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February 21, 2014 3:54PM

Another $6.5 Billion in DOE Loan Guarantees

After Solyndra collapsed, the Department of Energy (DOE) should have learned its lesson. Guaranteeing loans for energy and industrial companies is a bad idea. The failures of Beacon Power and Fisker Automotive should have driven home the message. Now, we have further proof that the DOE isn’t paying attention.

Yesterday, DOE Secretary Ernest Moniz traveled to Georgia to announce $6.5 billion in loan guarantees for two new nuclear reactors already under construction. 

The loan, like so many others, has the markings of an incredible risky use of taxpayer dollars. According to the Washington Post, the project is already 21 months behind schedule. Additionally, Southern Company, the largest shareholder of the project, had its ratings’ outlook downgraded from “stable” to “negative” by Standard and Poor’s last year, in part because of “cost overruns” at the Georgia facility.

Even more frustrating, the company already had private loans in place to finance construction. Now we, the taxpayers, will save the company $250 million a year in interest costs by bearing the full burden of default.

The company also benefits from $2 billion in other federal tax credits, according to its CEO.

Some deal.

February 21, 2014 3:50PM

Water in the West: It’s Complicated

In the media, one hears two different stories regarding the drought in California and Western water problems in general. Liberals say that droughts are being made worse by climate change. Conservatives say that water shortages are being perpetrated by the EPA in a misguided effort to sacrifice farmers for some tiny fish. The Washington Times editorial today is of the latter genre.

The real story is more complicated. It’s not just Mother Nature, and it’s not just farmer vs. fish.

The fundamental problem is that the federal government has been heavily subsidizing Western water for decades, particularly for crop irrigation. Artificially low water prices have encouraged overconsumption and the planting of very dry areas where farming is inefficient and environmentally unsound. Subsidized irrigation farming has created major environmental problems in the San Joaquin Valley, for example.

To make matters worse, federal farm subsidies have boosted demand for irrigation water, which has further encouraged farmers to bring marginal lands into production.

So don’t blame the Delta smelt. Instead, blame antimarket policies going back eight decades in the case of farm subsidies and a century in the case of subsidized water from the federal Bureau of Reclamation.

The long-term solution to the West’s growing water problems is free-market economics. Policymakers should end the farm subsidies, reform water property rights, transfer federal dams and aqueducts to state ownership, and move toward market pricing of water.

For more, see my essay with Peter Hill and check out the great work from the free-market environmentalists at PERC.

February 21, 2014 3:44PM

White House Stimulus Report Based on ‘Keynesian Fairy Dust’

Did you sing "Happy Birthday"?

The nation just "celebrated" the fifth anniversary of the signing of the so-called American Recovery and Reinvestment Act,

Political Cartoons by Nate Beeler

more commonly referred to as the “stimulus."

This experiment in Keynesian economics was controversial when it was enacted and it's still controversial today.

The Obama administration tells us that the law has been a big success, but I have a far more dour assessment of the spending binge. Here's some of what I wrote about the topic for The Federalist.

The White House wants us to think the legislation was a success, publishing a report that claims the stimulus “saved or created about 6 million job-years” and “raised the level of GDP by between 2 and 3 percent from late 2009 through mid-2011.”

Sounds impressive, right? Unfortunately, those numbers for jobs and growth are based on blackboard models that automatically assume rosy outcomes. Here's how I explain it in the article:

[H]ow, pray tell, did the White House know what jobs and growth would have been in a hypothetical world with no stimulus? The simple answer is that they pulled numbers out of thin air based on economic models using Keynesian theory. ... Keynesian economics is the perpetual motion machine of the left. They build models that assume government spending is good for the economy and they assume that there are zero costs when the government takes money from the private sector. That type of model then automatically generates predictions that bigger government will “stimulate’ growth and create jobs. The Keynesians are so confident in their approach that they’ll sometimes even admit that they don’t look at real world numbers. And that’s what the White House did in its estimate. The jobs number (or, to be more technical, the job-years number) is built into the model. It’s not a count of actual jobs.

In the real world, however, you can count jobs. As part of my Federalist article, I looked at the Minneapolis Federal Reserve Bank's interactive website and compared the current recovery to all business cycle expansions in the post-World War II era. I did that comparison for both jobs and economic growth. The figure below shows the numbers for the labor market. The current recovery is in red, and you can see that the nation is "stumbling through the second-worst recovery for job creation in the post-WWII era."

