Archives: 09/2007

Pretty Bad News in Higher Ed

First, the good news: Yesterday, a congressional conference committee passed legislation that would cut subsidies to lenders participating in federal student loan programs. Terrific! Lenders – especially Sallie Mae, the federally spawned queen of student loans – deserve no taxpayer-furnished profit, and this bill would get us a little closer to that ideal.

Unfortunately, the good news ends there. Only a measly $750 million out of about $22 billion in subsidy cuts would go to the taxpayers who have been forced to enrich lenders for decades – and that will be in the always-questionable from of “deficit reduction” – and the rest will be transferred to the other group on whom taxpayers have long been forced to lavish money through federal aid: students. The bill would cut interest rates on subsidized federal loans, for instance, from 6.8 percent to a minute 3.4 percent over four years; boost Pell Grants from the current maximum of $4,310 to at least $5,400 by 2012; and forgive loans after ten years of making payments for people in “public service” jobs ranging from firemen to prosecutors. And, in the end, the big lenders like Sallie Mae will probably be just fine, because the bill would institute an auction system in which lenders would bid for control over federal loans, giving the big guys huge advantages over little banks and lenders.

Student advocates are, of course, pleased as punch with all this, especially over at the New America Foundation, where for months they’ve been leading the charge against private lenders and for this auction scheme. Ironically, they partly hailed the compromise on the grounds that the auction would use “market forces to set student loan subsidy rates.” This, of course, begs the question: How can you love an auction because it supposedly uses market forces, while simultaneously supporting the gargantuan market distortion that is the overall federal student aid system? Unfortunately, the only possible answers seem to be that (a) you are a politician intent on bribing the college-going population and their parents to vote for you, (b) you are confused about how a real market works, (c) you work in academia and know that the more the government shells out, the better your life will be, or (d) all of the above.

Unfortunately, this legislation seems likely to be signed by president, and if it is, you can ultimately chalk it up to (d) being the answer in Washington.

Arguing Over the Emperor’s New Clothes

According to Alexander Russo at the Ed Week blog, Representative George Miller, chairman of the House education committee, has been going at it with Ed. Sec. Margaret Spellings over his proposed revisions to the No Child Left Behind act. Miller is quoted as saying that Spellings’ criticism that his revisions would “muck up accountability” are ”hokum.” This is very much like two members of the imperial court arguing over whether “the emperor’s new clothes” are fab or fugly. In order for NCLB to be “muck-uppable” it would have to be doing something useful to begin with. It isn’t. As Neal McCluskey and I document in our new study released today, NCLB has failed to fulfill its goals.

Still Conservatives?

For those of us who experienced the revival of Britain during the Thatcher years, the dismal plight of the British Conservative party under a series of post-Thatcher leaders has been startling and increasingly dismaying.

Short-lived Tory leaders have been intent on ditching the classical liberal principles that Thatcher and her inner coterie foisted on the party – principles that gave the Tories their finest years of the 20th century and ones that pulled Britain out of decades of economic failure. David Cameron, the current no-doubt short-lived leader, has been as determined as his recent predecessors to distance himself and the party from the Iron Lady and all that she stood for – from low, or at least lower, taxation, to expanding individual choice and on to a healthy skepticism of government.

Now at last one Tory grandee has had enough of the retreat from Thatcher principles. The former Thatcher cabinet member, Michael Ancram unveiled this week an alternative manifesto [pdf], entitled “Still a Conservative,” to the Cameron agenda, one that calls for a return to the core values that won four successive elections for the Conservatives. He warns that the British public perceives that the party lacks “an overall sense of vision and direction.” And he argues that the party should support lower taxes, leaving people with more of their own money to make their own decisions. By contrast, Cameron wants to match the Labour government’s public spending and has turned his back on lower taxes.

