Archives: August, 2011

Irene Wasn’t All That

By
Patrick J. Michaels

Hurricane Irene (which seemed more like Tropical Storm Irene from Virginia Beach to New York City) has prompted the usual rhetoric from the usual suspects about global warming making these storms worse.  Too bad there is no evidence for this whatsoever on a global scale.

Ryan Maue, at Florida State University, tracks global tropical cyclone energy back to 1970, which is the time at which adequate data on hurricane winds became available. His “Accumulated Cyclone Energy” (ACE) index peaked in the mid 1990’s and in recent years has been at or near the lowest point ever recorded. His most recent refereed paper, in press at Geophysical Research Letters, is called “Recent Historically Low Global Tropical Cyclone Activity.”  Enough said?

However, there is an interesting trend in Atlantic hurricane activity. The Department of Commerce’s National Hurricane Center (NHC) is naming tropical storms that they clearly would have ignored in previous years.  This year we have had ten (the latest is “Jose”, which currently looks weak in satellite imagery), and I doubt that seven of these would have made the grade years ago.  In fact, I have written to NHC’s Chris Landsea (with whom I have authored refereed papers on hurricanes) about this, and he agrees that NHC is naming systems that they would have previously ignored or missed.  Frankly, some of our recent “tropical storms” have pitiful presentations, looking more like small clusters of thunderstorms than the familiar pinwheels of nascent hurricanes.  A recent paper in Journal of Geophysical Research, by Princeton’s Gabriele Villarini, noted the contamination of the Atlantic hurricane data by what he called “shorties.”

Why NHC is doing this, and why they kept Hurricane Irene’s “category” (one through five) high despite  acknowledging that hurricane hunter aircraft were having trouble finding enough wind, has more to do with risk aversion than any putative conspiracy to toe the politically correct line on global warming. The result is that ships at sea are “warned” of brisk winds and high seas that might have previously surprised them, and that politicians and emergency management officials can justify massive evacuation orders. This used to be known as covering one’s posterior.  Now NHC sometimes calls it “the course of least regret.”

It is also a dangerous practice. People who endure the endless torture of a hurricane evacuation from barrier islands like the North Carolina Outer Banks from storms that cause little damage may be reluctant to leave when the next – big and real – one shows up.

Topics: 
Energy and Environment

Lagarde Confused, Again

By
Steve H. Hanke

Christine Lagarde, the new managing director of the International Monetary Fund and former French finance minister, is confused, again.  In her speech before the central bankers assembled in Jackson Hole, Wyoming this weekend, Ms. Lagarde asserted that the way forward for Europe was to recapitalize Europe’s “weak” banks.  This, she claimed, would cut the “chains of contagion” and promote growth.

Nothing could be further from the truth.  Even the IMF, in its July 2011 Article IV consultations with Mexico, realized that mandating higher capital-asset ratios (recapitalization) for banks, would take some steam out of Mexico’s money supply growth and jeopardize Mexico’s economic recovery.

It is rather easy to see why higher capital-asset ratios are “deflationary.”  If we hold the level of a bank’s capital constant, an increase in its capital-asset ratio requires that the level of its assets must fall.  This, in turn, implies that the banking system’s liabilities – demand deposits – must contract.  Since the money supply consists of demand deposits, among other things, the money supply must, therefore, contract.

Alternatively, if we hold assets constant, an increase in the capital-asset ratio requires an increase in capital.  This destroys money.  When an investor purchases newly-issued bank shares, for example, the investor exchanges funds from a bank deposit for the new shares.  This reduces deposit liabilities in the banking system and wipes out money.

Given Euroland’s anemic broad money growth rate (M3), the struggling state of Europe’s economies, and the IMF’s recent counsel to Mexico, Ms. Lagarde’s Jackson Hole assertions signal confusion, at best.

Topics: 
Finance, Banking & Monetary Policy, International Economics and Development

Stop the Madness, President Calderon

By
David Boaz

The Wall Street Journal covers a single day in Mexico’s drug war, a day on which 25 people died in separate incidents. The summary paragraphs tell a story of failure:

Since President Felipe Calderón took office in December 2006, declaring war on traffickers, roughly 43,000 people have been killed in drug-related homicides here, according to government figures and newspaper estimates. The pace of killings is escalating. More than half the dead, 22,000, were killed in the past 18 months, a rate of one every 35 minutes….

Mexico’s murder rate has more than doubled, to 22 deaths per 100,000 residents in 2010, in just four years, a period that parallels the drug war. Before that, it had been falling steadily. In the U.S. the murder rate is about 5 per 100,000.

