Perry the Profligate

Rick Perry is one of the more disappointing of Trump’s cabinet secretaries. He once fashioned himself a conservative budget-cutter, but since becoming head of the Department of Energy (DOE), he has focused on defending subsidies rather than cutting anything. He once wanted to abolish the DOE, but he turned 180 degrees on that idea upon taking the DOE helm in 2017.

The Daily Caller reports:

… Perry visited Waynesboro, Georgia, on Friday and announced $3.7 billion in additional federal loans for the primary owners of a nuclear power project that has been beset with delays and cost overruns.

The Department of Energy is guaranteeing up to $1.67 billion in loans for Georgia Power, up to $1.6 billion for Oglethorpe Power, and up to $414.7 million for the Municipal Electric Authority of Georgia (MEAG Power). The three utilities are co-owners of the Vogtle Electric Generating Plant.

The loans are to help Vogtle’s construction of its two latest nuclear reactors: Units 3 and 4. The two units, which are the only nuclear reactors under construction in the entire country, were originally planned to be completed by 2017, but have been plagued with construction delays and ballooning costs. Unit 3 will not be ready to be loaded with fuel until 2020, and Unit 4 won’t go online until 2021.

Construction of the two units are expected to cost a total of $27 billion, and the announcement by Perry on Friday marks a total of $12 billion in federal loan guarantees to help keep the project afloat.

More on energy subsidies and Vogtle here, here, and here.

Pearl Harbor Profligacy

A damaging divide in democracy is between the profusive promises of politicians and the pathetic performances of bureaucracies. Big government schemes fail over and over for basic structural reasons. The taxpayers lose every time and government officials never apologize. People don’t pay attention, and then they re-elect spendthrifts to waste more of their money.

The Wall Street Journal profiles an elevated 20-mile rail project in Honolulu that has soared in cost from $5 billion to more than $9 billion. It is a boondoggle. And, as we often see, government officials are blaming others and dodging responsibility.  

Like most passenger rail projects, the Honolulu project likely only proceeded because of the lure of federal subsidies. It was conceived when “the late Sen. Daniel Inouye helped win more than $700 million of federal funding in 1991.” As it turned out, the federal government has so far withheld the aid it promised, and the state has imposed major tax hikes to cover the ballooning costs.

Urban rail transit has been a scandal for decades, as Randal O’Toole documents. The costs of projects balloon and demand falls short. Bus systems are nearly always more efficient, flexible, and safer, but federal aid induces state and local politicians to ride the rails.

Here’s some Journal highlights on the Hawaii project:

More than a decade after inception, having spanned the tenures of three mayors and three governors and outlived its most powerful benefactor in Congress, the project is only half built. Hopes it might transform the crowded island city anytime soon are fading.

Among the cascade of problems: Honolulu pushed ahead before fully planning the project, and nearly 100 contracts had to be reworked, causing delays. The city began construction before fully checking Native Hawaiian burial grounds, and a judge halted the project for over a year. Planners built too close to power lines, so Honolulu must shell out hundreds of millions of dollars to move them.

Dogged by such blunders, the project has seen its price tag soar to more than $9 billion from about $5 billion. The cost overruns are among the largest that transportation experts say they’ve ever seen. The cost has led to an extra excise tax on businesses, which can affect the price of goods and services, and it has hit tourists through an expanded hotel tax.

… a recent state audit said officials misled the public about the train line’s shaky finances.

… Honolulu’s elevated rail line shows how badly municipalities can stumble in tackling giant infrastructure projects, especially when they’re powered by political urgency.

… “They tried to force this as a major solution,” said Panos Prevedouros, civil and environmental engineering chairman at the University of Hawaii and a former mayoral candidate. “Now, we’re paying the dividends of all the lies, and we haven’t gotten any benefits.”

… The late Sen. Daniel Inouye helped win more than $700 million of federal funding in 1991, but the city council rejected a tax boost to help pay. In 2004, the idea got a boost from then-Mayor Mufi Hannemann. The charismatic, 6-foot-7-inch mayor persuaded the state to let Oahu add a half-percentage-point surcharge to a state tax on business receipts.

Oahu residents voted to proceed in November 2008. Though it was the midst of the financial crisis, city officials sought to move fast. Firms needed contracts, and Mr. Hannemann warned of a risk that state lawmakers might grab the money from the tax surcharge for another use.