And there is much else in Ancram’s manifesto that would please libertarians and classical liberals, especially his call for the regulatory state to be turned back and his advocating of widening the areas of life left to individual choice rather than government diktat. There are things, though, in the manifesto that are unappealing – from his over-defined Euro-skepticism to his rejection of treating gay civil partnerships equally with marriage when it comes to benefits and taxes. He says there are other long-term relationships outside marriage which should be welcomed for their commitment, but “for Conservatives there can be no fudging the issue of marriage.”

It is a great pity that he overdoes the Euro-skepticism and is prepared to treat gays unequally – for at heart Ancram’s alternative manifesto places classical liberal principles front and center.

And how has Cameron and his supporters responded? Not much of a welcome: they have told him to hold his tongue. A party spokesman said: “This is just a blast from the past. Just as Britain has changed, the Conservative Party has to change along with it.” And a former cabinet colleague of Ancram’s, Michael Portillo, said: “I was a great admirer of Margaret Thatcher but to invoke Thatcherism now, a phenomenon which is 25 years old, just makes the Tory party look old-fashioned and, of course, divided.”

Well, apparently that isn’t the viewpoint of Labour Prime Minister Gordon Brown, who like his predecessor, Tony Blair, realizes that Thatcher is still a name to conjure by. This week he spoke of his admiration for the Iron Lady. “I think Lady Thatcher saw the need for change,” he told a press conference. “Whatever disagreements you have with her about certain policies – there was a large amount of unemployment at the time which perhaps could have been dealt with – we have got to understand that she saw the need for change.”

Cato “Neutered” on Electricity Deregulation?

Last week, Peter Van Doren and I had an op-ed in The Wall Street Journal that reflected on the record of electric utility restructuring in light of the recent rate hikes experienced in the “deregulated” states. Libertarian energy consultant Mike Giberson over at The Knowledge Problem, however, was unimpressed.

Giberson offers only two substantive criticisms. First, he takes issue with our claim that the case for vertical integration was scarcely heard during the debate over restructuring:

It isn’t clear from the article where Taylor and Van Doren were during the debates over unbundling, but delving into the voluminous public records of both federal and state regulators of the electric power industry would reveal that vertical integration has been among the matters discussed at length. Earlier in the article they quote MIT economist Paul Joskow, but if they were at all familiar with his work they would not make such “unfortunate” claims.

Vertical integration was in fact a big part of the policy conversation in the state legislatures and regulatory hearing rooms during the course of restructuring. But as Economist Robert Michaels at U. Cal., Fullerton argues, those discussions were superficial, uninformed, and politically charged conversations primarily concerning utility market power and the need to corral it. Paul Joskow’s work on this matter (which we are indeed well acquainted with) along with that of other academics who’ve investigated vertical integration in the electricity sector from an I/O perspective was given little serious attention by policymakers. That was our point.

Second, Giberson seems to take issue with our contention that vertical integration is an efficient means of remedying hold-up problems between generators and power distributors, facilitating efficient investment in transmission, and maintaining system reliability. Giberson finds it “curious that Cato Institute writers are so skeptical about the ability of decentralized arrangements (like prices and contracts) to lead to efficient results.”

Market arrangements indeed have their place, but if they were always preferable to alternative arrangements, then the firm as we know it would not exist – a point well made by Ronald Coase (no enemy of markets he) in his classic essay “The Nature of the Firm” back in 1937. Just because one has great faith in the power of markets does not necessarily mean that one should enter a daily spot market in the search for secretarial help or, alternatively, daily spot markets for electric power. For a longer discussion on why “decentralized arrangements (like prices and contracts)” are problematic in the electricity business, see this Cato study from the aforementioned Robert Michaels.

With the substance now put aside, let’s examine the kicker:

And it dawns on me that through it all, the Cato authors don’t advocate anything at all, not even the “true deregulation” that they describe in the final paragraph. They discuss history, explain some economics, call the loss of vertical integration unfortunate, speculate on preferences for contracts, and suggest that a totally unregulated world might turn out to be like the old regulated world.

