washington like a profit center, making “investments” in politicians in exchange for policies that unfairly tilt the economic playing field.

Let’s look at another example of big companies suckling at the federal teat.

Mark Calabria, one of my Cato colleagues (and we also both studied economics at George Mason University!), explains why the federal government shouldn’t be in the business of helping rich shareholders by having the government subsidize corporate insurance policies.

House Republicans and Senate Democrats are in the midst of negotiating a deal to extend the Terrorism Risk Insurance Act (TRIA), which expires at the end of this year. They should save themselves the trouble and protect the taxpayer by allowing TRIA to expire. TRIA is no more than corporate welfare wrapped up in the flag. …TRIA is simply a mechanism for allocating the losses from a terrorist attack. It does nothing to deter terrorists. Do we truly believe that terrorists say to each other, “Let’s not attack that building, it’s insured”? Under the best of circumstances, TRIA has zero impact on the cost of a terror attack. …Why are taxpayers thought to be better able to bear…risk than shareholders in publicly traded corporations, given the concentrated holdings of corporate equity? Why should middle-class taxpayers subsidize the 1 percent?

Amen.

I don’t want the federal government doing any redistribution, but it’s particularly upsetting when politicians and bureaucrats hurt ordinary people to line the pockets of the rich.

Mark also explains that this isn’t simply a case of robbing Peter to subsidize Paul. As with many government programs, the indirect effects result in added collateral damage.

It would be bad enough if TRIA simply redistributed losses from corporate America to taxpayers, but TRIA runs the risk of increasing the losses from terrorism. If developers faced the full cost of their design choices — say, that between a glass building façade or reinforced concrete – they would build safer structures. We’ve sadly seen this play out in the national flood-insurance program, where subsidies have encouraged poor construction while also encouraging families to live in harm’s way. Even the Congressional Budget Office has acknowledged that TRIA lessens the incentives to reduce losses from a terror attack. …the most important lesson of the financial crisis was that when you underprice risk, people make poor choices. That has been repeatedly demonstrated when Congress has attempted to hide the costs of certain activities, like subprime-mortgage lending. Similarly distorting the pricing of terrorism risk will also lead to poor choices.

The final sentences are critically insightful. We need unfettered prices to ensure that costs and benefits are properly calculated and resources are productively allocated.

The Wall Street Journal editorial page is similarly opposed to this example of corporate welfare.

For proof of Ronald Reagan ’s maxim that the closest thing to eternal life on Earth is a government program, consider the Terrorism Risk Insurance Act of 2002. What was sold to the public as a temporary backstop is becoming another permanent entitlement. …Insurers and potential targets of terror, such as the National Football League, property developers and hoteliers, have lobbied hard to keep the program going, and going and going. Congress waved through extensions in 2005 and 2007. Earlier this year, facing a Dec. 31 expiration date, Harry Reid ’s Senate passed another seven-year extension 93-4. Like the Export-Import Bank, terrorism insurance is one of those business subsidies that both parties are only too happy to support. …The best solution would be for the House to let the program expire. Insurers have had 13 years to adjust their models. The Government Accountability Office reported in May that terrorism risk premiums have stabilized. …Private reinsurers can cover many of the risks that taxpayers now bear.

By the way, I think private insurers and reinsurers were the best option, even immediately after the 9-11 terror attacks. Yes, the market was very unsettled and would have stayed that way for a while, but both insurers and customers would have had big incentives to quickly figure out the best pricing strategies.

I would have much rather faced a year or two of instability rather than a decade-plus of distortionary subsidies.

But that’s water under the bridge. What matters now is that there’s zero excuse for subsidizing the insurance policies of big corporations.

By the way, just in case you think I’m exaggerating and that corporate welfare is limited to the Ex-Im Bank and terrorism insurance, check out these other examples of big business and big government conspiring against taxpayers and consumers.

Look at the way the major pharmaceutical companies and big insurance companies got into bed with the White House to line their pockets via Obamacare.

And examine how big financial firms pillaged taxpayers as part of the sleazy TARP bailout.

