Sunday, October 30, 2011

Choice, not federal gifts, boosts school outcomes

Published in The Tennessean, Sunday, October 30, 2011

by Richard J. Grant

The Obama administration recently nationalized the college loan industry. Then this week the president announced an income-based cap on the repayment rates of student loans. After 20 years, any unpaid portion of the loan would be forgiven, that is, paid by taxpayers.

The net effect of this policy will be to encourage disproportionately those students who are least likely to benefit either themselves or taxpayers in the pursuit of higher education. The most heavily subsidized students will be those who enter the lowest value-adding professions.

In the world of educational subsidies, higher education has always offered the lowest returns to taxpayers. This effect is merely exacerbated by the involvement of the federal government. But none of this matters to those who know that the real name of the game is No Vote Left Behind.

In contrast, some state governments have been moving their educational policies toward greater efficiency and better outcomes. After more than a century of increasing state involvement in schooling, they are acting to benefit from decentralized decision-making and the freedom to choose in education. That century of experience has demonstrated that governments are not particularly good at education. They are not even good at picking winners in vocational training.

Perhaps the kindest explanation for why governments got involved in schooling was to ensure that all children, regardless of family circumstances, were introduced to reading, writing, and arithmetic. This could easily be organized at the local level. But as the curricula grew more ambitious, and providers saw gain in political organization, the spending power of state governments was recruited.

The trend toward school choice for government-funded students reflects the recognition that governments have a knack for raising funds but a poor record in running schools. When states such as Indiana, Wisconsin, Ohio, and Florida introduced school voucher programs, they empowered families to find and select their own educational opportunities. The state got out of the way except to ensure adequate funding and the prudent use of those funds.

In Tennessee, State Senator Brian Kelsey is sponsoring a bill called the “Equal Opportunity Scholarship Act,” which would give low-income families the power to send their children to the schools of their choice. Students in the four most populous counties would have available to them vouchers amounting to half of what the state and local school systems would have spent on them. In essence, these are scholarships that can be spent at any approved private or government-run school.

The effect, when tried elsewhere, has been improved student performance. When families are free to choose, and schools are free to compete, the schools have an incentive to be better and the families get to choose what works best for them. To attract and better serve their students, the schools will necessarily direct their resources to those uses that best serve their needs.

School choice depoliticizes the school environment and reduces the need for cumbersome administrative structures and bureaucratic assessment systems. It would also reduce the need for state and local governments to be involved in the expensive construction and management of school grounds and buildings. And it works better when more students are eligible.

Ironically, the acceptance of freedom in education will require education. Special-interest groups, such as teachers unions, will argue against any change that allows families alternatives to unionized schools. Families have something to teach the teachers.


Richard J. Grant is a professor of finance and economics at Lipscomb University and a senior fellow at the Beacon Center of Tennessee. His column appears on Sundays.

E-mail: rjg@richardjgrant.com

Twitter: @RichardJGrant1

Copyright © Richard J Grant 2011

Sunday, October 23, 2011

'9-9-9' would shine light on true tax burden

Published in The Tennessean, Sunday, October 23, 2011

by Richard J. Grant

Decades ago, while riding an overnight train through Italy, a fellow passenger offered a warning. He had heard that organized criminals would wait until passengers fell asleep and then spray anesthetic into the compartment to deepen that sleep. With the passengers now safely oblivious, the thieves could help themselves to unguarded valuables.

Although almost certainly untrue, this story does serve as a neat allegory for the real-life relationship between taxpayers and tax legislators. It is much easier to get voters’ support for a tax-rate increase when taxpayers are unaware of their true position in the political food chain.

We know that, all else equal, income earners and property owners are happier the more of their income and property that they are allowed to keep. The higher the tax rate on each additional dollar earned, the less likely it is that a worker will put in the extra effort to earn one more dollar. Other activities become relatively more attractive. These might include leisure or the pursuit of some other less-taxed income opportunity.

When taxpayers perceive their own tax rates to be rising, they are likely to offer resistance in their role as voters. But if they believe that someone else is paying those taxes, they are more likely to be neutral or even supportive – especially if those perceived to be bearing the burden are seen as rich or undeserving.

Few people are aware of the difference between the “incidence” and the “burden” of a tax. Although one person is seen to be paying the tax to the government, this does not mean that no one else bears the burden.

Even children are affected. When I was a young teen, an old man once remarked that I did not pay taxes. When I insisted that I did, he laughed. That was until I pointed out that, if my parents did not pay such high taxes, my life would undoubtedly be different.

Many people believe that their Social Security payouts are half free because their employer pays half the tax. They are unaware that the portion of the tax paid by the employer adds to the cost of hiring that employee. This draws away resources that could be used to bid against other employers for the services of that worker. The employer would be just as happy to give the money to the employee as it would be to give it to the government. The employee might, if aware of the trade-off, have a stronger bias in the matter.

