The Fed, Our Fiscal Health, and the Road Out – Part 1

Our banking system is based on fractional reserves.  Banks take in deposits and make loans with most—but not all—of the deposit money.  The portion that is not loaned out is called a reserve.  There are both required reserves and excess reserves, the former is what the Federal Reserve Bank mandates that banks hold back and keep deposited in their accounts at the Fed.  Excess reserves are the dollars which banks are allowed to lend, but which they have chosen not to lend.  

Under normal circumstances, banks have very little incentive to keep any excess reserves—the Fed pays almost nothing in interest and they usually can make a lot more money by lending.  Only if a bank has made loans which it anticipates will fail, or when it sees no attractive lending opportunities, will it allow excess reserves to grow.

The ‘money supply’ (crudely, the number of dollars in our financial system) grows faster or slower, depending mainly upon how much of their reserves banks decide to lend.  Milton Friedman once famously said that “inflation is first and everywhere a monetary phenomenon.”  By that Friedman meant that we get inflation when too many dollars are chasing too few goods.  

Stick with me—I’m building up to a relevant point.  I promise.  

   

For most of the history of the Federal Reserve Bank, total reserves were comprised of ~95% required reserves and ~5% excess reserves.  During periods of financial stress, or when the Fed is said to be “easing”, the amount of total reserves has tended to go up (and down again when the Fed “tightens”), but the ratio of required to excess reserves has stayed remarkably constant.  For instance, Total Reserves in August 2001 stood at $39.98 billion, went up to $57.96 billion in response to 9/11, but were back down to $39.51 billion by May 2002.       

This link shows the history of reserve ratios from January 1959 through March 2012. 

In August 2008, total reserves stood at $46.59 billion and $44.72 billion of that, or 96%, was required.  But then look what happens beginning in September 2008: total reserves begin to sky rocket, while required reserves increase much more slowly.  Today, total reserves are a whopping $1.66 trillion, or a 3,500% increase since August 2008.  

With total reserves of $1.66 trillion, how much are the required reserves?  Only $98.08 billion, or about 6% of the total.  In other words, the ratio of required reserves to total reserves has been turned completely upside down.  “OK,” you say, “that rises to the level of marginally interesting, but still—so what?”  Think back to the fractional reserve system of banking.  Normally banks lend right up to the amount they’re able to lend, but now they’re keeping 94% of their reserves in their Fed accounts.  This is the bank equivalent of ‘mattress money.’  

That reality has been frustrating to those at the Fed, who’ve been hoping that banks will turn excess reserves into loans, thus stoking economic growth.   Instead all that money just sits there: 10% of our annual GDP is parked at the Federal Reserve, doing nothing but collecting 0.25% interest.  Why aren't the banks lending the excess reserves?

But here's the really big question: what will happen to the prices of the things we buy (recall Friedman's point above) if $1.5 trillion of excess reserves come rushing back into the economy by way of new loans?

A Positive Aspect of The Affordable Care Act

The Supreme Court begins three days of hearings today on the Patient Protection and Affordable Care Act.  26 states have challenged the constitutionality of numerous aspects of the law, but by far the most controversial piece is the coverage mandate—the requirement that by 2014 every U.S. citizen would have to had purchased (or have had purchased for their benefit) health insurance coverage, or pay a fine.  

I gather that the argument is essentially the Commerce Clause ("To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes.") v. The Tenth Amendment (“The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.”)  I have no sense of what cases will be cited by either side as precedent.    

One noble pursuit of the Act which doesn't get much attention is the change to the way Medicare reimburses physicians.  Here's Sarah Kliff's recent post on Ezra Klein's blog.  It's not that long, and it seems to me to frame the issues pretty well.  

Pause.  I’d much rather see Medicare become a defined benefit public assistance plan (e.g., “premium support”) than a totally open-ended benefit (i.e., the current “pay for service” model).  Among other things, as currently structured, the open-ended benefit model is bankrupting the U.S.  But, given what we currently have, this provision of the Act seems totally reasonable.

