There is no doubt that inequality is increasing. Those with more education are pulling farther and farther away from those with less. Look at the chart below to see just how much things have changed (h/t TT)
Discuss.
Schumpeter for president!
May 15, 2012, 3:31 pmAt the core of market capitalism is innovation driven by creative destruction. Society must both reward innovators and allow the disruption their innovations necessarily bring. Without creative destruction, there is no wealth creation.
But that doesn’t mean it’s going to be popular. Indeed, Joseph Schumpeter himself predicted that innovative market capitalism would perish at the hands of jealous intellectuals who hated it and the passive bourgeoisie who failed to defend it.
Which brings us to Mitt Romney, Bain Capital, and a very good essay by Guy Sorman in the Manhattan Institute’s City Journal:
Yes, free-market advocates can point out that when a state steps in to help a dying sector of the economy, it is actually harming economic growth by sinking financial capital—a limited resource—into inefficient activities and diverting funds from more innovative enterprises. A job saved in an obsolete economic sector, they will say correctly, is a job—often many jobs—forgone elsewhere in the economy. But that’s a very hard argument for a politician to make. As the great free-market economist Milton Friedman frequently observed, a business closing gets on the television news, while the new businesses that get created from the reallocated capital go unnoticed because they are so widely dispersed.
Mitt Romney has run smack into this problem during his campaign for the Republican nomination. Bain Capital, the firm he led, was a pure engine of creative destruction: a private investment fund that bought troubled businesses, restructured them (often by firing people), and sold them for a profit. Even some of Romney’s Republican opponents, who know better, couldn’t resist attacking him for his entrepreneurial work; Newt Gingrich went so far as to run ads featuring workers who had lost their jobs because of Bain’s restructuring. Romney contended that Bain had helped create 100,000 new jobs, which may be true, but—underscoring Friedman’s point—no one knows exactly where they are. …
Can a Schumpeterian candidate make it to the White House in 2012? Yes, but in the current climate of economic uncertainty, he will need to be a talented rhetorician. Otherwise, America in a second Obama term will probably continue to move in a European direction, with the government playing an increasingly activist role in the economy, protecting out-of-date ways of doing business. And without the liberating fire of creative destruction, America will follow Europe down the path of slow growth, high unemployment, and decline.
One suggestion Sorman offers is for Romney to emphasize his support for a modernized social safety net: unemployment benefits, retraining, and various welfare services (as long they have pro-work incentives). But I also think that Romney needs to point out again and again that stopping or penalizing creative destruction means stopping innovation, resulting in a stagnation of American living standards and a worsening of our debt situation. The opposite of innovative capitalism is crony/state capitalism. And as even China may finally be realizing, the latter only works for so long.
Francis Fukuyama explains why saving the euro is a ‘fairy tale’
May 15, 2012, 2:55 pmThe EU isn’t a dysfunctional marriage between hard-working, thrifty northern Europe and lazy, profligate southern Europe. Rather, it’s a dysfunctional marriage between a clientelistic and non-clientelistic Europe, says political scientist Francis Fukuyama.
And that’s why, he says, “the whole project of deepening Europe into a fiscal union seems to me like such a fairy tale. Outside pressure will never succeed in bringing about change by itself unless it can be allied to internal forces that themselves want reform. In Italy, these forces at least potentially exist, but in Greece they seem altogether absent.”
See, in clientelistic systems, political parties reward supporters with individual benefits, such as jobs, when they get in office. It is Chicago-style democracy.
In my view, clientelism should be distinguished from corruption proper because of the relationship of reciprocity that exists between politicians and voters. There is a real degree of accountability in a clientelistic system: the politician has to give something back to supporters if he or she is to stay in power, even if that is a purely private benefit. Clientelism is not the product of a cultural proclivity or a failure of politicians to understand how a modern democratic political system is supposed to operate. Rather, it is often the most efficient way to mobilize relatively poor and uneducated voters and get them into the polling place. Such voters often care less about programmatic policies than an immediate personal benefit like a job or the equivalent of a Thanksgiving turkey.
Here is how it works in Greece. And change in Greece will take a lot more time than the bankers will offer.
Solving the issue of clientelism would address one of the long-term sources of the current crisis. But any fix would have an effect only over a prolonged period, and is therefore not terribly relevant to the short-term future of either Greece or the EU. If the Greek public wants to reject the austerity agreement, which seems pretty clear, the country will be heading for outright default and exit from the euro. I always believed that exiting the euro was Greece’s only realistic option, and one that could have been done in a reasonably orderly way had it been undertaken some months ago. Now, it is being pushed as the preference of the extremist parties, and if it happens, will probably occur in a very messy way with bad consequences for the stability of Europe as a whole. So neither the long- or short-term futures look terribly bright.
I am certainly convinced that the euro cannot survive in its current form without some sort of fiscal union involving common euro bonds and fiscal transfers. But the north sees the clientelistic states for what they are, even if they cannot articulate their views quite as lucidly as Fukuyama, and seems unwilling to go that route.
This is why Obama isn’t getting crushed right now
May 15, 2012, 2:11 pm
Why is Obama even close? If you look at the fundamentals, the president should be getting crushed right now. The economic mood of the country is terrible. Roughly 75 percent of Americans believe the economy is still in recession. According to a Quinnipiac survey, only 35 percent of Americans say they are better off than they were four years ago. Barely a third believe the country is heading in the right direction. The economic climate is as bad as or worse than it was in 1968, 1976, 1992 and 2000, years when incumbent parties lost re-election.
Brooks’s answer is a) Dems have a growing demographic advantage (single women, secular types) and b) voters like Obama’s cool and confident style.
