Archives: 09/2010

China Bill All about Saving Lawmakers’ Jobs

The House is expected to vote today on a bill that would allow U.S. companies to petition the Commerce Department for protective tariffs against imports from countries with “misaligned currencies.” Everybody knows the bill is aimed squarely at China.

Advocates of the legislation say it is about jobs, and they are partly right. The bill is about saving the jobs of incumbent lawmakers who are desperate to appear tough on China trade, which they blame for the loss of U.S. manufacturing jobs.

As my colleague Dan Ikenson and I have argued at length, in blog posts, op-eds, and longer studies,

Let’s hope cooler, wiser heads in the Senate and the White House save us from this election-season folly.

President: “We Need More Teachers.” Reality: “Yoohoo! I’m Right Over Here! Hellooo!”

This week, President Obama called for the hiring of 10,000 new teachers to beef up math and science achievement. Meanwhile, in America, Earth, Sol-System, public school employment has grown 10 times faster than enrollment for 40 years (see chart), while achievement at the end of high school has stagnated in math and declined in science (see other chart).

Either the president is badly misinformed about our education system or he thinks that promising to hire another 10,000 teachers union members is politically advantageous–in which case he would seem to be badly misinformed about the present political climate. Or he lives in an alternate universe in which Kirk and Spock have facial hair and government monopolies are efficient. It’s hard to say.

Bending the Cost Curve: Ryan’s Roadmap Would Succeed Where ObamaCare Fails

From my oped in today’s Investors Business Daily:

Rep. Paul Ryan’s (R-Wis.) “Roadmap for America’s Future” proposes even tighter limits on Medicare’s growth, leading columnist Bruce Bartlett to opine, “the Medicare actuaries have shown the absurdity of the Ryan plan by denying that Medicare cuts already enacted into law are even worthy of projecting into the future.”

On the contrary, experience and public choice theory suggest that the Ryan plan has a better shot at reducing future Medicare outlays than past efforts, because the Roadmap would change the lobbying game that fuels Medicare’s growth.

For more on Ryan’s Roadmap, click here.  For more on Medicare, read David Hyman’s Medicare Meets Mephistopheles.  For more on public choice economics, click here.

First World War Ends

On September 26, 2010 – 92 years after the WWI officially ended – Germany made her last payment of $94 million in reparations “to private individuals, pension funds and corporations holding debenture bonds as agreed under the Treaty of Versailles.” As Keynes rightly predicted, the unreasonably high French demands for financial reparations led to German economic weakness. The end result was hyperinflation, which was one of the principal causes of Hitler’s rise to power and the start of the Second World War. In spite of losing two world wars, Germany did eventually become the most powerful nation in Europe – through trade, capitalism and German ingenuity.

Targeted Killing of U.S. Citizen a State Secret?

That’s the claim the Obama administration made in court. As Glenn Greenwald puts it:

[W]hat’s most notable here is that one of the arguments the Obama DOJ raises to demand dismissal of this lawsuit is “state secrets”:  in other words, not only does the President have the right to sentence Americans to death with no due process or charges of any kind, but his decisions as to who will be killed and why he wants them dead are “state secrets,” and thus no court may adjudicate their legality.

Italics in the original. My colleagues Gene Healy and Nat Hentoff have expressed concerns about targeted killings. Charlie Savage wrote a good piece on this that highlights how even the most ardent defenders of executive power may blush at this broad claim of power.

The government’s increasing use of the state secrets doctrine to shield its actions from judicial review has been contentious. Some officials have argued that invoking it in the Awlaki matter, about which so much is already public, would risk a backlash. David Rivkin, a lawyer in the White House of President George H. W. Bush, echoed that concern.

“I’m a huge fan of executive power, but if someone came up to you and said the government wants to target you and you can’t even talk about it in court to try to stop it, that’s too harsh even for me,” he said.

In fairness, Rivkin would defend the administration’s claim of power on other grounds – that targeting is a “political question” for the elected branches of government – but this approach seems to have lost out because it invites the judiciary to determine whether the U.S. is at war in Yemen.

