Category Archives: Federal

Fed Theft Update: $749 Billion from Bank Depositors

silent_theftFederal Reserve Bank suppression of interest rates has cost bank depositors $749 billion in interest income on savings accounts, CDs, and money market accounts over the past six years, according to Richard Barrington with MoneyRates.com.

Quantitative Easing has made possible one of the greatest redistributions of wealth in United States history. Unlike with taxes, which tend to be highly visible, most people don’t understand how interest rate suppression affects them. Low interest rates have devastated not only bank account savings but public and private pension funds and savings vehicles such as insurance policies. Beneficiaries are borrowers, including house buyers, car owners, college students, credit card owners, corporations leveraging their balance sheets, and, of course, the U.S. government. Every percentage point in interest rate suppression across the yield curve benefits Uncle Sam to the tune of $180 billion a year.

So, how did Barrington calculate the cost to bank depositors?

MoneyRates.com starts with the total amount on deposit at U.S. banks as of March 31, per the FDIC. That total is then increased by average money market rates over the subsequent year … and then adjusted for the inflation rate over the same period. The difference between the resulting figure and the original amount on deposit at U.S. banks represents the hidden cost of the Federal Reserve’s low-rate policy.

The little guy knows the system is stacked against him. He just doesn’t know how. Pass this blog post around.

— JAB

Your Federal Tax Dollars at Work

The fog of government

The fog of government

And I thought the City of Richmond was incompetent for its inability to close out its financial books in a timely manner!

Heed this opinion from the federal Government Accountability Organization (GAO) on Uncle Sam’s financial statements for 2014 and 2015: “Certain material weaknesses in internal control over financial reporting and other limitations on the scope of … work resulted in conditions that prevented GAO from expressing an opinion on the accrual-based consolidated financial statements.”

Three major departments — Defense, Agriculture and Housing & Urban Development, controlling 34% of assets and 19% of spending — accounted for the most questionable financials, according to Government Executive MagazineBut accounting issues pertaining to Medicare cost control also prevented GAO from expressing an opinion on sustainability financial statements on HHS’ Statement of Social Insurance on accounts worth about $27.9 trillion.

Bacon’s bottom line: The federal government will run a $544 billion budget deficit this year…. we think. It could be more, it could be less. What’s a few billion dollars?

(Hat tip: Tim Wise.)

Radiation, Hormesis and Nuclear Power

radiationby James A. Bacon

I belong to a generation that grew up with a fear of nuclear war, fall-out and slow, agonizing death by radiation poisoning. We’d seen the horrors of Nagasaki and Hiroshima. We lived through the scare of Three Mile Island and, years later, had our fears reinforced by catastrophes at Chernobyl and Fukushima. Given the fear of radiation, when people talked about the wonders of nuclear power, my reaction was, “Sounds great. Just make it safe.”

As the United States evolves toward a low-carbon future, nuclear energy has two great virtues. First, it emits zero carbon dioxide. Second, nuclear power plants run around the clock; unlike with wind and solar, output does not vary with weather conditions. The drawback is that nuclear units are hideously expensive to build, largely because federal rules have zero tolerance for radiation leaks.

The zero-tolerance philosophy is based upon a scientific premise known as the linear no-threshold model (LNT), which states a linear dose-risk relationship. We know incontrovertibly that large radiation doses are deadly. The LNT model asserts that small doses are damaging as well, though at proportionately lower levels. While that scientific view has prevailed in the regulatory arena — better safe than sorry — it has not been universally accepted.

Proponents of “radiation hormesis” argue that biological organisms evolved in an environment with measurable background radiation. Not only is this low level of radiation not harmful, says the hormesis hypothesis, it is beneficial because it stimulates organisms to engage in cellular repair activities that counter not only the deleterious effects of radiation but cancers unrelated to the radiation exposure. The positive hormesis effect small, however, so its statistical signal has been drowned out by seemingly infinite variations in environmental conditions and by measurement error.

Still, the hormesis hypothesis has been gaining traction in recent years — so much so that the U.S. Nuclear Regulatory Commission has requested public comment on proposals to change the basis for NRC “Standards for Protection Against Radiation” from the LNT model to the hormesis model. Presumably, the proposed change would declare low levels of radiation emissions to be harmless, which in turn could relax the regulatory requirements surrounding the construction and operation of nuclear reactors.

“Exaggerated radiation fears have been crucial in driving up the safety, waste storage and licensing costs of nuclear power,” declares Holman W. Jenkins Jr. in the Wall Street Journal today. “But change may finally be coming—a paradigm shift in how we think about nuclear risk.”

