Cal State Needs Economics Lesson

Stunning news emerged from Long Beach last week when the California State University (CSU) Chancellor’s Office announced it would freeze enrollment at most campuses next spring and wait-list all applicants for the 2013-14 academic year.  State budget cuts have driven CSU to slash its enrollment by 20,000 to 25,000 students, and the enrollment freeze is CSU’s solution.

CSU’s budget problems are certainly real.  The Legislative Analyst’s Office notes that under the Governor’s proposed 2012-13 budget, CSU would receive 26 percent less General Fund revenue next year than it received in 2007-08.  And despite large tuition increases over the same time period – increases of 55 percent net of financial aid – CSU’s total funding would still be 5 percent lower in nominal terms.  When cost increases and inflation are factored in, the magnitude of this funding reduction grows much larger.

But must thousands of high-school seniors and community college transfers have their higher education plans put in jeopardy because of CSU’s funding crisis?

CSU’s logic goes something like this:  Budget cuts have led to reductions in faculty and staff, and thus fewer class offerings.  Having fewer classes makes it harder for CSU students to meet their graduation requirements, and so students take longer to graduate.  Since this backlog makes it more difficult for subsequent cohorts of students, then enrollment must be curtailed.

This is in essence a supply-oriented story.  Namely, CSU cannot provide enough classes under its current resources to effectively meet students’ needs.

CSU is neglecting the demand side of the equation, however.

Despite the large fee hikes over the past few years, CSU still remains very affordable to California students.  As the Chancellor’s Office notes in a press release just this month, “the cost of attending the California State University remains well below that of public and private universities across the nation….”

Based on data compiled from the website College Portrait for Undergraduate Education, CSU describes that its full-time undergraduates paid an average “net price” (the amount actually paid on average) of $2,124 for tuition fees.  This compared to the average national “sticker price” (tuition and fees charged to full-time undergrads) of $7,119 for public universities and $25,538 for private four-year institutions.

And therein lies the problem.

Economics 101 tells us that the lower the price of a good or service, the more of it will be consumed.  This is true whether buying potato chips, gallons of gasoline, haircuts, or college courses.  And if prices are too low, demand can outstrip supply resulting in shortages.

This is undoubtedly part of the story with CSU.  While budget cuts and eliminated classes have contributed to class shortages, the low prices for a CSU education have also contributed by needlessly increasing the demand for classes.

Specifically, low prices encourage students to “shop around” by signing up for extra classes that are only tangential to their majors.  And they encourage these students to take longer to graduate.  After all, who wouldn’t want to spend more time “finding themselves” in college if it were cheap to do so?

And there is actual data suggesting that low prices do help cause shortages.  The National Center for Education Statistics (NCES) has compiled graduation rates for students who entered four-year public and private colleges across the country in 2003. NCES data for California show that nearly 60 percent of students in private, not-for-profit schools got their bachelors’ degrees in four years, compared to just over 33 percent of students in public schools (including CSU).

Graduation Rates for California Public and Private 4-Year Institutions
(2003 Cohort)

School Type

Graduation Rate




Public (including CSU)




Private (not-for-profit)




Source: National Center for Education Statistics (NCES) Integrated Postsecondary Education Data System

Note that these graduation rates are for 2007, which predated the severe budget cuts to higher education in California.  And also note that by year six, graduation rates between public and private institutions are more comparable.  In other words, it is difficult to argue that public students are any less capable than private students of finishing college.

So prices matter in terms of class shortages, and increasing prices across the board (again) seems like a good starting point for CSU.

That said, given CSU’s commitment to maintaining Californians’ access to education, perhaps there other ways that CSU could introduce price signals to help reduce shortages.  One innovative example comes from Santa Monica College (SMC), part of California’s community college system.

As described in the Atlantic and elsewhere, this summer SMC will provide additional offerings of its most popular courses and charge students their full cost.  (The classes are beyond what state funding normally covers, so SMC needs to recoup the entire expense.)  The price works out to about $180 a credit (although financial aid will still be offered to students).

The advantages of this approach are clear:  The higher cost discourages people who don’t need these summer classes from taking them.  Students who choose to take the summer classes get closer to meeting their degree requirements sooner.  And the reduced backlog makes it easier for other students to enroll in the state-subsidized classes during the regular academic year.

What’s interesting is that by applying basic economic concepts to its course offerings, SMC will be able to offer more courses, like economics.  CSU could learn a thing or two.