Minn Fed Recovery Jobs Data



The next figure shows the Minneapolis Fed's numbers for economic growth. It doesn't seem possible, but GDP performance has been even worse than job performance. We are mired in stagnation. As I noted, "the current recovery (red line) is the weakest expansion since World War II."

Minn Fed Recovery GDP Data



In other words, it's very difficult to argue—looking at the numbers—that the President's main economic initiative was a success.

So why did it flop?

I pontificate in the article, pointing out three specific problems with Keynesian economics. I start with the elementary observation that the theory is based on the notion that you can become richer by taking money out of one pocket and putting it in another pocket:

[T]here is an “opportunity cost” when government borrows money and spends it. Resources are diverted from the productive sector of the economy. This might not be a problem if government spent money wisely, but stimulus schemes tend to reward interest groups with the most political clout. So instead of outlays for physical and human capital, which at least theoretically might improve the economy’s productive capacity, the White House directed the bulk of the stimulus to redistribution programs and handouts to state governments.

I then make a critical observation about how you shouldn't try to solve one set of bad government policies with another layer of bad policy.


[T]he Keynesians don’t seem to appreciate that recessions generally are the result of bad government policies—such as inflation, housing subsidies, etc.—that lead to fundamental and unsustainable economic imbalances. Unfortunately, more government spending often is designed to prop up these imbalances, which can create a longer and more painful period of adjustment.

Political Cartoons by Eric Allie

The clincher, at least for most people, is the simple fact that Keynesianism simply doesn't work:


But the biggest problem with Keynesianism is that the real-world evidence is so unfriendly. Consider, for instance, that the White House claimed that the unemployment would never climb above 8 percent if the stimulus was adopted. ... Keynesian economics has a long track record of failure. It didn’t work for Hoover and Roosevelt in the 1930s. It didn’t work for Nixon, Ford, and Carter in the 1970s. It didn’t work for Japan in the 1990s. And it hasn’t worked this century for either Bush or Obama.

And guess what? I'm going to make a very sad prediction that we'll get more Keynesian economics in the future, but it's easy to predict right now that these future spending binges will fail just like the previous stimulus schemes have flopped.

P.S.: Here's my video on Keynesian economics and here's my video on Obama's failed stimulus.

P.P.S.: If you'd rather laugh than hear my voice, my favorite cartoons on Keynsianism can be viewed here and here.

February 21, 2014 12:08PM

Understanding the Protests in Ukraine and Venezuela

"All happy families are alike; each unhappy family is unhappy in its own way." If one believes Tolstoy’s famous dictum, then the protest movements in Ukraine and Venezuela should not have much in common. However, there are several striking parallels between the events unfolding in the two countries—as well as some important differences:

1. It’s the economy, stupid!

Although the popular unrest in Ukraine was triggered by the government’s decision to cancel the agreed free trade agreement with the European Union, the popular discontent has deeper roots. After years of kleptocratic governance, which derailed the country’s transition toward a market economy, ordinary Ukrainians are desperate for change. In 1990, Ukraine’s GDP per capita was $8,200, which was roughly identical to Poland’s. Today, Poland’s GDP is $18,300 and Ukraine’s has gone down to $6,400. Unlike its post-communist neighbors to the West, Ukraine did not pursue deep institutional reforms and its economy was seized by a narrow group of oligarchs, with close connections to political power and to the Kremlin. The son of the President Viktor Yanukovych, Oleksandr, has become one of the richest men in the country during his father’s time in the office, while incomes of most Ukrainians stagnated.

In Venezuela the economic situation has deteriorated sharply since the death of Hugo Chávez last year. The country has the highest inflation rate in the world (officially 56 percent in 2013, although according to Steve Hanke’s Trouble Currency Project, the implied annual inflation rate is actually 305 percent). After years of nationalizations, expropriations, and currency and price controls—all under the name of “21st Century Socialism”—the private sector has been decimated. Hour-long lines in supermarkets are a daily occurrence and shortages of basic food staples and medicines are widespread. And just like in Ukraine, corruption is rampant as the ruling elite rake in the profits from oil revenues. This has resulted in the rise of a new privileged class called the “Boligarchs.” so-named because they’ve prospered tremendously under the so-called Bolivarian revolution. Moreover, Venezuela is now one of the most dangerous nations in the world, with almost 25,000 murders committed last year. A large segment of the population, mostly middle class, is simply fed up as the country quickly becomes unlivable.

