Forget the Election … Education Tax Credits Will Save the Republic and Bring World Peace!

Let’s face it : everyone is sick of election prognosticating and there’s nothing left to say in any case (until the results come in and politicians and pundits begin to spin again).  So let’s turn to wonky school reform spats that just won’t die!

Sara Mead at Edpresso just doesn’t buy that education tax credits are the best thing going in education reform, so we’ll have to get more detailed.

She cannily (given that we’re libertarians here) attacks tax credits on rational choice/econ grounds, arguing that dollar-for-dollar tax credits will reduce the “cost to the donor and his or her incentive to hold scholarship foundations accountable.”  This is certainly true compared with someone in a system without tax credits that has to make the decision to pay twice for education – their incentives to hold the school accountable are large due to the significant additional investment. 

But her analysis overlooks many important factors. Most importantly, it fails to compare incentives in a tax credit system to those of the relevant alternative – our current government-run school system. 

There are many costs and incentives beyond fiscal ones.  A business that donates money to a Scholarship Granting Organization, it is true, reallocates money from the government to a non-profit, and therefore does not incur any additional monetary cost in this very simplified scenario.  That does not mean there are no costs to the company.  They must identify SGOs to which they wish to donate and comply with the required paperwork to do so.  This cost may be offset by community good will and publicity (or added to by criticism from school choice critics).  In addition, they have a long-term interest in the performance of both the SGO and children and schools they fund because their company name is now associated with them.  Donating to SGOs that fund failing schools will provide no community goodwill and is likely to draw criticism.

Another reason why businesses participate in scholarship donation programs is because they recognize that many students are emerging from our K-12 public schools unprepared to succeed in work or higher education. In addition to its civic benefits, ensuring that children are better educated directly benefits the donor businesses themselves. Better educated students mean a stronger labor force from which businesses can recruit new employees. Those businesses would thus have an incentive to direct their money to the best-managed SGOs.   

Businesses using donation tax credits have very significant interests in holding SGOs and schools accountable for educating children, interests that would easily justify the costs of choosing and donating to SGOs. 

Individual donors face the same costs of donating, and will be invested with personal incentives to make sure that they are not wasting their money and the time they have devoted to the process on SGOs and schools that fail.

Again, the reason an individual would make a donation under an SGO program is that that individual is dissatisfied with the quality of education on offer in the public schools.  Donors with that sort of motivation are hardly likely to pick SGOs at random.  Furthermore, just as the media now cover the school beat, so too would they cover SGOs, so the cost to donors of finding out about SGO operations would be low – they’d just have to pick up the paper.

It may be true that the choices of what one can do with a tax credit are severely limited compared to the universe of unrestricted choices.  But the donor will still face a choice between many SGOs, individual children, and sending the money to the state for it to disburse for her.  The donor is still making a decision regarding how to spend her money – it is simply a restricted choice set.  But the donor will still have an incentive to hold organizations accountable for results, and will have an easier time responding to information.  A donor can easily send next year’s tax credit to another SGO. 

Sara compares these incentives to hold schools accountable with donations made without the benefit of a tax credit.  Certainly, in the latter case, the incentive is large because the cost to the donor is large.  But a cost can be too large, and in this case it is – otherwise we would be awash in private scholarships.  People must currently pay twice to help the disadvantaged – once through state taxes and then again through donations.  It’s no surprise that many do not do both, even when the state misspends their tax dollars.  Education tax credits reduce the costs but not the incentives to help the disadvantaged, thereby ensuring that more of the disadvantaged will be helped.

The appropriate comparison is not with the incentives of donors who cannot claim tax credits.  The appropriate comparison is with the incentives and ability to hold schools accountable under the current system versus other proposed systems.   Sara recognizes this, but doesn’t consider the strength of the incentives within the current or proposed government-run systems (emphasis in the original):

More significantly, Adam’s point here acknowledges that the people who fund schools have a clear interest in holding those schools accountable. Guess what–when we’re talking about education that’s supported from public coffers, then the people funding the schools are all of us taxpayers, and we all have an interest in holding schools accountable for serving the public good.

Taxpayers may have an interest, but not the ability to hold schools accountable. Just try withholding your taxes when you don’t like the local schools.  I don’t think the police will be impressed with your explanation.

