Archives: 03/2015

If You Want Good Fiscal Policy, Forget the Balanced Budget Amendment and Pursue Spending Caps

Back in 2012, I shared some superb analysis from Investor’s Business Daily showing that the United States never would have suffered $1 trillion-plus deficits during Obama’s first term if lawmakers had simply exercised a modest bit of spending restraint beginning back in 1998.

And the IBD research didn’t assume anything onerous. Indeed, the author specifically showed what would have happened if spending grew by an average of 3.3 percent, equal to the combined growth of inflation plus population.

Remarkably, we would now have a budget surplus of about $300 billion if that level of spending restraint continued to the current fiscal year.

This is a great argument for some sort of spending cap, such as the Swiss Debt Brake or Colorado’s Taxpayer Bill of Rights.

But let’s look beyond the headlines to understand precisely why a spending cap is so valuable.

U.S. Aid Empowering Organized Crime in Mexico

Two weeks ago I had an article in The National Interest where I made the case against the Obama administration’s proposal to deliver hundreds of millions of dollars in aid to Central American governments to help them fight organized crime, promote security and foster economic development. In my piece, I wrote that “…giving $1 billion to governments with dubious records on transparency and human rights will empower corrupt officials to the detriment of ordinary Central Americans.”

Last week, Jesse Franzblau had a revealing exposé in The Nation that proves how counterproductive this sort of aid can be. In his article, Franzblau publishes unclassified documents that show how U.S. authorities continued to deliver millions of dollars in aid to Mexican security agencies despite knowing that those same forces were infiltrated by drug cartels. This money came under the auspices of the Plan Mérida, a $2.6 billion program aimed at helping Mexico fight drug cartels. In some instances, the documents seem to show efforts by U.S. officials to cover up or downplay serious human rights abuses committed by Mexican security forces so it wouldn’t affect the continuity of Plan Mérida.

As Franzblau points out:

While US laws explicitly prohibit the delivery of aid to foreign individuals and units implicated in systematic human rights violations, internal reporting on the implementation of Mérida programs reveals that institutional connections to organized crime are consistently overlooked, ignored or kept hidden from public scrutiny as counter-drug money continues to flow.

This is serious stuff. Instead of helping the fight against drug cartels, U.S. aid might be empowering them. As I mentioned in my article, there is well-documented evidence about how the security agencies and judicial systems of Central American countries have been infiltrated by powerful criminal organizations, from drug cartels to youth gangs.

Franzblau’s article also shows a well-documented phenomenon regarding aid: once it starts flowing, the bureaucracy in charge of delivering it has an incentive to disregard the evidence of whether it is accomplishing its goals or being counterproductive since discontinuing the aid would compromise the bureaucracy’s own existence. In this particular case, Franzblau mentions that “US officials were well aware of the effect that reports of abuse could have on Mérida assistance.”

There is no reason to believe that the Obama administration’s massive aid plan for Central American governments won’t suffer from the same flaws that Jesse Franzblau exposes in his article.

17 Errors & Omissions in Vox’s Otherwise Excellent History of King v. Burwell

This week, the Supreme Court will hear oral arguments in King v. Burwell, one of four legal challenges to an IRS regulation that purports to implement the Patient Protection and Affordable Care Act, but in fact vastly expands the IRS’s powers beyond the limits imposed by the Act. Just in time for oral arguments before the Court, Vox’s Sarah Kliff has produced what I think may be the best history of King v. Burwell and related cases I’ve seen. Still, there are a few important errors and omissions, listed here in rough order of importance.

After Eight Years of Losses, End the Government’s Postal Monopoly

The United States Postal Service lost $5.5 billion last year. That is the eighth annual loss in a row and the third highest ever. The only good news is that it remains below the red ink tsunami of $15.9 billion in 2012.

Why does the federal government deliver the mail? Why does it have a monopoly over delivering the mail?

