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Posts Tagged ‘Subsidies’

As part of National Education Week, I’ve looked at the deterioration of K-12 government schools and also explained why a market-based choice system would be a better alternative.

The good news is that we have a choice system for higher education. Students can choose from thousands of colleges and universities.

The bad news is that federal subsidies are making that system increasingly expensive and bureaucratic.

That’s today’s topic.

The underlying problem is “third-party payer,” which is a wonky term to describe what happens when students are buying education with money from somebody else. When this happens, they tend to not care about the price, which then makes it possible for colleges and universities to increase tuition so they become the real beneficiaries of the subsidies.

So nobody should be surprised that college costs are skyrocketing upwards, both in absolute terms and relative terms.

It’s a bubble, but one that probably won’t pop because of the ongoing stream of subsidies.

Jon Miltimore has a very good summary of the perverse incentives created by government.

Federal loans have made tuition far more expensive. Universities get paid up front—so whether students graduate, drop out, or default on the loan doesn’t matter. Departing students are easily replaced. Confident that students have access to cheap money (which can be expensive in the long run), colleges have no incentive to control or cut back the prices of housing, tuition, fees, and meals. …The best solution is to get the federal government out of the loan business altogether. If universities themselves offered loans, incentives would push them toward controlling costs and maximizing student success after graduation. Another option is income share agreements, which allow potential employers or independent organizations to pay tuition in exchange for a percentage of the students’ future earnings. …When markets seem to falter—recent, painful examples include the student loan bubble and housing crisis—the culprit is often government intervening in a way that warps incentives.

In a study for the Mercatus Center, Veronique de Rugy and Jack Salmon compile numbers and analyze studies.

The evidence broadly suggests that institutions of higher education are capturing need-based federal aid and responding to increased federal aid generosity by reducing institutional aid. …federal and state student aid funding expanding significantly over time, from just under $3 billion in 1970 to just under $160 billion in 2017. …Increased eligibility over time has led to a large and growing proportion of college students who receive federal financial aid. …there is a growing strand of economic literature examining the relationship between federal aid and tuition prices. …A study by Bradley Curs and Luciana Dar…finds that…institutions actually raise tuition levels and reduce their institutional aid when the state increases need-based awards. …A study by Stephanie Cellini and Claudia Goldin…finds that for comparable full-time nondegree programs in the same field over 2005–2009, institutions that are eligible for federal aid raised tuition by about 78 percent more than institutions that are ineligible. …Grey Gordon and Aaron Hedlund…develop a quantitative model for higher education to test explanations for the steep rise in college tuition between 1987 and 2010. …These results reveal that increased federal aid is responsible for more than doubling the cost of tuition over a 23-year period.

Here’s a chart from the study showing the explosion of federal subsidies.

By the way, Paul Krugman actually thinks taxpayers have been “starving” higher education.

Let’s get back to exploring the analysis of more sensible economists. Professor Antony Davies and James Harrigan make two key points in their FEE column.

First, subsidies are producing consumers who don’t make sensible education purchases.

…total student debt in the United States passed the $1.5 trillion mark. …the total has been growing at around $80 billion per year. …Around 11 percent of student debt is either delinquent or in default, which is more than four times the delinquency rates for credit cards and residential mortgages. …the problem with making college “free…” that a student must repay a college loan gives him tremendous incentive to at least consider what jobs he could obtain with the college education he must pay for after graduation. A student who is unencumbered by the need to repay a college loan faces little cost when choosing to major in something with little to no future value. …It’s well worth taking out tens of thousands of dollars in loans to pay for a degree that increases a student’s expected lifetime earnings by millions of dollars. But taking out tens of thousands in loans to pay for a degree that increases a student’s expected lifetime earnings by the same tens of thousands or less is, financially, a terrible investment.

Here’s a chart from their article, which looks at the value of various majors.

Second, the problems are caused by bad government policy.

We are in the midst of a college loan bubble for almost all of the same reasons that, a decade ago, we found ourselves in the midst of a housing loan bubble. …In both bubbles, the government interfered in markets in two critical ways. First, the government stepped in as a lender. Second, it shielded private lenders from the consequences of making bad loans. …Making college “free” will simply double-down on the very problem we already face. With “free” college, not only will colleges not have to care whether students can repay their loans, but the students themselves will also not have to care. Meanwhile, taxpayers will be on the hook for the numerous imprudent decisions by both colleges and students. It will bring about the worst of all possible worlds.

