Category Archives: Federal

Government’s War on the Poor: College Loans

Chart credit: Mercatus Center

Students graduating in recent years are defaulting on student loans at a significantly higher rate than earlier age cohorts, finds Mark J. Warshawsky, a senior research fellow with the Mercatus Center at George Mason University, in a posting on the Mercatus website.

“Some students, particularly from nontraditional backgrounds, seem to have been harmed by the increase in federal funding of student loans,” he says. “They have not seen increases in their incomes as workers, have often not completed their education, are more likely to default on their loans, and miss out on job-related income and training.

Click for more legible image.

Warshawsky does not offer an explanation of why loan default rates are climbing. But the answer is obvious: Uncle Sam has been shoveling out more and more loans without any consideration of credit risk. As the percentage of high school graduates enrolled in two- and four-year institutions of higher education has increased over the years (see chart immediately above), we have seen an increase in the number of students who (a) are not academically prepared for college-level work, (b) lack the family resources to complete college, even with loans, or (c) both.

These college drop-outs and defaulters are disproportionately poor and minorities. The federal government cannot issue loans on the basis of credit quality, for that would mean discriminating against the poor and minorities, a political impossibility. So, instead, Uncle Sam dishes out loans indiscriminately, and the poor and minorities are the ones who wind up defaulting disproportionately on student loans and suffering the adverse consequences of ruined credit scores and debt they cannot discharge.

Thus the price of misguided compassion…

Do you want stronger proof? The percentage of high school graduates attending college has ticked down slightly since 2009, while the total of state and federal grants and loans has dipped since 2010. If I my logic above is correct, and absent an economic downturn and widespread job loss, at some point we should see a reversal of the trend shown in Warshawsky’s chart and a decline in the rate of defaulting students.

Trump Budget Bullet Barely Grazes NoVa

President Trump’s proposed budget would cost the Washington metropolitan region up to 24,600 jobs and billions in lost salaries and procurement spending, according to a new analysis by regional economist Stephen Fuller.

But Washington’s Virginia suburbs would get off easier than Maryland and the District of Columbia, reports the Washington Business Journal. The district would lose 14,000 to 15,000 jobs and Maryland would lose 5,500 to 6,000. But in Northern Virginia, where cuts to the federal bureaucracy would be partially offset by an increase in defense spending, would lose only 500 to 3,600 jobs.

Overall federal spending in the Washington region would drop between $4.2 billion to $5 billion, reducing growth in the region’s gross domestic product by 1%. If GDP tracks job losses, the impact on Northern Virginia will be even milder.

Bacon’s bottom line: Trump’s budget will not be enacted as submitted. Congress will tinker, undoubtedly sparing some non-defense programs on Trump’s chopping block. (I’m rooting for preservation of funds for Chesapeake Bay restoration.) But assuming that Fuller’s projections are in the ballpark, it doesn’t look like Virginia has much to worry about. The loss of 500 to 3,600 jobs in Northern Virginia’s dynamic economy will cause no more than a burp in growth.

Health Care as Entitlement for All

State involvement in health care can be traced back to 1773 when the "Public Hospital for Persons of Insane and Disordered Minds" opened in Williamsburg.

Virginia”s state involvement in health care can be traced back to 1773 when the “Public Hospital for Persons of Insane and Disordered Minds” opened in Williamsburg.

by Allen Barringer

For seven years now we have lived with “Obamacare,” the Affordable Care Act, and now we are engaged in rewriting it as the American Health Care Act, and, yes, it’s “all very complicated.” One thing already is clear: both Democrats and Republicans talk about “affordable, quality health coverage for all Americans” — but neither the ACA nor the proposed ACHA truly lives up to that description.

I understand that standards of health care are contentious. We don’t agree on what is “quality” or “adequate” care, let alone “humane,” and we don’t even agree how limited medical resources, such as transplantable organs, should be allocated. But until this year, I thought we did agree on equal access to whatever it is the government provides. If there is a health entitlement at all, it should be available to all.

Health care has long been a government responsibility. From medieval times, the established Church organized hospitals and administered the poor house and other components of the social safety net, while the King dealt with public sanitation, quarantines and military health. The Enlightenment brought about a greatly expanded government role in public improvements, including public health, during the 17th and 18th centuries. Those traditions were brought to the American Colonies; indeed, persons drafted for their medical skills were among the earliest settlers in Virginia and in New England. By the 19th century, and particularly after the Civil War, public health (including, individual care for the ill and the indigent) was generally recognized as a concern and a responsibility of the States.

In Virginia, the first mental hospital was built in Williamsburg in 1773 at the urging of Governor Fauquier, and Western State opened in Staunton in 1825. Jefferson’s Anatomical Hall, completed in 1826, was an early building for medical instruction at the University of Virginia. The Hampden-Sydney “Richmond Department of Medicine” opened in 1834, becoming the Medical College of Virginia in 1854. After the Civil War health activity in Virginia exploded due to the legacy of military health care and new learning about the importance of cleanliness, the source of infections and epidemics, and use of anesthesia.

