Archives: 03/2009

NPR and El Salvador: Setting the Record Straight

NPR had a story this morning on “social inequalities and growing discontent in El Salvador.” Relying exclusively on anecdotal evidence, the story was full of mischaracterizations about the economic and social reality of that country.

Let’s see: Regarding the upcoming presidential election this Sunday, NPR says,

…whichever candidate wins, he faces a faltering economy, entrenched poverty, rampant crime and a population that’s still recovering from a civil war.

Granted, rampant crime is a major problem—unfortunately El Salvador is the most violent country in the world—but a faltering economy? NPR didn’t provide any evidence aside from anecdotes.

Actually, El Salvador has made enormous progress thanks to an aggressive agenda of market reforms. Once you account for revised population data due to a new census, El Salvador’s per capita GDP has grown by 3.3 percent since 1992—the third highest rate in Latin America during this period, after the Dominican Republic (3.8) and Chile (3.6). And as I point out in my new paper on El Salvador, there is ample evidence that official figures significantly underestimate the performance of the economy, mostly because the service sector—an area in which El Salvador leads the region—is grossly undervalued in the country’s estimation of GDP. The economy is probably more than 30 percent larger than indicated by the official data. Thus the average per capita growth rate since 1992 has been approximately 5.2 percent per year.

Entrenched poverty? Since the end of the civil war in 1992, the number of households below the poverty line has diminished by more than 25 percentage points. Extreme poverty has also declined by almost 18 percentage points. During the first decade of the market reforms, net enrollment in primary education increased by close to 10 percentage points, infant mortality declined by 40 percent, and the population without access to safe water was halved. Yes, almost 35 percent of Salvadoran households still live in poverty, but by any indicator, poverty is in retreat.

One of the most telling facts about how tough life is in El Salvador right now is that a quarter of its population chooses not to live here. An estimated 2 million Salvadorans out of a population of less than 7 million live and work in the United States.

It is true that approximately 2 million live outside, but the bulk of Salvadorans who immigrated to the U.S. left during the period of civil conflict. Immigration has certainly continued, but presenting it in its entirety as a sign of economic hardship, as NPR correspondent Jason Beaubien does, is misleading.

El Salvador has moved aggressively under the conservative Nationalist Republican Alliance, or ARENA party, to align its economy with the U.S. In 2001, it adopted the U.S. dollar as its sole currency, and in 2006, it ratified a free-trade deal with the United States. The trade agreement led to a modest boost in exports, but in the market, shoppers and shopkeepers say it hasn’t helped them.

How does adopting free market reforms constitute an effort to “align” the economy to the U.S.? By liberalizing their economy, Salvadorans authorities are protecting the cash value of pensions and salaries, lowering interest rates, have incentivized savings,  and provided modern and affordable public services, etc. Their goal was to make the Salvadoran economy more dynamic and competitive, not to “align” it to the U.S.

Also, the increase in exports since CAFTA was implemented three years ago has been anything but “modest.” Exports were 34 percent higher last year than in 2005, the year before CAFTA went into effect. From 1991 to 2007 El Salvador had the highest export growth rate in all Latin America.

This is not to say that there aren’t serious challenges facing El Salvador. As I said earlier, crime is the most serious of all, and the main source of popular discontent in the country. The country is feeling the consequences of the global economic downturn, as are most developing countries. But the way that NPR presents life in El Salvador demands a serious reality check.

Where Are the Muckrakers?

In the mythology of journalism, investigative reporters fall somewhere between archangels and demigods. They protect the public by exposing political deceit and corruption, burrowing relentlessly into the words and deeds of those in power, in search of the truth. And in the field of education, they are as numerous as leprechauns and unicorns.

In education, “muckrakers,” as Teddy Roosevelt called them, are few and far between. There are, however, legions of mucksailors – reporters who glide over the surface of a story, seldom probing beneath the public statements of those in power to determine their truth or falsehood. Through my web browser window I can watch the sails of a vast muck navy.

Consider the coverage of the battle over DC’s school voucher program. Democrats inserted language into the $410 billion omnibus spending bill that would sunset funding for the program after next year, instead of simply reauthorizing it for another full five-year term. The vouchers could still be reauthorized when they come up again, but since House Appropriations Committee chairman David Obey ( D-Wis.) has already told DC public schools to prepare for the return of voucher students, that seems highly unlikely.

So here we have Democrats working to shut down a program serving 1,700 poor kids in the nation’s capital – kids who are so desperate to stay in their chosen private schools that they’ve made YouTube videos beseeching Congress and president Obama to save it. Given that most people are not inherently so cruel, why would Democrats want to kill this program? They say it’s because it robs money from needy public schools and gives it to private schools that are already flush from lavish tuition fees. But. Is. That. TRUE?

Is DC’s government-run k-12 system financially needy? Are the independent schools serving voucher students making a Madoff-style killing?

No. And… No.

