Archives: 03/2010

Don’t Need More Rental Subsidies

At Tuesday’s congressional hearing on the future of Fannie Mae and Freddie Mac, Rep. Barney Frank (D-MA) said that “It’s a mistake for the government heavily to subsidize homeownership.” Coming from one of the biggest cheerleaders for federal homeownership subsidies, and an architect of the housing meltdown, a conversion from Frank would be welcome.

Unfortunately, Frank followed the comment with a call for more rental housing subsidies:

We are much better off trying to subsidize rental housing, because when you put people into decent rental housing, you do not confront the problems we have seen putting people inappropriately into homeownership.

Frank is correct that tying oneself to a mortgage is much riskier than renting. The federal bias toward homeownership has been predicated on its alleged civic virtues, but there’s no virtue in being a slave to an expensive mortgage, especially when one’s house is worth less than the note.

But the government’s dismal experiences with rental subsidies, including public housing, demonstrate that more federal interventions are unwarranted. In addition to abolishing homeownership subsidies, the federal government should also abolish rental subsidies, as a Cato essay by Howard Husock argues.

The following are some key points from the essay:

  • Before federal subsidy programs were begun, and before the widespread use of detailed housing regulations and zoning ordinances, private markets did a good job of provided housing for lower-income Americans. During the period from 1890 to 1930, for example, vast amounts of new working-class housing were built in American cities. Data from that period show that a significant percentage of residents of poor neighborhoods did not live in overcrowded tenements, but instead lived in small homes that they owned or in homes where the owners lived and rented out space.
  • Since the 1930s, the federal government has funded one expensive approach to low-income housing after another—without seeming to notice that the new approaches were made necessary less by market failure than by the failure of past public policies. Public housing projects erected to replace slums soon became severely distressed, housing vouchers meant to end “concentrated poverty” instead moved it around, and the low income housing tax credit program provides large subsidies to developers and few benefits to low-income families.
  • A major social benefit of private and unsubsidized rental and housing markets is the promotion of responsible behavior. Tenants and potential homeowners must establish a good credit history, save money for security deposits or downpayments, come with good references from employers, and pay the rent or mortgage on time. Renters must maintain their apartments decently and keep an eye on their children to avoid eviction. By contrast, public housing, housing vouchers, and other types of housing subsidies undermine or eliminate these benefits of market-based housing.
  • Federal housing subsidies are very expensive to taxpayers. In 2010, the federal government will spend about $26 billion on rental aid for low-income households and about $8.5 billion on public housing projects.

A Glance into Costa Rica’s Health Care System

Costa Rica – my home country – has suddenly become part of the health care debate after celebrity radio talk show host, Rush Limbaugh said that he would move to Costa Rica go to Costa Rica for health care if  ObamaCare were approved by Congress the federal government gets too involved in health care in the next few years.

Soon after Sunday’s vote in the House of Representatives, a website was set up to buy Limbaugh a one-way, first-class ticket to Costa Rica. Liberals were quick to point out that my country has a socialized health care system that is among the best in Latin America.

People claim that in Costa Rica health care is a right, not a commodity. The problem surfaces when you actually need to exercise your “right.”

Last July, La Nación newspaper carried a report about one hospital that had 5,000 people on a waiting list for surgery, some waiting up to a year. Among those on the list, 900 patients waited months to have possible cancerous tumors extracted. According to the head of the Oncology Department, “We know that 85% to 90% will be cancer cases based on previous medical tests.” For many of these patients, the wait is the equivalent of a death sentence.

Stories like this are common in the Costa Rican press.

Unfortunately, the current nationalized health care system and the state-owned monopoly in health insurance stifle the development of a viable, dynamic private health care system. Thus, many Costa Ricans can’t imagine life without “free” health care. That’s too bad since there’s nothing free about mandatory monthly contributions from workers and nothing just about being forced to pay for deadly delays in health care attention.

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Wednesday Links

  • Idea of the day: Repeal the 16th Amendment, which  gives Congress the power to lay and collect taxes. Replace it with an amendment that requires each state to remit to the federal government a certain percent of its tax revenue.
  • Economist Richard Rahn on the necessity of failure in the market: “When government becomes a player and tries to prevent the failure of market participants, its decisions are almost invariably corrupted by the political process.”
  • Read up on Goodwin Liu, Obama’s nominee for a seat on the 9th Circuit Court of Appeals: “Liu’s confirmation would compromise the judiciary’s check on legislative overreach and push the courts not only to ratify such constitutional abominations as the individual health insurance mandate but to establish socialized health care as a legal mandate itself.”
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Calling Out Trade’s Myth Makers

Organized labor’s trade “think tank” in Washington, the Economic Policy Institute, claims that currency manipulation is a major cause of the U.S. trade deficit with China, which (along with other unfair trade practices) accounted for 2.4 million American job losses between 2001 and 2008. EPI has been making similar claims for years, getting lots of media attention for its hyperbole, and providing smoke bombs for charlatan politicians to hurl into the discussion to obscure the public’s understanding of trade.   For starters, as conveyed in this new paper, I am skeptical about the relationship between currency undervaluation and the trade account.

