July 10, 2012 4:36PM

Get the Feds Out of the Rail Racket

The California Senate’s recent vote to authorize $8 billion for the first segment of a widely panned plan for high-speed rail is another example of why the state remains on fiscal suicide watch. And because federal taxpayers are on the hook for $3.2 billion of the plan's cost, it’s another example of why the federal government should not be subsidizing rail projects.

If California’s voters and the officials they elect want to blow the state’s taxpayers’ money on high-speed rail, then so be it. But taxpayers in the other 49 states shouldn’t be on the hook. Likewise, Californians shouldn’t have to subsidize rail projects in the other 49 states. Indeed, the federal Department of Transportation acts like a money laundering operation: money taken from each state’s taxpayers goes to Washington, gets “washed” on Capitol Hill, and then gets sent back to the states (minus a cut for the bureaucracy) as directed by the Beltway bosses.

Take, for example, Rep. Don Young’s (R-AK) “railroad to nowhere,” which was featured on Politico this morning:

Seven years ago, the veteran Republican created a cash gusher for the touristy Alaska Railroad by giving it a share of Congress’s mass transit bucks. In June, he stared down the Senate to keep the subsidies flowing for another two years. The price tag: $62 million. Those millions were part of a package meant to help mass transit lines carry commuters, not send cargo and tourists through the Alaskan tundra…

“Throughout my career in Congress, I have fought hard to ensure a level playing field between Alaska and its lower-48 counterparts---and the Alaska Railroad is no different,” Young said in a statement to POLITICO. “There is no reason why the Alaska Railroad should be treated differently than other American passenger rail systems---and that is exactly why this provision is so important.”

Critics say it’s too much to spend on a train that carried 412,200 passengers last year, few of whom actually commute. The New York City subway system gave more than 1.5 billion rides last year. Even Salt Lake City's light rail carries 40,000 people per day.

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July 10, 2012 4:30PM

Government Cost‐​Cutting Leads to Cost Overruns

The government can’t seem to do anything right! It can’t even streamline activities to cut costs without creating egregious cost overruns.

Since the late 1980s, the military has gone through a number of BRAC rounds to close excess military facilities. The BRAC process has shown that Congress can pursue spending cuts if only politicians put the effort in to make it happen.

However, the Washington Post’s Walter Pincus describes how the Pentagon has had a hard time saving money even when directed to do so by Congress:

In its latest review of the 2005 BRAC program—the largest and most complex—the GAO found that the estimated cost of $21 billion to implement the program had grown to $35 billion by Sept. 30, 2011.

… Take the consolidation of various National Geospatial‐​Intelligence Agency (NGA) locations at a new campus at Fort Belvoir, Va. A project that had been projected to cost $1.1 billion grew to a price tag of $2.6 billion.

… Even small BRAC projects experienced giant cost growth. …At Fort Jackson, S.C., for example, the price tag for two projects grew by more than 1,000 percent. One of them, the Single Drill Sergeant School, was supposed to cost $1.8 million. But when the Army determined that its 40‐​year‐​old facilities needed new classrooms, headquarters offices and a dining area for 250 additional students, the project’s cost grew to $27.2 million, the GAO reports.

I’ve described some of the causes of cost overruns in this essay. One of the fundamental factors that drives all kinds of federal government inefficiency is that costs are benefits to public‐​sector decisionmakers.

For program administrators, it always seems as though the need for services is growing, and program expansion also brings greater personal prestige.

For politicians, there is little if any downside if federal projects in their districts double or triple in cost. Indeed, cost overruns are usually a benefit to them because that means more voters in their districts will receive money from taxpayers who live elsewhere in the nation.

While decisionmakers in private markets are disciplined by the need to earn profits, there is no such mechanism in the public sector to control costs. Occasional negative stories by good reporters like Pincus may embarrass the big spenders in government, but it rarely seems to change their spendthrift ways.

July 10, 2012 2:47PM

New Liberty‐​Friendly Law Blogs

Those of you pining to read more Supreme Court/​legal blogging (or “blawgging”) from a liberty‐​friendly perspective—our friends at the Volokh Conspiracy can’t cover everything!—should check out two recent additions to the genre:

First, there’s the Liberty Fund’s Law & Liberty blog, which was established by Mike Greve, now of George Mason Law School, and Mike Rappaport, of the University of San Diego. It currently features an excellent essay by Jim Chen on “The End of the American Lawyer’s Guilded Age”—with a response by our own Walter Olson.

