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George David Banks

March 29, 2014, 1:02 PM

George David Banks is managing director of Vanguard Political, a consultancy specializing in energy and environment issues on the state and federal level, and a senior fellow with the R Street Institute. He also serves as senior fellow for nuclear energy policy at the Center for Strategic & International Studies.

He formerly was Republican deputy staff director of the U.S. Senate Environment & Public Works Committee and a partner at Boyden Gray & Associates, a law firm and strategic consultancy in Washington.

During the Bush Administration, Dave was the senior adviser on international affairs and climate change at the White House Council on Environmental Quality, where he was one of the chief architects of the Major Economies Meeting on Energy Security and Climate Change. In September 2008, he was nominated by President George W. Bush to be assistant administrator of international activities at the EPA.  His CEQ work on promoting the reduction of non-CO2 greenhouse gases, including methane and HCFCs, was later recognized by the Obama Administration, earning him an EPA Climate Protection Award for Diplomacy.

From 2004 to 2006, he served as the State Department’s point person on climate change and energy diplomacy at the U.S. Mission to the EU in Brussels, Belgium, where he received a Superior Honor Award for promoting U.S. diplomatic objectives.  He was also a decorated CIA economic analyst and served as legislative fellow to Rep. Howard Berman, D-Calif.

A native southeast Missourian, Dave received his bachelor’s and a master’s in economics from University of Missouri at St. Louis, and also has a law degree from George Mason University.

Email: gbanks@rstreet.org

Tax breaks impact home size

March 29, 2014, 12:54 PM

From Green Blizzard:

Studies by economist at Marquette University have shown that because of this residential real estate t:ax incentive, people are buying a BIGGER residences – probably more than they need. 

Lane reports that Hanson and his colleagues calculated that tax-code subsidies increase the average home size 11 percent to 18 percent above what it would have been without them, depending on location.  In the Washington, D.C. metro area, the average home size would have been 1,424 square feet smaller without these subsidies, the Hanson study estimates.

This study shows that tax breaks increase home size roughly between 10-20%.

Time to scrap the mortgage interest deduction

March 29, 2014, 12:51 PM

From the Washington Examiner:

But even if one were to accept that boosting home ownership is a worthy goal for government, the interest deduction and accompanying tax benefits for homeowners should be seen as a miserable failure. That’s the conclusion of economists Andrew Hanson, Ike Brannon, and Zackary Hawley in a study prepared for the R Street Institute, a right-of-center think tank, and published in National Affairs.

The authors took a detailed look at the distribution of existing tax benefits for home ownership and found that the benefits do more to help wealthier Americans purchase larger homes than they do to encourage lower-income Americans who otherwise would be renting to purchase homes in the first place.

The study found that in Atlanta, Denver, Detroit, Minneapolis, Philadelphia, Phoenix, Seattle and Washington, D.C., 80 percent of taxpayers earning more than $100,000 claimed the deduction, compared with just 25 percent of those earning less.

Divorce is actually on the rise, and it’s the baby boomers’ fault

March 29, 2014, 12:48 PM

From the Washington Post:

As an assessment of the health of American marriages, these findings cut two ways. On one hand, a divorce is a far more disruptive and messy life event than simply moving out of your partner’s apartment. In that sense you have to applaud the wisdom of today’s twenty- and thirty-somethings for taking their time before tying the knot. But as Reihan Salam notes at the National Review, cohabitating relationships sometimes produce children. And whether they happen via cohabitation or divorce, split-ups are bad for kids.

Why it’s OK that startups prefer to hire younger workers

March 29, 2014, 12:16 PM

From Quartz:

And as National Review columnist Reihan Salam points out, if low barriers to entry mean that lots of young people get a chance they otherwise might not, that’s probably a good thing.

Three things conservatives wrote this week that made us think

March 29, 2014, 12:14 PM

From ThinkProgress:

By my lights, Reihan Salam is the conservative at National Review most worthy of liberals’ attention. He combines an almost super-human capacity for consuming oddball studies and theoretical arguments with a knack for coming at liberals sideways, hitting us in ways we wouldn’t expect. His latest target is Noam Scheiber’s big piece in The New Republic, which charges Silicon Valley with an implicit and particularly relentless bias against anyone past their early 30s. I found Scheiber’s account compelling, and the older tech industry hands he chronicled deeply sympathetic, so I was interested to see where Salam would go with this. His post pokes a few modest-but-reasonable holes in Scheiber’s evidence, but the core of Salam’s argument is here…

…This is interesting because it takes a classic left-wing critique — that for historically privileged groups, the sudden arrival of a level playing field can feel like oppression — and uses it to make an ostensibly right-wing point. It depends on whether you actually buy the idea that older Americans can still be considered a privileged group in this segment of the market world. And, admittedly, solid and extensive data on wither side of the argument is hard to come by. By Salam’s argument is a particularly coherent defense of the libertarian-inflected culture of creative destruction that Silicon Valley champions.

Targeted taxes will spur economic growth

March 29, 2014, 12:10 PM

From MoneyNews.com:

A recent study by the R Street Institute suggests this tax preference doesn’t benefit the broad society. The data indicate this policy doesn’t generally incent home ownership, which was the original intent. Instead, it has caused an 18 percent surge in home size in the most affluent areas.