EPI’s methodology (to use the term loosely) is not to be taken seriously, though, because it derives from a simple formula that approximates job gains from export value and job losses from import value, as though there were a straight line correlation between the jobs and trade data. It pretends that there are no jobs created when we import, and that import value is somehow an appropriate measure of job loss.

The flaws of those assumptions are many, but perhaps the easiest one to convey is that most of the value embedded in imports from China is not Chinese. (The ensuing discussion is from a forthcoming Cato paper.)

According to the results from a growing field of research, only about one-third to one-half of the value of U.S. imports from China comes from Chinese labor, material and overhead. Official U.S. import statistics—which pay no heed to the constituent value-added elements—therefore overstate the Chinese value in those imports by 100 to 200 percent, on average. The cited job loss figures are based on import values that are unequivocally overstated because one-half to two-thirds of that value are the costs of material, labor, and overhead added in other countries, including the United States.

What is seldom discussed—because they are often portrayed as victims—is that large numbers of American workers are employed precisely because of imports from China. This is the case because the U.S. economy and the Chinese economy are highly complementary. U.S. factories and workers are more likely to be collaborating with Chinese factories and workers in production of the same goods than they are to be competing directly. The proliferation of vertical integration (whereby the production process is carved up and each function performed where it is most efficient to perform that function) and transnational supply chains has joined higher-value-added U.S. manufacturing, design, and R&D activities with lower-value manufacturing and assembly operations in China. The old factory floor has broken through its walls and now spans oceans and borders.

Though the focus is typically on American workers who are displaced by competition from China, legions of American workers and their factories, offices, and laboratories would be idled without access to complementary Chinese workers in Chinese factories. Without access to lower-cost labor in places like Shenzhen, countless ideas hatched in U.S. laboratories, that became viable commercial products and support hundreds of thousands of jobs in engineering, design, marketing, logistics, retailing, finance, accounting, and manufacturing might never have made it beyond conception because the costs of production would have been deemed prohibitive for mass consumption. Just imagine if all of the components in the Apple iPod had to be manufactured and assembled in the United States. Instead of $150 per unit, the cost of production might be double or triple or quadruple that amount.

Consider how many fewer iPods Apple would have sold, how many fewer jobs iPod production, distribution, and sales would have supported, how much lower Apple’s profits (and those of the entities in its supply chains) would have been, how much lower Apple’s research and development expenditures would have been, how much smaller the markets for music and video downloads, car accessories, jogging accessories, and docking stations would be, how many fewer jobs those industries would support and the lower profits those industries would generate. Now multiply that process by the hundreds of other similarly ubiquitous devices and gadgets, computers and Blu-Rays, and every other product that is designed in the United States and assembled in China from components made in the United States and elsewhere.

The Atlantic’s James Fallows characterizes the complementarity of U.S. and Chinese production sharing as following the shape of a “Smiley Curve” plotted on a chart where the production process from start to finish is measured along the horizontal axis and the value of each stage of production is measured on the vertical axis. U.S. value added comes at the early stages—in branding, product conception, engineering, and design. Chinese value added operations occupy the middle stages—some engineering, some manufacturing and assembly, primarily. And more U.S. value added occurs at the end stages in logistics, retailing, and after market servicing. Under this typical production arrangement, collaboration, not competition, is what links U.S. and Chinese workers.

EPI’s work on this subject provides fodder for sensational stump speeches. But it is also a major disservice to a public that is hungering for truth, and not self-serving advocacy masquerading as truth.

My Big Fat Greek Budget

Since we’re already depressed by the enactment of Obamacare, we may as well wallow in misery by looking at some long-term budget numbers. The chart below, which is based on the Congressional Budget Office’s long-run estimates, shows that federal government spending will climb to 45 percent of GDP if we believe CBO’s more optimistic “baseline” estimate. If we prefer the less optimistic “alternative” estimate, the burden of federal government spending will climb to 67 percent of economic output. These dismal numbers are driven by two factors, an aging population and entitlement programs such as Medicare, Medicaid, and Social Security. For all intents and purposes, America is on a path to become a European-style welfare state.

If these numbers don’t depress you enough, here are a couple of additional observations to push you over the edge. These CBO estimates were produced last year, so they don’t count the cost of Obamacare. And as Michael Cannon repeatedly has observed, Obamacare will cost much more than the official estimates concocted by CBO. And speaking of estimates, the long-run numbers in the chart are almost certainly too optimistic since CBO’s methodology naively assumes that a rising burden of government will have no negative impact on the economy’s growth rate. Last but not least, the data above only measures federal spending. State and local government budgets will consume at least another 15 percent of GDP, so even using the optimistic baseline, total government spending will be about 60 percent of GDP, higher than every European nation, including France, Greece, and Sweden. And if we add state and local spending on top of the “alternative” baseline, then we’re in uncharted territory where perhaps Cuba and North Korea would be the most appropriate analogies.

