Rebate Folly

I was exploring some old CBO reports for information on dynamic budget scoring and I came across this nugget:

If a tax cut—such as a rebate or a higher standard deduction—does not reduce the tax on income from an extra hour of work, the additional income will create an incentive for people to cut back their working hours and spend more time at home. Not everyone will respond, but some people (especially second workers in a family with one full-time earner) may decide to leave the labor force to care for children or aging parents or to pursue other interests.

(Supplement to CBO’s May 9, 2002, Testimony on Federal Budget Estimating May 2002 CONGRESSIONAL BUDGET OFFICE, page 9)

We are about to receive a rebate in May this year as part of the economic stimulus that Congress passed in February. I suppose the folks at the CBO would have pointed out that although a rebate may stimulate consumer spending, it is also likely to reduce labor supply. The net impact, therefore, would not necessarily involve any increase in national output but it would certainly induce stronger inflationary pressures—adding fuel to the inflationary fire the Fed’s apparently stoking by cutting interest rates so rapidly. So it’s perhaps not surprising that the dollar’s value took a nosedive during February this year.

Higher rebate-induced debt and higher inflation implies higher future interest rates and, therefore, increased cost of financing consumer and investment spending. Rebate recipients will benefit today, but everyone will lose in the long-term as the economy becomes more sluggish.

Bottom line: Politicians gain by appearing to be doing something – and most of us lose!

A Nation at Risk

Cato Unbound is right now hosting a discussion about the legacy of A Nation at Risk, the report that 25 years ago this month famously warned that a “rising tide of mediocrity” in American education was threatening “our very future as a Nation and a people.” The report also, by the way, was invaluable in setting the political stage for the subject of a Cato forum to be held tomorrow, “Markets vs. Standards: Debating the Future of American Education.”

Richard Rothstein, a research associate at the Economic Policy Institute and a former New York Times education columnist, penned the lead Cato Unbound essay, which is responded to by FLOW CEO Michael Strong, Manhattan Institute Senior Fellow Sol Stern, and the American Enterprise Institute’s Frederick Hess. I encourage you to read all the essays, and just thought I’d throw in my two cents.

I should begin by saying that I think Rothstein is right on a couple of points.

First, I agree that A Nation at Risk started a flood of ill-considered railing that the United States was heading to economic irrelevance as a result of our education system. As Rothstein notes, this simple correlation—mediocre education equals nation of burger-servers, great education equals everyone a CEO—ignores myriad variables outside of education that influence economic success. Unfortunately, Rothstein identifies mainly bits of economic kryptonite as the real keys to economic success, especially beefing up protections for labor unions, but his basic point that education is far from the only force shaping the economy is a fair one.

Rothstein is also right to declare that the extent to which American education was in decline in the years leading up to ANAR was somewhat exaggerated, based mainly on a drop in SAT scores that could at least in part be attributed to wider ranges of kids taking the test. In contrast to the impression Rothstein gives, however, slumping SAT scores was far from the only evidence ANAR offered to back its assertion not that American schools were stuck in reverse, but in hopelessly mediocre neutral. ANAR offered a long list of indicators of educational woe, including poor American standing in international comparisons, functional illiteracy among adults, and numerous indicators that 17-year-olds—the final products of American education—were in very poor educational shape, a condition that remains today.

Clearly, stubborn mediocrity and decline are two different things, with the former perhaps a bit more tolerable than the latter. But stagnation is bad, and especially hurts because, as Michael Strong points out, not only have we gone nowhere, we’ve stood pat while hugely increasing education funding:

Richard Rothstein cites evidence that public schools have improved math scores at age 9 and 13, but not age 17. Thus whatever gains are being made in elementary and middle school are being lost in high school. Since 1973, K-12 educational expenditures have more than doubled; on a per-dollar basis, “investing” in public education now shows a thirty-five year trend of steadily decreasing returns.

