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Posts Tagged ‘Public Policy’

Video of last week’s panel discussion of “Expanding Opportunity in Oklahoma,” sponsored by the Charles Koch Institute and the Oklahoma Council of Public Affairs, is now up.

Things got rather feisty among the three Oklahomans (two progressives and a conservative). I tried to play peacemaker on occasion.

P.S. I did not get any Koch money for participating in this panel, for those who are wondering.

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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, (more…)

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I have noted before that the contemporary GOP seemed to be AWOL in the war of ideas, citing John Boehner’s recent remarks in Cleveland as exhibit A. Now it appears that the GOP is attempting to shake its recent label as the “Party of No” by releasing a 20 page document entitled A Pledge to America (draft text here) presenting a host of reforms that a Republican controlled Congress would pursue (see a brief overview at Politico).

This certainly is an improvement over the overly general statements of the past. There are some interesting ideas here and I think the electorate is well served when parties provide a unified front and make commitments to relatively specific proposals.  I am concerned that the Pledge promises to reduce the deficit largely through caps on non-security related discretionary spending (everyone knows that the engine of growth is and will be entitlement spending). And on entitlement spending, the Pledge is overly vague:

Reform the Budget Process to Focus on Long-Term Challenges: We will make the decisions that are necessary to protect our entitlement programs for today’s seniors and future generations. That means requiring a full accounting of Social Security, Medicare, and Medicaid, setting benchmarks for these programs and reviewing then regularly and preventing the expansion of unfunded liabilities (p. 11).

I suppose in an electoral season, this is about the best that one can hope for. Anything more specific would give rise to a geriatric revolt.

There are a number of promised reforms in process, including allowing members of any party to offer amendments on any bill that would reduce spending.  Assuming that parties are procedural cartels that control access to the agenda (see Cox and McCubbins, Setting the Agenda) and given the recent history when the GOP as majority party used rules rather ruthlessly to control business in Congress (see Hacker and Pierson, Off Center), I can’t imagine that this promise will be realized.

There are a few nods to social conservatives (e.g., “We pledge to honor families, traditional marriage, life, and the private and faith-based organizations that form the core of our American values” in the preamble). But this document seems to be driven by fiscal conservatives with hopes of appealing to the Tea Party independents.

Undoubtedly, few will read the Pledge (it is far too convenient to listen to the talking heads spinning a document that they too have never read). But I recommend it to Pileus readers and look forward to any reactions.

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The headlines are ablaze with news about the new poverty statistics released by the Census  Bureau.  As Carol Morello notes in the lead to a front page story in today’s Washington Post

In the second year of a brutal recession, the ranks of the American poor soared to their highest level in half a century and millions more are barely avoiding falling below the poverty line, the Census Bureau reported Thursday.

About 44 million Americans – one in seven – lived last year in homes in which the income was below the poverty level, which is about $22,000 for a family of four. That is the largest number of people since the census began tracking poverty 51 years ago.

Is anyone surprised that a deep recession and slow recovery increases the prevalence of poverty? The reactions to the news were predictable. The Obama administration noted that things could be worse: “Because of the Recovery Act and many other programs providing tax relief and income support to a majority of working families – and especially those most in need – millions of Americans were kept out of poverty last year.” And Michael D. Tanner of the Cato Institute noted things are worse: “We’re spending more money fighting poverty than ever before, yet poverty is up. Clearly, we’re doing something wrong.”

Indeed…we are doing a lot wrong.

Obviously, there are many ways to frame the poverty statistics. One compelling story involves race. Another involves family structure. A third involves age. Let’s give consider each briefly, drawing on the Census Bureau report, Income, Poverty, and Health Insurance Coverage in the United States.

Race. Table B-1 provides some striking figures that should give anyone pause. Yes, the overall poverty rate for 2009 was 14.3 percent. But there was incredible variation by race.

