Archives: 02/2010

Doubling Down on Failed Policies

Today in Las Vegas, President Obama will take another $1.5 billion in taxpayer money and let it ride another spin on the roulette wheel otherwise known as foreclosure assistance.  This time, however, he’s not even bothering to send the money to homeowners; its all going to state governments.  

That’s correct, he’s sending a huge check to select state governments to use in almost any manner they choose, as long as it offers some pretense at propping up the housing market.  

The assistance will be targeted at those states that have seen at least a 20% decline in home prices.  Subsidizing states because their housing markets are getting more affordable almost makes one yearn for the days when we subsidized states because their housing markets were too expensive.  What we are really subsidizing is those states whose destructive land-use policies contributed to the magnitude of the housing bubble.  Basic economics tells us that as supply becomes more inelastic (think growth boundaries), prices become more volatile.  It’s bad enough that most of our housing subsidies, both homeowner and renter, have ended up going to states that have crippled their housing markets, but now we are sending them a big check to reward such behavior.

Washington needs to end its constant attempts to prop up the housing market.  The only viable solution to an over-supply of housing is a further decline in prices.  Most of the worst-hit areas, such as California, do not lack for families wanting to buy homes.  They lack a supply of homes at affordable prices, which would be solved by letting prices fall.

This Week in Government Failure

Over at Downsizing Government, we focused on the following issues this week:

Tax Havens Are Not Money Laundering Centers

Demagogues such as Sen. Carl Levin (D-MI), as well as many other politicians and journalists, often assert that low-tax jurisdictions are havens for dirty money and terrorist financing. From a theoretical perspective, this does not make sense. So-called tax havens have a big incentive to avoid scandal since they are much more vulnerable to reputational risk. Just imagine what would have happened, after all, if the 9-11 terrorists had used a bank in the Bahamas instead of a bank in Florida. Critics of low-tax jurisdictions automatically would have assumed that the bank was complicit and the entire financial services industry in the Bahamas would have been crippled – or even destroyed. But because the terrorists used American banks (as well as banks in high-tax European nations and the Middle East), there was no knee-jerk reaction. People understood that the bank tellers and managers had no way of knowing that the flight school students were actually lunatics.

But this does not stop the anti-tax haven smear campaign. Low-tax jurisdictions are viewed as a threat by politicians since it is much harder to impose bad tax policy in a world where tax competition is allowed to flourish. This is why tax havens are attacked whenever something bad happens. If there is a terrorist attack, blame tax havens. If there is a financial crisis, blame tax havens.

With this in mind, a new report from the University of Basel’s Institute of Governance did some real research and came up with a list of nations where there actually is a high risk of money laundering and terrorist financing. As the map below indicates, only one so-called tax haven is among the 28 countries listed, and that nation was in the lowest-risk category.

Krugman Don’t Know Health Insurance

When I debated Nobel Prize-winning economist Paul Krugman on health care reform, I asked him if he was familiar with the work of University of Pennsylvania economist Mark Pauly.  Pauly is a leader in the economics of health insurance.  He and his coauthors have shown that health insurance markets are way ahead of politicians – and way ahead of economists – in solving the problems that bedevil health insurance markets. I already knew the answer: only someone completely oblivious of Pauly’s work could have debated as Krugman did.  (As Krugman himself demonstrated in that debate, you never want to ask a question to which you don’t already know the answer.)

Krugman’s column in today’s New York Times tells me that he still has not read Pauly.

Krugman addresses the 39-percent premium increases that insurer Wellpoint planned to impose on its California customers:

WellPoint claims … that it has been forced to raise premiums because of “challenging economic times”: cash-strapped Californians have been dropping their policies or shifting into less-comprehensive plans. Those retaining coverage tend to be people with high current medical expenses. And the result, says the company, is a drastically worsening risk pool: in effect, a death spiral.

Krugman then argues that if Wellpoint’s explanation is accurate, then that demonstrates that free-market reforms would cause private insurance markets to collapse, and demonstrates further the need for government to impose price controls on health insurance and to force healthy people to purchase it.

Yet there are at least two major problems with Wellpoint’s story.

  1. Healthy people dropping coverage would not lead to across-the-board premium increases in California, because California allows markets to set premiums.  Only when the government imposes the kind of price controls that Krugman wants does an “adverse selection death spiral” follow.
  2. Krugman may be thinking, “Even with market prices, once the healthy people drop out, insurers must raise premiums to cover the future costs of the sick people who remain.” Yet Pauly and his colleagues show that insurers collect the money they need to cover those costs in advance by “front-loading” premiums.

There is still one way that Wellpoint’s story could have some validity – I’m curious to know if Krugman knows what it is – but as University of Chicago economist John Cochrane explains in this Cato study, that particular problem is due to government failure, not market failure.

In an email to me, Pauly offers a more reasonable explanation for Wellpoint’s premium hikes:

Individual insurance premiums are very volatile so you can always find some insurer jumping their premium a lot.  Consumers then usually move to the insurer that did not.  I know the … California story: Wellpoint had tried aggressively to expand its individual business by setting low premiums, and I think realized the underpricing to gain market share did not make sense in a recession, so they put premiums back up where they should be.  Maine is heavily regulated so I do not know the story there but I bet these big hikes came after several regulatory refusals to increase premiums moderately – so again we see a correction of underpriced coverage… I could be wrong but I think this is all political; you could have found this story at virtually any time in the last 10 years but it is more salient now.

The next time Krugman wants to interpret news about health insurance markets, he should do what I do: check with Mark Pauly.