“I thought it was prudent to move quickly,” Mr. Hannemann said in an interview, partly to show the Federal Transit Administration, which would provide part of the funding, that Honolulu was committed. “We needed to send a very strong positive message that the project was good to go,” he said.

Honolulu signed a $483 million contract to design and build the first elevated section in November 2009.

The environmental-impact study wasn’t complete. Neither were surveys of archaeological and historic sites, including wahi pana, which are places Native Hawaiians consider significant. The city hadn’t coordinated plans with the electric utility, the state university or groups that owned land along the route.

Honolulu also hadn’t received final approval from the FTA for a $1.55 billion grant it was counting on, 30% of the project budget.

… Delays, such as losing bidders’ appeals, triggered a cascade of contract adjustments, ultimately costing hundreds of millions of dollars. A financial analysis ordered in 2010 by then-Gov. Linda Lingle, a Republican, said the project would cost $1.7 billion more than Honolulu anticipated. The report also said tax revenue for the project was likely to grow at 30% less than forecast. And it said ridership forecasts—about 100,000 a day when built and 120,000 daily a decade later—were too rosy.

… In spring 2016, an audit by the city found HART’s [Honolulu Authority for Rapid Transportation’s] financial plan in disarray, with hundreds of millions of dollars unaccounted for. The audit said financial disclosures and conflict-of-interest reports for contractors were missing or never required, train officials had radically miscalculated costs, and the authority was paying for vacant office space.

… The city and state released new audits earlier this year. The city audit showed that of 96 contracts awarded from 2008 to 2016, two-thirds had to be revised, with 641 change orders and amendments. “The rush to approve the project was for political purposes,” the audit said.

Preview of Oral Arguments in Kisor v. Wilkie

On Wednesday morning, the Supreme Court will hear oral arguments in Kisor v. Wilkie, an important administrative law case in which the Court is reconsidering the Auer doctrine, or controlling deference to an agency’s regulatory interpretations.

The immediate controversy pertains to James Kisor, a Vietnam veteran whose claim for disability benefits hinged on the interpretation of the term “relevant” in the Board of Veterans Appeals rules of procedure. Only when the board denied Mr. Kisor’s claim did the agency announce its interpretation unprompted and without having been briefed on the matter. Obviously, Mr. Kisor was given no advance notice of the new “rule” — which was really just a new interpretation of the word. Mr. Kisor appealed the denial of his claim to the Veterans Court, which sided with the government. He then sought review of the Veterans Court’s decision before the U.S. Court of Appeals for the Federal Circuit, which, again, sided with the government. The three-judge panel determined that the term “relevant” was ambiguous, and that both parties had advanced reasonable interpretations. Nevertheless, the appellate court sided with the agency, based on the aforementioned Auer doctrine.

In December 2018, the Supreme Court granted Mr. Kisor’s petition for certiorari, but instead of limiting the case to the meaning of the agency’s rules, the Court chose to reconsider wholesale the Auer principle.

The problems with Auer deference are set forth in a brief supporting Mr. Kisor filed by Cato, joined by Professors Jonathan H. Adler, Richard A. Epstein, and Michael W. McConnell, as well as the Cause of Action Institute. We argue that Auer, by concentrating lawmaking and law-interpretation in regulatory agencies, both offends separation of powers principles and facilitates procedural shortcuts. Auer deprives regulated entities of fair notice, which is fundamental to the integrity of the law, and also robs administrative policymaking of legitimacy by allowing agencies to avoid public participation in the formulation of their rules. Finally, despite some predictions that overturning Auer will wreak havoc in administrative agencies, we point out that independent judicial assessment will change the outcome in only a small minority of cases. In sum, overturning Auer is an important step towards reining in the administrative state.

Government Mandated, State-Run Auto-IRAs Can Cause Real Harm

A number of states have recently enacted employer mandates that force companies who don’t offer retirement plans to enroll their workers in a state-run, auto-IRA plan. Oregon’s program – known as OregonSaves – is the oldest and most established. By mid-2020, Oregon’s mandate will cover all companies; it currently covers companies with twenty or more workers.

