Archives: May, 2010

The Good Side of Bad News in Europe

What does the Greco-Euro currency/debt crisis mean for the U.S. economy?

Nearly everyone except the uniquely wise economist John Cochrane assumes very bad “contagion” effects –on U.S. banks, exports and particularly U.S. manufacturing.

This echoes identical anxieties while the world went through a far more dramatic Asian currency crisis after  July 1997,  and a Russian debt crisis the following May.

The most widely ignored effect of that crisis, however, was to depress foreign demand for oil, and thus slash oil prices to U.S. buyers from $25 a barrel in early 1997 to $11 by the end of 1998.

Oil is a major input into the manufacturing process (e.g., chemicals and plastics), and a major cost of distribution (trucks, trains and airplanes).  It is also a major determinant of the cost of all energy sources used in making other goods such as aluminum and paper.   When marginal costs go down, it becomes profitable to expand production.

At the height of the Asian/Russian crises, the table below shows that U.S. manufacturing output  rose by more than 10 percent. It’s an ill wind that doesn’t blow somebody some good.

Looking at the same phenomenon from the other side, every recession but one (1960) was preceded by a big increase in the price of oil. For oil importers like the U.S., cheaper oil is definitely better.

During the last big foreign currency/debt crisis, the real growth of U.S. Gross Domestic Purchases (the home-grown portion of GDP) jumped by 4.7% in 1997 and 5.5% in 1998.  Yet the Fed cut interest rates three times in October and November of 1998 because of what was happening in other countries.

The table  show what happened to the price of oil and to U.S. manufacturing from June 1997 to December 1998. The middle column is the price of a barrel of West Texas crude, and the column to the right is the U.S. industrial production index for the manufacturing sector.

1997-06    19.17    87.80
1997-07    19.63    88.12
1997-08    19.93    89.69
1997-09    19.79    90.45
1997-10    21.26    90.98
1997-11    20.17    92.05
1997-12    18.32    92.52
1998-01    16.71    93.36
1998-02    16.06    93.31
1998-03    15.02    93.13
1998-04    15.44    93.68
1998-05    14.86    94.25
1998-06    13.66    93.53
1998-07    14.08    92.96
1998-08    13.36    95.40
1998-09    14.95    95.11
1998-10    14.39    95.96
1998-11    12.85    96.08
1998-12    11.28    96.63

In recent weeks, as the debt and currency problems in Euroland hit the front page, the price of crude oil fell by about 20 percent.

Once again, as in 1997-98, everyone may be watching the wrong ball in the wrong court.

Krugman and Oil Spills, cont’d

Last week Paul Krugman seized on the Gulf oil spill as another occasion to bash libertarians in general and the great Milton Friedman in particular. On Friday David skewered the Times columnist over his odd rhetorical ploy of treating politicians’ failure to follow Friedman’s principles as a refutation of those principles. Now economist Alex Tabarrok at Marginal Revolution reports that Krugman also completely misunderstands the current set of laws governing oil spill liability:

The Oil Pollution Act of 1990 (OPA), which is the law that caps liability for economic damages at $75 million, does not override state law or common law remedies in tort (click on the link and search for common law or see here). Thus, Milton Friedman’s preferred remedy for corporate negligence, tort law, continues to operate and there is no doubt that BP’s potential liability under common law alone would be in the billions of dollars.

…The point of the OPA was not to limit tort law but to supplement it.

Tort law, as traditionally understood, could only be used to recover damages to people and property rather than force firms to pay cleanup costs per se. Thus, in the OPA as I read it – and take the details with a grain of salt since I’m not a lawyer–there is no limit on cleanup costs. Moreover, the OPA makes the offender strictly liable for cleanup costs which means that if these costs are proven the offender must pay them regardless (there are a few defenses, such as an act of war, but they are unlikely to apply). The offender is also strictly liable for up to $75 million in economic damages above and beyond cleanup costs. Thus the $75 million is simply a cap on the strictly liable damages, the damages that if proven BP has to pay regardless. But there is no limit, even under the OPA, on economic damages in the event that BP failed to follow regulations or is otherwise shown to be negligent (same as under common law).

The link Krugman supplies, and perhaps the source of his error, was this Talking Points Memo item baldly describing “the maximum liability for oil companies after a spill” as “a paltry $75 million.” Even the most passing acquaintance with the aftermath of real-world oil spills should have been enough for Krugman and TPM author Zachary Roth to realize that liability for assessments to this one federal rainy-day fund is but one component, perhaps but a minor one, of liability for overall spill damage. And even as regards this one specialized federal fund, Krugman and Roth got it wrong, as a glance at the May 1 edition of Krugman’s own paper would have revealed:

When a rich and well-insured company like BP is responsible for the spill, the government will seek reimbursement of what it spends on cleanup from the company and its insurers.

