Monthly Archives: June 2012

Student Subsidies and the Federal Government

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I’ve written before about the failure of subsidies, their feel-good and superficial benefits notwithstanding.  The student subsidy that is a Pell Grant is a case in point.

Jenna Robinson and Duke Cheston, of the Pope Center for Higher Education, reported a bit ago on the growing excesses of the Pell Grant program (the full report can be read here or here).  The program consumed some $36 billion in the 2009-2010 academic year, half the Department of Education’s budget.  This also is—surprise—the Federal government’s largest education expenseinvestment.

Here’s what’s been done over the last several years, of which those $36 billion are only the latest, with/to a program that began life 30 years ago as a well-intensioned program to help the poor go to college.

  • In the 2009-2010 academic year, 60% of all college students received a grant—9.6 million students.  Between 2008 and 2010, the number of Pell recipients increased by almost 50%, roughly doubling taxpayer cost (this is a government charity, not a private one).
  • The maximum grant was raised to $5,550 beginning 2011 from 2008’s $4,731 per year.  This further encourages creative accounting: a 2009 study by Christina Chang Wei and Laura Horn (“A Profile of Successful Pell Grant Recipients: Time to Bachelor’s Degree and Early Graduate School Enrollment”) found that 60% of Pell Grant recipients were “financially independent” of their parents, compared with 34% of non-recipients.  Being “financially independent” means the parents’ finances have no bearing on student need or eligibility.
  • Better-off students often take their large Pell Grants and go to more expensive schools.  In that 2009-2010 academic year, 20% of Pell grantees from families making over $60,000 (so much for “financially independent”) went to schools that cost $30,000 or more per year with the aid of those Pell Grants.  Students from lower income families, without that wealthier base underlying their own grants, attended those higher-cost schools at a significantly lower rate—13%.  (By itself, this should be no big deal; people should go where they can afford to go with their money.  But this isn’t their money, it’s our taxpayer money—and our charity should help folks get by, and get a leg up, not help them live large.)

What did we gain from this…government largesse?  The usual subsidy distortions, but no improvement in academic performance or ultimate success.

  • An apparent increase in college enrollment by poor students—from 46% in 1970 to 59% in 2009, but
  • Poor actual performance, at least comparatively: graduation rates were lower for students who received Pell Grants than for those who didn’t.

And, as the WSJ points out, in the manner of all subsidies

  • Pell Grants contribute to the ever-rising tuition spiral: colleges and universities learned long ago how to capture that extra cash, and they adjust their price schedules accordingly.

Hmm….

Failure of the Euro—a False Fear from Moral Hazard

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“The euro is in trouble and only Germany can fix it.”  That’s the meme—and the fear—described in a recent Spiegel Online piece.

Much of the euro zone and EU “leadership” is pushing for a “bank union,” a “debt repayment fund,” a communalization of (southern Europe) debt across Europe in the form of euro bonds.  Without one or more of these, goes the plaint, there is no way to stop the debt crisis.

But these worthies make no coherent case for why the taxpayers of one country should be held liable for the debts of other countries’ governments—or of other countries’ private institutions.  Indeed, this amortization across the sound and responsible can only damage, if not break, the sound and responsible economies and create an enormous moral hazard by indemnifying the irresponsible from the consequences of their profligacy.  This indemnification can only encourage yet more of the same.

Subsidizing anything only produces more of that thing, without making it any more accessible to the originally targeted population, and the schemes above only subsidize borrowing.  This is the way to prolong the debt crisis, it is not a solution to it.  These proposals do not even pretend to an imposition of fiscal discipline, either from within the fiscally irresponsible nations themselves or from without by the sound nations withholding further lending.  The courses proposed will only have the effect of punishing the sound for their soundness and they will reduce those sound nations’ own willingness (much less their ability) to maintain their own fiscal responsibility.

If euro bonds were introduced, goes one claim, countries like Italy and Portugal could take on large amounts of new debt without having to fear effective monitoring of their government spending.  Yet this is an aspect of moral hazard.  Jens Weidmann, President of the Deutche Bundesbank, the German central bank, points out that if debts were shared, “liability and control would have to be in conformity with one another.”  Indeed.  But if such unity were achieved, the empirical evidence demonstrates that it would be by loosening the discipline of the responsible countries, the direct opposite of the needed outcome.  The profligate borrowers, bailouts in hand, will have no incentive to mend their own ways, to seek discipline.