Victor Davis Hanson of the Hoover Institution used to be a Classics Professor at California State University. So he’s well positioned to provide a then-now comparison.

Here’s what he experienced in his early years.

Overwhelmingly liberal and often hippish in appearance, American faculty of the early 1970s still only rarely indoctrinated students or bullied them to mimic their own progressivism. Rather, in both the humanities and sciences, students were taught the inductive method of evaluating evidence… As an undergraduate and graduate student at hotbeds of prior 1960s protests at UC Santa Cruz and Stanford, I don’t think I had a single conservative professor. Yet there were few faculty members, in Western Civilization, history, classics, or mandatory general education science and math classes, who either sought to indoctrinate us with their liberal world view or punished us for remaining conservative. …Administrators in the 1960s and 1970s were relatively few. Most faculty saw administration as a temporary if necessary evil that took precious time away from teaching and research and so were admired for putting up with it. …Professors taught large loads—four or five classes a semester for California State University faculty. …The result was that both college tuition and room and board stayed relatively inexpensive.

And here’s what it’s become.

What went wrong? …Politics increasingly infected courses as competence eroded—logical for faculty and students since the former required far less of the latter. Across the curriculum, race, class, and gender studies found their way into art, music, literature, philosophy and history classes. Deduction now replaced the old empiricism. Grades inflated… Universities emulated the ethos of loan sharks and shake-down businesses. The con was as simple as it was insidiously brilliant. Academic lobbyists pressed the government for billions in guaranteed student loans… The federal government-backed student loans. That guarantee greenlighted cash-flush universities to pay inter alia for diversity czars, assistant provosts of “inclusion,” and armies of woke aides and facilitators, to reduce teaching loads, and to open more race/class/gender “centers” on campus—by jacking up college costs higher than the rate of inflation. Student debt soared. …A new generation owes $1.5 trillion in student debt… One’s 20s are now redefined as the lost decade, as marriage, child-rearing, and home buying are put off, to the extent they still occur, into one’s 30s. …The result was reduced teaching, a bonanza of release time, administrative bloat, Club Med dorms, gyms, and student unions, and epidemics of highly paid but non-teaching careerist advisors, and counselors.

So what’s his solution?

Universities should be held responsible for repaying a large percentage of the loans they issued and yet in advance knew well could not and would not be repaid. The government should get out of the campus loan insurance business.

Amen.

As I said at the end of this recent TV interview, colleges and universities need to have some skin in the game.

Daniel Kowalski explains for FEE that government policy is causing ever-higher costs.

Student loans did not exist in their present form until the federal government passed the Higher Education Act of 1965, which had taxpayers guaranteeing loans made by private lenders to students. While the program might have had good intentions, it has had unforeseen harmful consequences. …Secured financing of student loans resulted in a surge of students applying for college. This increase in demand was, in turn, met with an increase in price because university administrators would charge more if people were willing to pay it… According to Forbes, the average price of tuition has increased eight times faster than wages since the 1980s. …The government’s backing of student loans has caused the price of higher education to artificially rise…the current system of student loan financing needs to be reformed. Schools should not be given a blank check, and the government-guaranteed loans should only cover a partial amount of tuition. Schools should also be responsible for directly lending a portion of student loans so that it’s in their financial interest to make sure graduates enter the job market with the skills and requirements needed to get a well-paying job. If a student fails to pay back their loan, then the college or university should also share in the taxpayer’s loss.

All this government-fueled debt has real consequences. Three economists from the Federal Reserve found it hinders home ownership.

To estimate the effect of the increased student loan debt on homeownership, we tracked student loan and mortgage borrowing for individuals who were between 24 and 32 years old in 2005. Using these data, we constructed a model to estimate the impact of increased student loan borrowing on the likelihood of students becoming homeowners during this period of their lives. We found that a $1,000 increase in student loan debt (accumulated during the prime college-going years and measured in 2014 dollars) causes a 1 to 2 percentage point drop in the homeownership rate for student loan borrowers during their late 20s and early 30s. …According to our calculations, the increase in student loan debt between 2005 and 2014 reduced the homeownership rate among young adults by 2 percentage points. The homeownership rate for this group fell 9 percentage points over this period (figure 2), implying that a little over 20 percent of the overall decline in homeownership among the young can be attributed to the rise in student loan debt.

For those interested, here are some of their empirical findings.

By the way, I discussed the negative interaction of student debt and housing in the second half of this TV interview.