(Dr. Justin L. Adams is the President and Chief Economist of Encina Advisors, LLC, a Davis-based research and analysis firm. Originally posted on Fox & Hounds.)

Obamacare’s Road to Serfdom

The U.S. Supreme Court took oral arguments this week on the constitutionality of the Patient Protection and Affordable Care Act, aka Obamacare. But like a sporting event, most media coverage has focused on whether the act will win or lose before the Supremes – rather than on the law’s provisions and what the Commerce Clause was intended to mean.

On Intrade, the prediction market site, odds of the Supreme Court striking down the individual mandate (requiring purchase of health insurance) are nearly 65 percent. Forbes Magazine, on the other hand, predicts Obamacare will survive on a 6-3 vote.

However, there have been some important positives in the coverage. The liberal Mother Jones magazine gave an in-depth presentation of the actual arguments of Solicitor General Donald Verrilli, representing the administration, and the attorneys for states that are suing to have the law struck down.

“Where the lawyers challenging the mandate invoked the Federalist Papers and the framers of the Constitution, Verrilli offered jargon and political talking points,” Mother Jones reported.

It is possible that the Obamacare outcome may be a movement towards the principle on which America was founded: a federal government with limited powers. Who would have thought that you would find a reference to the Federalist Papers in Mother Jones? The fact that more than two dozen states have brought a 10th amendment challenge that has reached the Supreme Court is a start in the right direction.

The basis of the government’s case is that Congress has the power to regulate interstate commerce and thus can require you to purchase health insurance. At first glance, this appears to be quite a stretch. It is. The Commerce Clause has been used over the years to greatly expand the power of the federal government, and we are at a crossroads where the Court may say enough is enough.

In Federalist No. 11, Madison explains the purpose of the Commerce Clause:

“An unrestrained intercourse between the States themselves will advance the trade of each by an interchange of their respective productions, not only for the supply of reciprocal wants at home, but for exportation to foreign markets. The veins of commerce in every part will be replenished and will acquire additional motion and vigor from a free circulation of the commodities of every part. Commercial enterprise will have much greater scope from the diversity in the productions of different States.”

The Commerce Clause was not intended to grant the federal government large powers to interfere in the economy, but for the federal government to limit the ability of states to interfere in interstate commerce with tariffs and quotas.

If the Commerce Clause can force individuals to purchase health insurance, said Chief Justice Roberts, it could surely be used to force the purchase of cell phones, because we might have to use one sometime in an emergency. In 1850 Frederic Bastiat pointed out in The Law that once government engages in what he called “legalized plunder,” there is no limit to what government can do.

Similarly, if the Court were to rule that Congress can force you to purchase health insurance there will be no limit on what it can force you to buy.

At issue in this case is not just the health care industry, which represents about one-sixth of the U.S. economy, but the fundamental principle about how we are to govern ourselves. We separated from England was as a revolt against a government that had arbitrary power. We established a Constitution that provided for system of state and federal governments, with the federal government having only those powers granted to it specifically by that Constitution.

The purpose of government, as declared in the Declaration of Independence, is to secure our inalienable rights – including those to life, liberty, and the pursuit of happiness. Obamacare, with its requirement that every individual purchase a product that he or she may not wish to purpose, surely does not fit within the bounds of why “governments are instituted among men.” This Supreme Court has the chance to protect our liberty and return us to a land of free men and women, or to move us further down Hayek’s Road to Serfdom.

I sure hope Intrade turns out to be correct.

(Dr. Gary L. Wolfram is the William E. Simon Professor in Economics and Public Policy at Hillsdale College. Originally posted on Michigan View.)

Feinstein Ends Truce, Restarts Water Wars

California’s water wars are back. U.S. Senator Dianne Feinstein, D-Calif., sent a letter to the Association of California Water Agencies late Tuesday March 27 again pitting North against South.

The letter stated Feinstein was no longer entertaining compromise legislation on House Resolution H.R. 1837, the San Joaquin Valley Water Reliability Act, sponsored by Rep. Devin Nunes, R-Clovis.  HR 1837 would have repealed Feinstein’s three-year-old H.R. 146, the Omnibus Public Land Management Act of 2009 (formerly called the San Joaquin River Restoration Settlement Act of 2009).

Politicians have a way of using titles to their legislation that covers up what it is really all about.