So Krugman’s post not only strained to take a cheap shot at libertarians, but also thoroughly botched a factual background that it would have been easy enough for him to have looked up. Other that that, it was fine.

Fed Ed on the Move

There’s a lot to learn about what’s going on in federal education policy today, and none of it is good.

First, Steven Brill offers a revealing look at the Race to the Top evaluation process in a piece that can be added to the ever-growing pile of evidence that Race to the Top isn’t even close to the objective – or, I’d add, powerful – catalyst for meaningful reform that the Obama administration insists it is.

Second, it appears that congressional Democrats are preparing to pass a Harkin-proposed, Obama-endorsed, $23 billion bailout for teachers by attaching it to an “emergency” appropriation for the war in Afghanistan. (Passing major – and highly suspect – education legislation by attaching it to something totally unrelated? Sound familiar?) And what’s the nice thing about “emergency” legislation? No need to worry that the outlay would add to our already insane federal deficit; that can’t be allowed to interfere with saving the world (or public schooling lard).

Finally, looming on the horizon is the release of final standards from the Common Core State Standards Initiative. The Obama administration is trying to coerce all states to adopt the standards by linking adoption to Race-to-the-Top competitiveness and, potentially, Elementary and Secondary Education Act funding.

The good news is that on June 2 – potentially the very day the standards will be released – you can catch what has sadly been a rarity so far in the push for national standards: a real debate about whether national standards will actually improve educational outcomes.  My answer is that there is no meaningful evidence that national standards drive superior results, but joining me to debate that right here at Cato will be the Heritage Foundation’s Lindsey Burke, Sandra Boyd of Achieve, Inc., and the Fordham Foundation’s Michael Petrilli. It will be a debate that must be replicated across the country before we make any further move to adopt one standard for every public school in America. You can register here to see our debate live, or catch it online at Cato.org.

The feds are on the move in education, and the more we learn about their plans, the more obvious it is that they must be stopped.

Crocodile Tears? Liberals Lament Lack of Their Own on the Court

An interesting narrative has arisen among some on the left that the nomination of Elena Kagan shows what chumps Democratic presidents are.  That is, not only could President Obama have tapped a stronger “progressive” voice, but he – like President Clinton before him, and unlike Republican presidents – put avoiding political fights ahead of moving the Court left.  Since LBJ, Democrats have opted for a “moderate technocrat” like Stephen Breyer rather than a “lion” like William Brennan or Thurgood Marshall.  (Sonia Sotomayor was good and necessary for identity politics, the argument continues, but, let’s face it, she’s no liberal Scalia.)

Take this opening quote from a New York Times article that came out the day of the nominee’s announcement: “The selection of Solicitor General Elena Kagan to be the nation’s 112th justice extends a quarter-century pattern in which Republican presidents generally install strong conservatives on the Supreme Court while Democratic presidents pick candidates who often disappoint their liberal base.”  Or Dahlia Lithwick’s op-ed in Slate about how liberal law students are so many lost sheep because their ideological heroes are deemed unconfirmable and therefore not part of the nomination discussion.

Well.  A few things on this: First, even if the argument were true, it’s simply not statistically significant because we’re only talking four Democratic appointments (Breyer and Ruth Bader Ginsburg by Clinton, Sotomayor and Kagan by Obama; poor Jimmy Carter had none, the same number George W. Bush would have had had he not been re-elected).  Second, if you line up the Republican and Democratic nominees in recent decades, it’s conservatives who are disappointed (need I even mention John Paul Stevens, Anthony Kennedy, and David Souter, let alone Earl Warren and Brennan himself, all Republican nominees).  Third, to say that someone like Ginsburg – a push-the-envelope feminist and ACLU lawyer – is a moderate is to center the jurisprudential spectrum around the law faculty lounge.  And fourth, as David Bernstein details, it is people like Richard Epstein – and other Federalist Society regulars like Dan Troy, Miguel Estrada, John Eastman, Frank Easterbrook, Stephen Bainbridge, and Todd Zywicki (as well as Cato’s own Roger Pilon, Randy Barnett, and Ilya Somin) – who would be considered filibusteringly beyond the pale, much more than Lithwick’s vaunted American Constitution Society stalwarts.

