- When powerful politicians give no-bid construction contracts to their friends, you get Olympic bathrooms with two toilets to a stall. Thank god we don’t have those sorts of problems here in the West, right?
- Sheldon Adelson, owner of one of the largest (off-line) gambling ventures in the world, is really worried about on-line gambling. And, apparently, he “can sound surprisingly like a Southern Baptist preacher.” Bruce Yandle probably saw this coming.
- Remember that time when the D.C. City Council tried to side with the local taxi monopoly to keep out an innovative new competitor that was wildly popular with customers? Remember how Council members backed down after they were inundated with protests from angry constituents? Politicians in Pittsburgh, Chicago, Milwaukee, and Paris (France) don’t.
- In an effort to catch up with the private sector, the Obama Administration wants to move more government business from paper to the web. The paper industry is not a fan of this. In Bastiat’s telling, candlestick makers didn’t like competition from the sun either.
- Makers of maple syrup want more exacting grading standards for maple syrup. In other news, I would like a law saying that only economists who attended ASU and GMU can call themselves economists.
- Soccer star and aspiring (unproductive) entrepreneur David Beckham is trying to get a stadium built. He says “We don’t want public funding…We’ll fund the stadium ourselves. It’s something where we have worked hard to get this stage, to fund it ourselves.” In other reports, however, “Beckham’s group has hired prominent Tallahassee lobbyist Brian Ballard to help seek a state sales-tax subsidy similar to what other professional sports teams across Florida have received for building stadium facilities.”
- Elsewhere in privileged Floridian soccer news, the city of Orlando plans to use eminent domain to seize a church in order to tear it down and build a parking lot for Orlando’s new soccer stadium.
- WAMU’s Patrick Madden tweets that Mayor Vincent Gray has assured voters they will not be paying for soccer team D.C. United’s stadium….Voters will, however, pick up the cost of the land at $150,000,000 and then rent it back to the team for $1.00 per year. Sounds too crazy to be true? Read the terms here (to be fair, it looks to me like taxpayers will only be paying $140,000,000).
- Pat Garofalo writes: “In a move its protagonist, Vice President Frank Underwood, could be proud of, the studio that produces Netflix’s “House of Cards” is all but attempting to extort tax dollars out of the state of Maryland. As the Washington Post reported, Media Rights Capital has threatened to move production of its show about an absurdly corrupt Washington elsewhere if it doesn’t get a new slew of taxpayer money.”
- According to this report, FBI agents posed as film executives to bribe a California state senator to expand film tax credits. This sort of film subsidy corruption scandal will likely sound familiar to those in Iowa. And Massachusetts. And Louisiana. Makes you think that P.J. O’Rourke was right: “When buying and selling are controlled by legislation, the first things to be bought and sold are legislators.”
The Obama administration announced today it plans to send Detroit $320 million to “aid in its recovery,” according to The Hill.
The dollars come from existing federal money that is being re-purposed. It includes $24 million to rehabilitate buses and install safety cameras, $1.35 million for a community policing program, and the underwriting of 150 new firefighters. There are also funds for streets lights, police bike patrol, $3 million to hire new police, dollars for urban revitalization, and $25.4 million for demolition. A few months ago the administration said Detroit would have to work with creditors to resolve its bankruptcy issues. The city owes its creditors $18.5 billion.
Another example of how Detroit ended up in this awful position is highlighted in yesterday’s New York Times report of how Detroit City Council members skimmed $2 billion off of the pension system’ “excess earnings” to give employees ‘extra payments’ that had nothing to do with their pension benefits. This practice which spanned a 23 year period was justified as follows, quoting the NYT:
“People were having a hard time, living hand-to-mouth, and we thought we would give them some extra,” Ms. Bassett said.
Of all the nonpension payments, she said, 54 percent went to active workers, 14 percent went to retirees and 32 percent went to the city, which used its share to lower its annual contributions to the fund. The excess payments were often made near the end of the year, when recipients needed money for the holidays, or to heat their homes.
Of course the practice sounds wrong. Except it’s really another example of what happens when pensions value their liabilities based on asset returns. Detroit gave workers these “excess earnings.” New Jersey and scores of other states believed they were overfunded also and they “skipped payments” when the market was hot in the 1990s and early 2000s. The accounting gave them the illusion that this would all work out in the end. It is a dangerous fiction that these pension systems operate under.
That illusion of “overfunding in boom years” flows from the practice – discussed often in this blog – of discounting liabilities based on expected asset returns.The math really matters. For a long discussion, see here.
