Bacon's Rebellion

It came as a shock for Laurie Duncan.

This past Saturday, she was with her husband and 13-year-old daughter fishing on the Pasquotank River near South Mills, N.C. about five miles south of the Virginia border. There, amidst the marsh grass and cypress roots was a large, seven-foot-long alligator sunning itself. After a few pregnant moments, the gator slipped silently into the murky water.

Few writers on economics are able to say more in about 700 words than James Surowiecki of The New Yorker. He’s done it again in the current issue,

Perhaps not too oddly, he’s in sympathy with some of the points brought up by the budget-bashing Baconauts and Boomergeddons, not to mention the Big Bacon himself. “Multitrillion-dollar piles of debt have a way of making people nervous . . .” he writes. Yet he takes the worry a little farther by noting that Washington doesn’t have a spending problem per se but a health-care problem. Medicare, Medicaid and tax subsidies for employers who provide insurance are rising faster than just about any other expense.

He says insurance companies are not the real driver of costs (I have often said they are). He says health care providers are, namely hospitals, MRI tests, drugs and doctor’s exams. The fee for service system, not to mention CYA for malpractice, means that lots of uneeded tests are ordered, leading to complaints about waste and inefficiency you see here on this blog

How to go about it? Surowiecki tears apart the proposal of Congressman Paul Ryan, the darling of the New Right, to go to vouchers for Medicare. All that is a shell game that would mean tax payers pay less and seniors pay more out of their own pockets. If you buy into the Boomergeddons who have made fright about future debts a religion, Granny and Grandpa are going to have a lot less extra pocket change to bear the increased cost to them that vouchers would bring. Since many readers of this blog are a a few years ago from Granny and Grandpa, wake up! They are talking about us! So, a camp believes that seniors should be protected.

“The ideal system, for most voters, would guarantee all seniors reasonable health care, stop the debt from getting out of control, and keep paying health-care providers as before. The problem is that you can only do two of those things at once.”

Therein lies the rub.

Cutting Corporate Taxes Can Increase Tax Progressivity
Urban Institute
Cut corporate tax rates and jack up rates on dividends and capital gains – reduce incentives for corporate tax avoidance and recapture the revenue from payouts to stockholders.

Infrastructure Bank Means More Power to Washington
Heritage Foundation
President Obama’s idea for an “infrastructure bank” would concentrate transportation decision-making authority in Washington, D.C.

The Right Way to Reform Public Pensions
Center for Retirement Research
Hybrid public pension plans are in. They should be constructed so that the Defined Benefit and Defined Contribution portions of a plan are “stacked,” not “parallel.”

Improve Schools by Improving School Principals
National Governors Association
Next to teachers, principals are the most important school-based influence on student learning. School systems should overhaul how they prepare, license and evaluate principals.

Rewarding Better Teachers by Rewarding Better Evaluation Systems
Brookings Institution
Prod local school systems into adopting new teacher-performance metrics by financially rewarding those with the most reliable evaluation systems.

Malcolm Harris has published a piece, “Bad Education,” in N+1 magazine, which is “must reading” for anyone obsessing like I do about the higher education bubble. He draws eerie parallels between the Fannie Mae/Freddie Mac-fueled expansion of the housing bubble and the Sallie Mae-fueled expansion of the student loan bubble that should leave you feeling very, very nervous.

Some excerpts:

If tuition has increased astronomically and the portion of money spent on instruction and student services has fallen, if the … market value of a degree has dipped and most students can no longer afford to enjoy college as a period of intellectual adventure, then at least one more thing is clear: higher education, for-profit or not, has increasingly become a scam. …

Today, student debt is a exceptionally punishing kind to have. Not only is it inescapable through bankruptcy, but student loans have no expiration date and collectors can garnish wages, social security payments, and even unemployment benefits. When a borrower defaults and the guaranty agency collects from the federal government, the agency gets a cut of whatever it’s able to recover from then on (even though they have already been compensated for the losses), giving agencies a financial incentive to dog former students to the grave. …

In addition to the billions colleges have spent on advertising, sports programs, campus aesthetics, and marketable luxuries, they’ve benefited from a public discourse that depicts higher education as an unmitigated social good. Since the Baby Boomers gave birth, the college degree has seemed a panacea for social ills, a metaphor for a special kind of deserved success. We still tell fairy tales about escapes from the ghetto to the classroom or the short path from graduation to lifelong satisfaction, not to mention America’s collective college success story: The G.I. Bill. But these narratives are not inspiring true-life models, they’re advertising copy, and they come complete with loan forms.