Professor Richard Vedder explains for the Wall Street Journal that this subsidized system has resulted in an environment in which neither students nor faculty work very hard.

One reason college is so costly and so little real learning occurs is that collegiate resources are vastly underused. Students don’t study much, professors teach little, few people read most of the obscure papers the professors write, and even the buildings are empty most of the time. …Surveys of student work habits find that the average amount of time spent in class and otherwise studying is about 27 hours a week. The typical student takes classes only 32 weeks a year, so he spends fewer than 900 hours annually on academics—less time than a typical eighth-grader… As economists Philip Babcock and Mindy Marks have demonstrated, students in the middle of the 20th century spent nearly 50% more time—around 40 hours weekly—studying. They now lack incentives to work very hard, since the average grade today—a B or B-plus—is much higher than in 1960… Sociologists Richard Arum and Josipa Roksa have demonstrated, using the Collegiate Learning Assessment, that the typical college senior has only marginally better critical reasoning and writing skills than a freshman. Federal Adult Literacy Survey data, admittedly somewhat outdated, shows declining literacy among college grads in the late 20th and early 21st centuries. …the typical professor is in class around one-third fewer hours than his 1965 counterpart. …The litany of underused resources goes on. In 1970 at a typical university there were perhaps two professors for each administrator. Today, there are usually more nonteaching administrators than professors.

Unfortunately, many politicians respond to these government-caused problems by proposing even more government.

That’s what Hillary Clinton did in 2016 and it’s what politicians – most notably Elizabeth Warren and Bernie Sanders – are doing for 2020.

But that will make a bad situation even worse.

Paul Boyce, writing for FEE, explains that free college will lower standards and make college degrees relatively meaningless.

…college enrollment rates reached more than 40 percent in 2017. Of those, nearly one in three (31 percent) drop out entirely. Why should the average taxpayer subsidize this? …If college is free, it is likely that this rate will increase further. Students won’t have any skin in the game because they won’t be picking the tab up at the end. This effects efficient decisionmaking. In France, for example, the dropout rate is as high as 50 percent. …Government has a track record of underfunding. …This is demonstrated in France, which runs a “free” system. Its universities are heavily underfunded and unable to satisfy student enrollment. …As college enrollment has increased, standards have fallen to accommodate for this. …it defeats the goal of creating a well-educated workforce. …it dilutes the importance and value of a degree. …Undergraduate degrees will become the norm, and the financial return will become negligible.

And the experience of other nations isn’t a cause for optimism.

Andrew Hammel, an American who taught for many years at a German university, is not overly impressed by that nation’s free-tuition regime.

…in their early teen years, the brightest German students are sent to the most prestigious form of German high school, the Gymnasium. Currently, over 50 percent of German students earn this privilege (this number has jumped in the last 30 years, prompting charges of grade inflation). Gymnasium graduates with reasonable grades are guaranteed a place in a German university; there is no entrance exam. 95 percent of German students attend public universities, where they are charged fees, but not formal tuition. All professors at public universities are civil servants. …Supporters of the tuition-free system note that 65 percent of Germans say university should be tuition-free, “even if this means the quality of education is slightly worse.” …The system also gives students extra freedom: you can study art history or sociology, knowing that you won’t be hounded by creditors if you later find only spotty employment. …one-third of all students who enroll in German universities never finish. A recent OECD study found that only 28.6 percent of Germans aged between 25 and 64 had a tertiary education degree… German universities punch below their weight in international rankings… Gather any group of German professors, and talk will immediately turn to the burgeoning bureaucracy which distracts them from teaching and research. …Americans who teach ordinary classes in Germany find average German students somewhat less motivated than their dues-paying American counterparts. The top third of motivated students would succeed anywhere, and the bottom third, as we have seen, drop out.

I’ll close with an observation about inefficiency in higher education.

Here’s a chart I shared a few years ago. I’m sure the problem is even worse today.

The bottom line is that student debt, administrative bloat, and expensive tuition are all predictable consequences of federal subsidies.

P.S. If you’re worried about political correctness in higher education (and you have the appropriate subscriptions), I recommend this column in the Wall Street Journal and this George Will column in the Washington Post.

P.P.S. Here’s a video interview with Richard Vedder about high costs and inefficiency in higher education. And I also recommend this video explanation by Professor Daniel Lin.

P.P.P.S. It also turns that all these subsidies have a negative correlation with private-sector employment.

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The Department of Agriculture should be abolished. Yesterday, if possible.

