Archives: 09/2011

One Reason Obama Wants Another State Bailout

I recently discussed why the additional federal subsidies for state and local government that President Obama is proposing as part of his “job plan” are a bad idea. A new study from two Harvard economists suggests that the president’s affinity for these subsidies might have something to do with the fact that the aid would be particularly helpful to states with more left-leaning legislators and strong public sector unions.

The study from Daniel J. Nadler and Sounman Hong (see here) found that states with stronger public sector unions and a higher proportion of left-leaning state legislators face higher borrowing costs:

We find that, all things being equal, states with weaker unions, weaker collective bargaining rights, and fewer left-leaning state legislators pay less in borrowing costs at similar levels of debt and similar levels of unexpected budget deficits than do states with stronger unions and more left-leaning legislators. More practically, these findings suggest that the strength of public sector unions has become among the most important factors in bond market perceptions of a state’s risk of financial collapse.

Why do these states face higher borrowing costs? Nadler and Hong explain:

These “political” factors might signify to the bond market whether a state government has the willingness and capacity to initiate needed fiscal adjustments and austerity measures during the state fiscal crises that followed the financial crisis, and thus might provide some information to market participants about the likeliness that a given state government will choose to default on its debt instead of making politically difficult or undesirable budget cuts. Similarly, public sector labor environment variables, such as union strength, might signify to market participants the degree of organized political opposition state lawmakers would have to overcome to implement such austerity measures.

In a corresponding Wall Street Journal op-ed, Nadler and Paul E. Peterson, director of Harvard’s Program on Education Policy and Governance, do a nice job of explaining why the separation of responsibility between the federal government and the states has been crucial to the country’s economic rise:

Federal rescue of states is a dramatic departure from past practice. State bankruptcies date back to the 1840s when, amid a financial crisis, Pennsylvania, Michigan, Illinois and five other states discovered they had invested too heavily in infrastructure. The last state bankruptcy was in Arkansas during the 1930s. But overall the instances were few; in each case the federal government refused to come up with a fix.

Bankrupt states paid the price, but for the country as a whole, a system of fiscally sovereign states has proven incredibly beneficial to the nation’s economic well-being. Every state is responsible for its own police, fire, schools, transport and much more, and most of the time they do reasonably well. If they manage their affairs so as to attract business, commerce and talented workers, states prosper. If states make a mess of things, citizens and businesses vote with their feet, marching off to a part of the country that works better.

It is this exceptional federalist system that helped drive the rapid growth of the American economy throughout the first two centuries of the country’s history. Because state and local governments competed with one another for venture capital, entrepreneurial talent and skilled workers, governments generally had to be attentive to the needs of both citizens and commerce.

Unfortunately, the 20th century’s trend for the federal government to subsidize and manage more and more state and local affairs has worsened in the last 10 years as the chart in my blog post shows. If our bloated federal government is ever to be reined in, a return to fiscal federalism is a must. And if the states are to get their financial houses in order, state policymakers can’t be allowed to believe that a federal policy of “too big to fail” applies to them. (See this Cato essay for more on fiscal federalism.)

Somebody Deserves a Raise at the Ford Motor Company

From Fall 2008 through Summer 2009—the most intense months of the “Bailruptcy Era”—I ventured on occasion to question Ford’s near total silence in the face of an unprecedented intervention to rescue its chief rivals from a hard-earned fate.  In pondering whether Ford would defend its interests, I wrote:

There is probably no company in America that stands to lose more from taxpayer subsidization of GM and Chrysler…

 If GM and Chrysler were no longer producing, Ford would be able to pick up market share and productive assets from the others, and ultimately improve its own long term prospects. By keeping GM and Chrysler afloat with subsidies, the government is implicitly taxing Ford. Ford is facing unfair, government-subsidized competition, of the sort alleged against foreign producers all the time. But in this case, the subsidies are real, direct, quantifiable, and large.

Well, Ford did remain silent about the rescue operation (for reasons I never found particularly compelling). 

Fast forward to Ford’s Summer 2011 television advertising campaign, which includes commercials featuring Ford customers giving press conferences to answer questions about why they chose Ford.  One of those commercials (this one, HT Gene Healy) has the customer explaining that he’d never buy a car from a company that was bailed out by our goverment, which, as it turns out, is a compelling determinant of demand these days. 

In branding itself as the unbailed-out Detroit producer, Ford has politely ended its silence on the matter of the GM and Chrysler bail-ruptcies, in a very smart, respectable manner.  And by using actors instead of executives to speak ill of the auto intervention, Ford keeps its own bailout raincheck in a safe place, should the inclination to redeem it ever become irresistable. 

Somebody at Ford deserves a raise.

This Week in Government Failure

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

  • Federal Davis-Bacon rules could increase the price tag for Washington D.C.’s CityCenter development by $20 million.
  • The U.S. Postal Service is running on fumes. What will Congress do?
  • The President’s jobs bill would do nothing for education and would hurt the economy.
  • The Budget Control Act will likely produce either a minuscule defense cut in the near term or no cuts at all.
  • As the political circus over the Solyndra loan unfolds, let’s not lose sight of the fact that the more important question is whether taxpayers should be forced to subsidize energy companies to begin with. They shouldn’t.

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Interesting Thoughts on Postal Reform

Postal expert Alan Robinson’s Courier, Express, and Postal Observer blog is always an interesting read, but his latest two posts are particularly worthwhile.

The U.S. Postal Service’s financial woes are starting to attract commentary from prominent thinkers. In the first post, Robinson looks at recent articles from Felix Salmon, Gary Becker, and Richard Posner and concludes that while their analyses are incomplete, their observations deserve further consideration. The three pieces share a common theme: a government postal service micromanaged by Congress and regulators is no longer workable. Thus, it is time to consider reforms such as deregulation and privatization.