While sentiment may be shifting, millions of Americans remain less than convinced. Most of the comments I perused in the NRC comments were negative. Many people are convinced that the revised thinking is being driven by a self-serving nuclear power industry.

There is a good chance that the LNT-vs.-hormesis debate will come to Virginia. Dominion has filed for NRC regulatory permission to extend the life of its two Surry nuclear power units, and has spent hundreds of millions of dollars to keep alive the option of building a third nuclear unit at its North Anna power station. Environmental groups, most notably the Virginia chapter of the Sierra Club, have campaigned actively against the nuclear option.

Bacon’s bottom line: What’s fascinating about the NRC’s look at hormesis is that it comes from a Democratic administration, which, all other things being equal, one would expect to be far more responsive to environmentalist concerns than a Republican administration. In a conference on nuclear power last month that generated little attention in the media, the White House reiterated its commitment to nuclear as a necessary component of its clean energy policy.

While Dominion’s proposal to invest roughly $1.5 billion to patch up the Surry units so they can operate another 20 years may be economically defensible, it is hard to see any case being made for spending $19 billion to build a third North Anna unit…. unless Dominion is banking on major regulatory changes at the NRC. If the Obama administration embraces hormesis as the basis for its rule making, and if the new standards strip billions of dollars of expense from building new nuclear reactors, Dominion’s commitment to North Anna 3 makes more sense.

Whatever the NRC decides, fear of radiation is so deeply embedded in our popular culture that the LNT-hormesis controversy is sure to play out here in ye Olde Dominion.

The Tragic Political Economy of Higher Ed

Lynchburg College President Garren. Photo credit: Wall Street Journal

Lynchburg College President Kenneth Garren. Photo credit: Wall Street Journal

by James A. Bacon

Lynchburg College President Kenneth Garren was sipping wine at a reception last year when he bumped into Senator Mark Warner. He button-holed the senator and urged him to oppose an Obama administration plan to create a ratings system for U.S. colleges and universities. Two months later, under pressure from Garren and other Virginia college presidents, Warner declared his opposition to the plan, reports the Wall Street Journal today.

The higher education system has emerged as one of the most effective lobbying forces in Washington, spending more than $73 million yearly on lobbying and employing more than 1,000 lobbyists — more than any other industry in the nation save drug manufacturing and technology, the WSJ says.

Moreover, with a presence in every state and every congressional district, higher ed can mobilize enormous grassroots support. Rep. Robert Goodlatte, R-Roanoke, told the Journal that he received a letter opposing the Obama plan from every school in Virginia, and he met with several college presidents on the matter.

Federal loans and grants to college students now runs at $134 billion a year, making higher ed one of the biggest recipients of federal assistance of any industry in the country. With student debt surging way past the $1 trillion mark and student defaults climbing into the billions, the Obama administration, like administrations before it, has pushed for more transparency and accountability in higher ed by publishing data to allow students and parents to make more intelligent consumer decisions.

The higher ed lobby defeated Obama’s plan to rate colleges, although the administration did end up publishing significant data without the ratings. Colleges have opposed such transparency and accountability measures on the grounds of protecting student privacy or the impossibility of making fair comparisons between colleges serving different market niches. Government should not be in charge of weighing the factors that go into determining colleges’ performance, the industry says.

The colleges’ arguments have some merit, but they overlook the obvious: He who pays the piper calls the tune. When Uncle Sam supports the industry through $134 billion yearly in tuition assistance (not to mention billions in research grants), Uncle Sam will want a say in how that money is spent.

While much of the rest of the country has stagnated economically over the past 15 years, higher ed has been a growth sector entirely due to federal largess. But costs have ballooned, tuitions have soared and a generation of students is hobbling its future with debt. Higher ed doesn’t want to give up the money or to be held accountable to its students, and the federal government can’t afford to dole out billions without a measure of accountability, so conflict is inevitable.

As the federal leviathan seeks to impose its will, the industry mobilizes to defend itself, and yet another sector is sucked into the rent-seeking maw of Washington politics. Higher ed, a bastion of economic privilege, is fighting to maintain that privilege. The sector is morphing into another special interest like all the others

How the Feds Run Virginia’s Colleges and Universities Now

Anne Holton, Virginia's Secretary of Education: not really in charge of higher education any more.

