Archive for August, 2010

A Bad Week for Regulation

Nobody reasonably doubts the need for responsible regulation.  It’s for that reason that we need to understand the limits of reasonable regulations, and the risks that come from the temptation to exceed them.

Last week as a bad week for bad regulation.  First, this example of entrenched industries using regulators to further their own interests at the expense of their customers:

The National Association of Broadcasters is lobbying Congress to stipulate that FM radio technology be included in future cell phones.

In exchange, the NAB has agreed that member stations would pay about $100 million in so-called performance fees to music labels and artists. Radio stations would be required to pay performance royalties on a tiered schedule with larger commercial stations paying more than smaller and non-profit stations.

FM radio now has to compete not only with AM, but with all manner of streaming media.  So of course, they want the government to force their competition to pay the freight to expand FM’s market.  The irony is that the regulators writing these rules are just as clueless: my smartphone already includes an app where I can listen to any local FM radio station.

The other lesson is in the risk of politicizing well-established rules.  BP was browbeaten, if you recall, into putting $20 billion into escrow for the executive branch to dispose of as it wishes.  Some of us argued at the time that there were rules for how to deal with liability, and that the courts were a better, non-political venue for doing so.  Even assuming that Kenneth Feinberg were completely incorruptible personally, he would find himself buffeted by political pressures he – or his administration employers – might feel the need to respond to.

The first, most obvious pressure, is to be lenient in disposing of BP’s money.  Feinberg has tried to make it clear that he will, in fact, be far more lenient and timely than the courts would be:

Appearing … before about 300 people in Houma, La., Feinberg lectured, cajoled and asserted that once he takes over Monday, the process will be accessible, fast and fair.

“I will be extremely lenient in documentation,” Feinberg said. “I don’t need reams and reams of stuff. I don’t need a tax return. Do you have something you can show me? Well, the ship captain will vouch for me — fine. Well, my priest will — fine.”

But this hasn’t mollified those who want more:

Kenneth Feinberg’s effort to set the terms for handing out BP PLC’s money to Gulf oil spill victims came under fresh attack Monday from state officials and private lawyers who said he planned to be too restrictive in deciding who gets paid.

“Mr. Feinberg seems to be completely tone-deaf to the concerns of people along the Gulf Coast,” said Alabama Attorney General Troy King, who blasted Mr. Feinberg as a “corporate shill” of the oil giant.

The point here isn’t who’s right.  I certainly don’t know.  The point is that the suspension of normal, well-established processes for recovering economic damages have been suspended in favor of the judgment of a single bureaucrat.  Many will pile on and try to pressure the system in their direction, often through the media, which can’t help but erode public confidence in the system.

The temptation to help a client group, or to solve a problem now is dangerous, and often, if not usually, makes thing worse rather than better.

No Comments

Budget Lessons from the Old Dominion

This, from the Wall Street Journal, describes how Virginia managed to close its budget gap:

Here’s something you don’t see often these days: a government running a budget surplus. Governor Robert McDonnell announced last week that Virginia closed fiscal 2010 some $400 million in the black. That’s a radically improved financial picture from a year ago when the state faced a $4.2 billion two-year budget hole.

The usual suspects—the big business lobbies, the Washington Post—thought a major tax increase was needed. So did the previous Governor, Democrat Tim Kaine, who proposed a $2 billion tax hike before he left town, on top of two major Virginia tax increases in the previous eight years.

Mr. McDonnell has proved otherwise. The newly elected Republican put a freeze on hiring and took the knife even to such politically sensitive programs as school aid, police and Medicaid to cut hundreds of millions of dollars. Total state spending has been reset more or less to 2007 levels. If Congress were to do that, the federal deficit could fall by more than $900 billion, or two-thirds.

It’s true that Richmond used too many budget tricks to make the surplus appear larger than it really is. Sales tax payments were accelerated by one month to count in 2010 rather than 2011. Several hundred million dollars were borrowed from the public-employee pension reserve—money the Governor promises to repay by 2013. Most fiscal experts think the real surplus is closer to $87 million. But given the lousy economy, Virginia’s budget achievement is laudable. (Emphasis added)

Virginia does biennial budgeting, so they’ve passed their FY11 and FY12 budgets already.  Virginia’s general fund is about $15.5 billion, and its total budget is about $38 billion, so either way, it’s about twice Colorado’s.  Virginia was facing a $4.2 billion deficit over two years, so it was also roughly proportional to the $1 billion hole we face in FY11-12.

We could begin with a meaningful hiring freeze ourselves.  Despite the Democrats’ claim of a hiring freeze, the Bureau of Labor Statistics tells a different story:

It also makes the urgency of converting PERA from a defined-benefit to a defined-contribution plan even more plain.  (For the basics on public pensions, see this primer.)

In the past, I’ve posted on the difficulty of forecasting, how despite the best intentions and best information, the folks at Legislative Council have a hard time seeing revenue crises before they hit.  Bloomberg  has a fine posting on why this is so:

How do economists fare when it comes to real forecasting, to predicting GDP growth and inflation one year out? About as good as a coin toss, according to Bryan’s research. Less than half the economists did better than the “naive” forecast, which is based on no understanding of the economy and merely assumes next year’s outcome will be the same as this year’s. It’s what you’d expect if the results were purely random….

