I’ll be testifying before the Senate Judiciary Subcommittee on the Constitution, Civil Rights, and Human Rights this Wednesday, at 2:00pm. The hearing will investigate the “school to prison pipeline”—the pattern of flawed disciplinary policies and practices, including “zero tolerance,” that has been widely faulted for unnecessarily pushing students out of school and into the juvenile justice system.
In addition to summarizing some important recent research on the subject, I’ll also be describing an alternative discipline policy that has shown enormous success in one of the most violent, crime-ridden districts in the country, and what Congress can do to encourage the adoption of such policies.
The hearing is open to the public (Dirksen building, room 226), and I’ll be posting my written testimony afterwards.
I have a new piece up at ForeignPolicy.com this morning, commenting on the GOP’s apparent confusion about government spending and the effects that such spending has on others.
The party that opposes nearly all other forms of federal spending happily embraces the military variety. Republicans assert that military spending cuts will result in massive job losses, even as they argue that cuts in other federal spending would grow the economy and create jobs in the private sector. They are skeptical that the federal government should engage in nation-building at home, but celebrate it abroad. Republican candidate Mitt Romney accuses Obama of fostering a “culture of dependency” in the United States, yet ignores that U.S. security guarantees have created an entire class of affluent countries around the world that now rely upon U.S. tax dollars to pay for their defense.
Trouble is, as I point out, President Obama “hasn’t been anxious to kick other countries off the dole.” He boasts that the “the United States is still the world’s ‘indispensable nation,’” and he pledges that the U.S. military will continue “to underwrite global security,” which doesn’t leave much for anyone else’s military to do.
Such an ambitious mission is expensive.
Obama’s unwillingness to make deep cuts in military spending confirms his rhetoric. Over the next decade, the Pentagon’s annual base budget (which excludes most war costs) will average $517 billion in constant 2012 dollars, 11 percent higher than what Americans spent during the George W. Bush years.
For many Republicans, but especially for Mitt Romney, that isn’t nearly enough. They accuse the president of gutting the Pentagon’s budget, and loudly complain about his unwillingness to undo the automatic spending cuts that would cut even more (that they, inconveniently, engineered).
Republicans could reasonably claim that military spending should get a pass because the Constitution clearly stipulates a federal role in defending the country. But nowhere is it written that Americans must provide security for others; that is the job of their governments, not America’s.
Indeed, the Republicans’ reflexive commitment to more military spending is particularly curious given their appreciation for how incentives work in the domestic sphere. Republicans know quite well that people are not inclined to pay for things that others will provide for them. GOP leaders speak often of moral hazards – when individuals or businesses behave irresponsibly because others are there to bail them out. The same problem exists in international politics, but is strangely ignored in the GOP’s plan to continue policing the world.
I conclude the piece with some unsolicited advice for the GOP nominee, but I doubt he’s listening. You can read the whole thing here.
It is not surprising that the recent losses at JP Morgan have resulted in calls by current and would-be politicians to remove bankers from the boards of the regional Federal Reserve banks, as JP Morgan CEO Jamie Dimon currently sits on the board of the New York Federal Reserve. There’s even a petition for the “public” to demand Dimon’s resignation. Setting aside the irony of having senators call for keeping bankers off the regional Fed boards just days after they voted to place a former investment banker on the Federal Reserve board, the real question we should be debating is: Should the the Federal Reserve even be involved in banking regulation?
As I’ve noted elsewhere, a recent paper by economists Barry Eichengreen and Nergiz Dincer suggests that separating monetary policy from banking supervision would yield superior outcomes, both for banking stability and the economy more generally. While there is a very real conflict-of-interest when bankers sit on the boards of their regulators, there is an even bigger conflict-of-interest when those setting monetary policy are also responsible for bank safety. Rather than let institutions they supervise fail, and face public criticism, there exists a strong incentive for the monetary authority to mask bank insolvency by labeling such a liquidity crisis and then injecting easy and cheap credit. The result is that the rest of us are left paying for the mistakes of both the bank and regulator. A far better alignment of incentives would be to separate the conduct of monetary policy from bank supervision.
Like anything, such a separation would not be without its costs. I am the last to go around claiming a “free lunch” when it comes to banking and monetary policy. The current Boston Fed President made a strong case over a decade ago for keeping the two combined. The Richmond Fed has also offered a useful discussion of the pros and cons of such consolidation, as well as consolidating regulators more generally. These costs aside, I believe having the Fed focus solely on monetary policy would improve both.
