Why the Stimulus Failed

Why the Stimulus Failed

By Arthur C. Brooks @ National Review (September 25, 2012)

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A majority disapproves of the president’s 2009 stimulus, and according to a 2010 CNN poll, about three-quarters of Americans believe the money was mostly wasted.

Of course, the measure of economic success is not public opinion, but the factual effects of policy. The emerging evidence on various spending programs shows that Americans’ intuition is correct: The Keynesian deficit spending has been poorly designed and badly executed, and it has had little benefit for our economy.

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The reason is straightforward. As many economists have found, most government spending has relatively little effect on the economy, and any effects are generally short-lived. For example, Harvard economist Alberto Alesina and his colleagues show in a new National Bureau for Economic Research study across many countries that government spending has little connection to GDP growth, making spending cuts ideal for balancing budgets without provoking a recession — but this also means that spending does little to stimulate economies. Alesina finds, however, that tax changes have large macroeconomic effects; that is, tax increases reliably depress the economy.

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Again, this is not political dogma, but empirical reality. A new study published in the International Review of Economics shows that there is a direct and clear link between economic freedom and prosperity. Studying economic-freedom measures ranging from tax rates to regulation to government spending, the study authors find that from 2004 to 2008, economically freer OECD countries consistently outperformed those that were less economically free.

Is the prescription for the next administration, then, no government spending, and a move toward a minimum-tax, super-capitalist state that will gut all public services? The administration would have Americans believe that is the philosophy of today’s Ryanista Republicans. As President Obama put it in his Osawatomie, Kan., speech last December, “Their philosophy is simple: We are better off when everybody is left to fend for themselves and play by their own rules.”

This is nonsense. Conservatives today understand the importance of a reliable safety net for the truly indigent and the necessity of dealing with certain market failures. Further, there is universal support on the political right for opportunity-equalizing government policies, such as publicly funded education (ideally, administered for the benefit of children as opposed to rent-seeking bureaucrats and teachers’ unions).

But conservatives also know that when it comes to economic progress, the best government philosophy is one that starts every day with the question, “What can we do today to get out of Americans’ way?” In other words, the president should not ask what new agency or program the government can create to stimulate, bail out, or redistribute from this group to that one. That will ultimately add to our problems, rob more from our children, and make it harder to create the jobs, opportunity, and growth our country needs. The president should instead ask these questions: What tax barrier to small business can we lower; what competition-killing regulation can we rescind; what unfair crony-tax loophole can we close?

These are not new insights. Thomas Jefferson summarized them best when he famously said:

‘A wise and frugal Government, which shall restrain men from injuring one another, shall leave them otherwise free to regulate their own pursuits of industry and improvement, and shall not take from the mouth of labor the bread it has earned. This is the sum of good government.’

Most Americans understand these truths, and the next administration must hew to them if it wants to succeed in breaking our government out of its cycle of incompetence, failure, and excuses. This is not political propaganda or an untested theory. It is practical reality based on economic truth.

The High Cost of College: An Economic Explanation

The High Cost of College: An Economic Explanation

By Kenneth Gould @ AEI (August 31, 2012)

Despite good intentions, government has reduced price competition; as a result, prices have risen much faster than they otherwise would.

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Throughout the 1950s, and with the best of motives, Americans gradually adopted a policy of allowing—even encouraging—colleges to use what economists call first degree price discrimination. Here’s how this price discrimination works:

1.    Every good or service offered for sale has a different value for each of the various people who will choose to buy it. That is, some people will be willing and able to pay much more for any good or service than other people will be able or willing to pay for the same good or service.

2.    Normal market pricing consists of the producer of a good or service choosing the price that allows the producer to make a reasonable profit after production costs. When the prices posted by all producers are added together, they comprise the supply curve. When the prices that all the potential consumers are willing to pay are added together, they comprise the demand curve. Competition among producers forces market prices into a narrow range. Those who are only willing to pay a lower price than that range buy none of that good or service. Those consumers who are willing and able to pay a price higher than the range—sometimes a much higher price—get a break and buy the good or service at a lower price than they are willing to pay.

3.    First degree price discrimination occurs when normal markets are interfered with and producers are allowed to learn exactly what each consumer is willing and able to pay for the good or service. Using this data, all the producers set individual prices for each consumer, eliminating competition and forcing the consumers that are willing and able to pay a higher price to pay it. In this pricing scheme, those who are willing and able to pay only a lower price get a break.

