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Monetary Policy Easing is Nothing to Fear
As the storm gathered during 2008, the Federal Reserve aggressively eased monetary policy by using open market operations to drive short-term interest rates to near-zero levels. The Fed's lending during 2008 together with its asset purchases in frozen markets caused the assets in its balance sheet to increase sharply, from $800 billion before the crisis to over $2.3 trillion by year-end, says Robert McTeer, a distinguished fellow with the National Center for Policy Analysis.
Fed lending and asset purchases on such a massive scale caused equal expansion of its liabilities, most importantly the reserve deposits of commercial banks and thrifts. The expansion of bank reserves normally would have prompted additional bank lending and investing and thus expansion of monetary deposits. However, the last step in that process was never taken to any substantial extent.
Indeed, the massive loans and investments made by the Fed did not translated into overly rapid growth in the money supply, says McTeer.
• Despite the widespread slack in the economy, including an almost 10 percent official unemployment rate, money growth has not been overly rapid for the circumstances.
• M2, the most reliable measure of money, has grown only 3 percent over the past year, while the narrow M1 measure grew only 6.3 percent.
• Real gross domestic product (GDP) growth has decelerated recently, to an annual rate of 1.7 percent in the second quarter and 2 percent in the third, with over half of this meager growth attributable to inventories.
• Unemployment seems stuck at 9.6 percent; if discouraged workers and others marginally attached to the labor force are included, the unofficial unemployment rate exceeds 16 percent.
Moderate money growth, weak real GDP growth, declining total employment and persistently high unemployment have driven inflation down, not up. Under these circumstances, at least moderate Fed easing is needed, but it should take place routinely and without fanfare. Obsessing over inflation while it is falling and while deflation is emerging as a possibility is not helpful, says McTeer.
Source: Robert McTeer, "Monetary Policy Easing is Nothing to Fear," November 3, 2010.
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Democrats Support Yet Another Bailout
The so-called Create Jobs and Save Benefits Act of 2010, introduced by Sen. Robert Casey (D-Pa.), is a microtargeted bailout for underfunded union pensions that could cost taxpayers billions, say F. Vincent Vernuccio, labor policy council, and Ivan Osorio, editorial director and fellow in labor policy, at the Competitive Enterprise Institute.
• The bill would create a special fund in the Pension Benefit Guarantee Corporation (PBGC), an agency chartered by Congress that insures private sector pensions.
• The PBGC is funded through premiums paid by private companies to insure retirees if a plan sponsor were to become insolvent.
• Casey's bill would direct taxpayer dollars to shore up some underfunded union pension plans.
Casey's bill would create a new fund for the PBGC called the "fifth" fund, which would be "obligations of the United States." In other words, taxpayers, not just PBGC premium payers, would be on the hook. Money in the "fifth" fund would go to "orphans" -- employees whose employers have stopped contributing to their plan -- of certain existing pensions.
Phyllis Borzi, the assistant secretary of labor for the agency in charge of pension plans, is skeptical that the legislation will fix the current situation. She commented that the root of the problem is a sharp decline in the number of new employers joining union pension plans and a dramatic drop in the ratio of employees to retirees.
Estimates on the bill's cost vary widely.
• Sen. Casey very conservatively predicts the bill will cost $8 billion to $10 billion.
• News outlets such as the Wall Street Journal, Washington Examiner and Fox Business estimate the bill could cost as much as $165 billion.
Source: F. Vincent Vernuccio and Ivan Osorio, "Democrats Support Yet Another Bailout," Competitive Enterprise Institute, November 1, 2010.
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Put Department of Education in Timeout
The U.S. Department of Education was created with the primary stated goal of increasing students' test scores, but test scores for 17-year-old American students have remained essentially flat since 1970. The department's budget has grown to a whopping $107 billion this year. Per pupil, taxpayer-financed education spending (adjusted for inflation) has risen by more than 200 percent since 1970 (and 150-plus percent since 1980). Clearly and unambiguously, the department deserves a grade of F, says Richard W. Rahn, a senior fellow at the Cato Institute.
Many of the just-elected members of Congress have called for elimination of the Department of Education. What the new Congress can and should do, however, is greatly reduce the department's budget.
