Tag: incentives

How the World of Campaign Finance Is Changing

Journalists are looking closely at the DISCLOSE bill, Congress’ response to Citizens UnitedCQ says DISCLOSE will loosen independent spending by the parties on their candidates.

Why is Congress liberalizing party spending? CQ explains:

According to one GOP attorney, opponents of the Supreme Court’s decision are realizing that they will have a difficult time challenging the constitutional right of outside groups to spend money, so this bill is a response to free up the parties to compete.

Mark that. Citizens United has altered the incentives regarding speech. In the past, Congress tried to suppress speech to win elections. Now leaders must liberalize in order to compete for votes.

Ban on Short Sales Benefits Banks and Hurts Investors

Today, in what seems like an endless string of 3-2 votes, the SEC moved to restrict the ability of investors to short stocks, claiming that such restrictions would restore stability and protect our financial system.  The truth couldn’t be more different.  Short sellers have long been the first, and often only, voice raising questions about corporate fraud and mismanagement.  For instance, shorts exposed the fraud at Enron, WorldCom and other companies while the SEC largely slept.

Bush’s SEC, lead by former Congressman Chris Cox banned the shorting of various financial industry stocks during the crisis.  The SEC then, as now, would have us believe that Bear, Lehman, AIG, Fannie, Freddie and others were not the victims of their own mismanagement, but rather victims of bear raids by short sellers.  In another instance of Obama and his appointees reading from the Bush playbook, SEC Chair Mary Shapiro finds ever creative ways to expand Cox’s misguided policies.

Short sellers only profit if they end up being correct.  Sadly Washington instead believes in punishing market mechanisms that work and throwing increasingly more money at failed agencies, like the SEC.  Rather than attacking short sellers we should applaud them for doing the SEC’s job.  But then if we had more short selling, providing greater incentives for investors to root out fraud, we might start to question why we even have the SEC.

National Standardizers Just Can’t Win

I’ve been fretting for some time over the growing push for national curricular standards, standards that would be de facto federal and, whether adopted voluntarily by states or imposed by Washington, end up being worthless mush with yet more billions of dollars sunk into them. The primary thing that has kept me optimistic is that, in the end, few people can ever agree on what standards should include, which has defeated national standards thrusts in the past.

So far, the Common Core State Standards Initiative – a joint National Governors Association/Council of Chief State School Officers venture that is all-but-officially backed by Washington – has avoided being ripped apart by educationists and plain ol’ citizens angry about who’s writing the standards and what they include. But that’s largely because the CCSSI hasn’t actually produced any standards yet. Other, that is, than general, end of K-12, “college and career readiness” standards that say very little.

Of course, standards that say next to nothing are still standards, and that is starting to draw fire to the CCSSI. Case in point, a new post on Jay P. Greene’s blog by former Bush II education officials–and tough standards guys–Williamson Evers and Ze’ev Wurman. They are heartily unimpressed by what CCSSI has produced, and think its already time to start assembling a new standards-setting consortium:

The new consortium would endeavor to create better and more rigorous academic standards than those of the CCSSI….

Drab and mediocre national standards will retard the efforts of advanced states like Massachusetts and reduce academic expectations for students in all states.

Yes, it is late in the game. But this should not be an excuse for us to accept the inferior standards that at present seem to be coming from the rushed effort of CCSSO and NGA.

Evers and Wurman’s piece is an encouraging sign that perhaps once more national standards efforts will be torn apart by fighting factions and spare us the ultimate centralization of an education system already hopelessly crippled by centralized, political control. Unfortunately, the post also gives cause for continuing concern, illustrating that the “standards and accountability” crowd still hasn’t learned a fundamental lesson: that democratically-controlled government schools are almost completely incapable of having rich, strict standards.

Evers and Wurman’s piece offers evidence aplenty for why this is. For instance, the authors theorize that a major reason the CCSSI standards appear doomed to shallowness is that the Obama administration has made adopting them a key component for states to qualify for federal “Race-to-the-Top” money, and states have to at least say they’ll adopt the standards in the next month or so to compete. In other words, as is constantly the case, what might be educationally beneficial is taking a distant back seat to what is politically important:  for the administration, to appear to be pushing “change,” and for state politicians to grab federal ducats. Political calculus is once again taking huge precedence over, well, the teaching of calculus, because the school system is controlled by politicians. We should expect nothing else.

Here’s another example of the kind of reality-challenged thinking that is all too common among standards-and-accountabilty crusaders:

CCSSI’s timeline calls for supplementing its “college and career readiness” standards with grade-by-grade K-12 standards, with the entire effort to be finished by “early 2010.” This schedule is supposed to include drafting, review, and public comment. As anyone who had to do such a task knows, such a process for a single state takes many months, and CCSSI’s timeline raises deep concerns about whether the public and the states can provide in-depth feedback on those standards–and, more important, whether standards that are of high quality can possibly emerge from the non-transparent process CCSSI is using.