Homeowners with household incomes greater than $100,000 were between three to four times more likely to claim income-tax deductions than those earning less than $100,000 annually.

The average tax break for those earning over $100,000 was more than twice those earning less than $100,000, according to a study by Andrew Hanson, Ike Brannon, and Zachary Hawley in an upcoming issue of National Affairs, a public-policy quarterly.

Tonight on the Independents: Rise of the machines!

March 28, 2014, 4:12 PM

From Reason:

Kicking things off on a fearful note is James Barrat, author of new book Our Final Invention: Artificial Intelligence and the End of the Human Era, which Ron Bailey reviews here. Followed by George Mason University associate economics professor Robin Hanson, who is decidedly more upbeat. Brookings Institution scholar P.W. Singer, author of Cybersecurity and Cyberwar: What Everyone Needs to Know, will talk about robot sand-fleas; and Dr. Yulun Wang of InTouch Health will demonstrate his fancy diagnostic robot friend. Competitive Enterprise Institute Fellow Marc Scribner will talk about driverless cars, R Street Institute Senior Fellow Lori Sanders will talk about our jerbs, and the co-hosts will talk about their very favorite robots from audi-visual entertainment history.

Coalition to Congress: Reform agency grant processes

March 28, 2014, 3:38 PM

March 28, 2014

Dear Representatives:

On behalf of the millions of Americans represented by the undersigned organizations, we write to urge you to support the Grant Reform and New Transparency (GRANT) Act, H.R. 3316, sponsored by Rep. Lankford. This legislation would reduce favoritism in awarding federal grants and add much-needed safeguards for taxpayers.

Washington is spending more and more. The last three budgets approved by Congress have been the largest in history. One area of particular growth among this rapid increase in overall spending has been agency grants. The federal government spent $600 billion on grants in 2012, up from $135 billion in 1990.

Americans deserve to have their hard-earned tax dollars spent responsibly, not squandered on unviable and frivolous projects. Grant proposals should be fully documented and carefully scrutinized to ensure that the project is viable and appropriate. Agency grants should be awarded in an open, competitive system based on merit, not on their political connections.

The ban on congressional earmarks was a good first step in curbing spending on wasteful and expensive projects. But that ban has been succeeded by an executive branch-driven process that is equally, and in some cases even more, opaque. While we are pleased that the earmark ban has removed some of the political motives long associated with spending on individual projects, the way in which these project dollars are awarded continues to lack transparency, making it difficult for ordinary Americans to ascertain how these decisions are made.

The GRANT Act (H.R. 3316) will establish new standards that will improve accountability in the federal agency award process. It will improve documentation, such as requiring greater detail in grant applications, as well as final reports on project performance. Moreover, the measure will require executive branch agencies to establish clear standards for grants, and expand disclosure requirements regarding how final award decisions are made. This legislation will also increase transparency in grant reporting, which will make it easier for Americans to see where their hard-earned tax dollars are going.


Brent Gardner, Director of Federal Affairs
Americans for Prosperity

Dee Stewart, President
Americans for a Balanced Budget

Grover Norquist, President
Americans for Tax Reform

Mattie Duppler, Executive Director
Cost of Government Center

Tom Brinkman Jr., Chairman
Coalition Opposed to Additional Spending and Taxes

Gov. Gary Johnson, Honorary Chairman
Our America Initiative

George Landrith, President
Frontiers of Freedom

Carrie Lukas, Vice President of Policy
Independent Women’s Voice

Seton Motley, President
Less Government

Amy Ridenour, Chairman
National Center for Public Policy Research

Andrew Moylan, Outreach Director and Senior Fellow
R Street Institute

Steve Ellis, Vice President
Taxpayers for Common Sense

David Williams, President
Taxpayers Protection Alliance

Morton Blackwell, Chairman
The Weyrich Lunch

Penny Young Nance, CEO and President
Concerned Women for America

Lew Uhler, President
National Tax-Limitation Committee

Is it only violent people who fear video game violence?

March 28, 2014, 2:02 PM

Recently, residents of my home state of California got an uncharacteristically hilarious moment of political irony. In a storyline that may as well be from The Blacklist, state Sen. Leland Yee, D-San Francisco — one of the most infamous paternalists in California — turned out to be allegedly leading a criminal double life as an illegal arms purveyor.

Yes, that’s right, Leland Yee, defender of California’s children from the scourge of simulated violence by day was also Leland Yee, purveyor of items expressly intended to be used for real violence by night.

Naturally, firearms groups immediately denounced Yee as a hypocrite, given this crusades against gun rights in the Legislature. I want to focus more on Yee’s nauseating crusade against violence in video games, which ultimately got him slapped down by no less an eminence than Supreme Court Justice Antonin Scalia. Indeed, Yee’s example beautifully illustrates some the flawed logic deployed by opponents of video game violence.

There is one very revealing quote from Yee on this subject that (obviously) predates his recent embarrassment:

“Gamers have got to just quiet down,” Yee, D-San Francisco, said in an interview Tuesday. “Gamers have no credibility in this argument. This is all about their lust for violence and the industry’s lust for money. This is a billion-dollar industry. This is about their self-interest.”

