Author Archives: Aaron Merrill

Legal Plunder

How does law enforcement finance operations? Increasingly, police departments across the country pay for their activities, equipment and supplies by seizing the assets of people who have never committed a crime. It’s a process called civil forfeiture, and it’s at best, controversial. At worst, it provides direct monetary incentive for states and the federal government to steal property from innocent citizens. Gives a whole new meaning to Bastiat’s “legal plunder.”

Radley Balko explains how civil forfeiture perverts the “protect and serve” motto by introducing a profit motive: Continue reading

The Failure You Know

Better the devil you know, than the devil you don’t. – Traditional idiom

Sayings become traditional if they contain sufficient truth, but truth can usually be graded on a scale, from absolute to non-existent; better writers have called this the “truth-of-the-head” and the “truth-of-the-heart.”

The truth-of-the-head is that American public schooling is failing. Expenses are too high, political influence is too systemic, and results are terrifyingly low. This isn’t news. We’ve written and talked about it extensively.

A new study from the National Center for Policy Analysis adds to the mountain of evidence that school choice overwhelmingly benefits students, especially the poor.

From 1998 to 2008, the Children’s Educational Opportunity (CEO) Foundation funded a $52.4 million voucher program for residents of the low-performing Edgewood Independent School District in San Antonio, Texas. The vouchers were available to any student in Edgewood whose family chose to participate, regardless of academic ability or income.

The evidence shows that the voucher students weren’t the only ones who benefited. The students who remained in the Edgewood public schools benefited from increased funding resources due to increasing property values, and improvements in the public schools in response to increased competition.

Those are impressive results. Yet anti-reform groups and their legislative supporters have almost successfully killed school choice in Washington, DC, arguably the flagship federal school-choice program. Reason.tv has documented the trials, triumphs, and tribulations of the D.C. program for several years.

The recurring arguments against choice have always been theoretical. Students might be worse off. Communities might be forced into educational ghettos. Students might be subjected to failing systems, where private educators care only about power and money.

But any reasonable person has to agree, replace “might” with “is,” and “private” with “public,” and you have a fair critique of the current state. When faced with possible problems but tangible benefits, the devil you know seems egregiously evil.

I guess that’s why “idiom” and “idiot” are only one letter apart.

Fairfax County Considers Move to 401(k)s

Via the Washington Examiner, yesterday two Fairfax County Supervisors suggested moving employees from a defined benefit pension to a 401(k) retirement plan.

“A dip in the stock market can cause an immediate and unexpected need for an employer — in our case the government — to increase their contribution to the retirement fund,” [Supervisor Pat] Herrity said. “We all know there are only two ways to pay for [retirement funding shortages]: cut something else in the budget or raise taxes.”

Allowing easier forecasting for retirement payments, defined-contribution plans such as 401(k)s have become more popular with employers and governments in recent years. Montgomery County employs such a system.

Dan, Eileen and I have written before on the problems with defined benefit systems, but it looks like some of our neighbors haven’t been paying attention.

“We’re not making the salaries we would be making in comparable private positions,” [Fairfax County Government Employees Union President Karen Conchar] said. “You’d end up with a less motivated staff if you went to a defined-contribution-type plan. It would not be good.”

Ms. Conchar is flatly wrong on all three points. First, nationwide, public employees make significantly more than the private workers who provide for their retirement.

The only possible explanation for Mrs. Conchar’s claim would be specific to Fairfax County, which is one of the largest and wealthiest places in the country, and likely an outlier to national data. Even given that, it’s strange to complain about living in an uber-prosperous area.

Second, can anyone explicate the perverse incentives that would explain her “less motivated” remark? 401(k)s force employees to take a responsible and accountable role in providing for their own retirement, without the risk that unions or legislatures will use pension plan trust funds as political slush funds. When are people more motivated: when they have incentives to act responsibly and care about something, or when they’re given unconditional promises?

Lastly, it would be a good move, saving Fairfax taxpayers money, and providing a more secure retirement for public servants. Everybody wins.

Class Warfare

In my recent op-ed on the structural flaws of public pension systems, I argued that politicians, union heads and bureaucrats use their positions to play taxpayers against public employees for political and financial gain. Monday, the New Jersey Star Ledger reported on a growing backlash against public employee benefits:

In internet postings and on talk-radio shows, government workers are being called “greedy” and “bloodsuckers.” Commenting on the teachers union, one writer called its members “the worst human beings on the face of the planet.” Criticizing the police, another wrote, “The typical criminal could never steal what these cops are walking out the front door with.”

As New Jersey’s unemployment hovers at 10 percent and 401(k)s are dented by stock-market losses, retired public workers find themselves on the receiving end of “pension envy.”

“I understand that I retired with a good pension and the taxpayer contributed to it,” said Tevlin, who kicked in 8.5 percent of his salary toward his pension, which is about $4,000 a month. In his mind it was a fair bargain: In exchange, the public received reliable emergency services. “I don’t apologize to anybody,” he said. “I did a dangerous job.” Continue reading

Not Connecting the Dots

Public policy often seems that it should be intuitive. If a state needs more revenue, the easiest way to raise some is to increase taxes (easiest for elected officials, that is). Who has the most money to appropriate? Millionaires, obviously. Connect the dots, and raise taxes on millionaires.

