Archives: 09/2011

Dramatic Increase in Poverty Rate: One Small Step for Obama, One Giant Step for the So-Called War on Poverty

The Census Bureau has just released the 2010 poverty numbers, and the new data is terrible.

There are now a record number of poor people in America, and the poverty rate has jumped to 15.1 percent.

But I don’t really blame President Obama for these grim numbers. Yes, he’s increased the burden of government, which doubtlessly has hindered the economy’s performance and made things worse, but the White House crowd legitimately can argue that they inherited a crummy situation.

What’s really striking, if we look at the chart, is that the poverty rate in America was steadily declining. But then, once President Lyndon Johnson started a “War on Poverty,” that progress came to a halt.

As I’ve explained before, the so-called War on Poverty has undermined economic progress by trapping people in lives of dependency. And this certainly is consistent with the data in the chart, which show that the poverty rate no longer is falling and instead bumps around between 12 percent and 15 percent.

This is bad news for poor people, of course, but it’s also bad news for taxpayers. The federal government, which shouldn’t have any role in the field of income redistribution, has squandered trillions of dollars on dozens of means-tested programs. And they’ve arguably made matters worse.

By the way, just in case you think I’m being too easy on Obama, read this post about how the Administration is considering a terrible plan to re-define poverty in order to justify ever-larger amounts of redistribution.

I fully agree that the president’s policies definitely have made—and will continue to make—matters worse. But the fundamental problem is 40-plus years of a misguided “War on Poverty” by the federal government.

Al Qaeda: Never an ‘Existential Threat’

My Washington Examiner column this week celebrates 10 years without a major follow-up attack on American soil, and argues that the main reason the United States has been terror-free for a decade isn’t the unparalleled competence of the federal government’s terror warriors—it’s the fact that al Qaeda was never an “existential threat.”

I’ve written a number of columns and blogposts making the same point over the years, and yet, every time I write something that says “al Qaeda’s not so terrifying,” I feel compelled to knock wood, genuflecting to the superstition that merely saying ”we’re pretty safe” out loud will jinx us, and the moment a piece is published, the terrorists will morph into villains worthy of TV’s 24, moving from ineffectual gas-can bombs to nukes.

So far, though, it seems there wasn’t much reason to worry.

Last week, the Washington Post ran a piece entitled, “Who got 9/11 right, and who got it wrong? A pundit score card.” The Post erred badly by not including the distinguished political scientist and friend of Cato, John Mueller, who started making the case that the al Qaeda threat was overblown back when duct tape alerts were the “new normal.” I can’t think of any other prominent figure who got it right as early and as often as Mueller did.

As long as we’re giving credit for prescience, though, I’d like to toot my own horn (sure, it’s graceless, but nobody else is volunteering for the job).

As a larval pundit pecking away in obscurity through the early aughties, I suspected, before I’d ever read Mueller, that the al Qaeda threat was overblown—and I made that case wherever I could.

In September 2002, I reviewed Peter Bergen’s Holy War, Inc. for Liberty magazine:  “Osama bin Laden: Not as Scary as You Think” (.pdf ). In it, I asked whether al Qaeda was “as dangerous as federal powergrabbers have led us to believe.”

After recounting what Bergen reported about Mohamed Odeh, an al Qaeda operative involved in the 1998 bombing of the U.S. embassy in Tanzania—who botched his own escape by trying to convince Pakistani immigration officials that terrorism was “the right thing to do for Islam,”—I ventured that “a lot of these folks don’t sound all that bright.” (Since then, I’ve become even more convinced that these guys were never the sharpest scimitars in the shed.)

In December 2002, when my now-defunct blog was young and DC was waiting for the other shoe to drop after 9/11, I wondered “What if There Isn’t Another Shoe?”: “If the American Jihad/mullahs under the bed/the-country-is-riddled-with-sleeper-cells theory is correct, then why so quiet?” I suggested: “maybe there aren’t that many of them,” which turned out to be true. (Here’s a reference, and you can find the original if you go here and scroll down.)

Ten years later, it’s heartening to know that what was once a fringe position—and a marker of being “unserious” about terrorism—is fast becoming the conventional wisdom.