As Robinson notes at the outset, “any postal reform measure has to go beyond fixing retiree obligations or restructuring operations to reduce costs.” Robinson believes that a failure by policymakers to address three issues in particular will probably force Congress to re-examine the USPS’s business model again in a few years (I know, Congress kicking the can down the road? Shocking.):

1. Profit must be an explicit goal for the organization and profit must reflect a sufficient operating margin to ensure cash is generated to make capital investments needed to improve service once the current financial difficulties pass. There is no excuse for the Postal Service to be the only large national post suffering major losses in the Euro Zone, North America, and Oceana and Australia.

2. The Postal Service has to be granted significant relief from both congressional and Postal Regulatory Commission oversight. To the extent that either law or regulatory precedent freezes the status quo and prevents market-based pricing and market-based service quality, that law and those regulations must be removed.  In particular both restrictions on distance-based and regional pricing for commercial mailers need to be lifted in order to develop market-based and not cost-based prices.

3. Transition of the Postal Service to an entity that operates under standard corporate business, employment, and contract law must occur within a reasonable period. During this period, the privatization of the Postal Service as a public utility providing delivery services must be seriously examined.

The second post is related to Robinson’s issue #1: the need for capital investments to improve services and reduce operating costs. According to Robinson, the USPS’s new proposal to restructure its processing and transportation network is a “second-best option” because “pricing, financial, and labor contract constraints prevented it from making a proposal that could provide better service or further reduce operating costs.”

Robinson’s analysis of these constraints is informative, but it’s his conclusion that is worth highlighting here:

The capital constraint illustrates that significant investments in plant and equipment could reduce costs and increase profits. The capital constraint illustrates than maintaining the current payment schedule for retirement obligations, or adding more debt to cover those obligations would not help the Postal Service develop a network that optimally minimizes cost or sets the capital/labor ratio. The capital constraint hints that the Postal Service, cleared of the disputed portion of its retirement obligations, would be attractive to private investors who could use their capital to make network improvements that the Postal Service could not afford as long as it remains a government enterprise.

Malcolm Wallop, RIP

Former U.S. senator Malcolm Wallop (R-Wyoming) passed away on Wednesday at age 78. The Washington Post obit for him has a quote from one of his Cato appearances:

Sen. Wallop was unapologetically conservative as a Republican, a position that sometimes drew ire from members of his own party.

“Too many Republicans prefer to be a Democrat Lite,” he said in a speech at the Cato Institute in 1994. “As any beer connoisseur can tell you, Lite is a tasteless, repugnant concoction.”

Way before the Tea Party came along, he penned a scathing and wide-ranging critique of the expansive growth of the federal government in the February 1994 issue of National Review, “Can Conservatives Take America Back?”  That article is well worth rereading.  Unfortunately, no on-line link seems to be available, but perhaps that will change soon.

Wallop also spoke out against federal power-grabs that came in antiterrorism packaging.

The Perks of Local Government

The Washington Examiner reports:

Six of [the Washington-area mass transit system] Metro’s top executives are assigned agency-owned vehicles that they can drive home, the transit system acknowledged Tuesday, one day after saying none of them had take-home vehicles.

That is in addition to the 116 Metro employees who receive take-home vehicles, including 88 managers and superintendents, first reported by The Washington Examiner.

I wonder if executives and managers at automobile companies get free subway passes?

Does PPACA’s Mandate ‘Carry into Execution’ the Commerce Power?

The Obama administration contends that its mandate to purchase health insurance is “necessary and proper” to effect PPACA’s comprehensive scheme of interstate health care regulation. The constitutional argument is two-part: First, the Commerce Clause empowers Congress to regulate interstate health care. Second, the Necessary & Proper Clause empowers Congress to implement health care regulation by directing individuals to acquire medical insurance or pay a penalty. The administration concedes that the underlying purpose of the mandate is to subsidize insurance companies so they can afford to cover pre-existing conditions, which PPACA commands.

Consider the text of the Necessary & Proper Clause. It authorizes Congress “To make all Laws which shall be necessary and proper for carrying into Execution … all other Powers vested by this Constitution in the Government of the United States.” For example, Congress’s power to spend—which is not expressly mentioned in the Constitution—is necessary for carrying into execution numerous other powers that entail the expenditure of money. Also, the Supreme Court has determined that Congress’s power to regulate intrastate commerce may occasionally be necessary for carrying into execution Congress’s enumerated power “To regulate Commerce among the several States.” Similarly, Congress’s power to establish a federal penal system may be necessary for carrying into execution Congress’s enumerated power “To provide for the Punishment of counterfeiting” and certain other crimes.

All those implied powers are instrumental. They afford a means by which other express powers can be carried into execution. By contrast, PPACA’s health insurance mandate does not carry into execution any express power, including the Commerce Power to regulate interstate health care. Indeed, health care regulation—even with its requirement that insurers cover pre-existing conditions—could have been implemented without the mandate, in which case insurance companies would have been compelled to raise premiums, cut other costs, or accept lower profits.

Instead of carrying health care regulation into execution, the mandate is designed solely to produce a specified outcome for the benefit of private insurers—i.e., to subsidize insurers so they don’t have to raise premiums, cut other costs, or accept lower profits. In other words, the mandate is simply a cost distribution scheme: a policy judgment having nothing to do with facilitating execution and everything to do with who pays the bill. Because the mandate relates to outcome and not process, it cannot be prerequisite for carrying into execution the Commerce Power. Accordingly, it cannot be authorized under the Necessary & Proper Clause, the sole purpose of which is to carry other powers into execution.