Archives: June, 2008

Fordham Follow Up

Yesterday, I wrote about a new Thomas B. Fordham Institute report on high-achieving students. I focused mainly on a bit of hyperbole issued by Fordham president Chester Finn and vice president Michael Petrilli concerning the “plainly” positive effect of government “standards and accountability” on low-achieving kids. Today, I just want to add a quick, seemingly obvious observation — but one barely hinted at in the report — concerning survey results that show teachers think high achievers in their schools get short shrift.

“Teachers say that while the public schools muster serious effort to improve the academic achievement of struggling students, their resources rarely converge on the needs of high achievers,” report Stave Farkas and Anne Duffett, who handled the survey section of Fordham’s report.

The problem is — you’ve got it! — one-size can’t fit all! A single system of public schools — especially one ever-more centralized with crude government accountability mandates like the No Child Left Behind Act — can only focus on one or two things at a time, and high achievers aren’t it.

So what’s the obvious solution? School choice!

In a market, consumers purchase things according to their individual preferences, needs, abilities, etc., and producers tailor products accordingly. I need a small, fuel-efficient car, I get a Corolla. You want a big beast to haul your soccer balls, you get a Suburban. I want dinner that’s also entertainment, I go to Benihana. You want buttered lobster bites, you head to Long John Silver’s.

When producers and consumers are free, diverse preferences that seem almost infinite are met by equally diverse providers, and everyone is better off. With school choice, gifted kids could go to schools that specialize not only in nurturing gifted children, but specific talents like artistic ability or scientific acumen. On the flip side, students with specific learning disabilities could go to schools that focus on their problems. In contrast, when everyone gets what government tells them they’re going to get, well, you know what happens.

Sadly, the only choices mentioned in Fordham’s report are district-run magnet schools and programs, but since the survey was of public school teachers, that’s understandable.  What’s not understandable is why in their NRO piece yesterday, Finn and Petrilli, while lionizing government “accountability” for supposedly helping low-achieving students, didn’t point to the huge promise of markets to educate each and every student.

GAO Issues Report on Privacy

This week, for a hearing in the Senate Homeland Security and Government Reform Committee, the Government Accountability Office released a report on privacy titled “Alternatives Exist for Enhancing Protection of Personally Identifiable Information.” (GAO testimony based on the report is here.) I served on a National Academy of Sciences “Expert Panel” that gave the GAO some perspectives on issues related to the Privacy Act.

The report had three main conclusions, with my comments:

The Privacy Act’s definition of a “system of records” (any grouping of records containing personal information retrieved by individual identifier), which sets the scope of the act’s protections, does not always apply whenever personal information is obtained and processed by federal agencies. One alternative to address this concern would be revising the system-of-records definition to cover all personally identifiable information collected, used, and maintained systematically by the federal government.

The “system of records” definition has indeed fallen out of date. Thanks to the growth of search and other technological developments, records not organized by personal identifier can be accessed and used by the federal government, but they fall outside the purview of the Privacy Act. This should change. The report also highlights the fact that data used by the federal government, but held by information resellers, escapes the purview of the Privacy Act. This should also change.

According to generally accepted privacy principles of purpose specification, collection limitation, and use limitation, the collection of personal information should be limited, and its use should be limited to a specified purpose. Yet, current laws and guidance impose only the modest requirements in these areas… . Alternatives to address this area of concern include requiring agencies to justify the collection and use of key elements of personally identifiable information and to establish agreements before sharing such information with other agencies.

Once they have collected it, federal agencies can do anything they want with personal information simply by declaring their plan to do so in the Federal Register through a “System of Records Notice” or “SORN.” The statements agencies may make when they collect information do not bind them in the slightest. This is wrong and it should change. GAO’s recommendations to limit collection and sharing of information are rather tepid, alas, and they wouldn’t change agencies’ institutional incentives to over-collect and promiscuously share the personal information of the citizenry.

Privacy Act notices may not effectively inform the public about government uses of personal information. For example, system-of-records notices published in the Federal Register (the government’s official vehicle for issuing public notices) may be difficult for the general public to fully understand. Layered notices, which provide only the most important summary facts up front, have been used as a solution in the private sector. In addition, publishing such notices at a central location on the Web would help make them more accessible.

It’s true that Privacy Act notices don’t inform the public well. They are obscurely written documents in an obscure publication. But I’m not sure that the publication of “layered notices” would be an improvement. Sure, there’s a consensus among government types that layered notices are the next big thing, but I don’t believe that they will change citizen understanding or behavior in any significant respect. Notices are also not terribly relevant in the government environment because a person can’t decline to do business with a government based on its privacy practices or promises.

There’s more to learn on “notice” and its importance or relevance for getting people more privacy. The thing we know is that reducing data collection and use leads directly to privacy. Getting policymakers to understand the privacy costs they’re imposing on the public would be as effective, if not more, than notifying the public about what’s been done to them after a policy is made and the horse is out of the barn.

Right Message, Wrong Messenger

A column in the Wall Street Journal correctly explains that Senators Obama and McCain have a habit of displaying economic illiteracy. So it is rather ironic that the author is Karl Rove, the man who spent the past seven years steering George W. Bush into one bad economic decision after another.