These claims are rubbish. They are, in fact, MUCK. I have run the numbers on DC government k-12 education spending for the current school year and it is $26,555 per pupil. According to the government’s own published study of the voucher program, the average tuition charged by participating schools is $5,928. Furthermore, the voucher program actually added an extra $13 million a year to the DC public school budget, as a “sweetener” to elicit local and Democratic support.

But most Americans will never learn any of that. Because we have no muckrakers in the mainstream education media. We have mucksailors.

This is not entirely the journalists’ fault. Media businesses have been hit very hard in recent years, and are understaffed compared to earlier generations. Reporters are stretched very thin. But I ask the editorial establishment, what is more valuable to your readers: A dozen stories that merely regurgitate the official muck, or a single top notch investigative piece that demonstrates how our political leaders are flagrantly misleading the American people and exposes their real motives?

Speak truth to power? Anyone?

Anyone?

Regulations vs. Rate Cuts

A set of stories in International Tax Review today illustrate the backwards nature of U.S. corporate tax policy. The first story discusses the high-profile chest-thumping in Washington over corporate “tax haven abuse.” The congressional response to greater international tax competition is to load even more regulations on American businesses.

The second story is entitled “Taiwan Slashes Corporate Tax Rate”:

Taiwan’s government has approved plans to cut the country’s corporate tax rate from 25% to 20%. Ministers hope the cut will encourage investment in the country and stimulate growth in the economy…

America is in the worst recession in decades and it desperately needs to cut its 40 percent corporate tax rate to reinvigorate business investment. Why are U.S. policymakers so clueless about the most obvious way to spur investment when that policy imperative is clear to leaders just about everywhere else?

National-ID-Backing Intel Chief Steps Down

No sooner had I posted here about Chas Freeman’s support for a national ID than he withdrew his candidacy to be Chairman of the National Intelligence Council.

With a number of controversies roiling, the national ID issue may have been the straw that broke the camel’s back of Freeman’s aspirations to the intelligence post. Indeed, it may have been the mighty power of this blog, the acid keyboard of yours truly, that served as the catalyst … maybe.

Republicans, Democrats, and Appropriators…and Pork

I’m sympathetic to the oft-repeated saying that there are really three parties in Washington: Republicans, Democrats, and Appropriators.  This situation is likely to be demonstrated this evening when Republican members of the Senate Appropriations Committee provide enough votes for Democratic Sen. Harry Reid to close off debate and proceed to final passage of the pork-laden $410 billion fy2009 omnibus appropriations bill.

Greasing the skids for bigger government will be almost $8 billion in earmarks contained in the bill.  Fox News is pointing out that almost all of the Republican Senators expected or likely to support the Democratic measure stand to deliver quite a bit of pork to constituents and special interests.  Not coincidentally, all of the senators named, except Sen. Snowe of Maine, are appropriators.  As a matter of fact, if you look at the top 20 senators (both parties) in terms of dollars of earmarks secured for this bill, 15 are appropriators.

Bottom line: Appropriators love spending and they particularly love pork.  Sen. Snowe just likes the government spending other people’s money.

**Update: Cloture was invoked on a 62-35 vote and the legislation subsequently passed by voice vote.  Every single Democratic member of the Senate Appropriation Committee voted for cloture.  Republican appropriators Sens. Cochran, Specter, Bond, Shelby, Alexander, and Murkowski voted yes; Sens. McConnell, Gregg, Bennett, Hutchison, Brownback, Collins, and Voinovich voted no.  Thus, without the support of these Republican appropriators, the bill would have been effectively killed.  Of the top 20 recipients of earmarks in the bill, only 2 – Sens. Inhofe and McConnell – voted no.

Solve the Financial Crisis (and Make Some Serious Money)

Peter Van Doren and I have been puzzling over this very interesting NYT op-ed on home foreclosures by Yale economist John Geanakoplos and Boston University law professor Susan Koniak. If G&K’s story is right, then shouldn’t there be an opportunity for some clever financiers to help struggling homeowners keep their houses, help banks and other investors repair their balance sheets — and the financiers could help themselves to piles of cash in the process?

G&K argue that all three parties to a home mortgage — the homeowner, the lender, and the loan servicer who works as a go-between — currently face grim financial prospects:

  • Many homeowners are “underwater” — that is, they owe more on their mortgages than their homes are now worth. According to First American Core Logic, some 20% of mortgages were underwater as of December 2008. The percentage varies greatly from state to state, with 55% of mortgages underwater in Nevada, but only 7% in New York. The homeowners who are underwater include not just those who purchased with little down payment, but also many people who put down the traditional 20 percent when they bought in 2005 or 2006, at the peak of the real estate bubble. According to Case-Shiller index data, house prices nationwide have fallen 27% (as of December) from their May 2006 peak. Some local markets have experienced more dramatic declines, highlighted by Phoenix’s 46% slide. Rental prices are now far below many homeowners’ monthly mortgage payments, and lots of underwater homeowners will have to make payments for years before they have some equity stake in their homes. Many of those homeowners would rather default and risk foreclosure. G&K’s op-ed includes this figure showing that defaults increase dramatically as homeowners sink further and further underwater. Given their current options, default is rational.
  • The mortgage lender faces heavy losses if the home enters foreclosure. According to G&K, ”the subprime bond market now trades as if it expects only 25 percent back on a loan when there is a foreclosure.”
  • The servicer also is at risk. According to G&K, the servicer is obligated to continue paying the lender its monthly payment even if the borrower is in default. That obligation only lifts at foreclosure.