Government programs are easier to sell to voters when the full costs are hidden from view. It is well known that the bottom 40 percent of income earners pay no federal income tax. But they would be fools to believe that they bear no burden from the taxes paid by others. The tax disincentives facing investors and the resources taxed away from employers render employees less productive and therefore less valuable. The tax burden is borne as lower wages or, for some, as unemployment.

One of the criticisms of presidential candidate Herman Cain's 9-9-9 tax plan is that it would create a federal sales tax that might later be increased by Congress. But the plan eliminates an array of currently hidden taxes and replaces them with simple taxes that voters can see. Congress would have to operate without anesthetic.


Richard J. Grant is a professor of finance and economics at Lipscomb University and a senior fellow at the Beacon Center of Tennessee. His column appears on Sundays.

E-mail: rjg@richardjgrant.com .

Twitter: @RichardJGrant1

Copyright © Richard J Grant 2011

Sunday, October 16, 2011

U.S. economic freedom falls, China rises

Published in The Tennessean, Sunday, October 16, 2011

by Richard J. Grant

Since June 2010, the Chinese currency has risen in value by about 7 percent compared to the U.S. dollar. This has not stopped accusations of “currency manipulation” from the U.S. and elsewhere. Such accusations are politically useful since not one person in a hundred understands what the charge means and it vaguely sounds as though the accuser has the best interests of U.S. workers at heart.

The U.S. Senate has just passed a bill that would require the U.S. to impose tariffs on goods imported from selected countries in order to punish currency manipulators and to counteract perceived underpricing. House Speaker John Boehner has already indicated that the bill will not proceed in the House. He sees punitive tariffs as harmful to trade relations. But few dispute the charges of currency manipulation.

This is interesting because, of all the problems that Chinese actions might present us with, currency manipulation is the least of them. Of far greater importance, and a prerequisite for civil relations between individuals and nations, is respect for individual property rights. Governments that never come to terms with such basics will always present a threat to their citizens and to international peace.

China is not a free country and, although it is opening up, its people have paid a high price for past repression. According to the Economic Freedom of the World: 2011 Annual Report recently published by the Fraser Institute and the Cato Institute, China now ranks 92nd out of 141 countries studied in terms of economic freedom.

To the extent that economic freedom is a predictor of economic progress, then China has a long way to go in relative terms. But in absolute terms, its score on the freedom index has improved greatly over the past 30 years. This freeing up of economic relations explains the tremendous increase in China's productivity and standard of living.

Any neighborhood is made better by the presence of neighbors who are self-supporting and respectful toward other people and their property. It is in the interests of the Chinese people themselves to become such neighbors. To the extent that they retain state ownership of their enterprises they hurt themselves more than they hurt us. When they subsidize their industries, they hurt their own potential domestic production more than they hurt ours.

Most people can't figure this out for themselves; they must be shown. But what kind of example is it to the world, and to ourselves, if we reject our own economic freedom? Over the past 15 years, the United States has fallen to 10th place on the Economic Freedom of the World index; and in absolute terms, we have shown one of the most significant decreases in economic freedom.

After many years of single-digit growth, since 2008 the U.S. Federal Reserve has tripled the quantity of base money. It has also pushed its target interest rates down to record lows. Does this qualify as currency manipulation? Is not currency manipulation the purpose of all central banks that manage a fiat currency?

After its 20-percent inflation in 1994, China adopted our monetary policy by periodically fixing its currency to ours. But as we expanded our money supply, China had to do the same and suffer price inflation. To avoid this inflation, it was in China's own interest to allow its currency to rise relative to the dollar.


Richard J. Grant is a professor of finance and economics at Lipscomb University and a senior fellow at the Beacon Center of Tennessee. His column appears on Sundays.

E-mail: rjg@richardjgrant.com .

Twitter: @RichardJGrant1

Copyright © Richard J Grant 2011

Sunday, October 09, 2011

Wal-Mart can't join, tries to beat banks

Published in The Tennessean, Sunday, October 9, 2011

by Richard J. Grant

There’s an old joke about a senator who, when told that his idea won’t work because of “the law of supply and demand,” retorted, “Then we’ll just repeal that law!” As if to remind us that truth is stranger than fiction, Sen. Dick Durbin, D-Ill., was recently shocked to learn that it really was just a joke.

It was Durbin who inserted the amendment into the 2010 Dodd-Frank financial-regulation law that capped the transaction fees that debit-card issuers could charge retailers. He and his colleagues apparently believe that the forced reduction of prices is the same thing as the reduction of costs. He thought he could get something for nothing.

To recoup revenues lost from debit-card interchange fees, many banks have announced increased monthly fees on debit-card accounts. Real costs didn’t shrink. What changed was the pricing structure through which we bear those costs.

The debit-card interchange fees were invisible to consumers, but the new account fees are not. Just as politicians prefer that you not see the taxes that they impose, Sen. Durbin was doubly outraged that the new fees have been dubbed the “Durbin fee.”

