NH Bridge to Nowhere – Thanks Federal Government

I have a hard time taking Republicans too seriously when it comes to their commitment to fiscal sanity, but it is nice to see Romney highlight this stimulus wonder in New Hampshire (note that one cannot exactly use the bridge for transportation!): here.

Even if public parks should exist, isn’t this the kind of project that should be financed locally if citizens want to spend hundreds of thousands of good dollars for a non-functioning bridge from the 1800′s that few outside this nice little town will ever deem significant enough to visit?   

HT: New York Times!

CEOs vs. Small Business Owners on Which Policies Make for a Business-Friendly Climate

Which public policies make an economy better for business? One way to answer this question is to ask businesspeople. Two recent surveys ask businesspeople to rank the American states on their friendliness toward business.

Now, libertarians often remind us that friendliness toward business is not the same as friendliness toward markets. Indeed, libertarians believe that many of their favored policies, such as abolishing trade protection, corporate welfare, and regulations that privilege big business, will redound to the benefit of workers and small business owners. What’s so interesting about these two surveys is that they are of different types of business owners: CEOs of large companies and small businesspeople. The first survey was conducted by Chief Executive magazine and the second by thumbtack.com in partnership with the Kauffman Foundation. By relating respondents’ views about the friendliness of their states to those states’ actual policies, we can see where big and small businesses agree and disagree about which policies are most important for their success.

My first step was to draw out of these survey data those numbers that relate specifically to different states’ policy environments, as opposed to other aspects of the economic climate. From the CEO survey, therefore, I took the taxation/regulation score given for each state (higher is better). From the small business survey, I took the “Regulations” component grades. Unfortunately, the small business survey does not include raw scores for each state, so I simply quantified the grades as follows: A+ = 0, A = 1, A- = 2, and so on, up to F = 11. The small business survey only covers 45 states, but for these states, the correlation between CEO and small business scores was -0.76. Since higher is better in the CEO survey and lower is better in the small business survey, that high correlation indicates a surprising degree of agreement between large and small businesses about states’ friendliness toward their businesses.

Nevertheless, there may remain some important differences in which policies large and small businesses prioritize. To get a handle on this question,

NH Legislature Passes School Choice by Veto-Proof Majority

The New Hampshire House and Senate have overwhelmingly approved a bill that would give businesses tax credits for contributing to scholarship funds, which could make payments on behalf of students attending private schools. Even if the governor vetoes, the bill should pass into law. According to the Ruger-Sorens database of state policies, New Hampshire will join Arizona, Florida, Illinois, Iowa, Minnesota, and Pennsylvania in offering tax credit or deduction programs for private education.

(Nota bene: The New Hampshire Supreme Court has previously ruled that giving tax relief to parents for sending children to religious schools would violate the establishment clause of the state constitution. Thus, this sort of program is the only way that full school choice that includes religious schools can be enacted in New Hampshire.)

In Search of Fiscal Responsibility

As we approach another round of debt-ceiling debates–conveniently timed to land after November–Speaker John Boehner made his position crystal clear at Peter G. Peterson’s Fiscal Summit.  As the Speaker proclaimed:

Yes, allowing America to default would be irresponsible. But it would be more irresponsible to raise the debt ceiling without taking dramatic steps to reduce spending and reform the budget process. We shouldn’t dread the debt limit. We should welcome it. It’s an action-forcing event in a town that has become infamous for inaction…. When the time comes, I will again insist on my simple principle of cuts and reforms greater than the debt limit increase. This is the only avenue I see right now to force the elected leadership of this country to solve our structural fiscal imbalance.

 As one might guess, such talk drew the fire of Democrats. As the Christian Science Monitor reports, Senate Majority Leader Harry Reid issued a clear judgment on Boehner’s position:

“American people have had enough of this brinkmanship,” Mr. Reid told reporters Tuesday afternoon. “It’s pretty clear to me that the tea party direction to the Republican Party is driving them over the cliff.”

It looks as if the nation is ready to witness another principled battle over the issue of fiscal responsibility, each side driven by a commitment to responsible government, albeit a commitment that is shaped by deep philosophical differences regarding the role of the state.

At the same time, we can question the depth of these convictions.

The Speaker, for example, has been working to secure $150 million in federal transfers to a uranium enrichment plant in Ohio. Since the corporation in question is headquartered in Kentucky, Minority Leader Mitch McConnell has been a strong source of support. And in a fine example of bipartisanship in the name of fiscal responsibility, the Obama administration has been supportive (there is no better was to secure the gratitude of a swing state than to provide transfers). Jonathan Allen provides the details on this story here.

