Here’s an Idea: Don’t Do Either!

One of the biggest pieces of news coming from President Obama’s budget preview is that he’d kill federal guaranteed student lending – in which the feds subsidize private lenders – and move everything to direct lending straight from the government. He promises that cutting out the middle man would save about $4 billion a year.

In the short term, that savings figure might be possible, though whether or not that is the case is likely to be hotly contested. Washington does spend a lot subsidizing loans so that they carry almost no risk to the lenders and are, hence, low-interest and abundant. Eliminating those subsidies could save some dough. That said, there is absolutely no reason to believe that making Washington the monopolist student lender will produce any long-term efficiencies. In fact, all it will do is ensure gigantic bloat, as is the case with any government monopoly.

A recent story in the New York Times, coupled with a blog entry I wrote in November, illustrates why neither guaranteed nor direct federal lending should ever be expected to produce efficient outcomes.

On the blog I wrote about how, in order to keep things rolling during the “credit crunch,” the Bush Administration was essentially going to buy up any student loans that lenders thought were too insecure. At the time, the Education Department kept declaring that whatever the feds ended up doing it would be “cost neutral” – we wouldn’t feel a thing as they kept banks and students in the money. I wondered, skeptically, how exactly that would be done, but couldn’t find anything explaining it. All I found were Education Department promises that it would be made clear…eventually.

It turns out, I was very likely right to be suspicious. As the Times reported on Wednesday:

The program is supposed to cost taxpayers nothing, but the Obama administration has asked for additional analysis.

“We have reviewed the analysis with the staff here, and we do not have confidence in the bottom line,” said a senior official at the White House Office of Management and Budget, who insisted on anonymity, citing administration policy. Referring to differences between agreements entered into by the departing Bush administration and public descriptions of the program, the official added, “The documents on their face raise serious questions about whether it’s cost-neutral.”

So it seems likely that the government essentially lied to America. “Oh yeah – ‘cost neutral.’ Sorry. We thought you wouldn’t notice.”

What this little episode illustrates is something we frankly already knew: Government officials will happily deceive us if that’s what it takes to enact policies that they think will make them look good, especially in the short term (meaning, until the next election). With that in mind, whether the feds are working with a middle man or giving students the money directly, it almost certainly doesn’t matter: money will be lost, and probably in much bigger amounts than the public will be led to believe.

So what is government to do about student loans? Nothing! Washington should get out of the loan business and leave promising students and profit-seeking lenders to find each other in pursuit of mutual gain. (A student with high earning potential? A bank looking to make some bucks? Why, it’s a perfect match!) Then we wouldn’t have to choose between the frying pan and the fire, nor would we continue to encourage tons of people to pursue college educations they don’t need, can’t handle, or both. In other words, we’d return both some sanity and taxpayer justice to the world of college finance.

Week in Review: Obama’s Speech, a $3.6 Trillion Spending Plan and a New Cato Senior Fellow

Obama Outlines National Plan in First Address to Congress

President Obama’s first address to Congress laid out a laundry list of new spending and provided hints as to what will be contained in the budget – a so-called “blueprint for America’s future”– he submitted to lawmakers Thursday.

In a new video, Cato Institute scholars offer their analyses of the president’s non-State-of-the-Union Address.

While watching the speech, Cato scholars offered live commentary on Cato’s blog and Twitter feed.

Expanding on his recent article, “Obama’s Shock Doctrine,” Cato Executive Vice President David Boaz says that Obama’s speech further proves that his administration is using scare tactics and the financial crisis to further an agenda that will expand the size of government.

President Obama made good on his reputation for giving excellent speeches. He seemed calm and confident. It’s no wonder that instant polls show that most viewers liked it.

That reaction is all part of the guiding strategy of this administration: using a crisis atmosphere to amass more money and power in Washington. There’s a long history of government growth in times of crisis such as wars, natural disasters, or economic shocks. Think of FDR’s revolutionary “first 100 days” or LBJ’s driving through his Great Society programs in the wake of John F. Kennedy’s assassination.

George W. Bush did it, too, with both the Patriot Act and the invasion of Iraq after the shock of 9/11. And in so doing, he left his successor both a presidency and a federal government with unprecedented powers, ready to be employed for a different agenda.

For analysis of Obama’s speech, Cato scholars weigh in by topic on the president’s plans for America’s future.

Obama’s New Budget Includes $3.6 Trillion in Spending

On Thursday, the Obama administration introduced its new budget framework for the coming years, including $3.6 trillion in spending for the current fiscal year.

