Right Message, Wrong Messenger

A column in the Wall Street Journal correctly explains that Senators Obama and McCain have a habit of displaying economic illiteracy. So it is rather ironic that the author is Karl Rove, the man who spent the past seven years steering George W. Bush into one bad economic decision after another.

On many occasions, I visited economists in the administration to complain about their Keynesian fiscal policy (such as rebates), wasteful spending (such as farm bills and Medicare expansion), and senseless regulation (such as Sarbanes-Oxley), and invariably I would be told that the Bush White House was pursuing bad policy but that there was nothing that could be done because Karl Rove’s political strategy shop was calling the shots.

Only in Washington can people disply this amount of chutzpah and still retain credibility:

Barack Obama and John McCain are busy demonstrating that in close elections during tough economic times, candidates for president can be economically illiterate and irresponsibly populist. In Raleigh, N.C., last week, Sen. Obama promised, “I’ll make oil companies like Exxon pay a tax on their windfall profits, and we’ll use the money to help families pay for their skyrocketing energy costs and other bills.” Set aside for a minute that Jimmy Carter passed a “windfall profits tax” to devastating effect, putting American oil companies at a competitive disadvantage to foreign competitors, virtually ending domestic energy exploration, and making the U.S. more dependent on foreign sources of oil and gas. Instead ask this: Why should we stop with oil companies? They make about 8.3 cents in gross profit per dollar of sales. Why doesn’t Mr. Obama slap a windfall profits tax on sectors of the economy that have fatter margins? Electronics make 14.5 cents per dollar and computer equipment makers take in 13.7 cents per dollar, according to the Census Bureau. Microsoft’s margin is 27.5 cents per dollar of sales. Call out Mr. Obama’s Windfall Profits Police!

…This past Thursday, Mr. McCain came close to advocating a form of industrial policy, saying, “I’m very angry, frankly, at the oil companies not only because of the obscene profits they’ve made, but their failure to invest in alternate energy.” …And do we really want the government deciding how profits should be invested? If so, should Microsoft be forced to invest in Linux-based software or McDonald’s in weight-loss research? Mr. McCain’s angry statement shows a lack of understanding of the insights of Joseph Schumpeter, the 20th century economist who explained that capitalism is inherently unstable because a “perennial gale of creative destruction” is brought on by entrepreneurs who create new goods, markets and processes. The entrepreneur is “the pivot on which everything turns,” Schumpeter argued, and “proceeds by competitively destroying old businesses.”

…Messrs. Obama and McCain both reveal a disturbing animus toward free markets and success. It is uncalled for and self-defeating for presidential candidates to demonize American companies. It is understandable that Mr. Obama, the most liberal member of the Senate, would endorse reckless policies that are the DNA of the party he leads. But Mr. McCain, a self-described Reagan Republican, should know better.

What Do the U.S., North Korea, and the Old Soviet Union Have in Common?

Sadly, the answer to this question is that the United States is in unsavory company because of taxation.

For one thing, the U.S. Internal Revenue Code applies even to citizens who live and work abroad, an approach followed by very few nations other than hell-holes like North Korea. No other developed nation has this “citizenship-based” tax system, largely because it is unfair and anti-competitive. It is unfair because Americans who live and work abroad already are subject to all applicable foreign taxes (much as foreigners who live and work in the U.S. get the pleasure of dealing with the IRS). And it it anti-competitive because this punitive policy makes it harder for U.S. firms to earn a larger share of the market when competing in foreign markets. America’s tax policy is so punitive that some people are giving up their citizenship. But rather than dealing with this problem by fixing the tax code, politicians have decided to impose punitive exit taxes. The Economist has some of the unpleasant details: 

Queues of frustrated foreigners crowd many an American consulate around the world hoping to get into the United States. Less noticed are the heavily taxed American expatriates wanting to get out — by renouncing their citizenship. In Hong Kong just now, they cannot. “Please note that this office cannot accept renunciation applications at this time,” the consulate’s website states. Apart from sounding like East Germany before the fall of the Berlin Wall, the closure is unfortunately timed. Because of pending legislation on President Bush’s desk that is expected to become law by June 16th, any American who wants to surrender his passport has only a few days to do so before facing an enormous penalty.