How much damage has this accounting assumption and all the behaviors that flow from it caused? For Detroit – a significant amount. The city reports its pensions are underfunded by $634 million. It’s actually $9 billion underfunded on a market basis.
I am not entirely surprised by the bailout, which sounds like a mini-stimulus via federal municipal grant programs. And I openly wonder what it portends for other cities that find themselves looking at similarly dire economic and financial situations.
The University of Chicago’s Casey Mulligan has a great post and an interesting chart over at the NYT’s Economix blog:
Here is the thrust of his argument:
- In promoting the Stimulus, the Administration had assumed an employment multiplier such that for every 10 people hired under the Stimulus, another 6 jobs would be created. Thus, they said that if the law passed, the unemployment rate would be down to 7 percent by now.
- The fact that the unemployment rate is still around 10 percent means one of two things: a) the stimulus didn’t work, or b) the stimulus did work and the recession was simply much worse than the Obama Administration thought.
- This spring, the Census hired a bunch of new workers, providing a fresh opportunity to test the fiscal stimulus hypothesis. At the same time that the Census went on its hiring binge, non-Census worker employment seems not to have budged much at all.
- Professor Mulligan then does something very clever: He takes the Administration at its word. He assumes—as they do—that for every 10 government employees hired, another 6 jobs were created. In order to reconcile this assumption with the fact that overall employment didn’t increase much at all, he concludes that the economy must have been hit (once again!) with some extraordinary countervailing contraction right at the very time that this government stimulus was taking place. What terrible luck!
Alan Blinder has an interesting article in today’s Wall Street Journal.
In it, he says that the Obama Administration is on the right policy track in its attempt to extend unemployment benefits, create more fiscal stimulus, and permit the Bush tax cuts to expire for people earning more than $250,000.
He makes a claim that has become increasingly popular: policies that tax the rich and redistribute to the poor are not only compassionate, they are stimulative. There was a time when those on the left talked about a tradeoff between redistribution and growth. But Blinder and others now argue that redistribution is, on net, stimulative; that it is possible to have one’s cake and eat it too.
Blinder begins by conceding a point to the opponents of more generous unemployment insurance. He writes:
[L]onger-lasting benefits dull the incentive to seek work, which in turn drives up unemployment. Economic research suggests they are right.
But, he says, “one shouldn’t exaggerate the magnitudes.” Furthermore, he sees reason to believe that unemployment benefits can be stimulative. The key to this reasoning is his assertion that the poor are more likely to spend a marginal dollar than the wealthy. That’s why we can tax the wealthy, redistribute to the poor, and see a net gain.
[C]onsider three different ways to add a dollar to the budget deficit: increase unemployment benefits by $1, give a $1 tax cut to someone earning $50,000 a year, or give a $1 tax cut to someone earning $5 million a year.
While the immediate impacts on the budget are identical, the near-term spending impacts are not. The unemployed worker struggling to make ends meet will likely spend the entire dollar right away. The $50,000 earner probably will spend the lion’s share of it, saving just a bit—that’s what most Americans do. But the $5,000,000 earner probably will save most of the new-found dollar.
Blinder is referring to the “marginal propensity to consume.” Keynesians have long-argued that the poor have higher marginal propensities to consume than the wealthy. That is, Keynesians believe that if you tax a wealthy guy and redistribute the revenue to a poor guy, the economy will actually grow in the short run. Why? The wealthy guy wasn’t going to spend that money (or at least not much of it) anyway. He was just going to let it sit in his bank account (never mind that savings makes its way into aggregate demand as investment—buy Keynesians have other stories for why that doesn’t work). The poor person, however, is different. He will go out and spend that dollar right away, leading to a multiplier in terms of growth.
In my mind, this makes theoretical sense. The problem is: it doesn’t seem to be true. And President Bush’s Stimulus I provides the evidence. Economists Claudia Sahm, Matthew Shapiro and Joel Slemrod studied the way people spent the stimulus checks that were sent out in the first half 2008. Using data from the Reuters/University of Michigan Survey of Consumers, they found that spending patterns were “strongly at odds with the conventional wisdom.” It turns out that the poor were actually less likely to spend their 2008 stimulus checks than the wealthy. What’s more, analysis of the 2001 stimulus found much the same thing.
Now there may very well be humanitarian reasons for unemployment insurance (I’ll leave it to others to debate those). But is seems to me that the data are making it increasingly more difficult to argue that redistribution through unemployment benefits is both humanitarian and stimulative.