Virginia’s State Board of Health came in 1872. Virginia mandated vaccinations and sanitary sewers and quarantine regulations in its port cities. In 1889, a young doctor recently trained in Vienna, Austria, in the latest medical and public health practices, was hired as Professor of Medicine at the University of Virginia. He quickly convinced Charlottesville and university authorities that to maintain the good health of university students and faculty it was necessary to address the health of the whole community they lived in. Eventually he persuaded the General Assembly to support this approach also. Teaching students through the practice of public health was the hospital’s mission. Teaching better health practices to the community and abating communicable disease at the source was its outreach.

Health care for the community means everyone in the community. Disease afflicts rich and poor and all races and occupations alike; every occupation has its hazards. The University hospital which Professor Barringer, my grandfather, founded and promoted so tirelessly was from its inception open to the Charlottesville community without regard for university affiliation, status, gender, race, or ability to pay. Many medical professionals and hospital administrators in Virginia still provide medical care on those principles, although they try to obtain payment when they can. And health remains an object of State concern and appropriations. For example, just a few months ago, Governor Terry McAuliffe announced State measures to make counteragents available at little or no charge aimed at combating the growth of opioid addiction, which he described as “a public health emergency” in Virginia.

The involvement of our state and federal governments in providing health care is so pervasive that we cannot pretend this is, “by default,” a private responsibility. The details of how the government goes about providing “affordable, quality health coverage for all Americans” are not as important as the affordability, the quality, the coverage offered. And this is a Virginia issue, not just a federal one.

Medicaid has a state budget impact, and there is talk of turning the entire health entitlement spectrum into federal block grants to the States. When McAuliffe tried to expand Medicaid under the ACA (essentially “free” to Virginians for a time, at the expense of the federal government), the General Assembly turned him down. That seemed to many observers (including me) to be more a partisan rejection of Obamacare than a vote against the public health and economic welfare of Virginians — but it certainly had the latter effect. And according to the Congressional Budget Office, the ACHA as proposed would substantially aggravate that effect.

Government support for health care has two rationales. One is economic. A healthy community is more productive, with less missed work, less down-time, less family distraction and dysfunction, and less threat of a catastrophic epidemic. Even if it isn’t you who is ill, you have an economic stake in the health of those around you, and you receive a direct benefit from the investment of your tax dollars in health care for others, not to mention the indirect benefit of a higher quality of community life. There is no distinction between individual health and public health in this regard.

The other rationale, of course, is compassion. Compassion is a moral imperative, and while I hear very little about compassion from Republicans these days it’s high time they re-discover it. The parable of the Good Samaritan is in the Bible, not a book of etiquette. Working in health care is an intensely rewarding endeavor, which attracts churches, charities, and all those many individual volunteers who devote their time to helping others. Not incidentally, compassionate policies also appeal to voters. Continue reading

What the Obama Giveth, the Trump Taketh Away

Slash and burn

The federal budget sequestration may have kept a lid on escalating federal budget deficits, a good thing, but it was a disaster for Virginia’s economy. The cap on federal spending hammered a Northern Virginia economy built largely around the Pentagon. The ascension of Donald Trump to the presidency signaled a possible return to the region’s glory days as the new president promised to increase defense spending by $50 billion.

But the president has created massive uncertainty with a vow to slash discretionary spending in civilian programs and bureaucracies. The Washington Post is all in a dither:

The cuts Trump plans to propose this week are also expected to lead to layoffs among federal workers, changes that would be felt sharply in the Washington area. According to an economic analysis by Mark Zandi, chief economist for Moody’s Analytics, the reductions outlined so far by Trump’s advisers would reduce employment in the region by 1.8 percent and personal income by 3.5 percent, and lower home prices by 1.9 percent. …

Trump’s emphasis on defense spending might provide a buffer for Northern Virginia, although, as noted previously on this blog, there are some within his administration who believe that the Pentagon civilian bureaucracy needs to be whacked down to size in order to free more resources for fighting forces. Under a serious effort to rebuild the U.S. Navy, Hampton Roads’ military bases and shipbuilders could be big beneficiaries.

We can’t say anything with certainty until Trump releases the details of his plans later this week. But at this moment in time, it looks like the new budgetary policies could be a mild plus for Virginia with boosts in defense spending offsetting cuts in other areas. Conversely, Maryland and Washington, D.C., with their large non-military exposure, could be in for a world of hurt

Adding to Washington’s woes…. The metro area’s job performance in 2016 has been revised downward. Reports the Washington Business Journal: “The D.C. region added 55,600 jobs in 2016, according to final data released Tuesday by the Bureau of Labor Statistics — about 16,800 fewer than the agency had initially counted.”

