State of the Union 2014: More Preschool Politics?

18347411_SPundits are predicting that President Obama will try to recycle last year’s universal, government-run preschool plan in tonight’s State of the Union address.

The Los Angeles Times’ Kathleen Hennessey, for example, isn’t jazzed:

Little of what the president proposes in his most high-profile speech of the year is likely to get done, at least not any time soon. As Obama polishes a fresh list of ideas to tick off Tuesday night, many of last year’s proposals remain unfinished—stymied by a politically divided Washington.

But read a bit further, and it’s not “division” that’s the problem. Bad ideas from Obama and his propensity for Congressional end-runs are the real culprits.

Among the president’s least popular ideas are gun control and a mandatory minimum wage. Hennessey, however, devotes a lot of attention to President Obama’s failure to jump-start his federal universal preschool plan, noting that it hasn’t even had a hearing in the Democratic-controlled Senate, much less the House:

The first year in the life Obama’s preschool plan illustrates the nature of the hurdles ahead. Although Republican governors have moved to expand public preschool and polls show such efforts are popular, the launch of the federal effort was slow and sputtering.

The White House proposed paying to make preschool available to 4-year-olds in nearly all low- and moderate-income families with a 94-cent tobacco tax, an idea spurned by lawmakers from both parties.

‘I was happy to see they at least had some sort of plan for paying for this. It was in itself a bold statement,’ said Lisa Guernsey, director of the early education initiative at the New America Foundation. ‘But in reality the idea of raising a tax to pay for this was met with a lot of silence.’

The bill took months to draft and, even then, did not include a way to pay for it. In November, it was unveiled by Education Secretary Arne Duncan, Democratic lawmakers and its one Republican coauthor in the House. Two months later, only one other Republican has signed on.

But the budget bill passed this month included $250 million to help states expand preschool programs. The White House and its allies view that money as a ‘down payment’ on the president’s plan. House Republicans deny it had anything to do with Obama’s proposal.

But don’t let facts get in the way of taking credit where credit’s not due.

White House education adviser Roberto Rodriguez predicts we’ll be seeing preschool emerge as a national priority—but it won’t be driven by Washington. “I think you’ll see it emerge from states. You’ll see it emerge from cities,” noted Rodriguez. “It will take some time to reach Congress, but it will reach Congress.”

Perhaps it’ll take longer than Mr. Rodriguez thinks because members of Congress know that for all the emotional appeal, the Government’s longest running preschool program, Head Start, has been an expensive, decades-long failure—based on the feds’ own official evaluations.

The best approach is empowering parents to choose what—if any—schooling they think is right for their four-year-olds. Right now, Head Start funding amounts to just under $7.7 billion for 957,000 participants. That works out to more than $8,000 per child.

For all that cash, Head Start impacts are virtually negligible and fade out at early as first grade.

Rather than pump more taxpayer dollars into this or similar government programs, let parents who want and can afford preschool deduct their early education expenditures from their taxes. Instead of funding more ineffective bureaucracies, redirect Head Start program and overhead finding into early education savings accounts (EESAs) for low- and moderate-income families. With those funds parents could choose the schooling options they prefer, and if there are funds left over, parents could set those aside for future schooling expenses, such as after-school tutoring or even college tuition.

Empowering parents, not politicians, is the best preschool policy prescription.

Unfortunately, California seems bound and determined to make universal preschool, referred to as transitional kindergarten, mandatory for all four-year-olds in the state.

Governor Stevens and I

299px-Governor.Gen.StevensWhen Governor Isaac Stevens went around Puget Sound in the mid-1850s making treaties with the Indian tribes to clear the way for an anticipated influx of whites, he found again and again that asking for the tribal chief got him nowhere. The Indians would look around and shrug their shoulders. They had no chiefs. Like many North American Indian tribes, they made communal decisions by consensus, with at most a special influence being exerted by one or two respected elder males.

But Stevens, hellbent on following the treaty-making protocol established among Western nations, plowed ahead, finding someone on each occasion to treat as the chief who would put his X on the treaty to make it official. To make matters worse, the negotiations took place via interpreters who employed the Chinook Jargon, a trade language used by the local Indians to communicate (roughly) with one another, a language with only a few hundred words, a language obviously incapable of facilitating Stevens’s rather delicate negotiations. What the hell: the treaties were written in English, “signed” by some Indian or another, and treated as sufficient by the whites who sought to keep the Indians out of the way as they took over the area and exploited its natural resources.