Anne Holton, Virginia’s Secretary of Education: token task master. She’s really not in charge of Virginia higher education any more.

by James A. Bacon

A new Vanderbilt University study sheds light on the relentless increase in costs at U.S. colleges and universities: government regulation. In a detailed study of 13 institutions, Vanderbilt and the Boston Consulting Group found that compliance with federal regulations ranges between 3% and 11%, depending upon the institution, with a median cost of 6.4%. Research institutes bore the heaviest burden — grants & contracts incurred the greatest costs — but government regulations cut across all aspects of campus life.

The report delved deeper into the numbers than any previous study and is the most authoritative to date. “While many regulations are useful and effective, others are unrelated to the mission of higher education. All regulations impose cost, however,” said Thomas W. Ross, president of the 17-campus University of North Carolina, one of the study participants. (No Virginia university participated in the study.)

Under pressure for soaring tuition and fees, the higher ed sector has long complained about the cost of government regulation. A recent report, “Recalibrating Regulation of Colleges and Universities,” put it this way:

Over time, oversight of higher education by the Department of Education (DOE) has expanded and evolved in ways that undermine the ability of colleges and universities to serve students and accomplish their missions. The compliance problem is mandated by the sheet volume of mandates — approximately 2,000 pages of text and the reality that the Department of Education issues official guidance to amend or clarify its rules at a rate of more than one document per work day. As a result, colleges and universities find themselves enmeshed in a jungle of red tape, facing rules that are often confusing and difficult to comply with. They must allocate resources to compliance that would be better applied to student education, safety and innovation in instructional delivery.

Key points made in that study:

  • Regulations are unnecessarily voluminous. Referring to Department of Education regs alone, “the Higher Education Act (HEA) contains roughly 1,000 pages of statutory language; the associated rules in the Code of Federal Regulations add another 1,000 pages. Institutions are also subject to thousands of pages of additional requirements in the form of sub-regulatory guidance.”
  • Regulations are overly complex. “Frequent issuance of sub-regulatory guidance by the Department, although intended to clarify, often leads to further confusion.” A “Dear Colleague” letter on Title IX responsibilities regarding sexual harassment required further guidance in the form of a 53-page “Questions and Answers” document that took three years to complete. “And that raised even more questions. “Complexity begets more complexity.”
  • The DOE has an increasing appetite for regulation. The growth in the “volume and velocity” of regulation has increased in recent years, even in the absence of new statutory changes from Congress. “Negotiated rulemaking sessions have addressed topics as varied as accreditation, college teacher preparation programs, PLUS Loans, debit cards, gainful employment, state authorization, and the credit hour — all undertaken solely at the Department’s initiative without any prior Congressional action.
  • The DOE does not act in a timely fashion. “The HEA explicitly requires the Secretary of Education to issue final regulations within 360 days of the date of enactment of any legislation affecting these programs. The Department almost never meets this deadline.”
  • Regulation can be a barrier to innovation. “The Department’s definition of credit hour … is one example. By relying on the concept of ‘seat time,’ the Department’s definition had discouraged institutions from developing new and innovative methods for delivering and measuring education, such as competency-based models.”
  • The regulatory process is opaque. “While intimating that it consults professionals in the field in developing its calculations, we have been unable to locate a single institutional official who has ever been contacted by the Department for this purpose. Even more telling, we have been unable to locate any institutional official who has heard of anyone else ever being contact for this purpose.”

Bacon’s bottom line: For perhaps the first time ever, I feel a smidgen of sympathy for Virginia’s university administrators. The DOE exercises fearsome power — the ability to cut off federal backing for college loans, upon which almost every college in the country is slavishly dependent. And the DOE has wielded that power to compel colleges to submit to new regulations. A recent example: The Obama administration’s aggressive interpretation of Title IX regulations to attack the supposed “epidemic of rape” on colleges campuses has led to the creation of a new bureaucratic apparatus to combat the problem. (Hopefully, Bacon’s Rebellion soon will be able to document how that has played out at the University of Virginia.)

The big take-away from these studies is to change the way we think about public oversight of Virginia’s “state” colleges and universities. They are “state” universities in the sense that the state provides financial support for them and provides modest regulatory oversight. But the federal government, in its overweening way, now exercises as much, if not more, control over “state” universities as the state does. Indeed, all major regulatory initiatives in recent years have emanated from the U.S. Department of Education, not the state, not Congress.