“We are talking slashing and burning several different agencies on the discretionary, non-defense side. That could have a pretty chilling effect for the local economy,” said Clifford Rossi, a professor of the practice at the Robert H. Smith School of Business at the University of Maryland-College Park.

Rossi agreed that the revised job growth numbers reveal an economy that was weaker than it originally appeared, and that the federal spending cuts proposed by Trump could have a compound effect on the regional economy.

Bacon’s bottom line: Actually, the loss of 1.8% employment and 3.5% income is no worse than what dozens of other metros experienced in the last recession. But have compassion! Washington has never been through anything like this before.

(Hat tip: Rob Whitfield)

Virginia Colleges Spend Millions on Federal Regs

Federal regulations add measurably to the cost of running Virginia colleges and universities.

Federal regulations add measurably to the cost of running Virginia colleges and universities.

The University of Virginia estimates that it spends $20 million a year complying with unfunded federal mandates, just for its academic division, reports Karin Kapsidelis with the Richmond Times-Dispatch. The College of William & Mary estimates its compliance costs at $4.5 million to $6.7 million, and Virginia Commonwealth University puts the number at $13 million.

The estimates come in response to a Congressional request for information as part of a review of federal review of unfunded mandates. Higher ed institutions say the costs were likely underestimated due to the short turnaround time for providing the figures.

While universities have blamed federal regulations in the past for pushing up the cost of higher education, Virginia institutions are not necessarily eager to roll them all back. Reports Kapsidelis:

“There are rules that if no one else put them on us, we would put them on ourselves,” said Samuel E. Jones, W&M’s senior vice president for finance and administration.

“There are some requirements we might want to take a hedge clipper to and not an ax,” said Gary Nimax, U.Va.’s assistant vice president for compliance. …

“We’re just waiting to see what might change,” said Nimax. … . “The idea of having fewer regulations is an attractive one.” But U.Va. would like to see the focus on cutting “the non-value-added pieces of these requirements,” he said.

Prime offenders are the Clery Act, which requires extensive reports on campus crime statistics that run nearly 1oo pages long, and Title IX, which forbids discrimination on the basis of sex in higher ed. The initial focus on campus athletic programs under Title IX has expanded to the regulation of student sexual behavior.

Bacon’s bottom line: For purposes of comparison, the University of Virginia generates roughly $500 million a year in tuition revenue and gets another $150 million in state support. The $20 million regulatory burden amounts to 3% of those two sources of revenue. An argument can be made that federal regulations do contribute to the mushrooming costs of higher education, but insofar as universities’ priorities mirror those of the federal government — how many institutions would dismantle their Title IX bureaucracies? — it would be unrealistic to expect that deregulation would save much money.

Update: In an article about the growing self-censorship of faculty members due to fear of transgressing some politically correct taboo, the Wall Street Journal quotes Dale Carpenter, a Southern Methodist University law professor:

Universities have developed entire bureaucracies to combat the problem of discrimination and a hostile environment. Those bureaucracies are needed but the also tend to feed on their own momentum.

No Magical Solutions for Trump

Says Rep. Tom Cole, R-Oklahoma: Trump’s numbers don’t add up.

Someone in the national press corps is finally focusing on an issue less ephemeral than Donald Trump’s tweets: the fiscal disaster that looms if all of the president’s programs are enacted. Writes Rachel Blade and Josh Downey in Politico:

“I don’t think you can do infrastructure, raise defense spending, do a tax cut, keep Medicare, Medicaid and Social Security just as they are, and balance the budget. It’s just not possible,” said Rep. Tom Cole (R-Okla.), a senior member of the House Budget Committee. “Sooner or later, they’re going to come to grips with it because the numbers force you to.”

Duh.

If designed properly, tax cuts could be stimulative, but it takes a leap of faith to think that faster economic growth would recoup all the lost revenue. Carefully designed deregulation of the healthcare, banking, telecommunications and energy sectors could promote growth as well, although not without some offsetting risks and costs. Even if economic growth does rebound, it will likely trigger inflation and the Federal Reserve will raise interest rates. There are no magical policy levers that will allow the U.S. to fulfill all of Trump’s promises without running up deficits and the national debt.

My hunch is that the GOPs in Congress can water down the more fiscally irresponsible of Trump’s plans but won’t stop them all. Trump will blame the resulting deficits on Obama, just as Obama blamed his deficits on Bush. Words won’t change anything. Boomergeddon is coming. The only question is when.

Steve Bannon: Richmond Boy Made Good… Er Bad

Steve Bannon

Steve Bannon

by Les Schreiber

Virginia has contributed much to the political growth of the United States: George Washington as leader of the Revolutionary Army and first president; Patrick Henry as fiery supporter of the Revolution; Thomas Jefferson as author of the Declaration of Independence and third president. More recently, Doug Wilder became the first African American to be the elected governor of a Southern state since Reconstruction.

