“I’m from the government and I’m here to help”

The Wall Street Journal had two good commentaries on Obama’s latest pitch to use more government to fix problems caused by government — that is, his recent speeches on college education.

1. From Obama State University, this one is a page out of Hugo Chavez’s playbook:

 “We’ve got a crisis in terms of college affordability and student debt,” said Mr. Obama, without a trace of irony at the State University of New York at Buffalo. The same man who three years ago forced through a plan to add $1 trillion in student loans to the federal balance sheet over a decade said on Thursday, “Our economy can’t afford the trillion dollars in outstanding student loan debt, much of which may not get repaid because students don’t have the capacity to pay it.”

Naturally, the President blamed somebody else and demanded more authority over higher education.

Mr. Obama specifically blamed colleges and universities for charging too much. “Not enough colleges have been working to figure out how do we control costs, how do we cut back on costs,” he said. His solution is for the federal government to rate colleges on their effectiveness and efficiency, and then to allocate federal subsidies to the schools that Washington believes are providing the best education at the lowest cost.

Chavez and Obama don’t understand (or admit to understanding) that incentives matter. They distort incentives then blame the problems that result from those distorted incentives the folks who respond to them.

It’s not that colleges haven’t been working to figure out how to control costs (actually, some are, but we haven’t widely accepted the for-profits just yet), it’s that they have no incentive to do so.

Well, Obama is now proposing incentives, I can imagine some will say. To them, I respond, imagine how much credence you would put into a Federal government’s rating system for restaurants. My guess is that no matter what those ratings say, you’re still going to trust your gut and what you hear your family and friends say.

This is also from the article:

Mr. Obama is trodding a well-worn political path. Politicians subsidize the purchase of a good or service, prices inevitably rise in response to this pumped-up demand, and then the pols blame the provider of the good or service for responding to the incentives the politicians created. Think housing finance and medical care. Now President Obama is attacking colleges for rationally raising tuitions and padding their payrolls in response to a subsidy machine that began in 1965.

That’s when the feds launched a program to make college “affordable” by offering a taxpayer guarantee on student loans. Federal grants and loans have been expanding ever since and it’s no coincidence that tuition prices have been rising faster than inflation for decades. This week the White House noted that since the academic year ending in 1983 tuition and fees at four-year public colleges have risen by 257%, while typical family incomes have advanced 16%.

2. Richard Vedder: The Real Reason Colleges Cost So Much

Here’s something I’ve noticed when visiting my own alma mater:

Many colleges, he notes, are using federal largess to finance Hilton-like dorms and Club Med amenities. Stanford offers more classes in yoga than Shakespeare. A warning to parents whose kids sign up for “Core Training”: The course isn’t a rigorous study of the classics, but rather involves rigorous exercise to strengthen the gluts and abs.

Or consider Princeton, which recently built a resplendent $136 million student residence with leaded glass windows and a cavernous oak dining hall (paid for in part with a $30 million tax-deductible donation by Hewlett-Packard CEO Meg Whitman). The dorm’s cost approached $300,000 per bed.

Universities, Mr. Vedder says, “are in the housing business, the entertainment business; they’re in the lodging business; they’re in the food business. Hell, my university runs a travel agency which ordinary people off the street can use.”

My alma mater has a fantastic turf field complex for its students. It has an indoor/outdoor mini water park resort. The dorms look like alpine ski lodges. It has an arena for women’s basketball and one for men’s. The commons area rivals high-end shopping mall experiences. And, yet, they still have the nerve to call me weekly asking for money. No thanks. 

 

I’ll have a cost-benefit analysis, less the costs and heavy on the benefits, please

Daniel Henninger, in his Wall Street Journal opinion article, Obama’s Colossal Politics, correctly and succinctly identifies two causes of runaway government.

