What Could Possibly Be Better than “Public Policy Values?”

Last week, the New America Foundation’s Sara Mead took issue with a blog entry I wrote wondering how her group could tout student loan auctions because they use “market forces” while simultaneously advocating for “the gargantuan market distortion that is the overall student aid system.” Mead replied with a “there you libertarians go again” argument, writing that Cato:

holds that unrestrained markets always produce the best possible outcomes. But McCluskey is confusing means and ends here. Harnessing market forces is often the most efficient way of getting to a particular end. But we believe that public policy should use market forces to achieve desirable ends based on public policy values.

Now, let’s not get bogged down in some very important questions like who defines “desirable ends,” or what, exactly, “public policy values” are. No, let’s get right to a bottom line with which it seems Mead and I might be able to agree.

Toward the end of her argument, Mead says that it is important to “increase college affordability and access…because among other reasons, a better educated population produces broader social benefits—more civic engagement, innovation, economic growth, etc.” I agree with at least part of this. Economic growth is a good goal to shoot for, because it tends to reflect both the innovation Mead values, and an increasingly efficient and effective allocation of societal resources.

So it turns out a funny thing happens when the market is subverted to spend more money on higher education: It actually hinders economic growth. As economist Richard Vedder found in Going Broke By Degree: Why College Costs Too Much, controlling for other factors impacting economic growth, the more states invest in higher education, the lower their rates of economic growth. That’s right: letting “public policy values” force money out of taxpayers’ pockets and into colleges and universities actually has a dampening effect on economic growth.

Why is this? Because if left alone, individual taxpayers will produce better results in the aggregate than government can. Individuals know what they want and need better than any government, and even more importantly, in a truly free market they have to balance their needs and desires against those of all the other people in society, resulting in the fairest, most efficient, aggregate outcome. Not so with government, where politicians can’t possibly divine and balance the needs of everyone in our impossibly complex society, and the people with the most lobbying power often get what they want specifically because they don’t have to balance their needs against everyone else’s.

In the case of higher education, this plays itself out with relatively well-off students often getting aid; students spending large amounts of time partying rather than focusing on graduation; professors devoting much of their time to esoteric, often government-funded research instead of teaching; and universities using resources very inefficiently. Meanwhile, taxpayers are doing without money they might have used to buy food, or invest in innovative young companies, or any number of other uses that would have been much more beneficial to society, but which politicians ignore because – unlike kids taking subsidized loans or bigger Pell Grants – their absence is invisible.

Thankfully, sometimes there are crystal-clear signs of government failure. Case in point: all those lenders – especially the federally created Sallie Mae  – that Mead and others despise for making billions of dollars off of student loans. How’d they do it? Not through “unrestrained markets,” but government-subsidized loan programs designed to circumvent market forces in pursuit of – you guessed it – “public policy values.”

Obama’s “Tax Policy”

Presidential candidate Barack Obama introduced his tax plan in a speech yesterday. Unfortunately, it overflowed with bad ideas. First, Obama’s plan to increase dividend and capital gains taxes is out of step with global tax realities. Virtually all of the 30 major industrial nations provide relief for capital gains and dividend taxes. Indeed, a dozen major nations have capital gains tax rates of zero percent. And if the current dividend tax cut expires, the United States would have the highest dividend tax rate among major nations.

Second, Obama hasn’t got his math right. He claims that there is “$1 trillion worth of loopholes in the corporate tax code.” That is ridiculous. The entire corporate income tax collected only $372 billion in 2007.

Third, Obama proposed special tax breaks for seniors, which would take 7 million more elderly completely off the tax rolls. But that would inject a very unfair element of age discrimination into the tax code. Old folks are already taking young folks to the cleaners in terms of federal fiscal policy. Obama would make the injustice worse, yet he had the chutzpah to claim in his tax speech: “It’s time to stand up to the special interest carve outs.”

Fourth, Obama proposed a new payroll tax credit, but the tax code already has a huge program designed to offset the payroll tax—the Earned Income Tax Credit. Adding a new low-income tax “cut” on top would result in millions of people who already don’t pay any income tax getting an added $500 check from the government. That’s not tax policy, that’s simply looting from the people who do pay the federal tax bill.

I’m amazed Obama found two former Treasury officials who signed on to his plan because this isn’t tax policy in the sense of following any rational economic principles. It’s just crass political pandering using the tax code to bait votes.

