Archives: 02/2010

Wednesday Links

  • Is there a place for gay people in conservative politics? We’ll be discussing it today at Cato. Watch here live at 12 PM EST.

King Canute, Abraham Lincoln, and Wishful Thinking

King Canute famously demonstrated to his advisers that even a king couldn’t stop the sea from rising. Abraham Lincoln told his visitors that calling a dog’s tail a leg doesn’t make it a leg. But lots of people these days think that passing a law automatically makes things happen, that you can pass a law against drug use or racism or homelessness and solve a problem.

Today I heard a traffic reporter on WAMU public radio demonstrate just how widespread that assumption is, at least in Washington. About 9:20 a.m. he said, “The federal government opened on time today [after a week of closings and yesterday’s delayed opening], so most federal workers are already sitting at their desks.” Well, I was stuck in a miles-long backup on snow-blocked roads, and I’m guessing that a lot of the people in the other cars were federal employees. Just because you declare that the federal government will open on time doesn’t automatically mean that federal employees will get there on time. You have to take into account realities like weather, slow clearing of roads, and people’s unwillingness to start their commute much earlier than normal.

Reality, alas, interferes with a lot of grand plans.

Housing Market on Government Crutches

My house has been on the market for a month and it has drawn a lot more looks than I expected. I’ve been quizzing realtors as they come through, and each one tells me the same story: the government is single-handedly propping up the demand for housing. In addition to the homebuyer tax credit and government-induced low mortgage interest rates, most sales are being done with Federal Housing Administration backing.

As a seller, I’m looking to get out before the tax credit expires and interest rates starting ticking upward. But when I do sell, I certainly won’t be looking to buy a house, particularly since I’ll be selling at a loss. If my situation is representative of other current sellers, the housing market could be in for another tumble if the government crutches are removed. However, if the government instead continues trying to prop up the housing market, the risk that taxpayers will take another bath goes up. It’s a nasty Catch-22 that demonstrates the problems with the government distorting the housing market to begin with.

A recent New York Times article looked at the housing market in the “beleaguered” manufacturing city of Elkhart, Indiana, which has twice served as a prop for President Obama. The Times says Elkhart “symbolizes the failure of federal efforts to turn around the housing slump at the heart of the economic crisis” and that “[h]ousing in this community has become almost entirely dependent on a string of federal support programs.”

The situation in Elkhart described by the Times matches perfectly with what realtors are telling me:

To the extent that the real estate market is functioning at all, people here say, it is doing so only because of the emergency programs, which have pushed down interest rates on mortgages and offered buyers a substantial tax credit. Equally important is an expanded mortgage insurance program run by the Federal Housing Administration, which encourages private lenders to accept borrowers with small down payments. The government takes the risk of default.

The one problem with the Times piece is that it doesn’t completely connect the dots. Namely, the problem the government is trying to solve is a problem that its housing policies instigated: the housing boom and bust. For instance, the article cites a good example of government policies mimicking the irresponsible lending that helped create this mess in the first place:

The programs favor first-time buyers, who have the fewest resources to bring to a deal. Heather Stevens, a 23-year-old nurse here, is closing on a three-bedroom house this week. Since her loan was insured by the Federal Housing Administration, she had to put down only 3.5 percent of the $74,900 purchase price.

“It was a breeze to get approved,” she said.

The sellers are covering her closing costs, which agents say is often the case here. That meant Ms. Stevens had to come up with only the $2,600 down payment, which still took all her savings.

But the best part is the $7,500 tax credit. She will use that to remodel the kitchen. “If it wasn’t for the credit, we would have waited to buy,” said Ms. Stevens, who is getting married this year.

Buying houses with no money down was a feature of the latter stages of the housing bubble. It gave prices a final push into the stratosphere. But buyers with no equity were the first to abandon their properties as the market turned south.

But there’s no mention of the role Fannie and Freddie, HUD, or the FHA played in fostering that bubble.

The article continues:

With housing prices stagnant, bolstering the market by again letting people buy with hardly any money down is viewed in some quarters as a bad bet.

