Tag: economists

Public Prefers Education Tax Credits to Charters, Vouchers

In a recent public opinion study conducted by Harvard University researchers, education tax credits were found to attract more public support (72%) than either charter schools (62%) or vouchers (50%).

The authors seem to find this puzzling, in part due to their belief that “most economists think the difference between vouchers and tax credits more a matter of style than substance.” I have no idea whether this is an accurate assessment of economists’ opinions, but it is certainly a mistaken view, for several reasons.

First, based on a set of regression studies I reported last year in the Journal of School Choice, vouchers, but not tax credits, impose a large and highly significant extra burden of regulation on participating private schools (the link is to an essentially identical pre-publication version). In that study, I offer a suggested explanation for why this pattern may exist.

Second, tax credit programs confer freedom of choice and conscience not just on families but also on taxpayer/donors. As I argued in U.S. Supreme Court amicus briefs in ACSTO v. Winn, and a subsequent op-ed on the Winn verdict, this avoids the compulsion that has plagued state-funded school systems since their inception and has precipitated our endless “school wars.” Vouchers, by compelling all taxpayers to support every type of schooling, perpetuate that compulsion and so perpetuate the conflicts that flow from it.

To my knowledge, in the whole history of the world there hasn’t been a system of government funding for the education of children that has long avoided extensive regulatory constraints. Those constraints defeat the purpose of “school choice” programs, by homogenizing the schools from which parents are permitted to “choose.” There is evidence that tax credits, which make use of only private funds, avoid that fate. Perhaps many economists have not yet become aware of this distinction, but it is one they should take a keen interest in.

More Hayek Sightings

The long Hayek Week continues, a full two weeks after Cato’s all-star panel on The Constitution of Liberty. The Washington Post today features George Mason University professor Russell Roberts and his Hayek-Keynes rap videos.

And by reading the actual print edition of the New York Times Book Review, I discovered that the same issue that included Francis Fukuyama’s review of the The Constitution of Liberty last Sunday also included a letter from one David Beffert of Washington, D.C., coincidentally responding to a review of Fukuyama’s own new book. Beffert wrote:

I enjoyed Michael Lind’s April 17 review of Francis Fukuyama’s important new book, “The Origins of Political Order.” But even as someone who prefers John Maynard Keynes and Karl Polanyi to F. A. Hayek, I still feel compelled to defend Hayek from Lind’s mischaracterization. While I agree with Fukuyama’s argument that, as Lind puts it, “a strong and capable state has always been a precondition for a flourishing capitalist economy,” Hayek can hardly be accused of trying “to explain society in terms of Homo economicus.” A doctor of law and political science, Hayek afforded the state a central role in his philosophy — specifically, he saw the Rechtsstaat, constitutional government enforcing the rule of law, as a guarantor of liberty and a functioning capitalist order. In that sense he, like Fukuyama, is closer to the 19th-century sociological tradition than to neoclassical economists, who would appear to be Lind’s real target.

Speaking of misconceptions about Hayek, if you Google “soros hayek,” the first item that comes up is a page of letters in the Atlantic Monthly taking Soros to task for misunderstanding Hayek – in 1997. Tadd Wilson argues:

Soros cites Hayek as an advocate of laissez-faire and then goes on to reject laissez-faire economics on the grounds that it is a dogmatic system at once claiming and demanding perfect knowledge and equilibrium. Of course, Hayek’s major contribution to economics was his critique of scientific assumptions in equilibrium-based economics. In a nutshell, Hayek argues that the market process relies on contextual, personal knowledge to coordinate the activities of millions of individual participants – a vaguely Popperian notion. Soros misses Hayek’s crucial point.

This is much the same criticism that Bruce Caldwell made of Soros’s understanding of Hayek two weeks ago. Considering the many complaints that were raised about Fukuyama’s understanding of Hayek, we can only ask: Why can’t the Times get someone like, say, David Beffert or Tadd Wilson to review Hayek?

By the way, if you Google Hayek, you’ll discover that it’s a big week for Salma Hayek, too. They’re not related, but you can find a slightly dated comparison here.

The ‘Every Economist’ Myth

Just days after we rapped Rep. Betsy Markey (D-CO) for claiming that “every economist from the far left to the far right was saying the government needs to step in because there was absolutely no private sector investment,” Rep. Gerry Connolly (D-VA) tells the Washington Post,

You’re darn right I voted for the stimulus. Every economist, including [some] Republican economists … said, for God’s sake, don’t let it go off the cliff.

