Archives: December, 2011

Obama and Daniels Team Up to ‘Shovel’ Subsidies

(Credit: Westgate @ Crane)

The Indianapolis Star recently profiled local boy makes good (handing out other people’s money) John Fernandez, the ex-Bloomington mayor and Obama fundraiser who now heads up the Economic Development Administration. A reference to an EDA taxpayer handout to a technology park in southern Indiana caught my eye:

Southwestern Indiana got a $6.7 million boost from the EDA last year to create a multi-county technology park to tap into the research related to the Crane Division, Naval Surface Warfare Center in Martin County. At the July groundbreaking for the park, Gov. Mitch Daniels called it a ‘long-awaited development that will serve as an economic catalyst for the region.’

Why would Republican governor Mitch “Red Menace” Daniels want to help the Obama administration score public relations points with Hoosiers? One reason is Daniels’s favorite corporate welfare apparatus, the Indiana Economic Development Corporation, also handed out money from state taxpayers for the technology park.

From a WestGate @ Crane Technology Park press release:

The Indiana Economic Development Corporation offered WestGate @ Crane Authority, Inc. up to $1 million from the Technology Development Grand Fund as a local match to a U.S. Economic Development Administration grant commitment of $6.6 million.

So what is this technology park that U.S. and Indiana taxpayers are being forced to subsidize?

Qualified as a state Certified Technology Park (CTP) by the Indiana Economic Development Corporation (IEDC), the WestGate @ Crane Technology Park represents a natural marketplace for defense contractors currently providing technical support, and research and development services to the Naval Surface Warfare Center, Crane Division in southern Indiana. Operations of the $2 billion URS corporation, and SAIC, the nation’s 7th largest defense contractor, in addition to ITT, CACI, CSC, CLEC, MLE, Raydar & Associates, Novonics, NAVMAR, Stimulus Engineering and Technical Services Corporation (TSC), already maintain operations in the park.

Great. A high-tech playground for defense contractors—an industry that has enjoyed a taxpayer windfall thanks to Uncle Sam’s ten years of warring on terror.

In a blistering op-ed, Indiana Policy Review editor Craig Ladwig calls Daniels “more of an accountant than an economist, more Beltway than Hoosier” and says that “although he claims to admire the classical liberal philosophy, you strain to see any sign of it in his governing.” As evidence, Ladwig cites Daniels’s record of supporting “crony capitalist ventures.”

Craig is correct, but it’s not just Mitch Daniels. Support in the nation’s statehouses for crony capitalism is ubiquitous. And key enablers of state business subsidies are the numerous federal “economic development” programs—like the Economic Development Administration—that policymakers in Washington use to coddle special interests in the name of “job creation.”

As the Obama-Daniels tag-team demonstrates, corporate welfare is a bipartisan affliction. Indeed, back in February, Rep. Michael Michaud (D-ME) offered an amendment to restore $80 million in funding for the EDA. The amendment passed with 145 votes from Republicans and 160 from Democrats.

Newt Gingrich and the EMP Threat

The front page of yesterday’s New York Times features a story on Newt Gingrich’s “doomsday vision:” an attack over the United States’ airspace known as an electromagnetic pulse, or EMP. Gingrich and a cadre of concerned national security analysts worry that terrorists or rogue states—Iran and North Korea—could detonate a nuclear device over the United States that theoretically could disrupt electrical circuits, from cars to power grids.

The Times does a commendable job of questioning Gingrich’s arguments and whether this is a legitimate national security concern. Despite the fact that a “National EMP Recognition Day” exists, the threat is in fact very, very low. But it may be unfortunate that such extravagant doomsday scenarios get placed on the front page of the Times.

I addressed the EMP threat in my 2010 book Atomic Obsession and I included a discussion of the views of Stephen Younger, the former head of nuclear weapons research at Los Alamos National Lab, as forcefully put forward in his 2007 book, Endangered Species:

Younger is appalled at the way “one fast‑talking scientist” managed in 2004 to convince some members of Congress that North Korea might be able to launch a nuclear device capable of emitting a high‑altitude electromagnetic pulse that could burn out computers and other equipment over a wide area. When he queried a man he considers to be “perhaps the most knowledgeable person in the world about such designs” (and who “was never asked to testify”), the response was: “I don’t think the United States could do that sort of thing today. To say that the North Koreans could do it, and without doing any testing, is simply ridiculous.” Nevertheless, concludes Younger acidly, “rumors are passed from one person to another, growing at every repetition, backed by flimsy or nonexistent intelligence and the reputations of those who are better at talking than doing.” [Emphasis in original.]