  • White non-hispanic poverty rate: 9.4 percent
  • Asian poverty rate: 12.5 percent
  • Hispanic poverty rate: 25.3 percent
  • Black poverty rate: 25.8 percent

It is important to note that the poverty rate for blacks (and Hispanics) has always been a multiple of that for whites. In 2000, after a prolonged economic expansion, the rate fell to a historic low of 21.4 percent. In sharp contrast, the poverty rate for whites has been below 10 percent every year since 1973 except the 1982-84 period. Similarly, blacks and Hispanics have routinely faced double-digit unemployment rates whereas whites have lived largely in a full-employment economy.

We could also tell a story about family structure. We know that there has been a growth in the prevalence of female-headed households with no husband present. One does not have to channel Focus on the Family and present a moral critique.  Even if the gap between male and female salaries is falling (see the above report, page 11), one only needs to accept  that two incomes are better than one.

  • The 2009 poverty rate for “families with female householder, no husband present” was 32.5 percent, roughly 2.3 times as great as the overall poverty rate.
  • Even after the long expansion of the 1990s, the poverty rate for female-headed households was 28.5 percent (approximately twice the level that attracted headlines today)

Of course, the combination of race and family structure is particularly significant. In 2009, black, female-headed households had a poverty rate of 39.7 percent. Hispanic female-headed households had a poverty rate of 40.6 percent

Age. One might also develop a story about age cohorts.  The Census Bureau report (Table B-2) provides a striking picture of this success.  In 1959, the poverty rate for those over 65 was 35.2 percent. It fell steadily over the next several decades from 25.3 percent (1969) to 15.2 percent (1979) to 11.4 percent (1989) and 9.7 percent (1999), reaching a historic low of 8.9 percent in 2009.

In sharp contrast, consider the poverty rate for children. In 1959, the poverty rate for those under 18 was 27.3 percent. It fell significantly in the next decade to 14 percent (1969). Then it increased to 16.4 percent (1979) and 19.6 percent (1989), before declining somewhat to 17.1 percent (1999) and 20.7 percent in 2009.

As we know, our largest entitlement programs provide large transfers to the elderly, who effectively mobilize to secure benefits. These transfers have had a remarkable impact in reducing the poverty rates. The figures for children likely reflect a number of factors, including changes in family structure (see above). But there is evidence that for every dollar that the US government transfers per child, it transfers $8.12 per elderly citizen. Much as one might expect, these decisions carry significant consequences.

There are undoubtedly other stories to tell. For example, one might focus on the decline of manufacturing (as Pat Buchanan might note) and the lack of high-wage service-sector jobs for those with lower levels of educational attainment. We might focus on the failure of public education in the US, particularly as it serves African American and Hispanic communities. In the end, the poverty statistics reflect the complex interplay of a host of factors.

As Tanner notes: “Clearly, we are doing something wrong.”

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This week, House and Senate conferees are working out the details in what will likely be the most significant financial regulatory reform in some time. Should the new Consumer Financial Protection Bureau be housed in the Fed? Should the Volcker rule be universally applied? Should banks really be required to spin off their derivative activities? These are important issues and, in some cases, reform may be justified regardless of whether it actually addresses the causes of the financial collapse.

But what if the House and Senate have simply failed to understand the underlying problem? What if they have allowed politically-defined timetables to force premature closure, resulting in regulatory changes that will not have the intended impact?

A piece by Binyamin Appelbaum and Sewell Chan  published in the New York Times on May 2, entitled “Senate Financial Bill Misguided, Some Academics Say,” should have attracted more attention than it did.

The lead paragraph: “As Democrats close in on their goal of overhauling the nation’s financial regulations, several prominent experts say that the legislation does not even address the right problems, leaving the financial system vulnerable to another major crisis.” The piece continues: “A diverse group of critics… say the legislation focuses on the precipitators of the recent crisis, like abusive mortgage lending, rather than the mechanisms by which the crisis spread.”