In short, if anything it is Republicans who can rightfully be disappointed in their presidents’ nominees – though Kennedy’s seat was of course originally to have been filled by Robert Bork. More unfortunately, it is libertarian law students who can lament that their kind lacks representation on the High Court – though note that the second choice for Kennedy’s seat was Douglas Ginsburg (the last judicial martyr of the drug war).  And so, as the Court remains securely to the left of the American people, just today ratifying radical assertions of federal legislative and judicial power, Elena Kagan is poised to fit right into that jurisprudential “mainstream.”  Good for the left, bad for the Constitution.

Study: Medicaid Provides Lower-Quality Care

The Congressional Budget Office estimates that by 2019, ObamaCare will cover 32 million U.S. residents who would otherwise have been uninsured.  Half of those coverage gains would come from expanding the Medicaid program, which has been criticized for poor-quality care.

A new study in the journal Inquiry gives another indication that Medicaid provides low-quality care:

we find that uninsured and Medicaid patients are treated by lower-quality physicians both because of the hospitals these patients attend and because of sorting within hospitals…Our study concluded that patients in government hospitals that treat large numbers of uninsured and Medicaid patients are least likely to be treated by a board-certified or top-trained physician.

The study has plenty of limitations.  For one, physician training is an input, not an output.  What matters are health outcomes, and so it will be interesting to see what the Oregon Health Study has to say about Medicaid’s effects on health.

I Cut Spending 10%

House Republicans proposed some small cuts to the federal budget on their new YouCut website last week. I noted that the GOP cuts amounted to just 0.017 percent of the federal budget, and suggested that the conservative party in Congress could do much better. Below I’ve listed 10 terminations that would save about $380 billion a year, which is more than 10 percent of total federal spending.

Many politicians and congressional staffers will look at this list and consider the cuts too radical. But those folks should take a closer look at current budget projections, which show federal debt exploding to 100 percent of GDP within a decade and heading to the moon after that. Rising debt all but guarantees that there will be radical changes to the budget in coming years. So we can start making changes in an orderly way right now, or we can make then later when it’s harder to dig out from an even bigger pile of debt.

Besides, the 10 cuts proposed below are not radical. Canada doesn’t have a federal Department of Education, so why do we need one? New Zealand doesn’t hand out farm subsidies, so why should we? Britain’s new conservative-liberal government is cutting public-sector salaries, so why can’t we?

Cuts in subsidies will cause short-term dislocations for the groups dependent on them, but people will adjust quickly and society will be better off in the long run. Welfare supporters said that the reforms in 1996 would be a social disaster, but benefits were cut and low-income families prospered.

Americans don’t need subsidies, and the government obviously can’t afford them anymore. It’s time to start getting rid of them. The savings listed here are rough and rounded 2010 outlay amounts from the president’s budget.

1. Community Development Subsidies. The Department of Housing and Urban Development should not be funding local activities such as street repairs and parking lots. Save $10 billion.

2. Homeowner Subsidies. Federal subsidies for home ownership helped to cause the financial meltdown and recession by putting people into homes they could not afford. Save $10 billion

3. Energy Subsidies. Federal energy subsidies have a long record of waste and boondoggle. Private markets will invest in energy technologies when there is a reasonable chance for a return. Save $20 billion.

4. Higher Education Subsidies. Federal student aid contributes to college tuition inflation, and it can be replaced by private borrowing, family savings, and private charity. Save $20 billion.

5. Overpaid Federal Workers. Federal workers earn an average $120,000 a year in wages and benefits—twice what the average American earns. Federal wages should be cut 10 percent. Save $20 billion.

6. Farm Subsidies. More than 70 percent of aid goes to the largest 10 percent of farm businesses. With an average income 28 percent higher than the U.S. average, farm households don’t need federal welfare. Save $30 billion.

7. Public Housing and Rental Subsidies. Federal housing policies have damaged cities and created concentrations of poverty. They are based on a myth that markets can’t provide low-income housing. Save $35 billion.

8. K-12 Education Subsidies. Rising federal funding of the public schools has not improved test scores. It has only created large bureaucracies and stifled local control and innovation. Save $60 billion.

9. Transportation Subsidies. State governments and the private sector can more efficiently fund highways, airports, rail, urban transit, and air traffic control without federal subsidies and regulations. Save $85 billion.

10. Food Subsidies (Food Stamps and School Lunch). Low-income families often suffer from poor food choices and obesity, not a shortage of calories. Food aid for the needy should be left to private charities. Save $90 billion.

For details on most of these proposed cuts, see www.downsizinggovernment.org.