Expensive, Dangerous, and Unnecessary

On Friday, Washington Post business columnist Steve Pearlstein made a great case against the $825 billion “stimulus” monstrosity starting to take shape in the hallowed hallways of Congress.  I’ll sample some of the good stuff:

Great news! We’re going to lose only another 2 million jobs! And it will cost the average American household only $6,000.

The basic problem is that over the past several years, the U.S. economy over-expanded in response to a surge in debt-financed spending by American households and government.

The current recession is the process by which a market economy adjusts to that reality, which in this case could involve shrinking capacity in many sectors by 10 percent or more. And while that adjustment will be brutal, it is necessary to get to the point where supply and demand get back into balance so that the economy can begin to grow again in a healthy and sustainable way. To try to stop that process and return things to the way they were would amount to nothing more than reinflating the bubble economy.

Unfortunately, he concludes:

What government can do, however, is try to manage the process so that it doesn’t spin out of control, as it probably would, and turn a recession into something deeper and longer. That’s what the stimulus is about.

Steve, you had me at hello!  You’re telling me that the same gang of enlightened elected officials who fostered this economic downturn with their profligate spending, perverse incentives, and politicized subsidies are to be tasked with fixing the mess with an extra few hundred billion taxpayer dollars?

He proceeds to rhetorically ask “What is the optimal level of stimulus?” and admits that “In truth, nobody really knows.”

Nobody really knows, yet the continuance of bailout mania is the prudent course?  At this point in the game Congress is acting as if it’s playing roulette with other people’s money.  Oh wait, it is.

Time to Conjure Up the Ghost of Harold McGugin

As federal policymakers trip over each other to launch “New Deal II,” I thought I’d share a poignant statement delivered by an obscure Kansas congressman on the House floor in 1932.  Congressman Harold McGugin’s career apparently didn’t last too long, and there’s little information on the internet about him.  So, should some knowledgeable historian report that the man didn’t like kittens or kept the neighborhood kids’ baseballs when they strayed into his yard, please forgive me.  Regardless, I’d like to see more statements like this on the House floor during these heady days of “stimulus.”

I do not believe the obligation is upon the Congress of the United States to solve the financial, social, and economic problems of the individual citizens of this country.  The Federal Government was not framed for that purpose…We cannot escape the proposition that every time we appropriate money out of the Public Treasury to solve our troubles, whether they be troubles of the plug hats or of the humble people, we are following socialism.  Marxism is sweeping this country, and nowhere it it finding greater hold than in this particular Congress…I know not of a single emergency measure that is not founded upon the proposition of milking the Public Treasury.

My emphasis added.

Ways and Means to Subvert Foreign Policy

President-elect Obama has emphasized his intention to focus on restoring America’s squandered credibility with the rest of the world. He might want to reinforce that message for Congress or begin the process of distancing himself from its leadership because, like it or not, trade policy is a tool of foreign policy, and Congress isn’t looking very diplomatic about trade.

Yesterday, House Ways and Means Committee chairman Charles Rangel and Subcommittee on Trade chairman Sander Levin introduced the Trade Enforcement Act of 2009. Among the legislation’s provisions:

  • It would make it easier for domestic industry to obtain trade restrictions in antidumping and China-specific safeguard cases.
  • It impugns and defies World Trade Organization dispute settlement decisions.
  • It compels the Commerce Department to reverse its implementation of a WTO decision last year on the issue of “zeroing.” 
  • It establishes an Office of the Congressional Trade Enforcer to investigate foreign barriers to U.S. exports and to systematically develop complaints to file with the WTO, among other provisions.

Clearly, the United States is well within its rights to bring cases against its trade partners to the WTO. And generally, if U.S. exporters are facing market barriers that our trade partners committed to dismantle, then I support efforts to seek redress. But it is a bit condescending — indeed it whiffs Rumsfeldian — to so publically berate a WTO decision and question its authority (the official language in the legislation actually includes a several-hundred word diatribe against the WTO Appellate Body’s decision) in the same bill that presumes that our trade partners will heed the WTO’s verdicts. That is the kind of exceptionalism and arrogance for which the president-elect is hoping to make reparations.

It remains to be seen what becomes of this legislation or even if there will be a noticeable uptick in U.S. protectionism. But Congress’s increasingly unilateralist instincts on trade and its willingness to humiliate important trade and security partners in Colombia and South Korea by not considering long-pending trade agreements will definitely complicate Obama’s international fence-mending efforts.

President Obama and the D.C. Schools

For the third time in 30 years, a president has to decide where to send his school-age children after moving to Washington, D.C. And having school-age children naturally gives any new president a particular interest in the D.C. public schools. A big headline in today’s Washington Post (actual paper copy) proclaims, “Obama Interested in D.C. Schools.” In an interview with the Post, President-elect Obama said he was determined to be part of the local community and that

he and his wife had specifically discussed working with the D.C. public schools, using their own celebrity and success “as leverage to get kids and parents and teachers excited about the possibilities of an education.” He said he was “trying to think about regular visits to local schools to meet with kids and meet with teachers and principals” and reiterated his desire to open up the White House “in ways that haven’t been done before.”