It’s basically a welfare scam for politically connected farmers and it undermines the efficiency of America’s agriculture sector.

Some of the specific handouts – such as those for milk, corn, sugar, and even cranberries – are unbelievably wasteful.

But the European Union’s system of subsidies may be even worse. As reported by the New York Times, it is a toxic brew of waste, fraud, sleaze, and corruption.

…children toil for new overlords, a group of oligarchs and political patrons…a feudal system…financed and emboldened by the European Union. Every year, the 28-country bloc pays out $65 billion in farm subsidies… But across…much of Central and Eastern Europe, the bulk goes to a connected and powerful few. The prime minister of the Czech Republic collected tens of millions of dollars in subsidies just last year. Subsidies have underwritten Mafia-style land grabs in Slovakia and Bulgaria. …a subsidy system that is deliberately opaque, grossly undermines the European Union’s environmental goals and is warped by corruption and self-dealing. …The program is the biggest item in the European Union’s central budget, accounting for 40 percent of expenditures. It’s one of the largest subsidy programs in the world. …The European Union spends three times as much as the United States on farm subsidies each year, but as the system has expanded, accountability has not kept up. …Even as the European Union champions the subsidy program as an essential safety net for hardworking farmers, studies have repeatedly shown that 80 percent of the money goes to the biggest 20 percent of recipients. …It is a type of modern feudalism, where small farmers live in the shadows of huge, politically powerful interests — and European Union subsidies help finance it.

Is anyone surprised that big government leads to big corruption?

By the way, the article focused on the sleaze in Eastern Europe.

The problem, however, is not regional. Here’s a nice visual showing how there’s also plenty of graft lining pockets in Western Europe.

P.S. I imagine British politicians will concoct their own system of foolish subsidies, but the CAP handouts are another reason why voters were smart to vote for Brexit.

P.P.S. The CAP subsidies are one of many reasons why the European Union has been a net negative for national economies.

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The 2008 financial crisis was largely the result of bad government policy, including subsidies for the housing sector from Fannie Mae and Freddie Mac.

This video is 10 years old, but it does a great job of explaining the damaging role of those two government-created entities.

The financial crisis led to many decisions in Washington, most notably “moral hazard” and the corrupt TARP bailout.

But the silver lining to that dark cloud is that Fannie and Freddie were placed in “conservatorship,” which basically has curtailed their actions over the past 10 years.

Indeed, some people even hoped that the Trump Administration would take advantage of their weakened status to unwind Fannie and Freddie and allow the free market to determine the future of housing finance.

Those hopes have been dashed.

Cronyists in the Treasury Department unveiled a plan earlier this year that will resuscitate Fannie and Freddie and recreate the bad incentives that led to the mess last decade.

This proposal may be even further to the left than proposals from the Obama Administration. And, as Peter Wallison and Edward Pinto of the American Enterprise Institute explained in the Wall Street Journal earlier this year, this won’t end well.

…the president’s Memorandum on Housing Finance Reform…is a major disappointment. It will keep taxpayers on the hook for more than $7 trillion in mortgage debt. And it is likely to induce another housing-market bust, for which President Trump will take the blame.The memo directs the Treasury to produce a government housing-finance system that roughly replicates what existed before 2008: government backing for the obligations of the government-sponsored enterprises Fannie Mae and Freddie Mac , and affordable-housing mandates requiring the GSEs to encourage and engage in risky mortgage lending. …Most of the U.S. economy is open to the innovation and competition of the private sector. Yet for no discernible reason, the housing market—one-sixth of the U.S. economy—is and has been controlled by the government to a far greater extent than in any other developed country. …The resulting policies produced a highly volatile U.S. housing market, subject to enormous booms and busts. Its culmination was the 2008 financial crisis, in which a massive housing-price boom—driven by the credit leverage associated with low down payments—led to millions of mortgage defaults when housing prices regressed to the long-term mean.

Wallison also authored an article that was published this past week by National Review.

He warns again that the Trump Administration is making a grave mistake by choosing government over free enterprise.