Now, the most famous Virginian at the national level is Steve Bannon, a graduate of Benedictine High School and Virginia Tech. Some national publications have indicated that he has more influence with president Trump than even even the Veep. His role has been magnified by his elevation to the National Security Council, the  only political operative in U.S. history to be given such a distinction.

Bannon also is also an avowed anti-Semite. According to divorce papers filed in California vited by the New York Times, Bannon wanted to remove his children from the Archer School in Los Angeles because he thought there were too many Jews there and they were all “whiny brats.” According to this deposition, he was offended by a collection of books that explained the Jewish festival of Chanukah.

Bannon’s website Breitbart News referred to a conservative columnist as a Renegade Jew and in writing about famous investor George Soros that “Hell hath no fury” like that of a Polish American Jew when he senses that he has not received appropriate deference.

The Anti-Defamation League has written that Bannon, through the Bretibart website, has advanced ideologies that are antithetical to American values by including, ant-Semiticsm, misogyny, racism, and Islamaphobia.

The New York Times reported recently that in 2014, Bannon attended a conference of conservative clergy where he referred consistently to the writings of an obscure Italian philosopher, Julius Avola. Mussolini based his 1938 racial laws restricting the rights of Jews in Italy on Avola’s writings. The Times further reports that last March Bannon’s website, Breitbart, stated that Avila provided the foundations for the Alt Right movement that Bannon champions.

Bannon does not seem to be fit to hold so lofty a post in government.

Virginia’s Republican members of Congress such as Rep. Dave Brat must vocally disavow Bannon’s repulsive ideas and work to remove him from any role in the Republican Party. Their continued silence in the face of this information that they are morally and intellectually bankrupt. Their failure contaminates what true conservatism is about.

More Hidden Deficits: Bad Bridges and Bad Metro

Virginia has its share of bad bridges.

Bad bridges. Image source: USA Today

Update on America’s hidden deficits: Nearly 56,000 bridges across the country are structurally unsound, according to the American Road and Transportation Builders Association (ARTBA), as reported by USA Today.

More than one in four of the bad bridges are at least 50 years old and have never had major reconstruction work, according to the ARTBA analysis. Thirteen thousand are along interstates that need replacement, widening or major reconstruction. Virginia falls in the middle tier of states where the percentage of bad bridges ranges between 5% and 8.9%.

Don’t county on the federal government for help — unless the Trump administration moves ahead on its fiscally unsustainable $1 trillion infrastructure spending plan. The U.S. highway trust fund spends $10 billion a year more than it takes in. The USA Today article did not say how much it would cost the country to remedy the structural deficiencies.

Bacon’s bottom line: Welcome to the American way of building infrastructure. Uncle Sam subsidizes the up-front costs and the fifty states eagerly jump on board. Forty or fifty years later, the bridges wear out. The states haven’t salted away any money to fix them, and the feds say,” So, sorry, we only fund construction, not maintenance and repairs.”

If you want to build roads, bridges, highways, airports, and mass transit, you need a plan for long-term financing. Otherwise, you’re just creating a huge problem for the next generation. Eventually, the bills come due. If we can’t afford to fix what we’ve already built, we have no business building new stuff we can’t afford.

But we build new stuff anyway. A case in point comes from Loudoun Now: New estimates suggest that Loudoun County’s payments to the Washington Metro could run as much as $27.9 million higher than expected — double what was expected. (The number may be somewhat overstated because it includes the cost of a bus service, which Loudoun is already providing.)

Loudoun doesn’t have a station on the Metro Silver Line yet, but it will in a couple of years when Phase 2 is complete, and it will have to start paying its share of operations and capital costs. Unfortunately for Loudoun — and this was entirely predictable because METRO’s fiscal ills have been well known for years — METRO needs much more money than in the past to compensate for decades of under-funding and scrimped maintenance.

METRO’s problem has been brewing for decades. Fiscal conservatives have been sounding the warning for years and years. Government officials been making financial projections that everyone knows, or should know, have no basis in reality. But everyone pretends everything is fine to keep the gravy train rolling.

If it’s any consolation, $28 million is no big deal in a county budget that runs $2.4 billion a year, says county finance committee Chairman Matthew F. Letourneau. who also represents the county on the Metropolitan Washington Council of Governments and the Northern Virginia Transportation Commission. “We’re the jurisdiction that’s building $35 million in elementary schools ever year.”

Hmmm…. I wonder if the county is socking away any money for maintenance, repairs and replacement of all those elementary schools. I would be astonished if it is.

More P3s Coming. Taxpayers, Hang onto Your Wallets

The twice-bankrupted Pocahontas Parkway: Virginia's poster child for failed P3s.

