Archives: 11/2010

What Austrian Economics Is

…and what it is not. That’s Steve Horwitz’s topic in this post at Coordination Problem. He notes a recent post at FrumForum about “the Austrian school’s disdain for American foreign policy and willingness to call Lincoln a tyrant.”

No, Horwitz says. Austrian economics is “an approach to the study of human action and the social world, not a set of policy conclusions.” Austrian economics is not the same thing as libertarianism, natural rights, or any perspective on American wars past or present.

TSA’s Strip/Grope: Unconstitutional?

Writing in the Washington Post, George Washington University law professor Jeffrey Rosen carefully concludes, “there’s a strong argument that the TSA’s measures violate the Fourth Amendment, which prohibits unreasonable searches and seizures.” The strip/grope policy doesn’t carefully escalate through levels of intrusion the way a better designed program using more privacy protective technology could.

It’s a good constutional technician’s analysis. But Professor Rosen doesn’t broach one of the most important likely determinants of Fourth Amendment reasonableness: the risk to air travel these searches are meant to reduce.

Writing in Politico last week, I pointed out that there have been 99 million domestic flights in the last decade, transporting seven billion passengers. Not one of these passengers snuck a bomb onto a plane and detonated it. Given that this period coincides with the zenith of Al Qaeda terrorism, this suggests a very low risk.

Proponents of the TSA’s regime point out that threats are very high, according to information they have. But that trump card—secret threat information—is beginning to fail with the public. It would take longer, but would eventually fail with courts, too.

But rather than relying on courts to untie these knots, Congress should subject TSA and the Department of Homeland Security to measures that will ultimately answer the open risk questions: Require any lasting security measures to be justified on the public record with documented risk management and cost-benefit analysis. Subject such analyses to a standard of review such as the Adminstrative Procedure Act’s “arbitrary and capricious” standard. Indeed, Congress might make TSA security measures APA notice-and-comment rules, with appropriate accomodation for (truly) temporary measures required by security exigency.

Claims to secrecy are claims to power. Congress should withdraw the power of secrecy from the TSA and DHS, subjecting these agencies to the rule of law.

Lame Ducks and Locavores On Food Safety

Last week the New York Times reported on the story of Estrella Family Creamery, an award-winning, very-small-scale producer of raw milk farmstead cheeses in Montesano, Wash. The family faces a Food and Drug Administration ban on its products because the food pathogen listeria has been found in its facilities; when it expressed defiance, the FDA proceeded to stage a raid to seize its entire cheese stock. It’s not easy to sort out how large a health risk may be involved (listeria, a widely disseminated form of bacteria, poses a real danger of food poisoning, but no actual illness has been traced to Estrella cheese). I was struck, in any event, by these paragraphs from the Times account:

“If the F.D.A. wanted to shut down the U.S. artisan cheese industry, all they’d have to do is do this environmental surveillance and the odds of finding a pathogen would be pretty great,” said Catherine W. Donnelly, co-director of the Vermont Institute for Artisan Cheese of the University of Vermont, referring to the listeria testing at cheese plants. “Is our role to shut these places down or help them?”

Kurt Beecher Dammeier, owner of Beecher’s Handmade Cheese, an artisan cheesemaker and retailer in Seattle, said the F.D.A. needed to work harder to understand artisans like Ms. Estrella. “The F.D.A. comes from an industrial, zero-defect, highly processed, repeatable perspective, and she comes from a more ancient time of creating with what she gets,” he said. “I’m not sure they can really even have a conversation.”

What lends some urgency to these continuing debates is that that the Senate is expected to vote as early as this week on a bill that will conscript thousands of food producers, processors and “facilities” – including many that produce or import relatively low-risk foods for specialty, local or ethnic clienteles – into a best-industrial-practices safety model with extensive recordkeeping requirements and other regulatory burdens. The bill cleared a Senate cloture vote the other day 74-25 and is scheduled for floor consideration Monday.

