Archives: September, 2010

Postal Service’s Financial Woes

The U.S. Postal Service is in a lurch after Congress wrapped up business until November without giving the USPS a break on a $5.5 billion retiree health benefits payment that’s due tomorrow. Combined with an expected loss in the billions of dollars, the USPS could run out of money in October.

In addition, the USPS’s regulator today rejected the USPS’s request for an exigent postal rate increase. The Postal Regulatory Commission acknowledged that the recession has led to a substantial decline in mail volume. However, the PRC rejected the request because the rate adjustments “represent an attempt to address long-term structural problems not caused by the recent recession.”

The PRC singled out “an overly ambitious requirement for the Postal Service to prefund its future retiree health benefit premiums.” The prefunding requirement stems from a 2006 law that sought to address unfunded obligations for retiree health benefits. Last year, Congress agreed to reduce the USPS’s 2009 payment by $4 billion in order to help it keep its head above water.

Congress did not provide such relief this year, which some members of Congress have inappropriately criticized as being a “taxpayer bailout.” However, allowing the USPS to defer its obligations only increases the possibility that future taxpayers could be on the hook. Therefore, policymakers who are critical of giving the USPS another break are correct when they state that the government mail monopoly needs to be substantially reformed.

The PRC’s rejection of the rate increase request points to the problem with the government trying to run a business. If UPS or FedEx had to ask a federal regulatory body for permission to raise prices for their services, it’s unlikely that either would survive.

As I’ve previously discussed, the USPS is currently trying to get Congress’s blessing to eliminate Saturday service. While it’s ridiculous that the American people are forced to use a government monopoly that wants to raise prices while simultaneously degrading services, having to get Congress’s approval to alter delivery schedules is a serious problem for a commercial operation.

Postal management has succeeded in cutting costs, but still lacks the necessary flexibility that a private firm would possess. For instance, if the USPS wants to close post offices, it has to jump through numerous regulatory and congressional hoops. Last year, for example, the USPS proposed consolidating 3,000 postal outlets, but following a congressional outcry, the number under consideration was reduced to a paltry 157.

While the USPS has been able to eliminate a substantial number of employees through attrition, the USPS’s predominantly unionized workforce continues to account for 80 percent its costs. When weighing a decision on postal union contracts, arbitrators are not allowed to take the USPS’s financial situation into consideration. In addition to extracting benefits that are generous even by federal employee standards, inflexible union contracts also make it difficult for the USPS to efficiently manage its workforce.

Beyond the nostalgic depictions of the USPS being a “national asset” that “binds the nation together” is the unglamorous fact that it provides a service just like millions of other commercial outfits. Electronic communication and other technological advances are making the USPS’s mail monopoly increasingly irrelevant. Instead of haggling over six-day mail delivery and retiree health benefit prefunding formulas, Congress should start focusing its attention on getting the government out of the mail business once and for all.

Three Views of Matt Ridley

Matt Ridley’s new book, The Rational Optimist: How Prosperity Evolves, is garnering rave reviews. Ridley, science writer and popularizer of evolutionary psychology, shows how it was trade and specialization of labor–and the resulting massive growth in technological sophistication–that hauled humanity from its impoverished past to its comparatively rich present. These trends will continue, he argues, and will solve many of today’s most pressing problems, from the spread of disease to the threat of climate change.

The Cato Institute has now presented three different looks at the book, with a review in the Cato Journal, another in Regulation, and an event at Cato with Matt Ridley himself.

Powell on Ridley

My colleague Aaron Powell published the first Cato review of The Rational Optimist with a piece in the Fall 2010 edition of the Cato Journal (pdf).

What The Rational Optimist makes clear, in perspicuous prose and enchanting storytelling, is that, just as biological evolution populated the world with the wondrous variety of life, exchange allowed one of those species to achieve a wondrous standard of living that will only improve and become more uniform as we trade and invent.