How about the way big agri-businesses rip off consumers with the ethanol scam.

Don’t forget H&R Block is trying to get the IRS to drive competitors out of the market.

Big Sugar also gets a sweet deal by investing in politicians.

Another example is the way major electronics firms enriched themselves by getting Washington to ban incandescent light bulbs.

Needless to say, we can’t overlook Obama’s corrupt green-energy programs that fattened the wallets of well-connected donors.

And General Motors became Government Motors thanks to politicians fleecing ordinary Americans.

P.S. Since our topic today dealt with terrorism, check out the terrorism-related humor and links in the “P.P.P.S.” of this post.

P.P.S. New topic. Every so often I find some left-wing political satire that is genuinely clever and thoughtful.

There’s my collection of anti-libertarian humor (including an article about libertarian law enforcement), some good leftist tax cartoons, a Fox News dystopia, and some well-done first-world vs third-world imagery.

Now we can add this cartoon about a Joe GOP Sixpack who thinks government is grossly incompetent and untrustworthy, with one exception.

A very effective zinger, I’ll be the first to admit. Indeed, the cartoonist hits me in a somewhat sensitive spot.

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I periodically try to explain that there’s a big difference between being pro-market and pro-business.

Simply stated, policy makers shouldn’t try to penalize businesses with taxes, mandates, and regulations.

But neither should politicians seek to subsidize businesses. That’s why I’m against bailouts, subsidies, and other distortions that provide special favors for politically connected companies.

I have nothing against companies earning money, to be sure, but I want them to earn their profits in the marketplace rather than lining their pockets by using the coercive power of government to rig the rules of the game.

But I don’t just have disdain for companies that stick their snouts in the public trough. I also have little regard for the politicians that enable this sordid type of business by trading campaign cash for corporate welfare.

I realize that’s a strong assertion, but I can’t think of any legitimate reason to support handouts for big companies. And I get especially angry when giveaways are facilitated by politicians who claim to support free markets.

Let’s look at two examples, the Export-Import Bank and the Obamacare bailout for big insurance corporations.

I’ve previously argued that the Export-Import Bank is a squalid example of corruption and I’ve shared a video that explains why it’s economically foolish to subsidize a handful of big exporters.

To augment those arguments, here’s some of what Professor Jeffrey Dorfman of the University Georgia recently wrote in a column for Real Clear Markets. He correctly warns that certain GOP politicians are to blame if the Export-Import Bank stays alive.

The Export-Import Bank is everything that Republicans should stand against. It is crony capitalism at its worst. It is corporate welfare, taxing American families to boost corporate profits. It ever forces firms to potentially subsidize a competitor. There is simply no need for this government agency. Republicans in Congress should make a stand and show voters that Republicans believe in free markets and small government, even if some big businesses complain. The Ex-Im Bank should not be reauthorized. …Over the last decade or so, the Democrats have increasingly become the party of big business, stealing that crown away from Republicans because of the Democrats’ willingness to engage in crony capitalism and actively pick winners and losers in our economy. While Republicans are still thought of as the pro-business party, and other actions by the Democrats are clearly anti-business (Obamacare, environmental over-regulation), large multinational corporations like Boeing and GE have donated money to Democrats and generally profited from their political alliances with them. If Republicans want to make gains among (lower) middle-class voters, one of the things that could help is to convince voters that they are on the side of the people and not big corporations. The Ex-Im Bank reauthorization is a perfect opportunity to do just that. …Income redistribution is wrong especially when the money is going to big and profitable companies.

Ryan Ellis of Americans for Tax Reform agrees. Writing for Forbes, he looks at both the policy and politics of Export-Import Bank handouts.

The ExIm bank is an export subsidy program, giving money to certain companies…in the hopes that gives them a leg up in international trade.  It’s been criticized for decades by free traders and those who simply oppose corporate welfare spending out of Washington. …the ExIm bank will sunset on its own on September 30th.  All Congress has to do is let nature take its course, and this corporate welfare program simply goes away forever.