One of the most difficult problems in government is accountability.  There is a reason that even farmers who don’t need it continue to get subsidies, that sugar prices here are absurdly high, that the tax code is cluttered with special breaks, and that earmarks for pet projects have exploded.  All of these things are funded by “all of us taxpayers,” and we certainly “all have an interest” in holding our Congress accountable for serving the public good and not running up a deficit.  But the costs are diffuse and small to any single taxpayer, while the benefits are large and concentrated among organized groups. 

The key differences between a true system of school choice and a government run system are that individual taxpayers fund students in a system of choice, and the government funds schools in the current system.  The ability and incentives to hold schools accountable in such a system are almost non-existent, and it shows.  The costs are diffuse, and therefore not readily apparent, and the benefits are concentrated among the education establishment, which uses the political system to its advantage.  

In order for taxpayers to hold the schools accountable, they must unite on a single issue area and work together through a difficult political system for very definite goals.  Needless to say this does not happen.  It is too difficult, and the costs and potential gain are too diffuse (and non-selective) to overcome collective action problems.  Even in a charter system, this would hold true.  And even within a student-based/attached funding or voucher system, the government would fund students, meaning that costs and responsibility would still be diffuse and therefore the incentives and ability for taxpayers to hold schools accountable would be low. 

A tax credit system creates the most powerful system of incentives to hold schools accountable because individual taxpayers fund students.  Parents have the ability and incentive to hold schools accountable by going elsewhere with ease, because the money follows their child.  And taxpayers have the ability and incentive to hold schools and SGOs accountable because they know where their money is going and can take it to other schools or SGOs with ease. 

An education tax credit system relies on the incentives, knowledge, and actions of thousands of parents and taxpayers, ensuring that the interests of individual parents, families, communities, and the diverse public at large are met.  This system makes schools accountable to the largest number of stakeholders possible, and provides the most effective means of holding schools accountable to each stakeholder: exit. 

This is true public accountability.  And this system truly serves the public good by ensuring a basic education for all citizens – an education that respects the diversity of the public to which that good is provided. 

Sara proclaims that she supports choice in education, and that she doesn’t “care if you want to send your kid to a Montessori school, a single-sex school, a military school, a religious school, or a billingual Esperanto immersion school.”  Wonderful news, I say!

 “But,” Sara says, “I do care, as a taxpayer, that schools using my tax money meet basic health and safety standards, don’t discriminate, and teach kids sufficient math and verbal/literacy skills to contribute to the economy and have a decent shot in life. That’s why we need both parent choice and public accountability. And it’s why education tax credits just don’t cut it.” 

First, any educational facility would be required to meet basic health and safety standards under existing laws.  Tax credits don’t magically eliminate all previously passed regulations.    Second, all tax credit programs and proposals with which I am familiar already prohibit discrimination on the grounds of race and national origin.  Third, I can’t imagine how tax credits could result in lower basic math and verbal skills than those our current system is producing – but, even such an unfounded concern can be resolved with ease by requiring participating students to take some kind of basic achievement test, which current programs and proposals all do, and which most private schools do currently as well (however, it’s an unnecessary measure in any case – just look at all of the information on colleges).

There must be other, legitimate issues if Sara’s concern for the “public accountability” of education tax credits is to be taken seriously.  If these are the only problems Sara has with an education tax credit system, then she should unite with us behind ETCs!

Schumer-Bloomberg on Sarbanes-Oxley

Apparently I am not alone in the skepticism I expressed last week concerning an oped by Sen. Chuck Schumer (D-NY) and New York City mayor Michael Bloomberg, in which the duo decries the ill effects of regulation and frivolous lawsuits on New York’s financial services sector.  Four of the five letters to the editor in today’s Wall Street Journal expressed incredulity that these two pols could possibly expect to be taken seriously on the subject, given their otherwise steadfast support for government intrusion into our lives. 

I don’t know the newspaper business, but I have an inkling the WSJ ran their piece not so much for the good ideas it contained, but because it knew that the juxtaposition of those ideas with that by-line would elicit a spankfest from its readership that would lend itself to today’s title of the Letters to the Editor section: ”Schumer and Bloomberg Are For Less Regulation? Is This a Joke? (sorry, subscription required).