So, it appears that the Speaker’s heroic embrace of fiscal responsibility is only limited by the appeal of ladling corporate welfare to a firm in the fine state of Ohio (insert expression of shocked disbelief here).

As for Senator Reid, one has reason to question his sincerity as well. In a stunning profile in courage, the Democratic majority has failed to propose or pass a budget in three years.  As Scott Wong explains:

The Democratic-led Senate on Wednesday is expected to reject all four GOP budget plans, including the contentious House-passed proposal authored by Rep. Paul Ryan (R-Wisc.). A fifth budget, offered by Republicans and based on President Barack Obama 2013 spending blueprint, also will likely fall short of the 50 votes needed to pass, dealing the White House an embarrassing election-year blow.

But Democratic leaders have defiantly refused to lay out their own vision for how to deal with federal debt and spending, arguing that last summer’s debt-ceiling deal essentially serves as an actual budget. While a budget resolution is non-binding, they say, the Budget Control Act was signed into law.

So while Senator Reid has described the GOP budget as “ridiculous,” “absurd,” and “all just for show,” he has countered with…nothing. If Senator Reid is convinced (as the earlier quote suggests) that the tea party dominated GOP is driving the economy off the cliff, one can only question why he, as leader of the world’s greatest deliberative body (insert snicker here), refuses to take the wheel. The answer is clear: fear of the political repercussions of passing a budget since it would force attention on entitlement reform.

If one is in search of fiscal responsibility, it is clear that it may be a difficult quest at least until capital markets turn on our debt. On one side, we can achieve fiscal balance as long as we eschew tax increases and nod and wink as we work around the so-called earmark ban when politically advantageous. On the other side, we can achieve it as long as we reject entitlement reform and refuse to pass budgets.

Another Take On Risk and Regulation

Sven certainly is entitled to make his case below for regulation (and it is clear from the comments that he is talking about more than the recent JPM loss).  But this article by Jonathan Macey in the WSJ is closer to my own view (as you’ll also see in the comments to Sven’s post).

The entire piece is worth reading, but here is a nice sample:

The trades that J.P. Morgan made were extremely complex, and it certainly appears that they did not work the way that they were supposed to. But the reason that markets work better than central planning is because market participants learn from experience, and they learn fast and thoroughly because they suffer significant losses when their investments, whether they be hedges or not, turn out badly.

Thus, far from serving as a pretext to justify still more regulation of providers of capital, J.P. Morgan’s losses should be treated as further proof that markets work. J.P. Morgan and its competitors will learn from this experience and do a better job of hedging the next time. They will learn because they have to: In the long run their survival depends on it. And in the short run their jobs and bonuses depend on it.

The second lesson from J.P. Morgan’s failed hedging effort is that politicians and regulators are opportunists who will use any pretext to increase their power and influence. Rahm Emanuel, the former chief of staff to President Obama, once famously said that one should never let a crisis to go to waste. It appears that the current regulatory class is of the view that even crises that are not serious must be exploited.

Risk and regulation

A minor miracle happened today.  I made it to the end of a Paul Krugman column without disagreeing with anything.

In fact, I found that his assessment of the need for risk regulation of the banking sector was a tad too moderate.  Even if deposits were not federally insured, the external costs of insufficient regulation are too great to leave unchecked.

In talking about risk management with students, I often mention that a good guideline for buying insurance is whether a loss would seriously disrupt one’s life.  Unless your TV blowing up puts a serious dent in your financial picture, buying insurance on that TV is a very bad idea.  Salespeople in consumer electronics know this, which is why they push extended warranties harder than the product itself.   Even if the warranties were not actuarially outrageous, they are still a bad idea.  The answer for sound insurance policies is to purchase insurance only against catastrophic losses.

The lesson is this: for losses that can be absorbed without too much pain, a consumer who self-insures is better off over the long run.  This applies broadly.  Over-insurance—and the resulting over-treatement—is one of the main problems in the health care market, for instance.  The reason Obamacare is bad policy is not because of mandates.  It is a failure because we should be structuring health care reform around incentivizing consumers to internalize more risk through high-deductible plans and health savings (as well as borrowing).

This lesson can be writ large to the financial sector as well.  We do not need to insure against all risks because risks are what drives innovation, creativity and work.  Firms, including financial institutions, need to be allowed to face the consequences of bad decisions.  The economy can absorb failures and bankruptcies and market devaluations.