…Congress has turned on expats, especially those who, since new tax laws in 2006, have become increasingly eager to give up their citizenship to escape the taxman. Under the proposed legislation, expatriates surrendering their citizenship with a net worth of $2m or more, or a high income, will have to act as if they have sold all their worldwide assets at a fair market price.

…That expats want to leave at all is evidence of America’s odd tax system. Along with citizens of North Korea and a few other countries, Americans are taxed based on their citizenship, rather than where they live. So they usually pay twice — to their host country and the Internal Revenue Service. As this makes citizenship less palatable, Congress has erected large barriers to stop them jumping ship. …[I]t may have the opposite effect. Under the new structure, it would make financial sense for any young American working overseas with a promising career to renounce his citizenship as early as possible, before his assets accumulate.

Another embarrassing feature of U.S. tax law is that exit taxes historically have been adopted only by the world’s most reprehensible regimes. As Richard Rahn explains in the Washington Times, the United States should not mimic the Soviet Union by confiscating the wealth of people who displease the ruling elites:

One of [the] old Soviet Union’s actions that was most heavily and correctly criticized by human-rights activists both left and right was its confiscation of the wealth of those who chose to leave the U.S.S.R. The right to emigrate is considered by civilized people to be a basic human right. Regretfully and embarrassingly, the U.S. Congress has just passed a law that places a higher tax burden (and in some cases wealth confiscation) on those who choose to permanently leave the United States, and may make some “tax hostages.”

…People who choose to renounce their citizenship are often looked upon as traitors, both by those in totalitarian and authoritarian states, and unfortunately sometimes by those in democratic societies, even when their intentions are benign. Many who immigrated to America over the last four centuries had some, or most of, their wealth in the old country taken from them in one form or another. This was rightly considered unjust. Yet, the descendants of many of those who suffered just voted to do something similar that differs only in degree, but not in kind or spirit.

…The apologists for Fidel Castro and Hugo Chavez will be able to point to this new U.S. law and ask why this is any different from the property takings by the aforementioned thugs? Yes, it is [a] bit different, but behind it is the same mean-spiritedness and disregard for property rights and the right to emigrate because of political beliefs. Such laws only make the United States look hypocritical to the rest of the world.

Econ 101 for Democrats

Executives from Goldman Sachs and Morgan Stanley met with Democratic staff members of the Senate Energy and Natural Resources Committee last week to make the case that trading in energy contracts is not the reason that oil prices are rising. Judging by Jeff Birnbaum’s report in the Washington Post, it’s not easy to teach Democrats about economics:

But the executives were met with skepticism and occasional hostility. “Spare us your lecture about supply and demand,” one of the Democratic aides said, abruptly cutting off one of the executives.

Another aide “warned the executives that no matter what arguments they muster, it would be hard to prevent Congress from acting.” So much for fact-finding and economic sanity in an election year.

More on Medicare’s Stupid Strategies for Reducing Administrative Costs

A recent Government Accountability Office report highlights another way Medicare keeps its administrative costs down: sending checks to providers without bothering to check whether those providers owe back taxes.

According to today’s Washington Post:

Health-care providers are allowed to collect millions of dollars in federal Medicare payments each year despite owing the government more than $2 billion in back taxes, congressional investigators said yesterday.

The Government Accountability Office found that more than 27,000 nursing homes, hospitals, physicians and other providers flouted the tax system while collecting Medicare fees in 2006. That represented 6 percent of all providers [who participate in] Medicare….

Some cases cited in the new report were especially egregious. They included a nursing home operator with a history of asset concealment schemes who filed $15 million in Medicare claims while owing $7 million in unpaid taxes and establishing a charitable foundation that purchased luxury cars for the owner’s personal use.