More than a hundred years later, these phony-baloney treaties became the basis for federal court cases decided in what is known as the Boldt decision, after the judge who handed it down in 1974. In the aftermath of this decision, all hell broke loose because the Indians, who had been catching less than 10 percent of the salmon in Washington waters, were now given a right to harvest half of the salmon. The white fishers went ape.

In the sequel, state and federal regulators attempted to get control of the situation and keep the melee from becoming violent, and in the process I was retained as an economic consultant, first by Washington state and later by the federal Pacific Fishery Management Council, to assist in the process. Fisheries consulting occupied me in one way or another from the mid-1970s to the early 1980s and again in the early 1990s, when I worked for an industry association in connection with federal regulation of the Bering Sea pollock fishery. (For a while, the famous economist Arnold Harberger was part of our team.) Thus is established the connection between Isaac Stevens and me. Ain’t history fascinating!

Health Benefits Cost 40 Percent More for Government Workers than for Private Workers

I recently criticized an advocacy piece by an employers’ group, a report that promoted harmful, government-driven, solutions to price transparency in health care. This blog post will argue that private employers are not entirely ineffective.

The media never fails to give good coverage to the Kaiser Family Foundation’s Annual Employer Health Benefits Survey, which draws on “almost three thousand interviews with non-federal public and private firms.” The Survey reports a total premium for single coverage of $5,884 per employee, of which the worker paid $999 and the employer paid $4,885. (Economically speaking, the employee actually paid the entire cost, because the employer would otherwise have paid the balance as wages. However, our culture struggles to accept this fact, so we’ll let the figures stand as reported.)

The Kaiser Family Foundation divides its sample in different ways. It reports coverage by household size. It reports coverage by employer size. What it does not do is separate the public-sector benefits from the private-sector benefits. This is a shame, because the report is freely available and heavily reported.

A less-accessible report, published by United Benefit Advisors for its clients, tells a disturbing tale. Last year, public-sector health benefits cost $8,551 per employee, while private-sector coverage cost only $6,040.


Stockman: Cronyism Is Destroying American Capitalism and American Democracy

B1033I’ve recently read David Stockman’s book, The Great Deformation: The Corruption of Capitalism in America. (You can buy it at Amazon, but it’s cheaper at the Mises Institute.) Stockman explains how cronyism has grown throughout the 20th century in America, placing much blame on the Federal Reserve, and describing how businesses have managed to warp public policy to benefit the economic elite, creating unsound public policy that will inevitably lead the country to a fiscal collapse (p. 693).

Stockman describes in great detail one episode after another in which public policy was steered to benefit insiders with political connections. The book is long, at more than 700 pages, and his narrative offers the insights of an insider. (Stockman was a US Congressman, Budget Director in the Reagan White House, and a partner with a private equity firm.)

One frustrating aspect of the book for this reader (an academic by profession) is its lack of footnotes and sources. The book has a five-page “Note on Sources” at the end, but no footnotes or references in the book, so the reader has no way to check the many facts in the book. Even when Stockman directly quotes somebody, there is not a footnote to the source of the quotation.

Still, everything in the book is plausible and lines up with what is publicly known about the events Stockman recounts. I did not identify anything in the book I would call an error of fact. If you have the idea that the public policy game is rigged so that the political and economic elites design policy to benefit themselves, and the public be damned, this book offers lots of (poorly documented) evidence to back that up.

I have often thought that the best way to run a political campaign and gain popular support is to run against the status quo, rather than in favor of policies to replace it. That’s why politicians run on slogans like “It’s Morning in America” or “Hope and Change” rather than offering real policy alternatives. Stockman’s book reminded me of that idea because as I read through it, I was right with him as he railed against the rampant cronyism that has been growing in America. That’s the status quo we are against. But when I got to his recommendations, which include public funding of election campaigns and a 30% wealth tax to pay down the national debt, I found myself in disagreement. We oppose the same things; we just don’t agree on what should replace them or how they should be replaced.