Jobs Bill Only Makes Political Sense

I can’t look into President Obama’s heart, so I can’t tell you what motives are driving the American Jobs Act. I can, though, tell you this: One look at the facts about American education, and his proposal only makes sense if the goals are to energize union support, and perhaps use spending as some easy shorthand to tell voters that the President cares about kids.

The basic reality is that over the last several decades governments at all levels have conducted ever-bigger education money bombings with no positive academic impact. According to the Digest of Education Statistics, real per-pupil expenditures rose from $5,671 in 1970-71 to $12,922 in 2007-08 (the latest year with available data). On the federal level, between 1970 and 2010 per-pupil spending rose an astonishing 375 percent. Meanwhile, National Assessment of Educational Progress scores for 17-year-olds – essentially, our schools’ “final products” – were almost completely flat. More money did not buy better results.

What did it buy? Exactly what President Obama seems to want to protect: staffing bloat. Between 1969 and 2008 American schools went from having 22.6 students per teacher to 15.3. District administrative staff went from 697.7 students per employee to just 363.3. In total, students per employee dropped from 13.6 to 7.8, all while academic outcomes froze. We got lots of jobs – many unionized – but nothing of educational value.

There is simply no way to look at the data and believe that $30 billion for school staffing will improve education. So it must only be about jobs, and ineffectual jobs at that.

That “ineffectual” part is the economic key. Stimulus supporters argue that paying for any job is good because employed people spend their dollars. But they ignore that the money must come from somewhere, and that somewhere is ultimately taxpayers who would either spend it themselves – including investing in new or existing companies – or put it in banks that would lend it. So the money would be spent one way or another, only taxpayers have huge incentives to employ it much more efficiently than do public schools, if for no other reason than they did the hard work of earning it. In the aggregate, that means we’d be better off just letting taxpayers keep their ducats.

What we’ve tried already supports this. Contrary to what Dan Domenech writes, public schools have gotten oodles of bailout money. The original stimulus included roughly $100 billion for education, the bulk of which went to public K-12 schooling, and in 2010 the President signed legislation giving states another $10 billion to keep school employment rolls engorged. And did unemployment plateau at about 8 percent, as the Obama team projected? You know the answer.

How about fixing dilapidated school buildings? Again, money is not the answer, unless the question is how do you win union friends and influence voters.

As I testified in 2008, for years school districts had been spending more on maintenance and construction than it was estimated they needed to bring all schools into “good overall condition.” Yet conditions seemed to keep getting worse.

What’s the problem? First, districts often put off maintenance so that small problems become bigger. And second, they often spend lavishly on School Mahals, a tendency embodied by L.A. Unified’s $578 million Robert F. Kennedy Community Schools complex.

Of course, building something brand new, equipped with more superfluous lights and whistles than the original starship Enterprise, doesn’t make practical sense if you could keep the old buildings fully functional at a fraction of the cost. But practical and political are totally different animals. Keeping the boiler in good repair simply doesn’t make for politician-aggrandizing, ribbon-cutting photo-ops. But undertaking a big addition or renovation, which Obama’s bill would pay for, absolutely does.

And let’s not forget: All the labor would likely have to be hired at union rates, in keeping with standard federal requirements. So jobs yes, but not more jobs in exchange for market wages.

Ultimately, the President’s bill would do nothing for education and would hurt the economy, because government spending more almost by definition means a nation wasting money.

C/P from the National Journal’sEducation Experts” blog.

Social Security Demagoguery from Mitt Romney and Michele Bachmann: Economically Wrong, Politically Wrong

Governor Rick Perry of Texas is being attacked by two rivals in the GOP presidential race. His sin, if you can believe it, is that he told the truth (as acknowledged by everyone from Paul Krugman to Milton Friedman) about Social Security being a Ponzi scheme.

Here’s an excerpt from Philip Klein’s column in the Examiner, looking at how Mitt Romney is criticizing Perry.

Mitt Romney doubled down on his attack against Texas Gov. Rick Perry this afternoon, warning in an interview with Sean Hannity that his critique of Social Security amounted to “terrible politics” that would cost Republicans the election. Romney’s decision to pile on suggests that he’s willing to play the “granny card” against Perry if it will help him get elected, a tactic more becoming of the likes of DNC chairwoman Debbie Wasserman Schultz than a potential Republican nominee.

And here’s a Byron York column from the Examiner looking at how Michele Bachmann is taking the same approach.

