Friday, May 28, 2010

Tim Davis answers 9 policy questions

Q: How should we hand the immigration problem with Mexico?  What do you think of the Arizona law?
    There are distinct issues related to the influx of people from Mexico.  Border crime is the most serious as violence from the Mexican cartels spills into the U.S.    Enhanced border security, perhaps including the creation of a solid barrier, is a rational response to the violence.
    Separately, undocumented Mexican laborers have become a staple of some American industries.   This is a problem because the employment of illegal immigrants encourages tax evasion, puts workers at risk of exploitation and breeds contempt for the law.    At the same time – imported workers create wealth and, to the extent they spend money in the U.S., they boost aggregate demand, thereby creating jobs for American citizens.   U.S. immigration policy should adjust to ensure we have access to the labor the economy needs, without resort to illegal immigration.
    The Arizona law mandates that state, county and municipal officials follow a policy of enforcing Federal immigration law to the fullest extent.   On its face – the law requires every state, county and municipal officer to spend all day, every day, seeking out, detaining, and handing over illegal immigrants to Federal immigration officials, or, if they refuse, or feel their time might be better spent doing something else, these civil servants can face a penalty of up to $5,000 per day.   Any legal resident of Arizona has standing to file a lawsuit to enforce the civil penalty in state court.
 The law requires people who look like they might be illegal immigrants – meaning anyone of Hispanic descent – to carry government issued identification or face possible arrest.  The law also forces state and local police to turn over to Federal authorities any illegal alien whom they contact.   The unfortunate result of this requirement is that it automatically stops the 500,000 or so undocumented workers in Arizona from communicating with police about domestic violence, drug trafficking, and other serious crimes.  The downside of Arizona’s law is steep:   it deprives the police of vital information; it ensures that family violence in the immigrant community goes unchecked, and it diverts state resources from established uses to the capture and detention of undocumented but otherwise productive people.

Q: How can the Congress promote economic growth and  jobs?

Other than adjourning for major holidays, there are at least four things Congress does to create growth and jobs:
  (1) Congress  funds law enforcement agencies and the U.S. military; 
  (2) Congress creates types of private property and the means to trade and protect such property; 
  (3) Congress funds the acquisition and protection of public property; and
  (4) Congress makes investments in infrastructure, education, defense and other areas the private sector cannot handle adequately.  In essence, smart government provides a framework that allows the private sector to create wealth and jobs.
    That said -- what Congress cannot do, and should not attempt, is to manage American business.   When it comes to business, the government has no profit motive, no means to assess whether it is using resources wisely, and therefore no rationality.   The government take-over of any industry is accompanied by the law of unintended consequences; this tends to stymie innovation, limit consumer choice and drive up costs.  When the government intrudes, management decisions cease to focus on the creation of wealth and instead become a function of politics.  The collapse of the Soviet economy illustrates the outcome of central planning, pushed to the extreme.

Q: What can Congress do to make our education system more effective?
    Inflation-adjusted spending on K-12 education has increased from an average of $4,000 per student in 1970 to more than $10,000 today.    Despite this increase in real spending, reading scores for elementary, junior high and high school students remained steady.    It seems that the quality of education must be a function of something other than aggregate spending.
    The missing element is likely competition in the market for education.  Federal and state initiatives that increase competition among schools have been shown to increase the quality of education.   To improve competition Congress ought to encourage these programs: 
(1) Public school choice – public school choice allows parents to choose the best public school for their children;
(2) Charter schools – charter schools are publicly funded, but privately managed schools; and
(3) Congress ought to permit state and local policy makers to chart their own course in education, without universal mandates from the U.S. Department of Education.

Q:  Earmarks: what do you think about them and why?
Earmarks account for 1.5% of Federal spending.  It is a trivial sum in the context of the overall deficit crises.   Also – while people may chafe about their member of Congress appropriating funds for specific local projects, there is no guarantee that spending decisions by unelected bureaucrats in Washington would be any better.
Q: Health care: where do we go from here now that the U.S. has reformed health care?
     To be successful, government involvement in health care must accomplish one of three things:   (1) it must reduce the real costs incurred by health care providers; (2) it must increase the capacity of the health care system; or (3) it must shift bargaining power to consumers.   Given the novelty and complexity of the recent health care bill, it remains to be seen how effectively it accomplishes these objectives.
    In the meantime – opponents of the bill have mounted a constitutional challenge that will take years to work through the Federal courts.  Ultimately, I expect the U.S. Supreme Court to decide whether the fee imposed on people who refuse to buy health insurance is a tax (and therefore authorized by the constitution) or a penalty.   And, if it is a penalty, the Court must decide whether it is constitutional. 
    If the fee is declared unconstitutional, the health care system Congress just enacted will collapse because the system is predicated on putting young and healthy people into the same insurance pool as people who are older or in poor health.   Without the cross-subsidy from young people who pay above-market insurance rates, the health insurance system must operate at a deficit.  And, obviously, that is not sustainable.