Sounds like we should have a guaranteed victory from free markets over intervention, right?

Don’t count your chickens before they hatch.  Ryan explains that Republicans may shoot themselves in the foot by trying to rescue this reprehensible example of cronyism.

Charging in at the last minute to save ExIm only makes the House GOP look beholden to K Street.  It also looks like they are flip-flopping from where they were back in the summer.  …ExIm reauthorization…is likely to take a GOP grassroots focused on President Obama’s failures and full of midterm election intensity, and turn them inward toward criticism of the House GOP leadership instead. If things go badly with this CR gambit, the House GOP will have given themselves a self inflicted wound just as they are trying to get out of town and not screw up what should be a good year for their candidates.

How nauseating.

I realize that the Export-Import Bank is a relatively minor issue and that I should mostly care about whether politicians do the right think on big topics such as entitlement reform. After all, that’s what really counts if we want to avoid fiscal catastrophe.

But I can’t stop myself from foaming at the mouth when self-proclaimed supporters of free markets undermine the argument for economic liberty with cronyist deals.

Obamacare is another example of big business being against free markets. We already know that the big pharmaceutical firms cut a special deal with the Obama White House.

The big insurance companies also had their snouts in the trough. Not only did they get legislation that mandated the purchase of their products, but they also got language that provides bailouts if they aren’t able to profit from Obamacare.

What’s really amazing, though, is that some Republicans are willing to go along with Obamacare bailouts for those major companies.

The good news is that Florida Senator Marco Rubio is in the right side. Here’s some of what he wrote about bailouts for health insurance companies for Fox News.

 …section 1342 of the ObamaCare law…established so-called “risk corridors”. According to this provision, taxpayers will make up the difference for health insurance companies whose plans lose money under ObamaCare. Last November, as it became clearer what this section of the law actually meant, I introduced legislation repealing it and protecting taxpayers from being forced to cover insurers’ ObamaCare losses. …In recent weeks, the public has learned that senior White House officials have been working closely with insurers behind the scenes to make sure that their earlier bailout deal, which helped assure ObamaCare’s passage in 2010, would stand and that a taxpayer-funded bailout was still, in fact, on the table. …On this ObamaCare bailout, as with so many issues, Washington politicians are misleading average Americans and planning to stick them with the bill. This is government favoritism and corporate cronyism at its worst. …It’s time to repeal and replace it, but at the very least, we should make it the law of the land that health insurers won’t be bailed out by taxpayers.

I’ll also add a moral argument.

As far as I’m concerned, I want the health insurance companies to suffer major losses. I want the business community to see that it’s a mistake to get in bed with big government.

Though I guess I’m actually making a practical argument. I may be motivated by morality, but the companies hopefully will do a cost-benefit analysis and decide that it’s too risky to strike deals with the political class.

By the way, Republicans often do the wrong thing because they’re afraid that voters favor the statist agenda of dependency.

But that’s not the case for Obamacare bailouts for health insurances companies. Here’s some polling data on the issue that showed up on my Twitter feed.

Let’s close by sharing some of what the editors at National Review wrote about both the Obamacare bailout and Export-Import Bank subsidies.

Congressional Republicans keep saying they oppose Obamacare. Yet they’re refusing to take the simplest and easiest action against it. …Some Republicans say that the insurance companies should not be penalized for the defects of the law. Why not? They have freely chosen to participate in the exchanges, and they should bear the risks of that decision — which include the risk that Congress might decide not to shovel tax dollars at them. The alternative, after all, is to punish taxpayers. …The debate over the Export-Import Bank is one test of Republican sincerity about ending corporate welfare. These taxpayer subsidies are another: If Republicans can’t take on corporate welfare when doing so advances one of their party’s most popular and basic commitments, when will they?

Amen. Both of these issues are tests for the GOP.

Actually, they should get added to a long list of issues that tell us whether Republicans have any sincerity (or brains) in the fight against statism.

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.

P.S. If you’re in the mood for some dark humor, here’s the federal government’s satirical bailout application form.

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The Export-Import Bank is noxiously corrupt example of crony capitalism.

