Tag: obama

Waiving Goodbye to the Constitution

Today the Obama administration will announce, according to early press reports, that ten states (of eleven that applied) will be receiving waivers from key provisions of the No Child Left Behind Act. That’s right, the 2002 education law passed by Congress and signed by President Bush that absurdly insisted that all children will be proficient in mathematics and reading by 2014. Now President Obama, unilaterally, is telling states that they can forget all that as long as they adopt – or at least have “plans” to adopt – reforms to his liking, such as national curriculum standards and teacher evaluations based on student standardized testing progress.

At this point, it is almost impossible to keep track of the federal savaging of the Constitution in supposed service of education. First there was the federal expenditure of money, allowed by none of the enumerated powers, largely starting in the 1960s. Then there was the growing attachment of controls to that money – again, with no Constitutional authority – culminating in NCLB. Now there is the blatant disregard for the separation of  powers by a President who just decided he didn’t like waiting for Congress to reauthorize the law, and a Congress that exhibits no spine whatsoever when it comes to this power grab because, well, no one seems to like NCLB.

Within this fiasco is all the evidence anyone should need to see why the Feds must be extracted from education. While Washington can drop humongous sacks of taxpayer dough on states and districts, and impose lots of bureaucratic rules and regulations, it can’t actually make education much better. Indeed, the whole point of NCLB was to end decades of Washington spending billions for no return. And what happened? Exactly what state, district, and school-level bureaucrats and unions expected: “accountability” swerved off the road before the 2014 deadline. It took longer than expected – it was a slightly more nerve-wracking game of political chicken than usual – but in the end the entrenched interests won because they’re the most motivated to bring the political pain. After all, their very livelihoods are at stake.

Aside from desegregation – which it has Constitutional authority to compel – the federal government has done no meaningful good in education. Why? Because the special interest-driven reality of politics ensures it can’t do any good. Yet we not only let it continue to trample the Constitution by meddling in education, we are allowing it to shred the Constitution into ever-smaller bits in order to “fix” the destruction it has wrought. And for this, all who turn a blind eye to the Constitution in the name of “the children” are to blame.

One Year Later, Another Look at Obamanomics vs. Reaganomics

On this day last year, I posted two charts that I developed using the Minneapolis Federal Reserve Bank’s interactive website.

Those two charts showed that the current recovery was very weak compared to the boom of the early 1980s.

But perhaps that was an unfair comparison. Maybe the Reagan recovery started strong and then hit a wall. Or maybe the Obama recovery was the economic equivalent of a late bloomer.

So let’s look at the same charts, but add an extra year of data. Does it make a difference?

Meh… not so much.

Let’s start with the GDP data. The comparison is striking. Under Reagan’s policies, the economy skyrocketed.  Heck, the chart prepared by the Minneapolis Fed doesn’t even go high enough to show how well the economy performed during the 1980s.

Under Obama’s policies, by contrast, we’ve just barely gotten back to where we were when the recession began. Unlike past recessions, we haven’t enjoyed a strong bounce. And this means we haven’t recovered the output that was lost during the downturn.

This is a damning indictment of Obamanomics

Indeed, I made this point several months ago when analyzing some work by Nobel laureate Robert Lucas. And it’s been highlighted more recently by James Pethokoukis of the American Enterprise Institute and the news pages of the Wall Street Journal.

Unfortunately, the jobs chart is probably even more discouraging. As you can see, employment is still far below where it started.

This is in stark contrast to the jobs boom during the Reagan years.

So what does this mean? How do we measure the human cost of the foregone growth and jobs that haven’t been created?

Writing in today’s Wall Street Journal, former Senator Phil Gramm and budgetary expert Mike Solon compare the current recovery to the post-war average as well as to what happened under Reagan.

If in this “recovery” our economy had grown and generated jobs at the average rate achieved following the 10 previous postwar recessions, GDP per person would be $4,528 higher and 13.7 million more Americans would be working today. …President Ronald Reagan’s policies ignited a recovery so powerful that if it were being repeated today, real per capita GDP would be $5,694 higher than it is now—an extra $22,776 for a family of four. Some 16.9 million more Americans would have jobs.

By the way, the Gramm-Solon column also addresses the argument that this recovery is anemic because the downturn was caused by a financial crisis. That’s certainly a reasonable argument, but they point out that Reagan had to deal with the damage caused by high inflation, which certainly wreaked havoc with parts of the financial system. They also compare today’s weak recovery to the boom that followed the financial crisis of 1907.