Now, I challenge anyone who reads this in the context of Yee’s current predicament not to burst into incredulous laughter. Aside from the metric tonnes of irony, one can see how someone who allegedly allows his lust for money to turn him into a conduit for others’ lust for violence would assume that gamers have the same mentality.

And Yee isn’t the only anti-video game crusader to have been outed as a dangerous fraud, though he’s certainly the most lurid one. There’s also the case of Florida-based anti-video game activist and former attorney Jack Thompson, who was disbarred (to quote the actual court decision) on grounds that:

 (4) respondent publicized and sent hundreds of pages of vitriolic and disparaging missives, letters, faxes, and press releases, to the affected individuals;

(5) respondent targeted an individual who was not involved with respondent in any way, merely due to “the position [the individual] holds in state and national politics;”

(6) respondent falsely, recklessly, and publicly accused a judge as being amenable to the “fixing” of cases;

(7) respondent sent courts inappropriate and offensive sexual materials;

(8) respondent falsely and publicly accused various attorneys and their clients of engaging in a conspiracy/enterprise involving “the criminal distribution of sexual materials to minors” and attempted to get prosecuting authorities to charge these attorneys and their clients for racketeering and extortion; […]

(10) respondent retaliated against attorneys who filed Bar complaints against him for his unethical conduct by asserting to their clients, government officials, politicians, the media, female lawyers in their law firm, employees, personal friends, acquaintances, and their wives, that the attorneys were criminal Case Nos. SC07-80 and SC07-354 Page Three pornographers who objectify women.

Among the targets of Thompson’s stupidity, as a note of interest, was current American Conservative Union President Al Cardenas.

The fact that these two high profile opponents of video game violence were both such deeply flawed men might raise troubling questions. At least, they would, to someone like Jack Thompson or Leland Yee. There is about as much evidence that opponents of video game violence are themselves closeted psychopaths as there is that Doom for th Eric Harris and Dylan Klebold’s killing spree at Columbine High School.

The evil of men like Yee and Thompson would be an outlier in any community they might belong to, and needs to be treated as such, rather than masked with logically fallacious scapegoating. Applying the faulty logic that both Yee and Thompson employed in warning that every video gamer might potentially be a school shooter, one would inescapably conclude that every anti-video game violence crusader could potentially be a sordid criminal. If we reject that formulation in the one case, we must reject it in the other.

One only hopes the next time someone tries to spin the same discredited story as Thompson and Yee, they’ll remember that it cuts both ways.

This work is licensed under a Creative Commons Attribution-NoDerivs 3.0 Unported License.

Smoking cessation expert to Health Canada: Stop killing smokers

March 28, 2014, 11:51 AM

Health Canada has blocked sales of nicotine-containing e-cigarettes, even though the devices are readily available in the United States.  I previously commented on the agency’s unfounded opposition to tobacco harm reduction here.

This week, Dr. Gaston Ostiguy, medical director at the Montreal Chest Institute’s Smoking Cessation Clinic, told Health Canada that “it’s time to authorize the sale of electronic cigarettes.”  His stern admonition, published as an open letter in the Montreal Gazette, was co-authored by tobacco research and policy experts from Canada, Switzerland, Italy and the United Kingdom.

Dr. Ostiguy objected to the general obsession with tobacco prohibition, noting that: “unfortunately, it is wishful thinking that one day we will completely eradicate nicotine use.”  He referenced a report that I have often cited in my lectures and blog posts:

In a landmark report published in 2007, the Royal College of Physicians makes a compelling case why harm reduction should no longer be ignored by health authorities to lower the death and disease caused by tobacco use.

Dr. Ostiguy summarized the Royal College’s findings:

  • Conventional prevention and cessation “will be ineffective for the millions of smokers who, despite best efforts to persuade and help them to quit, will carry on smoking.”
  • “Tobacco-control policy needs to be radically extended to address the needs of these smokers with implementation of effective harm-reduction strategies.
  • “Harm reduction in smoking can be achieved by providing smokers with safer sources of nicotine that are acceptable, and effective cigarette substitutes.
  • “There is a moral and ethical duty to provide these products to addicted smokers.”

The bottom line:

  • “Electronic cigarettes are such a substitute.”

Dr. Ostiguy noted e-cigarettes’ significant harm reduction benefits and their potential, but unproven, risks.  He called on Health Canada to establish appropriate regulation “so that good manufacturing practices are followed to protect consumers and that sales to minors are forbidden. However, any excessive regulations that could make it too difficult to communicate about the reduced risks of these products or to access them should be avoided.”

That is a message for FDA regulators, as well.

This work is licensed under a Creative Commons Attribution-NoDerivs 3.0 Unported License.

Can Bitcoin outrun the regulators?

March 28, 2014, 10:05 AM

Bitcoin is at the cutting edge of innovation. And like most new, potentially transformative ideas, most future job creators, and most disruptive innovations, Bitcoin does not have lobbyists, trade associations or hired goons in Washington ready to defend it. It just has millions of users across the country.