The twice-bankrupted Pocahontas Parkway: Virginia’s poster child for failed P3s.

by Randy Salzman

The history of American transportation “public private partnerships” indicates that virtually all P3 shell companies go bankrupt before paying back federal loans and the “private activity bonds” which they sold to finance part of the debt.

When these firms go bankrupt, who loses? Taxpayers. We get stuck (1) with paying back the money Uncle Sam lent the privates; (2) paying off bonds guaranteed by the state; and (3) picking up the maintenance costs. As a practical matter, the supposedly entrepreneurial, risk-taking private sector doesn’t take nearly as much risk as taxpayers do.

Aubrey Layne, Virginia’s secretary of transportation, recognized that his predecessor gave away Virginia’s transportation future with $6 billion (yes, with “b”) in 2012 through P3s. He has undoubtedly done a much better job negotiating Virginia’s latest P3, the I-66 project, but he’s a state official and has been interested in protecting Virginia taxpayers; not federal taxpayers. Most of us pay both state and federal taxes.

The I-66 partners are putting up over $500 million. Obviously, they expect to realize a profit or they wouldn’t have submitted the bid. That’s simple business and should underline, even if nothing else, what a horrifying reality previous P3s were for state and federal taxpayers. That 460 Mobility Partners put up zero dollars for the disastrous Suffolk-to-Petersburg connector under the McDonnell administration and walked away with $350 million is almost criminal.

The issue is especially timely now that President Trump is promoting public-private partnerships as a tool for increasing infrastructure spending and stimulating the economy. He has proposed $137 billion in federal tax credits for  investors who commit to financing infrastructure, which would transfer even more risk from the private sector to the federal government.

The justification for P3s is that the private sector can build and operate projects more efficiently and economically than government can. But the public record is splotchy, and the news media needs to dig into it. In the U.S., more than a dozen billion-dollar transportation P3 projects have gone bankrupt. Even the Indiana Toll Road, the poster child for the privatization of transporation infrastructure, went belly up in 2015.

Cintra, which won the I-66 contract, went belly-up this spring with Texas SH-130, a toll road from San Antonio to Austin. Heavily promoted by former Texas governor and present U.S. Secretary of Energy Rick Perry, the project was absurd from the gitgo. The highway is located is only 20 miles east of an existing interstate, I-35. Even though Texas increased speed limits to the highest in the nation, few drivers were willing to pay tolls to use the road. SH-130 is so underutilized that airplanes have on at least two occasions landed on it! The project generated less than half the traffic and income that Cintra cronies projected when bonds were sold and federal loans obtained. Even though Texas bought down the tolls (wasting additional taxpayer dollars), Cintra’s shell company still went bankrupt and taxpayers were will be stuck paying off the bonds.

We taxpayers are told, pre construction, that tolls will pay off P3 bonds and back the notes. Even honest media such as The Washington Post parrot that line without  examination. Yet no one can find a single instance in which a  U.S. P3 toll road has generated the projected traffic or income. There is no bell curve of successes and failures that as one would expect if the forecasting of future traffic and future income was done correctly.

Inevitably, a few years later, after all the politicians and reporters have changed, the same excuse is given as the reason for the eventual bankruptcy:  “For XXX reason, the drivers didn’t show up as expected and, reluctantly, the poor private had to give up the ghost.” Never do P3 advocates suggest that bankruptcy was the business model.

Here in Virginia, our first P3, Pocahontas Parkway outside of Richmond, has gone bankrupt twice (yes, twice) in a little over a decade. The owner: an Australian infrastructure company, Transurban. Since then, Transurban participated in the Capital Beltway Express public-private partnership. After CBE took in only one-fifth the projected tolls, the company had to restructure its debt on the project. Despite those negative experiences, Transurban is building the Interstate 95 HOT lanes and competed unsuccessfully for the I-66 project.

If Transurban keeps losing its shirt on P3s, why does it keep coming back for more? I cannot prove it, but I strongly suspect that the company hires the smartest lawyers and smartest financiers to structure the P3s so as to offload risk and ensure the company comes out whole regardless of what tolls are generated. The P3 contracts runs hundreds of pages, and I question whether anyone in the McDonnell administration truly understood them, or even read them as they farmed out negotiations to private law firms that proudly on their websites the great returns they got for private investors.. Continue reading

Reminder: Where the Defense Dollars Are Spent

Top Ten defense spending locations in Virginia. Source: Office of Economic Adjustment

Just to remind people how heavily dependent Virginia is on defense spending… This graphic comes from the Defense Department’s Office of Economic Adjustment. The numbers include defense spending only, not spending by homeland security or intelligence agencies. (Hat tip: Steve Haner.)

