President’s Auto Gaffe No Laughing Matter

In his address last night, president Obama implied that an American invented the automobile (“The nation that invented the automobile cannot turn away from it”). It doesn’t matter that the president was unaware this is false. Politicians can’t be expected to know everything. What matters is that neither he nor anyone in his inner circle apparently thought it was important to fact check his first major speech to the nation. What other parts of his speech and policy platform are based on mistaken assumptions, we might well wonder?

Alas, some very important ones. In his campaign fact sheet on “21st century threats”, then-candidate Obama declared that

 When Sputnik was launched in 1957, President Eisenhower used the event as a call to arms for Americans to help secure our country and to increase the number of students studying math and science via the National Defense Education Act.

“That’s the kind of leadership we must show today,” he later told a crowd in Dayton, OH.

The trouble is, the National Defense Education Act was an expensive failure. The average mathematics performance of 11th graders fell in the eight years following passage of the law, according to “national norm” studies conducted by the College Board. They still hadn’t returned to pre-NDEA levels a decade later.

In last night’s speech, the president called for increased federal “investment” in public schools, on the apparent assumption that this will improve educational outcomes and with them our economy. History does not support this rosy view.

To have any hope of achieving the lofty goals he has set out for himself, our 44th president would do well to get his future proposals – and speeches – thoroughly fact-checked. While this may starve late-night comics of material, it will save both the president and the American people a lot of heartburn.

Crédit Mobilier as a Model for High-Speed Rail

“History reminds us that at every moment of economic upheaval and transformation, this nation has responded with bold action and big ideas,” President Obama told Congress on February 24. “In the midst of civil war, we laid railroad tracks from one coast to another that spurred commerce and industry.”

Obama, who wants to make the construction of a national high-speed rail network his “signature issue,” no doubt sees this as a model. It was a poor choice.

Aside from the simple factual issue that most of the first transcontinental railroad was built after, not during, the war, most of Obama’s audience would have forgotten that its construction caused for one of the first and biggest financial swindles of the nineteenth century. That scandal was the result of a simple fact: such a railroad made no economic sense in the late 1860s.

To entice someone to build it, the federal government offered subsidies in the form of land grants and loans of $16,000 to $48,000 per mile (depending on terrain) for the actual cost of construction. Politics, not economics, determined the route, so most of the land for hundreds of miles was worthless (and remained so for a century after the railroad was complete). The loans were valuable only to the contractors who built the rail line, as the railroad itself would have a difficult time generating enough business to ever repay them.

So the directors of the Union Pacific Railroad came up with a scheme to profit from construction. They created a separate company, called Crédit Mobilier (cleverly named after a similar scandal in France). Run by the same people who nominally owned the railroad, this company was given the contracts to build the line. To take full advantage of the government loans, they overcharged for construction up to the limit of the loans, earning enormous profits for the company directors.

To keep the scheme going, the company freely used shares to bribe members of Congress who must have been fully aware of the plot. After the rail line was complete, the Union Pacific conveniently went bankrupt, thus avoiding the need to repay the loans. (Supposedly, the reorganized company eventually repaid the loans, though probably not the interest.)

Two decades later, James J. Hill proved that the way to build a transcontinental railroad was in stages, not all at once, with the profits from each stage paying for construction of the next. Hill’s Great Northern Railway was the first transcontinental in North America to be built without subsidies and the only one (except the Southern Pacific) never to go bankrupt. It helped that, unlike the Union Pacific’s line, most of the GN’s route was across fertile farm or forest land.

So now Obama wants to build a new rail empire. Like the Union Pacific, this one will require huge subsidies. Like Crédit Mobilier, contractors will make huge contributions to Congressional campaigns to keep the money flowing. The rail lines will never cover their operating costs, much less capital costs, and so will either go bankrupt or be forever subsidized by taxpayers. And just as the economic benefits of the Union Pacific were invisible for several decades, the environmental benefits of high-speed rail will be negligible or negative.

One difference: while transcontinental railroads eventually did make economic sense, high-speed rail never will.

A National Talk-Show Host with Nuclear Weapons

Over at the DC Examiner, I have a piece tied to President Obama’s address before Congress tonight. It’s called “The President Talks Too Much.” An excerpt:

In recent weeks, the president has been anywhere and everywhere, with a campaign-style blitz of media appearances and town hall meetings. But, hard as it is to imagine in this era of the omnipresent president, there was a time when presidents weren’t seen much and were heard even less. There might be a lesson there for Obama.

Our founding fathers didn’t want a president who’d perpetually pound the bully pulpit. They viewed presidential speechifying as a sign of demagoguery, and thought Congress should take the lead on most matters of national policy. They expected the nation’s chief executive to pipe down, mind his constitutional business, and keep his hands to himself.