Powell doesn’t find the book flawless, however. He identifies two problems that weaken Ridley’s argument, the first dealing with the “circular and unconvincing” nature of his claim that trade caused our human ancestors to achieve humanity. The second concern is broader. Powell writes,

It would be easy to get the impression Ridley is Pollyannaish. If nuclear annihilation, super flus, and starvation are nothing to be worried about, what possibly could be? Unfortunately, Ridley’s response to this critique is less convincing than it could be, for he fails to adequately draw a line between when an anticipated disaster is real and when it’s just pessimism writ large.

Henderson on Ridley

David R. Henderson reviews the book in the latest issue of Regulation (pdf). Like Powell, Henderson enthusiastically endorses the style and substance of Ridley’s book, though without identifying the weaknesses highlighted in the former review. His only point of contention with The Rational Optimist is a “jarring misstatement” regarding trade and value. Henderson writes,

Given the important role of trade in Ridley’s theory, and given his obvious understanding of trade, it is surprising that he makes a jarring misstatement: “For barter to work,” he writes, “two individuals do not need to offer things of equal value. Trade is often unequal, but still benefits both sides.” The correct statement is: “For barter or trade to work, individuals must offer things of unequal value.” If I valued what I give up the same as what I get in return, there would be no point in trading. Trading is always an exchange of unequal values.

Henderson goes on to defend Ridley against the negative appraisal his book received in the New York Times. That review, written by famous foreign-aid critic William Easterly, attacked The Rational Optimist for its take on Africa and for failing to “confront[] honestly all the doubts about the ‘free market.’” “Really?” Henderson responds. “All the doubts? I do not know if such a book could be written with the requisite amount of evidence and have under 3,000 pages.”

Ridley on Ridley

And then, of course, there’s the source himself. In May, Ridley spoke at a Cato Institute book forum about The Rational Optimist. He discussed the core arguments of his book and concluded (optimistically) that technology and trade have now made it possible to stop trying to keep the world from getting worse, and instead focus on making it better.

As with all Cato events, full video and audio are available for download on www.cato.org. Or watch it right here:

McDonald’s Case Highlights ObamaCare’s Threat to Low-Income Workers’ Health Insurance, Political Freedom

Many employers, such as McDonald’s, provide health benefits that are less comprehensive than most.  They may have an annual claims limit of $10,000 or less.  But if you’re young, healthy, and need to pinch your pennies, that may suit you just fine.  According to Jerry Newman, a SUNY-Buffalo professor who wrote a book about working at McDonald’s, “For those who didn’t have health insurance through their spouse, it was a life saver.”

These are the health plans (and the workers) that are seeing the highest premium increases under ObamaCare.  The Wall Street Journal reports:

Trade groups representing restaurants and retailers say low-wage employers might halt their coverage if the government doesn’t loosen a requirement for “mini-med” plans, which offer limited benefits to some 1.4 million Americans…

McDonald’s, in a memo to federal officials, said “it would be economically prohibitive for our carrier to continue offering” the mini-med plan unless it got an exemption from the requirement to spend 80% to 85% of premiums on benefits…”Having to drop our current mini-med offering would represent a huge disruption to our 29,500 participants,” said McDonald’s memo…

Insurers say dozens of other employers could find themselves in the same situation as McDonald’s. Aetna Inc., one of the largest sellers of mini-med plans, provides the plans to Home Depot Inc., Disney Worldwide Services, CVS Caremark Corp., Staples Inc. and Blockbuster Inc., among others, according to an Aetna client list obtained by the Journal. Aetna also covers AmeriCorps teaching-program sponsors, who are required by law to make health coverage available.

Aetna declined to comment; it has previously indicated that the requirement could hurt its limited benefit plans.

“There is not any issuer of limited benefit coverage that could meet the enhanced MLR standards,” said Neil Trautwein, a vice president at the National Retail Federation, using the abbreviation for medical loss ratio.

Yet again, we have evidence that President Obama’s oft-repeated pledge that “if you like your health care plan, you can keep your health care plan” should have come with a disclaimer: Offer not valid for low-income workers.