Feinstein’s H.R. 146:

  • Took water in 2009 from Central Valley farmers to redistribute to tourist commercial, fishing, recreational and real estate interests in the San Joaquin River under the guise of environmental restoration and mitigation;
  • Raised water rates for Central Valley farmers to subsidize fishing and recreational “restoration”; and
  • Required that renewal of agricultural water contracts had to go through an environmental review for distribution of “mitigations” to special interests.

Simply stated, the Republican-backed H.R. 1837 would have undone all this.

For a brief period, Feinstein was apparently willing to listen to a Republican proposal for a compromise bill brokered by Rep. Jeff Denham, R-Turlock. In a water war, as in all wars over water, it is difficult for opponents to meet face to face to make peace. HR 1837 was authored by Nunes and spearheaded by Rep. Tom McClintock R-Elk Grove, head of the U.S. House’s Subcommittee on Water and Power. Apparently, Feinstein has ended listening to any compromise proposals by Republicans.

DiFi’s Reelection Bid

Feinstein is also running for reelection in November and doesn’t want any appearance of capitulation to HR 1837 in the eyes of her environmentalist political base.

The Legislative Affairs Committee of the Association of California Water Agencies is holding a meeting on Thursday March 29 to issue a position statement on H.R. 1837.  Feinstein’s letter was to make her position clear that she will work to defeat H.R. 1837 if  it’s brought before the U.S. Senate.

Instead of pursuing compromise, Feinstein’s letter states she wants to pursue the Bay Delta Conservation Plan, the proposed state water bond, and water transfers, banking and recycling.  All of these are wholly Democratic Party-backed measures that stick agriculture, wholesale water agencies and cities with the tab for all of the above projects and policies.

In the case of the Bay Delta Conservation Plan, the hidden agenda is for Northern California to stick farmers, cities and water agencies with the bill for creating a huge regional “sewer district” that would clean up Delta pollution mainly caused by Northern California waste water discharges and urban runoff. The Bay Delta Conservation Plan is a cost-shifting scheme. But to pull this off, Northern California interests must disguise their actions as “environmentalism.”  And to do so they must demonize water agencies, cities, and farmers.

‘Consent of the Governed’

Thus, Feinstein’s letter represents an abandonment of an attempt to reach the “consent of the governed” and continued pursuit of her goals by force and fraud.  “Consent of the governed” is not the same as “compromise” or “consensus.” It implies that voluntary assent should be attained of those who must pay taxes, give up water, pay higher water rates or pay out mitigations.

What is at stake with attaining “consent of the governed” over Central California water is no less than democracy itself.  Otherwise any “consensus” would be a sham water grab by a kleptocratic state.

In California water war history, Feinstein’s water policies would be a sophisticated return to the water grabs of the Mulholland era of the Los Angeles Department of Water and power in Mono Lake in the early 20th century.  But even DWP paid market prices for land and water rights involving voluntary transactions.

Such “consent of the governed” was reached in 1994 with the Bay-Delta Accord.  Both Democrats such as President Bill Clinton and California Republican Gov. Pete Wilson agreed to the accord.

One-Sided Policy

H.R. 1837 would have “restored” the Bay-Delta Accord as the compromise policy document for the Delta, the San Joaquin River and the Central Valley.  But Feinstein and her Party of Government do not want to return to that former treaty in the North-South water war.

Instead, Feinstein has signaled she wants to pursue the one-sided water redistribution policies of her political party. And the only way to do that without “consent of the governed” is by force and fraud.

Hence, it is back to the water wars using the force of laws and the fraud of environmentalism as a cover for redistributionist policies. But public opinion polls are indicating a thin 51 percent approval for the proposed $11 billion state water bond on the November ballot. California Senate President Pro Tem Darrell Steinberg, R-Sacramento, indicated March 27 that the state water bond may be pulled from the ballot due to weak public support.

Radio and television commentator John Gibson was once quoted: “We’d love to be able to work out compromises to these problems, as long as they don’t compromise access to our land and water.”  This pretty much sums up the tug of war with the North-South water war in California over Central Valley water.

Water wars are obviously about water. But they are also often about real estate and wealth transfers.  This is why Mark Twain famously wrote: “Whiskey is for drinking. Water is for fighting.”

(Wayne Lusvardi is a Political Commentator and writes for CalWatchdog, where this article was first posted.)

Self-Employment Vital to California Economic Growth

Independent contractors are a vital and growing source of California’s economy, according to a new report co-sponsored by several leading business organizations. Attempts to rein in independent contractors through onerous regulations would have a harmful effect on California’s economic productivity and employment.