First, there’s the bad cost-benefit analysis, that overplays the benefits and doesn’t consider the costs:

 “If there’s just one life that can be saved,” Mr. Obama said Monday in Minnesota, using standard Washington risk-benefit analysis, “then we have an obligation to try it.”

Then there’s this:

When serious scientists try to solve a problem, they ask, What works? When Washington takes on a problem, it says, Why not?

Why not? We must look like we’re trying.

That’s not ‘top-down’

I saw a Barack Obama campaign ad while watching the Olympics the other night.

He said we have a choice to make in a few months. It was something like a choice between cutting taxes for the wealthy and hoping that works its way down to the rest of us, which is more top-down. We tried that. It didn’t work. Or we can invest in education, research, etc.

I thought this was funny for two reasons.

First, spending ourselves silly hasn’t worked either.

Second, letting folks keep what they earned isn’t top-down. In fact, it’s the opposite. That’s bottoms-up. What he says he wants to do in the commercial — tax and spend and direct money into the things he sees fit like education and research – is ‘top-down’.

Politicians love to redefine words. They redefined “reduced rate of growth” as a “spending cut” long ago. If your raise wasn’t as much as last year, do you ask your boss why your salary was cut? Probably not. You would look stupid.

‘Top-down’ refers to a system that is micromanaged by the folks in charge. ‘Bottoms-up’ is the opposite.

Washington DC taxing away more of your earnings so bureaucrats can decide how to spend it (e.g. grant to crazy in CO) is top-down. Letting us keep more of our earnings so we can decide how to use it is bottoms-up.

So, not only did Obama get the definition of top-down wrong, but he immediately said he wants to do more of the very thing that he said we should stop doing. Hmmm.

Speaking of crazy in CO, I’ve heard the fact that he was receiving taxpayer dollars mentioned on the news. I haven’t yet seen any aspiring investigative journalists go after the folks who dispense those dollars to hold them accountable.

What if it turned out that the Koch Bros. were funding crazy’s research and education? A 24/7 encampment of reporters would camp at their doorstep asking how they could be so irresponsible and where’s their accountability and what they owe to make amends?

Why hasn’t anyone followed that same trail through the government? Who approved the subsidy? How often is it reviewed? Why didn’t he stop receiving it as soon as he notified the school that he dropped out?

Which makes a key point about Obama’s desired (but lets not call it) top-down management — it doesn’t work because there is no accountability.

Be careful of the Pied Piper

I recommend listening to the latest Freakonomics podcast, The Power of the President. In it, Freakonomics economist Steven Levitt admits he was wrong about Obama.

At the 12:30 mark Levitt says:

I’ve probably never been more wrong about anything than I was about my projections for what the Obama administration would look like.

Levitt usually doesn’t pay much attention to politics and usually doesn’t vote. But he did in the last election. He credits Obama for being a great speaker and compares him to the Pied Piper, because:

…even though I disagreed with most of what he said, I immediately wanted to do them. I would have done whatever he would have told me to do.

That’s why I voted for Obama. I never vote, but I thought there was a good chance that Obama would be the greatest president in the history of mankind, and I wanted to be able to tell my grandchildren that I voted for Barack Obama.

One reason Levitt usually doesn’t vote is because he doesn’t think a president “matters all that much,” but he thinks the president can set a tone for the nation, and he thought “Obama would be able to set an incredible tone for our country.” He goes on:

…and what’s strange and surprising to me is that almost exactly the opposite happened. As soon as he got into office, it was just rancor and off-tune, off-pitch.

I’m glad someone can admit he was wrong. I wish he’d give other people, who weren’t wrong, more credit. Maybe we should more carefully consider their position in the future.

I’m reminded of a time where I participated in a mock government exercise as a high school student. In the gubernatorial campaign speeches, one candidate passionately recited some non-sense lyrics from a Prince song.

I remember thinking “what a disaster, this guy is bombing big time.” Much to my surprise, the auditorium erupted in applause and gave him a standing ovation. Myself and the guy sitting next to me were among the few who remained seated and silent with furled eyebrows. I asked him, “What the hell did he just say?” He responded, “I have no idea.”