Or … maybe voters are still cutting Obama considerable slack since he’s a first termer who inherited an economic mess. (And incumbents win about 70% of the time anyway.) “Blame Bush” still carries a bit of punch.
Let’s compare the economies in those election years Brooks mentions. The current misery index — inflation + unemployment — is 10.85. In May of those various election years, it was 7.42 (1968), 13.60 (1976), 10.62 (1992) and 7.19 in 2000. And in October of those years, it was 8.15 (1968), 13.16 (1976) 10.50 (1992) and 7.35 (2000).
So by the misery index measure, the economy is indeed worse today than it was in 1968, 1992 (barely), and 2000, but better than 1976. But keep in mind that in all those other years, the incumbent presidential party was finishing at least its second-straight term in office. So you had both a fatigue factor at play and the reality that the losing presidential candidates (Humphrey, Ford, Bush, and Gore) couldn’t blame the other party so easily since theirs already controlled the White House for some time.
(Now, let me also add that the real unemployment rate and the exceptionally slow recovery, to me, make the economy this year much, much worse than in any of those other elections years.)
Then there is the Carter Exception. Jimmy Carter was a first-term president who got bounced mostly due to the economy. But it was a really, really bad economy. The misery index in October 1980 was 20.27, and the economy suffered a recession earlier in the year.
Things aren’t that bad, and probably won’t be come November no matter what happens in Europe. The econ forecasting models make Obama a slight underdog. Sounds about right to me with a “more of the same” economy.
Is science in decline?
May 15, 2012, 1:12 pmThere’s been a lot of talk lately about which political party is “more scientific,” which has obscured a much more important question, which is whether the institution of science itself is in decline.
Over at nature magazine, Daniel Sarewitz points out very troubling trends in the world of science:
Alarming cracks are starting to penetrate deep into the scientific edifice. They threaten the status of science and its value to society. And they cannot be blamed on the usual suspects — inadequate funding, misconduct, political interference, an illiterate public. Their cause is bias, and the threat they pose goes to the heart of research.
What Sarewitz is pointing to here isn’t political bias (though the overwhelming liberalness of scientists is well documented), but rather, to systematic biases that favor the constant production of “positive” findings with redeeming social value:
The belief is that progress in science means the continual production of positive findings. All involved benefit from positive results, and from the appearance of progress. Scientists are rewarded both intellectually and professionally, science administrators are empowered and the public desire for a better world is answered. The lack of incentives to report negative results, replicate experiments or recognize inconsistencies, ambiguities and uncertainties is widely appreciated — but the necessary cultural change is incredibly difficult to achieve.
And while most of the examples he gives are from biomedical research (where, ironically, it’s easiest to test hypotheses), Sarewitz suggests we view most scientific research with caution these days:
It would therefore be naive to believe that systematic error is a problem for biomedicine alone. It is likely to be prevalent in any field that seeks to predict the behaviour of complex systems — economics, ecology, environmental science, epidemiology and so on. The cracks will be there, they are just harder to spot because it is harder to test research results through direct technological applications (such as drugs) and straightforward indicators of desired outcomes (such as reduced morbidity and mortality).
As someone who routinely has to dispute crazy claims about climate science being “settled,” and about predictions of the climate 100 years from now as being “sound science,” I find it refreshing to see such a discussion in nature magazine. But as someone trained in the sciences, who believes that science is still our pre-eminent route to understanding the world around us, and that robust scientific institutions are necessary to human progress, I find the entire thing somewhat depressing.
AEI Elsewhere—An out-of-proportion outcry, please don’t kill this terrorist, and more
May 15, 2012, 12:01 pm• Peter J. Wallison: “An out-of-proportion outcry to JPMorgan’s loss”
• Marc A. Thiessen: “Mr. President, please don’t kill this terrorist”
• Karlyn Bowman and Andrew Rugg: “What did the public think about taxes in 2011?”
• Frederick M. Hess: “Making the grade”
• John R. Bolton: “Against the globalistas”
• Kenneth P. Green: “The continuing failure of green conceit”
• Sally Satel: “Are you dead yet?“
‘The Road to Freedom’ quote of the day #3
May 15, 2012, 11:03 am
From The Road to Freedom: How to Win the Fight for Free Enterprise by AEI President Arthur Brooks, which was published earlier this month:
It’s going to take a lot more than one election to get us off what Nobel laureate Friedrich Hayek called the ‘road to serfdom.’ Americans today are experiencing a low-grade, virtual servitude to an ever-expanding, unaccountable government that, starved for tax revenues, has appropriated for itself funds that entrepreneurs could have used to grow the economy, has created a protected class of government workers and crony corporations that play by a different set of rules than the rest of America, and has consequently left the nation in hock for generations to come.
The fiscal cliff is like a nasty, double-diamond ski slope
May 15, 2012, 10:40 am
This is what the U.S. economy is facing (courtesy of a great chart from Strategas) come 2013 because of legislated tax increases and spending cuts. And here is the breakdown on those:
Fiscal cliff = recession—or an even worse recession if the EU debt crisis already has the economy shrinking by then.
New study: It was technology that smashed private-sector unions
May 15, 2012, 10:23 am
From economists Emin M. Dinlersoz and Jeremy Greenwood, The Rise and Fall of Unions in the U.S.:
When the productivity of unskilled labor is (relatively) high it pays for the union to organize a lot of firms and demand generous wages. The shift from an artisan economy to an assembly line economy during the beginning of the 20th century was associated with an increase in the (relative) productivity of unskilled labor that led to an increase in unionization and a decrease in income inequality.