Much of the bill’s press coverage – as with a USA Today editorial which followed ridiculously slanted coverage in that paper – appears blithely unaware of the apprehension the bill has raised among small farmers and organic/”locavore” advocates. Some of those fears played out in a battle over an amendment offered by Sen. Jon Tester (D-Mont.) to lessen regulatory burdens on smaller local producers, and strongly backed by (e.g.) foodie guru Michael Pollan. Most big “consumer” groups, however, including Consumers Union and the Center for Science in the Public Interest, lined up against the small farmers and facilities, as did (following their lead) the New York Times, whose editorial managed to denounce the Tester amendment without actually saying what it did, lest its readers (who of course include many foodie/locavore believers) be confused. Moreover, many big agribusiness sectors have actively opposed the Tester amendment as well, on the view that any regulatory regime they have to live with, Uncle Perry with his parsnip patch should have to live with too, even if it means he won’t manage to stay in business while they will. Despite that line-up, Senate leaders have now reportedly accepted a watered-down version of the Tester amendment, which does not by any means exempt small producers from federal regulatory control – they will face plenty of it – but at least nods toward the principle of “tiering” burdens. (Earlier here, here, here, here, etc.)

The wider question is whether the bill as a whole, with its massive ramp-up of federal regulation to displace both voluntary market choices and state-level regulation, is a good idea. As I observed to TownHall’s Jillian Bandes, despite the panic atmosphere generated over the issue in recent years, the best evidence is that the incidence of food poisoning continues to fall, not rise; one reason for the greater press coverage of the issue is that science has gotten better at identifying and tracing the sorts of outbreaks that were happening all along. To some who promote a more intensive regulatory state, the resulting “crisis” presents a welcome opportunity, even though, on these advocates’ own terms, the existing array of laws provides ample means by which federal agencies can crack down on food actually shown to pose a hazard.

When the new Congress convenes in January, it will bring to Washington dozens of new lawmakers with more skeptical views about regulation, who may listen with favor to colleagues like Sen. Tom Coburn (R-Okla.), who has argued against the pending FSMA as an unjustified power grab. Could that be why Sen. Harry Reid (D-Nev.) is determined to force through the bill during the lame duck session? In this case – as with the very bad Paycheck Fairness Act, which Republicans managed to stop earlier this month, and the even more appalling “Public Safety Employer-Employee Cooperation Act” to force unionization on local public safety workers – it’s almost as if the point of the post-election session is to push controversial measures that would encounter more resistance if held over to the next Congress. Is this really a proper use of the lame duck?

High-Speed Federalism Fight

In October, I speculated that the upcoming elections could be the nail in the coffin for the Obama administration’s plan for a nationwide system of high-speed rail. Indeed, some notable gubernatorial candidates who ran, in part, on opposition to federal subsidies for HSR in their states proceeded to win. However, Transportation Secretary Ray LaHood made it clear in a recent speech to HSR supporters that the administration intends to push ahead.

LaHood’s message was targeted specifically to incoming governors John Kasich in Ohio and Scott Walker in Wisconsin, who argued that HSR doesn’t make any economic or practical sense for their states.

LaHood said that states rejecting federal HSR subsidies won’t be able to reroute the money to other uses, such as roads. Instead, LaHood said the rejected money will redistributed “in a professional way in places where the money can be well spent” — i.e., other states. And sure enough, other governors were quick to belly up to the Department of Transportation’s bar in order to grab Ohio and Wisconsin’s share.

From the Columbus-Dispatch:

New York Gov.-elect Andrew Cuomo has said he would be happy to take Ohio’s money. Last week, California Democratic Sens. Barbara Boxer and Dianne Feinstein wrote LaHood saying that California stands ready to take some, too, noting that several states that elected GOP governors this month have said they no longer want to use the rail money for that purpose.

“It has come to our attention that several states plan to cancel their high-speed rail projects. We ask that you withdraw the federal grants to these states and award the funds to states that have made a strong financial commitment to these very important infrastructure projects,” Boxer and Feinstein said in their letter to LaHood.

This is a textbook example of why the Department of Transportation should be eliminated and responsibility for transportation infrastructure returned to state and local governments. If California wishes to pursue a high-speed rail boondoggle, it should do so with its own state taxpayers’ money. Instead, Ohio and Wisconsin taxpayers now face the prospect of being taxed to fund high-speed rail projects in other states.

If California’s beleaguered taxpayers were asked to bear the full cost of financing HSR in their state, they would likely reject it. High-speed rail proponents know this, which is why they agitate to foist a big chunk of the burden onto federal taxpayers. The proponents pretend that HSR is in “the national interest,” but as a Cato essay on high-speed rail explains, “high-speed rail would not likely capture more than about 1 percent of the nation’s market for passenger travel.”