Currently Medicare compensates physicians for volume.  In the Affordable Care Act the federal government says that, at least with respect to Medicare benefits, taxpayers want to compensate doctors for good results, not just attempts.  As a taxpayer, I have to say that I don’t want my Medicare dollars going toward quick turn-arounds.  If I’m required to pay for some guy’s hip replacement in Pocatello, I want the problem fixed correctly and to be done with the expense.

And, yes, I want the guy to enjoy his new hip.

In this provision, Medicare—as a market participant—is acting to exert its preferences (good care, lower taxpayer costs) on the vendors (doctors).  This particular market is warped in many ways, not the least of which is Medicare’s disproportionately large lever.  But, this is a market-based reform.  Doctors have the option to decline Medicare patients.  It may not be as profitable for them to do so, and Medicare administrators may be basing their paternalistic one-size fits all decisions about what constitutes 'good care' on ignorance, but doctors have the choice not to participate in the market if they don't want to.  

That’s important.   

Glass-Steagall Redux

Here’s a fun experiment for your next ______ (cocktail party, bat mitzvah, ultimate croquet challenge, etc.): ask a proponent of the Volcker Rule what caused the the global financial crisis of ’08-’09. 

What’s that?  The cocktail parties you attend don’t include conversations about financial regulations?   

I’m shocked.  

Well, wherever you’re able to find yourself a VR proponent, I’ll bet you a nickel that the first (and maybe only) catalyst she cites will be the 1999 repeal of Glass-Steagall.  

As a refresher, “Glass-Steagall” (officially the Banking Act of 1933) was the Depression era act which separated commercial banking activities (taking deposits, making loans) from investment banking activities (underwriting, securities trading, brokerage). 80 years ago, Congress felt that the business of lending was less risky, or at least that sort of risk could be contained more easily than trading & underwriting.  If taxpayers were going to provide a backstop for banks via the newly formed FDIC, Congress wanted to make sure that banking risk was minimized.  

It's not a bad notion.  The benefit taxpayers receive (a sound banking system) is much less tangible than the risk they bear (potentially pony-ing up for failed banks), so it made some public relations sense to put a short leash on banks.   

Although, risk avoidance is not risk management and the VR (and Glass-Steagall) is all about risk avoidance. 

Why?  Well, mainly, the Vocker Rule proponents are members of the “Regulate First, Aim Later” brigade.  This advocacy blinds them to the importance of the larger analytical question: what factors led to the financial crisis?  It’s not a terribly difficult question.  Here are some of the ones I see:     

1. Extraordinarily low interest rates coming out of the 2001 recession
   
2. 30:1 leverage ratios at hedge funds
   
3. Private investment banks converting to public companies
4. The Community Reinvestment Act and related GSE mandates
5. Moral hazard at Fannie Mae & Freddie Mac 
6. A large insurance holding company (AIG) acting as an unregulated derivative clearing house
7. Insufficient bank capital standards
8. And MAYBE the repeal of Glass-Steagall

I say maybe in #8 because I really can't see what sort of systemic risk is posed by adequately capitalized banks, regardless of which types of business activities they pursue.

It’d take too long to go into each of these, so knock yourself out on Wikipedia.  What factors would you add?
  

Wouldn't it be nice if we could boil a massive financial crisis down to a single variable?  Unfortunately, we can’t.  If we construct our regulatory regime on that basis, we'll get into trouble again.    Analysis suggests that there were many factors creating this perfect storm, not simply the repeal of Glass-Steagall. 

Fixing Our Schools – Part 2

Just to be clear: I’m completely aware that I’m not an authority on this topic.  But nor can I stick my head in the sand.  I’m asked to vote on educational referenda and levies.  Our society’s economic and intellectual health depend on quality education for each citizen.  As an employer, I need qualified applicants.  I also pay taxes to support public schools.  Like it or not, I’m a stakeholder—a moral owner—and I feel the burden to learn how to think critically about this issue. 

 

Just letting the educators (the ‘professionals’) decide the solutions is completely bogus.  That’s like the notion that you should look to your doctor for moral advice.  Teachers, like doctors, are vendors of professional services.  They have exceptional technical knowledge which the rest of us ignore at our own peril, but we should never delegate critical thinking and policy making to them.  