…another Republican rival, Michele Bachmann, is preparing to hit Perry on the same issue. “Bernie Madoff deals with Ponzi schemes, not the grandparents of America,” says a Bachmann adviser.  “Clearly she feels differently about the value of Social Security than Gov. Perry does.  She believes Social Security needs to be saved, that it’s an important safety net for Americans who have paid into it all their lives.” … “She strongly disagrees with his position on that…”

Shame on Romney and Bachmann. With an inflation-adjusted long-run shortfall of about $28 trillion, Social Security is a Ponzi scheme on steroids.

But as I explain in this video, that’s just part of the problem. The program also is a terrible deal for workers, particularly young people and minorities.

Here’s what’s so frustrating. Romney and Bachmann almost certainly understand that Social Security is actuarially bankrupt. And they probably realize that personal retirement accounts are the only long-run answer.

But they’re letting political ambition lure them into saying things that they know are not true. Why? Because they think Perry will lose votes and they can improve their respective chances of getting the GOP nomination.

Sounds like a smart approach, assuming truth and morality don’t matter.

But here’s what’s so ironic. The Romney and Bachmann strategy is only astute if Social Security is sacrosanct and personal accounts are political poison.

But as I noted last year, the American public supports personal accounts by a hefty margin. And former President Bush won two elections while supporting Social Security reform. And election-day polls confirmed that voters supported personal accounts.

I’m not a political scientist, so maybe something has changed, but I wouldn’t be surprised if Perry benefited from the left-wing demagoguery being utilized by Romney and Bachmann.

P.S. This does not mean Perry has the right answer. As far as I know, he hasn’t endorsed personal accounts. But at least he’s telling the truth about Social Security being unsustainable.

Overregulation, Swing States and D.C. Cynicism

Today’s Wall Street Journal carries a news report on how the Obama administration, after more than two years of pursuing damn-the-costs government control over the private sector, is finally developing more internal debate about whether and when zealous regulations are worth the cost. In particular, Office of Information and Regulatory Affairs chief Cass Sunstein, known as skeptical about some costly rules, has now acquired an important sometime ally in White House Chief of Staff Bill Daley, who played a role in getting EPA to table some very expensive new air-quality standards the other day.

All well and good, but I was stopped short by a paragraph that shouldn’t pass without comment:

The same day, Mr. Daley met with industry groups, who gave the White House a map showing counties that would be out of compliance with the Clean Air Act if the stricter standards were put in place. The map showed that the rule would affect areas in the politically important 2012 election states of Florida, Pennsylvania, Virginia, and Ohio.

Even by Washington standards, isn’t it appallingly cynical to evaluate environmental rules that could (critics have argued) cripple wide sectors of the economy according to whether the worst damage falls on politically vital states like Florida and Ohio, or just ho-hum non-swing states like Oklahoma, North Dakota and Tennessee? True, the article doesn’t say who was cynical enough to draw the connection here – the business groups giving the presentation? The White House listeners? Some third party whose viewpoint this is all being filtered through? But whoever’s being the cynic here, one of the costs is to feed the alienation of citizens of Texas in particular, whose officials and businesses have been complaining for more than a year of being singled out for hostile attention by the Obama EPA. For everyone’s good, I hope someone in the White House at this moment is writing a sharp letter disclaiming any special intent to help Pennsylvania, Virginia et al. And I hope after drafting that letter they will be cleared to send it off for publication in the Journal, not just keep it in the desk to show outraged delegations of Texans.

Ackermann and Dimon 1; Bernanke and Geithner 0

My last blog on bank capital requirements concluded that the push to implement Basel III, which mandates increases in bank capital-asset ratios, is a deadly cocktail to ingest in the middle of an economic slump.

Shortly after, the Chairman of Deutsche Bank Josef Ackermann weighed in during a Frankfurt speech with a blistering attack on raising capital-asset ratios in the middle of a slump.  He was armed with heavy artillery – namely, “The Cumulative Impact on the Global Economy of Changes in the Financial Regulatory Framework,” a 123 page Institute of International Finance report that was hot off the press.

Today, the Financial Times reports that Jamie Dimon, Chief Executive of JPMorgan, has gone even further than Ackermann.  Indeed, Dimon suggests that the new Basel III capital requirements are “anti-American” and that the U.S. should consider pulling out of the Bank for International Settlements in Basel, Switzerland.