Not to fear, says the Obama administration. According to Bloomberg:

The government may allow some low-cost plans like those offered at McDonald’s, which have limited benefits, to get waivers from the health law’s insurance requirements, according to a Sept. 3 Health and Human Services memo. Those requirements were waived for McDonald’s on Sept. 24, [HHS spokeswoman Jessica] Santillo said.

Sorry, but I don’t find it comforting that ObamaCare gives HHS the power to waive these regulations on a case-by-case basis.  Power corrupts.  We’ve already seen HHS Secretary Kathleen Sebelius use other powers granted her by ObamaCare to threaten insurers who contradict the party line about the law’s cost.  The waiver power gives her another club to use against insurers and employers who complain about the law or donate to the wrong political campaigns.  (Will Home Depot, Disney, CVS, Staples, or Blockbuster dare to misbehave?)

Any such criticism now triggers an autonomic reflex among administration spokesmen where they regurgitate the lines, “Americans have seen what happens when insurance companies have free rein. The Affordable Care Act ends insurance companies’ worst abuses.”

As if giving bureaucrats free rein to engage in abusive government practices is an improvement.

Fiscal Report Card on the Governors

We released Cato’s report card on the fiscal policies of the governors today. We calculated data on the taxing and spending habits of 45 of the nation’s 50 governors, between 2008 to August 2010.

The governors are scored from 0 to 100 on seven separate taxing and spending variables. The scores are aggregated and converted to letter grades, A to F.

Four governors earned an “A” this year: Tim Pawlenty of Minnesota, Bobby Jindal of Louisiana, Mark Sanford of South Carolina, and Joe Manchin of West Virginia. You can read the report to find out what these governors did right from our limited-government point of view.

As it turns out, the residents of these four states seem to like the fiscal stance of their winning governors, who favor tax cuts and spending restraint.

Pawlenty has a 52 percent approval rating in quite a liberal state.

Jindal has a 74 percent approval rating.

Manchin has a 69 percent approval rating.

Sanford has a 55 percent approval rating, despite the troubles in his personal life.

Governors shouldn’t just focus on being popular in a superficial sense. These polls tell us that governors who focus on cutting taxes and spending in an honest and intelligent way will be supported by the people.

P. J. O’Rourke on Tour

P. J. O’Rourke, Cato’s H. L. Mencken Research Fellow, is touring the country to talk about his new book, Don’t Vote: It Just Encourages the Bastards. He’ll be doing these Cato events:

September 30                 San Francisco, Palace Hotel

October 7                         Los Angeles, Beverly Wilshire

October 13                      Dallas, Ritz-Carlton

October 14                     Houston, Four Seasons

October 28                    Washington, Cato Institute

Pretty swanky digs for a guy who once wrote Holidays in Hell. And sorry, San Franciscans – obviously I should have posted this a week ago. But if you’re a Cato Sponsor, you read about it in Cato Policy Report and you got an invitation.

You can find more book signings and media appearances at www.pjourke.com.

Eliot Cohen’s Key to Victory: Shut Up

Today’s Washington Post features an op-ed by John Hopkins’ SAIS professor Eliot Cohen arguing – via a series of fictional statements – that the Obama team’s decision to speak with Bob Woodward is likely to have a devastating impact on our ability to win in Afghanistan and elsewhere.

The technique is too cute by half. I could just as easily come up with a series of quotes by people who believe that the costs of the war in Afghanistan far exceed the benefits. (e.g. The widow of a soldier killed in Afghanistan, upon reading the Woodward excerpts, bursts into tears. “Why have we chosen to fight a war that Gen. Petraeus admits we will likely never win, and which our children and grandchildren will be fighting?”)

By the same token, Cohen employs Mahmoud Ahmadinejad and Benjamin Netanyahu to make his case that Obama is weak. How hard would it be to make up fictional statements by two other heads of state – say, by allies who have pulled out of Afghanistan, or are preparing to – that they are encouraged to see that someone in the U.S. government recognizes that the war in Afghanistan is a gross misallocation of resources and is looking for ways to refocus counterterrorism efforts, and away from a decades-long nation-building mission that is likely to fail? Not hard.