It never should have been created. But that’s something we could say about most government programs.

So the real question is how to reverse the damage.

If we reform a big program such as Medicare, you can’t end it overnight. You have to deal with the reality that millions of people have made plans based on government policies. And even if those policies are wrong, you can’t pull the rug out from folks who did nothing wrong.

So it’s important to put in place appropriate and fair transitions when reforming a major program.

But that’s not an issue with the Export-Import Bank. It provides undeserved subsidies to big companies. Those big companies will be just fine without having their snouts in the public trough. The right thing to do, from both a moral and economic perspective, is to shut it down immediately.

Indeed, this should be a test as to whether supposedly pro-taxpayer politicians in Washington understand the critical difference between being pro-business and being pro-market.

But what about the argument that the Export-Import Bank is somehow a win-win for the American economy? I tend to automatically dismiss such claims for the simple reason that all sorts of companies in the private sector would do what the Ex-Im Bank is doing if it really was a money maker.

But with the issue heating up, it would be a good idea to examine this claim more closely. Fortunately, Matt Mitchell (no relation) of the Mercatus Center does an excellent job of explaining the dodgy economics of the Ex-Im Bank is this short video.

In some sense, Matt is channeling Frederic Bastiat, the great French thinker who said that a good economist looks at both direct and indirect consequences of policies (the “seen” and the “unseen”).

Matt shows that the negative indirect impact of the Ex-Im Bank is far larger than any putative benefits generated by handouts to politically well-connected firms.

Just like bailouts, s0-called stimulus, and green-energy programs all look bad when you examine all the costs and benefits.

For more information, I also recommend this superb video on why cronyism is so corrosive.

And if you want a humorous analysis, scroll to the bottom of this post and see what the Kronies have to say about the Ex-Im Bank.

Or just enjoy this Glenn Foden cartoon.

P.S. I shared six jaw-dropping examples of left-wing hypocrisy last month.

But maybe it’s time to create a special Hypocrisy Hall of Fame, because the Wall Street Journal reveals that we another member who would be a shoo-in for the award.

It seems that Warren Buffett was not being terribly sincere or honest when he said people like him should be paying higher taxes.

Now this is awkward for President Obama and Senate Democrats. …Warren Buffett’s Berkshire Hathaway is expected to help finance Burger King’s  pending acquisition of Canadian doughnut-chain Tim Hortons. The deal will allow Miami-based Burger King to claim Canada as its new legal home for tax purposes. Beltway Democrats had been hoping to use a recent wave of such corporate inversions as a campaign tool. The idea was to propose new taxes on the companies that move. Step two was to beat up Republicans who don’t agree to make the free world’s most punitive corporate tax system even more punitive. But now that Democratic tax hero Mr. Buffett has been spotted surfing on top of this wave, the political challenge has become more difficult.

Sort of makes you wonder whether Buffett endorses higher taxes for the self-interested reason that the political class will then give him a free pass on issues such as the Burger King inversion?

Shocking, just shocking, to think that rich leftists are hypocrites.

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I like to think that very few people despise Obamacare more than me.

I don’t like Obamacare because it’s a fiscal boondoggle.

I don’t like Obamacare because it’s bad healthcare policy.

I don’t like Obamacare because it generated an embarrassingly bad decision by the Supreme Court.

I don’t like Obamacare because it is driving people out of the labor force and into government dependency.

I don’t like Obamacare because it has increased corruption in Washington.

And I don’t like Obamacare because it further enriches and empowers Washington’s political class.

But I also like being honest and that means I’m willing to acknowledge that there’s one small part of Obamacare that will have a positive impact.

More specifically, the so-called Cadillac tax on expensive employer-provided health plans will slightly reduce the distortion in the tax code that encourages over-insurance and exacerbates the healthcare system’s pervasive third-party payer problem.

Indeed, we’re seeing some signs of this already, even though the tax preference isn’t capped until 2018. Here are some excerpts from a story published by Fox News, starting with a description of the law.