Both Ackermann and Dimon are right. The cheerleaders for the imposition of higher bank capital requirements in the middle of a slump – like U.S. Treasury Secretary Timothy Geithner and Fed Chairman Ben Bernanke – are wrong.

We can demonstrate the validity of this conclusion with ease.  Higher capital-asset ratios are “deflationary.”  If we hold the level of a bank’s capital constant, an increase in its capital-asset ratio requires that the level of its assets must fall.  This, in turn, implies that the banking system’s liabilities – demand deposits – must contract.  Since the money supply consists of demand deposits, among other things, the money supply must, therefore, contract.

Alternatively, if we hold assets constant, an increase in the capital-asset ratio requires an increase in capital.  This destroys money.  When an investor purchases newly-issued bank shares, for example, the investor exchanges funds from a bank deposit for the new shares.  This reduces deposit liabilities in the banking system and wipes out money.

It’s no surprise that Sir John Hicks – a high priest of economic theory and 1972 Nobelist – thought there was nothing more important than a balance sheet.

If Geithner, Bernanke and other members of the official chattering classes insist on higher bank capital-asset ratios, the U.S. might, unfortunately, revisit 1937.  It’s time to listen to Ackermann and Dimon.

Cooling out the Marks in Uncle Sam’s Ponzi Schemes

The flap over whether Social Security is a Ponzi scheme reminds me of two passages about Social Security’s sister program, Medicare, from Cato adjunct scholar David Hyman.

The first is from his book Medicare Meets Mephistopheles, which remains the best (and only) satire ever written about Medicare:

Consider what happened when I presented some considerably less pointed remarks at the conference at Washington and Lee University School of Law. One of Medicare’s most enthusiastic supporters responded by making an impassioned speech that it was improper to describe Medicare as a “Ponzi scheme,” and the program should not be judged by the standards that would apply to a private pension because it was actually a “sacred bond” between the generations. (Leave aside the fact that I never used the word “Ponzi” in my remarks. I did note that the Medicare program bore certain similarities to an inter-generational pyramid scheme, which is something quite different. Of course, it is possible that the use of this term by the commentator was a Freudian slip.) His words brought enthusiastic applause from those members of the audience who had heard enough bad news of the sort found in this book and were more than ready to ignore Medicare’s problems on the basis of empty political sloganeering.

The second is from Hyman’s response to a critic of Medicare Meets Mephistopheles:

Finally, my reply is titled “Cooling Out the Marks, Medicare Style.” This is a reference to a well-known article by a famous sociologist, on con games and the social process of adaptation to failure:

“Sometimes, however, a mark is not quite prepared to accept his loss as a gain in experience and to say and do nothing about his venture. He may feel moved to complain to the police or to chase after the operators. In the terminology of the trade, the mark may squawk, beef, or come through. From the operators’ point of view, this kind of behavior is bad for business. It gives the members of the mob a bad reputation with such police as have not yet been fixed and with marks who have not yet been taken. In order to avoid this adverse publicity, an additional phase is sometimes added at the end of the play. It is called cooling the mark out. After the blowoff has occurred, one of the operators stays with the mark and makes an effort to keep the anger of the mark within manageable and sensible proportions. The operator stays behind his team-mates in the capacity of what might be called a cooler and exercises upon the mark the art of consolation. An attempt is made to define the situation for the mark in a way that makes it easy for him to accept the inevitable and quietly go home. The mark is given instruction in the philosophy of taking a loss.”  Erving Goffman, “On Cooling the Mark Out: Some Aspects of Adaptation to Failure,” 15 Psychiatry 451, 451-52 (1952).

The occupational hazard for Medicare’s defenders is the tendency to become coolers on the program’s behalf. Professor Horwitz largely avoids this temptation, although she is not (yet) willing to concede how hot things actually are in the place in which we find ourselves. The same cannot be said for Medicare’s more ardent defenders, who routinely justify and excuse Medicare’s pathologies on the grounds that it is a “sacred inter-generational trust,” and not just another mediocre government program. Yet, even these ardent defenders may eventually find themselves wondering, in the dark of night, how it came to pass that they became coolers, giving instruction to the poor and working classes on the philosophy of taking a loss at the hands of a program that was supposed to help them, but ended up treating them as marks. With friends like that, who needs enemies?