Neil Barofsky, the special inspector general for the government’s Troubled Asset Relief Program, wrote in his most recent report to Congress that “the federal government’s concerted efforts to support” housing prices “risk reinflating” the bubble.

He noted one difference from the last bubble: taxpayers, rather than banks, are now directly at risk in these new mortgages.

I would argue that the mere existence of TARP is proof that taxpayers were directly at risk to begin with. The risk may be more explicit now, but that’s only because the bubble’s bursting washed away a lot of the private sector’s bad actors. But the ultimate bad actor, Uncle Sam, who encouraged the private sector’s risky lending activities, has stepped in to fill the void. Just how badly this turns out for taxpayers remains to be seen.

Class Warfare Tax Policy May Be Emotionally Satisfying to Some People, but It Is Bad Economics

Barack Obama wants higher tax rates on the so-called rich, including steeper levies on income, capital gains, dividends, and even death. Along with other politicians in Washington, he acts as if successful taxpayers are like sheep meekly awaiting slaughter. I’ve explained in this video why class-warfare tax policies are misguided, and a new study from Boston College provides additional evidence about the consequences of hate-and-envy tax policy. The research reveals that high tax rates in New Jersey have helped cause wealthy people to leave the state, leading to a net wealth reduction of $70 billion between 2004 and 2008. Wealth and income are different, of course, so it is worth pointing out that another study from 2007 estimated that the state lost $8 billion of gross income in 2005. That’s a huge amount of income that is now beyond the reach of the state’s greedy politicians. Here’s a report from the New Jersey Business News:

More than $70 billion in wealth left New Jersey between 2004 and 2008 as affluent residents moved elsewhere, according to a report released Wednesday that marks a swift reversal of fortune for a state once considered the nation’s wealthiest. …The exodus of wealth…was a reaction to a series of changes in the state’s tax structure — including increases in the income, sales, property and “millionaire” taxes. …the report reinforces findings from a similar study he conducted in 2007 with fellow Rutgers professor Joseph Seneca, which found a sharp acceleration in residents leaving the state. That report, which focused on income rather than wealth, found the state lost nearly $8 billion in gross income in 2005. …Ken Hydock, a certified public accountant with Sobel and Company in Livingston, said in this 30-year-career he’s never seen so many of his wealthy clients leave for “purely tax reasons” for states like Florida, where property taxes are lower and there is no personal income or estate tax. In New Jersey, residents pay an estate tax if their assets amount to more than $675,000. That’s compared to a $3.5 million federal exemption for 2009. Several years ago, he recalled, one of his clients stood to make $60 million from stock options in a company that was being acquired by another. Before he cashed out, however, the client put his home up for sale, moved to Las Vegas, and “never stepped foot back in New Jersey again,” Hydock said. “He avoided paying about $6 million in taxes,” he said. “He passed away two years later and also saved a huge estate tax, so he probably saved $7 million.”

Still not convinced that high tax rates are causing wealth and income to escape from New Jersey? The Wall Street Journal wrote a very powerful editorial about the Boston College study, noting that New Jersey “…was once a fast-growing state but has now joined California and New York as high-tax, high-debt states with budget crises.” But the most powerful part of the editorial was this simple image. Prior to 1976, there was no state income tax in New Jersey. Now, by contrast, highly-productive people are getting fleeced by a 10.75 percent tax rate. No wonder so many of them are leaving.

Tuesday Links

  • “Snowmageddon!” If you’ve been watching the news, recent snow storms both prove and disprove global warming, depending on who you talk to. According to Pat Michaels, both sides are wrong: “The fact of the matter is that global warming simply hasn’t done a darned thing to Washington’s snow. The planet was nearly a degree (Celsius) cooler in 1899, when the previous record was set. If you plot out year-to-year snow around here, you’ll see no trend whatsoever through the entire history.”

It’s Not Camelot, ‘It’s Only a Model’

In Monty Python’s Quest for the Holy Grail, the assembled knights look in awe upon the imposing walls of “Camelot”… until someone points out that “it’s only a model.”

