Everyone Loves Teachers Don't They?

At last night's debate, President Obama accused Mr. Romney of  believing that class size “doesn’t make a difference” and that hiring teachers won’t create jobs. Romney denied this and said he loves teachers, too.  But if Romney had been more honest than political, he would have said, "More teachers and reduced class sizes don't seem to matter much to educational performance."

Over the last half century we have spent more and more on K-12 education -- mostly for hiring more personnel. Class sizes are down 40%. What has this gotten us? Nothing measurable. Of course, teachers love having lower class sizes. It makes their job easier. But is this the objective?

If you were running a store, surely your staff would like you to add more help. How long would you continue to do that if sales didn't increase at all? You wouldn't. You couldn't.  But, unlike rational enterprises, the education industry is run for the benefit of the employees and their unions, not the customers (i.e. the parents and students).

Creating jobs is not the objective. Creating additional economic value is, and adding more employees to produce the same output doesn't do that.







 
US Average reading scores (NAEP long-term trend assessment tests)

Yes, Let's Be More Like Europe

One of the more ignorant comments I heard recently was "We ought to be more like Europe where The Rich are made to pay their fair share." The fact is, that the US takes more of its taxes from the top 10% of earners than any other other OECD country. So, yes, in that respect, we should be more like Europe.

Driving Investment Away From the US With High Taxes

During this campaign there have been accusations thrown around as to which candidate is driving jobs out of the United States. Can we take a step back, please, and recognize that our current tax rates incent companies and  investors to move assets (and therefore jobs) away from the US. Our integrated tax rate (which is the net tax on corporate earnings after corporate income taxes and capital gains taxes) is nearly the highest in the world. People respond to taxes which affect their net returns. That's why people are leaving California for Texas. It's why someone would direct investment to Canada or Mexico or New Zealand and away from high tax locales like the US and France.

The President and Democrats in Congress want to increase taxes on investment. That will just make the incentives even greater to direct capital away from the US.

Airfares, Tution, Health Care and Government

In 1979 the federal government ceased its regulation of airfares. The first chart below summarizes what has happened since then. Contrast that to the cost of tuition and health care, industries where government is increasingly involved in both the operation and subsidization of service.

Remember this economic rule: The price of goods and services varies directly with the degree of government involvement. What do you think the odds are that more government involvement with health care and college financing will bring down those costs?

CEOs and Presidents

In the October 2nd Wall Street Journal, Alan Blinder states his case for why being a successful businessman is irrelevant  -- and perhaps counter productive -- to becoming President of the United States. He makes the following points:

1. There is no historical correlation between being a good CEO and being a good president. In fact, Herbert Hoover, who was arguably a very successful businessman, failed miserably as President.
2. Efficiency in operations, while very important in business, is not important in running government. "Rather than worshiping efficiency, some notion of 'fairness' is typically paramount in government."
3. The temperament that makes a CEO successful -- e.g. insisting on action and results from subordinates and colleagues -- is not well suited to being a successful President. Patience and compromise are.
4. "Top business executives focus single-mindedly on 'the bottom line'. Among the reasons why so many smart business people fail in politics and government is that there is no bottom line in government."

Now as a matter of observation, I agree with Mr. Blinder. Results, efficiency and attention to the bottom line have seldom been characteristics of government. Politicians exist to deny the most fundamental of economic principles -- that resources are scarce and having more of Choice A means having less of Choice B. Politicians (at least the most successful ones)  tell people that they don't have to make tradeoffs -- or at least that the tradeoffs will be born by someone else.

And where has this left us? Our government is broke. We're $16 Trillion in debt today and there appears to be no end to it. The federal government spends $32,000 per household every year. That means that 60% of the average household's income is given over to the federal government. Maybe efficiency should matter a bit?

Blinder attributed this to the difference between Shareholders and Stakeholders. In a company, a Stakeholder could be an employee, supplier or someone who lives in the neighborhood. The Shareholder is someone who put up the money to create the company and whose capital is at risk if the company performs poorly. In a company, the Stakeholders may have a voice, but they do get to run the company. In government, the Stakeholders not only get a voice, they get to make decisions about how to run the country. The Stakeholders vastly outnumber those who actually have to put up the money to run the country.

What would happen if companies were run in the same manner? Imagine that the Stakeholders got more votes than the Shareholders. You'd have companies where employees paid themselves larger salaries, couldn't be fired, had more days off, got free food in the cafeteria and paid nothing for a rich array of benefits. Suppliers would simply charge the company more for materials and supplies because nobody really paid much attention to costs. The neighbors would insist that the company build parks and ask for lavish "beautification programs". Anyone who tried to pay attention to the bottom line would be tossed out in favor of those pledged to run the company for the benefit of the Stakeholders.

And the world would be lovely for everyone. That is, until a competitor (say from another country) that did pay attention to the bottom line took away some of the company's business. Until the company's credit line ran out and borrowing became very expensive. Until the company discovered that investors weren't too interested in a company run for the benefit of the Stakeholders.

Then the Stakeholders might need to hire one of those CEOs that Mr. Blinder says aren't so well-suited to being Presidents. Someone who focused on the bottom line. They might need to hire someone who could turn around a failing enterprise. Or they might just continue to go on pretending for awhile longer. Maybe they would just Hope.

The Impact of Taxes AND Transfers

A lot of numbers get thrown about concerning the true burden of taxation. All of them miss the impact of an extremely important factor: government transfers. Government transfers are payments like Food Stamps, Earned Income Tax Credits, Social Security and free cellphones (yes the government subsidizes phone service and everyone who gets a telecomm bill pays for it). To evaluate the effective rate of taxation, you have to take these payments into account. After all, if you earn $2, are taxed $1 and you get $2 in payments, it would be disingenuous to say you have an effective tax rate of 50%.

So how do transfers affect the picture? For the lowest income group, income after taxes and transfers is four times that of income before taxes and transfers. Only about half of income earners actually have any positive effective tax after transfers. The media is ignorant on this subject. Willfully so.