Archives: 10/2011

GAO Throws Water on Postal Bailout

The Government Accountability Office has weighed in on the controversy over whether the federal government “owes” the U.S. Postal Service approximately $50-$75 billion in alleged pension “overpayments” made by the USPS to the government’s retirement system. In short, the GAO concluded that the USPS is not owed the money.

The controversy is interesting because it pits government agencies against each other. The USPS, the USPS inspector general, and the Postal Regulatory Commission say money is owed. The Office of Personnel Management, which administers the government’s retirement system, and the OPM inspector general say that money isn’t owed. The GAO is the most neutral party so its findings should carry more weight with members of Congress. Let’s hope as a transfer from the federal government to the USPS would amount to a taxpayer bailout.

The GAO explains:

Any assets that are transferred from the nonpostal to the postal subaccount of CSRS [Civil Service Retirement System] would increase the federal government’s nonpostal CSRS unfunded liability, which must then be paid by the federal government through tax revenue, borrowing, or both. For example, adoption of the recommendation in the PRC report would result in an asset transfer of about $50 billion to $55 billion, which would then need to be repaid by the federal government and taxpayers.

The GAO also notes that a bailout wouldn’t solve the USPS’s long-term problems:

Any change in the USPS’s share of responsibility for CSRS benefits would provide some temporary relief from the pressures USPS faces because of declining volume, revenue, and inflexible costs, but would not by itself address USPS’s long-term financial outlook. Such a transfer of CSRS funds would not be sufficient to repay all of USPS’s debt and address current and future operating deficits related to USPS’s inability to cut costs quickly enough to match declining mail volume and revenue.

See this Cato essay for more on the USPS’s problems and why it should ultimately be privatized.

American Government Spending: 41% of GDP

My good friend Kathy Ruffing at CBPP takes me to task for testifying that government spending in the United States is 41 percent of GDP, which in my view is a very high and harmful level.

Kathy says that recent U.S. spending data is “exaggerated” because of the recession, and indeed, spending has soared not only here, but in most major countries because of the unfortunate popularity of Keynesian pump-priming theories. My point was that the American smaller-government advantage eroded both during the Bush growth years and during the Obama recession years, as seen in Figure 2 of my testimony.  

Kathy noted that the OECD data I used are different than U.S. national income accounts data published by the Bureau of Economic Analysis. Well, that’s right. Every country has quirks in the way they do their national income data. The advantage of using OECD data is that the economists at the OECD adjust for these quirks and create spending data that is comparable across countries. If Kathy has more accurate international comparisons, I’d love to see them.

Finally, Kathy says that just because American government spending divided by GDP is about 40 percent, that “doesn’t mean that government controls about 40 percent of the U.S.economy.” I don’t agree. She means that government does not produce 40 percent of gross domestic product, which is true. The broader figure of 40 or 41 percent includes not just government production but government transfers. And transfers do entail government control over resources because both the taxing and spending activities involved in transfer programs distort private sector behavior. Thus, the government misallocates resources both when it “produces” useless solar power activities in its own labs and when it subsidizes failed private solar companies.   

Anyway, thanks to Kathy for raising the important issue of the overall size of government because it is something that the policy community should focus more attention on. For data geeks, the OECD has all kinds of cross-country comparison data here. Government spending is Table 25.

Splitting Hairs on the Cadaver

With the introduction of major Senate bills to reauthorize the Elementary and Secondary Education Act – aka, No Child Left Behind – the race is on to dissect the legislation and declare a winner. To my mind, however, both significant efforts are improvements over NCLB, ending many of its more absurd components. And the debates the bills are fomenting – more or less compulsion on teacher evals, firm progress goals or looser, and so on – are ultimately splitting hairs on a cadaver. The last nearly fifty years have shown that any federal involvement is doomed to failure, and the only rational response to that is to end Washington’s meddling.

First, a very quick history of federal involvement: In 1965 Washington enacted the ESEA, with the goal of equalizing resources between rich and poor students. For about twenty years the feds mainly just spent money, but that seemed to produce no significant educational benefits. In roughly the mid-eighties people started to get fed up with that, and slowly pressure grew to hold schools and states “accountable” for their use of federal dough. The pinnacle of that was NCLB, which was festooned in rhetoric about “annual progress,” “proficiency,” and “leaving no child behind,” but mainly appeared to produce bureaucratic demands and name-only proficiency.

