Topic: Government and Politics

Bailouts: Where Will They End?

“There’s no logical end to it,” Cato Senior Fellow Gerald P. O’Driscoll Jr. said to Neil Cavuto on Fox Business. He’s talking about the incredible expanding bailouts. It started with Bear Stearns in March and then homebuilders in April. Then Fannie Mae and Freddie Mac in September, and after that the deluge. AIG, announced at $85 billion but quietly increased to $123 billion so far, and the $700 billion centerpiece and then money market funds and then bank nationalizations and an increase in the federal guarantee to bank depositors. Where will it stop?

Friday’s papers noted that the head of the FDIC said that the federal government might start guaranteeing home mortgages. On Saturday we learned that insurance companies want to get a piece of the money. Yesterday the Treasury said that automobile companies–which already got their own $25 billion program–might also be eligible for the general “financial rescue plan,” and their success might encourage other industries to try to get in on it.

As I noted before, Congress is talking about “a second economic stimulus package, totaling $50 billion in the form of money for infrastructure projects, relief for state governments struggling with rising Medicaid costs, home heating assistance for the Northeast and upper Midwest, and disaster relief for the Gulf Coast and the Midwestern flood zone.” And Transportation Secretary Mary Peters wants “an $8 billion infusion” for the federal highway trust fund.

Where does all this money come from? The total cost is hard to estimate, because we don’t know how many of these guarantees will actually result in payments. But some analysts are talking about a total bill of $2-3 trillion. Given the underestimate on the cost of the Iraq war, we shouldn’t have confidence in any claims that it will be less. So where does the money come from? Even Obama doesn’t want to raise taxes that much. And if you tax Americans to bail out as many Americans as we’re now talking about helping, eventually you’re going to be taxing people to bail themselves out. In fact, the government is likely to borrow some of the money and have the Federal Reserve create more of it. That process seems to be under way, as Greg Mankiw and Jeff Hummel have discussed. How can that astounding and unprecedented increase in the monetary base not lead to inflation, even hyperinflation? We’ve already decided to tax the prudent and thrifty to bail out the imprudent and irresponsible. Now the prudent may face a danger even worse than taxes: inflation that erodes their hard-earned savings.

Howard Baker famously called Ronald Reagan’s tax cuts a “riverboat gamble.” This is more like a “Celebrity Solstice gamble.”

Members of Congress Who Voted for the Financial Crisis

In late 2000, with the budgeting and spending process in collapse, Congress hurriedly passed a mammoth spending bill called the Consolidated Appropriations Act, 2001. It contained a provision preempting state regulation of financial derivatives under gambling or “bucket shop” laws. The result less than a decade later was the out-of-control market for credit default swaps that has caused so much financial, and perhaps economic, chaos.

One hundred fifty-five members of Congress who voted for the Consolidated Appropriations Act and the preemption of state law are still serving and are up for election next week. Twenty-two senators who stood by as the bill passed by unanimous consent are also up for election Tuesday.

Details are in a WashingtonWatch.com blog post entitled “Did Your Representative Cause the Financial Crisis?

Many gambling laws are nanny-statism, of course, but if they’re going to go away, they should be repealed by the legislatures that wrote them. This federal preemption gave special permission to certain parts of the financial services industry to run a huge gambling operation masquerading as a market in real assets.

All this is a good illustration of why it’s harmful for Congress to let the annual budgeting and spending process go off the rails. Maybe voters will hold some of their representatives accountable.

Sen. Harry Reid’s Pork Park

When the weight of big government has me worn down at day’s end I occasionally look at a few politician photo-ops to keep me motivated.  A good source is the Department of Commerce’s Economic Development Administration (EDA): (See here.)

The latest EDA photo-op shows Sen. Harry Reid presenting a goofy oversized check from the U.S. Treasury (i.e., taxpayers) to some of his Nevada constituents to help build a technology park to be named after (drum roll please)…Sen. Harry Reid.