At a policy level, he said that he had met D.C. Schools Chancellor Michelle A. Rhee but had not spent much time with her and that he expects his incoming Education Department secretary, Arne Duncan, to be “interested in how the school experiment here goes.”

But the next sentence acknowledges that

Obama’s two daughters are attending the private Sidwell Friends School.

So he’d like to make regular visits to the D.C. public schools, but he ain’t sending his own kids there. Which is perfectly understandable. Neither did Bill and Hillary Clinton. Or Al Gore. Or Vice President-elect Biden’s son. Indeed all their children attend or did attend Sidwell friends. The Carters sent Amy to D.C. public schools, but that was the last time a president did so. The Obamas don’t seem to have considered public schools. They’re sending Malia and Sasha to Sidwell, a school of choice for the Washington elite.

Of course, the Obamas also sent their daughters to private school in Chicago. What’s most striking to me in all of this is that Obama has named Chicago school superintendent Arne Duncan to oversee the nation’s schools, even though in seven years he wasn’t able to produce a school in Chicago that Barack and Michelle Obama would send their own children to. “What he did for Chicago, he can do for America”?

Perhaps Obama and Tim Geithner believe that taxes and public schools are for the little people. And it would be nice if they’d give the little people a break on their taxes and a choice of schools.

Higher Ed Spendapalooza

When word first started leaking out about the upcoming “stimulus package” — not Bush’s little TARP, mind you, but the $825 billion doozy unveiled by congressional Democrats yesterday — it was clear that k-12 education would be in store for some serious cash. Well, that didn’t sit well with the higher education community, which complained — I mean, suggested in the interest of the common good — that giving it billions and billions of federal dollars is also crucial for stimulating the economy. It appears they’ve been heard: the proposed American Recovery and Reinvestment Bill of 2009 would furnish a windfall for all of education, blowing more than $100 billion on everything from university-based research to “teacher technology training.”

Now, don’t worry — I’ll be focusing a lot more on k-12 in the coming weeks. I wanted to attack one notion, however, right off the bat, especially since we held a forum that addressed it just two days ago: that higher education somehow needs increased government support.

Let’s start by confronting the constant and, one can’t help but conclude, deliberately misleading assertion that higher education has been the victim of ruthless public funding cuts that have forced costs onto “the backs of students.” As I made clear on Wednesday (watch the streaming video of the forum and/or download my slide show for details) the inflation-adjusted trend for total state and local higher education spending has been hugely upward over the last 25 years, and on a per-pupil basis has remained essentially constant. At the same time, net per-pupil public college revenue coming through tuition has gone consistently up, rising much faster than would have been needed to make up for any “lost” state and local funding. If you isolate four or five-year stretches — as the Delta Cost Project, for instance, has just done — you could say that tuition has increased just to keep revenue stable. If you check out the long-term trend, however, you absolutely cannot conclude that.

Which brings us to the second big public expenditure for the ivory tower: student aid. When college prices go up, the taxpaying public largely absorbs the blow. Between 1982 and 2007, total inflation-adjusted federal and state aid, including grants, loans, work-study expenditures, and education tax benefits, rose from $30.8 billion to $103.9 billion (Table 1). On a per-pupil basis, real grant aid (including, importantly, both institutional and federal and state aid) grew from $1,939 to $4,965, and federal loan aid rose from $1,562 to $4,841 (Table 3). Both amounts grew faster than the price of tuition, fees, room and board at public and private four-year colleges (Table 5).

So let’s be clear: The public has been paying out the nose for higher education. Indeed, all of this public largesse is a major reason — though not the only one — that the United States leads the rest of the industrialized world hands-down on tertiary education spending (Table B1.1a). And, as you’ll see on my slide show from Wednesday’s forum, it’s not like the money has translated into smarter grads. Quite the opposite: It seems largely to have enabled our college students to live higher on the hog while greatly depreciating the meaning of “a college degree.”  

Oh, and there’s one more thing: A common complaint about higher education is that professors care more about research than students. Well, don’t tell that to the stimulators, who want to “put scientists to work” by spending billions more on university-based research. Sure, inflation-adjusted federal expenditures on research at academic institutions rose from $13.9 billion in 1980 to $31.4 billion in 2006, and the unemployment rate for scientists and engineers hit an all-time low of 2.5 percent in 2006 (the latest year with available numbers), but we obviously need a lot more government–funded science projects.

Now, maybe blanketing college campuses with another several feet of taxpayer cash would be worthwhile if doing so really would produce economic growth, but here’s the thing: there is no conclusive evidence suggesting that it would. Indeed, as I noted during Wednesday’s forum, when Prof. Richard Vedder attempted to determine the effect of higher education spending on state economic growth, he found a negative impact. Why? Because if they could keep their hard-earned money, taxpayers would spend it more wisely and efficiently than will politicians, students, and academics who get it, essentially, for free.