One myth – perpetuated by the National Employment Law Project – is that state mandates expand opportunity to retirement savings, especially for low-income workers. They don’t. OregonSaves initially defaults worker contributions into a conservative capital preservation fund before redirecting contributions to a life-cycle fund once balances exceed $1,000. Since inception in 2004, the capital preservation fund has offered a paltry nominal return of 1.52% (essentially an inflation-adjusted return of 0%). OregonSaves also assesses an administrative fee of 100 basis points (that is, 1%) regardless of investment choices, further diminishing this return. This set-up isn’t really an opportunity for Oregon workers, because they already have access to Roth IRAs and investments with a more beneficial set-up. A 25-year-old worker might actively choose a life cycle fund with no minimums for initial investment or additional contributions, along with administrative fees of 75 basis points, significantly lower than OregonSaves. Choosing an index fund that tracks the S&P 500 could have administrative fees as low as 1.5 basis points. Without mandating Oregon employers to enroll their workers, OregonSaves would struggle to compete in a vibrant marketplace with many inexpensive alternatives for retirement contributions.

If government mandates don’t improve access to retirement plans, why have the program? The real reason is that the programs increase participation through inertia; simply put, many workers are asleep at the wheel. Many workers don’t take active steps to plan for retirement regardless of how a program is designed. If the default choice is to actively enroll, many workers won’t participate. If the default choice is automatic enrollment with an opt-out option, many workers do participate. Oregon’s 28% opt-out rate is relatively high, highlighting some of the problems of the program’s design. Among those enrolled, fully 93% of participants stick with the specified contribution rate and an astonishing 79% of all fund balances are invested in the capital preservation fund. Almost all remaining balances are invested in target date funds, likely for workers who have exceeded the $1,000 contribution.

Worker inertia is real, meaning that design choices like opting in or out, asset classes and contribution rates are likely to stick. The one-size-fits-all design of OregonSaves can cause real harm for many workers, an issue I explored with my colleagues in a new study for Journal of Retirement. If OregonSaves were adopted nationally, 24.2 million workers aged 25-64 would initially be opted-in. Approximately 33% of affected workers carry high-interest credit card debt, with balances averaging nearly $5,500. Around 15% of affected workers struggle to meet basic needs like paying rent or utility bills. Workers in these situations come out ahead by paying down debt or meeting basic needs, and siphoning off 5% of their paycheck will likely worsen their overall financial situation.

Financial planning websites consistently emphasize paying off revolving high-interest debt before saving for retirement (unless a company offers a match rate), yet auto-IRAs fail to take these investment lessons into account. Advocates for government mandates emphasize the benefits of compounding for assets in an IRA, while curiously ignoring the reality that unpaid debt compounds in the exact same manner! At an 18% interest rate, an unpaid $5,500 credit card debt would mushroom to $28,800 in ten years. The same amount of money directed towards OregonSaves might accumulate to $12,900 under rosy assumptions about investment returns. Ultimately, our study shows a significant number of workers are in situations like this, and auto-IRAs would do more harm than good for them.

What Federal Spending to Cut?

Economist Martin Feldstein warns about excessive government debt in the Wall Street Journal:

The most dangerous domestic problem facing America’s federal government is the rapid growth of its budget deficit and national debt.

I agree.

To avoid economic distress, the government either has to impose higher taxes or reduce future spending. Since raising taxes weakens incentives and further slows economic growth … the better approach is to slow government spending growth.

I agree. 

Defense spending and nondefense discretionary outlays can’t be reduced below the unprecedented and dangerously low shares of GDP that the CBO projects. Thus the only option is to throw the brakes on entitlements. In particular, the government needs to hold back the growth of Medicare, Medicaid and Social Security.

Here, I differ with Feldstein. We need a more expansive view of what can and should be cut.

The pie chart breaks down the $4.5 trillion federal budget for 2019 into major parts, and it identifies which parts should be cut.