Treasury’s plan for releasing Fannie Mae and Freddie Mac from their conservatorships is missing only one thing: a good reason for doing it. The dangers the two companies will create for the U.S. economy will far outweigh whatever benefits Treasury sees. Under the plan, Fannie and Freddie will be fully recapitalized… The Treasury says the purpose of their recapitalization is to protect the taxpayers in the event that the two firms fail again. But that makes little sense. The taxpayers would not have to be protected if the companies were adequately capitalized and operated without government backing. Indeed, it should have been clear by now that government backing for private profit-seeking firms is a clear and present danger to the stability of the U.S. financial system. Government support enables companies to raise virtually unlimited debt while taking financial risks that the market would routinely deny to firms that operate without it. …their government support will allow them to earn significant profits in a different way — by taking on the risks of subprime and other high-cost mortgage loans. That business would make effective use of their government backing and — at least for a while — earn the profits that their shareholders will demand. …This is an open invitation to create another financial crisis. If we learned anything from the 2008 mortgage market collapse, it is that once a government-backed entity begins to accept mortgages with low down payments and high debt-to-income ratios, the entire market begins to shift in that direction. …why is the Treasury proposing this plan? There is no obvious need for a government-backed profit-making firm in today’s housing finance market. FHA could assume the important role of helping low- and moderate-income families buy their first home. …Why this hasn’t already happened in a conservative administration remains an enduring mystery.

I’ll conclude by sharing some academic research that debunks the notion that housing would suffer in the absence of Fannie and Freddie.

A working paper by two economists at the Federal Reserve finds that Fannie and Freddie have not increased homeownership.

The U.S. government guarantees a majority of mortgages, which is often justified as a means to promote homeownership. In this paper, we estimate the effect by using a difference-in-differences design, with detailed property-level data, that exploits changes of the conforming loan limits (CLLs) along county borders. We find a sizable effect of CLLs on government guarantees but no robust effect on homeownership. Thus, government guarantees could be considerably reduced,with very modest effects on the homeownership rate. Our finding is particularly relevant for recent housing finance reform plans that propose to gradually reduce the government’s involvement in the mortgage market by reducing the CLLs.

For those who care about the wonky details, here’s the most relevant set of charts, which led the Fed economists to conclude that, “There appears to be no positive effect of the CLL increases in 2008 and no negative effect of the CLL reductions in 2011.”

And let’s not forget that other academic research has shown that government favoritism for the housing sector harms overall economic growth by diverting capital from business investment.

The bottom line is that Fannie and Freddie are cronyist institutions that hurt the economy and create financial instability, while providing no benefit except to a handful of insiders.

As I suggested many years ago, they should be dumped in the Potomac River. Unfortunately, the Trump Administration is choosing Obama-style interventionism over fairness and free markets.

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The great French economist from the 1800s, Frederic Bastiat, famously explained that good economists are aware that government policies have indirect effects (the “unseen”).

Bad economists, by contrast, only consider direct effects (the “seen”).

Let’s look at the debate over stadium subsidies. Tim Carney of the American Enterprise Institute narrates a video showing how the “unseen” costs of government favoritism are greater than the “seen” benefits.

Unfortunately, stadium subsidies are just the tip of the cronyism iceberg.

In a column for the Dallas Morning News, Dean Stansel of Southern Methodist University discussed some of his research on the topic.

While state and local economic development incentives may seem to help the local economy, the offsetting costs are usually ignored, so the overall effect is unclear. Furthermore, from the perspective of the nation as a whole, these policies are clearly a net loss. …In a new research paper, my colleague, Meg Tuszynski, and I examined whether there is any relationship between economic development incentive programs and five measures of entrepreneurial activity. Like the previous literature in this area, we found virtually no evidence of a positive relationship. In fact, we found a negative relationship with patent activity, a key measure of new innovation. …A recent study by the Mercatus Center found that 12 states could reduce their corporate income tax by more than 20 percent if incentive programs were eliminated. That includes a 24 percent cut in Texas’ business franchise tax. In six states, it could either be completely eliminated or reduced by more than 90 percent. These are big savings that would provide substantial tax relief to all businesses, both big and small, not just those with political influence. …That would provide a more level playing field in which all businesses can thrive.

And here’s a Wall Street Journal editorial from earlier the year.

Amazon left New York at the altar, turning down a dowry of $3 billion in subsidies. Foxconn’s promised new factory in Wisconsin, enticed with $4 billion in incentives, has fallen into doubt. …Now add General Electric , which announced…it will renege on its plan to build a glassy, 12-story headquarters on Boston’s waterfront. …The company reportedly…pledged to bring 800 jobs to Boston. In exchange, the city and state offered $145 million in incentives, including tax breaks and infrastructure funds. GE’s boss at the time, Jeff Immelt, said not to worry: For every public dollar spent, “you will get back one thousand fold, take my word for it.” …two CEOs later, a beleaguered GE won’t be building that fancy tower at all. There won’t even be 800 jobs. …GE will lease back enough space in two existing brick buildings for 250 employees. …what a failure of corporate welfare.