But I want to make a different point. As I’ve written before, Obama is not responsible for the current downturn. Yes, he was a Senator and he was part of the bipartisan consensus for easy money, Fannie/Freddie subsidies, bailout-fueled moral hazard, and a playing field tilted in favor of debt, but his share of the blame wouldn’t even merit an asterisk.

My problem with Obama is that he hasn’t fixed any of the problems. Instead, he has kept in place all of the bad policies - and in some cases made them worse. Indeed, I challenge anyone to identify a meaningful difference between the economic policy of Obama and the economic policy of Bush.

  • Bush increased government spending. Obama has been increasing government spending.
  • Bush adopted Keynesian “stimulus” policies. Obama adopted Keynesian “stimulus” policies.
  • Bush bailed out politically connected companies. Obama has been bailing out politically connected companies.
  • Bush supported the Fed’s easy-money policy. Obama has been supporting the Fed’s easy-money policy.
  • Bush created a new health care entitlement. Obama created a new health care entitlement.
  • Bush imposed costly new regulations on the financial sector. Obama imposed costly new regulations on the financial sector.

I could continue, but you probably get the  point. On economic issues, the only real difference is that Bush cut taxes and Obama is in favor of higher taxes. Though even that difference is somewhat overblown since Obama’s tax policies - up to this point - haven’t had a big impact on the overall tax burden (though that could change if his plans for higher tax rates ever go into effect).

This is why I always tell people not to pay attention to party labels. Bigger government doesn’t work, regardless of whether a politician is a Republican or Democrat. The problem isn’t Obamanomics, it’s Bushobamanomics. But since that’s a bit awkward, let’s just call it statism.

New Academic Study Confirms Previous IMF Analysis, Shows that Lower Tax Rates Are the Best Way to Reduce Tax Evasion

Leftists want higher tax rates and they want greater tax compliance. But they have a hard time understanding that those goals are inconsistent.

Simply stated, people respond to incentives. When tax rates are punitive, folks earn and report less taxable income, and vice-versa.

In a previous post, I quoted an article from the International Monetary Fund, which unambiguously concluded that high tax burdens are the main reason people don’t fully comply with tax regimes.

Macroeconomic and microeconomic modeling studies based on data for several countries suggest that the major driving forces behind the size and growth of the shadow economy are an increasing burden of tax and social security payments… The bigger the difference between the total cost of labor in the official economy and the after-tax earnings from work, the greater the incentive for employers and employees to avoid this difference and participate in the shadow economy. …Several studies have found strong evidence that the tax regime influences the shadow economy.

Indeed, it’s worth noting that international studies find that the jurisdictions with the highest rates of tax compliance are the ones with reasonable tax systems, such as Hong Kong, Switzerland, and Singapore.

Now there’s a new study confirming these findings. Authored by two economists, one from the University of Wisconsin and the other from Jacksonville University, the new research cites the impact of tax burdens as well as other key variables.

Here are some key findings from the study.

According to the results provided in Table 2, the coefficient on the average effective federal income tax variable (AET) is positive in all three estimates and statistically significant for the overall study periods (1960-2008) at beyond the five percent level and statistically significant at the one percent level for the two sub-periods (1970-2007 and 1980-2008). Thus, as expected, the higher the average effective federal income tax rate, the greater the expected benefits of tax evasion may be and hence the greater the extent of that income tax evasion. This finding is consistent with most previous studies of income tax evasion using official data… In all three estimates, [the audit variable] exhibits the expected negative sign; however, in all three estimates it fails to be statistically significant at the five percent level. Indeed, these three coefficients are statistically significant at barely the 10 percent level. Thus it appears the audit rate (AUDIT) variable, of an in itself, may not be viewed as a strong deterrent to federal personal income taxation [evasion].

Translating from economic jargon, the study concludes that higher tax burdens lead to more evasion. Statists usually claim that this can be addressed by giving the IRS more power, but the researchers found that audit rates have a very weak effect.

The obvious conclusion, as I’ve noted before, is that lower tax rates and tax reform are the best way to improve tax compliance - not more power for the IRS.

Incidentally, this new study also finds that evasion increases when the unemployment rate increases. Given his proposals for higher tax rates and his poor track record on jobs, it almost makes one think Obama is trying to set a record for tax evasion.

The study also finds that dissatisfaction with government is correlated with tax evasion. And since Obama’s White House has been wasting money on corrupt green energy programs and a failed stimulus, that also suggests that the Administration wants more tax evasion.

Indeed, this last finding is consistent with some research from the Bank of Italy that I cited in 2010.