Refereeing the Cheney-Greenspan Debate

In today’s Wall Street Journal, Vice President Cheney presents a friendly rejoinder to Alan Greenspan’s recent comments about the fiscal profligacy of the George W. Bush years. In it, Cheney notes:

On the spending side of the ledger, I can’t dispute Alan’s general notion that the federal government is too big and spends too much money–we’ve agreed on that point since we both worked in the Ford administration more than 30 years ago. President Bush feels the same way, and that’s why he has steadily reduced the annual rate of growth in non-security discretionary spending.

The key here is to notice that Cheney is only referring to “non-security discretionary spending.” What Cheney wrote isn’t necessarily wrong. But to make it true, you need to ignore all spending on entitlements (like Medicare and Social Security), everything the Pentagon does, and interest payments on the national debt.

What you’re left with is a very small slice of the budget. About 13%, actually. Asking Greenspan to grade the president using only this very narrow criterion is like asking your college to re-compute your graduation-day GPA using only four of the classes you took.

Why ignore the rest of the budget? After all, the Bush administration did have a hand in expanding many parts of it – the Medicare drug benefit is Exhibit A. Nor is everything the Pentagon does related to the operations in Iraq and Afghanistan. And the rising costs of the national debt are a result of the GOP’s unwillingness to cut spending in the face of deficits.

So, what if we put everything back into the mix except the money spent on the Department of Homeland Security, the security-related functions of other federal agencies, and the operations in Iraq and Afghanistan? (The last of these has been estimated by the Congressional Budget Office as recently as January of this year.)

Doing that, you’ll notice the growth rate has not declined steadily. In fact, as you can see in the chart below, the rate has jumped all over the place. It never went below 3% and, thanks to election-year spending sprees, sometimes went as high as 9%. The average annual growth rate since 2001 was 5.8% – faster than the average annual growth of GDP during that period (4.5%) and almost twice inflation (3%).

Looks to me like Alan Greenspan is on the right side of this fight.

Canadian MP “Thinks Very Highly” of Medicare, Goes to U.S. for Surgery

According to CTV.ca:

Liberal MP Belinda Stronach, who is battling breast cancer, travelled to California last June for an operation that was recommended as part of her treatment, says a report.

Stronach’s spokesman, Greg MacEachern, told the Toronto Star that the MP for Newmarket-Aurora had a “later-stage” operation in the U.S. after a Toronto doctor referred her.

“Belinda had one of her later-stage operations in California, after referral from her personal physicians in Toronto. Prior to this, Belinda had surgery and treatment in Toronto, and continues to receive follow-up treatment there,” said MacEachern.

He said speed was not the reason why she went to California.

Instead, MacEachern said the decision was made because the U.S. hospital was the best place to have it done due to the type of surgery required…

Stronach, who announced last April she would be leaving politics before the next election, paid for the surgery in the U.S., reports the Star

While it is rare for MPs to seek treatment outside Canada, MacEachern said Stronach was not lacking confidence in the system.

“In fact, Belinda thinks very highly of the Canadian health-care system, and uses it when needed for herself and her children, as do all Canadians…” MacEachern told the Star.

Not exactly a ringing endorsement of Canada’s Medicare system.

Best of luck to Ms. Stronach and her family.

H.T. David Hyman.

Senate Now Debating the Manner in Which to Fleece You

After a disastrous result in the House of Representatives, the farm bill debate has moved on to the Senate, where the main conflict is about how to provide assistance to farmers. Senator Max Baucus (D, MT), who sits on the Agriculture Committe but also holds the purse strings as Chairman of the Senate Finance Committee, favors a permanent weather-related disaster relief fund alongside more “traditional” farm subsidies. The Chairman of the Senate Agriculture Committee, Tom Harkin (D, IA) prefers government subsidies based on farm revenue rather than commodity prices, and more spending on “renewable fuels” and conservation of farmlands.

Sen. Harkin wants about $10 billion dollars over the amount currently slated for farm programs to pay for his pet projects, but Sen. Baucus has made it clear that if Sen. Harkin wants more money, then he has to dance somewhat to Mr. Baucus’ tune. Sen. Harkin has in recent days appeared more open to a “modest” permanent disaster-assistance program if it means he gets his money (see here). Something tells me that Sen. Harkin’s definition of “modest” might be different to mine. Nor am I convinced that a permanent disaster relief trust fund would prevent Congress from approving extra disaster funds along the way.

The administration has issued a veto threat, but on ominous grounds. For example, the administration does not like the tax package that the House approved to pay for extra money for food stamps and sees the House income cap of $1 million dollars annual adjusted gross income as an insufficiently tight means test. As well they might, because it would affect only 7,000 farmers.