The decline of the assembly line economy and the rise of the information age during the second half of the century reversed this. This led to the ∩-shaped pattern of unionization and the ∪-shaped one for income inequality. … Statistical analysis suggests that skill-biased technological change is an important factor in de-unionization.
In 1900 seven percent of the American workforce were union members. The number of union members rose until the middle of the century, as shown in Figure 1, hitting its apex at 32%. It then began a slow decline. At the end of century 14% of American workers belonged to a union. At the beginning of the 20th century, the top 10% of workers earned 41% of income. This figure declined hitting a low of 31% around mid-century. It then steadily increased to 41% around 2000.1 What could have caused the ∩-shaped pattern of union membership and the ∪-shaped one for the distribution of income? Are they related? The hypothesis here is that skill-biased technological change underlies the rise and fall in union membership, along with the up and down in income inequality. The beginning of the 20th century witnessed a shift away from an artisan economy toward an assembly line one. This favored unskilled labor. The premium for skill declined.
Unskilled labor is homogenous, almost by definition. This makes it easier to unionize than skilled labor. When the demand for unskilled labor rises there is a larger payoff to unionizing it. Things changed at the midpoint of the century. The second industrial revolution was petering out and the information age was dawning. Transistors and silicon chips meant that automatons could replace the hoards of unskilled workers laboring on factory and office floors. This represented a reversal of the earlier trend.
Sorry, my left-liberal friends, there’s no going back to the 1950s and 1960s when unions were strong. And just as technology undercut unions, it has contributed to the rise of income inequality. That is what we call a trade-off, though as long as median incomes are rising and mobility remains high, I don’t much care about inequality driven by technology and globalization, as opposed to crony capitalism.
Iran gloats over its success in stalling the West over nuclear program
May 15, 2012, 10:10 amThe Iranian regime is publicly gloating over its success in stalling Western action to stop its nuclear program. The New York Times reports:
As Iran starts a critical round of talks over its nuclear program, its negotiating team may be less interested in reaching a comprehensive settlement than in buying time and establishing the legitimacy of its enrichment program, Iranian officials and analysts said…
In continually pushing forward the nuclear activities — increasing enrichment and building a bunker mountain enrichment facility — Iran has in effect forced the West to accept a program it insists is for peaceful purposes. Iranians say their carefully crafted policy has helped move the goal posts in their favor by making enrichment a reality that the West has been unable to stop — and may now be willing, however grudgingly, to accept.
“Without violating any international laws or the nonproliferation treaty, we have managed to bypass the red lines the West created for us,” said Hamidreza Taraghi, an adviser to Iran’s supreme leader, Ayatollah Ali Khamenei, who is close to the negotiating team.
It gets even better:
Mr. Taraghi ticked off Iran’s successes. First, he said, Western countries did not want Iran to have a nuclear power plant, but its Bushehr reactor was now connected to the national grid. Second, the West had opposed Iran having heavy-water facilities, he said, but it now has one in Arak.
Third, the West had said no to any enrichment.
“But here we are, enriching as much as we need for our nuclear energy program,” Mr. Taraghi said with a smile, referring to the thousands of cascades of centrifuges spinning for years in the half-underground facility in Natanz. Since January, dozens more centrifuges have been online in the Fordo mountain bunker complex, near Qum, built to withstand a heavy attack.
Mr. Taraghi and other officials say their policy has forced the United States to accept enrichment, though five resolutions by the United Nations Security Council have called for it to suspend it. …
“We view the nuclear episode as a heavy retreat for the Western powers,” he said. “But acceptance of our nuclear program takes time, we understand that.”
This does not sound like a regime that is living in fear of a military strike on its nuclear program. To the contrary, the Iranians are basically rubbing their success in Obama’s face before the negotiations resume. This is because, as I pointed out in the Washington Post last week, the Iranians recognize that the Obama administration’s objective in these negotiations is not to stop them from obtaining a nuclear weapon—it is to stop Israel from striking their nuclear program before the November elections. If the Iranians were worried that failure in Baghdad could lead to devastating military consequences, would they really be gloating in the New York Times about how shrewdly they are playing America?
Fading Obama? Two charts tell the story
May 15, 2012, 9:51 amTwo charts. First one is what the polls are saying, via RealClearPolitics:
Next is what the betting markets are saying, via Intrade:
Both charts are telling the same story: The race is narrowing, probably due in large part to growing GOP comfort with Romney + the spring economic muddle + the SSM decision. And if you assume the economy will continue as it has—no EU debt blowup, but not mini-boom, either—the race might not look a whole lot different before the first presidential debate in the fall.
Eurozone crisis 2012: What you missed while you were sleeping
May 15, 2012, 9:33 amIs flat the new up? You know you’re in bad shape when avoiding recession is what passes for good news. Reuters:
Germany pulled the euro zone’s economy back from the brink of recession at the start of 2012 but stagnation in France and contraction in southern Europe underlined sharply differing fortunes in a bloc laboring under the effects of austerity. Overall gross domestic product was unchanged in the first quarter following a dip at the end of last year, data showed on Tuesday, meaning that the euro zone missed slipping officially into recession by the narrowest possible margin. …
GDP in Germany, Europe’s biggest economy, rose 0.5 percent on the quarter, confounding expectations of a more modest rise and lifting the rest of the 17-nation currency bloc. While the euro zone’s stagnation offered little cheer, it was still better than the 0.2 percent contraction most economists had expected. Two successive quarters of falling GDP would have marked the second recession since 2009.