Bottom line: There’s little evidence that either spending money or “accountability” has worked. Why the futility? Because federal policy is ultimately driven by what makes politicians look best, which at first was spending dough to show they cared, then making unrealistic, inevitably gamed demands to show that they cared in kind of a tough-guy way. And whether any of these things eventually translated into academic success has meant nothing for the politicians who voted for them because few voters connect failure to individual pols.

The good news is that in light of the NCLB debacle there seems to be pretty bipartisan agreement that it’s time to reduce the federal footprint. Nonetheless, there are still lots of assertions grounded in neither strong logic nor principle being made about what Washington should be doing.

To illustrate this I’m going to pick on AEI’s Rick Hess a bit. Rick, by the way, is overall very clear-headed and skeptical about federal policies, more so than most edu-analysts. He just happens to have published a blog post recently that offers a few, relatively constrained, examples of what I’m talking about, providing a target of opportunity. I quote from the end of his piece, where after comparing and contrasting the major ESEA-reauthorization plans he offers three things he thinks the feds should do:

First, it’s appropriate and helpful for the feds to insist upon transparency and clean reporting of performance and spending data as a condition for federal dollars. This entails special attention to the information regarding vulnerable populations and communities, including bright line guidelines regarding regularity of reporting, what gets reported, and so forth.

Second, the feds can offer support for leaders who choose to step out front, without trying to dictate just what those policies should look like. Hence, better to award Title 2 funds to states pursuing ambitious plans for teacher evaluation than to lay out a particular system of evaluation or mandate its adoption. Providing competitive funds for those state and district leaders willing to tackle the tough task of upending century-old routines focuses those dollars in useful ways and makes it more possible for those leaders (and the union chiefs with whom they’re working) to present efforts to rethink tenure, pay, evaluation, and the rest to affected teachers as a potential win-win.

Third, basic research is a public good, and one that demands an active federal role. In principle, I’m supportive of Senator Bennet’s proposed amendment to create an ARPA-ED. That said, the focus must be on cultivating new tools and technologies that will fuel problem-solving. If it’s designed to focus on “reforms” and implementation-dependent strategies, then I’m going to jump off the bandwagon real quick.

So, point 1: transparency. It is in vogue these days to condemn NCLB, but quickly add that the law deserves huge credit for forcing districts and states to disaggregate testing results to reveal how various student subgroups are performing. Presumably, we knew nothing about these kids before NCLB.

Accepting for a moment that we really did know nothing – an assumption belied by decades of education civil rights actions before NCLB – did all this new attention do any good?

We can begin to answer that by looking at National Assessment of Educational Progress outcomes for those groups that have typically struggled the most – generally, low-income kids – and seeing if their scores erupted under NCLB. What follows are several charts for both the NAEP Long-Term Trend (LTT) and Main tests, showing score changes per-year (out of 500 points) in periods between test administrations. Those periods that are highlighted saw greater increases than in the periods completely included in NCLB. Note that a few periods include some years under NCLB and some not. Because it took significant time to fully implement NCLB after it was passed in January 2002, periods that overlapped with the beginning of NCLB are counted as not reflecting NCLB. That is, of course, debatable, so take those with a grain of salt. Also, the best proxies available for income-level are used, which sometimes is parents’ education level, sometimes qualifying for subsidized lunch, and once race.

LTT Math, Parents Did Not Complete High School
LTT Reading, Black Students
Main NAEP Reading, Parents Did Not Complete High Schools
Main NAEP Math, School Lunch Program Eligible
Main NAEP Reading, School Lunch Program Eligible

So what do we see? For the most vulnerable students, there are lots of periods before NCLB that had greater gain rates, and many that were pretty close. This seriously wounds the assertion that NCLB created invaluable transparency. At the very least, it didn’t create transparency that resulted in massive score gains. Of course, that NCLB “transparency” often involved telling parents their children were proficient when they were really far from it might explain the scores.

