Archives: July, 2009

Would PASS ID Really Save States Money?

The proposed PASS ID Act is a national ID just like REAL ID, and it threatens privacy just as much. Some argue that a national ID under PASS ID should be palatable, though, because it reduces costs to states.

But savings to states under PASS ID are not at all clear. Let’s take a look at the costs of creating a U.S. national ID.

The REAL ID Act, passed in May 2005, required states to begin implementing a national ID system within three years. In regulations it proposed in March 2007, the Department of Homeland Security extended that draconian deadline. States would have five years, starting in May 2008, to move all driver’s license and ID card holders into REAL ID-compliant cards.

The Department of Homeland Security estimated the costs for this project at $17.2 billion dollars (net present value, 7% discount). Costs to individuals came it at nearly $6 billion – mostly in wasted time. Americans would spend more than 250 million hours filling out forms, finding birth certificates and Social Security cards, and waiting in line at the DMV.

The bulk of the costs fell on state governments, though: nearly $11 billion dollars. The top three expenditures were $5.25 billion for customer service at DMVs, $4 billion for card production, and $1.1 billion for data systems and IT. Getting hundreds of millions of people through DMVs and issuing them new cards in such a short time was the bulk of the cost.

To drive down the cost estimate, DHS pushed the implementation schedule way back. In its final rule of January 2008, it allowed states a deadline extension to December 31, 2009 just for the asking, and a second extension to May 2011 for meeting certain milestones. Then states would have until the end of 2017 to replace all cards with the national ID card. That’s just under ten years.

Then the DHS decided to assume that only 75% of people would actually get the national ID. (Never mind that whatever benefits from having a national ID drop to near zero if it is not actually “national.”)

The result was a total cost estimate of about $6.85 billion (net present value, 7% discount). Individual citizens would still spend $5.2 billion worth of their time (in undiscounted dollars) on paperwork and waiting at the DMV. But states would spend just $1.5 billion on data and interconnectivity systems; $970 million on customer service; and $953 million on card production and issuance—a total of about $2.4 billion. (All undiscounted—DHS didn’t publish estimates for the final rule the same way it published their estimates for the proposed rule.)

Maybe these cost estimates were still too high. Maybe they weren’t believable. Or maybe Americans’ love of privacy and hatred of a national ID explains it. But the lower cost estimate did not slow the “REAL ID Rebellion.” Given the costs, the complexity, the privacy consequences, and the dubious benefits, states rejected REAL ID.

Enter PASS ID, which supposedly alleviates the costs to states of REAL ID. But would it?

At a Senate hearing last week, not one, but two representatives of the National Governors Association testified in favor of PASS ID, citing their internal estimate that implementing PASS ID would cost states just $2 billion.

But there is reason to doubt that figure. PASS ID is a lot more like REAL ID – the original REAL ID – in the way that most affects costs: the implementation schedule.

Under PASS ID, the DHS would have to come up with regulations in just nine months. States would then have just one year to begin complying. All drivers’ licenses would have to be replaced in the five years after that. That’s a total of six years to review the documents of every driver and ID holder, and issue them new cards.

How did the NGA come up with $2 billion? Maybe they took the extended, watered-down, 75%-over-ten-years estimate and subtracted some for reduced IT costs. (The NGA is free to publish its methodology, of course.)

But the costs of implementing PASS ID to states are more likely to be closer to $11 billion than the $2 billion figure that the NGA puts forward. In just six years, PASS ID would send some 245 million people into DMV offices around the country demanding new cards. States will have to hire and train new employees to handle the workload. They will have to acquire new computer systems, documents scanners, data storage facilities, and so on.

There is another source for cost estimates that draws the $2 billion figure into question: the National Governors Association itself. In September 2006, it issued a report with the National Conference of State Legislatures and the American Association of Motor Vehicle Administrators finding that the costs to re-enroll drivers and ID holders over a 5-year period would cost states $8.45 billion (not discounted).

Just as with REAL ID, re-enrollment under PASS ID would undo the cost-savings and convenience that states have gained by allowing online re-issuance for good drivers and long-time residents. As the NGA said:

Efficiencies from alternative renewal processes such as Internet and mail will be lost during the re-enrollment period, and states will face increased costs from the need to hire more employees and expand business hours to meet the five year re-enrollment deadline.