This is the myth that just won’t die. Markey and Connolly are echoing similar claims by President Obama, Vice President Biden, and even the notoriously unreliable Robert Reich. When Biden said it, Harvard economist Greg Mankiw asked if he was “disingenuous or misinformed” and pointed out:

That statement is clearly false. As I have documented on this blog in recent weeks, skeptics about a spending stimulus include quite a few well-known economists, such as (in alphabetical order) Alberto AlesinaRobert BarroGary BeckerJohn CochraneEugene FamaRobert LucasGreg MankiwKevin MurphyThomas SargentHarald Uhlig, and Luigi Zingales–and I am sure there many others as well. Regardless of whether one agrees with them on the merits of the case, it is hard to dispute that this list is pretty impressive, as judged by the standard objective criteria by which economists evaluate one another. If any university managed to hire all of them, it would immediately have a top ranked economics department.

When Robert Reich tried to claim that “economic advisers across the political spectrum support Obama’s plan,” I pointed out that that claim depended on exactly two names and that the Washington Post had demonstrated that neither of them was in fact a Republican supporter of the $787 billion stimulus bill.

In fact, of course, hundreds of economists went on record against the stimulus bill. The Cato Institute’s full-page ad with their names appeared in all the nation’s major newspapers. The ad and the economists were featured on dozens of television programs.

Which brings us back to the question that Mankiw asked of Biden and that I asked of Markey. Is Representative Connolly really unaware that there was vigorous debate among economists about the so-called stimulus bill, and that hundreds of economists expressed their opposition in every major newspaper? Connolly has lived in Washington his entire adult life. He spent 19 years on a Senate committee staff. He served for 14 years on the Fairfax County Board. He worked as vice president at two large government contractors. Is it possible that he doesn’t read the Washington Post – or the Wall Street Journal, or the New York Times, or Roll Call, the newspaper of Capitol Hill? If so, then maybe he really believes that “every economist, including Republican economists” endorsed the stimulus. Someone should ask him: misinformed or disingenuous?

Betsy Markey: Misinformed or Misleading?

On NPR stations this morning, the “Power Breakfast” segment from Capitol News Connection profiled Rep. Betsy Markey (D-CO), who is fighting hard to keep her seat this year. The reporter noted:

She’s a Blue Dog, one of those fiscally conservative Democrats who frequently complicate things for Party leaders by insisting on spending offsets and the like.

A claim slightly complicated by the reporter’s earlier noting that Markey voted for the $787 billion stimulus bill, the health care overhaul, and cap-and-trade. How exactly does that make her a Blue Dog fiscal conservative? Oh, and in her first year she got a score of 19 percent on tax and spending issues from the National Taxpayers Union. The search for an actual Blue Dog goes on.

But I was really struck by this line about the massive stimulus bill:

MARKEY: [E]very economist from the far left to the far right was saying the government needs to step in because there was absolutely no private sector investment.

This is of course not true. Hundreds of economists went on record against the stimulus bill. The Cato Institute’s full-page ad with their names appeared in all the nation’s major newspapers. It is hard to imagine that Representative Markey missed it. If she wasn’t much on reading newspaper ads, lots of economists wrote op-eds and blog posts opposing the stimulus. If she didn’t read op-eds or blogs either, the ad and the economists were featured on dozens of television programs.

And so we come to the question in this post’s headline: Could Rep. Betsy Markey really be so misinformed that she actually believed that “every economist” supported a massive increase in spending and debt on top of TARP and the other bailouts?

Actually We Aren’t Running the World

Bloggers have already noted the most glaring problems with Arthur Brooks, Edwin Feulner and Bill Kristol’s Monday Wall Street Journal op-ed, “Peace Doesn’t Keep Itself,” which worries that conservatives are figuring out that trying to run the world is not conservative.

The op-ed pretends that the fact that defense spending isn’t the largest cause of the deficit means it isn’t a cause of the deficit. It obscures the fact that we spend more on defense than we did in the Cold War by counting the defense budget as a portion of the economy without noting the latter has grown faster than the former.

So I can limit myself to less obvious angles. The first is that neoconservatives like Kristol are for increasing the defense budget no matter what. For them the military is basically an expression of national awesomeness (to use an academic term). Enemies and other details, like what we spend already, come up mainly in the justification phase.

In 2000, when U.S. defense spending was nearly $180 billion lower than today—excluding the wars and adjusting for inflation—Bill Kristol and Robert Kagan wanted to increase defense spending by $60 to $100 billion a year. After September 11, they called for a “large” and “substantial” increase. Having got that and then some, Kristol, at least, wants even more. The neoconservative appetite for military spending is insatiable because their militarism is.