I want to hear a plausible scenario, based on what we know and what we expect, for how things are going to play out in the U.S. and on the global stage. Getting the number right is a job for an accountant. Putting that number in the context of a larger trend is a job for an economist.

We don’t know when revenue will recover, and we don’t know when the next drop will hit.  As a result, we need to be careful not to build in additional structural spending when times are good.

Unfortunately, we’ve already used up all those gimmicks that make the Virginia surplus look larger than it is.  For us, it’s going to be even more painful, which means it’s going to call for a seriousness that’s been lacking.  It’s going to call for the guts to make difficult cuts, and the courage to defend them before the voters – even in odd-numbered years.

No Comments


So I’m in synagogue on Saturday morning, and a friend of mine introduces me to someone he’s talking to:

David: Joshua, meet Steve
Steve: Hello, I’m Steve
Joshua: Hi, Joshua Sharf, how do you do?
Steve (slightly incredulously): You’re Josh Sharf?
Joshua (having been Joshua Sharf all his life, and thus finding it unremarkable): Eh, ye-es….
Steve: You’re the guy with all the signs!

This has happened a couple of times, with the blog, or with the radio show, or with the signs.  I’m always amazed by it.

1 Comment

The Wrong Way on Pensions

Via this morning’s Denver Post:

The city and the fire department union were at odds over how pension benefits are paid. The city wanted to continue the current pension plan, similar to a 401(k).

The union wanted to have the Fire and Police Pension Association of Colorado take over management of its pensions. The city feared losing control of the pension process.

An outside arbitrator recently sided with the fire union.

But this month, the City Council rejected that recommendation, which would have forced the issue onto the November ballot.

…The resolution passed by an 8-2 vote. Another matter to put the issue before voters in November was tabled indefinitely, killing it.

This is a terrible development, taking one, relatively small public pension (although not to the people of Aurora) entirely in the wrong direction.

PERA is underfunded by at least $20 billion.  It’s underfunded because it’s a defined benefit plan, and because politicians have traditionally found it easier to vote new benefits, listening to rosy return estimates and aggressive discounting.  There is enormous default risk associated with these pensions, and it’s sad to see the City of Aurora going down the same path with its firemens’ pension.

No Comments

A Plague of Bloggers

I’m not sure what the collective noun for runners is, but from experience, “plague” is as good as any.  Evidently, my friend King Banaian, econ prof up at St. Cloud State in Minnesota, is running for the State House of Representatives up there.  His district appears to be Democrat, but not irretrievably so.  It went for Franken in ’08, but by a relatively small margin, so it seems to be clown-averse to some degree.  Whether this is a help or a hindrance for a university professor, even one as level-headed as King, remains to be seen.

No Comments

How Not To Fix Health Care

This, from this morning’s Wall Street Journal:

The Food and Drug Administration proposed shoring up medical-device approval rules that have been criticized as lax and inconsistent by consumer advocates and the agency itself.

The FDA aims to better define what devices can use an approval pathway known as 510(k), under which companies can get an accelerated decision on whether they can market a new product if they can show it is similar to an already approved device. The proposals, which will be open for public comment, will be closely watched by the device industry because more-stringent rules would raise development costs.

Since in politics, anything you say can and will be used against you, let’s start by saying that medical devices that are supposed to help us shouldn’t kill us, and the FDA plays a useful – although an exclusive – role in making sure that doesn’t happen.

That said, this is bad news for health care and bad news for Colorado.  Medical innovation is the single, surest way of bringing down costs.  New technologies cost more, sure, but they bring down the relative desireability, and thus the relative price, of existing technologies. 

Think about your cell phone.  Everything about it, from the signal to the network to the phone itself, is in a relentless drive towards being commoditized.  Which means that you can get an iPhone for about 1/2 the real cost of a cell phone ten years ago, and pay only slightly more for the network access.  The same factors are at work in every market.

And bad news for Colorado?  Well, we’re home to some of the best, most innovative biotech companies around, which up until last year, attracted a lot of venture capital money.

Let’s hope the FDA doesn’t make things worse, and that if they do, that our Congressional delegation has the sense to stand up for innovation, rather than demagogue about “rich” “companies” “profiting” “at our expense.”

No Comments

Bad Behavior

Finally, the bad blood on the Democrat side of the ledger is getting some attention

The U.S. Senate Democratic primary campaign turned confrontational Saturday when about 100 supporters of Andrew Romanoff turned up at a campaign event for his opponent, Sen. Michael Bennet.

The Romanoff backers chanted and tried to interrupt the event, a news conference called by Bennet to slam his opponent for stooping to a deceptive attack campaign instead of focusing on issues.

While Romanoff’s ad is politics-as-usual (a strategy not without its own risks), showing up to disrupt your opponent’s press conferences is reminiscent of something else. 

I’ve said before to my Republican friends that the Democrats have all the same problems that we do, we just don’t often see them because we’re on the outside looking in on that drama, and we’re also very wrapped up on our own soap opera.  But even as we’re busy sorting out our own nomination, it can be instructive to see how the other side is behaving.

No Comments