 

Here are some reform suggestions:

  • Social Security. Congress should raise the retirement age as Feldstein advises, but also switch the indexing of initial benefits from wages to prices to slow growth, while also reforming disability insurance to encourage work.
  • Medicare. Congress should increase premiums and cost-sharing while moving to a system of vouchers to encourage competition and cost control.
  • Medicaid. Congress should convert federal aid to block grants in order to cut federal spending and encourage state innovation and cost reductions.
  • Defense. The largest federal bureaucracy is the Pentagon’s civilian staff of 750,000. A Washington Post investigation suggested that bloat in the defense bureaucracy cost more than $100 billion year. I don’t know whether that is true, but the Pentagon could certainly save money by tackling excessive layering, cost overruns, and corruption.
  • Interest. Without reforms, interest costs are expected to double over the next seven years, but those costs would fall if Congress cut spending.
  • Other Spending. Congress should cut food subsidies, farm subsidies, energy subsidies, housing subsidies, rural subsidies, development subsidies, K-12 subsidies, college subsidies, welfare subsidies, disaster subsidies, security subsidies, community subsidies, developer subsidies, water subsidies, grazing subsidies, unemployment subsidies, training subsidies, highway subsidies, transit subsidies, airport subsidies, rail subsidies, worker subsidies, foreign aid subsidies, business subsidies, flood subsidies, power subsidies, and much more.

If the government is subsidizing everyone, then it is effectively subsidizing no one. We are shuffling trillions of dollars around and the largest net gainers are the high-paid middlemen and lobbyists in Washington.

Feldstein concludes: “Lawmakers don’t like to cut spending, but they have to do something. Otherwise the exploding national debt will be an increasing burden on our children, economic growth and our future standard of living.”

I agree with that, but it suggests that cuts are like taking unpleasant medicine to treat an illness. Instead, spending cuts should be viewed as a positive. They would shift resources from mismanaged and damaging federal programs to more productive private activities. Federal spending cuts are not a necessary evil needed to tackle deficits, but rather an opportunity to spur growth and expand freedom.

On Trump’s Higher Ed Executive Order

President Trump’s hotly anticipated executive order on college free speech—brought to a fever pitch with his comments at this year’s CPAC—is out. It’s actually kinda several orders in one, with free speech on the main stage, but college outcomes data, and a bunch of studies—including of “skin in the game”—on the sides. Here are some quick thoughts on all three parts.

Free speech

Conservatives, especially, have become disgusted with what they have seen as an increasingly aggressive, politically-correct culture on American campuses, and not without some justification. The order, as you could glean from the White House signing event, was almost certainly motivated by that. But as far as the words of the order go, it seems restricted to combatting college policies, not cultures. Free speech zones, administrators prohibiting certain speakers, etc. Crucially, it treats public and private institutions differently, understanding that public colleges are fully subject to the First Amendment, while private colleges are beholden to what they promise their customers. If they say they are going to allow the free exchange of ideas, they need to do that, but if they are forthright about their speech codes, no problem.

The danger lurks in the order’s generality. It directs multiple federal agencies to “take appropriate steps, in a manner consistent with applicable law, including the First Amendment, to ensure institutions that receive Federal research or education grants promote free inquiry.” Sounds good, but it doesn’t spell out what that means. Could it result in agencies saying free inquiry requires intellectual “balance” among invited school speakers, or something similarly intrusive? What if all agencies have their own, differing definitions? And as Sen. Lamar Alexander (R-TN) suggested, isn’t speech protection more the bailiwick of the Department of Justice than Energy, or the National Science Foundation?

Data

The order calls for the Department of Education to create a new website and mobile app so borrowers can easily check data on their students loans, which is fine if you (wrongly) accept that the feds should be in the student loan business. Also, it requires that the College Scorecard, launched during the Obama Administration, add data on program-level, rather than just school-level, outcomes such as graduate earnings.

Data publication is one of the less dangerous things Washington does, but it still has pitfalls, especially the likelihood the data will be politically cherry-picked instead of used to inform.

Studies

A longstanding proposal, championed by many people who understand the root problems of higher education, has been for colleges to bear some cost for defaulted loans. As it stands now, most schools have little incentive to turn away federal bucks-bearing students, no matter how unlikely to complete their studies they may be. Schools get paid no matter what, meaning student aid is all upside for colleges. The “skin in the game” goal is to incentivize schools to better vet potential matriculators, or maybe do a better job educating.

Two problems. First, this blames institutions when the crux of the problem is elsewhere: Washington gives bundles of money to just about anyone who wants them, without seriously assessing their ability to handle the programs they plan to enter. It’s at the point of the initial loan where the vetting should occur, to the benefit of both the would-be borrower and the true lender: the American taxpayer. Second, politically favored schools such as community colleges would probably quickly be identified for exemption. Thankfully, as the heading of this section telegraphs, the order just calls for a study of ways to implement such a proposal.