The fact is, the Governor of Virginia and the General Assembly aren’t the drivers behind higher educational policy in Virginia anymore. The federal government — more specifically, the Obama administration, acting without the authorization of Congress — has usurped that role. The federal leviathan grows ever more powerful in ways that may never be reversed.

Pell Grants: Soaking Taxpayers and Creating Debt Slaves?

pell_loansby James A. Bacon

Earlier this month the Hechinger Report found that a large percentage of the beneficiaries of federal Pell grants to students from low-income families never graduate. The study also found that the federal government, despite spending $300 billion on the program since 2000, doesn’t keep track. The feds have doubled their commitment to the program since the 2007-2008 school year with absolutely no idea of what results they are getting.

Uncle Sam may be flying blind, but Virginia is not. The Commonwealth has been collecting the data for years and reports the results for every public and private university in the state, reports the VLDS (Virginia Longitudinal Data System newsletter. According to Tod Massa with the State Council for Higher Education for Virginia, “Virginia knows more about the success of students in all the Title IV financial aid programs, which are not ours, than the federal government does.”

Pell grants for low-income students provide awards of up to $5,775 per student. Graduation rates for Pell recipients in Virginia can be seen here.

For all first-time, full-time college students entering a Virginia institution in the 2001 school year, 60.3% graduated within five years compared to 43.4% for Pell recipients. The graduation rate varied widely between institutions, however. The more elite the institution, the higher the graduation rate. For instance the Pell graduation rate within five years at the University of Virginia was 85% for freshmen enrolled in 2001, while it was 20% at Norfolk State University. (View data for individual institutions here.)

The disparity in graduation rates raises the question of whether the program is inducing poor students to attend college when they have no business doing so, either because they are unprepared for college-level work or because they struggle to pay the tuition, fees, room and board. A nearly $6,000 grant covers about a third or fourth of what it costs to attend a public university in Virginia. It would be interesting to know how many Pell recipients end up taking out student loans. It would be even more interesting to know how many Pell recipients end up saddled with student debt without the degree credential that would help them pay it off.

Virginia has the data to undertake such an analysis. The fact that the U.S. Department of Education does not is just disgraceful. It’s not often that a government wealth-distribution scheme can both squander your tax dollars and propel thousands  of would-be beneficiaries into debt slavery.

— JAB

More Sequestration Pain for Virginia

pentagon_burning

Pentagon burning

by James A. Bacon

The pain of federal budget sequestration cuts in Virginia is not yet over. Look what The Washington Post reports today:

According to the Defense Department research, things are likely to worsen over the next four years. From 2010 to 2012, Virginia experienced $9.8 billion in defense cuts, with the vast majority of losses in Northern Virginia. Direct defense spending in the state is projected to drop from $64 billion this year to under $62 billion in 2019.

That’s only $2 billion in cuts compared to $9.8 billion previously. That sounds bad but not that bad. Actually, it is, says Sen. Mark Warner, D-Virginia: “If we have the return of sequestration, it’s going to be even worse than it was a couple of years ago, because every agency, particularly the Defense Department, has cleared out most of their coffers.”

I’m not sure exactly what “cleared out their coffers” means, but I’m guessing it means that defense agencies have burned through their budget gimmicks and are planning real cuts.

Adding to the woes, the impact of federal budget cuts will percolate through the rest of the economy. As government contractors consolidate, they’ll need less office space. That puts pressure on lease rates region-wide, there will be less construction work, and the necessary process of restructuring from inefficient and expensive land-use patterns to more cost-effective patterns will drag out. Meanwhile, transportation planning assumptions, predicated on wildly out-of-date assumptions about growth and development, will veer farther and farther from reality.

The rule is so simple: Things that can’t go on forever… won’t. The defense spending boom of the post 9/11 era could not continue forever… and it didn’t. The downturn and all the ugly consequences stemming from it were utterly foreseeable — I’ve been ranting about them for years.

I don’t lose a lot of sleep over real estate developers losing a fortune. They’re big boys and they know how to hedge their bets. (If they don’t, they shouldn’t be in the business.) I’m a lot more worried about the state and local government sinking billions of dollars on infrastructure designed for the go-go 2000s. It is astonishing to me that serious consideration is still being given to the Bi-County Parkway near Manassas, and I have serious questions about the assumptions underpinning the billions of dollars of improvements planned for Interstate 66 and the second leg of the Rail-to-Dulles project. Any project whose revenues are predicated on assumptions of increased traffic, which are based on the 2000s-era economic growth rates extended in a straight-line projection forever, will create nothing but headaches for taxpayers.