Angry citizens will ask their representatives why they are being investigated like criminals just so they can exercise their right to drive.

PASS ID does reduce some of the information technology costs of REAL ID, such as requirements to use systems that still do not exist, and requirements to pay for driver background checks through the Systematic Alien Verification for Entitlements system and the Social Security Online Verification system.

But PASS ID still requires states to “[e]stablish an effective procedure to confirm that a person [applying] for a driver’s license or identification card is terminating or has terminated any driver’s license or identification card” issued under PASS ID by any other state. How do you do that? By sharing driver information. The language requiring states to provide all other states electronic access to their databases is gone, but the need to share that information is still there.

A last hope for states is that the federal government will come up with money to handle all this. But the federal government is in even tougher financial straights than many states. The federal deficit for this fiscal year is projected to reach $1.84 trillion.

Experienced state leaders recognize that the promise of federal money may not be fulfilled. The weakly funded PASS ID mandate will likely become a fully unfunded mandate.

So, does PASS ID really save states money? I wouldn’t put any money on it … .

Wait! How’d I Get in This Invisible Box Again?

Kevin Carey has posted his response to my reply to him, and apparently he just won’t take it from a libertarian that we libertarians see no dilemma in the college-cost problem. At least, he can’t see how libertarians could “think seriously about restraining college costs” and still come to the conclusion that the best way to cut government spending on higher education is to, well, cut government spending. He still insists that the only way to “bend down the long-term higher education cost curve and thus reduce government spending is to increase government regulation.”

The mime who is boxing libertarians in must be one powerful illusionist, because Carey just can’t seem to not see a real box. But reading Carey’s post makes clear why this is: He wants desperately to believe that we must spend more on higher education, and that regulation is all that will work to keep colleges’ excesses under control.

What makes me say this? For one thing, Carey for all intents and purposes admits the spending part:

Just to be clear: I’d like to spend more public money on higher education, not less, albeit in a way that’s substantially more performance-sensitive and directed toward institutions that serve academically and economically at-risk students.

What about his obsession with regulation? Well, the whole point of his argument is that we must regulate higher ed more. Perhaps just as telling, though, is that he offers nothing to refute – or even acknowledge – what I wrote about government failure and the huge inefficiencies of regulation in my previous reply. You know, the hugely important cost side of the regulation ledger that most people whose first response to a problem is “regulate” typically ignore.

But let’s get to what Carey does offer in substantive response to my critiques, namely my argument that market forces, not regulation, best provide the information consumers need and most efficiently deliver goods and services.

I want to start by making one thing very clear: We absolutely do not have a free market in higher education! Far from it! State and local governments control the institutions attended by about 74 percent of students, and almost half of students receive federal aid in the form of grants, cheap loans, or work-study, (not to mention tax credits). In addition, governments fund billions of dollars of university-based research. Indeed, when you tally total revenues for public and private, not-for-profit institutions in the 2005-06 school year (the latest with available federal data), and then tally the amount that comes through government (directly to institutions and through student aid), it turns out that more than 52 percent of total postsecondary revenues come from taxpayers, making them the majority share holders in Ivory Tower, Inc.!

That shows clearly that higher education is absolutely not a free market! It also provides powerful insights into the principal/agent problem in higher education, the problem discussed at length by Robert Martin in the paper that touched off this whole debate, and the focus of Carey’s reply to me.

In general, the principal/agent problem boils down to the reality that everyone is self-interested, and the interests of, say, a company’s owners are not always aligned with those of the people they employ. At the most basic level, employers want employees to work as hard as they can for as little pay as possible, and employees want to work as little as possible for as much pay as they can get.

Carey believes – and is bolstered by Martin’s agreement – that the best way to mitigate this problem in higher education is regulation, because schools and their employees will not voluntarily reveal bad things about themselves:

In higher education, Martin argues, the principal / agent disconnect is less about risky profit-taking and more about status. Colleges are inherently status-maximizing institutions, even if the principals—taxpayers, donors, and students—would rather colleges focused on a different set of priorities, like giving every student a high-quality affordable education. As Martin writes,“senior administrators can persuade themselves that lavish offices, extensive building projects, expensive public relations events, luxury travel, and high compensation are in the institution’s interest. Board members may consider expensive social events to be in the institution’s interest.” The same could be said for giving too much weight to the research mission at the expense of teaching and lots of other things.