This policy is not working. President Calderon, I beseech you, in the bowels of Christ, think it possible you may be mistaken. Read the advice of President Fox’s foreign minister or this discussion by Cato’s Ted Galen Carpenter. American policymakers should also recognize that this crisis threatens us – and that we can help to end it.

Topics: 
Foreign Policy and National Security, International Economics and Development, Law and Civil Liberties

‘Back to the Future,’ or: ‘The Math of Khan’

By
Andrew J. Coulson

Oklahoma has just enacted a law that requires students to be held back a year if they are not reading on grade level by the end of 3rd grade. The inspiration is sound: poor readers cannot keep up with their classmates as the curriculum becomes more sophisticated and relies more heavily on reading comprehension across subjects. But this particular approach doesn’t begin to tackle the larger problem of age-based grading itself. Kids are not all identical widgets who learn every subject at the same rate. Individual children even learn different subjects at different rates. So the idea that all children should be grouped by age and, by default, moved through every subject at the same pace is ludicrous on its face.

More than that, it is a retrogression from the pedagogy of the early 1800s. In an early 19th century one-room schoolhouse, children of different ages and aptitudes progressed through the material at their own paces. It wasn’t unusual for an 11 year old girl to be on McGuffey’s or Elson’s 4th Reader while her older brother was still on the 3rd. It wasn’t unusual, and it wasn’t a problem. Age-based grading is a problem. Fortunately, technology will dump it on the scrapheap of history within a generation, as services like Khan Academy and software like Dreambox allow children to progress at their own rate through the material.

We can’t get back to the future soon enough.

Topics: 
Education and Child Policy

Obama Supports VAT Sympathizer for Top Job at Council of Economic Advisers

By
Daniel J. Mitchell

The White House has announced that it is nominating Alan Krueger, a professor at Princeton, to be the new Chairman of the Council of Economic Advisers.

In a Freudian copy-editing slip, the Fox News story (at least as of 8:44 a.m.) says “Krueger’s job will be to provide policy prescriptions on ways to spur unemployment.”

That’s obviously tailor-made for a joke about the Obama Administration not needing any help when it comes to stimulating joblessness.

On a more serious note, though, I’m worried about Krueger’s sympathy for a value-added tax (VAT). Here’s what he wrote back in 2009.

…a 5 percent consumption tax would raise approximately $500 billion a year, and fill a considerable hole in the budget outlook. In addition, a consumption tax would encourage more saving in the long run. Many economists consider a consumption tax an efficient way of raising tax revenue, especially in a global economy. The prospect of greater revenue flowing into federal coffers would probably help lower long-term interest rates because the government would need to borrow less down the road, and further bolster the economy.

To be fair, Krueger was very careful to leave himself some wiggle room, even going so far as to write that, “I’m not sure it is the best way to go.”

But it seems rather obvious that Krueger, like other leftists, wants this giant new source of revenue. Heck, President Obama also has semi-endorsed a VAT, saying it is “something that has worked for other countries.”

The President’s assertion is especially foolish. After all, European nations imposed VATs about 40 years ago, which simply encouraged more spending and more debt – and now several nations are on the verge of bankruptcy.

If that’s “something that has worked,” I’d hate to see the President’s idea of failure.

The real lesson is that the United States should not copy Europe’s mistakes. This short video has the key arguments against this European-style national sales tax.

P.S. For a humorous perspective on the VAT, take a look at these clever cartoons (here, here, and here).

Topics: 
General, Government and Politics, Tax and Budget Policy

Obama Refinance Plan Sows Seeds for Another Bailout

By
Mark A. Calabria

I’ve already mentioned how the rumored Obama plan to re-finance existing underwater Fannie/Freddie loans with new mortgages at as low as 4 percent would not actually do much, if anything, positive for the economy.  Even worse is that such a plan would likely require a massive infusion of taxpayer dollars into Fannie Mae and Freddie Mac.

First let us start with some basics about the Fannie Mae business.  According to Fannie’s most recent 10-Q (see page 28), Fannie’s current interest-earning assets, mostly mortgages, yield the company 4.59%.  However, Fannie has to fund those assets.  The cost of Fannie’s total current interest-bearing funding is 3.99%, leaving the company a spread of 60 basis points to cover its non-interest expenses.  What should be immediately obvious is that lowering the value of much of Fannie’s book to 4% will leave the companies with almost zero earnings.  I’m not sure how that is supposed to get Fannie back on the path to repaying the taxpayer.

