The Simple Solution to America’s Deteriorating Fiscal Outlook

The Congressional Budget Office has just released its new 10-year fiscal forecast and the numbers are getting worse.

Most people are focusing on the fact that the deficit is rising rather than falling and that annual government borrowing will again climb above $1 trillion by 2022.

This isn’t good news, of course, but it’s a mistake to focus on the symptom of red ink rather than the underlying disease of excessive spending.

So here’s the really bad news in the report.

  • The burden of government spending has jumped from 20.3 percent of GDP in 2014 to 21.2 percent this year.
  • By the end of the 10-year forecast, the federal government will consume 23.1 percent of the economy’s output.

North Koreans Should Have Attended Davos

Admittedly, North Korean diplomats would have cut a curious figure in Davos, attending the just-ended World Economic Forum. Representatives of one of the few regimes which still professes to be communist might have had to close their eyes amidst the capitalist excess highlighting the conference.

Still, the North Koreans would have seen much new. And there was the potential of what the Wall Street Journal termed “awkward encounters,” which might have allowed some informal diplomatic discussions on the side.

Alas, while the DPRK was invited to attend the forum, WEF rescinded the offer after the North’s latest nuclear test.

North Korea may be the most isolated state on the planet. Much of that is by choice. Nevertheless, Washington and its allies have made isolation their tool of choice in dealing with the North.

Of course, frustration with Pyongyang is understandable. Yet the policy has utterly failed. The DPRK has enshrined a unique form of monarchical communism, created an extraordinarily brutal system of domestic repression, maintained a large conventional military poised within reach of Seoul, and developed a growing nuclear arsenal.

Kim Jong-un, who succeeded his father in December 2011, has not liberalized politically. Moreover, he has continued the North’s missile and nuclear research.

Yet the DPRK is loosening economic controls. While much more needs to be done, Pyongyang’s commitment to reform appears real.

Kim has promised higher living standards alongside nuclear weapons. The more the regime could be tempted to sample heretofore forbidden economic fruits, the better. Just taste the apple from the tree of capitalism, Jong-un.

Which is where the WEF could have come in. Late last year the WEF invited the North for the first time since 1998, “in view of positive signs coming out of the country.” After Pyongyang’s January 6 nuclear test, however, the invitation was revoked since “under these circumstances there would be no opportunity for international dialogue.”

Actually, after the latest nuclear test was precisely the time when international dialogue was most required. War would be a foolish response and sanctions have been applied without result. China is angry with its frenemy but unwilling to risk the regime’s collapse. So if not negotiation, then what?

Metro Flunks Snowstorm 101

For the past several years, the Washington Metropolitan Area Transit Authority (Metro) has vied with San Jose’s Valley Transportation Authority for the non-coveted title of “Worst-Managed Transit System in America.” It is still only January, but with its performance, or rather non-performance, during snowstorm Jonas, Metro appears to have already clinched the title for 2016.

 This is what it takes to shut down Metro subways. Flickr photo taken Sunday morning after the storm by Ted Eyten.

To start with, rather than try to provide transportation for people who needed to travel over the weekend, Metro pre-emptively shut down, ending all bus service at 5 pm Friday (well before the worst of the snow fell) and ending rail service for the weekend at 11 pm. By comparison, New York’s Metropolitan Transit Authority (MTA)–serving an area that received much more snow than the district–kept its subways running throughout the weekend and kept its above-ground trains and buses going for as long as it could into the storm.

Metro could have followed MTA’s example by keeping the underground portion of its subways running–Ballston to Eastern Market, Medical Center to Union Station, and Fort Totten to Anacostia–all weekend, but chose not to do so. These lines cover much of the length and breadth of the district and could have provided vital transportation for many people. 

Metro’s excuses for shutting down were rather thin. It claimed that passenger safety was more important than the convenience of having service. But how safe is it to be out in a blizzard compared with riding on a subway? Metro also said it needed to put its employees to work to put it back in service on Monday. But the people who operate trains are not maintenance workers and union rules probably prohibited Metro from putting them to work shoveling snow.

Besides, Metro didn’t do a very good job of putting the system back into operation. Most of MTA’s above-ground trains were running by Sunday afternoon. MTA also put most of its bus lines back into service on Monday. Metro was content to open the subway portions of its lines on Monday, leaving its above-ground lines still closed, and to run just 22 out of its 325 bus lines.