2. Governments have responded with repression.

In Ukraine, the "Euromaidan" movement began with peaceful protests in late November, which occurred as a response to the government canceling the free trade agreement with the EU. In Kiev, the protesters gathered and set up an improvised camp on the Independence Square, called "maidan" in Ukrainian. After the protests were dispersed violently by the Berkut riot police on November 30, violence has slowly escalated, culminating in the events earlier this week, in which at least 77 people, and possibly more, died. The government has even paid thugs to infiltrate the opposition camps and incite clashes. Over past days, Ukrainian security forces used snipers and automatic weapons against protesters, resulting in large numbers of casualties.

In Venezuela, the protests began on February 12 after the government refused to release several students who had been arbitrarily detained days before. And just like the Viktor Yanukovych regime, Nicolás Maduro has cracked down on the demonstrations with unprecedented force, using the National Guard and armed paramilitary gangs. On February 19, government forces escalated their attacks against civilians, raiding apartment buildings and shooting people on the streets. The border state of Táchira is currently under military curfew. So far, at least eight people have been killed, dozens have been detained, and many are missing.

3. Foreign governments play a critical role in the events.

The Kremlin has been involved in Ukrainian affairs since its independence in 1991. After all, Vladimir Putin once called the demise of the Soviet Union “the greatest geopolitical catastrophe of the century.” Seeing Ukraine as part of its sphere of influence, Russia’s leaders have tried to use natural gas prices paid by Ukrainians as a way of extorting political concessions. Most recently, the Kremlin used gas prices to force the Ukrainian government to walk away from the free trade agreement with the EU, triggering the current unrest. Since the beginning of the Euromaidan protests, Russia has been providing the cash-strapped Ukrainian government with aid in the form of bond purchases.

The roles are slightly reversed when it comes to Cuban influence in Venezuela. Resources-strapped Cuba plays a critical role in propping up the Venezuelan government in return for much-needed oil: Venezuela provides Cuba with 120,000 barrels of oil per day, for an estimated value in 2012 of $3.6 billion (roughly 5% of Cuba’s gross domestic product). Cuban secret services control the security apparatus for the Maduro regime. Maduro himself was reportedly trained in communist ideology in Cuba in the 1980s, many years before Maduro predecessor Hugo Chávez actually came to power and ushered in the current communist government. It’s widely believed that Cuba's ruling Castro brothers were the critical factors behind the selection of Maduro as Chávez's successor. Without the oil, it is very likely that Cuba’s fragile economy would implode. The relationship between both countries is perhaps unique in world history as the larger, richer country has actually become a colony of its client state, up to the point that the Cuban flag flies in many Venezuelan military bases.

4. Countries seem divided by ethnicity and social status.

It has become conventional to distinguish between the pro-EU, Ukrainian-speaking part of the country and its eastern regions with closer ties to Russia. While it is true that the protest movement has gained relatively little traction in the Russian-majority regions, the ethnic and linguistic differences do not translate exactly into differences of opinion about the country’s future, with most Ukrainians, both Ukrainian- and Russian-speaking, favoring closer ties with the EU.

The division among Venezuelans isn’t along ethnic lines, but along socio-economic classes. The official—and disputed—results of last year’s presidential election in Venezuela show a country divided by halves: while Maduro obtained 50.6% of the vote, the opposition candidate Henrique Capriles got 49.1%. The regime draws most of its support from the poorest segments of the population that still receive significant government handouts, as well as public employees and the military apparatus. However, Maduro doesn’t command the same level of loyalty (and even adoration) that Hugo Chávez did with his supporters. Meanwhile, the opposition is mostly composed by the middle class and students. Unfortunately, there is a high level of hatred and mistrust between both camps that will persist for many years to come.

5. Neighbors and regional organizations are slow to respond.

Arguably, the reaction of the EU to the events in Ukraine has been excessively cautious and slow. Only yesterday did European leaders agree to impose targeted sanctions on Ukraine, including visa bans, assets freezes, and a suspension of export licenses for equipment that could be used for internal repression. In December and January, the EU did disappointingly little to articulate a potential relationship with the Ukrainian government that would be more appealing than deepening ties with Russia. Among the EU offerings: an accelerated "roadmap" to EU membership and its benefits, including free movement of people and access to the common market.