And there was the hospital that collected $21 million in Medicare fees while owing $15 million in taxes, mostly for failing to forward to the Internal Revenue Service payroll taxes that were withheld from employees’ checks.

What’s that?  This seems more like the IRS’s responsibility than Medicare’s?  Perhaps.  But even taking that into consideration, Medicare is still delinquent:

The IRS has an automated system to hold back a portion of payments to contractors who are delinquent on their taxes. Medicare officials have been slow to join, but Kerry Weems, acting administrator for the Centers for Medicare and Medicaid Services, said that all Medicare payments will be part of the program by October. “We take this issue very seriously,” he said.

Oh, indeed.  Medicare takes this issue as seriously as any government program whose raison d’être is to shovel money out the door.

REAL ID Grant Process Collapses, Money Goes to No-Bid Contract

Mickey McCarter at Homeland Security Today has the scoop on REAL ID grants that the Department of Homeland Security is doling out today.

Yes, REAL ID grants. Ten states have passed legislation to bar themselves from participating. (Arizona was the most recent.) And many more have registered their objections to the national ID law. But the Department of Homeland Security is still trying to revive it — this time, by spreading a little money around.

What’s “a little money”? The estimated $85 million in grants is about 0.5% of the $17 billion that it would cost to implement REAL ID, so it’s just a little. But that’s $85 million that taxpayers won’t be getting back.

It’s interesting to see where the money is going, of course.

The breakdown of awards, obtained by HSToday.us, signifies that AAMVA effectively gains a no-bid contract under the awards, as DHS designates it the sole national centralized database of driver’s license information under REAL ID through a grant award to the state of Missouri… . . A competitive grant process could have resulted in multiple hub awards instead of a sole-source contract to AAMVA, sources argue, decentralizing REAL ID information somewhat and encouraging the rise of the most effective database solution between competing vendors.

With enthusiasm for the program distinctly lacking, DHS abandoned its plan to award grants competitively and just divvied up the money state by state.

[A]lthough many states did submit proposals in response to the REAL ID guidance, according to a source knowledgeable of the evaluation process who requested anonymity, many of the state proposals for REAL ID grants were very poor. Evaluators who examined the proposals received by March 7 were surprised by the number that did not even request the funds for the specific program, instead asking for the money to spend on emergency response equipment and other needs.

No-bid contracts and funds for a program the states don’t want? Congress should not allow DHS to throw this good money after bad.

What Fordham Can’t Say, But Does Anyway

Yesterday, the Thomas B. Fordham Institute released a report suggesting that the No Child Left Behind Act has encouraged schools to focus on the lowest-performing students and neglect the highest-performing. This is not an unreasonable hypothesis: National Assessment of Educational Progress data suggest it could be true, though the results are mixed and Tom Loveless, the author of the report’s NAEP analysis (the report also includes some interesting survey results), makes it clear that it is impossible to say what, if any, test-score changes have been caused by NCLB.

Unfortunately, the spin put on the “good news” in the report by Fordham president Chester Finn and vice president Mike Petrilli is not nearly as measured as Loveless’ caveat about NCLB. On National Review Online today, Finn and Petrilli write with total certainty that government-driven “standards and accountability” regimes have produced gains for low-performers.

“NCLB and state-level efforts to impose standards and accountability on the schools are plainly boosting the kids who need it most — surely a good thing,” they pronounce.

Rising achievement surely is a good thing. That government standards and accountability produced it, however, is far from sure.

First, compare the period that contains NCLB, which was passed in 2002, to score changes in the period preceding it. In reading, the lowest 10 percent of 4th grade performers saw a much bigger increase in scores immediately before 2002 than after, and 8th graders saw their scores drop under NCLB. In math, we have to start with 2003, the earliest testing year within the NCLB timeframe. Again, for the lowest performers, in both 4th and 8th grades scores increased faster in the period right before NCLB — 2000 to 2003 — than after.