Independent contracting is a business arrangement in which a client firm (or government) will contract with, usually, a small business or individual to perform work that might otherwise be performed in-house by staff employees. Labor unions in California and elsewhere have criticized these arrangements and attempted to apply onerous regulations on record-keeping and taxation that would reduce the incentive to employ or become an independent contractor.

The study, prepared by Philip J. Romero, PhD, Professor of Finance, University of Oregon and former chief economist for Governor Pete Wilson, found that independent contractors are an important source of economic strength in California, and that arguments aimed at undermining independent contracting are based on myth, not credible data.

Key findings in the report include:

  • California’s economic growth in particular is heavily dependent on small businesses and independent contractors. In 2009 (the most recent year available), roughly 1.5 million Californians worked primarily for their own businesses — more than one of every eleven workers in the state. Self-employment is about one-third more common in California than in the nation. This is not surprising since California has long had a reputation as an incubator for new businesses. According to Romero, “arguably, the state’s high rate of new business formation is one of its few remaining competitive advantages.”
  • Romero provides convincing evidence that “the rate at which new firms are created may be the single most important contributor to economic growth.” Since California is among the leading states in formation of small and new businesses – which in turn are the key generators of job growth and long-term prosperity – “its economy would suffer disproportionately if independent contracting was curbed.”
  • Romero refutes the myths (masquerading as arguments) that have arisen in the debate on independent contracting. Independents contractors do not gain a competitive advantage in evasion of labor and tax laws – indeed, tax compliance is the same or higher for contractors than for employees. Contracting work is not a “fallback occupation” for those who have lost jobs – in fact, self-employment fell during the recent recession and has grown during boom years. Finally, contacting is a symptom, not a cause, of increasing global competition.
  • Restricting independent contracting will slow economic growth and add to the state’s unemployment rate. Using several national measures of regulation, Romero calculated that adding restrictions on labor arrangements, including independent contracting, “will suppress state GDP growth by between 0.3 percent and 0.6 percent … and add between 0.25 percent and 0.5% to the state’s unemployment rate.”
  • State policies that encourage self-employment facilitate productivity growth and thereby make the state’s economy more competitive. These policies assist workers who may be entrepreneurially inclined to pursue higher income, autonomy and greater job satisfaction.

Romero concludes that the greater cost of restrictions on independent contracting is not the short-run impact; it is “the suppression of innovation and productivity improvements that are at the heart of all economic progress.”

The Economic Benefits of Preserving Independent Contracting, by Philip J. Romero, PhD, Professor of Finance, University of Oregon, was co-sponsored by CFCE (of which I am president), California Business Roundtable, California Hispanic Chambers of Commerce, California Asian Pacific Chamber of Commerce, and National Federation of Independent Business, California.

(Loren Kaye is the President of the California Foundation for Commerce and Education. Originally posted on Fox & Hounds.)

American Federation of Teachers’ half truths and hypocrisy can’t hide an obvious agenda

In a slam against those of us who believe that part of a teacher’s evaluation should be based on how well their students perform on standardized tests, American Federation of Teachers President Randi Weingarten wrote an article for the Huffington Post last week which begins, “Since some people think that everything in education can be reduced to a number, let’s follow their lead.” She then fires off seven bullet points – all bolds in the original – which are supposed to convince the reader that some awful things are happening in the world of public education.

Consider me very unconvinced by her numbers.

She starts off with 76: The percentage of teachers who report that their school’s budget decreased in the last year (after the recession officially ended).

Whatever teachers may or may not know about their school’s budget, her point is clearly refuted by her rival union, the National Education Association. According to teacher union watchdog Mike Antonucci who examined the NEA’s Rankings & Estimates,

If we compare this year’s numbers to three years ago, we see an enrollment increase of 0.5 percent, a teacher reduction of 0.4 percent, and an increase in per-pupil spending of 6 percent (1.5% in constant dollars).

Going back further, he reports:

Let’s look at the last 10 years for convenience, and the last three to examine the effects of national recession. In 2001-02, there were 2,991,724 K-12 classroom teachers and 47,360,963 K-12 students. K-12 per-pupil spending was $7,676.

Ten years later, there were almost 7 percent more teachers and 4 percent more students. Per-pupil spending was $10,976 – a 43% increase (12.6% in constant dollars). (Bold added.)

Weingarten: 63: The percentage of teachers who say that their class sizes increased in the last year.