Second, the Federalist Society now has a SCOTUSreport, which so far has featured the likes of Richard Epstein, Brad Smith, Rick Garnett, John McGinnis, and precocious young scholar Joel Alicea. I’ve been invited to contribute as well, and I’m sure I’ll do so. You can also find links here to Federalist Society publications, blogposts, event videos, etc., that feature many Cato scholars and adjuncts.

Check ‘em out!

July 10, 2012 1:13PM

Teachers Unions Are But a Symptom of the Disease

Just as some public schooling defenders like to caricature their opponents as self‐​important, money‐​grubbing “corporate reformers” or malevolent destroyers of “public education,” there is a tendency on the other side to attack teachers unions as the root of all evil. They aren’t. They are a natural symptom of a government monopoly that, because it is a monopoly, strongly favors the monopolization of labor. One employer, one employee representative.

Unless someone has compelling evidence to the contrary—I’ve never seen any—teacher union officials and members are no different than anyone else: they are simply trying to get the best deals for themselves. What separates them from non‐​unionized workers—and unionized workers in the private sector—is not their desires, but that their employment comes from a system into which “customers” must pay, and which is controlled completely by politics. Public‐​sector unions have big advantages in politics, where organization, numbers, and motivation—millions of people advocating for their very livelihoods—translate into power.

That brings us to today’s Wall Street Journal piece on union political spending. That spending is huge, and manifested in far more ways than contributions to candidates. Between 2005 and 2011 the Journal estimates unions spent $3.3 billion on political activities, which beyond candidate donations included everything from trying to persuade members to vote a certain way, to supplying bratwursts to demonstrators in Wisconsin.

There would be no major freedom issue if all of this were spending by unions with completely voluntary membership, and which operated in truly free markets. There would, then, be no compelled support of politicking. But this is absolutely not the case when it comes to teachers unions and other public sector unions.

For one thing, teachers often are, for all intents and purposes, forced to join unions as a condition of employment, even when they are required to “just” pay big “agency fees” to cover collective bargaining. Moreover, the ultimately taxpayer‐​supplied dues money is used to get more dough out of taxpayers who have no choice but to be schools’ “customers.” And we’re not talking pocket change here: according to the Journal’s numbers, between 2005 and 2011 the National Education Association spent $239 million on politics and lobbying, and the American Federation of Teachers spent $138 million. And that doesn’t include the outlays of all their state and local affiliates.

Despite those power‐​wielding expenditures, the members and leaders of teachers unions still aren’t evil. They are normal, self‐​interested folks. The effects of their actions, however, are to compel people to fund political speech and activities against their will, and often against their personal interests. But we shouldn’t attack unions for that. We must attack the government schooling monopoly.

July 10, 2012 9:34AM

Repealing Obamacare Won’t Solve the Health Care Mess (but It’s a Good Start)

Working in the same building as Michael Cannon, I’ve learned that government‐​created third‐​party payer is a big problem with America’s healthcare system. Simply stated, people won’t be smart consumers and providers won’t compete to keep costs low when the vast majority of expenses are paid for either by government programs or by insurance companies.

That’s why I want to see reforms to Medicare and Medicaid, not only to save money for taxpayers, but also because entitlement reform is one of the steps that is needed if we want market forces to bring down the cost of health care. And I want to see a flat tax, not only for the pro‐​growth impact of lower tax rates, but also because it gets rid of the Internal Revenue Code’s health care exclusion, thus ending the distortion that encourages over‐​insurance.

With all that in mind, I’m obviously a big fan of the new video, below, from the Center for Freedom and Prosperity. Narrated by Julie Borowski from FreedomWorks, the video explains that third‐​party payer has been a growing problem for decades and that it would have required fixing even if the Supreme Court hadn’t botched the Obamacare decision.

Now that we’re stuck with Obamacare, at least temporarily, it’s more important than ever to deal with this underlying problem.

P.S.: This new video expands upon the analysis provided in a previous CF&P video.

P.P.S.: Setting aside the debate over the morality of abortion, the abortion market is an interesting case study of how prices don’t rise when consumers pay out of pocket.

P.P.P.S.: Government‐​created third‐​party payer also is screwing up the market for higher education.

July 10, 2012 7:18AM

Where Was Geithner During LIBOR Suppression?