Earlier this week I quoted Newt Gingrich as saying that the Pentagon bureaucracy is massively overstaffed and hinting that a priority of the Trump administration might be to whack that bureaucracy down to size. Along the same lines, the Wall Street Journal reports this morning that Trump is working with advisers to “restructure and pare back” the National Security Administration. The NSA headquarters is in Maryland, so I don’t know if that will have much impact on Virginia. But the larger point is that the president-elect holds few Washington arrangements sacred. If he’s willing to go after the NSA bureaucracy, he could well go after the Pentagon bureaucracy, the CIA bureaucracy and the Homeland Security bureaucracy.

Virginians need to pay close attention to these developments because, regardless of the wisdom of the bureaucracy busting, Virginia (and Maryland) will feel the impact more than the other 48 states.

This does not mean that the Northern Virginia economy is doomed, as one commenter to a previous post implied I meant. But a Trump administration assault on the federal defense/intelligence/homeland security bureaucracy potentially could amount to a Sequestration II for the Washington metropolitan area. Given the fact that NoVa now accounts for about 40% of Virginia’s gross economic output, when NoVa sneezes, Virginia’s General Fund budget catches a cold. And that matters to the Rest of Virginia.

“It’s Not about Money. It’s about New Thinking.”

While nitwits in the national media stumble over themselves covering the president-elect’s latest tweets — Newt Gringrich calls them “rabbits” sent out to distract the news hounds — important things are taking place outside of public view. You can get a sense of the new thinking about to overwhelm Washington, D.C., in comments that the former U.S. Speaker of the House made to the National Defense University a couple of weeks ago.

The speech was long, wandering and provocative, as is typically the case with Gingrich, but also illuminating. What struck me as a Virginia blogger was the focus on the massive waste built into the Pentagon bureaucracy. The bureaucracy, which is leeching resources from the nation’s war fighters, is a national disaster, and it needs to be fixed. But fixing it would shake up the Northern Virginia economy, much of which revolves around the feeding and nurturing of that bureaucracy.

If you went back to Eisenhower’s generation, Gingrich said, the number of people it took to run the largest armed force in the nation’s history was tiny.

A small number of people did an amazing amount of effective work. We’ve now replaced them with committees of 60, of whom 40 know nothing. …

This is particularly true in the American military bureaucracy including huge numbers of civilians right now. You have people who’ve been in Iraq and they’ve been in Afghanistan, and they’ve been in combat, dealing with people who have done none of that, and the people who have done none of that think they have the authority to question the people who have actually done it. …

It’s not about money. It’s about thinking. I’ll give you an example. The Pentagon was built in 1943, the year I was born. It was built to house 31,000 people, to wage global war, using manual typewriters with carbon paper. Beetle Smith, as Secretary to Chief of Staff George Marshall, used to run drills with his staff to see how fast they could find documents in the files, so that they could meet General Marshall’s request in the quickest possible time, manually.

What’s the exchange rate between filing cabinets with carbon paper, and manual typewriters, and the iPad, and the smartphone I carry with me all day? What would you guess? Ten to one? Twenty to one? Closing on infinity? … I propose, as a symbol, that we develop a plan that turns the Pentagon into a triangle. At least 40 percent of the current bureaucracy has to be superfluous. Literally. What does that cost? It means you have committees who think their job is to be important by asking stupid questions, and they have the power to then slow down everything while people answer the stupid questions, which will allow them to write a report that goes to a different committee, which wonders what that report really means, so they ask for another report about the report, and then you wonder how you get to the F-35. …

If Secretary Mattis goes in and says, we’re going to reform and modernize the Pentagon into a triangle, that would be transformational. You could either share the space with other Federal offices, or you could create a terrific museum of war. I mean, 40 percent of the Pentagon would be a great tourist trap. ….

You have to get it into your head. The current system is broken. It is obsolete, so don’t try to fix it. Try to replace it.

Perhaps this is Gingrich just being Gringrich, thinking the big thoughts. Perhaps the president-elect has other priorities than reforming the federal bureaucracy. Perhaps, as Gingrich has opined elsewhere, the administration “will lose its nerve.” But improving the military’s tooth-to-tail ratio is a national imperative. And with all the other plans the president-elect has for cutting taxes and investing in infrastructure, there will be precious few additional dollars for defense spending. If the new administration does get serious about restructuring the military, the next four years could be the most unsettling time in history for Northern Virginia.

More Information, Please, about Oceana’s New Solar Facility

solar_cloudsby James A. Bacon

The Department of the Navy  is collaborating with Dominion Virginia Power and the Commonwealth of Virginia to build a 21-megawatt solar energy facility at the Oceana Naval Air Station in Virginia Beach. The 100-acre facility, housing 179,0000 solar panels and scheduled for completion in late 2017, will supply enough electricity at peak production to power about 4,400 homes. Find the details here.