Loveless notes in the report that it is impossible to be sure what effect NCLB had on math in the 2000 to 2003 period — where the fastest gains are seen — since NCLB was passed in 2002. He’s right. However, in light of long delays in issuing NCLB regulations, and the unlikelihood of a huge jump in just one year of NCLB, it is more reasonable not to ascribe improvements to the law than to give it credit. More importantly, one definitely cannot say, as Finn and Petrilli nonetheless do, that the law “plainly” has something to do with rising low-achiever scores.

To be fair, Finn and Petrilli say NCLB and “state-level efforts” — not just NCLB — boosted those scores. On what basis do they split credit?

In his analysis, Loveless examined states’ NAEP score changes for the highest and lowest performers, controlling for whether or not states had their own standards and accountability regimes before NCLB. Unfortunately, the report doesn’t list which are considered “accountability” and which “non-accountability” states, so it is impossible to search for other common characteristics — charter schools, private-school-choice programs, increasingly affluent populations, new curricula — that could have driven states’ performances. Even more damaging to Finn and Petrilli’s pronouncement, the data the report does make available simple cannot support their all-too-firm-sounding conclusion.

For one thing, for the four subject-grade combinations presented, only between 34 and 37 states are analyzed, leaving out one-third of the country. More important, while in three of the four subject-grade combinations the lowest performers in states with accountability regimes did see greater score increases than low perfomers in states without them, when you only have four comparisons you simply cannot declare uncontestable victory, much less when only three of the comparisons support your conclusion. Change one, and you’ve got a coin flip. Unfortunately, that didn’t stop Petrilli and Finn.

In the end, Fordham’s new report doesn’t tell us anything definitive about the effect of NCLB or any other standards and accountability regimes. It offers some reason to believe that NCLB might help low scorers and leave high scorers behind — and it’s well worth reading just for that — but it provides nothing close to proof. It also suggests that standards and accountability regimes might help raise low-performers’ scores, but again has far too many holes and far too little information to support what Finn and Petrilli declare: that government-imposed standards and accountability “plainly” help low-achieving kids.

The Dangers of Dilettantism

I’m sometimes amazed at the ability of generalist pundits in Washington to inveigh on a host of issues ranging from gay rights to foreign policy to constitutional law. I find it hard enough to keep track of the various facets of my own field, American foreign policy. But sometimes there are instances where the presence of the dilettantes is damaging to the discourse. For example, here is The New Republic’s James Kirchick sneering at Matthew Yglesias’ suggestion that when Mahmoud Ahmadinejad declared his desire to see Israel “wiped off the map,” he might not have envisioned the genocide of the Jewish people.

I don’t like Mahmoud Ahmadinejad. I think he is a dangerous simpleton who should not be in charge of anything more portentous than perhaps municipal garbage collection in Shiraz. But he does enough repulsive things that he need not be accused of additional ones.

French television followed up with Mr. Ahmadinejad, doing an interview with him in 2007, in which the reporter asked him about this controversial remark. (Clip is in French, exchange begins about 6:00 into the clip.) In it, the interviewer references the quote and asks Ahmadinejad about whether he can understand why people are afraid of Iran’s nuclear program in its context. Ahmadinejad responds:

Why are you worried? Where is the Soviet Union? It has disappeared, has it not?

Ahmadinejad goes on to demagogue the issue, talking about democracy across all of Palestine, which for obvious reasons would cause Israel to be “wiped off the map.” But the end of the Cold War and the demise of the Soviet Union did not involve the genocide of the Russian people, or even any military action against the USSR. Instead of haranguing about analogies to Poland, Kirchick would be better served researching what analogy Ahmadinejad himself has used on the matter.

Now, maybe Ahmadinejad is lying. That’s a fair debate to have. But since the discussion is about what Mr. Ahmadinejad said, it seems relevant to pay attention when someone asks “hey, what did you mean by that remark?” and the speaker responds.

I think this is the danger of having generalists parachute into all manner of debates over national policies. As I said, it’s hard just to keep track of my little world. I can’t imagine thinking I had the breadth to contribute to the debate on many more issues than my own.