The 2012 presidential election should certainly contain a legitimate discussion of national security issues. But I don’t think it really needs to include a lot of breast-beating about the EMP “threat.”

Cross-posted from the Skeptics at the National Interest.

Should Fannie & Freddie Fund the Payroll Tax Cut?

At the top of the Congressional agenda for the remainder of this week will be extending the payroll tax cut. Whatever its merits, the extension is a done-deal. Both parties agree on it and it’s just a matter of assembling a way of paying for it. Both parties also understand that, despite their rhetoric, neither millionaires or federal employees will be bearing the full cost of the extension.

One of the “off-sets” being discussed is an increase in the guarantee fees (g-fees) that Fannie Mae and Freddie Mac charge to cover the credit risk in mortgages that they purchase. Not surprisingly, my friends in the real estate industry have come out against the proposal. NAHB goes as far to say, “This will jeopardize the tenuous rebound and is the last thing this economy needs.”

Accepting that the language is currently in flux and it is not even a given that the g-fee increase will be included, I believe my real estate friends are over-reacting. As presently proposed, the increase would only be 10 basis points (which are 1/100 of a percentage point) a year. This is so modest as to have about zero impact on the housing market. Mortgage rates fluctuate by more over the course of a day.

What I am worried about is that the change is instituted over a 10 year period. Putting aside the bizarre policy of using 10 year “revenue-raisers” to pay for one year of spending, the policy might actually make it harder to eliminate Fannie and Freddie. Why? Let’s say the next Congress and White House administration put the taxpayer above the special interests and decide to end Fannie and Freddie. Now you might have to “pay” for ending them, as their existence has been built into the 10 year budget baseline.

The simple solution to me would be to limit the increase to 5 years. I don’t think anyone really expects the GSEs to disappear before then. We could raise the same amount by increasing the g-fee bump to say 20 basis points, which would also have the advantage of making the GSEs less competitive with other sources of mortgage capital, allowing their market share to shrink.

This is all to say, be careful of what you ask for. I’m the first one to argue for sticking it to Fannie and Freddie, just be careful that there are not any unintended consequences of how you do so.

The New SOPA: Now With Slightly Less Awfulness!

On Thursday, the House Judiciary Committee is slated to take up the misleadingly named Stop Online Piracy Act, an Internet censorship bill that will do little to actually stop piracy. In response to an outpouring of opposition from cybersecurity professionals, First Amendment scholars, technology entrepreneurs, and ordinary Internet users, the bill’s sponsors have cooked up an amended version that trims or softens a few of the most egregious provisions of the original proposal, bringing it closer to its Senate counterpart, PROTECT-IP. But the fundamental problem with SOPA has never been these details; it’s the core idea. The core idea is still to create an Internet blacklist, which means everything I say in this video still holds true:



Let’s review the main changes. Three new clarifying clauses have been added up front: the first two make clear that SOPA is not meant to create an affirmative obligation for site owners to monitor user content (good!) or mandate the implementation of technologies as a condition of compliance with the law (also good!). But the underlying incentives created by the statute push strongly in that direction whether or not it’s a formal requirement: What else do we imagine sites threatened under this law because of user-uploaded content or links will do to escape liability? A third clause says the bill shouldn’t be construed in a way that would impair the security or integrity of the network—which is a bit like slapping a label on a cake stipulating that it shouldn’t be construed to make you fat. These are all nice sentiments, but they remind me of the old philosophers’ joke: “You’ve obviously misinterpreted my theory; I didn’t intend for it to have any counterexamples!”

The big changes in the section establishing court-ordered blocking of supposed “rogue” sites appear to be intended to respond to the objections of cybersecurity professionals and network engineers, who pointed out that requiring falsification of Domain Name System records to redirect users from banned domains would interfere with a major government-supported initiative to secure the Internet against such hijacking. The updated language explicitly disavows the idea of redirection, removes a hard five-day deadline for compliance, and (crucially) says that any DNS operator (like your ISP) has fully satisfied its obligations under the statute if it simply fails to respond to DNS queries for blacklisted sites.