Krugman also declines to consult the literature when he claims that allowing people to purchase health insurance across state lines would lead to a “race to the bottom” as states gutted their consumer protections.  (It wouldn’t.)

Conservatism and Gay Rights

We had a spirited forum at Cato on Wednesday on the question “Is There a Place for Gay People in Conservatism and Conservative Politics?” Nick Herbert, who is likely to be part of the British Cabinet in another 100 days, gave a powerful and pathbreaking speech on the Tory Party’s new inclusiveness. In the video below you can find his remarks beginning at about the 3:00 mark, where he says, “I’m delighted to be here at Cato, the guardian of true liberalism.”

Andrew Sullivan (24:00) gave a moving and eloquent defense of a conservatism that has a place for gay people, declaring himself “to the right of Nick, a Thatcherite rather than a ‘One Nation’ Tory.” And Maggie Gallagher (39:15) did an admirable job of presenting her own views to an audience she knew was very skeptical.

Then the fireworks began (51:50). Andrew denounced my question – reflecting many complaints I’d received before the reform – about whether he can really be considered a conservative at this point. “Preposterous,” he declared. There followed sharp exchanges on hate crimes, marriage, adoption, religious liberty, and the state of conservatism today.

Watch it all here:

Or listen to a podcast of Nick Herbert’s speech. Subscribe to Cato’s podcasts on iTunes here.

The Census: Constitutional but Very Costly

Most activities undertaken by the federal government have no constitutional basis. One exception is the Census carried out every 10 years to determine the allocation of seats in the House of Representatives. Alas, it appears that even this core federal function is subject to cost overruns and waste, as a new report from the Department of Commerce’s inspector general illustrates.

Quarterly updates of progress on the census by the inspector general were required by legislation in 2008, which gave the Census Bureau an additional $210 million “to help cover spiraling 2010 decennial costs stemming from the bureau’s problematic efforts to automate major field operations, major flaws in its cost-estimating methods, and other issues.”

So how are things going?

The Census has been forced to rush the creation of a paper-based processing system for its field staff because its original plan to equip workers with hand-held computers was a boondoggle. In the world of government, “rush” means that Census told Congress in April 2008 that it was scrapping the computers.

From a article at the time:

In 2006, the Census Bureau awarded a $595 million contract to Harris Corp. to develop more than 525,000 handheld computers that enumerators would use to collect data from Americans who did not send in their census forms… Since awarding the contract, the project has experienced constant setbacks, including changing system requirements that led to increased costs and missed deadlines. Reports by the Government Accountability Office, the department’s inspector general and Mitre Corp. all issued warnings that the handhelds were at risk of not being ready by 2010 and may not work as planned.

According to the inspector general’s report, the paper-based replacement system is also having problems:

  • “We found that system development and testing have fallen substantially behind schedule, resulting in less functionality and an increased likelihood of field staff’s encountering technical problems during operations.”
  • “Although development staff have been deployed as much as possible — working two shifts per day, extended hours, weekends and holidays — the schedule to build new functionality has not appreciably improved, and testing of already developed functionality continues to fall farther behind.”
  • Defects in the software have gone from 26 to 80 in the past year. As a result of the software delays and defects, the development of the training materials is 31 days behind schedule.
  • As for actual system performance, “Two load tests were conducted in December 2009 to determine the network and computing capacity needed during peak operations. The first test revealed numerous performance and functional problems. Although many of these problems were alleviated for the second test, performance issues persist.” Deployment is less than five weeks away.

The estimated cost of the census has increased by $3.2 billion in the last two years and is now expected to cost $14.7 billion. The inspector general’s take on cost overruns at early local census offices (ELCOs) speaks for itself:

These wide variances between budgeted and actual costs do not generate confidence in the Census Bureau’s budgeting and cost containment processes for large-scale field operations.

Among the findings:

  • “For production, 49 of 151 ELCOs (32 percent) exceeded their wage budgets and 75 (50 percent) exceeded their mileage budgets.”
  • “The ELCOs’ production wage costs were 45–186 percent of their budgets and for production mileage they were less than one percent to 250 percent of their budgets.”
  • “For quality control, 124 of 151 ELCOs (82 percent) exceeded both their wage and mileage budgets.”
  • “For the quality control phase of the operation, ELCOs’ wage costs were 68–439 percent of their budgets and for mileage were less than one percent to 878 percent of their budgets.”

That’s some quality control.

As for government efficiency:

During Address Canvassing, 15,263 employees received training but worked for less than a single day or did not work at all. Of these employees, 10,235 did not work at all but earned approximately $3.4 million for attending training. An additional 5,028 employees completed training, at a cost of $2.2 million in wages, but worked for less than a single day.

Looking at how the federal government is bungling a core constitutional function, it’s amazing that we let it meddle in housing, energy, health care, and thousands of other activities the Founders didn’t envision it doing.

See this essay for more on cost overruns in government programs.

Do You Still Think DC Spends Only $15,000/Pupil?

The District of Columbia spent over $28,000 per pupil in the 2008-09 school year. This year is probably similar. So why does (almost) everyone still claim the figure is around half that much? John Stossel has a good summary here.

If you’d like all the gory details, drawn from the official DC budget documents and the District’s own audited enrollment figures, then have a look at this Excel spreadsheet file.

I’m happy to go over the calculation with any DC or DCPS official – or journalist – who would care to dispute it. (It’s only been challenged once before, and the official in question fell silent after seeing the spreadsheet.)

Isn’t it about time that the local media start telling it like it is, and acknowledge that the District of Columbia spends four times as much per pupil as local voucher-receiving private schools charge in tuition ($6,620), while still getting worse academic results?