Maybe think of it this way: Would you trust a wealthy man who keeps crying poverty so that you’ll give him more money and he can get richer? Of course not: He’s a swindler, for crying out loud!  Well guess what? That rich man really exists: He lives in a great big ivory tower, and he’s about to come into a whole lot more of your hard-earned dough.

Tips for Blocking Socialized Medicine

Prominent health economist Victor Fuchs has an article in this week’s New England Journal of Medicine that all who care about freedom and health care reform should read.  He discusses the array of forces that could be — and in my view, should be — employed to stop health care reform this year:

First, many organizations and individuals prefer the status quo. This category includes health insurance companies; manufacturers of drugs, medical devices, and medical equipment; companies that employ mostly young, healthy workers and therefore have lower health care costs than they would if required to help subsidize care for the poor and the sick; high-income employees, whose health insurance is heavily subsidized through a tax exemption for the portion of their compensation spent on health insurance; business leaders and others who are ideologically opposed to a larger role of government; highly paid physicians in some surgical and medical specialties; and workers who mistakenly believe that their employment-based insurance is a gift from their employer rather than an offset to their potential take-home pay. These individuals and organizations do not account for a majority of voters, but they probably have disproportionate influence on public policy, especially when their task is simply to block change.

Second, as Niccoló Machiavelli presciently wrote in 1513, “There is nothing more difficult to manage, more dubious to accomplish, nor more doubtful of success … than to initiate a new order of things. The reformer has enemies in all those who profit from the old order and only lukewarm defenders in all those who would profit from the new order.” This keenly observed dynamic, known as the “Law of Reform,” suggests that a determined and concentrated minority fighting to preserve the status quo has a considerable advantage over a more diffuse majority who favor reform but have varying degrees of willingness to fight for a promised but uncertain benefit.

Third, our country’s political system renders Machiavelli’s Law of Reform particularly relevant in the United States, where many potential “choke points” offer opportunities to stifle change. The problem starts in the primary elections in so-called safe congressional districts, where special-interest money can exert a great deal of influence because of low voter turnout. The fact that Congress has two houses increases the difficulty of passing complex legislation, especially when several committees may claim jurisdiction over portions of a bill. Also, a supermajority of 60% may be needed to force a vote in the filibuster-prone Senate.

Fourth, reformers have failed to unite behind a single approach. Disagreement among reformers has been a major obstacle to substantial reform since early in the last century. According to historian Daniel Hirshfield, “Some saw health insurance primarily as an educational and public health measure, while others argued that it was an economic device to precipitate a needed reorganization of medical practice… . Some saw it as a device to save money for all concerned, while others felt sure that it would increase expenditures significantly.” These differences in objectives persist to this day.

That last item speaks to a divide among left-leaning health care reformers that was discussed by Drew Altman in a column at the Kaiser Family Foundation web site:

We could be headed for a new schism in the debate about health reform. Not the familiar gulf between advocates of the market and government, or the predictable one between deficit hawks and spenders, but a new one that crosses traditional partisan and ideological lines between advocates of long-term reform of the health care delivery system, and immediate help for the uninsured and insured struggling with health care costs.  This new rift is most likely to develop if tight money and a crowded agenda force the focus to shift from comprehensive to incremental reform and choices need to be made about what goes into a smaller, cheaper legislative package. It’s a rift that could stand in the way of progress on health reform if care is not taken to avoid it.

For one group, I will call them the “Delivery System Reformers,” true health reform lies in making the actual delivery of care more cost effective over the long term. Delivery System Reformers champion health IT, comparative effectiveness research, practice guidelines, and payment incentives to encourage more cost-effective care such as pay for performance … . Indeed some delivery reformers believe it would be a mistake to put more money into the current system through expanded coverage until more fundamental changes in the system are made.

The other group, I will call them the “Financing Reformers,” is focused on an entirely different set of problems. Its major concern is the problem of the 46 million Americans without health insurance coverage and the serious problems all Americans are having today paying for health care and health insurance … .

The health reform field is like a Venn diagram with circles that intersect (though not by a lot).

As an example of those conflicting priorities, Fuchs himself writes, “If the current health care reform initiative is limited to questions of coverage, without serious attention to cost control and coordination of care, the ‘crisis’ in health care will continue to plague us for years to come.”  (Almost sounds like something a member of the Anti-Universal Coverage Club would say.)  I would add that conflicts between delivery-system reforms and financing reforms (e.g., covering the uninsured) only arise when dealing with command-and-control approaches to reform.

Neither Fuchs nor Altman intended their articles to be used as a guide to block health care reform.  But since Messrs. Obama, Baucus, Daschle, and Wyden have already given us a fairly clear picture of the shape their proposed reforms will take, free-market advocates should scour both articles in their entirety for useful tips on how to beat back the next great leap toward socialized medicine.