Archives: 07/2009

A Look Inside the Ivory Tower Spiral

With the Obama Administration promising to ramp up all sorts of college-affordability (read: government expenditure) efforts in the coming months, now is a crucial time for Americans to understand why our colleges and universities ingest money as bottomlessly as their students guzzle beer. With that in mind, the release of a new report from the John William Pope Center is perfectly timed. The Revenue-to-Cost Spiral in Higher Education explains how colleges’ internal arrangements render them almost destined to spend every dime they bring in, no matter how wastefully. The basic problem, argues author and economist Robert E. Martin, is that very few colleges and universities are intended to make a profit – which would give “owners” a powerful incentive to maximize efficiency – and no one really seems to be in charge at most schools.

Of course, this is a serious over-simplification of Martin’s argument, so you’ll have to read the report. But don’t just stop there: A few weeks ago the Pope Center held a colloquium right here at Cato to discuss the report, and Pope Senior Writer Jay Schalin just posted an excellent summary of the back-and-forth between participants. I think you’ll find the points about the third-party-payer problem especially powerful, but there are lots of other good arguments highlighted as well.

Other Countries as Ends-in-Themselves

Here in Babylon on the Potomac, most foreign policy discussions begin and end with the United States: How can we extend our control of the world?  Who is challenging us?  What problems might, say, a rising China, pose to American primacy?  We are, as Madeleine Albright asserted, the “indispensable nation.”  One popular scholar recently advanced the theory that the U.S. government is, and should be, the world’s government.  There’s a real refusal to recognize that we are, as a simple matter of fact, isolated by the blessings of geography and power.  We’re just not a 19th century continental European power, no matter how much we threat-inflate and conceive of ourselves as the only source of order in a disorderly world.

You’d think we’d be inclined to recognize the luxury that our isolation affords us, but you’d be wrong.  Consequently, in discussions about the rise of China, for example, U.S. analysts generally pose the question as a simple U.S. vs. China confrontation: How quickly can they challenge us?  Where should our “red lines” be?  Which allies will support us?  If our strategists were smart, they’d be thinking more creatively about offloading responsibility to countries that live more closely to China, and waiting to see how things progress.  While the ChiCom menace tends to get represented as ten feet tall in these discussions, the Chinese have a host of significant problems, including the internal unrest that has been on display recently, among others.

china-india-exerciseHigh on the list of “other problems” is China’s relationship with countries like India.  Much more so than the United States, countries like India and Japan have a lot to lose, potentially, from China’s rise.  Liberal international relations thinkers are right to point out the positive-sumness of economic relations between potential adversaries.  Economic ties between China and Taiwan, China and the U.S., China and Japan, are also positive forces that can help to moderate security competition.  That said, security itself is zero-sum.  Either you control your sea lines of communication or else another country does.  If another country does, bad things can happen to you, as, for example, Japan remembers all too well.

All of which is a long-winded way of introducing this excellent article by James Lamont and Amy Kazmin in the Financial Times.  Lamont and Kazmin highlight the growing unease in New Delhi about China.  Unease tends to crop up when a big powerful neighbor does things like claim whole provinces of your country as its own territory, as China does with the Indian province of Arunachal Pradesh.  (For more on this subject, see my talk on Capitol Hill from May 2008: video here.)

In fairness, the Bush administration did some smart things on this front, like trying to improve ties with India.  For years, U.S.-India relations had been tainted by a cold war mindset where we resented their association with the Non-aligned Movement.  (I think the India nuclear deal has a lot of downsides, but the intentions underpinning it were smart ones.)  Similarly, the Bush administration signed a joint agreement with Japan stating that a peaceful resolution of the Taiwan dispute is a “common strategic objective.”

But the important part will be beyond getting other countries to accept our goodies (the India nuclear deal) or sign a statement of interest (the joint Japan-US statement on Taiwan).  Those countries would rather, ceteris paribus, stand tall against China from over the shoulder of the United States.  The only way that we will get to a point where the countries with the most to lose pay the most for a hedge against China is for the United States to credibly commit to do less.  And on that front, there is a lot more work to be done.

Obama Says 20 Percent for Government Is Too Much!

While perusing Instapundit, I came across a post suggesting that President Obama thinks investment will suffer if government takes 20 percent of a company’s income. At first I thought this was a form of satire, but there is a real link to a speech that the President gave to the Parliament of Ghana. Indeed, the speech has several good comments:

Development depends on good governance. …Repression can take many forms, and too many nations, even those that have elections, are plagued by problems that condemn their people to poverty. No country is going to create wealth if its leaders exploit the economy to enrich themselves… No business wants to invest in a place where the government skims 20 percent off the top… No person wants to live in a society where the rule of law gives way to the rule of brutality and bribery. That is not democracy, that is tyranny, even if occasionally you sprinkle an election in there. And now is the time for that style of governance to end. 

My initial reaction, focusing on the passage about 20 percent being too much for government, is to ask why Obama wants higher tax rates in America? After all, he wants American small businesses to pay 40 percent, which is twice the burden he thinks is excessive for Ghanians. Upon further reflection, though, I wonder if the President is referring to corrupt bureaucrats asking for bribes. But, even if that is the case, why does that matter? Investors and entrepreneurs care about the amount of disposable income that is generated by an investment. Losing 20 percent to the tax collector has a negative impact on incentives, regardless of whether the money winds up in Treasury coffers or a bureaucrat’s pocket. In any event, it is good to see that the President recognizes that the economy suffers when government becomes too much of a burden. We just need to figure out how to convince him that the laws of economics work the same way in America as they do in Ghana.