That’s when it first occurred to me how many people could be swayed by style and emotion and there are very few of us that are more resistant to that.

Even Levitt, an economist, duped himself. He didn’t agree with much of what Obama said, but he would have done whatever Obama told him to do. For some reason, I have a natural tendency to put more weight — nearly all weight — on whether I agree or disagree with what someone is saying, not whether I like the way he or she says it.

I’m usually scanning for content and filtering out style. Much to my chagrin, I’m at the mercy of a population that appears to do the opposite.

But, they don’t just do the opposite. They often know they disagree with the person, but rationalize it away. I had friends in ’08 election who tried to convince me that while Obama appeared to be a bit far to the left (judging from what he said and his voting record), but he’d move to the middle when president. One even told me recently that while Obama hadn’t really moved to the middle in his first term, he expects that he will if he gets a second term. I’m sorry, what?

I would appreciate hearing Levitt say something like, “I’m going to make a point to be more careful about being swayed by style, emotion and fallacy in the future, and I encourage all of us to do the same. Listen to what people are saying. Ask yourself if you agree or disagree and then ask yourself why. Then find someone who can represent the disagreeing position well and talk to them.”

Dumb or Deceptive?

I was planning to write a post about how Obama’s recent characterization of the Supreme Court was either dumb or deceptive. But, I discovered that I don’t have too. Stephen Presser did a fine job at CNN in his opinion piece, Obama should know better on Supreme Court’s role.

Presser writes:

Setting aside the point that the ACA did not pass with an overwhelming majority [as Obama claimed], but by a party-line vote in the Senate and seven votes in the House, and without the support of a single member of the Republican Party, the most astonishing thing about Obama’s diatribe was the fundamental misunderstanding of our constitutional tradition it revealed.

Since 1788, in the famous defense of the Constitution set forth by Alexander Hamilton in the Federalist Papers, it has been understood that it is the task of the Supreme Court to rein in majoritarian legislatures when they go beyond what the Constitution permits.

This is not, as Obama implies, judicial activism, or political activity on the part of the justices. This is simply, as Hamilton explained, fidelity to the Constitution itself, fidelity to the highest expression of “We the People of the United States,” the body whose representatives ratified that Constitution.

Judicial review is not usurpation — it is the manner in which the rule of law is preserved in this nation. It is certainly true that sometimes courts, and even the Supreme Court, have erred in their interpretation of the Constitution, and some legislative acts that clearly were permitted by the Constitution have been struck down. But if the ACA’s individual mandate is rejected, this will be fully within the legitimate exercise of judicial powers.

Call me crazy, but I think our elected officials should have a good understanding of the roles of the various branches of government and the key underlying principle of the Constitution — checks and balances on power.

It would be great if the media asked political candidates seeking Federal office to explain the roles of the Executive, Legislative and Judicial branches of the Federal government and how they can check and balance each other so we know if we are voting for someone who will follow his or her oath to preserve, protect and defend the Constitution or if we are voting for someone who views the Constitution as little more than a distraction or worse.

With everything there are trade-offs. No matter what the Supreme Court decides, I believe a positive outcome of this episode is that America is getting a much-needed lesson on checks and balances of power and maybe that will encourage voters to carry out more due diligence on their candidates.

“Why I Support Obama”: Point 1

This my response to the first point made by the Facebook Obama Supporter.  Let’s first review her point:

For 30 years I’ve heard politicians talk about health care reform, and he’s the first one to do something about it.  The Affordable Care Act removes conditions on pre-existing conditions, makes health care more affordable for small businesses, raises the age at which children can be on their parents’ policies, removes lifetime caps, and more. With the possible exception of insurance execs, who would not want these changes?

First, politicians have been reforming health care for a long time.

