Behold the Power of Education Tax Credits and Tremble

Arizona is proving a great example of why education tax credits have so much potential to expand over time compared with vouchers.

The state is facing budget shortfalls and some Democrats have demanded an end to the education tax credit program. So, is the program in mortal danger?

Nope. From an Arizona Republic news report:

Anyone who does [oppose the tax credits] could face an abrupt end to a political career because the program is so popular… Tinkering with the school-tax-credit donations is a political grenade, policy analysts say. “Voting against a tax credit can be seen as a vote to raise taxes,” said Michael Griffith, a school-finance expert for the Education Commission of the States, which tracks education-policy issues… . Arizona Superintendent of Public Instruction Tom Horne warned that “the constituency is too strong” in support of tax-credit donations to private and public schools. He cannot imagine legislators would change the credits to pull the state budget out of the red.

These quotes illustrate two extremely important differences between tax credits and vouchers.

One, vouchers are seen as government spending and welfare while tax credits are seen as tax cuts. When you cut a voucher program, you’re slashing spending. When you cut a credit program, you’re raising taxes. We’ve been saddled with wasteful and distorting tax credits for years because of this political dynamic. It can now be used to advantage.

Two, tax credits multiply the school choice constituency. A voucher program counts only voucher recipients as constituents. An education tax credit program counts recipients, donors, and scholarship organizations as constituents, adding not just numbers but individuals with more money and political influence to the category of active choice supporters.

Economists against the Stimulus

Cato has just published a full-page ad in the New York Times with the names of some 200 economists, including some Nobel laureates and other highly respected scholars, who “do not believe that more government spending is a way to improve economic performance” – contrary to widespread claims that “Economists from across the political spectrum agree” on a massive fiscal stimulus package. Of course, many economists don’t like to sign joint statements, so this is only a fraction of stimulus opponents in the profession. Greg Mankiw pointed to a few noted skeptics last week:

In a TV interview last month, Vice President Joe Biden said the following:

Every economist, as I’ve said, from conservative to liberal, acknowledges that direct government spending on a direct program now is the best way to infuse economic growth and create jobs.

That statement is clearly false. As I have documented on this blog in recent weeks, skeptics about a spending stimulus include quite a few well-known economists, such as (in alphabetical order) Alberto Alesina, Robert Barro, Gary Becker, John Cochrane, Eugene Fama, Robert Lucas, Greg Mankiw, Kevin Murphy, Thomas Sargent, Harald Uhlig, and Luigi Zingales–and I am sure there many others as well. Regardless of whether one agrees with them on the merits of the case, it is hard to dispute that this list is pretty impressive, as judged by the standard objective criteria by which economists evaluate one another. If any university managed to hire all of them, it would immediately have a top ranked economics department.

And of course Mankiw’s list isn’t comprehensive. There’s also former Treasury economist Bruce Bartlett, former Yale professor Philip Levy, former Ohio State and Federal Reserve economist Alan Viard, Russell Roberts of George Mason, and many more. Under the current circumstances, plenty of economists are endorsing large fiscal stimulus programs. But it’s just not correct to claim that there’s any consensus or that “every economist … from conservative to liberal” supports the kind of massive spending program that the Obama-Biden administration has proposed.

UPDATE: Martin Feldstein, whose support last October for a fiscal stimulus is the reed upon which journalists justify their claims about “economists across the political spectrum,” now calls this stimulus bill “an $800 billion mistake.”

Can Congress and the President Coordinate Care?

Paul Testa of the New America Foundation has kind words for the briefing paper that Arnold Kling and I coauthored, “Does the Doctor Need a Boss?“  He notes “how similar the authors’ core arguments and ideas were to other calls we’ve heard for delivery system reform from across the political spectrum.”

But Testa loses us here:

The emerging consensus on the means as well as the ends of delivery system reform create can lay the foundation for broader health reform. It’s up to Congress and the Obama Administration to build off that foundation bringing in the necessary pieces of cost, coverage and financing reforms to create a truly sustainable health care system that works for all Americans.

As Kling explains in this Cato podcast, Congress and the president are the wrong people to direct delivery system reform.

Of Cab Fares and Health Care: Markets with Uncertainty Require Competition between Payment Systems

Last week, I was late for a briefing on Capitol Hill. Some would say that was because traffic snafus caused by the March for Life blocked the usual route from the Cato Institute to Capitol Hill, requiring our cabbie to circle back to Cato and take another route. I say the real reason was the D.C. Taxicab Commission.

The D.C. Taxicab Commission requires all cabbies to use the same fare system. Until recently, the commission required cabbies to use a zone system. Under the zone system, the fare from Cato to Capitol Hill was the same flat rate, no matter what route the cabbie chose or how long the ride. If a cabbie encountered a traffic obstruction that slowed him down, then he bore the cost of that lost time. He received no additional money for waiting in traffic or taking a longer route, and the lost time meant that he would collect fewer fares. Therefore, a cabbie that charges according to zones, or any fixed price per trip, has an incentive to learn about and avoid significant traffic obstructions.

Recently, however, the D.C. Taxicab Commission required all cabs to switch from zones to meters that charge by the minute and by the mile. Under the meter system, the passenger bears the cost of delay, because meters charge additional money for every extra minute and every extra mile. Therefore, cabbies have little incentive to learn about and avoid significant traffic obstructions.