On many occasions, I visited economists in the administration to complain about their Keynesian fiscal policy (such as rebates), wasteful spending (such as farm bills and Medicare expansion), and senseless regulation (such as Sarbanes-Oxley), and invariably I would be told that the Bush White House was pursuing bad policy but that there was nothing that could be done because Karl Rove’s political strategy shop was calling the shots.

Only in Washington can people disply this amount of chutzpah and still retain credibility:

Barack Obama and John McCain are busy demonstrating that in close elections during tough economic times, candidates for president can be economically illiterate and irresponsibly populist. In Raleigh, N.C., last week, Sen. Obama promised, “I’ll make oil companies like Exxon pay a tax on their windfall profits, and we’ll use the money to help families pay for their skyrocketing energy costs and other bills.” Set aside for a minute that Jimmy Carter passed a “windfall profits tax” to devastating effect, putting American oil companies at a competitive disadvantage to foreign competitors, virtually ending domestic energy exploration, and making the U.S. more dependent on foreign sources of oil and gas. Instead ask this: Why should we stop with oil companies? They make about 8.3 cents in gross profit per dollar of sales. Why doesn’t Mr. Obama slap a windfall profits tax on sectors of the economy that have fatter margins? Electronics make 14.5 cents per dollar and computer equipment makers take in 13.7 cents per dollar, according to the Census Bureau. Microsoft’s margin is 27.5 cents per dollar of sales. Call out Mr. Obama’s Windfall Profits Police!

…This past Thursday, Mr. McCain came close to advocating a form of industrial policy, saying, “I’m very angry, frankly, at the oil companies not only because of the obscene profits they’ve made, but their failure to invest in alternate energy.” …And do we really want the government deciding how profits should be invested? If so, should Microsoft be forced to invest in Linux-based software or McDonald’s in weight-loss research? Mr. McCain’s angry statement shows a lack of understanding of the insights of Joseph Schumpeter, the 20th century economist who explained that capitalism is inherently unstable because a “perennial gale of creative destruction” is brought on by entrepreneurs who create new goods, markets and processes. The entrepreneur is “the pivot on which everything turns,” Schumpeter argued, and “proceeds by competitively destroying old businesses.”

…Messrs. Obama and McCain both reveal a disturbing animus toward free markets and success. It is uncalled for and self-defeating for presidential candidates to demonize American companies. It is understandable that Mr. Obama, the most liberal member of the Senate, would endorse reckless policies that are the DNA of the party he leads. But Mr. McCain, a self-described Reagan Republican, should know better.

What Do the U.S., North Korea, and the Old Soviet Union Have in Common?

Sadly, the answer to this question is that the United States is in unsavory company because of taxation.

For one thing, the U.S. Internal Revenue Code applies even to citizens who live and work abroad, an approach followed by very few nations other than hell-holes like North Korea. No other developed nation has this “citizenship-based” tax system, largely because it is unfair and anti-competitive. It is unfair because Americans who live and work abroad already are subject to all applicable foreign taxes (much as foreigners who live and work in the U.S. get the pleasure of dealing with the IRS). And it it anti-competitive because this punitive policy makes it harder for U.S. firms to earn a larger share of the market when competing in foreign markets. America’s tax policy is so punitive that some people are giving up their citizenship. But rather than dealing with this problem by fixing the tax code, politicians have decided to impose punitive exit taxes. The Economist has some of the unpleasant details: 

Queues of frustrated foreigners crowd many an American consulate around the world hoping to get into the United States. Less noticed are the heavily taxed American expatriates wanting to get out — by renouncing their citizenship. In Hong Kong just now, they cannot. “Please note that this office cannot accept renunciation applications at this time,” the consulate’s website states. Apart from sounding like East Germany before the fall of the Berlin Wall, the closure is unfortunately timed. Because of pending legislation on President Bush’s desk that is expected to become law by June 16th, any American who wants to surrender his passport has only a few days to do so before facing an enormous penalty.

…Congress has turned on expats, especially those who, since new tax laws in 2006, have become increasingly eager to give up their citizenship to escape the taxman. Under the proposed legislation, expatriates surrendering their citizenship with a net worth of $2m or more, or a high income, will have to act as if they have sold all their worldwide assets at a fair market price.

…That expats want to leave at all is evidence of America’s odd tax system. Along with citizens of North Korea and a few other countries, Americans are taxed based on their citizenship, rather than where they live. So they usually pay twice — to their host country and the Internal Revenue Service. As this makes citizenship less palatable, Congress has erected large barriers to stop them jumping ship. …[I]t may have the opposite effect. Under the new structure, it would make financial sense for any young American working overseas with a promising career to renounce his citizenship as early as possible, before his assets accumulate.