Second, I want to pick on one point the op-ed makes because it is both wrong and widely believed: “Global prosperity requires commerce and trade, and this requires peace. But the peace does not keep itself.”

There are really two theories there. First, commerce requires general peace in supplier nations and military protection of supply lines. Second, only the United States can provide both. There is some evidence for these claims in a long-running correlation. Since World War II, U.S. military hegemony has coincided with explosive growth in global trade. So it’s easy to see how people assume causation. But as Chris Preble and I argue in the Policy Analysis that we just released, “Budgetary Savings from Military Restraint,” the causal logic here is weak. It overstates the U.S. military’s contribution to global stability and trade and the trouble that instability causes us.

The first theory is right in the sense that nations devastated by war ultimately lose purchasing power, which is bad for their trade partners. But in the meantime, warring countries typically need a lot of imports. They also generate capital for armies by selling goods abroad. For that reason, the Iranians and Iraqis kept pumping oil during their war. Wars do not simply shut down trade.

The argument for policing peacetime shipments is even worse, as I explain in a guest post I did yesterday for the Stimson Center’s revamped defense budget blog. As I note there, we do not really protect shipments now. A tiny minority get naval protection. Thus primacists tend to argue that what matters is not defending trade but the ability to do so, which deters malfeasants from harassing it or building capability to do so. But that argument gives the game away. You don’t need to do it in good times to do it in bad times.

What happens the day after we tell our Navy to stop sailing around in the name of protecting commerce? Who interrupts shipments? Would Iran start charging tolls at the Strait of Hormuz or China in the South China Sea? I say no because they know that we can force access and because there are plenty of ways to retaliate, including blockading those countries.

A more plausible claim is that some states would increase naval spending to police their own shipping. That seems like a good thing. Sometimes people say that such burden-sharing could set off a naval arms race that causes a war, say between India and China. I suppose that is possible, but naval arms races have caused few, if any, wars.

Let’s say our ability to buy some good from some area is cut off, either by instability at the source or en route. The likely outcome is supply adjustment, not supply failure. Generally another supplier takes the orders and prices adjust. That is particularly true as globalization links markets and increases supply options. It is when you have only one potential supplier that you really need to police delivery.

If you believe that military hegemony protects peacetime shipments, you could argue that it distorts price signals by shifting a portion of the good’s cost to federal taxes. Because I don’t believe that we are propping up prices in most cases, I say that what primacists are really selling is an attempted but failed subsidy to consumption of goods, including oil.

Oil is a special case because price shocks caused by supply disruption have in the past caused recessions. However, economists argue that the conditions that allowed for this problem have changed. One change is the reduced burden energy costs now impose on U.S. household income. Others disagree, but if they are right, that is why we have public and private reserves.

You can read more of what we think of about the idea that only we can keep the peace among states in the Policy Analysis or in the stuff Cato scholars have been pumping out for years. I will just say here that primacists ignore all the history contradicting the idea that only hegemons create a stable balance of power and the many rivals that formed stable balances of power without an hegemon taking a side.

International stability and world trade would be OK without our nation trying to use our military to provide them. If you don’t believe me, you might read one of these three papers by Eugene Gholz and Daryl Press. I took a lot of this from them.

Prof. Krugman Is Wrong, Again

Prof. Paul Krugman asserts in his New York Times column of May 31st that “Both textbook economics and experience say that slashing spending when you’re still suffering from high unemployment is a really bad idea – not only does it deepen the slump, but it does little to improve the budget outlook, because much of what governments save by spending less they lose as a weaker economy depresses tax receipts.”

While Prof. Krugman and most other fiscalists believe this to be self-evident, it is not.  Indeed, this fiscalist dogma fails to withstand the indignity of empirical verification.  Prof. Paul Krugman’s formulation fails to mention the state of confidence.  This is an important oversight.  As Keynes himself put it: “The state of confidence, as they term it, is a matter to which practical men pay the closest and most anxious attention.”

By ignoring the confidence factor, economic theory can lead to wildly incorrect conclusions and misguided policies.  Just consider naive Keynesian fiscal theory – the type presented (as Prof. Krugman notes) in textbooks and embraced by most policymakers and the general public.  According to Keynesian theory, an expansionary fiscal policy (an increase in government spending and/or a decrease in taxes) stimulates the economy, at least for a year or two after the fiscal stimulus.  To put the brakes on the economy, Keynesians counsel a fiscal contraction.