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But as it turns out, this seemingly humane aim has a fundamental flaw—the same flaw that afflicts all non-market based systems: When producers no longer need to compete, production costs always rise faster than they otherwise would.

As a result, over time the cost of providing the good or service as a whole rises faster than it otherwise would. Also, the lower price provided to the person of few means gradually pays for less and less of the goods and services provided, requiring that those with more means pay a rapidly rising price. Eventually the price increases must be passed on to those of lower means, defeating the equal outcomes aim itself.

As the prices rise and the demand for the particular good or service falls as a result, producers can employ fewer people to provide the good or service. The economy shrinks and jobs are scarcer than they otherwise would have been. The wealth of the entire nation is reduced.

This flaw of price discrimination is always present when governments aim to achieve equal outcomes. Without control over the price paid by different citizens, the desired equal outcome could not be achieved.

The reason some people are willing to accept price discrimination when equal outcomes are desired is that they mistakenly assume that a well-meaning and diligent government is capable of managing the efficient production of all goods and services even in the absence of normal market signals, such as competitive prices. But that assumption has never proven to be true. The U.S. college cost dilemma is an example of the fallacy of this assumption.

Paved with Good Intentions

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Under this evolving system, the federal government asked parents to provide the most intimate details of their financial situation so it could decide how much aid to provide for their child. So far so good. But then the fundamental error was made. As part of the procedure developed to implement the National Defense Education Act, the government passed the information on to the colleges.

At that point, it was easy and natural for colleges to move to price discrimination. The means are simple: Set the price of tuition and room and board at a level higher than their actual costs and then provide monetary aid to students whose parents cannot afford to pay the inflated prices. How much higher should the prices be set? However much higher is required so that discounts can be provided to as many students as the college feels will achieve an optimal mix between high and low income students.

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Price discrimination is not confined to college educations. Indeed, it is linked closely with our federal government and has become more and more common in recent decades.

All “means testing” is a form of price discrimination. If a household’s income is greater than some limit, it cannot receive the government benefit subject to the “means testing.” Medicaid, the Supplemental Nutritional Assistance Program (SNAP), and earned income tax credits are examples of the use of such “means testing” in distributing benefits.

Increasingly, tax deductions and taxable income exemptions are subject to similar price discrimination. Examples of this include medical, job, and miscellaneous expenses. The greater our total taxable income, the more our Social Security income is subject to taxation—another form of “means testing.”

The effect of price discrimination is to gradually decrease the need to keep production costs as low as possible. It has taken half a century for the full impact of this flawed method of setting college prices to become apparent. To correct it, we need to stop giving colleges the information that is essential to sustain the price discrimination.

Families that hope to qualify for federal grants or loans would still be required to provide the financial information to the government, but that information would not be automatically forwarded to the colleges, as it is today. Instead, only those families that hope to receive additional aid directly from the college would provide their financial information to the institution.

The result of this reduced information flow would put colleges in the same position as other providers of goods and services and, over time, the effects of increased price competition will cause greater attention to cost reduction, making funding a child’s college education while simultaneously saving for retirement a more manageable task for families.

Give ‘Em Hell, Mitt!

Give ‘Em Hell, Mitt!, Romney needs to stay on the offensive of the Medicare debate

By Rich Lowry @ National Review (August 17, 2012)

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Others pooh-pooh the significance of the cuts. They supposedly hit only “nonessential services.” This may be the first time in the debate over entitlements that Democrats have deemed anything related to Medicare “nonessential.”

What Democrats mean is that $156 billion of the cuts fall on the Medicare Advantage program. They have always hated this feature because it gives seniors access to private-sector coverage options. But seniors like it.

The Obama cuts also rely on grinding, year-after-year reductions in payments to doctors and other providers. This is a way to maintain that there are technically no changes in “benefits,” though access to and quality of care inevitably will be affected.

No one concerned with the health of Medicare would go about it in this fashion. But “Obamacare” was helter-skelter legislating, a desperate attempt to make the numbers temporarily add up.

Medicare’s actuaries consistently sound the alarm about the consequences. A May 2012 report by the Centers for Medicare and Medicaid said, “The large reductions in Medicare payments rates to physicians would likely have serious implications for beneficiary access to care.” It also noted the punishing effect on hospitals, skilled-nursing facilities, and home health agencies, which “would have to withdraw from providing services to Medicare beneficiaries, merge with other provider groups or shift substantial portions of Medicare costs to their non-Medicare, non-Medicaid payers.”