Evers and Wurman assert that if standards are going to be of “high quality” the process of drafting them must be transparent. But the only hope for drafting rigorous, coherent standards is actually to keep the process totally opaque.

Phonics or whole language? Calculators or no calculators? Evolution or creationism? Great men or social movements? Transparent standardizers must either take a stand on these and countless other hugely divisive questions and watch support for standards crumble, or avoid them and render the standards worthless. Of course, don’t set standards transparently and every interest group excluded from the cabal will object mightily to whatever comes out, again likely destroying all your hard standards work.

In a democratically-controlled, government schooling system, it is almost always tails they win, heads we lose for the standards-and-accountability crowd. This is why these well-intentioned folks need to give up on government schooling and get fully behind the only education system that aligns all the incentives correctly: school choice.

Choice lets parents choose schools with curricula that they want, not what everyone in society can agree on, establishing the conditions for coherence and rigor. Choice pushes politicians, with their overriding political concerns, out of the education driver’s seat and replaces them with parents. Finally, choice lets real accountability reign by forcing educators to respond quickly and effectively to their customers  if they want to get paid. In other words, in stark contrast to government schooling , school choice is inherently designed to work, not fail.

Is Trade Policy Obsolete?

That is one of the conclusions in my new paper, “Made on Earth: How Global Economic Integration Renders Trade Policy Obsolete.”

For hundreds of years, trade policy has been premised on the assumptions that exports are good, imports are bad, and the interests of domestic producers are tantamount to the “national interest.” Though that mercantilist worldview has never been accurate, its persistence as a pillar of trade policy into the 21st century is especially confounding given the emergence and proliferation of disaggregated production processes, transnational supply chains, and cross-border investment. Those trends have blurred any meaningful distinctions between “our” producers and “their” producers and speak to a long chain of interdependent economic interests between product conception and consumption.

Still, trade policy places the interests of domestic producers above all else even though the definition of a domestic producer is elusive and even though actions on behalf of producers often harm interests along the product continuum, which include engineers, designers, financiers, processors, assemblers, marketers, shippers, retailers, consumers, and others.

In 2008, foreign nameplate automobile producers, employing American workers, paying American taxes, and supporting American businesses, communities, and charities, accounted for almost half of all U.S. light vehicle production. The largest “U.S.” steel producer, Arcelor-Mittal, is a majority-Indian-owned company with headquarters in Luxembourg and Hong Kong. The largest “German” producer, Thyssen-Krupp, is completing a $3.7 billion green-field investment in steel production facilities in Alabama, which will create an estimated 2,700 jobs in that state.

So, who are “we”? And who are “they”?

Are these foreign-named or –headquartered companies not “our” producers because some of the profits they earn are repatriated or invested in operations outside the United States? If so, then shouldn’t we consider U.S. Steel Corporation, which earned 25 percent of its revenue last year on steel produced in Slovakia and Serbia, and General Motors, which has had success producing and selling cars in China, to be “their” producers? Why should U.S. Steel, General Motors, and the unions that organize workers at those companies dictate the parameters of U.S. trade policy, while Toyota, Thyssen and their non-union workers have no input? Why should trade policy reflect a bias in favor of producers—or worse, particular producers—at all? That bias hurts other interests—both foreign-based and domestic—in the supply chain.

Global commerce isn’t a competition between “us” and “them.” It is instead a competition between entities that defy national identification because of cross-border investment or because the final good or service comprises value added from many different countries. This reality demands openness in both directions, which flies in the face of conventional trade policy wisdom, which seeks to maximize access for domestic producers abroad while minimizing access for foreign producers at home.

It is only for simplicity’s sake that a container full of iPods shipped from China and unloaded in Seattle registers as imports from China. But the fact is that only a few dollars of the $150 cost to produce an iPod is Chinese value-added. The rest is mostly value attributable to Japanese, Korean, Singaporean, Taiwanese, and American components and labor. Then iPods retail for about $300 and most of the mark-up accrues to Apple, which uses the profits to support innovation and higher paying jobs in the United States.

From a trade policy perspective, each iPod imported from China adds $150 to our bilateral deficit in “high tech” goods. It is regarded as a problem to solve. The temptation is to restrict.

But from a commercial perspective, each imported iPod supports U.S. economic activity up the value chain. Without access to lower-cost labor abroad—if rudimentary component manufacturing and assembly operations were required to take place in the United States—ideas hatched in American labs would be far less likely to make it beyond the white board. Much higher costs would make it far more difficult to create these ubiquitous devices that have, in turn, spawned new ideas and industries.