So far, I’m developing more questions than I am answers.  For instance, school boards rightly hold the authority to act on behalf of the moral owners of public school education.  But the more school boards there are, the less likely we are to attract only the most capable citizen fiduciaries to those boards.  Just because someone is elected to a school board doesn’t make him the best choice.  I’m not questioning the value of democratically electing school boards, mind you.  I’m just asking whether having so many school boards helps or harms efforts to improve educational quality?  

    

I watched the documentary Waiting for Superman a couple of weeks ago.   I cannot recommend it highly enough.  The contrast between the failing public schools and successful charter schools profiled was stark and the kids in the movie will break your heart.  

You could almost rename the movie Waiting for Randi Weingarten, though (you’ll know what I mean when you see it).  Between this one and the Juan Williams documentary, A Tale of Two Missions, I came away feeling like the answers are just to 1) bust up the teachers unions and 2) send everyone to charter schools.
 

The reality, though, is that charter schools have widely varying outcomes.  

The 2009 CREDO Study tracked the performance of charter school students in 16 states over 15 years, beginning in 1994, and compared their results to those of kids in traditional public schools (TPS).  17% of children in charter schools performed significantly better than TPS students in their localities, while roughly half performed the same  and 37% performed significantly worse.  It seems like more work needs to be done on distilling the factors that have led some charter schools to perform very, very well.  Likewise for the ones which are failing miserably.

I’m also learning that many educators are deeply suspicious of or firmly opposed to promoting competition among teachers.  This one really, really baffles me.  On the surface, it seems to me that some of the school under-performance issues could be solved by just having more truly professional educators in the classrooms—people wired to teach and who are truly passionate about educating kids—as opposed to people who want a 'good job'.  

Having held jobs that were incongruent with my skill set and passions, I can say from experience that my failure to succeed in those environments helped me discover where I would fit best.  When you watch Waiting for Superman, pay attention to the discussion about “lemons” and how administrators have learned to deal with under-performing teachers.  Hint: they can’t just fire them.

If you’re like me, you had some really awful teachers.  You probably also had some who cared so deeply for you and had such faith in who you could become, that you felt more alive and inspired by them than almost anyone else.  A great teacher might have even pointed you on a path that changed the trajectory of your life.    

Who is hurt by competition among teachers?  The students?  The moral owners of public school education?  Society at large?  Employers?  Parents?  Tax payers? Good teachers?  None of these are, as far as I can see.  

The only people I can see that are hurt by competition are union leaders and some of the lemons.  The union leaders have sold the fear that if members didn’t have their representation, they’d all be paid peanuts and subjected to galley slave working conditions.  What if that fear is wrong—not necessarily willful deception, just incorrect?  And what if, instead, unions became suppliers of the most highly qualified, passionate teachers due to their extensive apprenticeship programs? 

 

Some of the lemons would benefit immediately from being fired—they’d be nudged out of the nest to find their passions.  Others are just there to collect a steady paycheck and don’t give a hoot about what the kids learn.  I believe it’s our moral obligation to purge the system of those dregs.

What’s wrong with teachers competing?  What am I missing?  

I've Decided to Become a Fashion Writer

Sure, I’m a middle-aged, white guy who loves fishing in farm ponds.  I live smack dab in the middle of one of the classic 'fly-over' states.  And I may look at a dress worn by an emaciated, morose model on a runway and think, “Golly, I wonder how she even puts that sucker on?”

But, come on, I wear clothes!  And I know that Milan is in France, how hard can it really be?

A little thing like not knowing what she's talking about doesn't stop NPR’s Terry Gross.  It’s one thing to not know what you’re talking about—can a radio host possibly be an expert in everything?—it’s something else entirely to know so little about a subject that you choose to interview someone who doesn’t know what they’re talking about.  

Am I being caustic again?  Probably.   But before you write me off as mean-spirited, I just want to note that Charlie Rose never seems to make these kinds of mistakes.   