Italy, for instance, has a debt-to-GDP ratio of 120 percent. The proposed courses of action would mean that Rome could transfer a significant fraction of its debt to a shared euro debt fund, for instance.  The Italians thus would have even less incentive to introduce necessary structural reforms.   There’s that moral hazard.

For all this, Sabine Lautenschläger, Vice President of the Deutche Bundesbank, points out that when there is a crisis in a national banking system, “it may be necessary to use the money of taxpayers in other countries.”  This is moral hazard carried to the point of naked freeloading.  “I exist, and you have money.  Therefore, you owe me.”

The matter is emphasized by the current bailout of Spanish banks, long resisted by Prime Minister Mariano Rajoy, and the market’s recognition of the failure of such a thing: following news of the loaning of €100 billion ($126 billion) to Spain’s larger banks, the financial markets pushed Spanish borrowing costs to recent year record levels.  And of course the markets reacted badly: they correctly recognized this as simply adding debt to a debtor who has said he’s unable to repay existing debt.  Rajoy was correct to resist the bailout for as long as he did, and he was wrong finally to accept it.  He has only increased the danger to Spain.

That’s the moral hazard; now we get the Chicken Little act: “senior officials” in Berlin are openly discussing the possibility that the euro could fall apart, and Christine Lagarde, Managing Director of the International Monetary Fund, insists with a straight face that there remain only “three months” to save the euro.  A senior euro-zone diplomat in Brussels bleats, “If Germany doesn’t make a move, Europe is dead.”

There’s more: Germany already has billions of euros invested in preserving the currency zone says Spiegel.  And so they must pony up yet more, or lose the sunk investment.  This, though, is the amateur investor’s error: being married to a failed position.  Insisting on holding to that failure, even adding money to it, in the hope that the investment will, eventually, finally, turn around and the losses be recouped is a fool’s hope.  In reality, the losses continue to mount as the failure deepens, and the final bankruptcy is that much more expensive, because the amateur investor will have lost that much more.  The best move for a failed investment is to cut the losses by terminating the investment, painful as that may be.  So it is with the nations’ sovereign debt.  Cut the losses.  They’ve already demonstrated they cannot repay—adding to their debt burden only makes their inevitable bankruptcy that much more disastrous.

Yet the fear of dissolution is both unfounded and misdirected.  After the inhomogeneity of social, political, money purpose imperatives of the euro zone nations, the next greatest risk to the euro is this moral hazard.  Eliminating the moral hazard would strengthen the EU and the euro zone, not destroy it.  Let the bankrupt go bankrupt, stop propping them up with more debt funded with OPM.  Fiscal discipline—as the northern European countries, especially Germany, have demonstrated—is the road back, to the extent there is one, with that inhomogeneity barrier in the way.

Indeed, that inhomogeneity demonstrates another aspect of the crisis.  Each PIIGS’ problem and situation is unique, beyond the general theme of irresponsible spending and borrowing.  Each solution must be unique, beyond the general theme of no bailouts from outside.

As Churchill once said, these folks are killing the wrong pig.

But It’s the Wrong Problem

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Ron Williams, a former Chairman and CEO of Aetna Inc, in a recent Wall Street Journal op-ed, described his evolution toward opposition of Obamacare’s Individual Mandate, which he had supported initially.  He then offered a couple of alternatives to the Individual Mandate; however his alternative solutions are as erroneous as the Individual Mandate is an overreach of Federal government power.  The reason for his error is that he’s pursuing the wrong problem.

Williams says

As a society, we have a moral obligation to ensure everyone has access to affordable health care.  We must find a way to cover those who are no longer healthy but need care.

No.  There is a difference between health care and health insurance; the two are conflated far too often—sometimes cynically and deliberately, sometimes out of genuine ignorance, and sometimes just out of careless thought.  People who are no longer healthy do not need health insurance; they need health care.  We must find a way to help them to get that care.  Moreover, this social obligation is not at all a government obligation, or even a legitimate government task.  Society is not our government—it is us.