How do you get more status, particularly in an industry where reputations are seemingly as ancient and permanent as the stone buildings themselves? You buy it, by purchasing nicer buildings (old-looking stone is a popular choice of materials) and more prominent researchers and students with better SAT scores. Or you just let it accumulate in the endowment, also a major benchmark of prestige. All of this dovetails with Bowen’s revenue-to-cost-hypothesis: college spending is capped only by revenues and colleges have every incentive to spend, so they constantly build up fixed costs, raise more money, spend more money, raise more, spend more, and so on.

Martin’s solution? More information. To mitigate the principal / agent problem, give the principals more data so they know what’s really going on. And the government has to play a role

So how does the principal/agent problem get controlled – though it can never be totally eliminated – in the private sector? Yes, there is regulation, but as I made clear in my previous post, regulation has serious costs and often fails completely. I urge you to re-read my previous post for details, or, if you really want to get a feel for regulatory and government failure, consider the current economic mess, driven by government pushing risky mortgages; implied – and then very real government bailout assurances for large financial institutions; and, if you’re inclined to think good regulation could have prevented our current woes, regulators failing in their duties. And no, unlike what Carey says, government requiring McDonald’s or Ruth’s Chris to publish nutrition information isn’t what makes them set consistent standards or deliver food people want – it’s the need to acquire and keep customers, who are highly motivated to spend their money on things that they think are worth it.

Wait. Customers? Of course! What forces high standards and constrains costs in true private markets is not regulation, but the need for firms to maximize revenue, which means competing with one another and, ultimately, serving customers as best they can. That is also what aligns the interests of principals and agents – if they don’t both focus primarily on satisfying customers, both will be out of jobs and money. Of course, principals help keep agents in line with performance bonuses and other tools, and there is the threat of legal prosecution if an agent outright steals from a principal, but mutual self-interest is the most powerful force keeping principals and agents aligned in the private sector.

The problem in higher education is that this alignment is all but nonexistent! With over half of the “business owners” involuntary shareholders with no power, the agents can run wild. Worse yet, the principals’ customers consume their product to a large extent on the principals’ dime, greatly inflating what the customers demand and are willing and able to pay.

Now, consider the very real-world, negative ramifications of this misalignment of interests. Because students are largely paying for their education with someone else’s money, they have greatly reduced interest in shopping for the most efficient education, and instead look for the swankiest rec facilities; celebrity professors who may teach few, if any, classes; and buildings made of “old-looking stone.” They also have reduced incentives to determine if higher education is really best for them to begin with, explaining such colossal waste as 34 percent of first-year students taking remedial courses; only 56 percent of students graduating within six years of entry; and 29 percent of Americans ages 25 and older having bachelor’s degrees, though only 25 percent of jobs require them. And, of course, there’s the rampant tuition inflation that ends up scaring away many of the truly poor people that government is supposed to be focused on helping.

But it doesn’t end with those things. Because college employees don’t have to provide a return to their “shareholders” – or anyone else, for that matter – to make their money, they can pursue their interests without much if any regard for how their interests align with those of principals or customers. And their interest is, often, to pursue the “prestige” that Carey (and certainly many others) laments is the coin of the realm in higher ed. Oh, and it doesn’t help that principals are often forced to directly fund things like research that adversely affect a college’s teaching mission but really build professors’ reputations.

What if we were to remove much of the forced, distorting, third-party money? Carey, in unfortunate, scaremonger fashion, warns that “massive public disinvestment in higher education…would cripple thousands of institutions and shut the doors to college for hundreds of thousands of students nationwide.”