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The Democrats’ Growing Medicare Dilemma

The Democrats’ Growing Medicare Dilemma

By Yuval Levin @ National Review (August 15, 2012)

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The second Democratic defense, the “it’s not so bad” defense, suggests the Democrats don’t grasp just how the fee-for-service design of Medicare that they’re eager to retain forever actually works. The basic argument the Democrats are trying to make is that because the cuts consist mostly of reductions in provider payments, they’re not actually cuts to benefits that seniors get but only to money given to the people who provide them with coverage or care. So, for instance, the New York Times today quotes a White House spokeswoman saying these cuts “do not cut a single guaranteed Medicare benefit.” But in a fee-for-service system, cuts to fees are cuts to services, especially because administrative price controls create supply shortages, which means seniors will have fewer options and less access. That’s exactly why the way to reform Medicare is through market competition—which increases options and seeks an equilibrium between supply and demand—rather than yet more administrative price controls.

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Mitt Romney’s Approach Would Differ Greatly From Obama’s Failed Vision

Mitt Romney’s Approach Would Differ Greatly From Obama’s Failed Vision

By Andrew Puzder @ Human Events (July 27, 2012)

Not since the 1980 contest between Ronald Reagan and Jimmy Carter has an election presented us with so clear a choice on our nation’s economic future. How do we best return our economy to growth and prosperity? Shall we pursue the American economic model that created the most prosperous nation in history or the European socialist model that produced Europe’s current economic crisis?

Only the private sector can create sustained job growth. All public sector jobs rely on the creation of private sector wealth to support them. Economies create jobs when business owners are willing to risk their capital in a new business or grow an existing business. Business owners invest when they believe they will make a profit sufficient to justify risking their capital, time and energy. To determine whether to take the risk, business leaders create models that forecast what revenues the business will generate and the expenses it will incur to generate that revenue.

The object is obviously to have revenues exceed expenses, resulting in profits.  If these profits provide a sufficient return on investment, people will readily invest. This investment is what creates employment. The greater the certainty with respect to revenues and expenses, the greater the investor’s confidence when deciding whether to invest. In this respect, government policy can significantly encourage or hinder investment by job creators. Four economic policies essential to any business decision, and on which President Obama and Gov. Romney differ materially, are taxes, healthcare, energy and labor. The question is which candidate’s policies advance the interests of job creation and economic growth?

Tax policy and small business…

Healthcare policy…

Energy policy…

Labor unions…

Obama’s big policy contradiction…

Economic Freedom, Not Socialism, Driving Canadian Growth

O Canada: Riding High on Greater Economic Freedom

By Anthony B. Kim @ The Heritage Foundation (July 19, 2012)

A recent Canadian study examining average household wealth in Canada and the U.S. reported something quite shocking. According to the study, the average Canadian has a net worth of $363,202, compared to $319,970 for the average American.

While headline writers have touted this as a vindication of socialism, the reality is quite different. Canada deserves plenty of kudos, but its recent economic success owes to moves away from socialism, not toward it.

According to the Index of Economic Freedom, Canada has, in the last two years, surpassed the United States to become the freest country in North America. Through moves such as downsizing government and cutting its corporate tax rate, Canada has restored economic dynamism and reduced unemployment. In June, for the fourth straight month this year, the Canadian economy created more net new jobs than expected.

By contrast, the U.S. economy has suffered from four consecutive years of over $1 trillion budget deficits, an exploding regulatory burden, and ever-growing government intrusion. It’s no wonder we have fallen behind.

Which kind of capitalism? A debate for Obama and Romney

Which kind of capitalism? A debate for Obama and Romney

John Goldberg @ Los Angeles Times (May 22, 2012)

…Under normal circumstances, the U.S. economy creates tens of millions of jobs every year and destroys tens of millions, with net new jobs. In a typical year, up to 50 million Americans change jobs, often happily. They get hired away, promoted, etc.

This process partly explains why America’s capitalism has been so much more dynamic than Europe’s. In the social market, once you have a job, you cling to it because you may never get another. European governments make it much easier to cling to that job by punishing businesses that fire people. The unhappy byproduct of such “compassion” is that businesses are also far more reluctant to hire people because each new hire is a potential long-term liability.

Yes, Romney created jobs while he was creating value and wealth at Bain; he also destroyed jobs. Both are necessary in a dynamic market that improves the prospects for most Americans through economic growth. Some suffer from the process. But I would argue more people suffer under the social market. Which system is better is, indeed, a worthy — and overdue — debate.