University administrators build their empires and faculty members enjoy their tenure at the expense of America’s new indentured class: the students.

The gap between state obligations for employee retirement benefits and the money set aside to pay for them grew to at least $1.26 trillion in fiscal 2009 — a 26% increase in one year, according to this Pew Center for the States analysis. Pension plans accounted for $660 billion of the gap, health care and other benefits for another $604 billion. The states collectively contributed only $73 billion in 2009 toward their plans, far short of the $115 billion urged by actuaries.

And that may be a conservative projection. The Pew estimate is based on the states’ own actuarial assumptions. Most states assume that their funds will earn a compounded rate of 8% annually in future years but many observers believe that figure is too optimistic.

The Government Accountability Office advises states to reach at least an 80% funding level. By that measure, Virginia’s funding of its public employee pensions is barely adequate, at 80% on the nose. The state’s unfunded liability amounts to $13.8 billion. By purposes of comparison, the General Fund budget this year is about $15.5 billion.

By Pew’s count, 31 states are doing worse — but 18 states are doing better. (Click on map for more legible image.) Not exactly consistent with our AAA bond rating, is it?

Expanded Measures of School Performance
Rand Corporation
Uncle Sam should encourage, but not mandate, the states to expand measures of school performance beyond those instituted by No Child Left Behind.

Coordinate Schooling with Social Services
Center for American Progress
Congress should ensure that social services like primary health and dental care are coordinated with teaching children, especially poor children, in schools.

Driving Down the Cost of Solar Energy through Collaborative Purchasing
World Resources Institute
Industry fragmentation makes solar energy more expensive. Governments should join with industry in purchasing collaboratives to begin standardizing the business.

Once upon a time, it was considered a sign of progress in rural American to pave over dusty gravel roads. After decades of spreading asphalt, economic reality is catching up with many counties in the Midwest. Iowa, Michigan, the Dakotas and other farm states are letting little-traveled paved roads revert back to gravel, reports the Minneapolis Star-Tribune.

County and state transportation officials are simply recognizing reality. The cost of asphalt has risen with the price of oil and the cost of replacing a mile of paved road costs up to $300,000 now. An emerging rule of thumb is that a road needs 150 to 200 cars a day to be worth paving. Michigan has switched more than 100 miles of pavement to gravel, South Dakota 120 miles.

As Virginia’s road-maintenance budget stretches thinner and thinner, we may start to see a reversion to gravel roads in the Old Dominion. Citizens demand road upgrades but they aren’t willing to pay for it. Everyone concocts a reasons why “someone else” ought to pay. But the Virginia Department of Transportation can’t pave roads with hopes and wishes.

We face three broad options: (a) Raise the gasoline tax, (b) figure out how to make our road-transportation dollars work harder, or (c) live with deteriorating road conditions. Raising the gas tax is a political non-starter — even though it’s the closest thing we have to a user fee, in which the people pay the tax in direct proportion to which they ride the roads. Stretching our maintenance dollars is theoretically possible, if VDOT could break out of its biennial budget cycle long enough to invest in road improvements that pay themselves back within three or four years, but there’s too much lethargy in state government for that to happen.

That leaves the third option: deteriorating road conditions. That’s the way we’re heading. There were so many pot-holes in Interstate-295 this winter that I was thinking for a while that state officials had decided to let the Interstate revert to gravel. Get used to it. There’s more where that came from.

There is a growing sentiment among think tanks and in the blogosphere that the higher ed industry is experiencing a financial “bubble” that cannot long be sustained. I have used this blog for years to document that college tuition and fees long ago detached from the Consumer Price Index and now constitute the most chronically inflationary sector of the economy, exceeding even health care. It’s good to see that others have begun to systematically explore that phenomenon.

The underlying cause of higher-ed inflation is the widespread conviction that “everybody” ought to be able to go to college if they want to. As a consequence, 70% of high school graduates are attending at least some college, more than at any time in history. Unprecedented federal funding has enabled students to pay the tuition and fees, but recent research suggests that higher ed is not becoming any more affordable — colleges and universities are “capturing” the federal largess to underwrite non-instructional expenses. (See “Why Colleges Grow Fat while Students Starve“)

Now a commentary by the John William Pope Center for Higher Education Policy joins the chorus arguing that the bubble cannot long continue. Writes Jenna Ashley Robinson:

Federal Pell grants, direct loans, and state need-based and merit scholarships, zealous parents, and helpful guidance counselors encourage more students to attend universities than ever before. President Obama wants more students in college as well, saying, “By 2020, America will once again have the highest proportion of college graduates in the world.”