Maryland did just that, but their experiment shows why political common sense and real life common sense are distinctly separate things. From the Wall Street Journal:

We reported in May that after passing a millionaire surtax nearly one-third of Maryland’s millionaires had gone missing, thus contributing to a decline in state revenues. The politicians in Annapolis had said they’d collect $106 million by raising its income tax rate on millionaire households to 6.25% from 4.75%. In cities like Baltimore and Bethesda, which apply add-on income taxes, the top tax rate with the surcharge now reaches as high as 9.3%—fifth highest in the nation. Liberals said this was based on incomplete data and that rich Marylanders hadn’t fled the state.

Well, the state comptroller’s office now has the final tax return data for 2008, the first year that the higher tax rates applied. The number of millionaire tax returns fell sharply to 5,529 from 7,898 in 2007, a 30% tumble. The taxes paid by rich filers fell by 22%, and instead of their payments increasing by $106 million, they fell by some $257 million.

Don’t feel sorry for the poor poor millionaires; that’s not the point I’m trying to make. Taxes are a serious driver of out-migration, be it small states like Maine, or more populous states like New Jersey:

New Jersey out‐migrants tend to move to states that have much lower property values (35% lower), property taxes (41% lower) and overall costs of living (17%lower). Destination states also have notably lower average incomes, substantially higher crime rates, higher infant and child mortality; slightly lower school quality, but somewhat warmer winters. Overall, it appears that net out‐migration is due to the high cost of living (especially the high cost of housing and property tax) in New Jersey.

Policy makers and their hangers-on have often regard taxpayers as little more than fiscal sheep, and periodically shear them. But people, unlike sheep, can vote with their wallets and feet. Usually the powers that be see this as something akin to letting the home team down, or not doing one’s “fair share.” The word “selfishness” is also thrown around.

Policies like the levels of taxes, services, and entitlements that a government prescribes are hardly a form of science. Law makers and interest groups would like to portray them as a serious commitments, and not self-interested social experiments. Again from the Journal:

Thanks in part to its soak-the-rich theology, Maryland still has a $2 billion deficit and Montgomery County is $760 million in the red. Governor Martin O’Malley’s office tells us he wants the higher rates to expire “as scheduled at the end of 2010.” But there are bills in both chambers of the legislature to extend the surcharge. The state’s best hope is that politicians in other states are as self-destructive as those in Annapolis.

The “Soak the Rich” phenomenon is a common-sense argument for redistributive policies, but it has significant flaws beyond the simple fact that it doesn’t work. Take a look at this chart of how tax burdens are distributed in Federal taxation. (here, either insert or link to this: http://www.mint.com/blog/wp-content/uploads/2009/11/MINT-TAXES-R4.png)

Libertarians and liberals can mostly agree that there is too much money and influence in politics, but the policy prescriptions each group suggests are dramatically different. Advocates of punishing the rich ignore the simple fact that when a certain group bears so much of the tax burden, they have massive incentives to care about and influence politics. It’s that or leave the country, or just stop making money (by, for instance, not hiring new employees.)

See this graphic (or click below) for a good visual explanation:

Great Idea from Geniuses

3shell_aaronBloomberg has the scoop on a new Federal Deposit Insurance Corporation plan to encourage state employee pension funds to buy up failed banks:

Oregon’s retirement fund may contribute $100 million as regulators seek “the support of state pension funds to solve the crisis surrounding ongoing bank failures,” Jay Fewel, a senior investment officer at the Oregon State Treasury, said in a presentation at the fund’s Feb. 24 meeting. New Jersey’s fund may also participate, said Orin Kramer, chairman of New Jersey’s State Investment Council.

This is ridiculous. Pension systems already run significantly higher risk than would be acceptable, essentially gambling taxpayer money that should be designated for public employees’ retirement. This mocks any notion of fiscal accountability. If the gambles fail, and according to this New York Times article they likely will, taxpayers will be left holding the bag.

Risk is the enemy of retirement investments. It’s not rocket science, but state legislatures, public unions, and state bureaucracies continue to make promises they can’t afford and gamble that either a booming market or future taxpayers can cover their debts:

Oregon would invest in Community Bancorp LLC, a bank being formed by Sageview Capital LLC, according to the Oregon presentation. Sageview was founded by former Kohlberg Kravis Roberts & Co. executives Scott Stuart and Ned Gilhuly. Sageview is looking to raise about $1 billion from pension funds and similar investors, the presentation said.

While the structure makes sense, pension funds would be better off investing in existing banks, said Chris Whalen, managing director of Institutional Risk Analytics of Torrance, California. At those lenders, management will oversee details of buying failed lenders and save pension funds the time and effort needed to launch a new bank, he said.

Buying out failed banks with state pension funds is nothing more than a shell game, moving failure from private banks to public employees to taxpayers. It’s a terrible plan, and Oregon and New Jersey should soundly reject it.