The Postal Service one of the few government programs with actual constitutional warrant. Alas, America’s revolutionaries turned the system into a fount of federal patronage.  Local postmasters became perhaps the president’s most important appointments. The Postmaster General was a member of the Cabinet from 1829 to 1971.

With politics rather than service the PO’s priority, Congress took the next step and approved the Private Express Statutes, preventing anyone from competing with the government in delivering first class mail.   

That left the system ill-equipped to adapt to changing circumstances. In 1971 Congress turned the Post Office into the semi-independent USPS but retained its control over postal policies and, of course, preserved the system’s delivery monopoly.

Banning competition could not preserve the postal market.  The number of pieces of mail peaked in 2001 and continues to fall despite a rising population. USPS’s last profitable year was 2006.

With characteristic understatement, observed the Government Accountability Office:  “Given its financial problems and outlook, USPS cannot support its current level of service and operations.”

The postal unions insist that nothing is wrong—at least, nothing which a federal bail-out wouldn’t solve.  They reserve particular ire for the requirement that USPS prefund workers’ retirement.

But prefunding protects taxpayers. Washington’s unfunded (government) retirement liability is about $800 billion, growing every year.  Only USPS must prefund, which is unfair to taxpayers, not the postal service. 

There’s no other obvious way for USPS to become solvent.  Over the last half century the postal authorities raised rates 50 percent faster than the rate of inflation.  Pushing hikes even faster in the future would encourage more people to use alternatives. 

USPS has reduced costs through facility closures and staff reductions despite strong opposition.  Cuts in compensation, retirement benefits, and workforce levels and improvements in productivity also are obvious responses, but must overcome union opposition. 

Proposals for reducing services abound.  All of these anger consumers, encouraging them to go elsewhere—including to Federal Express and UPS, which offer better options for packages.  Irritated workers and customers also complain to Congress, creating political roadblocks for USPS.

Instead of attempting to save an unnecessary political monopoly, Congress should look abroad where numerous countries, some pushed by the European Union, have introduced competition and innovation into their postal markets. 

The Organization for Economic Co-operation and Development reported that such reforms had yielded “quality of service improvements, increases in profitability, increases in employment and real reductions in prices.”  Only in the supposed laissez faire paradise of America—where a union-led “Grand Alliance to Save Our Public Postal Service” just formed to ensure that whatever has been will forever be—do such ideas seem radical. 

Yet even President Barack Obama admitted a few years back that “it’s the post office that’s always having problems.”  In contrast, “UPS and FedEx are doing just fine.” 

Better management and less politics would help.  In fact, revenue was up a bit last year, despite the bigger loss.  But over the long-term USPS cannot escape from a seeming death spiral of bigger losses, higher rates, poorer services, fewer customers, bigger losses, and so on.

As I contend in the Freeman:  “Uncle Sam should ease out of the postal business.  Privatize USPS and drop the federal first class monopoly.  No one can say for sure what would happen.  But history suggests that innovative entrepreneurs would be more likely to find a cost-effective solution than will today’s mix of politicians and bureaucrats.”

Ignoring the Evidence Doesn’t Make It Disappear

If a study shows the benefits of school choice, but you don’t read it, does it really exist?

Apparently not, at least according to Americans United for Separation of Church and State (AU), an organization ideologically committed to opposing school choice. In a blog post today, AU makes this demonstrably false claim:

For example, voucher boosters often assert that students who receive vouch­ers excel academically in private schools. In fact, no objective study has shown this to be the case. Several studies show that voucher students perform the same or worse academically as their peers in public schools.

In reality, there have been 13 randomized controlled gold standard studies of the effect of school choice policies, all but one of which found a statistically significant positive impact. One study found no discernible impact and none found any harm. For AU’s benefit, here is a sampling:

  • William G. Howell and Paul E. Peterson, The Education Gap: Vouchers and Urban Schools, Brookings Institution, 2002, revised 2006. – After two years, African-American voucher students had combined reading and math scores 6.5 percentile points higher than the control group.
  • Jay P. Greene, “Vouchers in Charlotte,” Education Next, Summer 2001. – After one year, voucher students had combined reading and math scores 6 percentile points higher than the control group.
  • Jay P. Greene, Paul E. Peterson, and Jiangtao Du, “School Choice in Milwaukee: A Randomized Experiment,” in Learning From School Choice, ed. Paul Peterson and Bryan Hassel, Brookings Institution, 1998, pp. 335-56. – After four years, voucher students had reading scores 6 Normal Curve Equivalent (NCE) points higher than the control group, and math scores 11 points higher. NCE points are similar to percentile points.