But this growth is unsustainable. And if it is predicated on the assumption of value that isn’t really there, the conditions are ripe for the bubble to burst.

Robinson publishes the following graph:

There is growing evidence that the value is not there. Many students do not belong in college. Many are learning little, dropping out and racking up debt for an education that will do little for them. (See “Want to Cut Costs? Start by Slashing Subsidies for Sorry-Ass College Students“).

It’s one thing to say that “anybody ought to be able to go to college,” if that statement means that college should be open to Americans of all racial, religious, ethnic and class persuasions, or even if that it means lack of income should not be a barrier to attending college. But that is very different from saying that everyone should go to college, because it is manifestly evident that tens of thousands of students are acquiring few of the cognitive skills they need to prosper in the knowledge economy. Instead, they are saddling themselves in debt and spending time out of the workforce where they could have been learning a useful craft or trade.

The fact is, not everybody has the ability or inclination to succeed in college. Sooner or later, the reality of that fundamental fact will sink in. Stories will spread of college drop-outs saddled with thousands of dollars in debt they cannot repay. At some point, people will understand that college is an investment that offers a higher rate of return to some people than to others. It makes economic sense for the cognitively gifted to attend. It makes little economic sense for others.

This is a hard truth, but it must be said: The federal government is doing people no favor by encouraging people to attend college if they only wind up dropping out. Further, state government need not build a higher education system capable of accommodating every high school grad who would like a college degree. As I repeat endlessly on this blog, government needs to begin making hard choices. Abandoning the notion that “everyone” should go to college would be a good start.

After a gig at the Virginia Institute for Public Policy, Bacon’s Rebellion alum Norm Leahy (right) has joined forces with Scott Lee (of the radio Lee Brothers fame here in Richmond) to launch The Score Radio Network. With the tag-line of “free market radio for free people,” the Score provides an outlet for rational yet passionate conservative views on the radio and in the blogosphere.

It’s an interesting combination. Other radio show hosts publish a blog as an afterthought, but The Score puts Norm’s blogging front and center… which makes total sense because Norm is one of the best bloggers in Virginia (some say he’s the best blogger). The radio show is not unlike Norm’s blogging — irreverent but very substantive. Scott is entertaining, as a talk show host must be, but he has a great line-up of guests and addresses serious topics from a conservative perspective.

At present, The Score produces an hourly show once a week and is broadcast on WLEE radio in Richmond, WMBG in Williamsburg and WLNI in Lynchburg as well as three Internet talk radio sites. The ambition is to expand the show into a network spanning the state.

Norm and Scott have interviewed some of the leading lights (or dim bulbs, depending upon your perspective) of Virginia politics, as well as think tank gurus, pundits and other odd, assorted characters such as myself. Earlier this month, Scott and I pontificated (or ranted, if you will) on the budget debate in Washington, D.C. Later in the show, Scott interviewed former Del. Chris Saxman and former Republican Party chairman Ron Nehring.

Listen to the podcast.

Update: Speaking of blogs branching into other media, Bearing Drift does a super job of melding blogging, podcasting and now a magazine. It is fascinating to see blogs climb out of the primeval ooze and evolve into real-live media enterprises. I don’t know if they meet Ed Risse’s standards for “citizen” media, but they do represent the honest voices of citizens before they have become rich, successful and corrupt.

Fighting Poverty with Behavioral Research
Brookings Institution
Poor people don’t always behave as “rationally” as we think they should. Research shows how to fine-tune poverty-fighting programs to make them more effective.

A Report… on a Plan… to Fight Hospital-Acquired Infections
Rand Corporation
If we think about it hard enough and publish enough studies, we might actually figure out how to stifle hospital-acquired infections that kill 100,000 people a year.

Americans Ship More Freight by Truck than Economically Optimal
Government Accountability Office
Government subsidies and regulations distorts the transportation market. As a result, Americans move more freight by truck than is economically optimal.

Nearly 5,000 Criminal Aliens in Virginia Prisons and Jails
Government Accountability Office
Of the estimated 10.8 million illegal aliens in the United States, 350,000 are held in federal, state and local prisons and jails. Virginia ranks 11th in the nation for criminal alien population. (Would someone please explain the roughly 7,000 German illegals in U.S. jails?)

Everybody Wins But Wall Street
Demos
Yank state deposits out of Wall Street banks and use them to set up “main street partnership banks” that bankroll community businesses instead of synthetic mortgages, derivatives and other weapons of financial destruction.

BPA Do-Gooders Jeopardize Public Health
Competitive Enterprise Institute
Maryland is the latest state to restrict Bisphenol A (BPA) from baby product packaging on the grounds. But there is no ready substitute for the chemical that wards off pathogens. The BPA ban could prove detrimental, not helpful, to babies.