David Wessel’s Curious Defense of the Fed’s Ambiguous Mandate

David Wessel, the Wall Street Journal’s economics editor, appears displeased that Republican Congressmen Bob Corker, Paul Ryan and Mike Pence want to clarify the Federal Reserve’s mandate – instructing the Fed to focus on preserving the value of its Federal Reserve notes, rather than continuing the 1946 Employment Act’s instruction to also “maximize employment” and minimize long-term interest rates (he mistakenly refers to this as “reopening the Federal Reserve Act,” which included no mandate).    Wessel imagines this must be a political stunt, citing some seemingly sensible comments by Sarah Palin as evidence.  He cannot imagine any valid reason for a prudent backlash against Chairman Bernanke’s repeated references to the dual mandate as an excuse for trying to nudge inflation higher. 

Instead of looking ahead, Wessel looks back – selectively.   He writes, “prices rose at only a 1% annual rate in the third quarter, the Commerce Department said Tuesday.”   However, that figure refers only to personal consumption expenditures (PCE), not to inflation in the overall economy, including producer prices.  The implicit price deflator for GDP rose by less than 1% in 2009, then at a 1.1% rate in the first quarter, 1.9% in the second and 2.3% in the third.  That is insufficient evidence of a worrisome trend, but it is also insufficient evidence to justify a massive program of monetizing long-term Treasury bonds.

Since QE2, Wessel notes, “markets have confounded the Fed by pushing yields on 10-year Treasuries up lately” [to about 2.9% from 2.5%].   I hate say “I told you so,” but I told you so.  

Wessel counters that, “No measure of inflation expectations foresees anything like the 8%-plus inflation of the ’70s.”  Of course not.  If markets expected inflation above 8% then bond yields would already be above 8%.   But expected inflation never makes a sudden leap from 3% to 8% overnight, and expectations are often slow to catch up to reality.  

In 1972, no measure of inflation expectations provided advance warning of the 7.9% rise in the core PCE deflator in 2004 (10.4% including food and energy).  In 1978, no measure of inflation expectations provided advance warning of the 9.2% rise in the core PCE deflator in 1980 (10.7% including food and energy).    Inflation creeps before it gallops.  Yet inflation surprises commonly result in falling bond prices and falling real wages, which means expectations proved overly optimistic.

Mr. Wessel’s new book is called, “In Fed We Trust.”   Such ardent faith has often been misplaced.

Righteous Indignation vs. Profits vs. Facts

Yesterday the Education Trust – a group focused on educational equity – released the latest righteousness-dripping attack on for-profit colleges and universities. I won’t go into the whole thing, but will offer one critique as kind of a teaser for some of the insights to expect from next week’s Cato forum “Profiting from Ivory Towers.”

As seems to be standard in these kinds of reports, the authors take the worst data they can find for for-profit schools, conduct an apples-to-pears comparison to public and private nonprofit institutions, and declare for-profit schools demons of the first order. Case in point:

To start with completion rates, among first-time, fulltime, bachelor’s degree-seeking students who enroll at for-profit institutions, only 22 percent earn degrees from those institutions within six years. By contrast, students at public and private nonprofit colleges and universities graduate at rates two to three times higher—55 and 65 percent, respectively.

That looks pretty bad for for-profit schools. But here’s the thing: For profits argue – and there seems to be general agreement on this – that they take disproportionate percentages of “underserved” students, presumably deserving people other schools leave behind. Since getting such people college degrees is a central Education Trust mission, it seems that what should be important is how good a job schools do at getting those underserved students a diploma, not all students.

Unfortunately, we don’t have good income data for students, but we do have a couple of proxies to help answer this important question.

The first proxy is offered by the Education Trust itself, which gives six-year graduation rates in four-year institutions broken down by the percentage of students receiving Pell Grants at the schools. (Pell Grants are federal grants aimed at low-income students.) Looking at the stratum of schools with 67-100% of students receiving Pell Grants, the graduation rate at for-profit schools is only 1 percentage point lower than public schools, and five points higher than private nonprofits. The report doesn’t say how many schools fall into this group, importantly, but that the Education Trust’s own report gives a hint that when it comes to educating the most underserved students for-profits do no worse than other schools shouldn’t be ignored.

We can also examine federal data to get a more fair comparison. Using data from Table 5 of this recent report, we can see that if we use another rough proxy for underserved populations – in this case, minority status – graduation rate disparities are significantly different from the Education Trust’s picture.