The “permanent campaign” that dominates modern presidential politics would have appalled our forefathers. Accepting the 1844 Democratic nomination, James K. Polk described the custom of the time: “the office of president of the United States should neither be sought nor declined.”

When 19th-century candidates spoke publicly, they sometimes felt compelled to apologize, as 1872 Democratic contender Horace Greeley did, for breaking “the unwritten law of our country that a candidate for President may not make speeches.”

The modern ritual of the State of the Union–with members of Congress rising to clap for every outsized promise–has grown weirdly anti-republican. Congressmen and women are members of a coordinate branch, and they ought not to be clapping maniacally like so many members of the Supreme Soviet. (George W. Bush’s last SOTU was interrupted 72 times by applause).

It would be nice if Obama returned to the Jeffersonian tradition of writing out the State of the Union and sending it over by messenger, rather than delivering it in person before Congress assembled. Of course, that’s never going to happen. There is one thing he could do, however, that would endear him to millions of Americans in the viewing public: start the speech with the following words:

“Ladies and Gentlemen: Please hold your applause to the end.”

Cato Scholars Live-Blogging Obama’s Speech

Tune in here on Cato@Liberty tonight, where Cato scholars will provide live commentary on President Obama’s address to Congress.

The president is expected to highlight domestic issues in his speech, including the state of the economy, health care and energy policy. He’ll touch on foreign policy, addressing the wars in Iraq and Afghanistan and the future of the detention center at Guantanamo Bay.

The speech begins at 9:00 PM EST and is expected to last 50-60 minutes.

You can also follow our live commentary of Obama’s speech on Cato’s Twitter feed.

Topics:

The Foreclosure Five Dominate Case-Shiller Price Indexes

A CNNMoney.com report, “Home prices in record drop,” posted a scary map labeled “Falling Homes Sales.” But it actually shows falling home prices. Within the S&P Case-Shiller sample of 20 metropolitan areas, the steepest drop in prices (not sales) were in Phoenix, Las Vegas, San Francisco, Los Angeles, San Diego, Tampa and Detroit.

All 7 of those metropolitan areas (7 out of 20 in that index) lie within 5 states with by far the worst mortgage problems, as shown in my February 21 article, “The Foreclosure Five.” Yet I also showed that states with the steepest price declines also have had huge increases in home sales, which makes the label on the CNNMoney map doubly misleading.

My article used third quarter house prices because fourth quarter figures were not yet available. That turns out to make even less difference than I expected.

The fourth quarter Federal Housing Finance Agency (FHFA) figures show home prices down 21.8% for the year in Nevada, 20.5% in California, 15.2% in Arizona, 19.5% in Florida, and 11.8% in Michigan. Prices were down 3.7% in the median state, North Carolina, but up 21.6% over five years. That means prices fell by less than 3.7% last year in 24 states— including a half dozen states with home prices up a bit, and New York with only a 3.3% decline.

CNNMoney says, “The decline does not seem to be slowing - just the opposite. The average home price dropped 2.5% between November and December in the 20 top metro areas.” The FHFA data for all 50 states, by contrast, show a small 0.1% increase in home prices between November and December.

The article goes on say, “The S&P Case-Shiller National Home Price Index reported that prices sank a record 18.2% during the last three months of 2008, compared with the same period in 2007. Case-Shiller’s index of 20 major metropolitan areas fell 18.5%, also a record.” The FHFA, by contrast, shows that prices fell just 8.2% during the last three months of 2008, or 3.7% if using a median average. Ten percentage points is quite a wide gap.

What accounts for such huge differences between Case-Shiller and federal price indexes? CNNMoney imagines it’s because “Homes purchased without financing or ones too expensive to qualify for a Fannie-Freddie loan are not counted in the FFHA (sic) statistics.” That’s more than unlikely. The inclusion of cash sales and jumbo loans (larger than $729,750 in pricey area) can’t possibly explain why price declines in the Case-Shiller index look so much more dramatic those in the OFHEO/FHFA index.

The real reason is simple: Case-Shiller indexes are hugely dominated by the Foreclosure Five. In the Case-Shiller index of only 20 “top” metro areas, the Foreclosure Five account for 41.2% of that value-weighted index with California alone accounting for 27.4%.

The “national” Case-Shiller index totally excludes 13 states, such as Indiana and South Carolina, and samples only a fraction of many others. The Foreclosure Five account for 28.3% of that “national” index, with California amounting to 17.1%.

As is true of nearly all reprorting about foreclosures, underwater mortgages and falling house prices, what the Case-Shiller price index really shows is that many people are confusing what has been happening in the Foreclosure Five with what has been happening in the nation as a whole.