…companies desperate to avoid a 40 percent ObamaCare “Cadillac tax” are finding ways to shift the costs to workers. The so-called “Cadillac tax,” now four years away, will affect health plans that spend more than $10,200 per worker. “The excise tax, when it hits in 2018, will affect both employers and employees,”said Brian Marcotte, president of the National Business Group on Health.

Allow me to make an important correction before sharing other parts of the story.

Companies aren’t shifting costs to workers. The money currently spent on health insurance policies is part of total employee compensation.

Think of it this way. If a company hires you for a salary of $50,000 and also includes a $10,000 health insurance policy, what’s your total compensation?

If you give an answer other than $60,000, you’re either very bad at math or you have the logic skills of a politician.

So the story should have stated that the Cadillac tax is merely making workers more aware of costs that already exist.

Thanks for letting me vent. Now back to our main point, which is that the Cadillac tax discourages overinsurance, and this is already leading to some positive changes in the marketplace.

Employees will get incentives to reduce costs through such arrangements as wellness programs, including losing weight or stopping smoking. Meanwhile, employers are shifting workers into plans with higher deductibles, just as ObamaCare does in the health care exchanges, and using health savings accounts to help defray the costs.

I’m particularly happy that employers and employees are shifting to plans with higher deductibles. As I’ve explained before, health insurance should cover large, unanticipated costs, such as the onset of cancer or getting injured in a car wreck.

But it shouldn’t cover annual checkups, elective surgery, and other routine and/or predictable expenses.

And we have one other bit of good news. The tax isn’t going to raise nearly as much money as the politicians wanted!

The “Cadillac tax” was originally intended to take effect sooner, but unions and other groups convinced officials to delay it until 2018, reducing the anticipated income from $137 billion to $80 billion over ten years. But many analysts predict it will be far less than that. Henry Aaron of the Brookings Institution said, before then, it’s expected that most of the businesses that offer that form of insurance will back off and make the insurance less generous, so the tax won’t bite.” …if employers are able to avoid it and less than expected is collected, ObamaCare could fall tens of billions short in paying for itself as promised.

I should hasten to add, by the way, that I’m glad that Obamacare isn’t paying for itself since that simply means lots of taxes to accompany all the additional spending.

I’d be even happier, of course, if we could figure out how to get rid of all the spending as well.

Just in case folks are thinking I’ve gone soft, let’s close today’s post with some humor directed at the rest of Obamacare.

Since the IRS is a big part of Obamacare, here’s a particularly good bumper sticker that shares a line with the above poster.

Here’s a poster mocking the delightful fiscal impact of the law.

Though whoever put this together should have been careful of using The Joker.

I like this next poster since it highlights how politicians have exempted themselves from the law.

Last but not least, here’s Dr. Obama making a cameo appearance.

Ah, the IRS shows up again. Do you sense a theme?

And don’t forget the IRS bureaucrats want to be exempt from the law as well.

P.S. If you’re a glass-one-tenth-full person, here’s some other good news about Obamacare.

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I periodically comment about government corruption, often in the context of trying to make the general point that shrinking the size and scope of the public sector is the most effective way of reducing sleaze in Washington.

Now let’s get specific. I’ve already cited Obamacare, the tax code, and the Export-Import Bank as facilitators of corruption. Let’s augment that list by looking at government intervention in the financial sector.

We’ll start with some findings on the effectiveness of lobbying. In some new research, two professors at George Mason University’s Mercatus Center found that being active in Washington is beneficial for top executives, but it doesn’t help a company’s bottom line.

Here’s how the Washington Examiner summarized the study.

What is the return on investment in lobbying? Does a PAC contribution actually pay for itself? There are so many cases of a lobbyist winning an earmark, or a PAC contribution immediately preceding a subsidy, that it’s hard not to see politics as a good investment. …But for every company that hits the jackpot after lobbying campaign, scores of others end up throwing away money on lobbyists — and scores of executives whose PAC contributions don’t help the company a bit. Business professors Russell Sobel and Rachel Graefe-Anderson of the Mercatus Center at George Mason University collected the data and dug into the bigger question: Do lobbying expenditures and PAC contributions increase corporate profits, on average? Their answer: No… When Sobel and Graefe-Anderson crunched numbers, conducted regressions, and controlled for firm size, industry and other factors, they arrived at data “suggesting that any benefits gained from corporate political activity are largely captured by firm executives.” In short, when a CEO and a lobbyist decide to get their company more involved in politics, the CEO and the lobbyist benefit, while not helping the company.