When government butts out of our affairs, when it leaves our money in our hands, it becomes a lot easier for us as individuals to see to our obligations ourselves, and in our own way.  Then we can do more of what we need to do—directly, or through our local communities, or through our churches and private charities, or some combination of these.  Government legitimately comes into play only as a last resort, not the first resort—or only resort, as some would have it—and the Federal government must be last among these.  New York’s tax funds, to the extent they’re involved at all, should go first to New York’s poor, not first into a general national pile from which, for instance, Illinois or California might draw ad lib.

On top of that, competitively sold health insurances policies, sold nationwide rather than within 50 different state jurisdictions, would be a powerful market solution that would potentiate our ability as a society to act on this imperative.

Free Speech and the UN

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There is a carefully sub rosa international attack on free speech in progress, and unless our government takes a more active role than it has been, that attack is going to have very serious negative repercussions right here at home.  Gordon Crovitz described this in a recent Wall Street Journal op-ed.

The UN’s International Telecommunications Union is hosting a World Conference on International Telecommunications this December, which will be attended by all 193 of the UN member nations, including the US.  This meeting has been utterly devoid of publicity, and any knowledge we have about the agenda and goals have come to us only through leaks.  But here’s what we know, according to Crovitz.

A 200+ page “planning document” indicates the UN’s goals for the conference, and Eli Dourado, a George Mason University researcher, summarized the document’s contents thusly:

These proposals show that many ITU member states want to use international agreements to regulate the Internet by crowding out bottom-up institutions, imposing charges for international communication, and controlling the content that consumers can access online.

The proposals include the following:

  • give countries authority over “the information and communication infrastructure within their state”
  • require that online companies “operating in their territory” use the Internet “in a rational way”

Since these proposals come from the People’s Republic of China, this means government authorities and government definitions of “rational way.”

Other proposals would actually let the UN regulate Internet content:

  • “protect” against computer malware or spam
  • inspect private communications
  • measure Internet traffic along national borders and bill the originator of the traffic
  • give the UN authority over allocating Internet addresses, replacing ICANN, the self-regulating body that presently ensures the stability of the Internet

These proposals come from Russia and Iran; although amazingly, Europe supports the billing drive (perhaps not so amazingly considering the penchant for government controls that EU member nations have).

So far, our government’s reaction to this assault on free speech—and on American free speech—has been…muted.  The best the Obama administration has been able to do is to mumble about

“unnecessary and beyond the appropriate scope” of UN regulation

and

the text [of the planning document] suggests that the ITU has a role in content-related issues.  We do not believe it does.

This is a far cry from the bolder response we took took when the UN’s UNESCO became too ideological and not enough concerned with science and education: we cut off funding to the organization.

This administration needs to become a whole lot more forceful in opposing this attempt to grab the Internet and to use that control to stifle free speech.

Illegal Aliens and Amnesty

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Late last week, President Obama signed an Executive Order wherein he announced his decision to shirk his Constitutional duty to “take Care that the Laws be faithfully executed.”  This also violates his personal promise to do so—not a campaign promise, but his oath of office:

I do solemnly swear (or affirm) that I will faithfully execute the Office of President of the United States, and will to the best of my Ability, preserve, protect and defend the Constitution of the United States.

His EO does this: it protects from immigration law enforcement those illegal immigrants who came to the US before they were 16, are younger than 30, have committed no major criminal offenses, have been in the country for at least five continuous years, and have a US high school diploma or a GED or served in the US military.

This seems like a good idea, and it even has elements of Congressman Luis Gutierrez’ (D, IL) and Senator Marco Rubio’s (R, FL) plans for handling the children of illegal aliens.

However.

John Yoo, Deputy Assistant Attorney General in the Bush the Younger administration, had this to say about the Obama Amnesty Program:

President Obama’s claim that he can refuse to deport 800,000 aliens here in the country illegally illustrates the unprecedented stretching of the Constitution and the rule of law.  He is laying claim to presidential power that goes even beyond that claimed by the Bush administration, in which I served.  There is a world of difference in refusing to enforce laws that violate the Constitution (Bush) and refusing to enforce laws because of disagreements over policy (Obama).