Metro might argue that federal offices were closed Monday anyway, so the demand for its services was lower. But if Metro had been more on the ball, federal offices might not have had to close.

In short, MTA passes but Metro flunks Snowstorm 101. But Metro puts itself well ahead of the pack in the race to being the worst-managed transit agency of 2016.

The Fed’s Lack of Appreciation for the Healing Power of Markets

In my recent Cato Institute policy analysis, “Requiem for QE,” I analyze the transcripts of the 2008 and 2009 Federal Open Market Committee (FOMC) meetings in some detail.  Among them, the March 2009 transcript stands out as particularly troubling, as it reveals the FOMC’s failure to appreciate an economy’s ability to heal itself through market mechanisms following an adverse macroeconomic shock.

Yet market economies do have self-correcting mechanisms: relative prices change, resources get reallocated, and consumer and business expectations adjust to new realities.  In the case of the financial crisis, expectations had to adjust to the fact that house prices were significantly out of line with economic fundamentals.  As they did,  perceptions of wealth declined in line with house prices.  Workers, particularly those in construction, began the process of acquiring new skills, finding alternative employment, starting new businesses, and so on.  That these self-correction processes were already at work prior to the March 2009 FOMC meeting is one reason why the recession ended just three months later, in June 2009.

The same self-correcting mechanisms can be seen in the very markets in which the financial crisis began.  Put simply, the financial crisis was precipitated by a decline in house prices which, in turn, sparked concerns about the default risk of banks and other financial institutions with large holdings of mortgage-backed securities (MBS).

The Dowager Countess of Grantham Denounces Statism

Libertarian fans of Downton Abbey got a special treat last night when Violet, the Dowager Countess of Grantham, let loose with an excoriation of statism right out of John Stuart Mill. Debating whether the village hospital should be merged into the larger regional hospital in 1925, Lady Grantham exclaimed:

For years I’ve watched governments take control of our lives, and their argument is always the same — fewer costs, greater efficiency. But the result is the same, too. Less control by the people, more control by the state until the individual’s own wishes count for nothing. That is what I consider my duty to resist….

The point of a so-called great family is to protect our freedoms. That is why the barons made King John sign Magna Carta.

Rosamund: Mama, we’re not living in 1215. And the strength of great families like ours is going, that’s just fact. 

Countess: Your great-grandchildren won’t thank you when the state is all-powerful because we didn’t fight.

Of course, the Dowager Countess is not a libertarian, nor a liberal, but a reactionary aristocrat. Still, libertarian ideas crop up wherever people feel their liberties being infringed. And such ideas were being enunciated by genuine liberals in that era. An editorial in The Nation in 1900, thought to have been written by its founding editor E. L. Godkin, mourned the decline of liberty and liberalism:

To the principles and precepts of Liberalism the prodigious material progress of the [19th century] was largely due.  Freed from the vexatious meddling of governments, men devoted themselves to their natural task, the bettering of their condition, with the wonderful results which surround us.  But it now seems that its material comfort has blinded the eyes of the present generation to the cause which made it possible.  In the politics of the world, Liberalism is a declining, almost a defunct force. 

Liberalism was giving way, he said, to the forces of socialism and imperialism; and “international struggles on a terrific scale” were the likely result, struggles that indeed had already begun by 1925 and would only get worse in the lives of Lady Grantham’s grandchildren and great-grandchildren.

Fed Disclosure

Earlier this month, the Federal Reserve released FOMC transcripts and related materials from 2010. One of the issues—an important one—discussed in October and November of 2010 concerned Fed disclosure of inside information. Those transcripts hit one of my hot buttons. Fed leadership, instead of being defensive as shown in the 2010 transcripts, should be vocal in explaining why non-public activities further the cause of sound monetary policy.

Consider first an extreme view, a view that will help to frame disclosure issues. Would we want the Fed to confine its contacts with outsiders to public meetings at which press were present, or could be present? In that case, the FOMC would make its policy decisions solely on the basis of publically available information, such as that released by the Bureau of Labor Statistics and other statistical agencies. Keep in mind that under this view Fed officials would not only cease to have any non-public meetings with private sector individuals but also with government officials.

I add government officials to the mix because it is well known that some members of Congress and congressional staff make stock trades based on inside information.