Shameless Self-Promotion

Is there any other kind? I have an op-ed up at AOL News on the looming crisis in state pension funds. The New York Times article I reference is here, and the Pew study is here.

If you’d like to read more on this coming pension tsunami, we recommend this. Eileen and I have forthcoming issue of Mercatus on Policy on the issue, and will have a longer paper in the future.

Institutionalizing Failure

From the New York Times:

As advocates of charter schools, including the Bloomberg administration, try to persuade legislators to lift the limit on the number of such schools in the state, no one is as likely to stand in their way as Mr. Perkins, whose district encompasses nearly 20 charter schools. Several more are planned next year.

Over the last decade, as charter schools have multiplied, Mr. Perkins has undergone a dramatic shift and emerged as their most outspoken critic in the Legislature, writing guest columns in newspapers and delivering impassioned speeches criticizing the “privatization” of public schools.

First, calling charter schools “privatization” is a lie. They’re publicly approved, publicly financed, and publicly supervised. The only way they’re “private” is they are free of the education bureaucracy and the grasp of teachers unions.

There are two main arguments against charter schools, which are logically inconsistent. First, there are those who say that charter schools don’t improve educational outcomes, while conversely arguing that charters ‘”eave some students behind.” If there’s no benefit to charter schools, what are the students who stay in public schools being left behind from? In Mr. Perkins’ words:

“If there are people fleeing from something, it is cause for alarm,” he said in an interview in his office. Using an analogy he favors when talking about charter schools, he said: “That should tell you there is a fire, and those who are responsible should find out what is causing that fire, not just create a new place for those who flee and leave the rest inside to burn there.”

The analogy is apt; public schools are failing students at catastrophic rates. Students and parents are fleeing, with good reason. Mr. Perkins, however, is firmly blocking the door. I’ll never understand people that refuse to accept choice and freedom because of some unpredictable future. Is the devil you know really better than the chance at something better?

Interestingly, Alex Tabarrok points to the NBER Digest‘s summary of recent research on the schools in Harlem:

Will Dobbie and Roland Fryer find that in the fourth and fifth grade, the math test scores of charter school lottery winners and losers are virtually identical to those of a typical black student in the New York City schools. After attending the Promise Academy middle school for three years, black students score as well as comparable white students. They are 11.6 percent more likely to be scoring at grade level in sixth grade, 17.9 percent more likely to be scoring at grade level in seventh grade, and 27.5 percent more likely to be scoring at grade level by eighth grade. Overall, Promise Academy middle school enrollment appears to increase math scores by 1.2 standard deviations in eighth grade, more than the estimated benefits from reductions in class size, Teach for America, or Head Start.

Those numbers indicate that the failures of monopolistic public education are so institutionalized and ingrained in students, it takes years of instruction and adaptation to the new institutional arrangements of charter schools to rehabilitate students, and then they can begin to blossom.

However, the article notes that Mr. Perkins decided charter schools were unsatisfactory after… a few months.

Tales in Good Government

snowmelter-meltingWashington D.C. is sometimes proverbial for its poor governance. Scandals seem to plague the district as regularly as the August heat.

Other times, the local government just plain doesn’t work.

Take for example the District’s snowmelter. Sounds like it would be a big help clearing out those snow-clogged streets, doesn’t it? It would be, if it worked.

Continue reading

A Strange Tale of Education Budgets

Maine’s legislature recently engaged in a strange exercise. A representative introduced a bill to eliminate local referenda on educational budgets. The bill read in part:

A regional school unit’s budget must be approved at a regional school unit budget meeting and by a budget validation referendum as provided in section 1486.

The very next day, the bill’s sponsor disavowed the measure, after he was inundated by constituent mail opposing the proposal. After hearing Representative Howard McFadden’s mea culpa, the education committee unanimously voted the bill down, allowing localities to retain control of local education spending.

The issue was far from dead, however. The education committee was also considering a separate bill which contained a referendum-killing provision, ostensibly to enable easier school-consolidation measures.

Ultimately, a “tidal wave” of constituent input convinced the education committee to unanimously abandon the measure. For now Mainers retain the right to control local education spending, and judging by the hue-and-cry voters raised, by a significantly popular margin.

School consolidation in Maine is problematic. The state is divided into two radically different polities. Southern/Coastal Maine is relatively affluent and densely populated, while Northern and Central Maine are sparsely populated and less affluent.

Consolidation makes sense in many respects, but the economics are questionable. Some towns, like Fayette, have no higher education facilities, but have a voucher-style tuition system to send students to any of the surrounding high-schools, including a local private high school.

This kind of school choice introduces a modicum of competition into local systems, and allows families to choose the school that is best suited to their particular needs.

Instead of removing local control via consolidation measures, Maine’s education committee should consider measures introducing more personal and local choice.

Previously on Neighborhood Effects, Emily Washington wrote about education competition and Eileen Norcross detailed the struggles of D.C.’s controversial voucher system. Eileen also recently co-authored an issue of Mercatus On Policy on educational competition.

(H/T Maine Heritage Policy Center.)