Amending the Authorization for the Use of Military Force passed by Congress after 9/11 is long overdue. What groups are we truly at war with, where does the line between war and peace sit, who can we detain and kill, and what process is owed before a citizen may be targeted with lethal force? Questions of war are political in nature, and if we don’t know the answers, it is Congress’ role to step in and provide them.

If Not Fannie, then Who?

A common defense offered for keeping Fannie Mae and Freddie Mac, or something like them, is that the market simply cannot absorb the same level of mortgage lending without them.  The central flaw in this argument is that Fannie and Freddie themselves must be funded by the market.  So if the financial markets can absorb X in GSE debt, then the financial markets can absorb X in mortgages.

Different market participants currently face different capital requirements for the same assets.  To some extent, Fannie and Freddie were a vehicle for shifting mortgage risk from higher capitalized institutions to less capitalized.  If the Obama administration and bank regulators are serious about closing “regulatory gaps” then all entities backed by the govt, implicit or otherwise, should hold the same capital against the same risks.  In the following I will thus assume that differences in capital requirements behind mortgages are irrelevant.

So to determine who could absorb the GSEs’ buying of mortgages, let’s look at who holds GSE debt.  Of the approximately $5 trillion in GSE debt and mortgage backed securities (MBS), about a trillion is held by commercial banks and thrifts.  Another trillion is held by insurance companies and pension funds.  Close to a trillion is held by mutual funds.  That quickly gets one to 3 trillion.  Households and state/local governments also hold close to a trillion.  That leaves us with about a trillion left, held mostly by foreign governments (usually central banks).  For this analysis, I am using data pre-Federal Reserve purchases of GSE debt/MBS.

Given that banks hold about a trillion in excess reserves and over 9 trillion in deposits, I think its fair to assume commercial banks could easily absorb another $1 trillion in mortgages, as represented by foreign holders.   Some holders of GSE debt are legally prohibited from holding mortgages.  These entities can generally hold bank commercial paper (think mutual funds) which could then fund the same level of mortgages.  

The point here should be clear, by swapping out GSE debt for mortgages, our financial markets have sufficient capacity to replace Fannie and Freddie.  In fact, we are the only advanced country that does not fund our mortgage market primarily or exclusively with bank deposits.  This analysis also does not assume any reduction in the size of our mortgage market, which should actually be an objective of reform.  We devote too much capital to mortgages, at the expense of more productive sectors of our economy.

End Drug War, Save Billions in Wealth

A new Cato Institute report examines the budgetary impact of ending the drug war and concludes that $88 billion could be saved each year (about $41 billion from canceled spending and about $47 billion in new tax revenue).

Here’s the executive summary:

State and federal governments in the United States face massive looming fiscal deficits. One policy change that can reduce deficits is ending the drug war. Legalization means reduced expenditure on enforcement and an increase in tax revenue from legalized sales.

This report estimates that legalizing drugs would save roughly $41.3 billion per year in government expenditure on enforcement of prohibition. Of these savings, $25.7 billion would accrue to state and local governments, while $15.6 billion would accrue to the federal government.

Approximately $8.7 billion of the savings would result from legalization of marijuana and $32.6 billion from legalization of other drugs.

The report also estimates that drug legalization would yield tax revenue of $46.7 billion annually, assuming legal drugs were taxed at rates comparable to those on alcohol and tobacco. Approximately $8.7 billion of this revenue would result from legalization of marijuana and $38.0 billion from legalization of other drugs.

Saving money that is otherwise wasted is just one of a dozen good reasons to end the drug war.  But since policymakers have placed all of us into a financial jam, this report shows one way to improve our position.  Voting against the drug war remains a risky vote but more politicians are concluding that it is a less painful vote than voting against other things the government spends money on.  

Harvard economist Jeff Miron and his co-author Katherine Waldock have data on the federal budget and all the states.  Check out how much money your state is wasting and spread the word to others.