If you think reducing the amount of money colleges spend on wasteful extravagances, or professors who teach very little, is “crippling” institutions, then you’ll think Carey is right. If you believe eliminating much of the aid that encourages people to pursue education they aren’t ready for, often don’t finish, and that seriously inflates college prices is shutting “the doors to college,” then you’ll think Carey is right again.  But if you realize that by reducing aid many of the major distortions that drive up prices would also have to be reduced – the cheap, third-party money wouldn’t be there to fund them anymore – then you also realize that the new higher education market would still provide necessary education to most if not all of those people who could truly benefit from it. Indeed, even the poorest person would be able to get aid if he or she had strong, demonstrated earning potential, because both a private lender and the student would gain in the long run from agreeing to a loan. And there is such a thing as “charitable giving,” by the way.

Amazingly, Carey actually finds a way – though a very weak one – to blame the free market for the distortions in higher education. And by “free market” Carey means, simply, the much reviled U.S. News and World Report college rankings:

The free market has given us the U.S. News & World Report college rankings, which are all about status and spending. Fully 10 percent of each college’s score is based on a simple measure of spending per student — the more you spend, the higher you rank. Another 20 percent is based on things that cost money to buy — low class sizes, faculty salaries, etc. — and much of the rest flows from larger reputational and selectivity factors that are directly and indirectly enhanced by spending.

In other words, the free market has created an information environment that exacerbates the runaway college-cost problem that McCluskey is supposedly interested in trying to solve.

Where to start…

Yes, the U.S. News ranking probably relies too much on reputation and spending, but it also includes valuable output information, such as graduation and retention rates. And here’s the thing: Despite what Carey would lead you to believe, there are a lot more college guides out there than U.S. News! The Princeton Review gives you all kinds of insights into the atmosphere at numerous colleges. The Intercollegiate Studies Institute’s Choosing the Right College furnishes lots of insights into schools for conservatives. Forbes, in conjunction with Richard Vedder’s Center for College Affordability and Productivity, recently published rankings based on several college output measures. In other words, there seems to be almost a competitive rankings market burgeoning, a sign of market forces pushing their way into a non-market system, like shoots that somehow find a way through cracks in even the most concrete of jungles.

And rankings aren’t the only sign of market forces adapting as best they can to a government-distorted system. Indeed, in a system where everyone is artificially encouraged to pursue higher education, and employers are essentially banned from using the most straightforward way to assess applicants’ qualifications – direct testing – it makes sense to use the prestige of the schools that applicants attended as a proxy for their potential as employees. From an employer’s point of view, it is a relatively useful and inexpensive signal for what an applicant would bring to the job. Of course, it would be much better, especially for taxpayers, if employers were free to use more efficient and effective measures, and we didn’t push so many unqualified people to get increasingly watered-down degrees, but considering the restrictions and incentives government has imposed, market forces are doing the best they can.

With all that now said, I’m pretty sure I’m once again out of the mime’s box, hopefully this time to stay. Analyzing the principal/agent problem as it applies to higher education, as well as the numerous costs and failures of government regulation, point clearly not to regulation as the solution to what ails the ivory tower, but reducing or eliminating government spending. And please, don’t blame the free market for our higher ed problems. It’s doing all it can to fix them, but government failure is a heck of a tough thing to overcome.

Is Buying an iPod Un-American?

We own three iPods at my house, including a recently purchased iPod Touch. Since many of the iPod parts are made abroad, is my family guilty of allowing our consumer spending to “leak” abroad, depriving the American economy of the consumer stimulus we are told it so desperately needs? If you believe the “Buy American” lectures and legislation coming out of Washington, the answer must be yes.

Our friends at ReasonTV have just posted a brilliant video short, “Is Your iPod Unpatriotic?” With government requiring its contractors to buy American-made steel, iron, and manufactured products, is it only a matter of time before the iPod—“Assembled in China,” of all places—comes under scrutiny? You can view the video here:

In my upcoming Cato book, Mad about Trade: Why Main Street America Should Embrace Globalization, I talk about how American companies are moving to the upper regions of the “smiley curve.” The smiley curve is a way of thinking about global supply chains where Americans reap the most value at the beginning and the end of the production process while China and other low-wage countries perform the low-value assembly in the middle. In the book, I hold up our family’s iPods as an example of the unappreciated benefits of a more globalized American economy:

The lesson of the smiley curve was brought home to me after a recent Christmas when I was admiring my two teen-age sons’ new iPod Nanos. Inscribed on the back was the telling label, “Designed by Apple in California. Assembled in China.” To the skeptics of trade, an imported Nano only adds to our disturbingly large bilateral trade deficit with China in “advanced technology products,” but here in the palm of a teenager’s hand was a perfect symbol of the win-win nature of our trade with China.