France, the euro zone’s second largest economy, reported no expansion in the first quarter, unwelcome news for Hollande as he was inaugurated in the Elysee Palace in Paris on Tuesday. … Italy’s heavily indebted economy shrank more than expected in the first quarter, with GDP falling 0.8 percent and marking the third consecutive quarter contraction. … Data two weeks ago showed Spain, which is struggling to reduce a huge deficit and rebuild its banking sector following a burst property bubble, is already in recession, after GDP shrank 0.3 percent in the first quarter. Even in the wealthy Netherlands, economic output contracted for a third consecutive quarter, shrinking 0.2 percent in the first quarter of 2012 compared with the previous three months, underscoring just how damaging the crisis has become. … Greek GDP contracted 6.2 percent year-on-year in the first quarter of 2012.
Still, the region might not be so lucky for the rest of the year, according to IHS Global Insight:
We fear that renewed Eurozone GDP contraction is very much on the cards for the second quarter as latest survey evidence has been largely disappointing and softer.
The Eurozone is still facing major headwinds, notably including increased fiscal tightening in many countries and markedly rising unemployment. Elevated oil prices have kept inflation sticky, maintaining a significant squeeze on consumers’ purchasing power while also hurting companies’ margins. On top of this, relatively muted global growth is limiting export orders.
Meanwhile, the heightened Greek crisis is likely to hit already weak and fragile business and consumer confidence, as well as adding to uncertainty about the outlook and putting upward pressure on market interest rates for Spain, Italy and several other Eurozone countries.
We expect the Eurozone economy to stabilize in the third quarter and then start growing modestly in the fourth quarter, assuming reduced inflation boosting consumer spending power, a pick-up in global growth and broad containment of the sovereign debt problems. This environment should increasingly support business investment and hopefully help credit conditions to ease.
Even so, we still see Eurozone GDP contracting by 0.5% overall in 2012, held back significantly by extended contraction in Italy and Spain.
More importantly, it now seems almost certain that Greeks will be headed back to the polls next month. Last-ditch talks to create some sort of unity government have apparently failed. No wonder EU politicians seem more and more eager to acknowledge reality, such as Sweden’s finance minister Anders Borg, who told reporters in Brussels that we are now “very close to the end of the road regarding Greece,” and that Greece must “seriously consider” if it wants to remain in the eurozone.
Oh, I think Greece wants to remain in the eurozone, but perhaps not at any price. As usual, the Daily Telegraph’s Jeremy Warner nails it:
Let’s just briefly deconstruct the increasingly desperate position that Greece finds itself in. Greeks have voted to reject austerity but remain in the euro. They won’t be allowed both.
If they don’t continue with the programme, they’ll be denied the remainder of the bail-out money. Unable to pay wages, pensions, healthcare costs and bills, government will quickly grind to a halt. The state could theoretically force the banks to buy its bonds, but the ECB would soon in such circumstances refuse further funding. At that stage Greece would have no option but to return to the drachma.
Hyperinflation would replace grinding deflation. The effect on living standards would be equally catastrophic. It’s true that properly managed, leaving the euro does in the long term have the potential to return Greece to competitiveness and growth.
But does anyone believe Greece capable of managing such a transition well given the positively heroic scale of mismanagement to date? And is it in any case possible to have a well managed exit for a country that doesn’t want to leave? In or out, the outlook for Greece looks bleak.
It scarcely looks a great deal more appetising for the rest of Europe. … The threat comes instead from market contagion to other eurozone countries worst hit by the debt crisis. To Germany, Greece has always been a special case, a nation which cheated its way into the euro, whose citizens are lazy and won’t pay their taxes, and is in any case basically ungovernable. There is a very different attitude to Spain and Italy. Germany’s determination to make the rest of the eurozone work should not be underestimated.
The trouble is that once one has left, and the principle has been established that it is indeed possible to leave the euro, it’s going to be tough to impossible to contain the crippling capital flight which is certain to set in elsewhere. Greece is just the canary in the mineshaft, an outrider for the much wider problem of imbalances and divergent competitiveness.
Like it or not, Bibi keeps outsmarting everyone
May 14, 2012, 5:12 pmBenjamin Netanyahu continues to confound opponents, surprise experts, and consolidate political power. Through a series of unconventional moves since 2009, Bibi has gone from struggling to form a supposedly weak coalition to heading one of the largest parliamentary majorities in Israel’s history. His bold move this week, cancelling early elections in favor of a unity deal with opposition leader Shaul Mofaz, is only the latest in a series of maneuvers that attest to his political acumen:
• Netanyahu created Israel’s largest government, with 30 ministers and eight deputy ministers out of 120 Knesset members. Despite his criticism of predecessor Ehud Olmert’s 27 ministers as wasteful, his massive government ensured him the loyalty of 38 MKs, more than quarter of the Knesset.
• In his first six months in office, he focused on consolidating coalition discipline, some say by controversial methods. Deputy Defense Minister Matan Vilnai submitted a complaint that Bibi’s advisers burst into his office while Vilnai sat absent from a vote on the Knesset floor that would have failed without Vilnai present to vote.
• Bibi strengthened the power and influence of advisory bodies within the Prime Minister’s Office. The National Economic Council, created in 2006, was a largely irrelevant body under Olmert. But with Bibi’s 2009 appointment of Eugene Kandel as head of the NEC, it grew quickly in importance, influencing policy on management of natural gas revenues, taxes, and Israel’s macroeconomic policy. The influence of the National Security Council has grown as well under Netanyahu, assuming responsibilities previously handled by the military adviser, a Defense Ministry official. Knesset members regularly complain that the Prime Minister’s Office has taken power from them, including the Knesset Speaker. As MK Daniel Ben-Simon put it on the Knesset floor: “We are closer to the Chinese model… the (Prime Minister’s) Office decides everything. There are no checks and balances.”