The other areas for study are pretty innocuous, as far as federal education intervention goes. The Secretary of Education is to study and report on better ways to collect on defaulted loans, and to formulate ideas to increase college completion based on what’s worked in states and institutions.

Summary

All in all, the order’s not the worst thing we could have gotten, but there are ample causes for concern.

NY-NJ Should Put Up or Shut Up

New York Governor Andrew Cuomo is upset that the Trump administration doesn’t want to fund new tunnels under the Hudson River. Cuomo sent an angry letter to Trump earlier this week accusing the president of being prejudiced against New York and New Jersey because they didn’t vote for him. Cuomo claims the tunnels should be federally funded because “the Northeast is home to 17 percent of the entire population and contributes 20 percent to the national domestic product.” 

But gross domestic product and regional populations aren’t among the criteria Congress established for federal funding of transit infrastructure. Instead, one of the most important criteria that the Department of Transportation is required to use is whether the project is “supported by an acceptable degree of local financial commitment.” Based on the lack of local support, the Federal Transit Administration’s 2020 New Starts funding recommendations gave the project a “medium-low” rating, and under federal law, that makes it ineligible for funding. Not counting some very small projects (such as the downtown Los Angeles streetcar), the only other project to get a medium-low rating was the Portal North Bridge, which is also part of the Hudson Gateway megaproject.

Cuomo argues that Trump has ignored “the financial commitments made by New York and New Jersey.” The FTA’s profile of the project reveals just what those commitments are.

First, the states are asking the federal government to put up $6.7 billion, or 49 percent of the projected $13.6 billion cost. Second, they want the federal government to make them a loan of $2.3 billion that will be “repaid with PANYNJ [Port Authority of New York and New Jersey] funds.” Third, they want another federal loan of $2.0 billion that will be “repaid with project revenues.” These two loans total to 32 percent of the projected costs.

Another billion dollars (7%) is supposed to come from “unspecified private capital sources” who will be “repaid with project revenues.” Further, $1.4 billion (10%) would come from “GDC funds” derived from “project revenues.” GDC is the Gateway Development Corporation, which consists of Amtrak, New Jersey Transit, the Port Authority, and the U.S. Department of Transportation. It currently earns no revenues of its own, so it will have a hard time paying $1.6 billion in construction costs. Finally, $178 million, or 1.3 percent of the total, would come from the Port Authority of New York and New Jersey.

In short, New York and New Jersey are nobly committing themselves to cover 1.3 percent of the cost of the project, while they are relying on the federal government to fund a mere 81 percent. Of course, some of that would be loans, but the states may not be obligated to repay those loans unless the project earns sufficient revenues to do so. The private capital sources who are supposed to put up 7 percent are almost purely imaginary, and even if they existed they would demand that they be repaid out of project revenues before the federal government. But before repaying anyone, these mythical project revenues are supposed to cover another 12 percent of the cost.

Pardon me if I sound naive, but what project revenues are we talking about? Amtrak, New Jersey Transit, and the Port Authority are all money-losing operations. Amtrak claims to make money in the Northeast Corridor, but that’s only because it ignores depreciation and the corridor’s $51 billion infrastructure backlog, only part of which is the Hudson Tunnels. New Jersey Transit trains don’t even earn enough fares to cover 60 percent of their operating costs, much less any to pay for maintenance or capital costs.

In other words, Cuomo is asking Trump to have federal taxpayers pay nearly all the up-front costs and to take nearly all the risks of this project. What if self-driving buses put New Jersey Transit and Amtrak out of business – or at least reduce their ridership enough that they have no surplus revenues to repay federal loans? What if many of the firms now located in Manhattan realize that the subway system is never going to be repaired and decide to move away? Who is going to pay for the inevitable cost overruns? New York and New Jersey are clearly trying to get these tunnels while putting up as little of their own money as possible.

The FTA has long had a policy that applicants for transit capital funds must put up half the cost in matching funds, and federal loans don’t count as matching funds. Following this policy, it rated the Hudson Tunnels “medium low.” Congress made the rules, so Cuomo is complaining to the wrong party when he writes Trump, as the Department of Transportation just followed Congressional direction when it gave the project a medium-low rating. If anything, the DOT was generous: the project really deserves a “low” rating.