Under Article II, Section 3 of the Constitution, the president has the duty to “take Care that the Laws be faithfully executed.”  This provision was included to make sure that the president could not simply choose, as the British King had, to cancel legislation simply because he disagreed with it.  President Obama cannot refuse to carry out a congressional statute simply because he thinks it advances the wrong policy.  To do so violates the very core of his constitutional duties.

As  Former Attorney General Alberto Gonzales notes, the move is both “political” and “well short of what we need as a country.”  He told Fox News in a recent interview,

Substantively…it fails to deal with securing the border, visa over-stayers, enforcing tougher work place enforcement, and the millions of adults that came into the country illegally as adults.

Procedurally…it’s bad timing because it’s being done during what [Gonzales] calls “political silly season.”

“Rightly or wrongly, it is viewed as political, given the fact that we’re in an election season, and this is something that he could have done, certainly, well before now,” he said.

It is political, though; it doesn’t only look like one.  It’s naked vote pandering.  This “fix” is only temporary, as Obama himself admits; one President’s EO can be rescinded by another.  Moreover, what is it that Obama is saying to Americans and to those who come here from other countries?  He’s saying, as Gonzales emphasizes, that laws are what Obama says they are:

…by selectively failing to enforce the law faithfully he’s not doing his job making sure all laws are faithfully executed.

There’s that violation of a promise thing, again.  And

…there are things that should be done in conjunction to reassure everyone that not only are we a compassionate nation in taking care of these kids, but we’re a nation of laws, and that we enforce our laws.

Gonzalez is being polite, though.  Obama’s vote pandering by giving amnesty to some illegal aliens does nothing actually to address wither of the nation’s problems in this context: our immigration difficulties or our problem of what to do with the existing population of illegal aliens.

No effort has been made at all by Obama to address that overall problem of immigration into America: securing our borders (although, he is actively suing states to prevent them from doing so within the framework of existing Federal law); making it easier for foreigners to enter our country legally, and to stay here longer (e.g., once they’ve graduated from college, they have to leave; when the time limit on any other entry permit has expired, they must leave; when their work visas have expired, they must leave; etc.  In the meantime, it takes weeks to months to get a green card or to convert an existing visa to one, and other visas are shamefully quota-ed); or to deal with the existing population of illegal aliens—a problem for which Congressman Gutierrez and Senator Rubio, as I mentioned above, have good beginning ideas.

Nor does this address the millions of Americans—citizens all—who are out of work today, or are badly underemployed.  This Obama Amnesty Program adds an additional roughly 800,000 individuals to that pile (they are “required” by his Amnesty Program to apply for work permits, which are good for two years; although, in truth, there seems to be no requirement actually to apply for work with those permits)—where will they fit in the millions-long queue?  If they go to the end of the line, what good will the work permit do them beyond allowing the fiction of their remaining in the US “legally?”  Will the work permit then make them eligible for 99 weeks (nearly those two years) of unemployment insurance (or the reduced duration, should the Democrats actually allow the current 99 weeks to expire without extension)?  On the nickels of the states forced to harbor these people?

And there’s more.  Whose definition of “significant misdemeanor” will apply, and what is an example of such a thing?  The illegal aliens already have committed one significant illegal action: they’re in the country illegally.

In the context of this post, that they were brought here without the capacity to decide for themselves whether they wanted to commit this offense certainly might be cause for mitigation.  But we can’t forget that, having reached their age of majority, they certainly did have the capacity to decide for themselves whether they wanted to continue the (now their own) offense.  However, we also cannot forget the power of family ties, the developed community ties, their childhood histories, and so on.  Plainly, for the children and young adults in this situation, a solution will not be easy.  But that puts a premium on solving the illegal alien problem as a whole, and not just layering on epicycles of special case treatments whose aggregation will doom the whole orrery to catastrophic failure.

Finally, as Senator Lindsey Graham (R, SC) said,

I think it’s pretty clear there are 10 million illegal immigrants not affected by this.  What about them?  I don’t think it’s a brilliant move for a president of the United States to tell a federal agency to stop enforcing a law.

And as Governor Mitt Romney pointed out, in an echo of Gonzales,

If he felt serious about this he should have taken action when he had a Democrat House and Senate, but he didn’t.

In the end, though, I don’t think Americans of Hispanic heritage are as stupid as Obama thinks they are.