• Netanyahu consolidated power within his Likud party, taking the unprecedented step of running for party chairman as sitting Prime Minister. He won the election easily, giving himself control over the party’s slate for the next election. This move angered Likud’s right wing, who wanted to stack the list with their activists. Likud’s right wing still has not forgiven him.
• Bibi keeps outlasting his political opponents. After refusing to join Netanyahu’s government, former Kadima head Tzipi Livni gained no traction as opposition leader, and found herself voted out of her party’s leadership. He almost succeeded in breaking Kadima in two by passing the “Mofaz Law,” allowing eight MKs to jump ship to another party. He split the Labor party in two, keeping Ehud Barak and his new Independence Party in his government. The rump Labor Party would have done quite well if the early elections were held, but they will have to wait another year and a half. Popular journalist Yair Lapid, who jumped into politics recently with a new political party, also stood to do well in the scheduled September elections, but by October 2013, he will likely not be a factor at all.
Netanyahu’s latest surprise allows him to progress on major legislation, as no party can topple the government, and no coalitions can form against him. Religious parties will hold little sway in the coalition, allowing the secular Likud, Independence, Yisrael Beiteinu, and Kadima members to pass a new law requiring ultra-Orthodox to serve in the army and the labor force. This might cost the coalition the votes of 16 MKs, but it can easily handle that. There has also been a growing effort to reform Israel’s unstable electoral system, with more power centralized in the Prime Minister’s Office. Expect the new coalition to pass legislation, drastically reforming politics in Israel.
Still, significant hurdles remain for Netanyahu’s government. The Supreme Court gave the government two months to evacuate the Givat HaUlpana neighborhood in the West Bank, and right wing MKs have threatened to leave the coalition if the evacuation goes ahead. The budget, which must pass this fall, is extremely controversial, as there is simply not enough money available to fulfill promises made in response to the social protests last summer.
This move has implications for America, too. Obama, clearly no Bibi fan, will have to deal with a strengthened PM, and will find it even more difficult to intimidate him. Netanyahu has more political backing for his Iran policy, but Mofaz has been more moderate rhetorically than Netanyahu or Barak. And if the Palestinians are really interested in making progress on peace negotiations, this is exactly the kind of broad coalition, armed with stability and national security credibility, that can hammer out a game changing deal with the Palestinians.
A college both left and right should be angry about
May 14, 2012, 5:09 pmDemocrats in Congress and the Obama administration have spent the past three years going after for-profit colleges in an effort to combat fraud and misuse of federal student aid monies. Some policymakers were careful to cast the onslaught as an attempt to root out bad actors. But most of the heated Democratic rhetoric went further, alleging that there is a fundamental contradiction between serving students and serving shareholders, and that for-profits simply can’t help but choose the latter (for my long take on the politics of this issue area, see here).
Because of this tension, Democrats have argued, for-profits will skimp on education and spend their resources on the things that drive their stock price—marketing and recruiting. In order to avoid wasting federal student aid dollars on such useless expenses, Democrats have argued that the government should regulate access to student aid on the basis of an institution’s tax status. Non-profit? No problem. For-profit? Let me see your hands.
If this logic strikes you as dubious, just wait until read Businessweek’s latest story about High Point University, a private, non-profit college in North Carolina. In 2005, High Point hired Nido Qubein, a motivational speaker, to serve as its president. Qubein proceeded to invest nearly $700 million in the campus, constructing shiny new buildings, high-end dining halls, and a ridiculous array of amenities that would make the manager at a Four Seasons blush. As Businessweek points out, this is a very expensive way to grow the brand. Moody’s downgraded their bonds to junk status after the campus borrowed $165 million in just a few short years. Tuition at High Point has increased 60 percent, reaching $37,800 this past year. (High Point received about $400,000 in Pell Grants and $2.3 million in federal student loan dollars in 2009-2010).
Among the juiciest nuggets in the story:
In 2010, according to High Point’s annual IRS filing, [Qubein] received a deferred compensation package that boosted his pay to $1.38 million. IRS filings show the university pays almost $1 million annually to his family’s public-relations and consulting business, now headed by Qubein’s 28-year-old daughter, Deena Qubein Samuel.
So let’s get this straight: When for-profits spend public money on marketing instead of education, Senator Tom Harkin calls them to the carpet in the Senate. But when a nonprofit university feeds at the federal trough to the tune of $700 million in fountains, marble, and a certified “Director of WOW,” policymakers don’t bat an eye because they don’t pay out dividends to shareholders?
And we wonder why we have a college cost problem.
Energy fact of the week: The shale whale
May 14, 2012, 5:09 pmOne of the most tired talking points of the “hydrocarbon deniers” (as I am going to call them) is that the U.S. must move beyond oil because we have less than 2 percent of the world’s proved reserves, though we consume about 20 percent of global oil production. After last week’s testimony from Anu Mittal, the director of natural resources and environment for the Government Accountability Office, to the House Committee on Science, Space, and Technology, anyone who persists in using this talking point again (that would include the president) deserves to be labeled an anti-science ignoramus.
Mittal reviewed the geological survey data of oil shale in the western United States that show we have about 3 trillion barrels of oil equivalent. This represents about two-thirds or more of the total shale oil estimated to exist worldwide. About half of it, according to Mittal’s testimony, is thought by public and private analysts to be recoverable. With droll understatement, Mittal offered the following conclusion, which should be read slowly: “This is an amount about equal to the entire world’s proven oil reserves.”
So let’s look at what this means graphically. Figure 1 shows the estimated proven reserves of conventional oil. But add in “unconventional” shale oil (though this distinction is increasingly meaningless with the advance of extraction technology), and you get Figure 2, which shows that instead of having only 2 percent of global oil reserves, the U.S. actually has 82 percent as much oil as the rest of the world, and almost twice as much as the Middle East. Maybe we should start exporting oil to China and join OPEC?