Bitcoin is a digital currency, the first decentralized digital currency, through a public ledger that provides some level of anonymity for users. Bitcoins are “mined” or released to people whose computers crack complex math problems. There are currently 12 million bitcoins in circulation. There will eventually be a total of 21 million bitcoins when they are fully mined. The smallest current unit is known as “satoshi” in honor of the creator of Bitcoin, and is 100 millionths of a bitcoin.

Digital currencies are disruptive and make powerful enemies. Paul Krugman recently quoted Charlie Stross, who said that these digital currencies look like they were “designed as a weapon intended to damage central banking and money-issuing banks.” Perhaps. But maybe that’s a feature and not a bug.

To be clear, Bitcoin is not the first digital currency, not even close. We have Digicash, ecash, Yodelbank, E-bullion, ePassport, Liberty Reserve, Liberty Dollar and E-Gold among others. E-Gold and Liberty Dollar were essentially shut down by the government.

Liberty Dollar was created by Bernard Von NotHause, who was convicted in 2011 of “making, possessing and selling his own currency.” His currency was silver backed. Anne Tompkins, a prosecuting attorney during his trial in North Carolina, described the Liberty Dollar as a “unique form of domestic terrorism” trying “to undermine the legitimate currency of this country.” E-Gold was backed by gold and was shut down for money laundering. Money laundering and similar statutes are easier to violate than you may imagine.

Here’s what makes Bitcoin more durable. E-Gold eventually reached a user base of more than 5 million. While it used a sophisticated encryption technique for handling transactions, it was a centralized currency. When the U.S. government accused E-Gold and its founder of money laundering and other crimes, E-Gold was soon finished. But unlike E-Gold, Bitcoin is decentralized. There is no one person to arrest. It is a concept, an idea, not a person, and “there is nothing more powerful than an idea whose time has come.”

Because it’s a digital currency, it’s in many ways completely detached from the traditional state-based monetary instrument system; and this is precisely why it is so feared. Sen. Joe Manchin, D-W.Va., has called for Bitcoin to be banned:

The clear ends of Bitcoin for either transacting in illegal goods and services or speculative gambling make me weary [sic] of its use…Before the [United States] gets too far behind the curve on this important topic, I urge the regulators to work together, act quickly,and prohibit this dangerous currency from harming hard-working Americans.

There have been hearings on Bitcoin in Congress. In New York, there is a zealous prosecutor going after Bitcoin operators. Other countries like China, Thailand, and Russia have already essentially banned Bitcoin. These developments have further emboldened Manchin, who said he is “most concerned that as Bitcoin is inevitably banned in other countries, Americans will be left holding the bag on a valueless currency.”

It is interesting that a U.S. senator wants us to follow the lead of Russia and China on questions of what should be regulated.

Rep. Jared Polis, D-Colo., an internet entrepreneur and one of the most tech-savvy members of Congress, has a witty and satirical response to the Bitcoin naysayers. Their arguments actually mean that we should ban the U.S. dollar, Polis writes:

A physical dollar bill is a printed version of a dollar note issued by the Federal Reserve and backed by the ephemeral “full faith and credit” of the United States. Dollar bills have gained notoriety in relation to illegal transactions; suitcases full of dollars used for illegal transactions were recently featured in popular movies such as American Hustle and Dallas Buyers Club, as well as the gangster classic, Scarface, among others. Dollar bills are present in nearly all major drug busts in the United States and many abroad. According to the U.S. Department of Justice study, “Crime in the United States,” more than $1 billion in cash was stolen in 2012, of which less than 3 percent was recovered. The United States’ dollar was present by the truck load in Saddam Hussein’s compound, by the carload when Noriega was arrested for drug trafficking and by the suitcase full in the Watergate case.

Unlike digital currencies — which are carbon neutral, allowing us to breathe cleaner air — each dollar bill is manufactured from virgin materials like cotton and linen, which go through extensive treatment and processing. Last year, the Federal Reserve had to destroy $3 billion worth of $100 bills after a “printing error.” Certainly, this cannot be the greenest currency.

Printed pieces of paper can fit in a person’s pocket and can be given to another person without any government oversight. Dollar bills are not only a store of value, but also a method for transferring that value. This also means that dollar bills allow for anonymous and irreversible transactions.

From a historical perspective, the operative question may be whether Bitcoin can receive broad-scale adoption before regulators, politicians or courts try to ban its existence.

In 1975, the Sony Betamax went on sale domestically at a cost of $6,093 in today’s dollars. Almost immediately, in 1977, Japanese-based Sony was sued by the content industry, seeking an injunction on the basis of copyright infringement (allowing consumers to record live television). At the same time, the MPAA tried to lobby Congress to ban the VCR through legislation, and almost succeeded.

This is a quotation from then-MPAA President Jack Valenti who testified before Congress:

We are going to bleed and hemorrhage, unless this Congress at least protects [our industry against the VCR]…I say to you that the VCR is to the American film producer and the American public as the Boston strangler is to the woman alone.

Sony, meanwhile, lost their case at the 9th Circuit, and the VCR was to be banned across the country. Sony then received certiorari and went to the Supreme Court. The justices met internally after oral arguments, and decided among themselves to uphold the 9th Circuit ruling. The VCR was to be banned. Then, at the last minute, the Supreme Court decided to allow a re-argument of the case, during which time one critical justice flipped their vote, and the VCR was upheld by one vote at the Supreme Court.