The book is a worthwhile read. We need more books like Stockman’s, and like Peter Schweizer’s Extortion, to shed light on the state of contemporary American politics.

“I Felt Like a Hostage”: Toward a Solution for Medical Price Transparency

priceless_180x270I recently wrote an article critical of a business group’s approach to improving transparency of prices for medical and hospital procedures. However, as noted in the article, expressing such criticism is not to deny that we have a serious problem when it comes to figuring out how much we owe for treatment.

In Saturday’s New York Times, the estimable Elisabeth Rosenthal has written another excellent report (gated, for subscribers only) about a failure in American health care: Even insured patients cannot get prices from their healthcare providers.

Rosenthal writes about a woman who went to a dermatologist’s office, where a physician’s assistant cautioned her that a white spot might be cancerous. A biopsy confirmed it. Rosenthal then unfolds a “daylong medical odyssey several weeks later, through different private offices on the manicured campus at the Baptist Health Medical Center that involved a dermatologist, an anesthesiologist and an ophthalmologist who practices plastic surgery. It generated bills of more than $25,000.”

The patient’s share was $4,590, which she whittled down to $3,000 after much effort. A highly educated patient, at no point was she told how much her bills would be or given an adequate response to her requests for simpler and less expensive treatment. “I felt like a hostage,” she laments.

The system is so screwed up, most patients don’t bother asking. According to a recent report published by the Altarum Institute, less than one third of patients asked about the price of a treatment before receiving it, and few believe that they can “shop around” for different providers.


Venezuela: The End of Newspapers?

14108454_SI recently got a call from the owner and editor of “El Nacional,” the longstanding Venezuelan daily, in which Miguel Henrique Otero told me that things are even worse than what has been reported in relation to his country’s newspaper industry.

Since the end of last year, the government has refused to allow the print media access to foreign currency with which to pay for newsprint imports. Otero happens to buy paper from Canada and the United States, but others get their supply from Brazil, Finland, and other places. All of them have been requesting the authorities to lift the restriction for weeks. Their inventories are dwindling and they have run out of ways to survive in this environment—they’ve already drastically reduced the number of pages published. Some of them, such as “El Impulso” in Barquisimeto, are literally a few days from having to shut down their operations entirely. Others, including “El Nacional,” have enough newsprint to last four more weeks.

What is CADIVI, the government body in charge of allocating foreign currency, arguing? Literally nothing. In order to maintain the fiction that the government is not acting deliberately against these outlets, CADIVI has not officially barred newspapers from obtaining foreign currency. It is simply refusing to exchange it in practice.

In many other areas of the economy, when people need U.S. dollars they resort to the black market, obtaining them at an exchange rate ten times higher than the official one (68.7 bolívares per dollar is the going rate in the streets). Obviously, newspaper companies cannot do the same in relation to their import needs. It would be impossible for them to hide the transaction and the origin of the currency. Not to speak of the risks they would run under a government that harasses them judicially and administratively day in, day out.


Is There an Argument—Any Argument—for Community Rating?

I’ve never seen an intelligible argument for community rating.priceless_180x270

I think I know why. I’m afraid there isn’t any.

Don’t believe me? I’ll tell you what I’ll do. I let you pick any recognized ethical system in the entire history of Western philosophy. (Only Western? Yeah, we’re not cultural relativists here.) Altruism, Egoism, Nietzschean ethics, Nicomachean (Aristotelian) ethics, Kantian ethics, Thomism (Christian ethics), Utilitarianism, Rawlsian ethics, etc. ― pick any one you like. Then at the other end, I won’t even confine you to health care. You can pick any good or service you like. Your task: to show how you can logically go from the chosen ethical system to the conclusion that the “just” amount a person should pay is the same for everybody, regardless of expected consumption.

While we’re waiting for that demonstration, let’s review the bidding. As everyone acknowledges, community rating creates horrible perverse incentives for everyone. On the buyer side, people have an incentive to refrain from insuring until they get sick. Once they do decide to buy, those who are charged an artificially low premium will over-insure. People who are over-charged will under-insure. Insurers will seek to attract the healthy and avoid the sick. After enrollment, their incentive will be to over-provide to the healthy and under-provide to the sick.

To put up with the bad outcomes of all those perversions, there must be some really compelling moral objective behind it. But I suspect that after it is examined closely most people will actually find community rating morally objectionable.