Point two: Washington should support states “pursuing ambitious plans for teacher evaluation” rather than “lay out a particular system of evaluation or mandate its adoption.” This is a distinction without a difference. Why? Because someone in the federal government will ultimately have to decide what is sufficiently “ambitious” or worthy of reward. All that not specifying that in statute does is leave it to the discretion of regulation writers and, in the end, probably the Secretary of Education. So the feds will still be dictating, it will just be a bit later in the process and with even less transparency than would exist if parameters were spelled out in law. See “Race to the Top” or “waivers” to understand all the additional problems and threats that creates.

Lastly, point three: “basic research is a public good, and one that demands an active federal role.” How so? Where, first of all, in the Constitution is the “basic research” clause? Nowhere, which means the feds have no authority to have an “active role” in conducting it. Perhaps as important, why should we think Washington would be good at running basic education research? Why should we think the topics chosen wouldn’t be politicized? Or the researchers? Such problems are real even in the hard sciences, and would be even bigger in a heavily politicized, squishy field like education. Meanwhile, we see that the real driver of innovation isn’t government, but the private sector. Yes, government sometimes sponsors beneficial research, but also probably crowds out much potential private research funding. And really, was the superior innovator Steve Jobs – who created better things to make more money – or the entity that brings us jobs bills?

At this point, it’s absurd to keep quibbling over what the proper federal role is. The Constitution tells us that: other than prohibiting discrimination by states and districts, and controlling education in DC and federal lands, there isn’t one. That’s both the dictate of the supreme law of the land, and the only thing that makes sense in light of  nearly five decades of bankrupting federal failure.

Cain 9-9-9: Huge Tax Haul from VAT

The Herman Cain campaign released details of the revenue expected to be collected from his 9-9-9 tax plan. Here are the estimates for 2010:

  • $701 billion from the 9 percent personal income tax.
  • $753 billion from the 9 percent retail sales tax.
  • $863 billion from the 9 percent business VAT.

Yikes! By far the largest tax haul under the Cain plan would be from the business VAT—a tax which would be hidden from most voters.

By the way, the Cain business tax is not a tax on “corporate income,” as some media stories are identifying it. The new revenue data makes it clear that it is a tax on all value added by all businesses in the nation—corporate, partnership, and proprietorship.

Sorry Mr. Cain, I think your tax plan gives the federal government far too much room to grow in coming decades as entitlement cost pressures increase. I’d suggest dropping 9-9-9 and going with my 15-15-15 tax plan. After that, you could move on to proposing a detailed plan for spending cuts, as candidate Ron Paul has delivered.

Did Canada Steal Our Tenth Amendment?

Under the U.S. Constitution, the federal government was assigned specific limited powers, and most government functions were left to the states. To ensure that people understood the limits on federal power, the Framers added the Tenth Amendment: “The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.” Those delegated powers are “few and defined,” noted James Madison.

But the Tenth Amendment has disappeared. No one has seen it in recent decades. But I’ve found some statistics that make me very suspicious that the Canadians stole the Tenth. Look at the pie charts below. The top pie shows that 71 percent of total government spending in the United States is federal, while 29 percent is state/local. (See BEA tables 3.1, 3.2, 3.3 for 2010 data).

Back when we still had the Tenth, that ratio was the other way around—like how the bottom chart looks for Canada today. In Canada, federal spending accounts for just 38 percent of total government spending, while provincial/local spending accounts for 62 percent. (See Canada Yearbook for 2010/11 data.)

Actually, the real culprit for the missing Tenth is not the Canadians, but the U.S. Congress. In recent decades, Congress has undertaken many activities that were traditionally reserved to state and local governments. A primary method has been through “grants-in-aid.” These are federal subsidies combined with regulatory controls that micromanage state and local affairs. In United States, federal grants are about 4.1 percent of GDP (in fiscal 2011), while in Canada they are about 3.3 percent of GDP.

Even more striking: while we’ve got a complex mess of more than 1,000 state grant programs, Canada seems to have just a handful, and they are simple block grants. As I understand it, Canada’s federal grants to lower governments mainly just include:

  • A health care block grant
  • A social services block grant
  • An “equalization” block grant to help the poor provinces.

There is a smattering of other aid, but that’s just about it. There are no federal subsidies for K-12 education in Canada, for example. There are a few large block grants and not much else.