Perhaps the most interesting turn of events in the ongoing LIBOR scandal is the potential involvement of financial regulators, both in the United Kingdom and the United States. We know that on at least one occurrence, an October 2008 phone call between Bank of England (BoE) deputy governor Paul Tucker and Barclays CEO Robert Diamond, a BoE official indicated that he was “concerned” with Barclays’ high LIBOR submissions. While there is so far no evidence that the BoE requested Barclays to lower its submissions, there seems to be some strong suggestions that the BoE would have welcomed a lower number.

From an American perspective, an interesting fact revealed in the UK’s Financial Services Authority investigation was that on a number of occasions the Federal Reserve Bank of New York, then headed by current Treasury Secretary Tim Geithner, was informed by Barclays of its concerns about LIBOR manipulation by other banks as well as Barclays’ own approach to submitting LIBOR. Or as the FSA puts it:

Barclays discussed liquidity issues with external entities such as the FSA, the Bank of England and the Federal Reserve Bank of New York during the financial crisis in routine liquidity calls. At times information about Barclays’ liquidity position was relayed to the FSA on a daily basis. During certain of these liquidity calls, between November 2007 and October 2008, Barclays described to these external entities its perception that other banks appeared to be understating their LIBOR submissions. On occasion Barclays made comments about its own approach to submitting LIBOR. Barclays had similar conversations with the BBA [British Bankers Association] and believed that it had disclosed its approach to the BBA.

The FSA also notes that:

On 17 April 2008, Manager D made comments in a liquidity call to the FSA indicating that Barclays had been understating its LIBOR submissions: “we did stick our head above the parapet last year, got it shot off, and put it back down again. So, to the extent that, um, the LIBORs have been understated, are we guilty of being part of the pack? You could say we are. We’ve always been at the top end and therefore one of the four banks that’s been eliminated. Um, so I would, I would sort of express us maybe as not clean clean, but clean in principle”. Barclays made similar comments to the BBA and the Federal Reserve Bank of New York.

While UK regulators appear to be at the heart of the discussions, it is appropriate to ask what exactly did the New York Fed know and what did it say? Perhaps if we ever get a real audit of the Fed, we can learn whether Geithner and his crew at the NY Fed signed off on Barclays’ suppression of LIBOR rates.

July 9, 2012 4:02PM

Unemployment Benefits Overpayments

Citing Department of Labor data, CNNMoney reported today that the federal government and states overpaid an estimated $14 billion in unemployment benefits last year (about 11 percent of total benefits). The state of Indiana actually made more improper payments than it did correct ones, which has to be some sort of record for bureaucratic ineptitude.

As a Cato essay on the failures of the unemployment insurance system explains, large bureaucratic costs and misspent money are inevitable with massive, complex government programs:

State governments must raise taxes from almost 8 million businesses, with tax bills specifically calculated for each firm’s experience rating. At the same time, the states dole out individually calculated benefits to millions of workers and monitor whether each person making a claim is currently eligible. Businesses and states need to adjudicate the many disputed claims for benefits, and states need to police UI tax evasion as businesses try to manipulate the system to get a lower tax rate.

Federal and state UI administration cost taxpayers $5.9 billion in 2010. Despite this large cost, there is widespread concern among experts that the UI system is “in long‐​term decline” from an administrative perspective. UI computer systems are apparently far outdated in many states, and administrators say that they need more money to do their jobs competently.

One problem is that state UI tax systems are very complex. There are four different experience‐​rating systems, and there are three different methods of determining which businesses to charge when a worker makes a claim. States have various exclusions to the UI tax base, and new businesses have special rules because they don’t have an experience rating yet. Most states also impose a range of added charges to basic UI taxes, such as solvency taxes, taxes for socialized costs, reserve fund taxes, and various surtaxes.

Employers face substantial costs to deal with all the paperwork and tax planning needed to comply with the UI system. For example, the National Federation of Independent Business notes that regardless of eligibility, “many departing employees automatically file for unemployment compensation. They have nothing to lose; filing a claim costs nothing and it puts the ball in the employer’s court.” Businesses are then forced to spend time and money fighting unjustified claims.

There is a substantial amount of waste, fraud, and abuse in the UI system. Many people try to grab benefits improperly, including people who are ineligible, people who are not actively looking for work, and people who have taken jobs and neglect to report it. Other problems include the misreporting of earnings, the provision of false ID to gain benefits, and falsifying reasons for employment termination.