I feel I’m watching a remake of Quest every time I read another blog post about the economics paper “Anti-Lemons” by MacLeod and Urquiola.

Matt Yglesias reproduced its abstract last month, saying “I would have to pay $5 to read the whole paper, but the abstract conveniently supports political positions I like, so I’ll talk about it some more.” That, needless to say, isn’t the sort of talk that calls for a thoughtful response.

But now that Megan McArdle has picked up the thread from a second Yglesias post, read the paper, and it given it a favorable verdict, it’s time to point out that “it’s only a model” – and not a very good one at that.

“Anti Lemons” is not an empirical study. Instead it presents a series of abstract mathematical models with arbitrary assumptions. The final model purports to demonstrate the authors’ conclusion that “For-profit entry turns out to be feasible, despite these assumptions, as long as private schools can cream skim the highest ability students from the public system.”

What are the authors’ assumptions?

i) individuals differ only with respect to innate ability

ii) all schools are equally productive

iii) for-profit schools must operate unsubsidized

The first two of these assumptions are nonsense and the third contravenes the whole point of a school choice program (whether tax credits or vouchers), which is to subsidize access to private schooling for those who could not otherwise afford it.

As if these problems were not enough, the model also incorrectly assumes that when academic selectivity is permitted, every private school will not only select students based on academic entrance tests, but that they will all use the same test. Like the others, this assumption is out of touch with reality. When I analyzed survey data for Arizona private schools in 2006, I found that nearly half of all private schools were not academically selective. Only a third actually administered an academic admissions test of any kind. The only admissions criteria applied by a majority of schools were measures of student and parent desire to attend the school and students’ and parents’ willingness to abide by its code of conduct.

So the MacLeod and Urquiola model has precious little to do with reality. It tells us nothing about the real world or about tax credit or voucher programs or proposals. In fact, it seems to serve no productive purpose whatsoever, unless one considers it productive to give left-wing bloggers a study abstract to talk about that “conveniently supports political positions [they] like.”

Though MacLeod and Urquiola briefly discuss a modified model that relaxes the proscription against subsidization of private schools, its other erroneous assumptions remain and so it produces a result that is, not surprisingly, completely at odds with the reality established by the large body of empirical findings in this field.

Last year, I reviewed the worldwide literature comparing public and private schools (65 studies reporting 156 different statistical findings) and found that the statistically significant findings favor private schools by a margin of roughly 8 to 1. More importantly, when we focus more precisely and compare truly market-like school systems to monopolies such as U.S. public schooling, the statistically significant results favor markets by a margin of nearly 15 to 1 (and they greatly outnumber the insignificant findings as well). It is thus the least regulated private schools that show the most consistent advantage.

MacLeod and Urquiola mischaracterize that research literature as follows: “there is no consistent evidence that introducing choice substantially improves learning, or that private schools have higher value added than public ones.” The sources they cite to back up their mischaracterization are both incomplete and imprecise, failing to look at a large swath of the research and failing to distinguish among various forms of “choice” with fundamentally different features.

So, no, the “Anti-Lemons” study is not the Camelot it is cracked up to be by recent rhapsodic blog posts. It’s not even a good model.

[Should anyone want to interject Hsieh and Urquiola’s 2006 empirical study of the highly regulated Chilean voucher system at this point, I’ve already offered my thoughts on it here.]

The Government Has Your Baby’s DNA

My 2004 Cato Policy Analysis, “Understanding Privacy – and the Real Threats to It,” talks about how government programs intended to do good have unintended privacy costs. “The helping hand of government routinely strips away privacy before it goes to work,” I wrote.

There could be no better illustration of that than the recent CNN report on government collection and warehousing of American babies’ DNA. “Scientists have said the collection of DNA samples is a ‘gold mine’ for doing research,” notes a sidebar to the story.

I have no doubt that it is—and that government-mandated harvesting of this highly valuable personal data from children is an unjust enrichment of the beneficiaries.