In sum, if our cabbie were paid a fixed price for taking us from Cato to Capitol Hill, he probably would have paid more attention to traffic conditions – on the radio, his mobile phone, etc.. He would have known that the usual route was blocked, because he would have borne the cost of delay. But because the D.C. Taxicab Commission requires him to use a meter, he cared a lot less about delay.

The problem is not the meter system. The old zone system probably had its own perverse outcomes, perhaps dead zones where you couldn’t catch a taxi or cabbies who drove too fast. The problem is that the DC Taxicab Commission dictates a single payment system for all taxis. Absent that mandate, cabbies would use different payment systems and competition would force each to offer better service. “Zone” taxis would slow down and pick up fares in more areas, while “meter” taxis would try to avoid unnecessary delays.

Incidentally, that’s the same reason America spends too much on health care and so few Americans have electronic medical records.

The federal government is the largest purchaser of medical services and it effectively dictates a single payment system for most providers. Medicare pays providers on a fee-for-service basis, which is akin to paying cabbies on the basis of meters. (The federal tax code further encourages fee-for-service payment by insulating consumers from the cost of their health insurance.) As a result, doctors and hospitals have little reason to invest in things (e.g., comparative-effectiveness research, electronic medical records) that help avoid unnecessary services, because Medicare pays for unnecessary services. In contrast, prepaid group plans like Kaiser Permanente receive a fixed amount per patient, which is akin to paying cabbies on the basis of zones. Kaiser conducts comparative-effectiveness research and provides electronic medical records to its enrollees because Kaiser bears the cost of unnecessary or duplicative services.

Markets use competition between different payment systems to improve quality and reduce costs, particularly in markets with uncertainty. That form of competition is usually lost when government runs the show.

Give Government a Power and It Will Find Something to Do With It

In Section 8131 of the Department of Defense Appropriations Act for fiscal 2004, Congress cancelled funding for the Total Information Awareness program, and it seemed to mean it:

“Terrorism Information Awareness Program” means the program known either as Terrorism Information Awareness or Total Information Awareness, or any successor program, funded by the Defense Advanced Research Projects Agency, or any other Department or element of the Federal Government, including the individual components of such Program developed by the Defense Advanced Research Projects Agency.

But in a classified annex, Congress allowed parts of the program to continue: “[T]his limitation shall not apply to [a] program hereby authorized for Processing, analysis, and collaboration tools for counterterrorism foreign intelligence … .”

Providing further:

“None of the funds provided for Processing, analysis, and collaboration tools for counterterrorism foreign intelligence shall be available for deployment or implementation except for:

(1) lawful military operations of the United States conducted outside the United States; or

(2) lawful foreign intelligence activities conducted wholly overseas, or wholly against non-United States citizens.

Parts of TIA could survive, but they could only actually be used in U.S. military operations conducted outside the United States or for lawful foreign intelligence activities conducted overseas or against overseas persons.

Shane Harris of National Journal documented TIA’s life after death in February 2006.

Now whistleblower Russel Tice has come forward in a series of interviews (reviewed by Wired’s Threat Level blog here and here) to describe what he knows of a program that is the very similar to Total Information Awareness, including the use of “red teams” to generate supposed patterns of terrorist activity. The program was potentially used to investigate U.S. journalists and may have combined communications information with credit card data.

In the spring of 2006, Tice told a reporter, “[T]he biggest sweat that happened at NSA happened when John Kerry almost got elected president [in 2004], because they were concerned they were all going to be thrown in jail.” He feels strongly that people at the NSA have been violating the law.

It’s hard to determine the truth of things from one whistleblower who may bring bias and mistake in recollection and interpretation. But there was no reason for Congress to continue Total Information Awareness in secret. As Jeff Jonas and I documented in our paper on the subject, data mining for terrorism will not work. There just aren’t enough instances of terrorism from which to generate patterns that reliably indicate terrorism.

It’s quite plausible that folks at the National Security Agency, finding no counterterrorism use for the Total Information Awareness components transferred there, put them to work on other things - like investigating journalists’ sources.

This cries out to be cleared up. Should it see fit to investigate, Congress should not give immunity to credit card companies.

What Did the New Deal Do?

There has been much recent debate about whether or not President Franklin Roosevelt’s New Deal policies increased the nation’s economic pain during the Great Depression or led to its end. In today’s Cato Daily Podcast, Regulation Magazine managing editor Thomas A. Firey reveals why erroneous stories about the effects of the New Deal survive despite decades of economic research that tell a different, more nuanced story:

Listening to the fight today among commentators on the left and the right talking about the New Deal and making various claims about it, as far as a stimulus—they’re almost all wrong, and what’s most disturbing to me as an economic historian is this is actually pretty well-plowed ground, so I don’t know how they can be wrong and how no one’s calling them out on it….

…The two stylized stories, the one that nothing got better and the other that the New Deal miraculously fixed everything—both are very clearly wrong when you look at the numbers. But no one wants to tell the real story, because, first of all, it doesn’t fall nicely in an ideological story on either side, and, second of all, it requires work. You have to read stuff and do research and care about the facts, and, let’s be honest, in this political environment, very few people do those things or care about the facts.

More from Firey on the effects of the New Deal.

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