Given the Supreme Court action, Congress was waiting to act. But by the time Sony had won in 1984, the VCR had become inevitable. The extremely narrow ruling got widespread support, and Sony sold 2.3 million units worldwide. With this level of popularity even one of the most powerful of special interest groups, the MPAA, couldn’t ban it.

But ultimately, everyone came out better as a result. Just two years after the Supreme Court ruling, the movie studios made more money from VCR video sales than they did from movie theaters. There is a lot to be learned from the Betamax example that can be applied to disruptive new technologies like Bitcoin.

Bitcoin is very novel to a lot of people. To some, it seems like a complete game-changer. Roger Ver, an angel investor, claimed that “Bitcoin is the most important invention in the history of the world since the Internet.” To others, like Paul Krugman and Alan Greenspan, it seems ridiculous and silly. Krugman even called Bitcoin “evil.” The truth is probably somewhere in the middle.

Bitcoin is a very new innovation and we have yet to see its full potential. Most of the scare talk surrounding it is either incorrect, or based upon current technology, rather than what is actually possible in the future. Broad-scale adoption is the best insurance against regulators killing Bitcoin off before we find out what this incredible technology, and future iterations of decentralized currencies, can do.

When does a school become a scam?

March 28, 2014, 9:31 AM

With the student loan debt bubble starting to look to many worried observers like Subprime Mortgages 2: Electric Boogaloo, the question of whether college is really worth it as an investment has been raised with increasing regularity. But as Jordan Weissman at Slate notes, the right question might be less “Is college worth the money?” and more “Which colleges are worth the money?”

Weissman looks at records from the salary comparison website Payscale, which ranks colleges and universities by their “return on investment” – that is, how much more than a typical high school graduate an alumnus can expect to earn, minus what they spent in tuition. Unsurprisingly, the numbers are highly favorable for graduates of the Ivy League, well-respected state universities, tech-focused institutions and prestigious liberal arts colleges (though some of these, like my own alma mater Wesleyan University or the similar Amherst College, don’t appear on the rankings at all, presumably due to insufficient data). Schools that fit into more than one of these categories, like number-one-ranked Harvey Mudd College and number-two-ranked Massachusetts Institute of Technology, do better still.

However, the list isn’t just about patting deserving schools on the back. It’s also about shaming institutions that not only fail to provide a useful education, but are actively detrimental to students’ life experiences. Contrary to the prevailing impression that for-profit colleges are the primary bad actors in this area, it is largely traditional research institutions and liberal arts colleges that comprise most the very bottom of the roughly 1,300-school list.

To be fair, many of public institutions near the bottom fall that low based on calculations of the higher tuitions that out-of-state students would pay, and they are largely not schools that would draw many out-of-state applicants in the first place.

But the bottom school on the list is the private Shaw University in North Carolina. According to Payscale, 20 years after graduation, Shaw alumni are $156,000 worse off than if they hadn’t gone to college at all. Other private schools near the bottom of the list include Bluefield College, a Christian school in Bluefield, Va., where the 20-year return on investment is -$123,000, and Ohio’s Ashland University, with an ROI of -$91,600.

The idea that anyone pays to attend schools where the average student are worse off for going ought to be beyond belief. People who pay Nigerian princes to send them fictitious millions of dollars lose less money than the graduates of some of these schools. One has to ask, at what point does a school cease being a school and simply become a scam?

Weissman suggests the federal government develop rankings like Payscale’s and make it mandatory that schools disclose this information. To be sure, average salary isn’t everything. But when education is priced like a luxury good and treated by millions of parents and students as an investment in the future and gateway to the middle class, greater transparency should be a first step toward solving the problem.

But serious questions also need to be asked about whether to start treating certain colleges as predatory institutions. Student loan debt could be a bubble that pops the entire economy, all because millions of students were raised to believe a college diploma – any college diploma – was a nest egg. If schools like the above operate without accountability, many of those students will end up with nothing but egg on their faces.

This work is licensed under a Creative Commons Attribution-NoDerivs 3.0 Unported License.

Why are rich people’s houses so big? Because Uncle Sam pays for extra rooms

March 27, 2014, 5:15 PM

From the Washington Post

These data are from the National Association of Home Builders and research by economists Andrew Hanson, Ike Brannon and Zackary Hawley.

Helping the wealthy live in more luxurious homes is worse than a waste of taxpayers’ money. Larger houses require more energy to heat, and urban sprawl has been a disaster for the world’s climate.

What’s more, the financial crisis of 2008 might have been as bad as it was partly because of the tax code. “To the extent that it encouraged debt over savings use to pay for housing, it could have exacerbated the problems that we saw,” Hanson said, though he warned that any connection between the two is still just conjecture.

Detroit: From ‘Heat Wave’ to deep freeze

March 27, 2014, 4:32 PM

In the early 1960s, a young songwriter from Detroit named Lamont Dozier signed an exclusive contract with Motown Records, teamed up with Eddie and Brian Holland, and eventually produced 13 back-to-back number one national hits on the pop charts, recorded by acts like the Supremes, Marvin Gaye, Martha Reeves and the Vandellas, the Four Tops, the Temptations and the Marvelettes.