Assembling iPods obviously creates jobs for Chinese workers, jobs that probably pay higher-than-average wages in that country even though they labor in the lowest regions of the smiley curve. But Americans benefit even more from the deal. A team of economists from the Paul Merage School of Business at the University of California-Irvine applied the smiley curve to a typical $299 iPod and found just what you might suspect: Americans reap most of the value from its production. Although assembled in China, an American company supplies the processing chips, a Korean company the memory chip, and Japanese companies the hard drive and display screen. According to the authors, “The value added to the product through assembly in China is probably a few dollars at most.”

The biggest winner? Apple and its distributors. Standing atop the value chain, Apple reaps $80 in profit for each unit sold—an amount higher than the cost of any single component. Its distributors, on the opposite high end of the smiley curve, make another $75. And of course, American owners of the more than 100 million iPods sold since 2001—my teen-age sons included—pocket far more enjoyment from the devices than the Chinese workers who assembled them.

To learn a whole lot more about how American middle-class families benefit from trade and globalization, you can now pre-order the book at

Lowry on the “Mad Dash” to Pass ObamaCare

From National Review editor Rich Lowry’s column for King Features Syndicate:

As with the stimulus package, Obama’s health-care plan depends on speed. More important than any given provision, more important than any principle, more important than sound legislating is the urgent imperative to Do It Now.

Do it now, before anyone can grasp what exactly it is that Congress is passing. Do it now, before the overpromising and the dishonest justifications can be exposed. Do it now, before Obama’s poll numbers return to Earth and make it impossible to slam through ramshackle government programs concocted on the run. Do it now, because simply growing government is more important than the practicalities of any new program…

Obama cultivated an image of cool during the campaign. Unrattled. Deliberate. Cerebral to a fault. Who knew he’d be in a panic to remake one-sixth of the economy by the first week of August of his first year in office?

Normally, the larger and more complicated a bill is, the longer Congress takes to consider it. With the stimulus and cap-and-trade, Obama and the Democrats upended this rule of thumb by passing byzantine, 1,000-page bills that no one had the time to read. When the work product is indefensible, deliberation is dangerous.

There’s a touch of the guilty conscience about Obama’s terrible rush. As if he knows he was elected as a moderate-sounding deficit hawk last year, and if he’s going to pass an ambitious left-wing program, he must do it before the opposition builds.

The Play Is Not the Thing

I’ve already started receiving e-mails in response to my earlier blog challenge: name a field that has suffered a productivity collapse like education (stagnating or declining performance with massive increase in cost). The leader so far: live theater.

Except it just doesn’t measure up. The NYT reported in 1968 the advent of $15 Broadway tickets. That’s equivalent to $93 today. But you can go see revivals of Chicago for as little as $63 and Hair for as little $35. Mama Mia starts at $60. Those are the three most popular plays on Broadway. You can pay more for the best seats, but you can get a good seat for the same or less money than was the case 40 years ago.

So while there has not been a dramatic improvement in the productivity of live theater, there is also no obvious decline.

What’s more, the analogy is not entirely apt. The market for live theater, such as it exists, is a market for a very specific service: people on stage in front of you acting out some bit of dramatic entertainment. The market for education is not, at least in principle, so closely bound to a particular delivery mechanism. Parents want their children prepared for good, happy and successful lives, but if they had a diverse range of options available to them that would secure those ends (as they would if education weren’t a government monopoly), they would not necessarily insist that it be delivered in exactly the same way that it was 100 years ago – a full day of kids sitting in rooms with their age-mates listening to teachers lecture.

Any other candidates for fields suffering calamitous productivity declines like education?