Chris Edwards, Cato’s director of tax policy studies, says that despite what Obama might say behind a microphone, the new administration has little interest in fiscal responsibility.

President Obama said some encouraging words about federal spending in his first major speech as president, but the budget released by his administration today reveals a substantial disconnect between his rhetoric and his policy.

The president says the money in his new budget will be spent wisely, but Boaz explains why it’s impossible for the government to spend trillions of dollars without waste or fraud.

In the new edition of the Cato Handbook for Policymakers, Chris Edwards offers six ways Congress should cut spending.

Cato Welcomes Tucker Carlson

Television commentator, author and journalist Tucker Carlson has joined the Cato Institute as a senior fellow.

Carlson will use his initial time with Cato to focus on writing a book on the state of the American polity. Through other writings as well as media and public speaking appearances, he will also seek to educate the broader public about how the libertarian philosophy differs from the standard liberal and conservative orthodoxies embodied in the two main U.S. political parties.

Carlson was co-host of the staple CNN debate program “Crossfire” and also had his own programs on MSNBC (“Tucker”) and PBS (“Tucker Carlson: Unfiltered”), as well as appearing regularly on numerous other news programs. Though sometimes showcased by these networks as the “conservative” point of view, Carlson became a dependable critic of numerous Bush administration policies, including wasteful spending and the war in Iraq.

Topics:

When Is an Iraq Withdrawal not a Withdrawal?

When it means leaving 50,000 troops in Iraq to train and fight.

Reports the Washington Post:

President Obama has invited members of Congress to the White House for a meeting later this afternoon to discuss his plans for drawing down troops in Iraq – a plan that has already drawn stiff criticism from his Democratic allies.

After Speaker Nancy Pelosi complained that the level of troops – 50,000 – who would remain in Iraq is too high, other senior Democrats voiced similar concerns on Thursday. Among Democratic leaders, only Sen. Richard Durbin of Illinois is defending the new Obama plan, which will take three months longer than he promised and still leave a significant force structure on the ground.

“I’m happy to listen to the secretary of defense and the president, but when they talk about 50,000, that’s a little higher number than I had anticipated,” Senate Majority Leader Harry M. Reid (D-Nev.) said.

“It has to be done responsibly, we all agree, but 50,000 is more than I would have thought, and we await the justification,” said Sen. Charles Schumer (D-N.Y.).

“I do think we have to look carefully at the numbers that are there and do it as quickly as we can,” said Sen. Patty Murray (D-Wash.).

Sen. Russ Feingold (D-Wisc.) issued a statement saying he was “concerned” about the level of troops that would remain in Iraq.

It’s not just a “little higher number” than most Americans want.  It is a lot higher.  President Barack Obama should bring home all of America’s troops from Iraq.  If he doesn’t, Democratic officials and peace activists need to make their views known to him just as vigorously as they did to President George W. Bush when he was launching and escalating the war.  Congressional Democrats certainly shouldn’t be bought off by a little sweet talk in the Oval Office.

New Podcast: ‘Paul Krugman’s Nostalgianomics’

Expanding on his February 9th White Paper, “Paul Krugman’s Nostalgianomics: Economic Policies, Social Norms, and Income Inequality”, Cato Vice President for Research Brink Lindsey discusses the problems with the 2008 Nobel laureate’s analysis of income inequality in today’s Cato Daily Podcast.

[Krugman] has a clear ideological incentive to portray the ‘50’s and ‘60’s as this enlightened period of governance. Liberals were in charge, it was a time of very activist government, lots of intervening in markets, and yet the economic numbers were stellar. Growth was fantastic, income growth in particular was great, and these egalitarian values of income compression were being fulfilled as well. To him, it looks like a wonderful model for liberals of today. ‘Look back at what liberals did in the 50s and 60s and we can do that again.’ But to reach that kind of ideologically satisfying, for him, conclusion I think he has to be very selective about what was actually going on back in the 50s and 60s. He has to cherry-pick policies he likes.

Trying Al-Marri

The Washington Post is reporting that the Obama administration is planning to charge Ali Saleh Kahlah al-Marri with providing material support to Al Qaeda.  Al-Marri is an alleged sleeper agent for Al Qaeda, and the FBI intercepted him while he was an exchange student in Illinois.  Prior to his trial, the Bush administration moved him into military custody and dropped the charges with prejudice, meaning that they could not be re-filed.  Apparently, there is enough evidence to file a fresh indictment.  The ACLU statement is available here.  My prior posts on the topic are available here and here.