Detroit has made any number of contributions to the national popular culture, including the Red Wings, Tigers, Lions, Pistons, Kid Rock and Eminem, along with the priceless treasures now housed at the Detroit Institute of Arts, about which my colleague Andrew Moylan and I recently authored a modest paper. But Motown probably remains the most enduring. The transformation of a fledgling record company into an industry ground-breaker and powerhouse is also highly illustrative of Detroit’s squandered chance to remain a major American city.

Detroit filed for bankruptcy July 18, 2013. This surprised no one, since the person picked by the governor to manage the city and correct its fiscal instability is a bankruptcy lawyer. The move also capped more than a half-century of decline. By 1980, Detroit’s property values had dropped 67 percent from what they had been in 1960, before the 1967 riots that killed 43 people. The population has likewise fallen by more than half since the mid-20th century.

The city’s debt was downgraded to junk bond status in 1993, although Mayor Kwame Kilpatrick got the ratings ratcheted up to investment grade with a complicated 2005 Wall Street deal to sell pension obligation certificates and buy interest rate swaps.  Because of a subsequent credit downgrade, the deal had to be renegotiated, and the city now owes $2.8 billion in principal, interest and insurance over the next 22 years. These instruments today represent about 19 percent of total city debt.

There have been many factors in the city’s decline, including bad economic decisions made by a series of mayors, erosion of the once-dominant American auto industry in a competitive global market, a ferocious crime rate and, ultimately, widespread abandonment of entire neighborhoods.  In more recent years, Republican domination of the state Legislature certainly plays some role, although Detroit still gets about half of Michigan’s statutory revenue sharing (excluding sales tax), despite representing only about 7 percent of the population.

Some of the key factors contributing to the city’s fiscal imbalance can be laid at the doorstep of former Mayor Coleman Young, who lead the city from 1974 to 1994.  During his tenure, crime rates tripled and the city saw one of the most dramatic cases of “white flight” to the suburbs of any city in the country.

His major mistake was authoring Public Act 312, requiring mandatory binding arbitration to settle union compensation fights when he was a state legislator.  The elected management of the city never really had a chance to exercise control after that, because the city regularly lost arbitrations and was limited in its ability to curb any costs.  If this isn’t fixed, then I don’t see how Detroit can be.

To pay for the union benefits awarded by arbitrators, Detroit instituted three new taxes — on utilities, casino gaming and income.  Today, Detroit has more revenue sources, higher tax rates and less revenue to show for it. The state provides about 16 percent of the city budget.

Coleman and nearly every mayor who followed him gave nearly $1 billion in “13th check” bonuses to both city workers and retirees from the mid-1980s through 2008.  Actuaries estimate that if the money has been invested instead, there would be an extra $1.9 billion in the city treasury now.

According to Andrew Biggs, former principal deputy commissioner of the Social Security Administration, who now chairs a group looking at unfunded public pension obligations across the country, Detroit employees who put in a full career of 30 to 35 years with the city can expect a pension that pays out about two-thirds of what they earned.  Police and firefighters pay nothing into the plan. When added to Social Security benefits, these employees secure retirement pay equaling 95 percent of what they were paid as public servants, which averages about $100,000 a year in salary and benefits.

Plainly, the taxpayers are paying out benefits to government workers that they cannot themselves afford. In 1960, Detroit had 26,386 employees supporting 10,629 pensioners.  When Young was mayor, that ratio dipped to one to one. By 2012, 10,525 Detroit employees are each carrying two retirees in the pension system.

New York City had a brush with default and bankruptcy in the 1970s, after following some of the same fiscal patterns seen in Detroit.  A succession of mayors used the same solutions.  They borrowed for expanded city services.  Overgenerous contracts to public employee unions were granted to prevent labor unrest.  State aid was also extracted, because Albany realized what could happen to everybody else if the Big Apple rotted. Even the leaders of Germany and France expressed concern at a New York bankruptcy. Matters came to a head in 1975, when the nation’s largest city literally ran out of money and could not pay operating expenses.  At the time, New York had $14 billion of debt outstanding.

One difference is that New York didn’t attempt to walk away from its debts. Bonds were sold through the newly created Municipal Assistance Corporation, carrying a hefty 11 percent interest rate in a market where the index of high-grade municipals carried a coupon of 6.89 percent. The city also transferred debts to the state and federal governments. State aid for all purposes was accelerated to help keep the city afloat. The feds chipped in $2.3 billion in short-term loans, a plan that only passed the U.S. House by ten votes. In exchange, the city accepted changes in its governance and financing. After all this, for years, the city was seriously constrained in how it could borrow money.

In Detroit, the real concern is that, while the city offers the appearance of talking tough to pensioners, the real plan is to short the other debt holders or win additional support from the state.  Depending on how it all goes down, this could have a ripple effect on future municipal bankruptcies.

While there are other municipal bankruptcies in progress in California, most eyes these days are on Chicago. The city is making balloon payments on its debt which, according to Mayor Rahm Emanuel, could require an unprecedented hike in the property tax.  The pension shortfall in Chicago is reported to be $7,100 per resident, or roughly eight times the size of Detroit’s unfunded liability.  True to form, the Chicago Teachers Union is promising protests that will look a lot like those generated in Wisconsin when Gov. Scott Walker and the Legislature worked to address the problems of funding imbalances and sustainability of state services and employee benefits.