• The ratio of classroom teachers to pupils has grown very slowly over the past 40 years despite the huge increase in government spending on education.
• Most of the increase in spending has gone to education bureaucrats -- including more and more layers of "administrators" (assistant principals, deputy assistant principals, and on and on) -- and much of it is needless overhead.
• So, as those in Congress cut back the department's funding, they must be smart about it -- they need to insist that the funds be reduced for the middlemen and not the classroom teachers.
The nation is best served by having a highly competitive mix of public, private, nonprofit and for-profit educational institutions.
Source: Richard W. Rahn, "Put Department of Education in Timeout," Washington Times, November 2, 2010.
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State Bailouts? They've Already Begun
The threat posed by the state fiscal crisis in the United States is vastly underestimated and underappreciated, says Meredith Whitney, CEO of Meredith Whitney Advisory Group LLC.
A clear example of this took place in Manhattan last week at the Economist magazine's Buttonwood Conference, where a panel role-played the federal government's response to a near default of the hypothetical state of New Jefferson. After various deliberations and simulated threats from the Chinese government, the panel reluctantly voted to grant New Jefferson an emergency bailout of $1.5 billion to cover the state's debt payment.
What this panel and so many other investors fail to appreciate is that state bailouts have already begun.
• Over 20 percent of California's debt issuance during 2009 and over 30 percent of its debt issuance in 2010 to date has been subsidized by the federal government in a program known as Build America Bonds.
• Under the program, the U.S. Treasury covers 35 percent of the interest paid by the bonds.
• California is not alone: Over 30 percent of Illinois's debt and over 40 percent of Nevada's debt issued since 2009 has also been subsidized with these bonds.
Beyond debt subsidies, general federal government transfers to states now stand at the highest levels on record. Today, more than 28 percent of state funding comes from federal government transfers, says Whitney.
These transfers have made states dependent on federal assistance.
• New York, for example, spent in excess of 250 percent of its tax receipts over the last decade.
• The largest 15 states by gross domestic product spent on average over 220 percent of their tax receipts.
At the same time, local governments now rely on state government transfers for 33 percent of their funding. Thus, when a state finds itself in a financial bind, it has the option of saving itself before saving one of its local municipalities.
Rather than waiting for more federal intervention, states need to make their own hard decisions and not kick the can down the road, says Whitney.
Source: Meredith Whitney, "State Bailouts? They've Already Begun," November 3, 2010.
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A Primer on the Constitutionality of Health Reform
The legal battles over ObamaCare present the fundamental questions of where government gets its powers and what the constitutional limits to those powers are, say Ilya Shaprio, a senior fellow in constitutional studies, and Trevor Burrus, a legal associate, at the Cato Institute.
The strongest constitutional criticism of the legislation is that the individual mandate to buy health insurance exceeds Congress's power to "regulate commerce ... among the several states."
• Never before has the federal government required every man, woman and child to buy a particular good or service -- or pay a civil penalty for declining to do so.
• Never before have courts had to consider such a breathtaking assertion of raw power under the Commerce Clause.
• The lawsuits thus allege that an individual's choice not to purchase health insurance is not an economic activity that Congress can regulate.
While the Court has rejected nearly all Commerce Clause challenges since the New Deal, two such lawsuits have been successful, say Shapiro and Burrus.
• In 1995, the Court struck down a law prohibiting the possession of guns near schools because it was not "part of a larger regulation of economic activity, in which the regulatory scheme could be undercut unless the intrastate activities were regulated."
• Similarly, in 2000, the Court struck down the Violence Against Women Act because the gender-motivated violence it regulated had only an "attenuated" economic effect.
With the Commerce Clause justification facing a credible challenge, the government began to argue that the fine levied on those who fail to comply with the individual mandate is a "tax" authorized under Congress's power to tax for the general welfare. However, Congress specifically changed the term from "tax" to "penalty" in the last iteration of the bill and identified no revenue that would be raised from the "tax."
Finally, even if the individual mandate and its accompanying fine are deemed a tax, it would be an unconstitutional one, say Shapiro and Burrus.
Source: Ilya Shapiro and Trevor Burrus, "A Primer on the Constitutionality of Health Reform," Cato Institute, November 3, 2010.