So while Rothstein is probably right that ANAR—or, more accurately, many of the people reacting to it—somewhat overstated our educational decline, the report’s conclusion about immovable mediocrity is much harder to refute, and the dreadful return on investment undeniable.

One of the highest-profile movements focused on overcoming this seemingly permanent state of mediocrity is school choice, which at its most basic level would let parents choose where their children are educated and attach education money to the kids. Were this universally applied, our recalcitrant, regulation-strangled, special-interest-dominated public schooling system would be bypassed and schools would be forced to compete and innovate. In practice, however, choice has been implemented in very hamstrung forms: choice only among public schools, charter schools that must be approved by government and often remain shackled to rules and regulations, and voucher programs open only to relative handfuls of kids. As a result, choice has not come close to creating the real, innovation-driving, educational free market necessary to truly transform American schooling

In perhaps the most interesting wrinkle of the Cato Unbound debate, Hess offers what seems to be a not-so-veiled critique of co-respondent Sol Stern, whose recent City Journal piece pushing choice to the reform margins has caused a big stir in education policy circles. Hess appears to rebuke Stern for failing to consider all that is needed to get a real market up and running, a problem that bedevils school choice supporters and detractors alike:

[S]ome who were once enthusiastic proponents of “choice” have reversed course and expressed doubts about the viability of educational markets — without ever having stopped to consider all the ways in which simply promoting one-off choice programs falls desperately short of any serious effort to thoughtfully deregulate schooling or promote a coherent K-12 marketplace. Indeed, some have abandoned the choice bandwagon with the same ill-considered haste that marked their initial enthusiasm.

Hess is absolutely correct that for too long choice supporters have touted each and every little voucher or charter school proposal that’s come down the pike, and some have lost their choice enthusiasm when those little programs have produced little change. But the problem is not choice itself. The problem is that choice must be big to overcome well-nigh immovable American public schooling, and getting people to realize that is going to take a lot of time and, probably, a lot more failure.

Violence against Unions or Just Violence in General?

Yesterday in the Washington Post, AFL-CIO’s president John Sweeney rhetorically asked “How many murders are ‘acceptable’?” regarding the union killings that have been used as argument by Congressional Democrats to delay indefinitely a vote on the FTA with Colombia. “I can’t answer… with a number other than zero,” stated Sweeney.

That’s good posturing. Sweeney presents these killings—which have dropped by nearly 90 percent since President Alvaro Uribe took office—as a clear sign of violence against union activity in Colombia. However, the evidence shows otherwise.

In an op-ed last Friday in the Boston Globe, Edward Schumacher-Matos, a visiting professor for Latin American studies at Harvard University, writes that:

The number of convictions now being won in the union’s own cases reveals that perhaps one-fifth, and almost certainly less than half, of the killings had to do with unionism.

Of convictions won in 87 cases since the first one in 2001, almost all for murder, the ruling judges found that union activity was the motive in only 17, according to the attorney general’s office. The judges found 15 of the cases had to do with common crime, 10 with passion, and 13 with being guerrilla members [emphasis added. No motive was established in 16 of the cases.

The unions don’t dispute the judicial findings, and deep in their reports say that they, in fact, have no idea of suspect or motive in 79 percent of their cases going back to 1986. The killings, in other words, are isolated and not part of a campaign against unionizing.

As we can see, far from being a targeted campaign against union activity, the killings of union members in Colombia are mostly part of that country’s sad history of regular violence, which also affects teachers, politicians, journalists, etc.

It’s time to get the facts straight in this debate.

Attention Sen. McCain: Moderation in the Pursuit of Tax and Spending Cuts is No Virtue

Reporters are lighting up my voice mail and inbox with queries about what I make of Sen. John McCain’s call today for suspending SPR fill orders and the federal gasoline tax from Memorial Day to Labor Day in a bid to get gasoline prices down. Color me tepid.