FOMC practice has long been to gather nonpublic information, some of which is presented in FOMC meetings. The beginning of every FOMC meeting is occupied with presentation, and discussion, of anecdotal information. I always made an effort to smoke out expectations about the future from my sources. Forward-looking information is especially important because there is little formal statistical data on business plans for hiring and investment. As an example, I routinely asked my contacts at FedEx and UPS about their plans to add capacity in the busy holiday season and what their customers were telling them about their expectations. I asked my Wal-Mart contact about his interpretation of retail sales. Did he think that recent sales reflected idiosyncratic issues for his own company or were the trends more general?

The FOMC has long believed that such information strengthened the policy process. I know of no study that has attempted to quantify the policy value of anecdotal information, but have to believe that this approach is sound. Fed critics remind me of the old saw about the weatherman. Look out the window. Can’t you see that it is snowing? Do you want the Fed to stop looking out the window? Would it not have been helpful in 2008 if the Fed had had some detailed inside information about the condition of Lehman and AIG?

The Federal Reserve has long had robust policies, and active internal controls, to prevent insider trading by all employees, especially those with access to confidential policy information. Yes, nonpublic contacts with industry insiders do raise the risk of improper disclosure. What is the evidence on that score?

I know of only three prominent, evident or possible violations of this confidentiality. One is ongoing today: an unresolved case concerning an alleged leak of FOMC information in 2012 to Medley Global Advisors. In the second case, Rohit Bansal, a former Goldman-Sachs employee, was convicted this past November of obtaining inside information from Jason Gross, a former bank examiner at the New York Fed, who was also convicted. In the third case, Robert A. Rough, a former director of the New York Fed pleaded guilty in 1989 to disclosing discount rate actions to securities traders while he was in office. The New York Times story on the case noted that, “Samuel A. Alito Jr., the United States Attorney for New Jersey, said Mr. Rough was the first director in the 75-year history of the Federal Reserve System to be convicted of criminal wrongdoing.”

As far as I know, that is it. A damn good record, I would say. I challenge anyone to find an agency of this size and longevity with a superior record. The very highest level of integrity is built into the Fed’s day-to-day procedures and its DNA. Fed leadership should be defending its disclosure and research policies rather than dancing away, dodging the issue.

A CBS segment on 60 Minutes in November 2011 discussed insider trading by some members of Congress and congressional staff. Public outrage ensued and led Congress to pass the Stock Act, which became law April 4, 2012. By April 15, 2013 Congress had modified the Act, largely gutting it.

The most gentle way I know to summarize the concerns of some members of Congress over Federal Reserve disclosure is that they represent rank hypocrisy.

Ultimately, “School Choice” Must Be about Freedom

It is National School Choice Week, and this ever-growing event-of-events will feature discussions throughout the country tackling test scores, competition, empowering the poor, efficient use of taxpayer dollars, monopoly breaking, and numerous other, very important topics. But ultimately just one goal must be paramount: maximizing freedom. In the end, it is defending liberty – the true, bedrock American value – that school choice must be about.

This is first and foremost a normative conviction. Freedom must have primacy because society is ultimately composed of individuals, and leaving individuals the right and ability to control their own lives is fundamentally more just than having the state – be it through a single dictator, or majority of voters – control our thoughts, words, or actions.

Of course, children are subject to someone’s control no matter what. But a corollary to free individuals, especially when no one is omniscient and there is no unanimous agreement on what is the “right” way to live, or think, or believe, must be free association – free, authentic communities. We must allow people and communities marked by hugely diverse religious, philosophical, or moral views, and rich ethnic and cultural identities and backgrounds, to teach their children those things. Short of stopping incitement of violence or clear parental abuse, the state should have no authority to declare that “your culture is acceptable,” or “yours must go.” Indeed, crush the freedom of communities and you inevitably cripple individual liberty, taking away one’s choices of how and with whom to live.

Of course, the reasons to demand educational freedom are not just normative. They are also about effective education, and it is not hard to understand, at a very basic level, why.

If there are things on which all agree, choice is moot – all will teach and respect those things. But if we do not all agree, forcing diverse people to support a single system of “common” schools yields but three outcomes: first, divisive conflict; then, either inequality under the law – oppression – when one side wins and the other loses, or lowest-common-denominator curricula to keep the peace. Forced conflict and curricular mush no one should want. And inequality under the law we should all loathe and fear, even if we do not care about the rights of others and think we will come out the victors today. Tomorrow, we may not.

School choice is something for which all Americans should fight. But ultimately, it is too limiting. What we need is freedom for all.