Let’s wrap this up with a look at some additional scholarly research.

Economists for the World Bank investigated government favoritism in Egypt and found that cronyism rewards politically connected companies at the expense of the overall economy.

This paper presents new evidence that cronyism reduces long-term economic growth by discouraging firms’ innovation activities. …The analysis finds that the probability that firms invest in products new to the firm increases from under 1 percent for politically connected firms to over 7 percent for unconnected firms. The results are robust across different innovation measures. Despite innovating less, politically connected firms are more capital intensive, as they face lower marginal cost of capital due to the generous policy privileges they receive, including exclusive access to input subsidies, public procurement contracts, favorable exchange rates, and financing from politically connected banks. …The findings suggest that connected firms out-rival their competitors by lobbying for privileges instead of innovating. In the aggregate, these policy privileges reduce…long-term growth potential by diverting resources away from innovation to the inefficient capital accumulation of a few large, connected firms.

For economics wonks, here’s Table 2 from the study, showing how subsidies are associated with less innovation.

The World Bank also found awful results because of cronyism in Ukraine.

But this isn’t a problem only in developing nations.

There’s some depressing research about the growing prevalence of cronyism in the United States (ethanol handouts, the Export-Import Bankprotectionismtax favoritismbailoutssubsidies, and green energy are just a few examples of how the friends of politicians get unearned wealth).

Cronyism is bad under Democrats and it’s bad under Republicans. Time for separation of business and state!

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Something really strange is happening. Yesterday, I wrote about how I agreed with Trump on a trade issue.

Today, I’m going to agree with Crazy Bernie about a moral hazard issue.

Shocking, but true. The Vermont socialist actually understands that it makes no sense to subsidize new homes in flood-prone areas.

I’ll probably never again have a chance to write this next sentence, so it deserves an exclamation point. Bernie is completely correct!

Flood insurance encourages people to take on excessive risk (i.e., it creates moral hazard). And the subsidies often benefit rich people with beachfront homes (which may explain why Senator Sanders is on the right side)

If nothing else, politicians are very clever about doing the wrong thing in multiple ways.

So we’re not merely talking about luring people into flood-prone areas with subsidized insurance.

Sometimes government uses rental subsidies to put people in flood-prone areas.

Here are some excerpts from a story in the New York Times.

When a deadly rainstorm unloaded on Houston in 2016, Sharobin White’s apartment complex flooded in up to six feet of water. She sent her toddler and 6-year-old to safety on an air mattress, but her family lost nearly everything, including their car. When Hurricane Harvey hit the next year, it happened all over again: Families rushed to evacuate, and Ms. White’s car, a used Chevrolet she bought after the last flood, was destroyed. …But Ms. White and many of her neighbors cannot afford to leave. They are among hundreds of thousands of Americans — from New York to Miami to Phoenix — who live in government-subsidized housing that is at serious risk of flooding… But the Department of Housing and Urban Development, which oversees some of the at-risk properties, does not currently have a universal policy against paying for housing in a designated flood zone. …Nationwide, about 450,000 government-subsidized households — about 8 to 9 percent — are in flood plains…

While FEMA and government-subsidized flood insurance wouldn’t even exist in my libertarian fantasy world, I’m willing to acknowledge that government sometimes does things that aren’t completely foolish.

For instances, it’s better to subsidize people to move out of flood-prone areas instead of subsidizing them to rebuild in those areas.

Nashville is trying to move people…away from flood-prone areas. The voluntary program uses a combination of federal, state and local funds to offer market value for their homes. If the owners accept the offer, they move out, the city razes the house and prohibits future development. The acquired land becomes an absorbent creekside buffer, much of it serving as parks with playgrounds and walking paths. …While a number of cities around the country have similar relocation projects to address increased flooding, disaster mitigation experts consider Nashville’s a model that other communities would be wise to learn from: The United States spends far more on helping people rebuild after disasters than preventing problems. …research shows that a dollar spent on mitigation before a disaster strikes results in at least six dollars in savings. There are many reasons more people end up rebuilding in place than moving away. Reimbursement is relatively quick, while FEMA’s buyout programs tend to be slow and difficult to navigate.

While it’s encouraging to see a better approach, we wouldn’t need to worry about the issue if government got out of the business of subsidizing flood insurance.