There was one letter, however, that actually defends Sarbanes-Oxley and the huge regulatory burdens imposed upon financial services firms operating in New York because it “gives our New York financial market a distinct competitive advantage [relative to London].”  Come again?  Yes, this letter argues that, ”while it is quite true that there are more regulatory bodies and higher fines in New York than overseas, that is only a temporary situation.”  The author argues not that those U.S. regulations will be relaxed, but that the regulatory burden on firms operating in the London market will be just as heavy in the future, and that New York firms are lucky to have a head start on the learning curve.

To put this all in context, the author of the pro-regulation letter is a vice president at Orchestria Corporation (a New York company), which is an entity that “helps companies achieve compliance and good governance through electronic communication control.”  Orchestria is in the business of helping it’s customers “to efficiently manage the burden of regulation and ensure compliance.”  In other words, Orchestria (and probably hundreds of companies like it) is the Frankenstein of Sarbanes-Oxley.  Although people like Schumer and Bloomberg are recognizing rhetorically the damage caused by regulatory overkill, righting the ship will be more difficult than just publishing an oped.

Sarbanes-Oxley has created a whole new industry that benefits from the status quo.  I wonder if they know any politicians who would enjoy their financial support.

Ponnuru Misses the Point

In his cover story for the new issue of National Review, “Conservatives on the Couch” (not yet available online), Ramesh Ponnuru devotes considerable ink to debunking the recent Cato study by David Boaz and David Kirby on “The Libertarian Vote.” I think he misses the point.

Here’s Ramesh:

David Boaz and David Kirby … have recently made an ambitious attempt to claim that libertarians are the swing voters at the center of American politics. Their chief evidence: The 15 percent of voters whom they identify as broadly “libertarian” gave Bush 72 percent of their votes in 2000 and only 59 percent in 2004….

They seem unaware that their data tell more against than for their thesis. The electorate as a whole swung toward Bush during those years: He increased his percentage of the overall vote from 48 to 51. Libertarians swung one way; the remaining 85 percent of the electorate swung the other way, and swung far enough to overwhelm the libertarians. Could it be that the same actions that alienated libertarians won Bush the support of these other voters? Well, yes, it could.

For those keeping score at home, here’s how my card reads: Ramesh, 1; Straw Man, 0!

Ramesh does a fine job of marshaling evidence in support of the utterly obvious. Of course libertarians aren’t the kingmakers of American politics. Of course it’s possible to ignore particular libertarian concerns and profit electorally. If those things weren’t true, much of American history would be inexplicable.

As I read it anyway, “The Libertarian Vote” makes more modest claims than those Ramesh seeks to refute. And Ramesh’s critique leaves those modest but important claims intact.

The fact is we don’t know why libertarian support for Bush declined between 2000 and 2004. Was it the war? Big spending? Social issues? The overall stink of incompetence? Or some or all of the above? We just don’t know.

We therefore don’t know what overlap there is between the issues that underlay reduced libertarian support and those that underlay increased overall support. It’s possible that an alternative-universe Bush administration could have taken positions that maintained or increased libertarian support while increasing support from other quarters as well – thus producing an even bigger victory in 2004 than the one that occurred here (which was pretty anemic for an incumbent with an expanding economy).

Here’s what we do know after reading “The Libertarian Vote.” The group of broadly libertarian, “economically conservative but socially liberal” voters makes up around 15 percent of the population. Historically, these voters have strongly favored Republicans, but their level of support fluctuates and has been trending down of late.

And what does that mean? It means that Democrats might be able to capitalize on those recent trends if they made any concerted effort at all to appeal to libertarians. And by so capitalizing, they might be able to change the outcome of close elections.

And if Democrats started winning by attracting libertarians who used to vote GOP – as it appears they have begun doing in Western states, according to Ryan Sager – libertarians could actually end up as a bona fide swing constituency, actively courted by both sides. And wouldn’t that be fun?

We’re not there yet. Right now, the libertarian vote is only a potentially important swing constituency. It has come into play for reasons we don’t understand well. But it’s big enough, and volatile enough, that it could lend decisive aid to either party that courts it.