Because of the servicer’s obligation, the servicer has strong incentive to push for quick foreclosure. However, the homeowner and the mortgage lender would likely benefit from a loan modification — even a significant write-down of principal — because that would keep the homeowner in his house and it would deliver a better return to the lender than the 75% loss from foreclosure. G&K thus argue that government, instead of continuing to bail out the banking industry and struggling homeowners (and putting taxpayers on the hook for hundreds of billions of dollars), should simply require that the lenders write down the mortgage principal.

But is government action needed? Couldn’t some private actors accomplish the same thing — and make some serious scratch in the process?

A financial wizard with sufficient backing could approach a troubled lender and offer, say, 50% of the original loan amount in order to take some of the toxic mortgages off the lender’s hands. Now, the lender won’t be happy with selling at a 50% loss, but that certainly beats a 75% loss, so the lender would grudgingly agree. The financial wizard would then approach the homeowner and offer to write down the mortgage principal to, say, 60% on condition that the homeowner purchase mortgage insurance. The homeowner should jump at the offer because it would put him back above water, purchasing a home that’s worth more than its debt. Finally, the financial wizard would get the servicer to release its control over the loan, because the servicer would want to be freed from the risk of having to cover the payments to the lender. The financial wizard would then pocket a cool 10% of the original mortgage’s value.

That is not chump change. G&K estimate some 8 million homes could be foreclosed upon in the coming years. Assume the original mortgage on each of those houses is $199,025 (95% of the median sale price of new U.S. homes in January 2004, about halfway up the bubble); that 10% would represent almost $160 billion.

Of course, if the bank proves recalcitrant and demands more than 50%, or the homeowner demands a write-down of more than 40% or he’ll walk away, that would cut into the profits. And the financial wizard would have to cover his costs and possible risk premiums. Still, at least in theory, there would seem to be a significant pile of money on the table.

So why isn’t this happening? Are there no money-loving financial wizards out there?

To some extent, they are. Last week, the NYT reported that some former Countrywide executives have formed a firm called PennyMac that, with financial backing from hedge funds and other investors, purchases toxic mortgages from insolvent banks at low prices, modifies the loans to increase homeowners’ likelihood of making payments, and profits from the rekindled mortgage revenue stream. In the particular case reported in the NYT, PennyMac paid 38 cents on the dollar. But PennyMac seems like very small potatoes compared to the $160 billion that may be on the table. And the banks were forced to sell the loans because they had been taken over by the FDIC.

So why aren’t there more firms doing what PennyMac is doing, or following the strategy that Peter and I have laid out above? And why aren’t banks lining up to offload their toxic mortgages (or to do the write-downs themselves and pocket the 10%)? Peter and I can think of three possible reasons:

  1. As G&K note in their op-ed, banks and other investors who’re currently saddled with toxic assets may be waiting for some form of government rescue that would enable them to recoup far more than the 50% or so that would be offered by our financial wizards.
  2. Banks are keeping bad mortgages on their books at values much higher than the 25 to 40 cents on the dollar observed in the rare sales of troubled assets, and so the banks are unwilling to sell the assets for 50 cents on the dollar. (Remember that PennyMac is purchasing assets from banks that have been taken over by the FDIC — in other words, these are forced sales.) The banks (and their managers) may strongly prefer to keep the assets on their books rather than sell them at a 50% loss.
  3. The transaction costs involved in this scheme (e.g., analyzing the toxic assets to determine which ones to buy, negotiating with the delinquent and at-risk homeowners) are prohibitively large.

Government can address (1) by committing not to bail out the investors. Unfortunately, it’s unclear how reliable that commitment would be, especially given government actions so far in this financial crisis.

Fixing (2) is difficult. Accounting rules could be changed to force the banks to lower their book values for bad mortgages, but it would be difficult to get that accounting change passed quickly. Besides, some accounting experts argue that, in stressful times, accounting rules should have more wiggle room rather than less.

As for (3), the PennyMac guys claim that the work is difficult. But c’mon, there could be a $160 billion payday for the guys who can figure it out.

So, come on you money-loving financial wizards: your country needs you!

The Early-Ed Big Lie

In a speech on education this morning at the U.S. Hispanic Chamber of Commerce, President Obama repeats questionable statistics in support of his bid to expand the government’s monopoly on education back to the womb, asserting that “$1 of early education leads to $10 in saved social services.”

Unfortunately he’s referring to small-scale programs that involved extensive and often intensive total-family intervention rather than simple “early education.”

In contrast to the– real-world school choice programs have been tested extensively with solid, random-assignment studies. Nine out of ten of these studies find statistically significant improvement in academic achievement for at least one subgroup.

Obama should follow the scientific evidence on what works in education; school choice, not “early education.”