Another embarrassing feature of U.S. tax law is that exit taxes historically have been adopted only by the world’s most reprehensible regimes. As Richard Rahn explains in the Washington Times, the United States should not mimic the Soviet Union by confiscating the wealth of people who displease the ruling elites:

One of [the] old Soviet Union’s actions that was most heavily and correctly criticized by human-rights activists both left and right was its confiscation of the wealth of those who chose to leave the U.S.S.R. The right to emigrate is considered by civilized people to be a basic human right. Regretfully and embarrassingly, the U.S. Congress has just passed a law that places a higher tax burden (and in some cases wealth confiscation) on those who choose to permanently leave the United States, and may make some “tax hostages.”

…People who choose to renounce their citizenship are often looked upon as traitors, both by those in totalitarian and authoritarian states, and unfortunately sometimes by those in democratic societies, even when their intentions are benign. Many who immigrated to America over the last four centuries had some, or most of, their wealth in the old country taken from them in one form or another. This was rightly considered unjust. Yet, the descendants of many of those who suffered just voted to do something similar that differs only in degree, but not in kind or spirit.

…The apologists for Fidel Castro and Hugo Chavez will be able to point to this new U.S. law and ask why this is any different from the property takings by the aforementioned thugs? Yes, it is [a] bit different, but behind it is the same mean-spiritedness and disregard for property rights and the right to emigrate because of political beliefs. Such laws only make the United States look hypocritical to the rest of the world.

Econ 101 for Democrats

Executives from Goldman Sachs and Morgan Stanley met with Democratic staff members of the Senate Energy and Natural Resources Committee last week to make the case that trading in energy contracts is not the reason that oil prices are rising. Judging by Jeff Birnbaum’s report in the Washington Post, it’s not easy to teach Democrats about economics:

But the executives were met with skepticism and occasional hostility. “Spare us your lecture about supply and demand,” one of the Democratic aides said, abruptly cutting off one of the executives.

Another aide “warned the executives that no matter what arguments they muster, it would be hard to prevent Congress from acting.” So much for fact-finding and economic sanity in an election year.

More on Medicare’s Stupid Strategies for Reducing Administrative Costs

A recent Government Accountability Office report highlights another way Medicare keeps its administrative costs down: sending checks to providers without bothering to check whether those providers owe back taxes.

According to today’s Washington Post:

Health-care providers are allowed to collect millions of dollars in federal Medicare payments each year despite owing the government more than $2 billion in back taxes, congressional investigators said yesterday.

The Government Accountability Office found that more than 27,000 nursing homes, hospitals, physicians and other providers flouted the tax system while collecting Medicare fees in 2006. That represented 6 percent of all providers [who participate in] Medicare….

Some cases cited in the new report were especially egregious. They included a nursing home operator with a history of asset concealment schemes who filed $15 million in Medicare claims while owing $7 million in unpaid taxes and establishing a charitable foundation that purchased luxury cars for the owner’s personal use.

And there was the hospital that collected $21 million in Medicare fees while owing $15 million in taxes, mostly for failing to forward to the Internal Revenue Service payroll taxes that were withheld from employees’ checks.

What’s that?  This seems more like the IRS’s responsibility than Medicare’s?  Perhaps.  But even taking that into consideration, Medicare is still delinquent:

The IRS has an automated system to hold back a portion of payments to contractors who are delinquent on their taxes. Medicare officials have been slow to join, but Kerry Weems, acting administrator for the Centers for Medicare and Medicaid Services, said that all Medicare payments will be part of the program by October. “We take this issue very seriously,” he said.

Oh, indeed.  Medicare takes this issue as seriously as any government program whose raison d’être is to shovel money out the door.

REAL ID Grant Process Collapses, Money Goes to No-Bid Contract

Mickey McCarter at Homeland Security Today has the scoop on REAL ID grants that the Department of Homeland Security is doling out today.

Yes, REAL ID grants. Ten states have passed legislation to bar themselves from participating. (Arizona was the most recent.) And many more have registered their objections to the national ID law. But the Department of Homeland Security is still trying to revive it — this time, by spreading a little money around.

What’s “a little money”? The estimated $85 million in grants is about 0.5% of the $17 billion that it would cost to implement REAL ID, so it’s just a little. But that’s $85 million that taxpayers won’t be getting back.

It’s interesting to see where the money is going, of course.

The breakdown of awards, obtained by HSToday.us, signifies that AAMVA effectively gains a no-bid contract under the awards, as DHS designates it the sole national centralized database of driver’s license information under REAL ID through a grant award to the state of Missouri… . . A competitive grant process could have resulted in multiple hub awards instead of a sole-source contract to AAMVA, sources argue, decentralizing REAL ID information somewhat and encouraging the rise of the most effective database solution between competing vendors.

With enthusiasm for the program distinctly lacking, DHS abandoned its plan to award grants competitively and just divvied up the money state by state.

[A]lthough many states did submit proposals in response to the REAL ID guidance, according to a source knowledgeable of the evaluation process who requested anonymity, many of the state proposals for REAL ID grants were very poor. Evaluators who examined the proposals received by March 7 were surprised by the number that did not even request the funds for the specific program, instead asking for the money to spend on emergency response equipment and other needs.

No-bid contracts and funds for a program the states don’t want? Congress should not allow DHS to throw this good money after bad.