On October 27, I’m on an Urban/Brookings panel looking at “What Can the United States Learn from Canada.” Perhaps we can learn how to get our decentralized federation back. While we’re at it, we could get some tips on how to cut government spending, as the Canadians did in the 1990s.

EPA Backs Off Dust Standard

Are there enough data points yet to call it a trend? I think there are: the Environmental Protection Agency is now backing off a whole series of deeply unpopular Obama-era initiatives. This time it’s the idea of tightening the federal standard for coarse airborne particulates—better known as “dust”—from the current 150 micrograms per cubic meter to a figure somewhere between 65 and 85, depending on what assumptions are used. That change could have dealt a tough economic blow to businesses, notably farms and ranches, that kick up quantities of dirt in the ordinary course of operation. Unfortunately, the EPA—unable to resist the urge to lash out against its critics—is being less than candid about its latest turnabout.

The retreats have been coming steadily in recent months, since President Obama’s popularity ratings began to tank. In July, following protests from Sen. Olympia Snowe (R-ME) and other lawmakers, the administration dropped a proposal that would have required lead-dust lab testing as part of even relatively minor renovations to older homes. Last month it scuttled costly new smog regulations. A couple of weeks ago it relaxed its so-called Cross-State Air Pollution Rule, which was menacing the continued operation of power plants. And it remains under heavy pressure to scrap its ultra-expensive “Boiler MACT” rules, another utility nemesis.

EPA administrator Lisa Jackson has made it clear that she isn’t happy about some of these about-faces, and her staff spun the latest dust decision in remarkably graceless fashion, accusing critics of spreading “myths” and claiming the agency never had any intention of going after farm dust in the first place. Following the same line, Kate Sheppard at Mother Jones has now twice dismissed the issue as “the tea party-right’s favorite EPA conspiracy theory. Sadly, it’s not true.”

But the farmers and ranchers—and the many lawmakers who stepped up to their defense—weren’t imagining things, as this letter last July from 21 Senators (including a couple of Democrats), or this contemporaneous Reuters coverage, makes clear. Had the standard been lower, various metropolitan areas would have been knocked out of compliance, and although it’s conceivable states could have found a variety of ways to order curbs to dust-raising economic activity, farms and ranches are just too big a target to have been spared. And the issue caused direct political blowback to President Obama, who was irritably dismissive of a farmer’s concerns when asked about it at a “Town Hall” in the rural Midwest.

This, then, seems to be the new Obama administration compromise position on the EPA: they’ll hold off for now on saddling the economy with at least some potentially ruinous regulations—but they’ll make sure you know they’re not happy about having to take that stand.

This Month at Cato Unbound: A Little Foundational Theory

The October, 2011 issue of Cato Unbound tackles some of the foundational questions of political theory: how do we recognize justice? If it’s not utopia, is it still good enough to command our respect? Or allegiance? How do we know? Who are the members of the political community? How are they chosen? What counts as a “reason” for political action?

If all of this sounds abstract, rest assured that lead essayist Gerald Gaus is both lucid and engaging. He writes:

Liberalism’s founding insight was the recognition in the sixteenth and seventeenth centuries that controversial religious truths could not be the basis of coercive laws and public policies. The task is now to apply this insight to philosophizing about justice itself. This is an extraordinarily difficult lesson for many. Can it really be that I should not endeavor to ensure that my society conforms to my “knowledge” of justice? (Compare: can it really be that my “knowledge” of God’s will should not structure the social order?)

Gaus argues for a “range of justice”—a range of theories that, while perhaps not perfect by anyone’s standards, are still close enough to demand our respect, especially given the large benefits that come from freely engaged social cooperation.

Discussing with him this month are a panel of three other prominent social theorists. Richard Arneson argues that we tolerate one another not because we’re all pretty close to rational (clearly a lot of us aren’t!)—but because intolerance breeds atrocity. Eric Mack argues that classical liberalism is no mere contending sect; it is the right approach to politics, because it offers the greatest leeway for individuals to choose their own ends in life. And Peter J. Boettke argues that any social system that neglects private property will fail to produce a cooperative society in any sense; without market exchange, individuals will fall into strife over scarce resources.

Obviously I won’t be able to do justice to their arguments here, so please do check out Cato Unbound, where discussion will continue through the end of the month.