Ramesh’s message seems to be that small-government types are unpopular nerds who should content themselves with being allowed to run with the social-conservative cool kids. (Yeah, I know that sounds funny – the conservative cool kids, I mean, not the libertarian nerds.)

I say libertarians can do better than that. And the data in “The Libertarian Vote” show that isn’t just an idle fantasy.

Classical Liberal International Hootenanny

Several hundred friends of liberty have gathered in Guatemala City for the 2006 international meeting of the Mont Pelerin Society.  The Cato Institute is well represented, with numerous Cato authors, adjunct fellows and scholars, officers, board members, and sponsors in attendance.  Right now we’re being treated to a great talk on “Latin American Populism” by the brilliant and insightful Alvaro Vargas Llosa.  The papers are really of a high order and represent a serious intellectual effort by advocates of freedom and limited government to address new and emerging challenges to classical liberalism.  It won’t do just to repeat the same old themes; advocates of individual rights, toleration, free markets, free trade, and limited government have to address new issues and to engage our critics fairly and squarely.  I’m really pleased to see that happening here in Guatemala, among participants who have come from throughout the world, from Mexico and Mongolia, Germany and Ghana, India and Ireland, Jordan and Japan.  (I’ll post a few times on some of the papers and presentations, at least those that strike me as the most interesting.)

CAN-SPAM Didn’t - Not By a Long Shot

Every once in a while, it’s useful to go back and look at how Congress has done with past regulatory efforts.  The exercise might help determine whether to embrace, or be skeptical about, future efforts.

Congress passed the CAN-SPAM Act in late 2003, and it became effective January 1, 2004.  Here’s the Federal Trade Commission’s summary of the law, which tells us that CAN-SPAM bans false or misleading header information, prohibits deceptive subject lines, requires that commercial e-mails give recipients an opt-out method, makes it illegal for commercial e-mailers to sell or transfer the email addresses of people who choose not to receive their e-mails, and requires that commercial e-mail be identified as an advertisement and include the sender’s valid physical postal address.

And here’s the result:  3 out of 4 e-mails are spam, and 0.27 percent of e-mails comply with CAN-SPAM.  That’s 27 in every 10,000 e-mails.

The regulation is a failure.  It provided consumers with zero benefit.  Most people are seeing less spam in their Inboxes because of improved filtering technology, a product of commercial ISPs working to serve their customers.

Should Congress or the FTC ramp up enforcement?  Increase penalties to bring spammers to heel?  No.  They should abandon the enterprise entirely and confess their incompetence to regulate the Internet and technology.

Despite its failure, consumers continue to bear the costs of the tedious regulations CAN-SPAM imposed on legitimate businesses.  They pay just a little more taxes, a little more for everything they buy online, and they forgo the benefits of that tiny margin of innovation lost as businesses divert their efforts to compliance. 

(Hat tip: TechDirt)

Taking Labor Markets Seriously

Perplexity over economic statistics – in particular, the decades-long trends of flat median real wages and increasing income inequality, combined with a recent disconnect between productivity growth and wage increases – is provoking serious, sober-minded people on the center-left to worry whether there might be something badly wrong with America’s economic system.

In a well-written piece (subscription required) for The New Republic, Jonathan Chait chronicles how the economic numbers are undermining confidence among Democrats in Clinton-style, pro-growth economic policies. The bottom line: what good is economic growth if it only benefits those at the very top?

Ezra Klein of The American Prospect is among the anxious. He’s written frequently on this point, but here’s a typical formulation of the perceived problem as he sees it: 

What worries me about inequality isn’t what it does, but what’s doing it, namely, a decades-long decline in worker bargaining power and the resultant redirection of productivity increases and corporate profits away from compensation and salaries. 

And here’s another:

[T]hrough mechanisms we’re not entirely sure of, the very richest are siphoning off the economic growth before it flows through the middle and lower classes.  

And here’s yet another that suggests what needs to be done: 

The right has tried to explain this accelerating inequality as an unstoppable structural feature of the new economy: It’s the meritocracy, or computers, or benefits, or global trade. Unfortunately, those explanations are largely bull****. Europe also has computers, and trade, and mobility, and benefits, and has easily avoided the widening chasm we’ve seen. So what makes us different?