When Bank of America announced a $5 per month fee, Durbin lashed out from the Senate floor and urged a boycott.

But while he and his Democratic colleagues cannot be absolved from responsibility for the law, we can still ask what motivated them.

Columnist Timothy Carney asserted that “the real culprit is Wal-Mart and the retail lobby, which used government to squeeze banks and fatten their own bottom line.”

But why stop there? What motivated Wal-Mart? During the past decade, Wal-Mart has tried to reduce its costs by directly offering credit services to its customers.

It has applied at least three times for an industrial loan charter, but each time has been met with intense opposition and lobbying activity from banks and so-called consumer groups.

The banks are rightly terrified by the prospect of competition from a company with the retail expertise and customer base of Wal-Mart. But reliance on government regulation to thwart competition is to take the road to serfdom; and what goes around comes around.

When market relations become fused with politics, then, with apologies to Clausewitz, politics becomes market competition by other means. Legal obstacles limit our choices and channel us into second-best survival strategies. Resources are diverted from the core business into defensive lobbying.

That is how it began for Microsoft, which, until the mid-1990s, tended to stay out of politics. While Microsoft was focused on serving customers, jealous competitors joined with the U.S. Justice Department in attempts to break up Microsoft. Once “blooded” with its first “hunt,” Microsoft learned to lobby with the best, and the worst, of them.

Wal-Mart’s ventures into politics might have begun the same way. But what kind of worldview would encourage Wal-Mart’s endorsement of the “employer mandate” in the recent health-care reform law?

The mandate would increase Wal-Mart’s employee health-care costs, but its competitors would be forced to pay even higher costs per employee. That’s competition by other means.

With determination and a clear assessment of the legal terrain, Wal-Mart can reduce costs by integrating banking functions into its operations.

Although itself “blooded,” it might be Wal-Mart that shows us that banking is not as different from other types of business as once believed.


Richard J. Grant is a professor of finance and economics at Lipscomb University and a senior fellow at the Beacon Center of Tennessee. His column appears on Sundays.

E-mail: rjg@richardjgrant.com .

Twitter: @RichardJGrant1

Copyright © Richard J Grant 2011

Sunday, October 02, 2011

Individual choice, not government, fuels prosperity

Published in The Tennessean, Sunday, October 2, 2011

Richard J. Grant

In the 2003 movie, Master and Commander, a British warship during the Napoleonic Wars is rounding Cape Horn when a severe storm rises. The mizzen-mast breaks and falls into the sea with a square sail and parts of the mast, still held by several lines, dragging behind the ship.

A popular midshipman has also been swept overboard, and his only hope is to swim to the trailing rigging. But the wreckage is acting as an anchor that threatens to sink the ship. The storm won’t wait for the unfortunate midshipman; the commander must choose between losing one man or the possibility of losing everyone.

Suppose that the commander had waited in hope for the man overboard to swim to the rigging, and in the waiting lost the ship. Other than the loss of a military asset, lost also would be the men and their future descendants, as well as all the experience and survival lessons that might have been passed on to the benefit of future colleagues and generations. By that small increment, progress would be slowed, and more losses would be suffered in the relearning.

Such stark examples are not uncommon in life, but most parallels are obscured by complexity. We dream of “no child left behind,” and in so dreaming become a drag on the entire government education system. Rather than quickening the stragglers, we are turning the schools into slow heats that fail to challenge those who are truly educable. By not-so-small increments, each generation starts from behind what might have been passed on by those who went before.

We dream of universal health coverage, and in so dreaming restrict and retard progress in the entire health-care process. So afraid are we that someone might not get the best available care or insurance coverage, we force everyone into the same regulatory egg crate.

But professional licensing and regulation are rarely harbingers of innovation. We have less healing capacity now to the extent that previous generations allowed government officials to decide for them what the future of medical care should be.

In each of these examples, the political battles that arise are less often over the desired ends than over the means of achieving them. Only party hacks would make political campaign commercials in which Grandma gets pushed over a cliff. The rest of us want what’s best for Grandma and for everyone else. But a desire to have everything for everyone now puts future grandmas at risk.

Present-day grandmas have been put at risk not only by the politically motivated programs of the past but also by the continued weakening of those best able to provide services needed by everyone. At any age, those who are unable to take care of themselves are better off in societies where those around them have the capacity to give care. And the surest way to retard the development of that capacity is to have government force everyone into the same kind of program.

If we truly wish to provide the poor and the helpless with better services — medical, educational, housing or financial — then we need to allow greater individual choice, not less. It is precisely that freedom that allows good people to build a better and more prosperous society. But when government programs crowd out or absorb private initiatives, they risk dragging down the entire ship.


Richard J. Grant is a professor of finance and economics at Lipscomb University and a senior fellow at the Beacon Center of Tennessee. His column appears on Sundays. E-mail: rjg@richardjgrant.com . Twitter: @RichardJGrant1

Copyright © Richard J Grant 2011