Sources: EIA and IEA.
Environmentalists to Canada: Drop dead
May 14, 2012, 5:08 pmIn a recent editorial assault on Canada, oil-sands climate activist extraordinaire James Hansen (NASA) has basically declared war on Canada’s economy (not to mention our own). Hansen wrote:
Global warming isn’t a prediction. It is happening. That is why I was so troubled to read a recent interview with President Obama in Rolling Stone in which he said that Canada would exploit the oil in its vast tar sands reserves “regardless of what we do.”
He goes on to suggest that the U.S. actually take actions against the interests of our neighbors to the north:
President Obama has the power not only to deny tar sands oil additional access to Gulf Coast refining, which Canada desires in part for export markets, but also to encourage economic incentives to leave tar sands and other dirty fuels in the ground.
This is truly astonishing: A high ranking official at NASA has taken to the pages of the New York Times to lobby the president of the United States to physically embargo Canada’s oil and impose economic sanctions against Canada to force them to eschew tar-sand development and export.
As Bruce Carson, executive director of the Canada School of Energy and the Environment points out in the journal Policy Options, that would be unbearably painful for Canada:
The energy sector represents the largest single private investor of capital in Canada and continues to attract the single largest slice of foreign direct investment, and these investments are spread across the country. The energy sector is a major economic driver for Canada, accounting for 6.8 percent of Canada’s GDP in 2008 and directly employing 276,000 persons, or about 1.9 percent of total direct employment in Canada. In 2007, oil exports alone generated nearly $70 billion for the Canadian economy. The Canadian Energy Research Institute (CERI) estimates that the oil sands industry alone will add 3 percent to Canada’s GDP by 2020 and will create, during the period to 2020, 5.4 million person years of employment, 44 percent of which will be outside Alberta. Currently the oil sands industry contributes toward 112,000 jobs across Canada and, according to CERI, over the next 25 years it is expected to contribute over 11 million person years of employment to Canada and $1.7 trillion to the Canadian economy.
It would feel pretty bad on our end too:
• Trade between the United States and Canada is huge and growing. Total trade between the two countries was worth $676 billion in 2008—more than one million dollars a minute.
• Canada is the biggest export market for U.S. products. Moreover, Canada ranked number 1 in 35 states as the leading export market for goods in 2008, and number 2 in 11 others.
• Trade creates jobs in the United States. More than 8 million U.S. jobs depend on trade with Canada. That’s 4.4% of total U.S. employment—1 in 23 American jobs depends on free and open trade with Canada.
Hansen’s most recent editorial has received sharp criticism for the over-reach of his claims about climate science, but what the media isn’t covering is an unprecedented call for environmental trade war with America’s largest trading partner. Let’s hope they catch up to that aspect of the story.
Romney doctrine, blah blah blah
May 14, 2012, 5:07 pmSo, David Sanger had a piece in the NYT last weekend wondering whether there’s a “Romney doctrine.” Of course, he wasn’t really wondering; he knew from the get go what he thought. And luckily for Sanger, he had plenty of Romney advisers to help along his theory. Romney has said that “[w]e should not negotiate with the Taliban. We should defeat the Taliban.” Apparently, this led to “a faction” of Romney’s “foreign policy advisers to shake their heads in wonderment.” I’ll bet it did.
Since the presidential campaign began in earnest 22 years ago (just feels like it), Romney’s team has been scooping up advisers left, right, and center. Literally. Dozens are among his many, multipart, compartmented working groups — my husband and many colleagues among them. They write papers, they do conference calls, they write more papers, they talk about the papers they’re writing. Few are actually certain that the governor is reading their papers (because, how could he?), but they labor away diligently, because they, like so many, are eager to do something, anything, to avert the disaster of a second Obama term. But not all these advisers agree with each other; rather, they are all united in the view that Governor Romney agrees with them, because otherwise, why would he have them?
And so, some lament when their putative leader says something that isn’t informed by their deep understanding of… whatever. And they like to lament in public, because they are, after all, public figures. Not, you know, with enough of the courage of their convictions to go on the record, but still, some. They are writing those “subtle position papers” that seem to have “little influence” on “Mr. Romney’s hawkish sounding pronouncements.” In fact, Romney sounds too much, apparently, like my AEI colleague John Bolton, who apparently leads the “Bolton faction” (who knew?) among Romney advisers. Where did Sanger get this tripe? Not from John Bolton, who was not honored with so much as a call from Sanger.
That bad ole’ Romney, he hasn’t roped in the greybeards of the foreign policy establishment… Brent Scowcroft, James Baker, et al. Indeed, he doesn’t even seem to be relying on what Sanger labels as another “nuanced” piece of work — the Eliot Cohen authored intro to Romney’s own foreign policy white paper. He seems to be… thinking for himself. How can that be? Perhaps, like Barack Obama, Mitt Romney has a world view. It doesn’t involve the United States being one of many exceptional nations (kinda like Greece); doesn’t involve religious obeisance to whatever the Council on Foreign Relations line of the day might be. And pace his many advisers, it is only informed in part by their deeply nuanced views.
After all that, we learn only one thing about Romney’s foreign policy: He ought to be more picky. There are only a few “nuanced” souls who would chat with Sanger in the first place. Most of us have a pretty clear idea who they are. And they should have the gumption to up and quit the campaign if they don’t like what their candidate is saying.