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.
On Wednesday, Defense Secretary Leon Panetta issued a warning to NATO allies that reducing military spending on both sides of the Atlantic will risk “hollowing out” the alliance’s capabilities. Panetta implied that Europeans cannot continue to rely on the United States for their security. Following former defense secretary Robert Gates’s comments in June, Panetta joins the long list of U.S. presidents, secretaries of defense and state, and innumerable lower-level officials who have pleaded with Europe to pick up the slack on military spending, provide for their own security, and close the gap in capabilities.
But Secretary Panetta’s speech also praised NATO for the mission in Libya and he extolled Europe’s leadership in the campaign: “The alliance achieved more burden-sharing between the U.S. and Europe than we have in the past…on a mission that was in the vital interest of our European allies.”
Relative to past NATO operations, it may be true that Europe contributed more in this instance. But this ignores the fact that the mission would not have been possible without the unique capabilities of the U.S. military. As Justin Logan pointed out, the Europeans quickly ran out of munitions and relied on the United States to conduct air strikes. “Thus, Washington essentially borrowed money from China to buy ordnance to give to Europe to drop on Libya.”
Panetta’s finger-wagging will do little to alter the incentive structure European states confront when determining what they should spend on defense. As I explain in an article recently published at Big Peace, until the United States takes concrete steps to force Europeans to spend more for their security, they will continue to free-ride on the U.S. taxpayers’ dime.
Cutting the Pentagon’s budget without imposing additional burdens on our troops requires getting our allies to do more. That is unlikely to happen unless U.S. officials, beginning with Secretary Panetta, force the issue. Unfortunately, he is merely one of many in Washington who seem to forget how incentives work:
Those who simply assume that others would not do more to defend themselves and their interests often ignore the extent to which U.S. actions have discouraged them from doing so. Just as some welfare recipients are often disinclined to look for work, foreign countries on the generous American security dole do not see a need to obtain military power. Our great power, and our willingness to use it, even when our own interests are not at stake, has allowed others to ignore possible threats, always confident that the United States will be there to rescue them.
The Obama administration’s rhetoric merely reinforces this message. The National Security Strategy, published in May 2010, declares “There should be no doubt: the United States of America will continue to underwrite global security.” Taking their cue, U.S. allies have proved understandably disinterested in military spending.
Despite Panetta’s pleas, U.S. strategy—and NATO’s very existence—allows this free-riding to continue. The Libya operation appears to have reinforced these destructive tendencies. If Washington really wants our allies to spend more to defend themselves and their vital interests, U.S. officials must jettison their reflexive attachment to the NATO alliance, an organization that has been irrelevant to U.S. vital security interests for at least two decades.
Secretary Panetta understands the United States is dealing with its own fiscal problems, but he has missed a perfect opportunity to offload a share of our burdens on to our rich allies.
President Obama has been saying that if the United States government can find and eliminate Osama bin Laden after ten years of searching, it can do anything:
Already, in several appearances since the raid, Obama has described it as a reminder that “as a nation there is nothing that we can’t do,” as he put it during an unrelated White House ceremony Monday. On Sunday night, during his first comments about the operation, he linked it to American values, saying the country is “once again reminded that America can do whatever we set our mind to.”
This is, of course, nonsense. Finding bin Laden, difficult as it proved to be, was an incomparably simple task compared to using coercion and central planning to bring about desired results in defiance of economic reality. You can’t deliver better health care to more people for less money by reducing the role of incentives and markets, even if you set your mind to it. As Russell Roberts said about a similar concept, “If we can put a man on the moon, then…”:
Putting a man on the moon is an engineering problem. It yields to a sufficient application of reason and resources. Eliminating poverty is an economic problem (and by the word “economic” I do not mean financial or related to money), a challenge that involves emergent results. In such a setting, money alone—in the amounts that a non-economic approach might suggest, one that ignores the impact of incentives and markets—is unlikely to be successful.
Obama should listen to Bill Clinton, who last fall seemed to be channeling Hayek:
Friedrich Hayek, The Fatal Conceit: “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”
Bill Clinton, 9/21: “Do you know how many political and economic decisions are made in this world by people who don’t know what in the living daylights they are talking about?”
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