But we do need protection against catastrophic risk, just as almost everyone needs some kind of catastrophic health insurance.  I would put my trust in markets against anyone who has a clue how the real world works—that is to say, people who realize that we don’t live in a financial fantasyland where all that is necessary to avoid systemic, potentially catastrophic risk in the financial sector is market discipline and letting financial institutions fail.  The external effects on the rest of the economy, which we’ve seen through hundreds of years of financial crises, are too large to suffer a laissez affair approach to our large financial institutions.

I’m ambivalent about the mix of policy tools that would be optimal, and I’m cognizant that regulation dampens profits in the financial sector.  But just as I’m willing to pay a little bit for the term life insurance that I have little prospect of needing in the next couple of decades, I’m willing to pay for financial regulation that protects against catastrophic failures, such as what happened in 2008.

I’m also not naïve enough to think that regulators know best.  The brightest financial minds do not, by and large, become government regulators.  And as the debacle of Fannie & Freddie show, government regulation sometimes creates merely the illusion of security. But neither am I content to let the Jamie Dimon’s of the world make unrestricted gambles with other people’s money.

Faith in markets promotes growth and prosperity.  Fantasies about markets just promote potential disaster.

Republican Party VP Selection – Late Night Musings

Eyeballing the electoral map on Real Clear Politics, it looks like Romney is going to have a tough time getting to 270 without taking nearly all of the current toss-up states. 

Of those toss-ups, I’m assuming Team Republican can take Arizona (11), Colorado (9), and North Carolina (15) – even though limited polls in CO suggest it is currently close.  And despite the typical voting issues that seem to emerge in Missouri (10), I’m going to put that in Romney’s camp as well.  Florida (29) and Ohio (18) are absolute must-wins unless Romney eats into Obama’s core and leaning states.  If Romney doesn’t win in Ohio and Florida (assuming Obama holds his core and leaners), it won’t matter whether the Republican nominee wins or loses the remaining three toss-up states.  But if Romney takes both of those states but can’t eat into Obama’s current base of 253 votes, he has to take 8 votes out of three toss-up states: New Hampshire (4) Iowa (6) Virginia (13).  Basically this makes New Hampshire moot (sorry Kelly Ayotte) unless Romney thinks he can win in Iowa as well. 

So what does this mean for the Veepstakes.  Romney has no shot without Florida and Ohio.  This is obviously why Rubio and Portman are getting serious consideration – especially the latter given that Portman wouldn’t even be in the ballpark if he was from Alaska or any other deep-red state.  Of course, this assumes that the Veep choice can help win a state – something that is probably only with the realm of possibility in very close state races.  Of course, Ohio and Florida might be very, very close calls and worth spending the Veep pick to lock down (all other things being equal). 

Now unless Iowa can be turned, it suggests that Gov. McDowell of Virginia ought to get serious consideration as well.  But some of his recent moves might be great fodder for those in the Obama camp who would love more culture war talk.  So I’d take him off my shortlist (where he was until recently). 

Too bad Ayotte doesn’t have a summer home in Iowa (then again, why would anyone want to be in Iowa vice NH for the summer?)!  But maybe someone from Iowa ought to be on Romney’s shortlist??  I’m hearing crickets…..  Or at least someone who would appeal to Iowans without harming Romney’s chances elsewhere (sorry Rick Santorum) — maybe Mitch Daniels (and you basically have him spend all his time in three states: Iowa, Missouri, and Ohio with maybe a trip or two to more libertarian New Hampshire) or heaven forbid, Mike Huckabee (whose populism scares me but he could help Romney if located in Iowa doing retail politics and otherwise kept in the background!).  

As for Rubio and Portman, either would be a safe pick (though I doubt Rubio helps that much nationally with Hispanics given that the Hispanic vote isn’t a solid block.  And btw, J. Bush has the wrong last name for this cycle otherwise he’d be a stellar pick).  Ayotte only works if  Iowa is in play or Romney wants to try to change the game rather than try to win any really significant state with the pick.  And if Romney really wants a game-changer, then Chris Christie is the man (sorry Paul Ryan, but I don’t see you helping enough in any particular state or changing the dynamic of the race enough to pick over a state-centric choice.  Ditto for Martinez and Rice).  

Of course, Romney could just go for someone who would make a competent VP without focusing too much on the always hoped for “Veep who brings a state.”  Hello Bobby Jindal?            

Well, this is only some scattered musing.  And please don’t hold me to any of this since I’ve spent hours and hours grading (which seems to make me dumb and dumberer the longer I do it).