Second, the Obama supporter doesn’t realize those reforms are why we have the problems that she wants the government to solve, like pre-existing conditions.

I wrote about how government created the pre-existing condition problem here.  John Cochrane, finance professor at the University of Chicago, agrees with me.  So does economist Steven Levitt.

Next, the Obama supporter believes Obamacare will make health care affordable for small  businesses. First, intentions of government programs are rarely realized. Usually it’s the opposite — the government programs make things worse. Second, affordability is partly caused by the government tax treatment of health insurance (see links in previous paragraph).  If we purchased health insurance like we do auto and home insurance, small business — or any business — could get out of the health insurance business and focus on whatever they do best.

Next, it’s not clear to me what problem raising the age for children to remain on their parents’ policy solves that wouldn’t be solved by decoupling insurance and employers as discussed in the previous two paragraphs.

Next, lifetime caps?  I haven’t heard of these caps being a problem.  And, in a freer market of health insurance, if people wanted protection over and above the lifetime cap, they could probably get it.

I’m not an insurance exec and I don’t want these changes.  I believe they will have negative unintended consequences that will slow progress and innovation in health care and lower quality and availability.

Plus, I bet insurance execs are not as upset by this as the Obama supporter thinks.  They are now politician’s cronies and as long as they keep their political cronies happy, the political cronies will keep directing our money to them.  That’s easier than developing innovative products that individuals choose over the competition.

Trade-offs

Nice job Joe Gerarden, in the video below, for getting Joe Biden to admit that government subsidies have increased college tuition.  Here I criticized Obama for seeming to be unaware of this fact of basic economics.

I’ll give the Vice President credit for demonstrating a better understanding of basic economics than President Obama.  He admits that government subsidies have increased tuition.

I also agree with Biden that subsidies have increased the number of college students.  That is basic supply and demand.

But, unlike Biden, I’m not confident that’s a good thing.  Too bad Mr. Gerarden didn’t have a counterpoint for that.

How do you convince someone like Biden that more college graduates isn’t necessarily a good thing?

After some discussions about this topic with the “more is better” (MIB) crowd, I’ve been asked, Do you want to be the one to tell Susie she can’t go to college and has to figure something else out?

I think the MIB crowd envisions two outcomes for potential college students:

  • Outcome 1: Allowed to go to college and then you have a better shot at the good life.
  • Outcome 2: Not allowed to go to college and then life will be miserable and a struggle.

I see two problems with this vision.

First, I would not need to tell Susie that she cannot go to college. No one disallows Susie from going to college, except for Susie herself.  It’s her decision.

Just because demand for a college education is lower in a world without government subsidies, doesn’t mean that someone is telling anyone they can’t go to college.

It means fewer people choose college because they view their other options as having more relative value without the government subsidies distorting the picture.

We all make similar economic choices every day without noticing it.  You might pass on your first vacation choice because airfare is too expensive and settle on your second choice and still enjoy yourself.   Or you choose the less expensive cut of meat or the lower priced bottle of wine at the grocery store.

Second, having a college degree isn’t the determining factor between success and failure many people seem to think it is. 

I know statistics say that college graduates have higher lifetime earnings, but remember that statistics can be misinterpreted.  College graduates include a few degree programs that do have high wages (primarily due to artificial constraints on supply) like doctors.  Also, a few business folks do climb to the top of their bureaucratic piles and make a lot of money.  Take just these two groups out of the college crowd and the earnings for the rest begin to look closer to a lot of non-college grads.

Also, remember, the non-college grad group includes a lot of folks that may not spend as much time in the work force because they raise families.

Remove some of the outliers from both groups and college grads and non-college grads start to look a lot more like our friends and family.  I know plenty of both who have done well.

So, nobody is telling Susie that she can’t go to college and she isn’t being consigned to a miserable life. Rather, she’s deciding for herself to pass up on the $100,000 liberal arts degree to start a cupcake catering business in her kitchen that eventually grows into a successful business.