These findings at first struck me as counterintuitive. After all, there are plenty of companies, such as General Electric and Archer Daniels Midland, that seem to obtain lots of unearned profits thanks to their lobbying activities.

But don’t forget that government – at best – is a zero-sum game. So for every company, industry, or sector that “wins,” there will be lots of companies, industries, and sectors that suffer.

And speaking of industries that benefit, there was one exception to the Mercatus Center findings.

The only exception was the banking and financial sectors, where they found “positive and significant correlations between firm lobbying activity and three measures of firm financial performance,” including return on investment and return on equity.

At this stage, let’s be careful to specify that lobbying is not necessarily bad. If a handful of business owners want to join forces to fight against higher taxes or more regulation, I’m all in favor of that kind of lobbying. They’re fighting to be left alone.

But a big chunk of the lobbying in Washington is not about being left alone. It’s about seeking undeserved benefits by using the coercive power of government.

And this latter definition is a good description of what the financial industry has been doing in Washington. That’s bad for taxpayers, but it’s also bad for the financial sector and the overall economy. Here are some of the conclusions from a recent study published by the New York Federal Reserve Bank.

…there have been many concerns with banks deemed “too big to fail.” These concerns derive from the belief that the too-big-to-fail status gives large banks a competitive edge and incentives to take on additional risk. If investors believe the largest banks are too big to fail, they will be willing to offer them funding at a discount. Together with expectations of rescues, this discount gives the too-big-to-fail banks incentives to engage in riskier activities. …The debate around too-big-to-fail banks has given rise to a large literature. … we study whether banks that rating agencies classify as likely to receive government support increase their risk-taking. …The results of our investigation show that a greater likelihood of government support leads to a rise in bank risk-taking. Following an increase in government support, we see a larger volume of bank lending becoming impaired. Further, and in line with this finding, our results show that stronger government support translates into an increase in net charge-offs. Additionally, we find that the effect of government support on impaired loans is stronger for riskier banks than safer ones, as measured by their issuer default ratings. …the level of impaired loans in a bank loan portfolio increases directly with the level of government support. …riskier banks are more likely to take advantage of potential sovereign support.

Isn’t that wonderful. Our tax dollars have been used to increase systemic risk and undermine economic growth. Though none of us should be surprised.

Since this has been a depressing column, let’s enjoy some morbid TARP humor.

Here’s a cartoon from Robert Ariail about the cronies who got rich from the Bush-Obama bailouts.

Good to see Hank Paulson getting ripped. At the end of the Bush Administration, I attempted to convince the White House that “FDIC resolution” was a much better way of recapitalizing the banking system. I was repeatedly told, though, that Paulson was in charge and there was no way of stopping him from bailing out his former cronies on Wall Street.

Oh well, at least I tried.

Here’s another cartoon about the real victims of TARP. Like the first cartoon, it’s an oldie but goodie and it’s a good illustration of how government is a zero-sum scam.

But let me re-emphasize a point I made above. Taxpayers aren’t the only ones to lose. The entire economy suffers from bailouts and subsidies. Such policies distort the allocation of capital and lead to slower long-run growth.

That may not be easy to measure, but it matters a lot.

Here’s a video explaining how such policies create moral hazard.

This is a good time to recycle the famous poster about supposed government solutions.

P.S. Not all financial institutions are corrupted by government. The nation’s 10th-largest bank, BB&T, did not want and did not need a bailout. But as the bank’s former CEO (and, I’m proud to say, current Cato Institute president) explained in his book, thugs from Washington threatened to use regulatory coercion if BB&T didn’t participate.

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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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