This is probably an attempt to remove the case from the Supreme Court’s docket and avoid the constitutional controversy of keeping someone out of the criminal justice system.

The Supreme Court should not be deterred from hearing the case.  Cato filed an amicus brief with the Constitution Project and the Rutherford Institute in al-Marri’s case.  We were not alone, as virtually every civil liberties organization weighed in.  A group of retired military officers filed an amicus brief arguing that the Posse Comitatus Act and associated statutes specifically prohibit the “direct participation by a member of the [Armed Forces] in a search, seizure, arrest, or other similar activity unless participation in such activity by such member is otherwise authorized by law.”

It is time to drive a stake through the heart of domestic military detention.  The Bush administration moved detainees into military custody and to different jurisdictions to avoid judicial review.  In 2006 the Supreme Court denied certiorari to convicted Al Qaeda operative Jose Padilla’s habeas petition.  He had just been moved to civilian custody and indicted in Florida, so he was no longer detained by the military.  The prospect of returning to military custody was taken seriously enough by three justices that they voted to grant certiorari - one shy of the requirement for the Court to hear the case.

Kennedy was sufficiently unnerved by domestic military detention that, although he voted not to grant certiorari, he wrote separately.  “In light of the previous changes in his custody status and the fact that nearly four years have passed since he was first detained, Padilla, it must be acknowledged, has a continuing concern that his status might be altered again.”  Chief Justice Roberts and Justice Stevens joined him.

As I have said before, the line between the civilian criminal justice system and the military is in many ways the line of liberty.  The Court should take up this case and put that line back in place.

Calling All Harvard Alumni

As my colleague Dan Mitchell has noted, Harvard is about to hold a conference about how the “free market ideology has dominated  legal discourse and lawmaking the last few decades.”  That’s a dubious narrative (to say the least (pdf)).

In any event, Harvard alums who read this blog should know that Cato adjunct scholar Harvey Silverglate  is running for a position on Harvard’s Board of Overseers.  Pass the word to all the Harvard alumni you may know.  Additional background here.

New Mandatory Savings Plan?

I haven’t seen any media attention paid to it yet, and I don’t recall the president mentioning it in his speech Tuesday night.  Regardless, p.37 of today’s budget blueprint calls for “Making Saving for Retirement Easier as the Economy Recovers.” Although it sounds innocuous, I believe the contents could be cause for alarm:

“Over the long-term families need personal savings, in addition to Social Security, to prepare for retirement and to fall back on during tough economic times like these. However, 75 million working Americans—roughly half the workforce—currently lack access to employer-based retirement plans. In addition, the existing incentives to save for retirement are weak or non-existent for the majority of middle and low-income households. The President’s 2010 Budget lays the groundwork for the future establishment of a system of automatic workplace pensions, on top of and clearly outside Social Security, that is expected to dramatically increase both the number of Americans who save for retirement and the overall amount of personal savings for individuals. research has shown that the key to saving is to make it automatic and simple. Under this proposal, employees will be automatically enrolled in workplace pension plans—and will be allowed to opt out if they choose. Employers who do not currently offer a retirement plan will be required to enroll their employees in a direct-deposit IRA account that is compatible with existing direct-deposit payroll systems. The result will be that workers will be automatically enrolled in some form of savings vehicle when they go to work—making it easy for them to save while also allowing them to opt out if their family or individual circumstances make it particularly difficult or unwise to save. Experts estimate that this program will dramatically increase the savings participation rate for low and middle-income workers to around 80 percent.”

Here are my concerns just off the top of my head:

Obviously, it represents yet another government encroachment upon individual liberty.  While employees would be “allowed” to opt out, employers would not.  More ominously, while there is no mention of government subsidization of individual plans or forced contributions by employers, how long will it take for activists and their congressional allies to go down those roads?  I can already envision hordes of politicians bemoaning the inability of low- and moderate-income workers to direct any portion of their wages toward their accounts.  And don’t just think this will be limited to leftist politicians.  When I worked for the U.S. Senate a conservative senator once asked me to design a mandatory savings plan for all citizens in which the government and employers would “contribute.”

I guess the bright side here is that the administration is implicitly acknowledging that Social Security isn’t the wonderful retirement nest egg defenders have wanted us to believe.  I also can’t help but chuckle at the political reintroduction of savings as being beneficial.  Over the past year we’ve been repeatedly warned that savings is bad and spending is good.  Anyhow, this issue is going to be one to watch going forward.