Archives: May, 2013

The Realities of Government Infrastructure

Politicians and liberal economists get misty-eyed when thinking about grand infrastructure projects. But recent stories in the Washington Post about D.C.-area projects illustrate the realities of government capital investments.

Arlington County recently spent $1 million for a single bus stop, and the structure doesn’t even shelter passengers from wind or rain. The stop is one of 24 along a planned streetcar route, which is a mode of transportation that makes no sense in this area. (I understand that the streetcar dream of local politicians is currently on hold in the face of strong citizen opposition). Why is Arlington wasting so much money on these bus stops? Probably because 80 percent of the costs are being paid by state and federal taxpayers, not local taxpayers.

The Washington Airports Authority has been in the news for mismanagement, overspending, and corruption. The Washington Post has a story today about corruption in contracting by the agency and the complete failure of senior executives to do anything about it. Why the corruption and mismanagement? Because the Authority is a government agency, and worse, it has a monopoly over D.C.-area airports. Airports should be privatized in order to introduce competition, improve service, end corruption, and reduce costs.

The Washington Post has also done an excellent job covering the Silver Spring Transit Center fiasco. The estimated cost of this grandiose bus/train station has more than quadrupled over time to $120 million. It’s a classic government cost overrun story involving mismanagement, design screw-ups, and contractor failures. A key cause of the problems seems to have been that so many different government agencies were involved that no one had the responsibility or incentive to make needed hard decisions to ensure quality and control costs. Today, fingers of blame are pointing in every direction, and the costs will rise even further as major engineering defects are fixed.  

The grandness of political visions for infrastructure run far ahead of the government’s ability to actually implement projects in an efficient manner. There are types of infrastructure that governments must fund. But more infrastructure should be opened up for private funding, ownership, and control. Private businesses make mistakes, but when they are spending their own money they have strong incentives to control costs, eliminate corruption, and complete quality projects on time—incentives that simply don’t exist in the government sector.

Student Loans: From Completely Disastrous, to Just 99 Percent

the state of higher ed fundingOn Thursday, the U.S. House of Representatives is scheduled to take up The Smarter Solutions for Students Act, which would end the practice of Congress designating interest rates for federal student loans, and instead link rates to the 10-year Treasury note. It would be a miniscule improvement. Basically, this change is like banging out a single dent in a car that’s careened off a cliff, rolled over twenty times, and caught fire.

It seems reasonable that if Washington is going to provide student loans, interest rates should be pegged to broader rates. There is disagreement about how much you add to base rates—Rep. George Miller (D-CA), for instance, is unhappy that the act’s rates could result in profits that would be used for deficit reduction—but letting Congress designate set rates is why we are once again scrambling to keep the subsidized loan rate from suddenly leaping to 6.8 percent from 3.4 percent. 

Of course, the root problem is that Congress furnishes student loans at all, killing the natural discipline that comes from people paying for something with their own money, or money they get from others voluntarily. Getting major dough from taxpayers has enabled massive overconsumption of higher education punctuated by dismal completion rates and huge underemployment for those who manage to finish. And giving people cheap money largely just enables colleges to raise their prices at breakneck speeds, often to provide frills that heavily subsidized students seem to happily demand.

Congress may inject a milliliter of sanity into a swimming pool of irrationality, but what it really needs to do is drain the whole thing.

Cross-posted at seethruedu.com

Public School Spending. “Officials” vs. “Some Critics”

The Wall Street Journal reports today that according to the latest Bureau of the Census figures there was a 0.4% drop in nominal U.S. public school operating spending from 2010 to 2011. The story then makes this unobjectionable factual observation:

Education officials say decreased spending will make it more difficult to prepare U.S. students for an increasingly competitive global marketplace. Some critics argue that public education costs are skyrocketing while academic achievement has not kept pace. They want the system overhauled before more money is spent.

What the story does not provide readers is any measure of student achievement that would allow them to determine who is right. Let’s see if we can help out. Below is an updated version of a chart some of you will already be familiar with. It shows the performance over time of U.S. 17-year-olds on the “Long Term Trends” testing program of the National Assessment of Educational Progress. The spending line corresponds to the trend in the total cost of a complete K-through-12 public school education (i.e., what it cost to send a high-school graduate all the way through public school). For good measure, it shows how the number of public school employees has roughly doubled since 1970–from about 3.3 to about 6.4 million people. 

So, who seems to be right: “Education officials” or “some critics”?