On the other side of the Atlantic, several Latin American left-wing governments have actually stated their solidarity with the Maduro regime, including the Mercosur trading bloc. Other nations with more mature democracies such as Mexico, Colombia, Peru, and Costa Rica have been silent—either out of cowardice or cynicism. Only Chile and Panama have voiced some restrained concern about human rights abuses in Venezuela. Regional coalitions such as the Organization of American States and the Community of Latin American and Caribbean States are likely to remain mum. Thus, the Venezuelan government doesn’t have to worry about being held accountable for repressing its population.

A final common trait of the two outbreaks of popular unrest against authoritarian and kleptocratic rulers is the uncertainty about the outcome. Today’s agreement in Kiev gives hope that an orderly transition toward a new constitution and a new election can be achieved. However, given that President Yanukovych has already reneged on similar promises in the past, any agreement that keeps him in power until a successor is elected is extremely fragile because of his lack of credibility. Similarly, in Venezuela, the government has refused to negotiate with the protesters, calling them “fascist.” Yet, as the discontent grows and the protests gain wider traction, they might well become a major headache to the regime.

February 20, 2014 4:56PM

Washington Pushed Common Core on Us, and All We Got Was This Lousy Burrito Wrapper

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The Common Core is slowly but surely becoming a big national issue, and three things in today's news tell us a lot about what's going on.

  • It is a major story – it was a lead Politico article this morning – that the National Education Association, after steadily, if quietly, backing the Core, yesterday slugged it. At least, President Dennis Van Roekel came out with guns blazing against the implementation of the Core, saying that in many states “implementation has been completely botched,” and calling for a slowdown in the Core rollout. To be sure, Van Roekel didn’t suddenly say the Core is poor-quality standards, but implementation is absolutely key, and it is there that experts across the spectrum have long been crushing the Core.
  • With the tide increasingly turning against them, Core advocates are no longer napping, feeling secure in the fact that Washington got a large majority of states to sign on to the Core before anyone really knew what was happening. This morning, news came out about survey results from the Core-supporting 50CAN. A big takeaway, according to 50CAN? Most people don’t know much about the Common Core, but would like it if they did: a sizeable majority support the idea of uniform standards. That’s probably accurate – in the abstract, one standard sounds nice – but what is more telling is the response to whether people trust policymakers in DC “to determine what is best for improving schools.” Only 17 percent either “strongly” or “somewhat” trust Washington. Eighty percent “do not trust” DC. Maybe that's why Core-ites seem hell-bent on ignoring the crucial role Washington had, through the Race to the Top contest and No Child Left Behind waivers, in coercing Core adoption. So uniform standards may seem nice, but federally driven? Ick! Which brings us to our last story…
  • It was reported today that Missouri State Representative Mike Lair put an $8 provision into an appropriations bill to purchase “two rolls of high density aluminum to create headgear designed to deflect drone and/or black helicopter mind reading and control technology.” This was meant to be a riproarious slap at Common Core opponents, whom Core advocates insist on tarring as kooks for fearing stuff like nationalization of school curricula. And they may, indeed, seem crazy to you if you refuse to acknowledge that the federal government, at the behest of the “state” groups that created the Core, coerced adoption. And if you ignore that Washington selected and funded two consortia to create tests to go with the Core. And if you are unaware that the U.S. Department of Education has a “technical review” panel for those tests that meets behind closed doors. And if you forgot that the federal government still requires, though it has loosened the rules, that schools be judged in part on state test performance. Yes, if you ignore reality, you could conclude that Core opponents are bonkers. But if you know and accept reality, then you know that far from being crazy, opposition to the Core is based, to a large degree, on logic and facts. Which means few at whom Rep. Lair is aiming his little joke are going to be making a chapeau with the free foil. At most, they’re going to put it to good use and make a burrito wrapper, or a solar oven, or are just going to throw it back at Rep. Lair, yelling, “stop calling me crazy, and stop wasting my eight bucks!”
February 20, 2014 4:40PM

Dumbest Trade War Indeed

In an article titled “The World’s Dumbest Trade War,” Slate’s Will Oremus offers a thorough accounting of the ridiculous policy of imposing tariffs on cheap solar panels from China. 