Some attention is given to Gary Gorton ( I have discussed his book, Slapped by the Invisible Hand, in a previous posting). In a presentation to the U.S. Financial Crisis Inquiry Commission, Gorton summarized his argument as follows (his entire testimony can be downloaded here, along with additional testimony):

  • As traditional banking became unprofitable in the 1980s, due to competition from, most importantly, money market mutual funds and junk bonds, securitization developed. Regulation Q that limited the interest rate on bank deposits was lifted, as well. Bank funding became much more expensive. Banks could no longer afford to hold passive cash flows on their balance sheets. Securitization is an efficient, cheaper, way to fund the traditional banking system. Securitization became sizable.
  • The amount of money under management by institutional investors has grown enormously. These investors and non‐financial firms have a need for a short‐term, safe, interest‐earning, transaction account like demand deposits: repo [repurchase agreements]. Repo also grew enormously, and came to use securitization as an important source of collateral.
  • Repo is money. It was counted in M3 by the Federal Reserve System, until M3 was discontinued in 2006. But, like other privately‐created bank money, it is vulnerable to a shock, which may cause depositors to rationally withdraw en masse, an event which the banking system – in this case the shadow banking system—cannot withstand alone. Forced by the withdrawals to sell assets, bond prices plummeted and firms failed or were bailed out with government money.
  • In a bank panic, banks are forced to sell assets, which causes prices to go down, reflecting the large amounts being dumped on the market. Fire sales cause losses. The fundamentals of subprime were not bad enough by themselves to have created trillions in losses globally. The mechanism of the panic triggers the fire sales. As a matter of policy, such firm failures should not be caused by fire sales.
  • The crisis was not a one‐time, unique, event. The problem is structural. The explanation for the crisis lies in the structure of private transaction securities that are created by banks. This structure, while very important for the economy, is subject to periodic panics if there are shocks that cause concerns about counterparty default. There have been banking panics throughout U.S. history, with private bank notes, with demand deposits, and now with repo. The economy needs banks and banking. But bank liabilities have a vulnerability.

Returning to the New York Times piece, the authors write: “Gorton…said the financial system would remain vulnerable to panics because the legislation would not improve the reliability of the markets where lenders get money, by issuing short-term debt called commercial paper or loans called repurchase agreements or ‘repos.’ … ‘It is unfortunate if we end up repeating history,’ Professor Gorton said. ‘It’s basically tragic that we can’t understand the importance of this issue.’

I find Gorton’s case compelling, although there are additional dimensions to the collapse that need to be explored. Moreover, there are the larger public choice problems and the difficulties inherent in engaging in social engineering via the political manipulation of credit markets).

The New York Times piece, which I strongly recommend to readers interested in understanding the debates, ends on a sober note: “critics point to the words of Nicholas F. Brady, a former Treasury secretary who led the bipartisan investigation into the 1987 stock market crash: ‘You can’t fix what you can’t explain.’”

Does anyone believe that the hard intellectual work of understanding the financial collapse has been completed (note: The Financial Crisis Inquiry Commission created by Congress, is not even scheduled to report its findings until December 2010) Does anyone believe that what we have learned thus far has informed the legislative debates?

By now it has become axiomatic that we should never let a good crisis go to waste. But what if moving rapidly to capitalize on the current crisis does nothing to prevent (or even worse, increases the likelihood of) a future crisis?

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This week should be remarkably interesting for those following the financial reform legislation.  Among the big issues on the table include the so-called derivatives “push out” (forcing banks to spin off their derivative trading activities) and the “Volcker rule” that would prohibit proprietary trading at banks. Silla Brush (the Hill) has a quick summary of the work that remains to be done and how the interests are lining up.

Shock of the day: Banking Lobbyists are Making a Run at Reform Measures. Eric Dash and Nelson Schwartz (New York Times) report that “the banking industry is mounting an 11th-hour end run.” Primary focus: the Volcker rule. There are several alternatives being floated and Dash and Schwartz nicely delineate them.