I co-wrote this column, published in the Washington Times today, with Kenneth E. Powell, an investment banker with Stone & Youngberg, which sells TIF bonds.

Four years ago, the Coliseum Mall in Hampton, Va., the city’s largest taxpayer, was on its last legs. Traffic was drying up. Tax revenues were wilting. The vacancy rate was approaching 40 percent and major leases were expiring. As a former city councilman put it, the retail center was becoming “a flea market.” But seeing turnaround potential, New York-based Mall Properties, Inc. was prepared to invest $275 million into the property. Just one hitch: The project required a large public investment in infrastructure.

The city found the money by creating a special tax district and issuing $95 million in bonds to pay for new streets, sidewalks, fountains, plazas, utilities and a 750-car parking deck. The bonds will be repaid by means of Tax Increment Financing (TIF): revenue from added sales and property taxes generated by the project, backed up by an assessment on the developer-landowner in the event of a shortfall.

Ground was broken in 2008. Despite the financial crisis and ensuing recession, development has proceeded on schedule. Today, Peninsula Town Center is more than 70 percent full. Fifty retailers signed leases this spring and landowners are investing in nearby properties. A neighborhood in Hampton stands transformed.

TIFs are the municipal financing tool of the 2010s, as state and local governments buckle under chronic fiscal stress. The Center for Budget and Policy Priorities estimates that budget shortfalls for the 50 states will amount to $196 billion this year, $180 billion next year, and $120 billion the following year. The federal government, which is projected to run another $1.47 trillion deficit in fiscal 2011, is in no position to help.

Some may see the growing incapacity of governments to fund economic development projects as a misfortune. We regard it as a positive. With TIFs, municipal governments have an opportunity to change their development paradigm from an inefficient, politically driven model to a transparent, accountable, market-driven model.

The past 30 years saw too much money chasing too few quality deals. Developers bought cheap land on the metropolitan periphery and used political clout to shift the cost of providing infrastructure to taxpayers. The disconnected, helter-skelter development left a legacy of expensive-to-serve transportation, public safety and other government services. Then the collapsing real-estate bubble left billions of dollars in bad deals and stranded infrastructure.

As developers crawl from under the rubble, municipalities now face a dearth of new development. Tax Increment Financing can help cash-starved governments jump-start new projects. Moreover, government leaders will be assured that developers will vet their projects more carefully. Not only do TIF projects have liens on the developer’s property, developers must persuade bond holders that projects make economic sense and likely will be completed. Thus, TIF deals benefit from an extra layer of sophisticated business oversight that government infrastructure projects ordinarily do not receive.

TIFs work for the developer, too. TIF districts can raise the money for upfront improvements. Developers don’t have to wait for municipalities to phase in upgrades as overstretched capital spending programs allow. The TIF tool allows entrepreneurs to jump on business opportunities quickly.

Citizens should love TIFs. All funds are handled in segregated accounts, not co-mingled with other projects in the public works budget where they are impossible to track. TIF projects are required to file public annual reports. If the promised benefits never materialize, the citizens know it. They can hold public officials more accountable than ever.

Best of all, TIFs with backup special assessments put the risks associated with real-estate development where they belong – with private developers. Municipalities are not set up to appraise complex deals and weigh business risk. Driven by the promise of “economic development,” they often approve deals that pose ill-defined risks they don’t fully understand.

Advocates of free markets should love TIFs because they are a mechanism to ensure an allocation of capital to projects that make economic sense. Developers must focus on the completion and performance of their project instead of courting public officials. And for smart growth advocates, TIFs shift the onus of paying for infrastructure from taxpayers to those who benefit from the investment. A development process disciplined by TIFs would finance less of the scattered, low-density development commonly called suburban sprawl.

The halcyon days of real estate development are over, collapsed in a bubble made possible by courthouse cronyism, public subsidies, easy money and rising prices. Good riddance. We welcome the return to sanity. With TIFs, we can resume redevelopment and growth free from the excesses of the past.

State funding for Virginia Tech remains well below that of 10 years ago, even though our enrollment and programs have grown significantly. State funding for Virginia Tech’s educational division has plunged from $182 million in 2000-01 to $131 million in 2011-12,” said [President Charles] Steger.

State support per in-state student at Virginia Tech is less than half today, once adjusted for inflation, than it was a decade ago. The state’s share of Virginia Tech’s educational cost has dropped from 58 percent in 2000-01 down to 28 percent in the coming fiscal year.