This is bad for transparency, in both the engineering and democratic senses of that term, insofar as it makes a government block indistinguishable from a technical failure, but it does, in a sense, address the direct conflict with DNSSEC. But as network engineers point out, a well-designed application implementing DNSSEC isn’t just going to give up when it doesn’t get a valid, cryptographically signed reply: it’s going to try other DNS servers (including servers outside US jurisdiction) until it finds one that answers.

There are two possibilities here. The first is that application designers don’t design their software properly to implement DNSSEC for fear of liability under the statute’s anti-circumvention provisions, which would be a Very Bad Thing. The second is that they’re assured they won’t be held liable for good design, in which case this whole elaborate censorship process—which was never going to be particularly effective against people who actually want to find pirated content—becomes a truly farcical pantomime, in which nobody running reasonably up-to-date clients even notices the nominal “blocking,” beyond a few seconds delay in resolving the “blocked” site. Now, if we’ve got to have an Internet censorship law, a completely impotent one is surely the best kind, but it becomes a bit mysterious what the point of all this is, beyond providing civil libertarians with a chuckle at the vast amount of money Hollywood has wasted ramming this thing through.

The other big change is to the private right of action, which previously would have allowed any copyright holder to unilaterally compel payment processors and ad networks to cut off sites that it merely accuses of infringement, or enabling infringement, or (in a baffling specimen of tortured language) taking “deliberate actions to avoid confirming a high probability” that the site would be used for infringement. That last little hate crime against English is mercifully absent from the revised SOPA, and it makes clear that only foreign sites are covered, and a judge is now required to actually issue an order before intermediaries are obligated to sever ties.

Which ultimately goes to show that the original proposal was so profoundly wretched that you can improve it a great deal, and still have a very bad idea. This is still, as many legal scholars have correctly observed, censorship by slightly circuitous economic means. The involvement of a judge should (knock on wood) weed out the most obviously frivolous complaints, but it still makes it far too easy for U.S. corporations to effectively destroy foreign Internet sites based on a one-sided proceeding in U.S. courts.

These changes are somewhat heartening insofar as they evince some legislative interest in addressing the legitimate concerns that have been raised thus far. But the problem with SOPA and PROTECT-IP isn’t that they need to be tweaked in order to get the details of an Internet censorship system right. There is no “right” way to do Internet censorship, and the best version of a bad idea remains a bad idea.

One out of Four Ain’t Bad?

Last week I was critical of a New York Times op-ed by AEI’s Rick Hess and Stanford’s Linda-Darling Hammond. Yesterday, Hess graciously replied to my critiques, basically saying that it would be good if we could get the feds out of education, but since that’s highly unlikely, lets see how Washington can help.

That’s a modest and sensible stance, and I don’t think Hess is “endorsing big government.” (At least relative to most edu-analysts—admittedly a lopsided scale.)  But even if you accept that few in Washington are willing to boot themselves out of schools—and few are—it’s still critical to explore whether or not the things you’d have them do would be of net benefit.

Like last time, we’ll take the four proposals in order, this time based on Hess’s rebuttal. But first, one pet peeve:

Hess writes that he’d be happy to end “two centuries” of federal education meddling, noting that it all started with “the Continental Congress’s Northwest Ordinance of 1787.” I don’t know if this was his intent, but that factoid is usually invoked to suggest that even the Founders believed the federal government should advance education. This is not an impression that should be given: the Constitution is very clear in ceding Washington no authority to govern education outside of federal lands and civil rights enforcement. That the states have jurisdiction over education was, in fact, explicitly acknowledged as recently as the 1940s by a commission overseen by none other than Franklin Delano Roosevelt. And, while there was some federal education activity largely during and after the Civil War, it was not until the 1960s that Washington got heavily involved.

On to the four points:

First, when it comes to transparency, states have a collective action problem. There is both the problem of providing parents, taxpayers, and voters with meaningful transparency and the fact that state officials in each state have an incentive to manipulate performance results to their own advantage. More standards accounting and linking results to NAEP is a case of the feds providing a public good that only Washington is equipped to provide.

It’s true that state officials have a big incentive to manipulate performance results so that they stay out of trouble with voters and, especially, the teachers, administrators, and others who would be held accountable. The problem is that once you connect real consequences to NAEP—currently there are none—it will become a target for manipulation just like state tests and standards. Don’t attach consequences, however—including having no consequences attached to the state tests you’d audit with NAEP—and there’s no real impetus for schools to change. At best, then, this is a very limp proposal, and that’s before you get into big questions about whether the public really knows what NAEP assesses, whether one set of tests is a useful measure of education, and others I’ll save for another day.