None of these findings are earth shattering, but each study found a statistically significant positive outcome overall or for certain subgroups, particularly low-income African-Americans who are currently the most choice-deprived. Moreover, these studies were conducted by experienced researchers at some of the most widely respected academic and research institutions in the world, including Harvard, Princeton, the University of Chicago, and the Brookings Institution.

In another blog post, AU does point to the one gold standard study that found a null result, a reexamination of the Peterson/Howell study of New York’s private scholarship program. However, AU never mentions that this reexamination employed unorthodox methods and classifications, or that a further reexamination of the data by other researchers at Harvard and the Cleveland Clinic Foundation confirmed the initial findings.

The AU staff can continue to close their eyes and stick their fingers in their ears, but they should stop making the false assertion that there is “no evidence” that students benefit from school choice.

China: Hot Money In, Now Out

For some years, hot money flowed in, adding massively to China’s foreign reserve stockpile. Speculators borrowed cheaply in U.S. dollars and bought yuan-denominated assets in anticipation of an ever-appreciating yuan. Well, this carry trade has shifted into reverse, with $91 billion in net outflows in the last quarter of 2014. And with that, the ever-appreciating yuan story has come to a close, too. Indeed, the yuan has lost 1.8% against the greenback since the New Year.

A clear picture of the drag that the hot money outflows are putting on China is shown by inspecting the annual growth rate in the People’s Republic of China’s net foreign assets. With the reserve of the carry trade, the slowdown in net foreign assets growth has been pronounced.   

This, in turn, has reduced the foreign asset component of the growth in China’s money supply, putting a squeeze on the economy’s fuel supply. Indeed, China’s money growth rate has fallen well below its trend rate since mid-2012.

In an attempt to reverse the slump in China’s money supply growth, the People’s Bank has just reduced its benchmark interest rates for the second time in three months. A wise move.

Boris Nemtsov, RIP

The murder of Boris Nemtsov in the immediate proximity of the Kremlin seems to be an important milestone in Russia’s descent into darkness. As Deputy Prime Minister in the late 1990s and as an opposition politician during the era of Vladimir Putin, Mr. Nemtsov was a voice for a more liberal, open, and democratic Russia.

Notwithstanding a certain degree of restraint in his criticism of the Russian government, his work as one of the central figures of Russian opposition reflected great personal courage. In spite of a history of frequent arrests, in the past year, he positioned himself as an important domestic critic of Russia’s war against Ukraine.

He was not a stranger to free market ideas or to the work of the Cato Institute, which has been trying to support the transition of Soviet Russia to markets since its landmark 1990 Moscow conference, Transition to Freedom: The New Soviet Challenge.  One decade later, Mr. Nemtsov spoke at a Cato conference on the privatization of pension systems around the world.

The circumstances of Mr. Nemtsov’s death are extremely disconcerting, especially in the light of the track record of Mr. Putin’s regime. Mr. Nemtsov was killed two days before the planned demonstration against Mr. Putin’s war against Ukraine. He feared for his life as he was preparing to publish new evidence on the presence of Russian troops in Eastern Ukraine. And the ‘investigation’ of his murder started on Friday night, with the police ransacking his apartment and confiscating his documents and hard drives.

Mr. Putin’s facetious promise that he will “personally oversee the investigation” strongly suggests we will never learn the names of Mr. Nemtsov’s murderers. But it is safe to say that a country in which opposition politicians of Mr. Nemtsov’s stature have to fear for their lives is a on a very dismal path.