The project is good P.R. all around. Dominion, the Navy and the McAuliffe administration all get to bask in the glow of solar goodness. But the press release touches only glancingly on the economics of the project. Which makes me wonder…

The Navy was the driver, with Dominion and possibly the state (it’s not clear what the state’s role was) presumably stepping in to meet the Navy’s renewable energy mandates. Here’s what Secretary of the Navy Ray Mabus had to say about the benefits of the project:

We’ve achieved $90 million in nominal energy cost savings, $62 million in energy security hardware upgrades to bases, 170 megawatts of access to power during outages, and 22 million tons of CO2 abated. And we’re just getting started.

Just a few questions:

What are “nominal” energy savings? Are they different from actual energy savings?

Why would it be considered an “achievement” to negotiate access to 170 megawatts of power during energy outages — presumably from Dominion — when Oceana already has access to Dominion’s distribution network?

How much does the project cost? How much are taxpayers paying in order to achieve 22 million tons of CO2 cuts? Are there more cost-effective ways of reducing CO2 emissions?

What are the $62 million in “energy security hardware upgrades,” and how do they factor into the calculation of benefits?

I’m on beach vacation this week, so I’m not in a position to answer those questions right now. But the fact that the press release does not mention the project cost much less the cost-per-kilowatt — information routinely released for any electrical generation project — I cannot avoid the suspicion that the Navy considered those numbers to be an embarrassment. I would think that taxpayers — including anyone whose priority is lower CO2 emissions — would want full transparency to ensure that the federal government is spending its money cost effectively.

Update: More information from Todd Flowers with Dominion…. Secretary Mabus’s remarks were referring to the Navy’s “global efforts and accomplishments. and were not meant to represent solely the Oceana project. The Navy’s benefit from Oceana will be in the form of electrical infrastructure upgrades (a new electrical feed) in exchange for our use of their land.

Virginia Economic Growth Still a Struggle

New home of Phone2Action -- celebrating small victories.

New home of Phone2Action — celebrating small victories.

Straws in the wind regarding Northern Virginia’s business climate:

Budget sequestration may be a thing of the past, but the federal budget squeeze is not. In her latest Richmond Times-Dispatch column, economist Chris Chmura notes that in the fiscal year ending Sept. 30, 2015, federal spending on contracts fell 4.4% — some $2.4 billion — in Virginia. About two-thirds of that was defense spending. With slow economic growth and Baby Boomer retirements driving Medicare spending ever higher, there is likely no relief in sight. Short of another big war, it seems to me, it is difficult to imagine a strong rebound in federal contracting.

Meanwhile, Washington, D.C., continues to gain competitive advantage over outlying jurisdictions in the metropolitan region. Even Arlington County, which is highly urbanized, close to the urban core, and blessed by mass transit and walkable neighborhoods, is feeling the challenge. “The county is … facing heavy competition from Alexandria and D.C., both of which are aggressively recruiting the same pool of talent,” writes Daniel J. Sernovitz with the Washington Business Journal.

The competition has gotten so fierce that Governor Terry McAuliffe made a trip to Arlington last week to celebrate the leasing of 3,586 square feet on Wilson Blvd. by Phone2Action, a 25-employee startup that had recently landed $4.7 million in venture funding. The governor provided $127,800 in state assistance. According to Sernowitz, Opower, an energy conservation company, has wangled money out of the state and Arlington County, to stay in Arlington rather than move to the district. Meanwhile, Arlington and Alexandria, he reported in February, felt compelled to set aside more funds for business recruitment.

To mangle an old phrase, if Northern Virginia sneezes, Virginia catches a cold. The commonwealth finished the 2016 fiscal year $266 million in the red, as revenues increased only 1.7%, short of the projected 3.2%.

— JAB

The Hidden Risk in Money Market Funds, and What It Means for Virginia

Cranky old man... or seer of the future?

Cranky old man… or seer of the future?

by James A. Bacon

I’m sure many readers are tired of hearing my jeremiads about excess debt, fiscal unsustainability, and the necessity of re-engineering Virginia institutions to survive the inevitable reckoning. Well, too bad. The global economy is severely out of balance, Virginia is part of that economy, and we will suffer the consequences when the world’s 21st century experiment with fiscal and monetary perpetual motion machines collapses. State and local polities that prepare for the inevitable storm will be in a better position to ride it out.

Bacon’s Rebellion has explored the unintended consequences of the Federal Reserve Bank’s policy of monetary easing, which has been magnified by comparable policies of monetary easing and reckless credit creation in the European Union, China and Japan. While near-zero interest rates benefit the world’s largest debtor, the United States federal government, it punishes savers and the institutions that serve them. Thus, the Social Security and Medicare trust funds are generating lower income from their surpluses, leading to premature depletion. Insurance companies are earning less on their capital, causing them to increase premiums. The rate of return for pension funds are earning less money, compelling corporations and governments to bolster their contributions.