Second, when it comes to basic research, the market tends to underprovide. Basic research is a public good…and is tough to monetize. The result is that, while the private sector is terrific at funding applied research, it tends to invest little in basic research.

As I mentioned last time, I hear this a lot but rarely see meaningful evidence to support it. And by “meaningful” I mean research looking at both the successes of government-funded basic research and the costs. Is it a net gain? Does the private sector steer clear of much of it because it’s an unjustifiable risk? Does it steer clear because government enables end users to rent-seek? There might be such research, but I’ve not seen it cited by those who assert that government must fund basic research. And then there’s the research I have seen that shows much of the funding translates not into innovation, but higher researcher salaries.

Third, even hard-charging state officials get tangled in decades of entrenched rules, regulations, and practices. The feds can help untangle this status quo by supporting officials seeking to throw off anachronistic routines but who must find ways to persuade skeptical constituents or union leaders to go along.

This if great if the goal is to clear out federal regulations, but state and local? There’s nothing in the Constitution authorizing Washington to manipulate state and local education systems, and perhaps more importantly: Why should anyone think it will work? The overwhelming, long-term track record for Washington is to add efficiency killing rules and regulations, and do the bidding of teachers unions and other school employees. Plus, why should we assume that the feds are able to pick the right routines to throw off or add on?

Finally, the federal government is obliged to ensure that constitutional guarantees of equal protection are observed. That said, this will ideally be pursued far less prescriptively than is the case today.

Here we agree, if Hess means Washington must stop clear state discrimination. And I guess one out of four ain’t bad.

It Was those Bad Speculators That Drove the Housing Bubble….

A recent report from the Federal Reserve Bank of New York examines the role of speculators in driving the housing bubble. Setting aside the fact that almost everyone who bought a house was “speculating” to some degree, the researchers focus on those who were buying homes they did not intend to live in.

Some have already tried to paint this study as proving the government had little to do with the housing crisis. To their credit, the study’s authors do not go that far. Others, Mark Thoma for instance, show no such constraint:

“This is pretty far away from the (false) story that Republicans tell about the crisis being caused by the government forcing banks to make loans to unqualified borrowers.”

Of course, I’m sure that even Thoma knows that he’s set up a straw-man. Does anyone really believe that the Community Reinvestment Act and the Government Sponsored Enterprises housing goals were the only factors behind the crisis? Perhaps if the New York Fed really wanted to understand the crisis, it should look in the mirror.  It would seem reasonable to me that three years of a negative real federal funds rate might have had some impact on the housing market, particularly in encouraging speculators. After all, the Fed was basically paying people to take money.

None of this takes away from the role that Fannie and Freddie played in the housing market. For mortgages they purchased directly, Freddie’s investor share increased from three percent in 2003 to seven percent in 2007. And this ignores the massive volume of private label mortgage backed securities purchased by Fannie and Freddie. I think its reasonable to believe some of those were investor loans. In addition, the FBI has reported that the most frequent form of mortgage fraud has been borrowers stating the loan was for a primary residence when it was not.  But then it would be impolite of me to suggest we actually prosecute borrowers who committed fraud.

As I argued over two years ago, the relatively high percentage of foreclosures that are driven by pure speculators should make us question the many efforts to slow or stop the foreclosure process. If so many of these foreclosures are speculators, then why do we continue to protect them from losing the homes? They gambled, they lost. It’s time to move on and let the markets continue to adjust.

Now, one can continue to blame private sector actors for following the perverse incentives created by government. After all, the banks didn’t have to make the loans and the borrowers didn’t have to take the money. But it should be the primary objective of public policy to get the incentives correct. It should by now be crystal clear that all of the massive speculation in the housing market didn’t “just happen”—it was the result of massive government distortions in our housing and financial markets.

 

“Liberalism’s Problem in One Graph”

That’s the title of Ezra Klein’s blogpost last night. Americans are increasingly distrustful of Big Government, it seems (64% in 2011, up from 35% in 1965), as opposed to Big Business (26% versus 29%) and Big Labor (8% versus 17%). Here’s the graph:

Of course, given that Big Labor these days is mostly in the public sector, you can really add its total to that of Big Government. And given corporate subsidies, part of Big Business can be thrown in there too. In any event, sobering news for the Occupy Wall Street crowd, and surely an electorate for political candidates who want to shrink the size of government.