In a word, power. Or the distribution of it. Europe has strong unions and active governments; countervailing powers that wrest a portion of the pie for their constituencies. We don’t.  

It’s one thing to be concerned generally about inequality: to hope that all people can participate in the blessings and opportunities that modern capitalism affords, and to look for policies that help those who are lagging. It’s quite another when that concern curdles into a belief that the capitalist system is fundamentally unfair – that workers are failing to get their fair share of the value they create because people at the top are hogging the gains from growth. It’s the difference between being an egalitarian liberal and being a collectivist. Or, in other words, between being a progressive and being a reactionary.

Here’s my question for Ezra et al.: is there something wrong with labor markets? Is there some market failure that is resulting in the systematic exploitation of workers?

I can’t imagine what that market failure would be. Labor markets are pretty vanilla, with lots of buyers (firms) and lots of sellers (workers). Local monopsony problems (e.g., the company town scenario) are unlikely to be significant in a diversified, modern economy with a highly mobile work force. I don’t know of any basis for thinking that firms’ competition for workers is less than robust. Accordingly, there are very strong reasons for thinking that wages and salaries are generally bid into line with the value of the various uses to which labor at a given skill level can be put.

As University of Chicago law professor Richard Epstein puts it:

The single most important thing to understand about the operation of a standard labour market in the world today is that it is immensely boring. It should be thought of in terms of the traditional intersection of supply and demand. It does not present any difficult transactional problems or generate negative externalities that require government control. 

In particular, there is no good reason to think that high earnings for managers and professionals at the top of the pay scale are coming at the expense of everybody else. Firms need workers at various skill levels. Exactly the same incentives guide firms when they are hiring highly skilled workers and when they are hiring less skilled workers. On the one hand, competition will cause them to bid up the price of labor to attract workers away from other job openings; on the other hand, concern with profitability will deter them from overpaying. There isn’t some pot of money in the company safe that’s dedicated to wages and salaries, so that more for some means less for others. Hiring and pay decisions are made at the margin: does adding this worker at this price improve our bottom line? For every new hire, whatever the job description or skill level, firms face strong pressures against either underpaying or overpaying.

(Note: I’m leaving aside for now the question of compensation for top executives, which raises complex issues of corporate governance. For now, it suffices to say that, even if CEOs are being overpaid, the problem affects only a tiny portion of the overall labor market.)

So I just don’t see those “mechanisms we’re not entirely sure of” that Ezra talks about. And just asserting they exist, without providing any theory or evidence of how they might work, won’t cut it as serious analysis.

But what about the decline of private-sector unions? Hasn’t that reduced workers’ bargaining power to their detriment?

Yes, it is true that, through collective bargaining, workers can obtain above-market prices for their labor – just as it is possible for price-fixing cartels to obtain above-market prices for their products. But it is also true that, over the long term, unionization has proved a disaster for affected U.S. industries. By cutting into profits, unions have deterred investment and R&D; the rigid work rules they imposed have hampered innovation and competitiveness; and the unsustainable pension and health care commitments they extracted have turned out to be financially ruinous in the long run.

A resurgence in union power wouldn’t improve the system. Union power distorted the system, ultimately with dismal consequences. Yes, some people came out ahead, but many others have suffered from the effects of underinvestment, inefficiency, and burdensome legacy costs.

Contrary to the fears of Ezra and the rest, America’s labor markets are working fine. Strong incentives are in place for companies to pay people what they’re worth. The system isn’t broken.

Of course you can be disappointed that more people aren’t doing better. In which case, you have a couple of options. Option one is to try to supplement the competitive market system. Let the system work, and accept that the prices it’s generating are offering reasonably accurate information about the economic value of different kinds of work. Then try to find policies that will (a) help people increase their value in the marketplace and (b) mitigate hardships for people with relatively low human capital.

Option two is to try to supplant the system by ignoring market signals and squelching competition. In other words, go against everything we know about how best to encourage innovation and wealth creation. Sure, a lucky minority may get windfalls, but everybody else will suffer from the reduction in economic growth.

Option one is egalitarian liberalism; option two is reactionary collectivism. As a libertarian, I am obliged to point out that perverse incentive effects and political dynamics make it very difficult for option one to work well. But option two is flat out doomed to make matters worse.