Are these provisions going to survive? Hillary Canada (WSJ) provides one indicator: Citigroup is planning to raise more than $3 billion for private equity and hedge funds via Citi Capital Advisors, its alternatives arm. And as the Times reports, JP Morgan Chase is moving ahead with talks to acquire a Brazilian alternative investment fund manager, Gávea Investimentos. Is this irrational exuberance or a rational calculation that past investments in Congress will yield the projected returns?

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The Big Shakedown

The Art of Misconstruction

As you know, BP agreed to set aside a $20 billion fund for those affected by the oil spill. It was a moment of high drama yesterday when Congressman Joe Barton (R-Texas), ranking member on the House Energy and Commerce Committee, held BP CEO Tony Hayward’s feet to the fire, noting:

“I’m ashamed of what happened in the White House yesterday… I apologize. I do not want to live in a country where anytime a citizen or a corporation does something that is legitimately wrong is subject to some sort of political pressure, that is again, in my words, amounts to a shakedown. So I apologize.”

After being subjected to some significant pressure by House GOP leadership, Barton quickly apologized for his apology, noting: “If anything I’ve said this morning was misconstrued from that I want to apologize for that misconstruction.”(I will leave it to my colleagues in the humanities to deconstruct the misconstruction).

Did the agreement to set aside a $20 billion fund amount to a “shakedown?” There is little question that BP caused significant damages.   It also seems both politically expedient (for Obama and BP) and prudent to establish such a fund immediately. One can only hope that the fund will allow for some immediate compensation free from the extraordinary transaction costs that turned Superfund into a lawyers’ trust fund.

Of course, “shakedowns” are ubiquitous in Washington. Elected officials commonly extract campaign contributions as the cost of access (without, of course, referring to them as “shakedowns”).  Joe Barton, for example, may find some “shakedowns” unpalatable, but his campaign committee and leadership PAC have extracted close to $14 million in “donations” in the past decade (the leading industry contributors, unsurprisingly, have been in the energy sector).

Members of the House Energy and Commerce Committee have extracted some $3.2 million from the oil industry since 2008. This  may seem like a pittance, given that the industry as a whole has invested $88.3 million in House and Senate races since 2000.

Does any of this matter?

One of the core insights of public choice was that we should assume that the same models of behavior should be applied across institutions (the symmetry argument). We cannot restrict the model of homo economicus to the market and presume that different models of behavior (altruism, public-spiritedness) prevail in nonmarket settings. This is not to say that there are not altruists or public-spirited individuals. But, as Geoffrey Brennan and James Buchanan remind us in The Reason of Rules, they are “delicate flowers, and crucial to their blooming may be the existence of institutions that do not make social order critically dependent on their effectiveness.”

Our political institutions are designed to facilitate mutually beneficial exchanges between transfer seekers (corporations, interest groups of any given stripe) and vote-maximizing officials. One should not expect that such exchanges are normally executed with more than fleeting consideration of altruism or the public good (those “delicate flowers”).  Such exchanges usually have a monetary component (as the campaign donations to Barton, the Energy and Commerce Committee, the House and Senate suggest) and they almost always impose costs (some financial, some environmental) on the unorganized. That, my friends, is the big shakedown.

Most of the pieces on the misconstruction of Barton are rather predictable. Here is a sampling.

Michael Kieschnick at Huffington Post is obviously pleased by Barton’s comments and begs him: “please keep talking!”

Erick Erickson at Red State makes the case that Barton was right and the congressional hearing was little more than a show trial.

At NRO, Daniel Foster recognizes the political ham-handedness of Rep. Barton but argues that the $20 billion fund “if not illegal, [is]at least extra-legal, and another example of Democrats’ selective disdain for the rule of law when it gets in the way of a government-run redistribution scheme.”

At WaPo David Weigel correctly sees the political consequences of Barton’s statement, providing Democrats with “an opportunity here to discredit the GOP’s rhetoric in support of small government.”

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