There will be a very interesting exchange of views in these matters for the next couple of years, and public managers will not be as popular as they are when they give bonus checks out of the public treasury. But the laws of economics are not so easily repealed.

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Fixing one driver of inequality may hit close to home for some progressives

March 27, 2014, 1:53 PM

From the Washington Post:

Instead, the tax code’s main effect is to help people who already could afford a home buy a bigger one, as a team of economists led by Marquette University’s Andrew Hanson has shown in a new study for the free- market think tank R Street Institute.

Using Zip code-level Internal Revenue Service data on tax filers’ use of housing breaks, as well as local housing market data from the American Housing Survey, Hanson and his colleagues calculated that tax-code subsidies increase the average home size 11 percent to 18 percent above what it would have been without them, depending on location.

In the District and its suburbs, the average home size would have been 1,424 square feet smaller without these subsidies, the Hanson study estimates.

Hanson and his team report that the dollar benefits from housing tax breaks are distributed unevenly across the nation, reflecting differences in local home values and property taxes. In the D.C. area, the tax breaks save an average homeowner more than $9,000 per year; in metropolitan Atlanta, by contrast, the savings are only $1,628.

Within these regions, of course, high-priced suburbs and gentrified city neighborhoods benefit the most.

Another clear, if unstated, implication of Hanson’s study is that housing tax breaks disproportionately subsidize Blue America.

The ‘House of Cards’ generation

March 27, 2014, 10:35 AM

In the first season of Netflix’s runaway political hit “House of Cards,” protagonist and antihero Frank Underwood remarks dryly about a liberal educational expert’s bill that:

Two things are now irrelevant: Donald Blythe and Donald Blythe’s new draft. Eventually I’ll have to rewrite the bill myself. ‘Forward’ is the battle cry. Leave ideology to the armchair generals. It does me no good.

Judging by a new report from the think tank Third Way, Underwood’s last few lines could have been spoken by the entire millennial generation.

Unlike other reports on millennial voting patterns, which tend to assume that the demographic is reliably Democratic-leaning, or try to paint them as closet libertarians, the Third Way report describes the newest generation in terms that are at once frustrating and enlightening. To quote from the report’s final paragraph:

Millennials are poised to have an outsized influence on our politics due to their sheer size. But their values and beliefs have been misunderstood, if not openly maligned, largely because they are not seen in the context of this group’s unique generational experiences. Millennials can support an expansive federal role for government while holding reservations and deep skepticism about its efficacy. They may be racially and ethnically diverse, but their views were not forged in the civil rights struggles of the 1960s. They came of age in an era of unprecedented access to alternatives and a steady stream of information from nearly any region of the world, yet they are expected to get excited by orchestrated events and scripted interactions.

Elsewhere, the report notes that millennials react with skepticism to politicians who present a carefully manicured public image, rather than offering themselves up, warts and all. As examples of this latter type, the report cites Cory Booker and Rand Paul, focusing especially on the latter’s choice to engage with younger constituents via Snapchat. In short, this is a ruthlessly pragmatic and skeptical generation that will abandon all forms of ideology, tradition, authority or spin the instant they cease to line up with what they see as reality. Appearances and intentions do not matter; all they want are truth and results.

Accommodating this mindset is a jarring challenge for politicians of all stripes. In many ways, its potential for disruption already has been witnessed in the careers of two especially successful recent media figures, one solidly in the millennial generation and the other narrowly missing it: namely, Ezra Klein and Nate Silver. As Charles Cooke at National Review observed about Klein and Silver’s recent alienation from their left-of-center fanbase:

What have the duo done to deserve their scorchings? Little more than to have proved more independent than their champions had assumed they would dare to be. Silver has been censured largely on the back of two terrible “mistakes” — those being to have hired Roger Pielke Jr., an economist and climate scientist of whom our self-appointed arbiters of taste evidently do not approve, and to have fired up his famous model and predicted that the Republican party had a 60 percent chance of taking the Senate this year. In Washington D.C., meanwhile, Klein was lambasted for hiring one Brandon Ambrosino, a gay writer who has apparently been operating under the impression that he has the right to deviate from the zeitgeist. Oops!

In other words, Silver and Klein did what they’ve gained a reputation for doing: offering facts and data irrespective of whether that data supports an emotionally or ideologically satisfying conclusion. Cooke sees this as a dishonest masking of bias, yet it’s what an entire generation appears to cry out for. The idea that one is “entitled to one’s own opinion, but not one’s own facts” has come back with a vengeance in the younger generation, and they have little patience for blind faith. To quote the report, “Millennial voters are unlikely to align with a political party that expects blind faith in large institutions – either governmental or nongovernmental.”

Contrary to those who rush to dismiss this bewildering “neutrality” among millennials as simple window dressing for a conventionally liberal ideology, there are in fact areas where millennials diverge equally as strongly from a liberal ideological consensus as they do from a conservative one. A slightly lower percentage of millennials are pro-choice than among older Americans , for instance, and 62 percent of millennials generally oppose the use of race as a factor in hiring or college admissions. In fact, the report suggests that millennials see the latter as just as antiquated and irrelevant to modern-day realities as racism itself.