Let’s take these issues one at a time. John McCain is absolutely correct to blame the SPR for helping to drive-up world crude oil prices. Oil economist Phil Verleger, for instance, thinks that federal fill orders for the SPR has driven up the price of crude by at least $10 a barrel and perhaps as much as $30. But why only temporarily stop the madness? Now’s a good time to dump the all federal inventories on the market and shut the SPR down once and for all. If we’re lucky, we’ll burst what may be an oil price bubble along the way and finally have something positive to show for the tens of billions of dollars of taxpayer funds that have been sunk into this white elephant.

The same goes for the federal gasoline tax. John McCain of all people should know that federal gasoline tax revenues are steroids for localized pork and special-interest subsidy. Road construction and maintenance (and the taxes that pay for them) should be turned back to state and local governments. A short-term moratorium on taxes, however, would probably have little impact on pump prices. If gasoline supplies are relatively fixed over the next several months (as I suspect they are), any service station that tried to pass the tax cut on to consumers would find demand increasing beyond where it otherwise would have been, and that increased demand would bid prices back up to where they were before federal taxes were cut. Over the long term, a cut in federal gasoline taxes would indeed reduce pump prices, but that’s not what John McCain is talking about here.

Sen. McCain is on the right track. But half-measures won’t accomplish much.

Supreme Court to Nation: Happy Tax Day!

In a fit of either highly coincidental timing or good humor, the Supreme Court today released opinions in two tax cases. In MeadWestvaco Corp. v. Illinois Department of Revenue, the Court limited the power of states to tax the money that a company based in another state earns when it sells off an investment in a division involved in a separate line of business. In U.S. v. Clintwood Elkhorn Mining Co., the Court decided that a taxpayer seeking a refund for an invalid tax under the Constitution’s Export Clause must seek a refund from the government before bringing a lawsuit.

So the taxpayers went 1-1 today, but the cases were both technical and not worth getting into. Perhaps the only interesting thing about them – aside from this whole Tax Day thing – is that they were both unanimous. This technicality and unanimity could be further evidence of Chief Justice Roberts trying to steer the Court to take on less high-profile (typically business) cases, with narrow issues that prevent the fractured 5-4 decision-making that make the Court seem more political than it really is (or should be).

At Least He’s Good on Trade

My colleagues Gene Healy and Justin Logan catalogue some of Sen. John McCain’s less admirable policies below, but at the risk of being the skunk at the dinner party, today I have released a paper arguing that John McCain’s trade policy position is much preferable to that of either of the Democratic candidates.

Over his career in the Senate, McCain has been a consistent free trader, voting against increases in trade barriers 88 percent of the time, and against subsidy increases 80 percent. Senators Clinton and Obama, on the other hand, have only managed 31 (Clinton) and 36 (Obama) on tariffs and 14 (Clinton) and zero (Obama) on subsidies. (For all congresscritters’ trade votes, see here).

To his credit, Senator McCain has also avoided the easy and politically tempting practice of railing against trade deals on the campaign trail, including in Michigan where the political prize probably required it. Both the Democratic candidates, however, turned to an unseemly debate on who hated NAFTA the most in Ohio, and may be tempted to do so again while campaigning in Pennsylvania.

Expect the Democratic candidates’ rhetoric on trade policy to degenerate, by the way, as economic conditions worsen.

Flat Tax or National Sales Tax?

On this unfortunate day, when many of us are pulling out our hair as we deal with last minute tax headaches, it is helpful to think there may be a better future. Some of us fantasize about a flat tax while others of us dream about a national sales tax. Both of these tax plans share common principles - including a low rate, no double taxation, and equal treatment of economic activity. That’s the good news. The bad news is that the existence of two attractive tax reform plans has divided the pro-tax reform camp, and this has rebounded to the benefit of the status quo. But this division is not necessary. In a new video released by the Center for Freedom and Prosperity, I explain why it is important to junk the system. More important, I suggest a strategy for uniting tax reform advocates:

As always, I welcome feedback on these videos.