First, when you look just at six-year graduation rates for bachelor’s seekers at four-year schools, the rates are indeed 55 percent, 65 percent, and 22 percent for public, private nonprofit, and for-profit schools, respectively. Look at African-American graduation rates, however, and, while they drop for all sectors, they drop by the smallest amount at for-profits. For African Americans, publics have just a 39 percent graduation rate, private nonprofits 45 percent, and for-profits 16 percent. Look next at Hispanic or Latino students and you’ll see something more dramatic: While Hispanic and Latino students’ graduation rates are lower than the overall rates in public and nonprofit privates, they are actually above the overall rate at for-profits.

How about two-year schools? Here for-profits appear to do much better than their competitors, both with overall and minority graduation rates. Indeed, while public schools graduate just 22 percent of their students overall, 14 percent of their African Americans, and 17 percent of their Hispanic and Latino students, for-profits graduate 60 percent, 49 percent, and 63 percent of those students, respectively. That’s really a crushing difference in the favor of for-profits, but the Education Trust authors can’t make themselves applaud the profit-makers for it. Instead, they complain that for-profit students have to go into debt to get those results. Needless to say, the fact that especially public schools are much cheaper to students because they get huge taxpayer subsidies right off the bat is not a point of emphasis for the Education Trust crusaders.

So is it the case that for-profit schools are actually really good? Hardly. While most of the data that’s been reported in the war on profits has been distorted to demonize for-profit institutions, there are lots of problems with using extent data to defend those schools. As Education Sector’s Ben Miller – who will be one of our panelists on November 30 – has rightly pointed out, federal graduation data is terrible for controlling for transfer rates and other important wrinkles. Moreover, almost no one – save, perhaps, yours truly – has pointed out what seems to be the real problem here: Not that one sector of higher education is worse than another, but that they all bring in students with thousands of ever-growing federal dollars – taxpayer dollars – attached to them, killing students’ incentives to economize and schools’ incentives to keep prices under control. In other words, almost every college and university is getting rich off of unprepared and/or overschooled students because you, not students or schools, are paying so much of the bill.

So there’s your teaser. To see how this plays out when all sides of the Ivory Tower Wars are in one place, come to Cato on November 30, or watch the forum live online!

How Capitalism Saved the Pilgrims

When I was growing up, my father would occasionally tell me the story around this time of year of how private property rights saved the Pilgrims from starvation.

When the Pilgrims first arrived in 1620, as my father told the story, they tried to live communally according to the spirit of the Mayflower Compact. What crops they grew were put in a common storehouse and then apportioned according to each family’s need. The small colony struggled to survive for two or three years until its leaders declared that every family henceforth would be responsible for growing its own food. The new system proved much superior at putting food on the table.

Years later, when I was writing editorials for the Colorado Springs Gazette, I would tell the story in print on Thanksgiving Day, this time quoting from Governor William Bradford’s first-hand account. One of my fellow editors objected to my version, claiming it was Squanto the friendly Indian who saved the Pilgrims by teaching them how to fertilize their crops with dead fish. We agreed to disagree and I stuck to my version.

Earlier this year, as I was reading Nathaniel Philbrick’s bestselling book, Mayflower: A Story of Courage, Community, and War (New York: Penguin Books, 2007, paperback edition), I came across a passage that weighs in decisively on our editorial dispute. It appears my father did know best after all.

From page 165 of Mayflower:

The fall of 1623 marked the end of Plymouth’s debilitating food shortages. For the last two planting seasons, the Pilgrims had grown crops communally–the approach first used at Jamestown and other English settlements. But as the disastrous harvest of the previous fall had shown, something drastic needed to be done to increase the annual yield.

In April, Bradford had decided that each household should be assigned its own plot to cultivate, with the understanding that each family kept whatever it grew. The change in attitude was stunning. Families were now willing to work much harder than they had ever worked before. In previous years, the men had tended the fields while the women tended the children at home. “The women now went willingly into the field,” Bradford wrote, “and took their little ones with them to set corn.” The Pilgrims had stumbled on the power of capitalism. Although the fortunes of the colony still teetered precariously in the years ahead, the inhabitants never again starved.

Among the many things I’m thankful for this week is that I live in a country that was founded on the solid rock of property rights and free markets.

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