If Obamacare Lost Your Personal Data, Would You Even Know?

hackerDavid Kennedy is a cybersecurity expert who runs a computer security firm called TrustedSec, LLC. He is in the news because of his expert testimony to Congressional committees on the security of, the website to which people go to apply for Obamacare health insurance if they are in a state with a federal health-insurance exchange.

Kennedy’s basic message is that there is no effective security of personal data that is submitted to He is a so-called “white-hat” hacker: Companies hire him to hack into their computers and then tell them how to fix the entry points he discovers. One can reasonably expect that he knows what he is talking about.

Some in the media resist his warnings. Media Matters, for example, insists that we are to believe the claims of the website’s own cybersecurity expert — a government employee — that everything is hunky-dory.

Between November 27 and December 15, the supermarket Target suffered a breach that allowed hackers access to online customers’ credit-card and shopping data. The company immediately announced the problem, and is taking steps to address the consequences. It has a specific website that explains what it is doing to respond to the breach and future threats.


The Failure of the “War on Poverty” in One Picture

War on Poverty

Source of chart: Jonathan Hoenig (@JonathanHoenig), Chicago, IL, based on U.S. Census data

The poverty rate in the United States fell by half from 1950 to the start of the “War on Poverty.” And it was on track to continue falling. But after the “War on Poverty” programs kicked in, the poverty rate has been stuck in a narrow corridor.

The lesson: Despite good intentions, statist redistribution programs to “help the poor” lead to multigenerational dependency and shrinking opportunities and incentives for low-skill individuals to enter the workforce, increase their skills, and move up the income ladder.

On the other hand, steady private investment in physical and human capital within a secure system of private property rights (which minimizes government corruption and exploitation) results in self-sustaining prosperity, which enables poor people to take advantage of opportunities and permanently lift themselves out of poverty.

Prior to the “War on Poverty,” the post-1950 U.S. economy wasn’t a capitalist nirvana, but it did benefit the poor much more than after The Great Society programs. The numbers speak for themselves.

President Obama on Inequality: Rhetoric vs. Reality

UEMPMEAN_Max_630_378President Obama has recently promoted inequality as a fundamental threat to our way of life, saying, “The combined trends of increased inequality and decreasing mobility pose a fundamental threat to the American Dream, our way of life, and what we stand for around the globe.” You can read the rhetoric here. Let’s look at the reality.

The president suggested policy initiatives to address these issues, so presumably, the president’s policies can make a difference. What has he done so far?

He has presided over corporate bailouts, not only declaring the Wall Street banks too big to fail, while a multitude of small businesses did fail, his policies continue to support the banking industry through low interest rates and the payment of interest on reserves held at the Fed. Banks holding bad mortgages were bailed out while individual homeowners were evicted from their homes.

While the president does not directly determine Fed policy, Bernanke was all-in on the president’s agenda, and now the president has appointed Janet Yellen as Fed chair because she supports a continuation of those policies.

The low interest rate policy has hurt small savers, who tend to keep their savings in fixed-interest assets, but has propped up the stock market where the wealthier tend to invest.

The president’s support for extended unemployment benefits has taken away some of the incentive for people to find work, which is the best way to escape poverty.

After campaigning against them, the president worked hard to preserve the “Bush tax cuts,” with ultimately just a small increase in rates for the highest-income individuals.

Then there is Obamacare, which provides financial incentives for employers to convert full-time jobs to part-time jobs to avoid the health insurance penalties, further eroding opportunities for those at the bottom of the income scale.

What has been the effect of the president’s economic policies? The unemployment rate remains high, at 6.7%, and long-term unemployment has spiked to its highest level in history, largely because of the extended unemployment benefits. The labor force participation rate has fallen from 66% in 2008 to below 63% today, so fewer people are even looking for the jobs that could help them escape poverty.

In 2008 13.2% of Americans fell below the official poverty line. By 2012 the poverty rate was 15%. The president’s policies have increased poverty.

How about the rich? The Dow Jones Industrial Average, which hovered around 8,000 when the president took office in 2009 has more than doubled to top 16,000 today.

Despite the rhetoric, the reality is that the president’s policies have created more inequality. They have hurt the poor, but Wall Street has done well.