Want to Know Why the U.K. Tory Party Is Revamping its Development Policy?

If so, just pick up a copy of James Tooley’s The Beautiful Tree: A Personal Journey into How the World’s Poorest People Are Educating Themselves.

The Tories have looked at the evidence amassed by James and his colleagues (see p. 36 of their new report) and concluded that the best way to advance education in developing countries is to encourage and support existing entrepreneurial schools that are already serving the poor. And if the polls are any guide, that will likely be official government policy in the U.K. before too long.

Congratulations to James, Pauline Dixon, and their wonderful team for bringing sanity to the development policy debate.

Barnett on the Supreme Court Confirmation Hearing

Cato senior fellow Randy Barnett has a piece in the Wall Street Journal on the Senate’s confirmation hearing for Obama’s nominee to the Supreme Court.  Excerpt:

Supreme Court confirmation hearings do not have to be about either results or nothing. They could be about clauses, not cases. Instead of asking nominees how they would decide particular cases, ask them to explain what they think the various clauses of the Constitution mean. Does the Second Amendment protect an individual right to arms? What was the original meaning of the Privileges or Immunities Clause of the 14th Amendment? (Hint: It included an individual right to arms.) Does the 14th Amendment “incorporate” the Bill of Rights and, if so, how and why? Does the Ninth Amendment protect judicially enforceable unenumerated rights? Does the Necessary and Proper Clause delegate unlimited discretion to Congress? Where in the text of the Constitution is the so-called Spending Power (by which Congress claims the power to spend tax revenue on anything it wants) and does it have any enforceable limits?

Read the whole thing.

Bernanke’s Part in the Housing Bubble

bernankeRecent weeks have seen a swirl of speculation over whether President Obama will or will not re-appoint Ben Bernanke to the Chairmanship of the Federal Reserve Board, when his current term as Chair expires in January 2010. Almost all of the debate has centered on his actions as Chairman. This narrow focus misses an important piece: his actions, and words, as a Fed governor during the build-up of the housing bubble.

What should have been Bernanke’s greatest strength as a Fed governor and later chair, his understanding of monetary theory and his knowledge of the Great Depression, has ended up being a weakness. While correct in his analysis of the role of “debt deflation” – where the deflation increases the real burden of debts and correspondingly weakens the balance sheet of both households and businesses – in the deepening of the Great Depression; his obsession with slaying the Great White Whale of Deflation provided intellectual cover for the Fed’s ignoring and contributing to the housing bubble. Like the proverbial general, he was fighting yesterday’s battle, rather than today’s.

While core inflation was moderate and increasing at a decreasing rate between 2001 and 2005, this measure ignores the dramatic up-tick in house prices during those years. First, housing makes up the single largest expense for most households, ignoring housing, especially after one subtracts out energy and food from the definition of inflation, gives a narrow and distorted picture of inflation. Even if one were to focus solely on rents, the 2000s were an era of increasing housing costs.

Separate from the impact of housing prices on inflation is the role which housing plays as the collateral for the primary piece of household debt: a mortgage. Even were the US to suffer a bout of mild deflation and the real burden of their mortgages increased, this would likely have little impact on household balance sheets in an environment of increasing home prices.

Admittedly Bernanke was then only a “governor” and not yet Chair of the Fed, but he was the Fed’s loudest voice when it came to combating deflation and arguing for lower rates. Additionally there have been zero public acknowledgements by either Bernanke or the Fed that its policy earlier this decade contributed to the housing bubble and financial crisis. Without admitting to the occasional mistake, we have no way of judging whether Bernanke has learned from any of his mistakes, and hence less likely to repeat them.

In weighing Bernanke’s record at the Fed, judgement should not solely consider his actions as Chair, but also consider his words and deeds while the housing bubble was inflating. How one responds to a impending disaster is as important as to how one helps to clean up after the disaster has struck.

Making Airline Travel as Unpleasant as Possible

The Transportation Safety Administration long has made air travel as unpleasant as possible without obvious regard to the impact on safety.  Thankfully, the TSA recently dropped the inane procedure of asking to see your boarding pass as you passed through the checkpoint – a few feet away from where you entered the security line, at which point you had shown both your boarding pass and ID. 

However, there are proposals afoot in Congress to set new carry-on luggage restrictions, to be enforced by the TSA, even though they would do nothing to enhance security.  An inch either way on the heighth or width of a bag wouldn’t help any terrorists intent on taking over an airplane.  But the proposed restrictions would inconvenience travelers and allow the airlines to fob off on government what should be their own responsibility for setting luggage standards. 

TSA also has restarted ad hoc inspections of boarding passengers.  At least flights as well as passengers are targeted randomly.  After 9/11 the TSA conducted secondary inspections for every flight.  The process suggested that the initial inspections were unreliable, delayed passengers, and led experienced flyers to game the process.  It was critical to try to hit the front of the line while the inspectors were busy bothering someone else.  There was no full-proof system, but I learned that being first or second in line was particularly dangerous.

Finally TSA dropped the practice.  And, as far as I am aware, no planes were hijacked or terrorist acts committed as a result.  But TSA recently restarted the inspections, though on a random basis.

I had to remember my old lessons last week, when I ran into the routine on my return home from a trip during which I addressed students about liberty.  Luckily I was able to get on board, rather than get stuck as TSA personnel pawed through bags already screened at the security check point.

There’s no fool-proof way to ensure security for air travel.  Unfortunately, it’s a lot easier to inconvenience passengers while only looking like one is ensuring airline security.