Silent spring? Not so much
May 14, 2012, 3:10 pmI’ve mentioned before that I live in Rachel Carson‘s old neighborhood and often hike in the Montgomery County, MD parks, where she spent time ruminating about the natural world. Given that I’m a fossil-fuel loving, better-living-through-chemistry enthusiast, I am sure my presence there has her spinning in her grave.
Carson is, of course, most famous for Silent Spring, her polemic against industrial chemicals, including DDT. The book was serialized by the New Yorker 50 years ago this June and is credited with launching modern environmentalism.
The anti-DDT forces inspired by Carson went too far (something Roger Bate and his friends demonstrate conclusively in this fine book). Many millions of people in developing countries have suffered needless disease and death due to anti-DDT zeal and rejection of science.
In any event, despite my love of modern industrial society, I’m as much a sucker for cute, helpless animals as the next mammal with opposable thumbs. So I’m happy to note that, as the picture below shows, there’s a noisy spring in my neighborhood this year.
That’s a nest in my backyard, adjacent to Carson’s old haunts.
The continuing U.S. retreat from Iraq
May 14, 2012, 1:36 pmLast year, after President Obama announced the withdrawal of all U.S. forces from Iraq, he invited Iraqi Prime Minister Maliki to the White House and told him: “Mr. Prime Minister, as we end this war, and as Iraq faces its future, the Iraqi people must know that you will not stand alone. You have a strong and enduring partner in the United States of America.”
Citing the “untold number of Iraqis who’ve given their lives” as well as the “nearly 4,500 fallen Americans who gave their last full measure of devotion” Obama declared “we owe it to every single one of them—we have a moral obligation to all of them—to build a future worthy of their sacrifice.” Obama promised that America would be a “partner for our shared security” and that as a central part of this effort his administration would “help Iraq train and equip its forces.”
What a difference five months makes.
The New York Times reported Sunday:
In the face of spiraling costs and Iraqi officials who say they never wanted it in the first place, the State Department has slashed — and may jettison entirely by the end of the year — a multibillion-dollar police training program that was to have been the centerpiece of a hugely expanded civilian mission here.
What was originally envisioned as a training cadre of about 350 American law enforcement officers was quickly scaled back to 190 and then to 100. The latest restructuring calls for 50 advisers, but most experts and even some State Department officials say even they may be withdrawn by the end of this year.
The training effort, which began in October and has already cost $500 million, was conceived of as the largest component of a mission billed as the most ambitious American aid effort since the Marshall Plan. Instead, it has emerged as the latest high-profile example of the waning American influence here following the military withdrawal….
The Times reports that the training sessions were so bad that Iraqis refused to attend them. Moreover, with all U.S. forces withdrawn, the State Department would not let trainers hold sessions at Iraqi facilities, rather than American ones, because of security concerns.
Robert M. Perito, director of the Security Sector Governance Center of Innovation at the United States Institute of Peace, called the project a “small program for a lot of money.”
“The first problem is the State Department doesn’t operate in dangerous environments,” said Mr. Perito, who last year wrote a history of United States police training in Iraq. “As soon as the U.S. military left, the State Department was on its own. And that immediately ran the price up and restricted the ability of advisers to move around.”
The State Department is also scaling back its overall presence in Iraq:
Last year, in preparation for the withdrawal of the military, the State Department planned a large expansion of its role here, designed to maintain influence and be a counterweight to the vast political influence of Iran. Yet, after doubling the size of the embassy staff to nearly 16,000 people, mostly contractors, the State Department quickly reversed course this year — partly because of Iraqi objections to the expanded operation — and is now cutting back from the slightly more than 12,000 people presently in Iraq.
Bottom line: The centerpiece of America’s post-war engagement strategy in Iraq is being abandoned—and the American retreat from Iraq continues apace.
Is Romney now immune to Obama’s Bain attacks?
May 14, 2012, 11:42 am
Here’s former Obama car czar and private equity guy Steve Rattner on the Obama campaign’s attack ad on Mitt Romney and Bain Capital (via MSNBC):
I think the ad is unfair. … Bain Capital’s responsibility was not to create 100,000 jobs … it was to make profits for its investors—most of whom were pension funds, and endowments and foundations—and it did it superbly well. … to pick out an example of somebody who lost their job, unfortunately, this is part of capitalism, this is part of life. I don’t think there is anything Bain Capital did that they need to be embarrassed about.
This all seems incredibly and intentionally obtuse—especially given Obama’s own record of job cuts and pay cuts when trying to turnaround the automakers. Of course, Romney and Bain weren’t in the game to directly create jobs. They were in it to make money for their investors and themselves. Then again, the same would go for Bill Gates, Steve Jobs, Michael Dell, Warren Buffett, and just about every other successful entrepreneur and investor you could name. But that is the miracle of free-market capitalism. The pursuit of profits by creating value benefits the rest of society through higher incomes, more jobs, and better products and services. This isn’t “destructive creation”—like, say, crippling U.S. fossil fuel production before “clean energy” sources are viable—but “creative destruction,” where innovation and efficiency sweep away the old and replace it with a more productive and wealthier society.
This also seems incredibly stale since the very same line of attack was trotted out by Newt Gingrich during the nomination fight. Asked and answered. But rather than actually being a legit attack on Romney’s economic bona fides, perhaps the aim of this ad—and many surely to follow—is simply to make Romney seem unlikable to voters. Make him seem mean. Drive down his favorables among blue-collar whites, I guess.
Anyway, I think this sort of ad strategy will backfire on Team Obama since it makes them look clueless on how a free-market economy actually operates.