A positive fiscal multiplier is the keystone for Keynesian fiscal theory because it is through the multiplier that changes in the budget balance are transmitted to the economy.  With a positive multiplier, there is a positive relationship between changes in the fiscal deficit and economic growth: larger deficits stimulate growth and smaller ones slow things down.

So much for theory.  What about the real world?  Suppose a country has a very large budget deficit.  As a result, market participants might be worried that a further loosening of fiscal conditions would result in more inflation, higher risk premiums and much higher interest rates.  In such a situation, the fiscal multipliers may be negative.  Fiscal expansion would then dampen economic activity and a fiscal contraction would increase economic activity.  These results would be just the opposite of those predicted by naive Keynesian fiscal theory.

The possibility of a negative fiscal multiplier rests on the central role played by confidence and expectations about the course of future policy.  If, for example, a country with a very large budget deficit and high level of debt (estimated U.S. deficit and debt levels as a percentage of GDP for 2010 are 10.3% and 63.2%, respectively) makes a credible commitment to significantly reduce the deficit, a confidence shock will ensue and the economy will boom, as inflation expectations, risk premiums and long-term interest rates decline.

There have been many cases in which negative fiscal multipliers have been observed.  The Danish fiscal squeeze of 1983-86 and the Irish stabilization of 1987-89 are notable.  The fiscal deficits that preceded the Danish and Irish fiscal squeezes were clearly unsustainable, and risk premiums and interest rates were extremely high.  Confidence shocks accompanied the fiscal squeezes, and with negative multipliers in play, the Danish and Irish economies took off.  (Evidence from the U.S. is presented in an article by Professors Jason E. Taylor and Richard K. Vedder which appears in the current May/June 2010 issue of the Cato Policy Report.)

Margaret Thatcher also made a dash for confidence and growth via a fiscal squeeze.  To restart the economy in 1981, Thatcher instituted a fierce attack on the British deficit, coupled with an expansionary monetary policy.  Her moves were immediately condemned by 364 distinguished economists.  In a letter to the Times of London, they wrote a knee-jerk Keynesian (Prof. Krugman-type) response: “Present policies will deepen the depression, erode the industrial base of our economy and threaten its social and political stability.”  Thatcher was quickly vindicated.  No sooner had the 364 affixed their signatures than the economy boomed.  People had confidence in Britain again, and Thatcher was able to introduce a long series of deep free-market reforms.

While Prof. Krugman’s authority is weighty, his arguments and evidence are slender.

Obama to Increase FHA Risk

The Federal Housing Administration is heading toward a taxpayer bailout, yet the president’s latest mortgage modification plan would further increase the agency’s exposure to risky mortgages. Mark Calabria calls it a “Backdoor Bank Bailout.”

The administration’s plan would encourage borrowers who owe more than their house is worth to refinance into FHA-insured mortgages. Therefore, the risk of a future foreclosure on these mortgages would fall to the government and taxpayers instead of private lenders.

A recent study from economists at New York University found that the FHA is underestimating its risk exposure. One of the problems is that the FHA isn’t properly accounting for the risk to underwater FHA mortgages that have been refinanced into new FHA mortgages. So it’s hard to see how the president’s plan to refinance private underwater mortgages into FHA mortgages won’t further exacerbate the situation.

To get these mortgages in better shape so the FHA can insure them, $14 billion in TARP money is going to be used to pay private lenders to reduce the amount borrowers owe on their mortgages. Some of this money will also be used to cover eventual losses on these loans. As a taxpayer whose mortgage is underwater, and who would rather go bankrupt than accept a government handout, I find it infuriating that my tax dollars are being used to bail out others in a similar situation.

But with government housing programs, it’s standard practice for officials to cannonball into the pool and worry about who gets splashed by the water later. On Sunday, CNN.com reported on “FHA’s Florida Fiasco,” where the collapse of the heavily FHA-insured condo market has contributed to the possibility of a FHA bailout. The FHA has now tightened its condo standards, but once again it’s a day late and possibly more than few bucks short.

The new FHA initiative is the latest in a series of efforts to “stabilize” the housing market with more subsidies. Policymakers seem oblivious that it was government interventions that helped instigate the housing meltdown to begin with. The housing market would stabilize itself if the supply of and demand for housing was allowed to be brought back into equilibrium. There would be pain in the short-term, but in the long-term we would have a smoother functioning housing market. Unfortunately, for politicians the long-term means the next election.

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