Remember, the U.S. government wants Americans to buy solar panels, and it subsidizes those purchases through rebates and incentives. The Chinese government wants Chinese companies to build solar panels, and it subsidizes their manufacture. And yet rather than celebrate this fortuitous arrangement, the world’s top economic powers find themselves on the brink of a trade war that could cripple a promising industry in both countries, kill jobs, and hurt the environment all at once. It’s a terrible trade-policy trifecta.

Trying to make solar panels more expensive to aid domestic manufacturers defeats the whole purpose of having domestic manufacturers in the first place. It aptly demonstrates the folly of green industrial policy—subsidies and tariffs to create and then maintain “green jobs”—as a rational environmental policy.

Fortunately, some countries have recognized the harmful impact of trade barriers and called for free trade in environmentally friendly products like solar panels and wind turbines. This initiative may be included in some form in the Trans-Pacific Partnership agreement. Last year, Simon Lester and I wrote a paper explaining that any such endeavor should not exclude antidumping and anti-subsidy duties like those being used here by the United States.

What’s more, as Oremus aptly points out, these duties not only reduce the viability of green energy, they harm domestic businesses that install solar energy equipment. 

Unfortunately, this phenomenon is in no way unique to solar panels. The U.S. imposes a great number of antidumping and anti-subsidy duties on imports that U.S. manufacturers rely on as inputs. Check out this video to learn more about America's economically irrational and destructive antidumping laws:

February 20, 2014 2:55PM

Gap Pay Raise Follows Rand Not Obama

Clothing retailer Gap Inc. has won praise from the White House in announcing its decision to raise entry-level wages to $9 an hour this year, and $10 next year. President Obama applauded Gap and argued that Congress should follow suit by passing a bill to increase the federal minimum wage from $7.25 an hour to $10.10 by 2016.

But there’s a big difference between a voluntary increase in a market-determined wage rate and a government-mandated minimum wage.

Gap must report to shareholders and make a profit to stay in business; politicians report to voters and must win elections to stay in office. Polls show that the American public strongly support a higher federal minimum wage — but only if it appears to be costless.

President Obama, in promoting a higher minimum wage, argues that it would “lift wages for more than 16 million workers—all without requiring a single dollar in new taxes or spending.” This is the free lunch that politicians love to promise—and it is an illusion.

When the government arbitrarily pushes up wage rates above the competitive level, two things happen: some jobs are lost; and more workers look for jobs but can’t find them, so unemployment of lower-skilled workers increases. These effects are greater in the long run as employers switch to labor-saving technology.

When firms make adjustments in expectation of higher minimum wages (both federal and state), there will be a decrease in the number of jobs for lower-skilled workers (mostly younger, inexperienced, less-educated workers) but an increase in the demand for higher-productivity, skilled workers who complement the new technology.

Gap has already made significant investments in labor-saving technology and recently implemented a “reserve-in-store” computer program that relies on higher-skilled workers whom Gap invests in to enhance their human capital. Gone are the days when high-school dropouts could easily get a job with retailers. As Gap raises its starting wage, there will be more competition for a dwindling number of jobs. More workers will want a job, but fewer workers will be hired, and those that are will be of higher quality.

Glenn K. Murphy, Gap’s CEO, told the company’s employers upon announcing the change in policy, “To us, this is not a political issue. Our decision to invest in front-line employees will directly support our business, and is one that we expect to deliver a return many times over.”

This is free-market, Randian thinking: self-interest is the motivating factor, not altruism.

When President Obama says, “It’s time to pass [the minimum wage] bill and give America a raise,” he is making a promise that can’t be kept: some workers will gain (those who have higher productivity) but others (the least productive workers who most need a job to gain experience and move up the income ladder) will lose.

Indeed, the Congressional Budget Office now tells us that an increase in the federal minimum wage to $10.10 an hour could cost a loss of 500,000 jobs. Those most affected would be low-productivity workers in low-income families—making them poorer, not richer. (If the government promises a wage of $10.10 an hour but a worker loses her job or can’t find one, then her income is zero.) There is no free lunch!

People do what is in their own best interest. Gap may win some friends by increasing entry-level wages and saying this is in tune with company “values,” but unless that business decision is profitable Gap will lose sales, and its shares will drop in value. There is thus a market test of the decision to raise wages.

The government has no business telling private employers what to pay or telling workers they cannot offer their labor services at less than the legal minimum wage, even if they are willing to do so to retain or get a job. The President’s minimum wage is anti-economic freedom and violates personal freedom; Gap’s higher entry wage does neither. This is a case of “the emperor has no clothes!”