These sorts of differences strike at the heart of progressive liberalism, for they threaten both conventional anti-racist and feminist wisdom. In fact, reading between the lines on millennial irreligiosity, wholesale rejection of socially conservative views on marijuana and marriage, skepticism of previous civil rights approaches and ambivalence on abortion, one sees a generation that is sorely weary of a politics based on one’s fixed identity, rather than on shifting reason and data.

How will politics shift to approximate the wishes of these voters? One cannot fully know. However, it seems very likely that, given their willingness to leave ideology to the armchair generals, millennials aren’t going to take the challenges the country faces sitting down.

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Home mortgage interest deduction helps the rich, study says

March 26, 2014, 4:41 PM

From the Deseret News:

It’s the tax deduction that economists love to hate but has huge support among Americans. The mortgage interest tax deduction has long been defended on the basis that it encourages home ownership, but a new study may undermine that justification

Mortgage interest mansions?

March 26, 2014, 11:07 AM

From the Patriot Post:

Every tax deduction or credit has its lobbying constituency, and the mortgage interest deduction is no different. The deduction ostensibly supports the American dream of home ownership, but a new study from the R Street Institute casts doubt on that idea. According to The Wall Street Journal, “The study estimates that tax preferences, particularly the mortgage-interest deduction, have helped drive up the size of houses by as much as 18% in the nation’s most affluent areas while not broadly encouraging people to buy homes.” In Washington, DC, for example, researchers say homes are some 1,400 square feet bigger because of the deduction.

Deepwater Horizon restoration funding must be transparent and avoid cronyism

March 26, 2014, 9:38 AM

Next month will mark four years since the Deepwater Horizon oil rig exploded fifty miles off the Louisiana coast, killing eleven men and spilling over four million barrels of oil into the Gulf. While initial predictions about the spill’s likely economic and ecological effects fortunately proved to be overblown, the Gulf’s economy continues to struggle and its natural environment is still suffering. To wit: last month, a half-ton tar mat from the spill washed ashore near Pensacola, Florida.

But the coast’s fortunes are looking up. The Treasury Department will soon outline how state and local governments across the Gulf Coast can draw down funds from the Gulf Coast Restoration Trust Fund, an account established with civil fines paid after the 2010 Deepwater Horizon oil spill. Whether these funds will be used effectively and efficiently — or squandered on pet projects and cronyism — is ultimately not in the hands of Treasury officials, but policy makers in the coastal states.

This devolution of authority was the express intent of Congress, which in 2012 passed the RESTORE Act. This landmark bill places 80 percent of the Clean Water Act fines paid by oil company BP and rig operator Transocean into a Gulf Coast Restoration Trust Fund. The vast majority of these funds will go either to individual states or to a council led by the governors of the five Gulf states. Depending on how litigation against BP resolves, the total amount available to the fund could be as much as $14 billion.

Conservatives have supported this policy from day one, and they should continue to endorse it and closely monitor its implementation. After all, giving state governments rather than Washington the responsibility to develop and execute projects that have positive environmental and economic benefits for the Gulf Coast reflects important conservative values: it allows states to address the particular needs of their populations and doesn’t try to impose a bureaucratically-driven, one-size-fits-all model on five states and thousands of miles of shoreline.

But in order for the RESTORE Act to live up to its potential, spending decisions must be made in a completely transparent manner — and funds absolutely cannot go to pet projects and special favors for particular industries or companies.

Fortunately there are good efforts afoot on the transparency side. Mississippi has launched a web site where citizens can suggest projects to fund with RESTORE Act dollars. In Florida, where the counties are primarily responsible for identifying and executing projects, a bipartisan bill in the legislature would require every proposed appropriation to be posted online for at least 30 days before it comes up for a vote. And in Louisiana, a proposed constitutional amendment would require that all funds the state receives under the RESTORE Act go to funding the state’s coastal protection infrastructure plan.

Spending this windfall on projects that benefit the economy and environment of the coast is consistent with limited government principles — provided it is done correctly. Building public infrastructure, developing public goods, and mitigating the deleterious effects of failed government projects are all appropriate activities for governments to undertake. If done properly, they can save taxpayers future costs and create an environment conducive to economic growth.

But in order to ensure that funds are spent in a way that benefits the broader economy, it is critical that policymakers steer funds towards projects with broad benefits, not those that just benefit certain favored groups. Too often, policymakers use targeted tax incentives or giveaways to politically connected companies as a means of trying to spur investment. But this is little more than industrial policy conducted through the tax code, and it would be a terrible use of RESTORE Act funds.

Projects funded through the RESTORE Act must be evaluated by proper metrics. This means examining likely costs and benefits in order to ensure taxpayers get the most “bang for the buck.” Looking just at the number of “jobs created” by a program, for instance, is a poor way to evaluate whether it provides value for taxpayers.

With the RESTORE Act, Congress made a historic decision to allow the Gulf Coast states to take the lead in developing stronger coastal economies and more resilient natural environments. The onus is now on policymakers in these states to ensure that projects are selected and funds spent transparently and efficiently on projects with benefits that accrue both today and into the future.