Worse is that newly re-financed 4% mortgages, or mortgage-backed securities, would remain on Fannie’s balance sheet for years (assuming Fannie is still around).  I cannot be the only one who believes rates are going up in the future – either due to inflation or the Fed raising rates to fight inflation.  It is not hard to imagine, in say two years, Fannie stuck with a balance sheet of 4% assets, while having to pay 5% to fund those assets.  It is also not hard to believe that the taxpayer would get stuck making up the difference.  On a $3 trillion balance sheet, that’s $30 billion.  Add in Freddie and you’ll get another $20 billion or so.  And that’s at future funding costs of 5%.  If Fannie’s funding costs hit 6% in the next few years, we could be looking at an annual shortfall of $100 billion. 

Instead of helping dig Fannie and Freddie into a deeper hole, Obama should start offering a real plan to help repay the taxpayer for what they’ve already had to shell out for Fannie and Freddie.

Topics: 
Finance, Banking & Monetary Policy

Constitutional Structure Matters: A Response to Larry Tribe

By
Ilya Shapiro

SCOTUSblog’s symposium on the constitutionality of Obamacare – to which I contributed, as did Bob Levy – provides a glimpse at the astonishing views of the law’s supporters.  It particularly shows how divorced the legal academy’s leading lights are not only from basic constitutional text and structure, but from jurisprudential reality.

Most prominently, in responding to the Eleventh Circuit’s decision striking down the individual mandate (and to Richard Epstein’s symposium essay), storied Harvard professor Laurence H. Tribe criticizes the court for “reflecting what appears to be a widely held public sentiment” that Congress cannot “mandate that individuals enter into contracts with private insurance companies for the purchase of an expensive product from the time they are born until the time they die.”  That sentiment is a problem, according to Tribe, because it elevates form over substance.  That is, just as it has done with Social Security, Congress could (under modern jurisprudence, which is wrong as a matter of first principle but not at issue in the Obamacare lawsuits) levy another income or payroll tax and use that revenue to provide health insurance and/or care for otherwise uninsured individuals:

Put otherwise, Congress may undoubtedly use its taxing power to mandate that individuals pay for coverage supplied by private insurers, so long as it acts in two steps: step 1, impose a tax, and step 2, use the proceeds of the tax to fund privately provided health insurance for each individual. If Congress may accomplish this objective in two steps, why not in one? No federalism or liberty-related concern, whether the dignity of the states or that of individuals, is served by denying Congress that authority.

Tribe’s reasoning echoes Justice Breyer’s reason (in dissent) for rejecting the notion that the Takings Clause applies when the Government orders an individual to pay another individual, in the case of Eastern Enterprises v. Apfel:

The dearth of Takings Clause author­ity is not surprising, for application of the Takings Clause here bristles with conceptual difficul­ties. If the Clause applies when the government simply orders A to pay B, why does it not apply when the government simply orders A to pay the government, i.e., when it assesses a tax?

But there is a very good reason why courts should deny Congress the power to compel individuals to purchase products from private parties or, for that matter, the power to order A to pay B – even if a similar result could be accomplished through the taxing power: political accountability. As Georgetown law professor (and Cato senior fellow) Randy Barnett explains:

Like mandates on states, economic mandates undermine political accountability, though in a different way. The public is acutely aware of tax increases. Rather than incur the political cost of imposing a general tax on the public using its tax powers, economic mandates allow Congress and the President to escape accountability for tax increases by compelling citizens to make payments directly to private companies.

Indeed, scholars as diverse as Richard Epstein and Cass Sunstein have argued that the Takings Clause requires just compensation precisely to preserve political accountability in the provision of public goods. As Justice Scalia explained in the case of Pennell v. City of San Jose:

The politically attractive feature of regulation is not that it permits wealth transfers to be achieved that could not be achieved otherwise; but rather that it permits them to be achieved “off budget,” with relative invisibility and thus relative immunity from normal democratic processes.

Under modern jurisprudence, essentially the only check on Congress’s taxing and spending powers under the General Welfare Clause (as opposed to its regulatory power under the Commerce Clause) is political.  So yes, Professor Tribe, there is a constitutional reason for depriving Congress of the power to do in one step what it could surely do in two other steps: to maintain that remaining constitutional qua political check. Indeed, the very reason why Congress adopted the individual mandate was because it lacked the political will – it feared political accountability too much – to impose single-payer universal coverage, where the government would first impose a tax on everyone and then provide health care (at this point it’s no longer “insurance”) to everyone.

To accomplish the same result without having to impose significant new taxes – as President Obama famously promised there would not be – Congress tried to evade political accountability through the individual-mandate mechanism. That’s why the Eleventh Circuit wisely declined to grant Congress the power to move a significant part of its spending “off budget” and “mandate that individuals enter into contracts with private insurance companies for the purchase of an expensive product from the time they are born until the time they die.”

Cato legal associate Chaim Gordon co-authored this blogpost.

Topics: 
Health Care, Law and Civil Liberties

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