…the coefficient of public spending inefficiency remains negative and highly significant. …We find that tax morale is higher when the taxpayer perceives and observes that the government is efficient; that is, it provides a fair output with respect to the revenues.

And I imagine that “tax morale” in the United States is further undermined by an internal revenue code that has metastasized into a 72,000-page monstrosity of corruption and sleaze.

On the other hand, tax evasion apparently is correlated with real per-capita gross domestic product. And since the economy has suffered from anemic performance over the past three years, that blows a hole in the conspiratorial theory that Obama wants more evasion.

All joking aside, I’m sure the President wants more tax compliance and more prosperity. And since I’m a nice guy, I’m going to help him out. Mr. President, this video outlines a plan that would achieve both of those goals.

Given his class-warfare rhetoric, I’m not holding my breath in anticipation that he will follow my sage advice.

Obama Is Avoiding the Tough College Course

College prices truly are ridiculous. But someone needs to tell President Obama that the root problem isn’t the colleges, which he is expected to announce today will be the targets of proposed sanctions should they raise prices too fast. No, the problem, Mr. President, is a federal government that wants to play Santa Claus by giving everybody, no matter how poorly qualified or unmotivated, money for college.

As I itemized in How Much Ivory Does This Tower Need? What We Spend on, and Get from, Higher Education, total aid in the form of federal grants and loans (I didn’t even get into tax credits and deductions) ballooned from inflation-adjusted $29.6 billion in 1985 to $139.7 billion in 2010. That is mammoth, and it probably helped not just colleges to enrich themselves, but enrollment to expand from 8.9 million full-time equivalent students in 1985 to 15.5 million in 2010.

But that latter part is good, right? Doesn’t that giant enrollment increase mean we’ve been “educating ourselves to a better economy,” to steal a favorite Obama administration catch phrase?

It might, if all those people were attaining important skills and graduating. But they haven’t been. You can get more details in my paper – and yes, some of the following stats are probably somewhat low because they’re for first-time, full-time students – but the higher ed outcomes appear dismal no matter what:

  • The most recent six-year graduation rate for students in four-year programs was 57.3 percent
  • The most recent three-year graduation rate for students in two-year programs was a minute 27.5 percent
  • Roughly a third of people who manage to get bachelor’s degrees are in jobs that don’t require them, up from about 11 percent in 1967
  • According to recent research by Richard Arum and Josipa Roksa,  45 percent of students learn nothing in their first two years of college, and 36 percent nothing in four years
  • Between 1992 and 2003, the percentage of bachelor’s holders proficient in prose literacy dropped from 40 to 31 percent, and in document literacy from 37 to 25 percent, on the National Assessment of Adult Literacy

What does all this – and more that’s in the paper – tell us? That millions of the people taxpayers are sending to college are getting little if anything out of it, while the colleges rake in heavy dough. But that means the root problem isn’t the colleges – they are just taking the people government sends them – it is the federally dominated funding system that insists on giving dollars to almost any warm body that declares it wants to experience ivy-covered walls and frat parties.

In light of this depressing reality, if the president really wants to rein in costs he will call for significanlty reducing student aid, both the amount available to individual students, and the numbers of students eligible.

That, though, will probably not happen. Not only did the president talk up keeping aid cheap and casting an even wider net in his State of the Union, but taking the right course – cutting aid – means taking the politically tough course. And neither this president, nor almost anyone else in Washington, has ever signalled real willingness to do that. It’s just much easier to keep giving money away.

Teddy Roosevelt Is No Model for a President

Cato senior fellow Jim Powell, author of Bully Boy: The Truth about Theodore Roosevelt’s Legacy, writes at Forbes.com today that TR is a bad model for President Obama:

Theodore Roosevelt was the man who, in 1906, encouraged progressives to promote a federal income tax after it was struck down by the Supreme Court and given up for dead.  He declared that “too much cannot be said against the men of great wealth.”  He vowed to “punish certain malefactors of great wealth.”

Perhaps TR’s view was rooted in an earlier era when the greatest fortunes were made by providing luxuries for kings, like fine furniture, tapestries, porcelains and works of silver, gold and jewels.  Since the rise of industrial capitalism, however, the greatest fortunes generally have been made by serving millions of ordinary people.  One thinks of the Wrigley chewing gum fortune, the Heinz pickle fortune, the Havemeyer sugar fortune, the Shields shaving cream fortune, the Colgate toothpaste fortune, the Ford automobile fortune and, more recently, the Jobs Apple fortune.  TR inherited money from his family’s glass-importing and banking businesses, and maybe his hostility to capitalist wealth was driven by guilt.