Incidentally, the WSJ only gives the partial “operating” figures for per-pupil spending. Actual total per pupil spending in 2010, adjusted to today’s dollars, was $13,871. That was down from the all-time inflation-adjusted high of $14,090 in the previous year. Still, $346,767 per class of 25 kids doesn’t seem too shabby.

Policy Life Stirs in Doha: Islamists and Democracy

Big conferences can be enervating, especially when large panels are populated with establishment political figures spouting the conventional wisdom. However, the Doha Forum, which I have been attending in Doha (surprise!), Qatar, sported a burst of spontaneity at a workshop on the role of Islamists in the Middle East.

While competing discussions of economics and technology were sparsely attended, the Islamist workshop overflowed. Islamists from Bahrain, Egypt, and Tunisia made the case that Muslim fundamentalists in those countries were dedicated to democracy and intended to be inclusive of all within their societies.

Most in attendance—at least those who asked questions (or made comments in the guise of asking questions)—were skeptical. The audience included many Westerners, but fellow Arabs led the attack. Attendees from Jordan and Kuwait, which have been at the periphery of the Arab Spring, were particularly critical. A Gulf journalist complained about Islamists who said one thing for his broadcasts but behaved differently in power (no American politicians have ever behaved that way!). A young female professional complained about the treatment of women, who helped overthrow authoritarian regimes but then faced increased discrimination.

The panelists stood their ground, but they didn’t seem to win many converts. So many people wanted to comment that the session went overtime a half hour. Both sides wanted to keep going, but the translators insisted that they needed a break before the next session.

While the tension between Islamic fundamentalism and revolutionary democracy has challenged U.S. policy, it even more directly affects those who live in the Middle East. It’s one thing to toss overboard archaic monarchies if the result will be liberal societies with democratic political systems. Revolution is quite another matter if the consequence will be fundamentalist societies ruled by authoritarian democracies.

The session reached no conclusion. But it highlighted a debate that will only intensify as the Arab Spring continues to reverberate throughout the region.

European Union Sacrifices Serb Self-Determination—Again!

The Balkans Wars ended years ago, but ethnic divisions remain strong, promoted, unfortunately, by the European Union. The latest example of geopolitical malpractice is the EU-brokered agreement for Serbia’s de facto recognition of Kosovo’s independence.

Two decades of America’s and Europe’s toxic mix of diplomacy and war-making followed one consistent policy: the Serbs always lose. Everyone else in the disintegrating Yugoslavia got their own country. Minority ethnic Serbs were expected to live under the sometimes heavy boot of others.

Independence for Slovenia, Croatia, Bosnia, Macedonia, Montenegro, and Kosovo were perfectly reasonable responses to Serb brutality, but no side was innocent of atrocities. That is evident in Kosovo where, as I point out in my new article in the American Spectator Online: after the war NATO “stood by as ethnic Albanians kicked out more than 200,000 Serbs, Roma, Jews, and others. In 2004 another round of Albanian-led violence ensued, as mobs destroyed the homes and churches of ethnic Serbs, creating additional refugees.” Even the Council of Europe acknowledged that allied policy had “led to numerous human rights violations and [had] not produced lasting solutions for the underlying problems.”

Some 120,000 ethnic Serbs remain in Kosovo, with roughly half concentrated in four counties around the city of Mitrovica north of the Irba River. They should be allowed to stay with Serbia, but the EU was horrified by such a suggestion. Instead, Brussels threatened to slow if not kill Belgrade’s membership aspirations if the latter did not come to terms. Serbia agreed to a nominal compromise which promises Serbian Kosovars limited autonomy in return for what looks to be eventual full recognition of Kosovo.

Of course, the decision is up to Belgrade, which is under heavy pressure to concede. However, the Kosovo Serbs may not go quietly. Far better, I argue, would be to offer ethnic Serbs the same right of self-determination granted others. As I conclude:

It’s too late to remedy the geopolitical and humanitarian messes that have resulted. But if the Europeans desire a stable solution, they should encourage genuine negotiations among the new Balkans nations, Serbia, and remaining disaffected minorities. Reasonable border changes are the only means to ensure peace. Continuing to suppress the aspirations of ethnic Serbs throughout the Balkans risks renewed conflict.

Can You Vague That Up for Me?

As the IRS scandal thickens, targeted groups are coming out to describe their ordeals in dealing with that most-reviled of government agencies. The Ohio Liberty Coalition was one of the groups targeted by the IRS, and Tom Zawistowski of the OLC recently sat down with Cato’s Caleb Brown to discuss the experience.