Essentially, the factory floor has broken through its walls and today spans borders and oceans, making Chinese and American labor complementary in this and many other industries. Yet, despite all of this integration, despite the reliance of producers in the United States and abroad on imported raw materials, components, and capital equipment, trade policy still pretends that access to the domestic market is a favor to grant or a privilege to revoke. Trade policy is officially ignorant of commercial reality.

Openness to trade in both directions is an imperative in the 21st century. Policies that do not try to channel incentives for the benefit of specific groups but rather provide the greatest opportunities for citizens to participate most effectively in our increasingly integrated global economy are the ones that will maximize economic growth and national welfare. People in other countries should be thought of more as customers, suppliers, and potential collaborators instead of competitive threats.

In the 21st century, instead of serving the exclusive interests of domestic producers, trade policy should be about welcoming investment and attracting and cultivating the human capital necessary to make the United States the location of choice for the world’s highest value economic activities.

The Cost of Government Guarantees

John Kay’s column in yesterday’s Financial Times criticizes government guarantees to banks because they involve hidden but large costs. According to Kay:

  • Such guarantees distort competition: sheltered banks outperform rivals not because of greater efficiency, but because capital becomes cheaper to obtain.
  • Sheltered banks gain too-big-to-fail status, which creates barriers to entry for smaller, more efficient banks.
  • Relief from business risk leads to more risk taking, AKA moral hazard.
  • Cheaper private risk management incentives are reduced within and outside the bank.

Other kinds of government guarantees, such as social insurance, also involve large hidden costs. Social Security and Medicare’s guarantee of a paid holiday with medical care for the rest of retirees’ lives generates the same types of costs:

  • Labor competition is reduced because the programs induce early worker retirements, which leads to higher wage costs, on average, and lower national output.
  • Workers who believe they will receive Social Security and Medicare will engage in lower personal saving, which means less capital formation and lower economic efficiency.
  • Retirement income guarantees induce riskier personal savings portfolios, AKA moral hazard.
  • Guaranteed retirement income means poorer financial knowledge and poorer risk management.

And now, retiree political power is too big to fail as well!

How come when Kay writes about market distortions from government guarantees for banks, he gets published; but when I do the same about government guarantees for people, I get the cold shoulder from editorial page editors?

GAO: Dept. of Ed. Suffers Oversight Deficiencies

A report released today by the federal government’s non-partisan General Accounting Office finds deficits in the Department of Education’s financial and program oversight. According to the GAO, “These shortcomings can lead to weaknesses in program implementation that ultimately result in failure to effectively serve the students, parents, teachers, and administrators those programs were designed to help.”

The GAO’s findings are consistent with the longstanding pattern: for forty years, Americans have steadily increased spending on public schools without any resulting improvement in student performance by the end of high school (see the figures here and here).

The Obama administration has touted its $100 billion in education stimulus spending as a key to long term economic growth. What the data show, however, is that higher spending on public schools over the past two generations has not improved academic outcomes. And economists such as Stanford’s Eric Hanushek have shown that it is improved academic achievement, not higher public school spending, that accelerates economic growth.

So if the administration is serious in wanting education to boost the American economy, it must support reforms that are proven to significantly raise achievement, such as those that bring to bear real market freedoms and incentives – programs like the DC private school choice program that the administration has decided to kill despite its proven effectiveness.

Ben Chavis to Charles Murray: “Bring it”

In an exchange I had with Charles Murray earlier this month, he complained that there was no bulletproof scientific research documenting miraculous improvement in student achievement attributable to great schools like those of Ben Chavis.

At the time, that objection was beside my point, which is that there is copious evidence that competitive market education systems yield very substantial (if not “miraculuous”) improvements over the status quo government monopoly. We don’t need miracles to prove that there is a much better way of organizing and funding schools.

But that wasn’t enough for Ben Chavis. He called yesterday to pass along a proposition to Charles: come perform the research yourself. In fact, Ben offered to put Charles up in his own house.

I don’t know if Charles will go for this, but I wish he would (or find a grad student who will). And here’s why: I think Charles is so skeptical of the results of great schools and teachers because he has not come across any mechanism in his studies that could adequately explain those results. But I contend that there is such a mechanism: a school culture so strong and conducive to academic effort that it can overcome the absence of an academically supportive culture in the home.

If you read Jay Mathews’ wonderful book Escalante, or Ben’s Crazy Like a Fox, this becomes immediately clear. The school environment in these rare cases becomes a much more powerful influence on students’ willingness to work and expectations of success than is normally the case. These great schools tap into a fundamental human desire to belong to a team that offers them support and to which they feel an obligation to be supportive in return. It’s the same impulse that leads soldiers to put their lives on the line for their buddies in combat, and that sustains the insane work ethic in high tech startups.

This is one reason why free enterprise education systems excel all others: they offer the greatest freedom and most powerful incentives for excellent schools to replicate their cultures on a grand scale.