Like Obama, TR was a passionate believer in big government – actually the first president to promote it since the Civil War.  He said, “I believe in power…I did greatly broaden the use of executive power…The biggest matters I managed without consultation with anyone, for when a matter is of capital importance, it is well to have it handled by one man only …I don’t think that any harm comes from the concentration of power in one man’s hands.”

Also like Obama, TR was almost entirely focused on politics – personalities, speeches, publicity and so on.  He seemed to be concerned about an economic issue only when it became a big problem, particularly if it was big enough to affect the next election.  There wasn’t much evidence of long-term thinking beyond the next election.  Certainly there was no evident awareness of unintended consequences.

Much more here.

Let’s Divest of GM Yesterday

Writing in today’s Washington Post, Charles Lane posits that the time is now for the U.S. Treasury to divest of its remaining 500 million shares of General Motors stock.  I agree with that conclusion, but not with Lane’s rationale or his recommendation for a heavy-handed, government-imposed exit strategy.

Just to recap: the Treasury recouped $23 billion of taxpayers’ $50 billion outlay when it sold GM shares to the public in an IPO in November 2010; the outstanding 500 million shares in government coffers must be sold at an average price of $54 to recover the remaining $27 billion; the IPO price was $33; today’s price is $21.69.  If all 500 million shares could be sold at today’s price, the Treasury would raise $10.8 billion, leaving taxpayers at a loss of just over $16 billion. (Of course, the sale of such a large number of shares would drive the average selling price way below today’s price, resulting in a much larger taxpayer loss.)

Lane is correct to conclude that GM’s immediate future isn’t looking quite so rosy. Demand is tanking in Europe. Concerns remain about whether GM will continue to be able to fund its $128 billion pension plan. And sales of the “game-changing” Chevy Volt have been lagging since the vehicle’s commercial introduction some 13 months ago—well before its engines demonstrated an annoying propensity to spontaneously combust. (Not to worry, says GM’s public relations team: the engines don’t seem to catch fire while being driven, only an hour or two after they’ve been parked in the garage.) Recognizing that that qualifier hasn’t been reassuring enough, GM is now offering to buy back any Chevy Volt it has ever sold, which doesn’t bode well for the bottom line, but also affirms how few of these Government Motors show pieces have even sold.

That grim analysis is the basis for Lane’s preference for government divestment now. There is more downside risk than upside potential. It is an argument based on market-timing, rather than on the principle that bad things happen when the government has a stake in the outcome of a race that it can influence. Sure, the administration would love to divest of GM at a profit to taxpayers. But the longer it is allowed to wait for that train to arrive, the greater the temptation to grease the skids.

The government should divest now. It should have divested in June, when it was first legally permissible to do so.  But the administration (following, by logic, what would have been Lane’s advice at the time) rolled the dice, expecting the stock value to rise. Instead it fell. And then there was this.

But my bigger problem is with Lane’s proposal for a managed divestment.  He writes:

It’s time to cut our losses.  Treasury should start selling its stake in GM.

And I know just the buyer: GM. The company is sitting on more than $33 billion in cash, about triple the market value of Treasury’s 500 million shares, which is roughly $10.8 billion.

Though GM wants to dedicate much of its cash to shoring up its pension plan, it could still absorb most or all of Treasury’s shares, even if Treasury charges a modest premium over the current market price, as it should.

Lane proposes this under the guise of some perverse fealty to a “free-enterprise economy,” as it would spare shareholders from the stock price-depressing impact of an unnatural 500 million share dump. But those shareholders knew the risks they were taking when they purchased GM stock in the first place. They certainly knew that the largest single shareholder didn’t intend to hold its position for very long. Lane’s argument for protecting those shareholders in the name of free-enterprise in unconvincing, if not misplaced.

Furthermore, Lane’s zeal for sticking it to GM seems to eclipse any real commitment to free markets. Forcing GM to divert resources from where management wants to commit them in order to achieve some favorable political outcome (a smaller taxpayer loss) is just as coercive as some of the administration’s actions on the road to GM’s nationalization in the first place.

GM should not be entitled to any favors or exceptional treatment by virtue of its ownership structure. To be certain of that, it should be 100 privatized yesterday. But likewise, GM should not be subject to compensatory or otherwise countervailing policies designed to punish or remove any perceived advantage. For starters, it is impossible to measure the benefits received or the penalties suffered with any precision. Demanding that GM not be exposed to special treatment goes in both directions.