We are to some extent guilty as charged. We did indeed spend a lot of our available word count explaining how electricity markets work. But it seemed to us that this was necessary in order to fully explain why the current emphasis on recent price increases in deregulated electricity regimes is misleading. Consumers seem advantaged by regulation during fuel-price upswings and disadvantaged by regulation during fuel-price declines. But over a longer time frame (1990-2006), the average price increases in regulated and deregulated regimes are not statistically different. Thus the differences between the old and new regimes are more apparent than real.

We go on to argue (as we did more robustly in this study published a few years ago) that a totally deregulated world of independent generators, transmitters, and distributors and consumers buying spot would not be efficient or stable because of the hold-up problem. We speculate that the arrangements to which firms and consumers would agree would resemble vertical integration which returns certainty for firms and price limits for consumers. Giberson might not like that argument, but it’s hard to miss.

Often Cato is bold, or insightful, or both, and sometimes it is over-dramatic in asserting the costs of this-or-that government program or the benefits of some tax cut or another, but almost always Cato offers clear advocacy for liberty. Taylor and Van Doren don’t give us that Cato in their rambling Wall Street Journal essay. Instead we get what amounts to an implicit defense of the old status quo.

While we do criticize the regimes produced by “restructuring,” we do not defend the old regime. In fact we do not defend any particular substantive market outcome at all. Instead, we defend an idea – that business owners – not politicians – should decide how market enterprises are organized and operated. If there is a more libertarian argument, then I have not heard it.

Oprah Winfrey, Political Power Broker

Billionaire Oprah Winfrey is making a million-dollar contribution to Barack Obama’s presidential campaign. And despite all the campaign finance restrictions of the past 30 years, it’s perfectly legal. That’s because Oprah is making her contribution in the form of time on her television show, appearances with him on the campaign trail, and other uses of her celebrity. But if a rival media mogul, someone like Sumner Redstone or John Malone, wanted to make a contribution of more than $2,300 to a presidential candidate, that would be illegal. Because, you know, it’s corrupt to make a large contribution. Wouldn’t want the next president to be indebted to a businessman who gave him a $10,000 contribution.

This Saturday, “Winfrey will host her first-ever presidential fundraising affair on the grounds of the Promised Land, her 42-acre ocean- and mountain-view estate in Montecito, Calif. – an event that is expected to raise more than $3 million for Obama’s campaign.”

Matthew Mosk of the Washington Post outlines some of the other ways Winfrey might help her preferred candidate.

Among the weapons in Winfrey’s arsenal: the television program that reaches 8.4 million viewers each weekday afternoon, according to the most recent Nielsen numbers. Her Web site reaches 2.3 unique viewers each month, “O, the Oprah Magazine,” has a circulation of 2 million, she circulates a weekly newsletter to 420,000 fans and 360,000 people have subscribed to her Web site for daily “Oprah Alerts” by e-mail.

More than that, though, the Nielsen tracking data show that her most loyal viewers are women between 25 and 55 – a group that also votes in large numbers in Democratic primaries.

Oprah’s well aware of her power:

The fundraiser may be only the start. The Winfrey and Obama machines have maintained silence on the exact nature of their talks over what her role will be, but the idea of her appearing in television ads and other appeals is very much in play. She offered during a recent interview with CNN’s Larry King: “My money isn’t going to make any difference. My value to him – my support of him – is probably worth more than any other check that I could write.”…

Winfrey said in an audio Web chat last week that, this year, the Obamas will be her only political guests.

Campaign finance reform was promised as a way to make everyone equal in the political process, to squeeze out the power of big money. But one of its effects is to make some rich people more equal than others. If Oprah–or Rupert Murdoch, or Donald Graham–decides to use his or her resources to help a particular candidate, that’s legal and very powerful. But the rich man who runs a software company is forbidden to use any significant part of his financial resources to help a candidate.

All power to journalists and celebrities in the reformed political process.

The Republicans’ Post-Election Personal Pork Party

At The Hill, I have an article about a little-known dip into the pork barrel: big bonuses for congressional staff if there’s money left over at the end of the year, especially if the money will fall into the hands of the other party at the end of the year.