Here’s the transcript to Gross’s recent interview with Jesse Eisinger.  Now, admittedly, understanding the financial crisis has been very, very difficult for those of us who get how these things normally work.  For most of the population, I’m sure it’s almost impossible to understand.  But Eisinger should know better—he’s at ProPublica now and was previously at the Wall Street Journal and The Street.com.

The interview is riddled with misinformation.  It's appalling, really.  

Here are a few problems I have with this bit of “news” from Terry and Jesse:

Is it really news that Sheila Bair thought the banks needed more capital but the Fed did not?  And why does Eisinger think the Fed is subject to lobbying pressures but FDIC isn’t?  What if both Bernanke and Bair just arrived at independent but different conclusions?  No one knew exactly how much additional capital was needed and how fast the banks needed to get there.  All anyone suspected was that bank capital was too thin to sustain another major financial crisis.  The original stress test wasn’t totally rigorous, but it was real—it confirmed that JP Morgan was significantly better capitalized than Bank of America. Also, it's not like the Fed stopped at one stress test; the most recent results were released this past Tuesday.

On the other hand, our fractional reserve system relies on banks retaining a small minority of each deposit as capital.  Jacking capital retention ratios north of, say, 15 – 20%—as we saw some Swiss banks do—would only serve to weaken velocity when the banks began to lend, putting more strain on the central bank to stoke growth.    Besides, Basel III is raising capital levels and requiring more secure types of capital for banks globally.  US banks could quickly become disadvantaged if they pushed farther faster than their European and Asian competitors.  The key was, and is, to get there (higher, stronger capital) in a coordinated fashion. 

Can we really generalize about “the banks” when critiquing things like dividend payments and acceptance of capital from the Fed?  JP Morgan had Fed capital forced down its throat—CEO Jamie Dimon never wanted it and never needed it.  In fact, he was the white knight that kept Bear Stearns’s clients tucked in.  Bank of America (thanks to its Countrywide and Merrill Lynch acquisitions) was an utterly and completely different story—they were a hair’s breadth from failing themselves.  

Is the fact that the Fed took a position in preferred stock something to lament?  And who cares that they didn’t get a vote with the preferreds?  They’re the Fed, for crying out loud!  They have all the voting power any stakeholder could ever want.  A share class is “preferred” because its owners have a senior claim to common stock holders.  In hindsight, sure the Fed could’ve made more money by buying the common shares, but when you don’t know if Bank of America is going to ultimately fail, should you really gamble with tax-payers’ money?  

Also, Warrant Buffett owns preferred shares in Bank of America and that means one thing: the bank just isn’t in the bad shape that Eisinger thinks it is.  Buffett may make goofy, populist, guilt-induced, political arguments about taxes, but he’s an incredibly sharp investor.  

Eisinger is correct that banks are currently making a healthy spread between their cost of money (what they pay to depositors), which is almost 0%, and what they can earn from buying Treasury bonds (2-3%).  And, sure, it would be nice for them to lend more (though Commercial & Industrial lending has already been pretty strong).  But ask yourself this question: if the Fed really wanted the banks to lend, why are they paying interest on bank excess reserves at their Fed accounts?  Shouldn’t they charge the banks to keep the money in the mattress?  Moreover, if the banks are really in the trouble Eisinger wants you to think they are, then shouldn’t he be delighted with healthy net interest margins because they’re allowing the banks to beef up capital?  

Dividends are taxed twice—there is no good argument for taxing them more.  Terry & Jesse are concerned that banks want to reinstate dividends because it's a more tax efficient means of compensation for executives than cash.  Well, let's see, here JP Morgan's tax rate last year was 27%, so if we add 15% tax on CEO Jamie Dimon's dividend (because dividends are after-tax cash flows), we get an effective tax rate of 42%.  If Jamie Dimon instead took the full amount of his dividend as a cash bonus his top federal tax rate would've been 35%, 7% less than his actual rate.  No, my friends, the banks aren't trying to pay the executives through stock dividends so they can avoid taxes, they're incentivizing them as owners.
   