The arrogance is breathtaking, until one remembers that we’re talking about a man who earns his living spending other people’s money (largely against their will).  The picture also illustrates why it is difficult to get rid of even the most obvious losers in the federal budget.

The EDA provides grants and loans to state and local governments, nonprofit groups, and private businesses in regions under “economic distress.”  It was born in the 1960s and has survived several attempts to kill it, including efforts by the Reagan administration and congressional Republicans in the 1990s.  The EDA’s wasteful spending is legendary and it is notorious for exaggerating its successes, which have often proved to be illusory.  (A perfect example of an EDA boondoggle can be viewed here.)

Unfortunately, the EDA survives for a common reason: the agency’s benefits are concentrated on special interests and its costs dispersed across millions of taxpayers. EDA administrators are aware of this reality and cultivate support from Congress by including politicians in the publicizing of money given to constituents. Press releases are coordinated with congressional offices to maximize political gain for both the EDA and the benefiting legislator.

It is little wonder that former EDA director Orson Swindle labeled the agency a “congressional cookie jar.” He realized that private actors in unfettered markets, not government bureaucrats, are better at fostering economic development. Swindle said, “The minute politics enters the equation, rational financial management and economic decision-making goes out the window.”

Getting back to Sen. Reid, yes, I know I’m singling him out for tawdry behavior routinely engaged in by most of his colleagues.  But don’t feel too sorry for him. In February, the Nevada Biotechnology & Bioscience Consortium gave its first ever “Harry Reid Award for Biotechnology and Bioscience Achievements” to (one more drum roll please)…Sen. Harry Reid!

A New Blog on Free Speech and the Media

This is the time of the season for being fed up with politics and not least, of course, with the presidential election. (Actually, I reached that point a while ago). Part of my frustration comes from the candidates who appear willing to say anything, no matter how unrealistic, to win the White House. But part of my frustration lies also with the media who don’t hold the candidates to any standards that might inform voters who care enough to read and listen. This is all the more so since we are experiencing a financial crisis that elicits nothing more from the candidates than a promise “to fix the economy,” whatever that might mean. Shouldn’t the media demand more on our behalf?

Writing for a new blog from The Media Institute, Patrick Maines helps makes sense of my frustration. He points out that the media are following their practice of covering the financial crisis (and the presidential election) like a horse race. Yes, the crisis is helping Obama, but is that the most important thing to know right now? Maines writes:

The stark fact is that the national news media have underreported and misreported virtually every important aspect of our national nightmare: how we got into it, how we can prevent it from happening again, and, most importantly, how we can escape its worst effects now – and how our national leaders can help us.

Maines’ criticism is apt and convincing. The Media Institute, the home of the blog, works on free speech issues and receives substantial support from media companies. Of course, free speech does not necessarily mean good or even useful speech. But the answer to such shortcomings is more speech as Maines proves in his post.

I am intrigued that Maines criticizes the media, a pretty independent stance when you think about it. This blog bears watching as we head into a new administration that seems likely to offer many challenges to freedom of speech.

Terrorism and Elections

With elections a week off, should we be especially worried about an Al Qaeda attack? Writing last week in Slate, Brookings’ Daniel Benjamin says yes, following in the footsteps of other terrorism experts. They could be right, but they have almost no evidence. Like the others, Benjamin supports his claim with a handful of past examples of Al Qaeda attacks that occurred around election time. But if Al Qaeda attacks occur when they are most convenient for the attackers, they will be randomly distributed throughout the year, meaning that a certain percentage, which will head toward 1/12 as years go by, will fall in the month before elections. Citing a few attacks that occured around election time is evidence of nothing.

What about specific attacks? Do they reveal qualitative evidence for the hypothesis that Al Qaeda tries to sway elections, such as attackers saying that this was their goal? Short answer: no. The only Al Qaeda attack that remotely fits this billing, and the one that all the experts cite, is the Madrid train bombings in 2004.