Weekly Standard Wants to Use F-22s in Afghanistan

goldfarbThe Weekly Standard’s Michael Goldfarb is particularly set off by the fact that the Senate has declined to continue funding the F-22 program for which SecDef Gates and President Obama requested no more funds.  He laments that Obama and Gates are representing their decision to expand the Army by 22,000 soldiers as being paid for by cuts in the F-22 budget.  Goldfarb remarks that this leaves us in a situation where

We may have more troops to patrol Afghanistan, but they’ll be patrolling on bicycles – because it’s a zero-sum game.

Is it impolitic to observe that “The F-22 has never been flown over Iraq or Afghanistan”?

Moreover, it’s my understanding that the Weekly Standard folks, Goldfarb included, believe in the importance of fighting a series of labor-intensive counterinsurgency wars across the Islamic world.  Based on Goldfarb’s remarks, he does not wish to support this objective by making cuts in capital to fund more labor.  What would be good to know, then, just to set up the debate, is how much he thinks we ought to be spending on defense.  We spend roughly (depending on how you count and whether you include the two wars we’re fighting) the same as the entire rest of the world combined.  Based on my consumption of the Weekly Standard’s foreign-policy output over the past several years, you could easily convince me that the between $600,000,000,000 and $800,000,000,000 American taxpayers spend each year on defense is insufficient to support the Weekly Standard’s foreign-policy aims.  But if there should not be a tradeoff like the one Gates pointed to in this discussion, how much is enough?  Inquiring minds want to know.

Why War in Afghanistan Is Futile

A couple weeks ago, my Cato colleague, Justin Logan, wrote a post on Rory Stewart’s brilliant article that appeared in the London Review of Books. Justin offered compelling reasons why arguments for nation building, and the concomitant “state failure is a threat to humanity,” are deeply flawed. But I think Stewart’s piece offers arguments that bears emphasis.

Stewart is Chief Executive of The Turquoise Mountain Foundation, a not-for-profit, non-governmental organization based in Kabul. According to Stewart, many policymakers and prominent opinion leaders are prone to:

minimizing differences between cultures, exaggerating our fears, aggrandizing our ambitions, inflating a sense of moral obligations and power, and confusing our goals… [these irresistible illusions] papers over the weakness of the international community: our lack of knowledge, power and legitimacy… It assumes that Afghanistan is predictable. It is a language that exploits tautologies and negations to suggest inexorable solutions. It makes our policy seem a moral obligation, makes failure unacceptable, and alternatives inconceivable.

Perhaps Stewart’s most important point:

But Osama bin Laden is still in Pakistan, not Afghanistan. He chooses to be there precisely because Pakistan can be more assertive in its state sovereignty than Afghanistan and restricts US operations. From a narrow (and harsh) US national security perspective, a poor failed state could be easier to handle than a more developed one: Yemen is less threatening than Iran, Somalia than Saudi Arabia, Afghanistan than Pakistan.

The argument that America’s security depends on rebuilding failed states, like Afghanistan, fails partly since terrorists can move to governed spaces. Rather than setting up in weak, ungoverned states, enemies can flourish in strong states because these countries have formally recognized governments with the sovereignty to reject interference in their internal affairs.

Insurgents know they can’t fight a conventional army directly. With a protracted war of attrition, however, they can gradually expand their political and economic influence.

Thus, as we’ve seen in Vietnam, Iraq, and today in Afghanistan, insurgents leave areas where American troops concentrate and then return when those troops deploy elsewhere. And Afghan militants find sanctuary in neighboring, nuclear-armed Pakistan, which is not targeting the original Afghan Taliban.

In fact, Islamabad still supports the original Afghan Taliban that at one time controlled most of Afghanistan. The Swat valley offensives we keep hearing about feature the Pakistanis fighting indigenous Pakistani Taliban groups that have proliferated in response to Islamabad’s alignment with the United States in the so-called “war on terror.”

Honestly, America has no business stopping Pakistan from influencing Afghanistan. Let them have it! As I argue here, “the war’s strategic rationale still remains tenuous. Central Asia holds little intrinsic strategic value to the United States, and America’s security will not necessarily be endangered even if an oppressive regime takes over a contiguous fraction of Afghan territory.”

Sadly, however, bureaucratic inertia and misconceptions of Washington’s moral obligations could trap the United States in Afghanistan for decades. Hopefully, some people in the Obama White House will inform the president that Afghanistan is not a winnable war.