Even money market fund are affected. A new study published by the National Bureau of Economic Research, “The Unintended Consequences of the Zero Lower Bound Policy,” has found that zero-interest rate policies create problems for savers who park their cash in seemingly safe money market funds. In an effort to deliver non-negative net returns to their investors, portfolio managers have not only reduced expenses charged to investors but chased higher yields by taking bigger risks.

That money market fund you think is a safe and stable repository for your cash? It may not be as safe and stable as you think. Not only is the yield approaching zero, but you may be shouldering risks you didn’t know existed. What’s worse:

Although our empirical results speak mostly to one part of financial markets, we want to emphasize that the effects we document are not necessarily limited to [the] money fund industry only. The reaching-for-yield phenomenon has been observed in other markets: for example, an average insurance company has shifted its assets toward riskier equity holdings, reaching the level of equity exposure of almost 20% in 2014. Similarly, pension funds expanded their holdings into more than 60% equity, away from typically held bonds. More work is needed to better understand the transmission mechanisms underlying the effects of the zero lower bound monetary policy on the stability of financial markets.

Just as generals are said to fight the last war, economic policy makers fight the last recession. Just as the masters of the universe in Washington, D.C. pursue policies to prevent a repeat of what they failed to foresee in 2007, they are blind to the extraordinary leverage built into the global economy, the linkages between sectors, and the mechanisms by which defaults in one corner of the globe will spread panic and chaos to other parts of the globe.

The best way for state and local lawmakers to insulate Virginia and its communities is (a) to curtail borrowing and (b) stop creating new long-term obligations that cannot be readily pared back. That’s not to say that we should cease borrowing altogether or refuse to launch any new programs, but it is to say that we live in times of great volatility and unpredictability and we should set higher standards for incurring any new liability.

Republicans and Leftists Are Outraged, Outraged, I Tell You

Nishizaki Sakurako and Bando Kotji in "Yoshino Mountain"by James A. Bacon

Here’s what I missed in yesterday’s quickie post about Governor Terry McAuliffe’s plan to convene a clean energy task force: Both Republicans and leftist environmental groups are attacking the move, though for opposite reasons.

Republican legislators see the initiative as an end run around the state budget, which specifically prohibits any spending on the federal Clean Power Plan for reducing CO2 emissions from electric power plants while it is being challenged in the U.S. Supreme Court. Normally, such accusations strike me as political blather, but Brian Coy, a spokesman for the governor’s office, confirmed that that was precisely the motive. Here’s how the Washington Post summed up his statement: “The governor did not create the work group to assuage environmental groups but rather as a way to dodge the Republican-controlled General Assembly.”

House Speaker William J. Howell, R-Stafford, was not pleased: As quoted by the Richmond Times-Dispatch, he said: “This order is another deliberate attempt to circumvent the legislature and the will of Virginia voters.  The governor is developing a troubling tendency to prefer Washington-style executive action instead of the dialogue and collaboration that Virginians expect and deserve.”

Meanwhile, McAuliffe’s initiative was belittled from the left, who cited his support for the Atlantic Coast Pipeline and Mountain Valley Pipeline, which would supply natural gas to Virginia and other Southeastern markets, as evidence that he is not serious about combating climate change. A joint statement by the Virginia Student Environmental Coalition, the Chesapeake Climate Action Network, and Virginia Organizing called McAuliffe’s initiative “a minor environmental policy” dwarfed by the harm of natural gas transportation and combustion.

The kinds words came from mainstream environmental groups who have been working through the administration to implement the strictest of the Clean Power Plan alternatives available to the state.

The governor is trying to reconcile his desire to combat climate change with his priority of creating jobs. Thus, he defends construction of two natural gas pipelines through the state on the grounds that they will create economic opportunity for the Tidewater region of the state, which is effectively precluded from competing for important categories of industrial expansion due to an insufficient supply of natural gas. At the same time, he has supported the federal Clean Power Plan (CPP), which seeks to curtail CO2 emissions from Virginia power plants. If the CPP passes legal muster, the Department of Environmental Quality (DEQ) will be charged from choosing from one of four broad approaches for the state to implement the plan. Environmentalists favor the option that would curtail CO2 emissions the most, although industry consumer groups worry the approach would drive up electric rates. McAuliffe has not yet endorsed an option.

Bacon’s bottom line: I’m still not sure what the fuss is all about. McAuliffe has already enacted a series of measures driving state government to pursue energy efficiency goals and to purchase solar energy. There is not much else that he can legally do. This new working group can recommend anything it wants, but it won’t have power to spend a dime. Meanwhile, the big action revolves around the Clean Power Plan. If the Supreme Court upholds its constitutionality, the focus turns to the already-instated DEQ working group to recommend how to implement it. If the Supremes nix the CPP, regulatory decision-making effectively reverts to the State Corporation Commission, which responds to legislative guidance enacted into law, not to gubernatorial directives.

I regard this whole hoo-ha as political theater — a kabuki production in which the actors rigidly play out their assigned roles.