The attack came 72 hours before Spain’s general elections. When the Popular Party, led by José María Aznar, made a clumsy attempt to blame the ETA, a Basque separatist terrorist organization, the Spanish elected the Socialists, who then pulled troops from Iraq. Because the terrorists evidently influenced the election, pundits tend to assume that this was their aim.  But evidence for this assumption is almost nonexistent. The main data point is that some plotters may have read a tract on a website saying to attack around election time. That’s about it.

What’s more, the plot was only an Al Qaeda attack in spirit. So far as we know from public sources, there was not central planning from the remnants of Al Qaeda in Pakistan or elsewhere. The perpetrators organized locally. Even if they meant to swing the election, their tenuous connection to other groups makes it hard to form conclusions about the movement as a whole.

Some might say that what matters about the Madrid attack is the lesson that other terrorists drew from it. The apparent success in influencing the election might provoke imitation. Maybe so. But there is scant indication that imitation has occurred.

Terrorist plots, especially those that occur in countries foreign to the plotters, are tough to pull off. They require considerable organization. Police and intelligence agencies are hunting jihadist groups. They are likely to organize attacks to maximize the odds of success rather than to fit US election cycles.

In general, we should be wary of analysis that talks about Al Qaeda as a unified entity. Al Qaeda is a loosely connected network of small organizations and groups of guys. Assigning overarching preferences or goals to them can be analytically useful, just as talking about a country as a unified actor can be. But this kind of theorizing exaggerates terrorist unity. Psychology tells us that we tend to see patterns in random events – causality, order and centralization where none is. We overtheorize, experts in particular. They deserve skepticism.

Palin, Disabled Kids, and Federal Policy

Last Friday, Republican vice-presidential nominee Sarah Palin offered a federal policy prescription for disabled students: more choice for parents, tens of billions of new spending on the Individuals with Disabilities Education Act (IDEA), and some unspecified “reforming and refocusing.”

The Constitution affords the federal government no authority to determine how children are educated, apart from ensuring equal protection of the laws.  A political party that accepted the limited, enumerated powers accorded to the federal government by the Constitution would not have a legislative agenda on this subject, other than rolling back unconstitutional laws already on the books. But, given that no such party exists at present, let’s consider this proposal.

McCain/Palin want to tie existing federal IDEA funding to individual students rather than to the districts that currently serve them, so that parents could take the money to a private school of their choice. Ideally, according to Palin, they’d want the state funding to follow the children, too (as in Florida’s McKay voucher program for disabled students), but it seems they would leave that decision up to the states. This is a better idea than any alternative IDEA reform offered in the past few decades.

The idea of “fully funding” IDEA is, however, one of the worst ideas of the past few decades. There are two problems with IDEA. First, it is not clear how much it helps disabled children. Studies of student performance before and after they enter IDEA programs show little if any benefit. Second, the law has led to a wholesale labeling of perfectly healthy children as “disabled” simply because the public school system has failed to teach them how to read.

Today, just under 3 million American kids are classified as suffering from “Specific Learning Disabilities,” a condition defined in law as reading performance below the level expected for a child of the given age and intelligence.  An obvious deficiency in this definition is that it encompasses children who have not been properly taught to read, and have not managed to pick up the skill on their own. Many public school systems, thanks to their infatuation with ”whole language” instruction and their resistance to structured synthetic phonics, have difficulty teaching many non-disabled children to read. These 3 million “SLD” children represent more than 40 percent of the entire population of students classified as disabled under the IDEA.

Fully funding IDEA without first addressing its recipe for rampant overdiagnosis will likely make this problem much, much worse.

A real solution would be the spread of large-scale school choice programs at the state level, which would allow all families to easily choose a public or private school for their children. As more families migrated to the private sector, and all schools were forced to compete, ineffective reading instruction methods would be discarded as competitive liabilities, saving millions of children from being exposed to them.