Last point: if you prohibit the banks from paying dividends for a long period of time, who would want to own their shares?   Let’s face it, banking isn’t exactly a growing industry, and bank stocks aren’t that exciting.  For seniors, pensions, or endowments which rely on dividends (which, because of ultra low rates, have replaced reliable CD & bond interest) they’ve been a reliable source of income.  The point is that if you eliminate all dividends indefinitely, you drive away the vast majority of your potential investors.  And when those guys leave, your stock price falls.  Bad idea.

I should be more fair to Terry Gross: she's a widely respected interviewer who's been doing her job a long time.  Still, she has a story to tell, airtime to sell.  She's naturally drawn to a certain type of interview, one that's controversial—apparently even when the controversy is fanciful.  If you don't get something, should you really comment on it?

 

The Breitbart Bombshell—Vetting President Obama or the Media?

To my knowledge I never read anything Andrew Breitbart wrote—I wouldn’t have recognized his face until I saw pictures in the news reporting his death on March 1. 

I’m a nut about analysis driving advocacy, but there are a ton of other things that should be driven by analysis also.  Like news reporting, for instance.

 

Take a look at this clip of CNN’s Soledad O’Brien interviewing Joel Pollak, Breitbart’s Editor-in-Chief.

Step back from the controversy about “Critical Race Theory”—it’s the first I’ve heard of this theory and I can’t possibly learn enough to comment on it any time in the near future.  Put aside, for the moment, questions about President Obama's previous associations with and support of Bill Ayers, Bernadette Dorn, Jeremiah Wright, and Derrick Bell.  Instead, focus on the question of the role of the media.  Here are some questions I'm asking about the media during this election cycle:

Is there any doubt that CNN and the other ‘main-stream’ media outlets are trying to persuade us to arrive at certain political conclusions? Do you welcome that? 

 

Is CNN really any better than MSNBC or Fox News, in this regard?

Has O’Brien’s overt bias in the interview damaged her credibility, in your mind, in any way?

The footage was not aired previously by the Boston PBS affiliate, WGBH.  Why?

Are Amy Holmes and Joel Pollak correct that the media and Charles Ogletree smell foul for keeping this back? 

Isn’t the white dude in the studio the guy who played Carla’s husband Eddie on Cheers?  Wha...?

I don’t know about you, but this video confirms my suspicion that people—even the ones that are supposed to be trustworthy—will do anything to get their guy elected this year.  It’s one reason I try to go back to the source data as much as I can. 

Pass the popcorn.  This year is going to be fantastic to watch! 

What the Sandra Fluke Affair Reveals

Last week bombastic conservative radio commentator Rush Limbaugh stuck his foot in his mouth—yet again—when he referred to a Georgetown law school student, Sandra Fluke, as a "slut."  The comment was at once base and baseless.  Limbaugh later apologized, sort of.  It was one of those prideful “I didn’t mean to offend you, but my intent is what really matters, and here’s why…” kind of apologies.  Not much contrition there.  You only get away with that sort of thing if the person to whom you’re apologizing isn’t someone you have to see again.   

Previously, Ms. Fluke had testified before the House Democratic Steering and Policy Committee that her cost of birth control, about $3,000 during her time in law school, is prohibitively expensive for a cash-strapped student.  Her testimony was part of Chairwoman Nancy Pelosi’s theatrical attempt to demonstrate why it’s OK for the Patient Protection and Affordable Care Act (a.k.a., 'Obamacare') to force Catholic institutions to cover birth control in their employee and student health insurance plans.  Limbaugh’s slut comment derives from an incorrect inference on the part of another commentator: if condoms cost about $1.00 each, and Ms. Fluke is in school for 3 years, a total cost of $3,000 equates to 2.74 condoms per day.  However, Ms. Fluke was clearly referring to the cost of birth control pills, not condoms, and we simply have no knowledge—thank heavens—about how, um, active she is.  

Rush blew it.  He should never in a million years have called her such a name, but since he did, he should’ve simply said—directly to Sandra Fluke: “I’m sorry.  What I said was awful.  I hope you can forgive me.”  The “yeah, but…” thing makes his epithet that much more offensive.    