So what do we do? There’s no sure-fire solution. Congressman Paul Ryan has a reform plan to reduce long-run federal spending to less than 20 percent of GDP. This “Roadmap” plan is excellent, though it is marred by the inclusion of a value-added tax. Bill Shipman of CarriageOaks Partners put forth a very interesting proposal in a Washington Times column to make the federal government rely on states for tax revenue. And I’ve been an avid proponent of tax competition as a strategy to curtail the greed of the political class since it is difficult to finance redistribution if labor and capital can escape to jurisdictions with better tax law. Any other suggestions?

Bad News for the Education Standards Crowd

Despite nearly two decades of state and federal standards-and-testing, as well as big increases in spending, today’s reading results from the National Assessment of Educational Progress – the so-called “Nation’s Report Card” – continue to tell a tale of stagnation.  Nationally, the average fourth-grade score was 217 (out of 500) in 1992. In 2009 it was only 221. For eighth grade, the average score in 1992 was 260. In 2009 it was just 264. Oh, and eighth-graders had hit 264 by 1998, which means there hasn’t been even a smidgen of improvement since then.

“But,” will say the standardizers, “the problem is that we just haven’t set really high standards and been unrelenting in forcing schools to meet them.” You know, we haven’t been like Massachusetts, which has shown the rest of the nation the way.

Think again. It turns out there very well might be a Massachusetts Mirage.

The average eighth grade score in the Bay State went up just one, tiny point between 2007 and 2009, going from 273 to 274, and it has been stuck around 273 since 2003. Worse yet, in fourth grade the average score dropped from 236 to 234 between 2007 and 2009, and the Bay State had hit 234 as early as 2002.    

Now, can we tell definitively from either the national or Massachusetts scores that centralized standards-and-accountability regimes don’t work? Nope. There are far too many variables involved in education, from child nutrition to the weather on test day, to make such a pronouncement. But we can say that those who are trying to sell us centralized control of education had also better not point to national scores, or scores in the sainted state of Massachusetts, as any kind of evidence that centralized standards-and testing works.

I’m not getting my hopes up.

Robert Wright on Being—and Not Being—“Pro-Israel”

The U.S.-Israel relationship has been in the news a lot lately.  First, Israel humiliates the American Vice President by announcing an expansion of settlements in East Jerusalem during his trip to that country.  Then, Gen. Petraeus states in congressional testimony [.pdf] that the Israel/Palestine imbroglio “foments anti-American sentiment, due to a perception of U.S. favoritism for Israel,” which in turn creates a dynamic where “Al Qaeda and other militant groups exploit that anger to mobilize support.”

For those with interest in the subject, Robert Wright’s piece on the New York Times’ website may be of interest.  Wright looks at how chauvinistically Gary Bauer, Max Boot, and Abraham Foxman define “pro-Israel” and writes

If Israel’s increasingly powerful right wing has its way, without constraint from American criticism and pressure, then Israel will keep building settlements. And the more settlements get built — especially in East Jerusalem — the harder it will be to find a two-state deal that leaves Palestinians with much of their dignity intact. And the less dignity intact, the less stable any two-state deal will be.

As more and more people are realizing, the only long-run alternatives to a two-state solution are: a) a one-state solution in which an Arab majority spells the end of Israel’s Jewish identity; b) Israel’s remaining a Jewish state by denying the vote to Palestinians who live in the occupied territories, a condition that would be increasingly reminiscent of apartheid; c) the apocalypse. Or, as Hillary Clinton put it in addressing the American Israel Public Affairs Committee conference on Monday: “A two-state solution is the only viable path for Israel to remain both a democracy and a Jewish state.”

So, by my lights, being “pro-Israel” in the sense embraced by Bauer, Boot and Foxman — backing Israel’s current policies, including its settlement policies — is actually anti-Israel. It’s also anti-America (in the sense of ‘bad for American security’), because Biden and Petraeus are right: America’s perceived support of — or at least acquiescence in — Israel’s more inflammatory policies endangers American troops abroad. In the long run, it will also endanger American civilians at home, funneling more terrorism in their direction.

I have been and remain skeptical that Washington could successfully force a deal on the Israelis and Palestinians.  To my mind, neither side seems willing to make the sorts of very painful concessions that would be necessary for peace.  I think that the big problem the I/P dispute presents for the United States is less inherent in the conflict than it is in the fact that the United States has placed itself in a position, as George Kennan wrote, where “each [side] has the impression that it is primarily through us that its desiderata can be achieved, with the result that we are always first to be blamed, no matter whose ox is gored; and all this in a situation where we actually have very little influence with either party.”

But as long as we’re implicated in this sorry affair, we ought to be throwing our weight around to try to push both parties in the directions we think they ought to go.  As Wright writes, smiling and nodding no matter what Israel does isn’t friendship.