A few hours ago, the Obama Administration released a new report estimating that Stimulus II saved or created about 3 million jobs. Shortly thereafter, my colleague, Veronique de Rugy, testified before Congress on the impact of the stimulus. She argued, among other things, that more realistic estimates show that fiscal stimulus tends to do more harm than good.
All of this talk about jobs reminds me of one of Veronique’s recent posts:
Since the beginning of the recession (roughly January 2008), some 7.9 million jobs were lost in the private sector while 590,000 jobs were gained in the public one. And since the passage of the stimulus bill (February 2009), over 2.6 million private jobs were lost, but the government workforce grew by 400,000.
I will leave it up to you to draw conclusions.
In the spirit of drawing conclusions: one body of research suggests that the conclusions are not happy ones. A number of studies have examined the relationship between government employment and private employment, concluding that the former crowds out the latter. Using data from 19 countries over 17 years, Horst Feldmann (2006), for example, examined the relationship between a large government sector and unemployment. He found:
[A] large government sector is likely to increase unemployment. It appears to have a particularly detrimental effect on women and the low skilled and to substantially increase long-term unemployment.
What is more, Feldmann is not the only one to come to this conclusion. As he reports in his literature review:
Several empirical studies suggest that an increase in government expenditure impairs labor market performance. For example, Karras (1993) observed negative employment effects of government spending in eight countries in his sample of 18 countries. Yuan and Li (2000) came up with the same result for the US. In a cross-country study of 15 major industrial countries, Abrams (1999) found that the government expenditure ratio was positively related to the unemployment rate. Christopoulos and Tsionas (2002) examined the relationship between the government expenditure ratio and the unemployment rate for 10 European countries over the period 1961 to 1999 and found that there was unidirectional causality from government size to unemployment rate.
The magnitude of the government (un)employment effect is not trivial. Looking at a sample of OECD countries for 40 years, Algan, Cahuc, and Zylberberg (2002) found that the “creation of 100 public jobs may have eliminated about 150 private sector jobs”
An under-discussed development in the Obama Administration is the re-animation of a policy better left in faded journals:federal urban planning.
The idea behind “federal blight removal” in the 1950s and 1960s was to pave over old neighborhoods, often derided as “slums” by the planning elite, and replace them with the fad du jour, Le Courbousier inspired high-rises.The intent was social engineering by constructing “cities of the future,” made of superhighways and towering apartments. As Martin Anderson documents in his 1964 book The Federal Bulldozer,the effect was the destruction of housing stock and neighborhoods, and the displacement of people.
Jane Jacobs,a resident of Greenwich Village who successfully fought off Robert Moses’ proposal to put a four lane highway in Washington Square Park offered a seminal critique of urban planning in The Death and Life of Great American Cities. Her key contribution is that cities are organic and complex social orders that grow with the residents and the life of the city. Cities aren’t imposed via top-down plans but grow spontaneously from the ground up.
Jacobs’ analysis of life in Greenwich Village formed the basis of the New Urbanism and its push to engineer the organic through low-density, mixed-used, walkable urban villages. While the aesthetic principles changed the basic error that cities can be imposed on people from above has remained in force.
The Administration’s throwback decision to federalize local planning only compounds New Urbanism’s central error. Slamming the cities with federal grants for bike paths, transit, edifices, roads, is nothing more than the promotion of the current wisdom of what constitutes ‘”correct” city living. It will leave its own artificial mark and short-circuit the progress of the city emergent.
Recovery.gov is the Obama Administration’s effort to provide reporting details on how federal stimulus dollars are being used.
Not only is this a big task, given the nature of bureaucracy and information, it’s an impossibility. Unsurprisingly, a private sector company has taken the lead with Recovery.org.
As Government Executive reports
“The goals and intent [of the administration] are absolutely right,” Balsam said. “But, they’ve got no experience and no reach into local communities and states. There’s no basis for them to go figure out where everything is, because there is no reporting relationship in place. It’s an intractable problem for the administration.”
Onvia is a company that tracks procurement spending. They saw the stimulus as an opportunity, if not an obligation, to follow the unprecedented infusion of federal dollars. The geographic detail is impressive.
I was surprised to find my (unincorporated) hometown. I expected to have my search end at the municipal level.
This stimulus bill may be a kind of ‘tipping point’ for transparency. What the goverment cannot provide quickly or meaningfully, it can also no longer hide as easily.