  

Predictably, the left has blown a gasket, calling for boycotts of the products of companies that advertise on Limbaugh’s show.  The boycott is working—several major sponsors have pulled out thus far, representing tens of millions of dollars in annual advertising revenue.  It’s the kind of thing that Limbaugh’s show, right now and in its present form, might not survive, if listeners boycott also.  

      

I say predictably not because I think lefties will always react to stuff they dislike with boycotts (although you have to admit, it’s one of their favorite tools), but because Ms. Fluke isn’t really a person, in this situation, but a prop.  That’s how these gross dances go: The Hatfields trot out some faux victim, the McCoys cry: "Baloney, you %@#$!", and the Hatfields scream: "Scandale dans la maison de McCoy!".

I’ll bet you didn’t know that the Hatfields spoke French.

The problem is that this scandale (call it ‘mysogeny’), like so many others, is actually symmetrical.  As Kristen Powers points out, there are plenty of lefty media types who throw around all sorts of horrible, demeaning language but emerge unscathed.  The left retorts, “But wait, Bill Maher is just a comedian.  Surely we can’t hold him to the same standard as a news organization!”  Maybe not, but has Rush Limbaugh, in the lefty mind, now suddenly been promoted from knuckle-dragging entertainer to serious newsman?

What would be helpful right now is not one of Nancy Pelosi’s dramatic productions, not one of Rush Limbaugh’s demeaning rants, and certainly not the left’s hypocritical, self-righteous indignation.  What would help is a little analysis.  

Fortunately, Cathy Cleaver Ruse has done just that for us.  The real issue is this: What limitation are we going to impose on the federal government’s ability to coerce the private sector into facilitating and funding acts which they find to be morally reprehensible?  Ms. Ruse points out that, unlike medicine which alleviates the symptoms of chronic diseases such as asthma, birth control medication facilitates private choice. 

 

I don’t share the Catholic Church’s view that prohibiting pregnancy is wrong.  But this isn’t about my opinion; it’s about what our government gets to force upon our citizens.  There are a whole lot of things with which I disagree (like dressing up as zombie Mohammed), but which I also defend in the name of liberty. 

Sadly, the Patient Protection and Affordable Care Act fundamentally is about forcing a certain view of equality, not facilitating liberty.  We should applaud Georgetown for even making a health insurance plan available, not berate them for declining one type of coverage.  And whenever possible we should flee coercion.     

Reality and Fantasy: The Economic Pie

All governments have certain financial obligations.  Which obligations they ought to have is a matter for political philosophy.  How they most prudently meet their obligations is, at least in part, an economic question.  It’s an important topic right now because if things don’t change pretty significantly, the U.S. may not be able to meet all of its projected expenses.  

There are essentially three views as to how we can satisfy those obligations, and they segregate into two camps: the size of the American economic pie is fixed, or the economic pie can grow.

The Occupy Wall Street crowd is the clearest example of fixed-pie thinking.  The very act of labeling citizens by their income percentile betrays a fixation on current wealth / income and ignores the implications of future economic growth.  Can you imagine any self-respecting OWSer arguing that in order to wring more money out of the 1% we should figure out how to incentivize them to deploy their wealth more productively?  Their rhetoric is entirely confiscatory.    

Reality is not on their side—economies grow.  The basic equation for macro-economic growth is a rising population + increasing productivity.  Both of those trends are intact globally and show no signs of letting up in the next several decades.   

Some fixed-pie folks may claim to have a right to a larger piece of that growth, but that is a question for political philosophy--and hopefully, the rule of law--not economics.  

The other group believes that the economic pie can grow.  They believe that taking money out of the public sector allows it to be put to work more productively in the private sector, which raises taxable incomes and which in turn leads to higher tax receipts.    

Growing pie proponents include “supply-siders”.  Supply-siders argue that that there is no limit to the amount of economic benefit realized through cutting taxes, and that because of this, the more taxes are cut, the more tax money will be raised through taxes.

Ultimately it’s a view that reduces to the absurd: if we were to cut total federal tax receipts from $1 to $0, would we really somehow then take in more money?  Reality is on their side, but only to a point.   