Q: What is your opinion of drilling for oil in national park land and how do you prevent another Gulf oil slick?
     Through the Bureau of Land Management, U.S. Forest Service, U.S. Fish and Wildlife Service and National Park Service, the Federal government owns a combined 623 million acres – equivalent to the total land mass of France, Spain, German, Poland, Italy, the U.K., Austria, Switzerland, Belgium and the Netherlands.
    Productive use ought to be made of this land.   Typically, however, the commercial use of public land results in the privatization of gains and the socialization of environmental costs.  Private profits are reaped from oil and minerals exploration.   But the environmental costs of cleaning up defunct mines or oil slicks are shifted to the public.   This is no accident; it reflects circumspect lobbying by the mining and petroleum industries.
  The oil slick in the Gulf is a case in point:   Under current law, British Petroleum must pay the actual clean up costs of the spill.  That is to say, BP must pay for the physical damage to real and personal property.  But BP’s liability for economic injury – a separate category of damage in tort law – is capped at $75 million by reason of the 1990 Oil Pollution Act.   The damage cap allows BP to partly shift the environmental costs of its lax safety measures to U.S. taxpayers.    This is unfair.   And it causes BP and other producers to be less careful about how they drill for oil, in that, the costs of their mistakes are certain to be borne by someone else.   Removing the damage cap and/or forcing drilling firms to buy adequate insurance would put an end to the socialization of environmental costs.

Q: Discuss the balance between personal privacy and individual freedoms versus protection from terrorists.
     The restraint on police power built into Federal and state criminal procedures reflects a balance struck between individual rights and the need to protect the public from traditional types of crime.  In reaching this balance, the potential crime the criminal justice system sought to prevent was of an isolated nature, affecting one or a handful of victims of any single criminal act.
    The nihilistic mission of al Quaeda shifts this balance.  The militants are not in business to commit isolated crimes.   They seek death on an apocalyptic scale.   Because of the potential for widespread catastrophe, state and local police and Federal intelligence services should be given latitude in their monitoring and pursuit of terror cells.  Additional screening at airports is a necessary, albeit unwelcome, part of curbing terror.

Q: How can our government realistically cut the federal debt?    
     A deficit occurs when Federal spending exceeds tax revenues.   Personal income and payroll taxes are the primary sources of tax revenues.   These taxes, combined with a handful of others, have historically generated revenues at about 18.2% of GDP.    Tax revenues, as a percentage of GDP, are not affected by marginal tax rates.  Stated another way – if Congress raises tax rates, people respond by tax evasion or avoidance so as to deprive the Treasury of whatever it hoped to gain.
    Because of this limited ability to tax – the Federal deficit will only disappear if Federal spending falls to the range of 18% of GDP.   Right now, Federal spending is approaching 25% of GDP, having increased by 32% in fiscal year 2009.   The country is on an unsustainable course.
    The sectors driving the increase in spending are (1st) housing – with an annual rate of increase of 79% from 2001 to 2009; (2nd) national defense – with an annual rate of increase of 8%; (3rd) social security – with an annual rate of increase of 3%; (4th) Medicare – with an annual rate of increase of 6%; and (5th) Medicaid – with an annual rate of increase of 6.3%.   In light of these figures, the Federal government should stop intervening in the housing market; this would have saved us $760 billion in fiscal year 2009.  Defense spending will continue at or above current levels.  The entitlement programs (Social Security, Medicare, Medicaid) are where the real crunch occurs:   they are slated to absorb 75% of the Federal budget by 2030 and 100% of the Federal budget by 2050.
    Simply put – we cannot meet our long term obligations under Social Security and Medicare unless the U.S. economy begins to grow more rapidly.    Based on assumed growth of 2.5%, the Congressional Budget Office still puts the present value of our unfunded liabilities for Medicare and Social Security at $37.9 trillion and $7.7 trillion, respectively. 
    My own estimate is that the economy must average annual growth of 4% or the Federal government goes into default.    I believe this rate of growth is possible.   But it will require competitive tax rates, a renewed commitment to market-based solutions, rational regulation of industries across the board, and the attraction of capital and entrepreneurial ability from abroad.

Q: How can the federal government reform Social Security?      The fiscal pressures created by Social Security are small compared to those coming from Medicare.   The U.S. government’s unfunded liabilities associated with Medicare and Social Security are $37.9 trillion and $7.7 trillion, respectively.
    The future liabilities of Social Security can be reduced 40% simply by changing the index used to calculate the annual rate of increase in payments.   The remaining 60% of unfunded liabilities can be handled, I think, by an increase in economic growth.  Whether Medicare can be fully funded going forward depends on whether health care costs are brought under control.   And that, of course, depends on whether Congress has the political will to challenge those with a vested interest in the status quo.

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