Which helps to explain why the Wall Street Journal expressed disappointment last year when Republicans blew a golden opportunity to fix the program.

One disappointment you can count on is a GOP failure to fix one of the worst programs in government: taxpayer subsidized flood insurance. …The Federal Emergency Management Agency’s flood insurance program was set to expire on Nov. 30, and Congress rammed through a temporary extension to buy more time. Congress was supposed to deal with the program as part of the end-of-the-year rush. The program runs a $1.4 billion annual deficit, which comes from insurance priced too low to compensate for the risk of building homes near water. Congress last year forgave $16 billion of the program’s $24 billion debt to Treasury, not that anyone learned anything. The program then borrowed another $6 billion. …If Republicans can’t fix this example of failed government because it might upset parochial interests, they deserve some time in the political wilderness.

In other words, Bernie Sanders is better on this issue than last year’s GOP Congress.

I’ve criticized Republicans on many occasions, but this must rank as the most damning comparison.

But let’s set aside politics and partisanship.

What matters is that the federal government is operating an insanely foolish program that puts people at risk, soaks taxpayers, and destroys wealth.

Gee, maybe Reagan was right when he pointed out that government is the problem rather than the solution.

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It seems like every Democrat in the country plans to run against Trump in 2020 and presumably all of them will feel compelled to issue manifestos outlining their policy agendas.

Which gives me lots of material for my daily column. I’ve previously written about statist initiatives from Bernie Sanders and bizarre ideas put forth by Elizabeth Warren.

Today, let’s review the two big ideas that have been unveiled by Kamala Harris, the Senator from California who just announced her bid for the White House.

We’ll start with her idea to create a federal subsidy for rent payments. I wrote about this new handout last year, and warned that it would enrich landlords (much as tuition subsidies enrich colleges and health subsidies enrich providers).

Here’s some of what Professor Tyler Cowen wrote for Bloomberg about the proposal.

One of the worst tendencies in American politics is to restrict supply and subsidize demand. …The likely result of such policies is high and rising prices, restricted access and often poor quality. If you limit the number of homes and apartments, for example, but give buyers subsidies, that is a formula for exorbitant prices. That is what makes early accounts of Senator Kamala Harris’s economic plans so disappointing. …Consider Harris’s embrace of subsidies for renters, as reflected by her recent sponsorship of the Rent Relief Act of 2018. Given the high price of housing in many parts of the U.S., it is easy to see why the idea might have appeal. But the best and most sustainable way of producing cheaper housing is to build more homes and apartments. The resulting increase in supply will cause prices to fall… That is basic supply and demand, with supply doing the active work. The Harris bill, in contrast, calls for tax credits to renters. …There is an obvious problem with this approach. If you subsidize renters, that will push up the price of apartments. Furthermore, economic logic suggests that big rent increases are most likely in those cases where the supply of apartments is relatively fixed, a basic principle of what is called “tax incidence theory.” In sum, most of the gains from this policy would go to landlords, not renters.

In other words, this is a perfect plan for a politician who understands “public choice” theory.

Ordinary voters think they’re getting a freebie, but the benefits actually go to those with political influence and power.

Now let’s look at her $2.7 trillion tax cut. I believe that people should be allowed to keep the lion’s share of any money they earn, so my gut instinct is to cheer.

But it’s always good to be skeptical when a politician is offering something that sounds too good to be true.

Kyle Pomerlau of the Tax Foundation has done the heavy lifting and looked closely at the details. He has a thorough explanation of her plan and its likely impact.

The “LIFT the Middle-Class Act” (LIFT) would create a new refundable tax credit available to low- and middle-income taxpayers. …LIFT would provide a refundable credit that would match a maximum of $3,000 in earned income ($6,000 for married couples filing jointly). …The credit would begin to phase out for single taxpayers starting at $30,000 of adjusted gross income (AGI) and $80,000 for single taxpayers with children, and begin phasing out for married taxpayers at $60,000 of AGI. The phaseout rate for all taxpayers would be 15 percent. …LIFT’s impact on the economy is primarily through its effect on the labor force. LIFT phases in from the first dollar of earned income to the maximum credit of $3,000 per tax filer. It then phases out starting at different levels of income, depending on a tax filer’s marital status and whether they have children. These phase-ins and phaseouts create implicit marginal subsidies and tax rates that impact individuals’ incentive to work.

At the risk of oversimplifying, Harris is proposing a new version of the earned income credit.