Among the many lessons we can take from this scandal is to realize how bureaucrats enforcing vague government regulations can chill free speech. Campaign finance laws are filled with vague regulations–such as whether an ad is the “functional equivalent of direct advocacy”–and they are anything but harmless to political speech.

In assessing applications for (c)(4) status, the IRS looked for whether political campaigning was an applicant’s “primary activity.” Due to the vagueness of this term, “rogue” IRS agents were free to harass applicants for the “content of their prayers” and other uncouth requests.

Advocates for campaign finance restrictions often do not understand how political speech can be killed by a thousand cuts as much as it can by one fatal blow. Some FEC regulations clearly prohibit certain types of spending. Others tell would-be speakers to judge whether their ads “in context, can only be interpreted by a reasonable person as advocating a candidate’s election or defeat.” Complying with these regulations ultimately comes down to a silly “magic words” test–that is, a search for words such as “vote for,” “elect,” “support,” etc.

Some campaign finance advocates who understand what Citizens United was actually about–that is, a non-profit corporation prohibited from showing a movie critical of Hillary Clinton on Pay-Per-View–concede that Citizens United should have narrowly won the case. Rather than allowing all corporations to spend independently in elections, as the case turned out, they argue the Court should have carved out an exception for “genuine ideological organizations,” “voluntary media choices” (Pay-Per-View), or some other vague criterion that would ultimately have been enforced by bureaucrats at the FEC. We can now can see how such vague standards are applied and abused. 

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Senators Levin and McCain: Two Peas All Up in our iPods

Earlier this year, Senator Carl Levin (D-MI) announced that he will be retiring after many, many, many decades of lawmaking when his term expires in January 2015. But he doesn’t intend to make for the exits without sealing his legacy of disdain for America’s wealth creators. After holding hearings last September to shed light on the “loopholes and gimmicks” employed by U.S. multinational companies to avoid paying their “fair share” of taxes, Levin resumed his inquisition today by holding a hearing intended to publically shame one of America’s most successful and most bountiful companies:

Apple sought the Holy Grail of tax avoidance. It has created offshore entities holding tens of billions of dollars, while claiming to be tax resident nowhere. We intend to highlight that gimmick and other Apple offshore tax avoidance tactics so that American working families who pay their share of taxes understand how offshore tax loopholes raise their tax burden, add to the federal deficit and ought to be closed.

Man, the spite in those words is palpable.

At the outset, it is important to note that no illegalities have been alleged, nor have any likely been committed. Like most other U.S.-based multinational corporations, who face tax rates of 35 percent on profits repatriated from abroad, Apple has tax avoidance specialists on its payroll to figure out the most effective ways to minimize their tax burden. They’d be sued for corporate malfeasance by their shareholders if they didn’t.

Unlike foreign-based multinationals whose governments don’t tax their profits earned abroad (or do so very lightly), U.S multinationals are subject to double taxation—first in the foreign countries where they operate at local tax rates and then by the IRS, at up to 35 percent, when profits are brought home. Well guess what? That system discourages profit repatriation, depriving the economy of working capital, and it encourages elaborate, legal tax avoidance schemes.

Oddly, Senator Levin’s problem is not with these perverse incentives, but with the act of following them. Thank you, sir, may I have another! But even worse, Senator John McCain (R-AZ) acknowledges the faults and disincentives of the system, but still casts the blame on those following Congress’s incentive structure:

I have long advocated for modernizing our broken and uncompetitive tax code, but that cannot and must not be an excuse for turning a blind eye to the highly questionable tax strategies that corporations like Apple use to avoid paying taxes in America. The proper place for the bulk of Apple’s creative energy ought to go into its innovative products and services, not in its tax department.

A company that found remarkable success by harnessing American ingenuity and the opportunities afforded by the U.S. economy should not be shifting its profits overseas to avoid the payment of U.S. tax, purposefully depriving the American people of revenue. It is important to understand Apple’s byzantine tax structure so that we can effectively close the loopholes utilized by many U.S. multinational companies, particularly in this era of sequestration.

Apple’s byzantine tax structure?

Should Apple be blamed for optimizing according to the legal incentives created by the likes of Senators Levin and McCain? Rather, the public would be better served if Senators Levin and McCain were hauled before a public panel to explain why the tax system they helped create and have failed to reform penalizes U.S. companies, and discourages domestic reinvestment.