  

The other growing-pie sub-group—we’ll call them the “optimal tax” group—says to the fixed pie-ers and the supply-siders, “Wait a minute, there must be a tax structure that engenders economic growth through private sector profit retention, and maximizes tax receipts to meet government obligations.”

One challenge—especially difficult in an election year—is to distinguish whether popular arguments pertain to political philosophy, or to economics.  Another challenge is to decide which economic arguments are reasonable.  

The fixed-pie crowd has a tough time distinguishing between philosophy and economics and when they do, they make poor arguments like: “redistributing wealth will allow ‘middle-class families’ to spend more money and, thus, increase economic growth.”  Hmm.  How do we know that consumers will spend money more productively than hirers?  Empirically, we’re seeing the limits of that notion right now: far from spending their FICA tax holiday money, consumers are paying down debt.

Supply-siders also frequently blur economics and philosophy.  They desire a less pervasive federal government and thus support all tax-cutting initiatives, often times without actually doing the work to figure out the real economic implications.

The place to spend our intellectual energy is optimal tax structure.  Optimal tax proponents agree with research which suggests that high marginal income tax rates act as a drag on incentives to produce.  They also know that we can’t simply cut our way to paying off our debts.  

Backing optimal tax rate policies does not limit you to one political philosophy.  It just means you’re thinking rationally about government income and expenditures, and tax payer incentives and disincentives.  In other words, optimal tax structure is the land of grown-up fiscal management—the domain of economic reality. 

 

So, OWSers and blind-faith supply-siders, pull up a chair!  The pie is delicious—and capable of growth—and the price ain’t so bad, in reality.

Fixing Our Schools

I'm no teacher.  Well, actually, I guess I am.  What I mean is that my career is not that of an elementary or secondary public school educator.  That distinction matters because it means that I lack an important perspective in the on-going debate about how to improve public schools.

I'm also not a consumer of public school education; I send my kids to a private school.  I'm fortunate to be able to pull that off.  Never mind the fact that I drive a 13 year old car and wear garage sale clothes to make it happen, I'm still fortunate.  I also know that I get to pay tuition twice: once for my own children at their school and then again for the kids in our neighborhood through my property taxes.   

What I am is a tax payer, a voter, a concerned citizen, and a practical economist who observes that our educational system is falling behind in global competitiveness, which has a negative impact on our productivity.

How do we fix this?  I'm not sure.  

Frankly, I see a lot of ideas: vouchers, magnet schools, charter schools, governmental programs like No Child Left Behind, and so on.  I hear from teachers and administrators that these attempts don't work.  Vouchers don't work because they take money away from public schools and, often, transfer it to religiously affiliated schools.  No Child Left Behind doesn't work because it takes money away from schools that need more funding and gives it to schools which were already performing well.  NCLB also has been widely criticized for forcing educators to 'teach to the test', thus skipping valuable subjects like art and music.  Charter schools are bad because they're run by corporations and they're said to be able to select the students they want and send the others back to the public schools.  

They may have some good points. 

What I haven't heard from teachers, administrators, and unions is much at all about what will work, and that silence is deafening.  Except, that is, for more money.  But as the link below points out, even a ton of money does not guarantee success, nor even ensure a lack of utter failure.   

Juan Williams produced an interesting documentary recently called A Tale of Two Missions about the horrific failure of Chicago Public Schools.  It's 28 minutes long, but well worth your time if you're interested in this issue.  I wonder whether what we're beginning to see are the effects of monopoly power when the service is required to be purchased.  If so, that type of failure should unite Democrats and Republicans.  Heck, one of the most powerful quotes comes from Chicago Mayor, Rahm Emanuel, at 4:17.  Says the mayor of Chicago Public Schools: "I think the system was never designed to benefit the kids."

Wow.  I never imagined that I'd quote that guy without also mocking him.  

As you think through the issue, consider these categories: moral owners, primary beneficiaries, vendors & competitors.  Now try to fit these groups into one of those categories: government (federal & state), parents, students, local school boards, property tax payers, teachers, teachers unions, private schools, charter schools, and society as a whole.  This list isn't comprehensive, so add some more.    

What do you come up with?