AEI Elsewhere—The human disaster of unemployment, Panetta plays chicken, and more
May 14, 2012, 11:32 am• Kevin A. Hassett and Dean Baker: “The human disaster of unemployment”
• Thomas Donnelly and Gary J. Schmitt: “Panetta plays chicken”
• Michael Barone: “Three different ways to look at the 2012 campaign”
• Arthur C. Brooks: “Uncle Sam or Uncle Sugar?”
• Daniel Vajdic: “Putin’s growing detachment from the West — and reality”
• Roger Bate, Aparna Mathur, and Ginger Zhe Jin: “Counterfeit or substandard?”
• Alan D. Viard: “Taxing state governments under a federal value added tax: Part 1”
• Aparna Mathur and Alex Brill: “Elizabeth Warren has used shoddy evidence before”
• Michael Auslin: “Where did the land go?“
Tax-hike austerity failing in California, just like Europe
May 14, 2012, 11:01 am
I am having problems comprehending this Bloomberg headline: “Brown Tax Increase Gains Urgency as Deficit Rises to $16 Billion.” The story is even more puzzling:
California Governor Jerry Brown bet that a nascent financial recovery would lift the world’s ninth-largest economy enough to whittle down a $9.2 billion deficit. Instead, the gap has widened to $16 billion.
Today the 74-year-old Democrat will unveil his revised budget and explain what additional spending must be cut. Tax collections have run $3.5 billion below what he calculated four months ago. Spending has grown $2 billion above projections. The federal government and court ruling blocked some savings he expected, while his fellow Democrats in the Legislature balked at others.
California, with an economy bigger than Russia’s, lost more than a million jobs in the recession that struck in 2007, costing the most populous U.S. state 24 percent of its revenue. The new deficit estimate increases the urgency of the governor’s plans to increase income taxes on some earners to the highest in the nation, and boost sales levies that are now more than any other state.
The plan would temporarily raise the statewide sales tax, already the highest in the U.S., to 7.5 percent from 7.25 percent. It would also boost rates on income starting at $250,000. Those making $1 million or more, now taxed at 10.3 percent, would pay 13.3 percent, the most of any state.
Wait, taxes are rising and revenues are falling. So obviously the solution is even more taxes? Who’s running the show over there, the IMF? So the state with highest sales tax in America would also have the highest income tax in America? As it is, California ranks 48th in the Tax Foundation’s State Business Tax Climate Index. The California Dream has become the Golden State Nightmare …
Charlie Gasparino on breaking up the big banks
May 14, 2012, 10:23 amCharlie is no socialist or friend of Big Government or Occupy radical. But he’s had enough:
No amount of rules, regulation and smarts (Dimon is the smartest guy in banking today) can prevent banks from sometimes losing money. And the bigger these banks are, the more likely they are to have losses with severe economic consequences for the markets and the whole US economy.
See, for all Dodd-Frank’s mind-numbing rules, it fails to address the fact that regulators can’t catch every screwup. If they could, then the Federal Reserve officials who regularly camp out in JPMorgan’s offices would’ve caught the London Whale’s bad trades before they snowballed into these huge losses. …
Plus, Dodd-Frank allows these banks to remain large, unmanageable and (in the end) “too big to fail,” which could leave the taxpayers on the line for a bailout that could easily dwarf TARP and the Obama stimulus. …
In many ways, Dodd-Frank was a Faustian bargain between the big banks and the Democrats who ran Washington in the crisis’ wake. The surviving banks got to stay intact as long as they agreed to the rules that the Obama administration, Rep. Barney Frank and Sen. Chris Dodd offered up.
Sure, Dimon and others opposed much of the fine print, but they publicly supported the overall law — which, in the end, let them keep their mega-institutions, risk and all.
Force JPMorgan, Citigroup and Bank of America to become less systemically important, and they’d then have to sit on a hell of a lot less capital — freeing it up for small-business loans.
Separate JPMorgan’s federally insured commercial bank (where the “Whale” loss came from) from its investment-banking division, and Dimon would have fewer risks to manage — and when he (or some successor) fails, the damage wouldn’t be systemic.
And let me add a study that backs Charlie up, via the Cleveland Fed:
While the Too Big To Fail issue has received wide attention in the academic literature and popular press, there is little agreement regarding economies of scale for financial firms. We take the stand that systemic risk increases when the larger players in the financial sector have a larger share of the output. Our calculations indicate that the cost to the economy as a whole due to increased systemic risk is of an order of magnitude larger than the potential benefits due to any economies of scale when banks are allowed to be large. When distributional and inter generational transfer issues are taken into account, the potential benefits to economies of scale are unlikely to ever exceed the potential costs due to increased risk of financial crisis.
Washington breaking up big banks now ‘possible’—Wall Street research firm
May 11, 2012, 3:42 pmWow. This, from the highly influential Washington Research Group of Guggenheim Securities:
The JP Morgan announcement has brought new attention to FDIC Director Hoenig’s plan to force commercial banks to sell their broker-dealers.
Our View
· We believe the Hoenig plan is getting considerable attention on Capitol Hill and it could form the backbone for an eventual legislative response to J.P. Morgan’s losses.
· The odds are still in favor of the status quo, but a break-up-the-bank outcome has now moved from the improbable to the possible. As we wrote this morning, the odds are now 35% for adoption of a break-up-the-bank plan.
All-star analyst Jaret Seiberg goes on to say that Republicans like the idea because it would give them a way of repealing Dodd-Frank, while Democrats fear that banks are becoming so large that they can exercise too much political and economic power. “That said, we believe there needs to be another scandal in order to move this from the realm of possible into the realm of probable. This is because the moderates from both parties remain uncomfortable with restructuring industries,” Seiberg says.
So one more blowup and the train really gets rolling. Maybe a worsening this summer of the EU debt crisis will provide just such a catalyst.