And that means some taxpayers get subsidized for working and some taxpayers get penalized.

For taxpayers in the credit phaseout range, tax liability would increase by 15 cents for each additional dollar earned. This means that these taxpayers would face an additional implicit marginal tax rate of 15 percent, which would reduce these taxpayers’ incentive to work additional hours. In contrast, taxpayers in the phase-in range of the credit would get $1 for each additional $1 of income they earn. As such, these taxpayers would benefit from an effective marginal subsidy rate, or negative marginal tax rate, of 100 percent. A negative tax rate of 100 percent would increase the incentive for these taxpayers to work additional hours.

Kyle crunches the numbers to determine the overall economic impact.

While the positive labor force effects of the phase-in of the credit could offset the negative effect of the phaseout, we find that, on net, the size of the total labor force would shrink under this policy. This is primarily due to the large number of taxpayers that would fall in the phaseout range of the credit relative to the number of individuals that would benefit from the phase-in. …We estimate that the credit…would reduce economic output by 0.7 percent and result in about 825,906 fewer full-time equivalent jobs.

Here’s the relevant table from the Tax Foundation’s report.

This is remarkable. It would seem impossible to design a $2.7 trillion tax cut that actually hurts the economy, but Sen. Harris has succeeded in that dubious achievement.

For all intents and purposes, she has figured out how to have an anti-supply-side tax cut.

And there are two other problems that deserve attention.

  • First, as noted in Kyle’s paper, the tax cut is “refundable.” This means that money goes to people who don’t pay taxes. In other words, it is government spending being laundered through the tax code. So Harris claims to be cutting taxes, but part of what she’s doing is expanding redistribution and making government bigger (and encouraging more fraud).
  • Second, Harris is very cagey about how the numbers work in her proposal. Does she want the tax cuts (and new spending) financed by more borrowing? By printing money? By offsetting class-warfare tax increases? Some combination of the three? Whatever the answer, the negative economic damage will be substantially higher if financing costs are included.

Considering the poor design and upside-down economics of the rent subsidy scheme and the new tax credit, the bottom line is rather obvious: Kamala Harris wants to buy votes, and she has decided that it is okay to hurt the economy in hopes of achieving her political ambitions.

No wonder she fits in so well in Washington!

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Some departments of the federal government should be shut down because of federalism. High on that list would be the Department of Education and Department of Transportation.

Other departments should be shut down because there is simply no role for any government involvement at any level.

I usually cite the Department of Housing and Urban Development as an example, but the Department of Agriculture also should be terminated.

It’s a rat’s nest of special interest favors. I’ve previously written about inane intervention to enrich Big Dairy, Big Sugar, and Big Corn.

But I confess that I was unaware of Big Cranberry.

The Wall Street Journal opines about the nonsensical nature of cranberry intervention.

As you dip into the Thanksgiving cranberry sauce, here’s a tart story that may make you want to drain the bog. This fall the U.S. Agriculture Department gave cranberry growers its approval to dump a quarter of their 2018 crop. Tons of fruit and juice—in the ballpark of 100 million pounds—will be turned into compost, used as animal feed, donated or otherwise discarded. The goal is to prop up prices.

Needless to say, there’s nothing about propping up cranberry prices in Article 1, Section 8, of the Constitution.

This is also a common-sense issue, as the WSJ explains.

The USDA rule caps growers’ production based on their historical output, with some exemptions. Small cranberry processors aren’t covered, and neither are those that don’t have inventory left over from last year. The trouble is that this reduces everyone’s incentive to downsize… Among the many economic perversities of agricultural policy, this is merely a vignette. Still, America is growing 100 million pounds of cranberries and then throwing them away to raise prices per government order. Wouldn’t it be better—and easier—to let the market work?

By the way, Trump’s protectionism is also part of the problem.

President Trump’s trade war hasn’t helped. About a third of production usually goes overseas. But in June the European Union put a 25% tariff on U.S. cranberry-juice concentrate in retaliation for U.S. steel tariffs. A month later, China bumped its tariff on dried cranberries to 40% from 15%. Mexico and Canada also added duties.

A typical Washington cluster-you-know-what.

Though I don’t recommend thinking about it too much, lest you get indigestion.

The solution is to copy New Zealand and get rid of all agriculture handouts.

P.S. If you like Thanksgiving-themed libertarian humor, the image at the bottom of this column augments the image to your right.

P.P.S. And if you like Thanksgiving-themed videos with libertarian messages, here’s one option and here are two others.

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