The veto threat is ominous because (a) it is based on things that are minimal and easily fixed relative to the entire package itself and (b) President Bush passed the similar 2002 farm bill without too much wailing and gnashing of teeth. At no point has the administration seriously questioned the rationale for these programs. While the President may have little to lose this time by vetoing the thing, Secretary of Agriculture Mike Johanns is reportedly seeking the Senate seat vacated by Sen. Chuck Hagel in Nebraska in 2008. Secretary Johanns has pushed strongly for reforms of farm programs until now, but presumably he would not want to campaign after being behind a farm bill veto.

Here’s an idea: instead of spreading the love around to more farmers (like the $1.6 billion in extra spending for fruit and vegetable growers who have traditionally missed out on largess), tinkering with the income limit and changing the method by which we give money to farmers, how about we scrap the whole thing altogether? See here and here for starters.

Chutzpah

Former Massachusetts governor Mitt Romney has denounced Hillary Clinton’s health care plan for being a European-style socialized medicine plan” of “government managed insurance.”

Hmmmm…. HillaryCare 2.0 calls for an individual mandate to purchase health insurance, a collectivized insurance pool, huge subsidies for low- and middle-income families, and new regulation of the insurance industry. Why, that sounds like…the plan Governor Romney signed into law in Massachusetts.

Fred Thompson’s Questionable Views on U.S.-China Trade

Fred Thompson’s relatively late entry into the presidential race has left people scrambling to discern his views on a range of topics from social issues to trade with China. I’ll leave it to others of probe his position on the former, but I came across something this week on the latter that is not encouraging for those of us who support free trade.

Two years ago, the former Tennessee senator was one of 11 commissioners to approve and sign the “2005 Report to Congress of the U.S.-China Economic and Security Review Commission.” The commission was established by Congress in 2000 to hold hearings and write reports on the implications of America’s growing trade with China.

Americans are right to cast a sober eye toward China’s foreign policy intentions and human rights record, but the commission also dabbles in the worst sort of economic populism toward U.S.-China trade. Among the questionable assertions in its 2005 report:

China’s “active participation in the global economy … is resulting in the movement of jobs, especially manufacturing jobs but increasingly service jobs as well, from the United States to China and other countries offering higher rates of return on capital” (p.3).

“U.S. producers of advanced technology products are also subject to the growing pressures posed by China. In 2004, the U.S. trade deficit in advanced technology products with China grew to $36.3 billion” (p. 4).

“The opening of the Chinese, Indian, and former Soviet bloc economies has led to more than a doubling of the global market’s work force and likely will put downward pressure on U.S. wages for workers at all levels, including higher levels of the wage scale. Mobile capital and technology flows accelerate this trend” (p. 5).

“Congress should consider imposing an immediate, across-the-board tariff on China’s imports at the level determined necessary to gain prompt action by China to strengthen significantly the value of the RMB [its currency]. The United States can justify such an action under WTO Article XXI, which allows members to take necessary actions to protect their national security. China’s undervalued currency has contributed to a loss of U.S. manufacturing, which is a national security concern for the United States” (p. 14).

Cato’s Center for Trade Policy Studies has systematically addressed economic concerns about U.S.-China trade at our web site, but here’s the crib sheet:

U.S. job losses from trade with China have been small and have been more than offset by jobs created in sectors that do not compete directly with China. The U.S. economy has added a net 16.5 million jobs in the past decade of expanding trade and the national unemployment rate is a low 4.6 percent.

Trade with China and other emerging economies has helped to boost living standards in the United States by reducing prices for consumer goods that make our lives better everyday. Average real hourly compensation (wages and benefits) paid to American workers is up 22 percent in the past decade. Tariffs on imports from China would reduce the well being of tens of millions of American households.

Real manufacturing output in the United States is up 31 percent compared to a decade ago. As my colleague Dan Ikenson shows in a new study for Cato, U.S. manufacturers enjoyed record output, sales, profits, and returns on investment in 2006. The “advanced technology products” that the commission worries about are overwhelmingly laptop computers and other consumer electronics. A WTO panel would rightly laugh at the claim that imports from China have somehow endangered America’s “national security.”

Which brings us back to Fred Thompson. Does he really believe the many questionable assertions in the 2005 report of the U.S.-China Economic and Security Review Commission that he approved? Or was he not really paying much attention? Or has he revised his views since 2005? An enterprising economics and business reporter should ask him.