How can there be money left over when the government is running multi-hundred-billion dollar deficits? Well, you might ask. But each department has its own appropriation, and those accounts often have “money left in the budget” as the end of the year approaches, necessitating the famous end-of-the-year spending spree.

In the congressional case, I found examples like this on committee staff budgets:

The House Energy and Commerce Committee showed similar patterns. In 2005, when the Republican leadership was spending its “own money” on year-end bonuses, several staffers received less than 10 percent of their annual salaries, while a few lucky staffers received extra payments of as much as 17 percent.

But when GOP Energy and Commerce bosses faced losing their chairmanship after the 2006 election, they decided to leave no dollar behind for the Democrats. Lucky staffers then got windfalls of 31 percent on a $35,000 salary, 30 percent on a $50,000 salary, 18 percent on a $100,000 salary, and so on. At least 15 committee staffers got bonuses of between $11,000 and $17,600.

And I concluded, cheekily:

Members of Congress are free to pay their staffers whatever they choose, up to an annual ceiling, so there’s nothing illegal about year-end bonuses, even year-end, post-election, before-the-other-party-gets-in bonuses.

But this pattern illustrates a big difference between the private and public sectors. In the private sector, if your customers become dissatisfied with your product, you tend to make less money. In the public sector, you get a couple of months to double-dip before you lose control of the money. For participating in a Congress that voters booted out of office, these bonuses are a handsome parting gift.

A big tip of the hat to Cato interns Schuyler Daum and Jonathan Slemrod for poring over payroll records, and to LegiStorm for making such information about Congress public and accessible.

A Second Industrial Revolution?

Peter Goodman has a fine article in Monday’s Washington Post about the resilience and tenacity of the manufacturing sector in the United States – even in the storied ghost towns that dot the once-bustling textile regions of North Carolina.  Like my recent paper on the topic, Goodman points out that U.S. manufacturing is thriving:

The United States makes more manufactured goods today than at any time in history, as measured by the dollar value of production adjusted for inflation – three times as much as in the mid-1950s, the supposed heyday of American industry. Between 1977 and 2005, the value of American manufacturing swelled from $1.3 trillion to an all-time record $4.5 trillion, according to the Bureau of Economic Analysis.

And he reinforces a key point of my paper that has yet to penetrate the pessimistic political discourse:

With less than 5 percent of the world’s population, the United States is responsible for almost one-fourth of global manufacturing, a share that has changed little in decades. The United States is the largest manufacturing economy by far. Japan, the only serious rival for that title, has been losing ground. China has been growing but represents only about one-tenth of world manufacturing.

The major difference between my paper and Goodman’s story is that the former takes a birds-eye view of the manufacturing sector, presenting an impersonal, data-driven assessment of the state of U.S. manufacturing.  Goodman’s story focuses on a particular biotechnology company that occupies a former textile mill, producing a drug for liver ailments from a local pond weed.  The story is emblematic of the metamorphosis throughout the North Carolina and U.S. manufacturing sectors:

North Carolina encapsulates the forces remaking American manufacturing. Between 2002 and 2005, the state lost 72,000 manufacturing jobs, about three-fourths in textiles, furniture-making and electronics, according to the North Carolina Commission on Workforce Development. At the same time, the state has become a rising powerhouse in lucrative new manufacturing sectors such as biotechnology, pharmaceuticals and sophisticated textiles.

During the most recent decade, U.S. manufacturing has become increasingly oriented toward the middle and upper ends of the value-added spectrum.  Opportunities abound for workers with skills or the willingness and wherewithal to acquire them.  In fact, the title of the National Association of Manufacturers tenth annual Labor Day Report on the state of U.S. manufacturing is “Rising Incomes Cushion Economy,” and its subtitle is “Finding Highly Skilled Workers Remains a Challenge for Manufacturers.”  It seems to me that rising wages should make more workers willing to get the skills, and the need to find highly-skilled workers should induce manufacturers to assist on the wherewithal front.