But I refuse to play Cohen’s game according to his rules. Better to focus on the flaws of his underlying argument – to the extent that there is one – that the reason we aren’t winning this/these war/wars is because the president’s aides are talking out of school. If they just shut up, and did what the generals said (some of whom, by the way, must also be talking to Woodward) we’d be on the road to victory.

Please.

As with an earlier Afghanistan story that began with a few ill-considered remarks to a reporter, we shouldn’t be focused on the fact that people talk off the record. That is the story that Cohen and other war-hawks tell. The more important story is that the Afghan strategy is fatally hamstrung by 1) an unreliable local partner, a necessary ingredient for any successful counterinsurgency campaign; 2) a profound lack of trust between the Afghan people and the American/NATO counterinsurgents; and 3) a complete mismatch between the ends sought and the resources (time, money, troops) available.

I have no idea how Cohen responds to points one and two. Those two problems are not unique to Afghanistan, and the absence of those two conditions has doomed many other counterinsurgency missions.

As for number three, Cohen might believe that talking about victory will convince the American people that they should back the military’s preferred strategy, which OMB said would cost $889 billion over the next 10 years (on top of the $250+ billion already spent), as the best possible use of money that we do not have. Indeed, Cohen has apparently convinced himself that the American people would be anxious to spend another ten or twenty years bogged down in a distant land trying to rebuild roads and schools, if only the president talked about it more often. Cohen might even believe, contrary to all evidence, as well as basic common sense, that the U.S. government is capable of creating a functioning nation state in Afghanistan, and that it constitutes a vital U.S. national interest to make that happen.

In short, Eliot Cohen believes that President Obama shouldn’t question how the Afghan mission aligns with our vital security interests, or even if it is achievable. He’d rather that he just shut up, believe in it – really believe –and back the generals.

I disagree. Where Cohen scorns (via proxies spouting imagined off-the-record quotes) internal administration deliberations as dangerously misguided, I am perversely encouraged that the president seems at least willing to ask hard questions, and that some of his advisers understand the utter futility of the current enterprise.

Of course, I’d be even happier if President Obama did what past presidents have done: determine the strategy, give the order, and expect the military to carry it out. And if the military leaders that he has won’t do it, he can find others. There are lots of them.

ARMs as Automatic Stabilizers

An argument often heard for keeping Fannie Mae and Freddie Mac, or some sort of subsidy for mortgages, is the desire to keep the 30 year fixed rate mortgage “affordable.” The 30 year fixed certainly has some merits - which borrowers should be willing to pay for - but it also has the downside of reducing the impact of monetary policy in stabilizing the economy.

Generally interest rates go down in a recession and up in an expansion.  Part of this is the reaction of the Federal Reserve, which tends to cut rates in a recession, but part is also the fact that the demand for credit also declines in a recession and increases in an expansion.

If borrowers moved to adjustable rate mortgages, then in recessions they would likely see a reduction in their mortgage rate, resulting in a reduction in their monthly payment, which would increase their disposable income, which itself should have some positive impact on consumption, helping to stabilize a weak economy.

The reverse would work in an expansion.  If the economy became over-heated, interest rates would likely go up, pushing up monthly payments, resulting in reductions in income and consumption.  While of course this would be unpleasant for the borrower, it would have the benefit of moderating a booming economy, reducing the likelihood of inflation and the occurrence of bubbles.

The latter effect would also increase the degree to which consumers care about inflation and demand price stability from the central bank.  Normally, borrowers have an incentive to favor inflation, as it reduces the real value of their debt.  If however, inflation resulted in an increase in their mortgage rate, their preference could switch toward price stability, which would in the long run be better for growth and the overall economy.

While I do not expect the above to settle the debate over the role of the 30 year fixed rate mortgage, we, as a society, should openly and loudly debate its costs and benefits before we simply assume it needs to be subsidized.

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