So what? First, she mentions nothing about how much of an increase. And it has been documented over and over again, most recently this past January, that class size has nothing to do with student achievement.

Weingarten: 16.4 million: The number of children in America living in poverty.

Red herring. Union drum-beating to the contrary, poor kids can learn also. Also important – what definition of poverty is being used? Poverty is one of those words that is defined by the person speaking or writing to make a point. Writer Leon Felkins points out,

The fact that “poverty” is a vague term and cannot be defined precisely, does not, of course, stop the government from using the word as if it were precise and the press going along with the scam, as is their way. In fact the government is not beyond declaring that poverty has increased or that it has decreased when the primary factor in the increase or decrease may be that the government has simply changed its definition of poverty.

Robert Rector has made a detailed and very well documented study of this very question in his online paper, “How ‘Poor’ are America’s Poor?” and the update, “THE MYTH OF WIDESPREAD AMERICAN POVERTY“. Some interesting comparison’s surface (as of 1990, the date of the original article):

  • In the 1920s, over half of the families would have been officially “poor” by today’s standard (adjusted for inflation).
  • The average “poor” American lives in a bigger house or apartment, eats far more meat, owns more appliances, has more amenities such as indoor toilets, than the average European (note that “average” includes all, not just the poor).
  • Today’s poor are more likely to own common appliances such as televisions and refrigerators than the average family in the 1950s.
  • Government reports show that the poor actually spend 2 to 3 times as much as their official income. Amazing! (Bold added.)
  • As a group, the “poor” are far from being chronically hungry and malnourished. In fact, poor persons are more likely to be overweight than are middle-class persons. Nearly half of poor adult women are overweight. Most poor children today are in fact super-nourished, growing up to be, on average, one inch taller and ten pounds heavier that the GIs who stormed the beaches of Normandy in World War II.

Weingarten: 50: The approximate percent of teachers who leave the profession within the first five years.

This is a stretch, wrapped in innuendo and topped off with a political flourish. The assumption here is that teachers are leaving the profession in droves because they are overworked, underappreciated, overwhelmed and underpaid. But a closer look at reality tells a different story. The number leaving the classroom is actually much closer to 40 percent and they leave for a wide variety of reasons including taking an administrative position, personal reasons, family reasons, pregnancy, health, change of residence, etc. A survey from North Carolina, for instance, reveals that only 2.24 percent said they were leaving the profession due to dissatisfaction with teaching.

And of course, Weingarten makes no mention of the fact that for the teachers do who leave their jobs for better paying ones in the first five years, the union is responsible for their relatively low salaries. New teachers, no matter how talented they may be, are typically stuck in the lowest rungs of step-and-column pay hell for years; they only advance by taking meaningless salary point classes and accumulating years on the job. Very rarely is incentive pay available for being an above average teacher. Also, archaic seniority rules punish good new teachers — no matter how effective they are in the classroom, they will be the first to go when money gets tight. Any attempt to deviate from this civil service model of payment and staffing is met with great resistance from the teachers unions.

The take-away here is that when a union leader speaks, you must assume that there is a very obvious agenda being laid out. Weingarten spins the numbers to suit that agenda, which is first and foremost about getting the taxpayers to fork over more and more bucks for education. I guess a 150 percent increase in spending nationally since 1970 (and getting nothing for it) isn’t enough for Weingarten.

It’s especially laughable because like so many other union phonies, Weingarten talks one way and lives another. Despite her ongoing “tax the rich” class warfare campaign, she is a card-carrying member of the dreaded “one percent” class. In 2010, her last year as United Federation of Teachers president, she received a $194,000 payout for unused sick days, which pushed her total compensation for the year to over $600,000. And she will tell you that it’s just a coincidence that she abandoned New York City that year for East Hampton, a very wealthy community on Long Island’s south shore, thus avoiding paying $30,000 in taxes.

Coincidence? Try hypocrisy.

(Larry Sand, a retired teacher, is president of the California Teachers Empowerment Network. Originally posted Union Watch.)

Brown’s “Millionaire Tax” Misleads Californians

Governor Jerry Brown’s defense of labeling his tax initiative a millionaire’s tax on the initiative’s website summarizes California’s fiscal problems. It’s obvious why the governor calls his tax plan a millionaire’s tax when it actually starts taxing income at the $250,000 level, and, oh by the way, includes a quarter-cent sales tax. The reason is the millionaire’s tax label polls well.

Government by slogan has lead California off the rails.

The governor who campaigned that he would tell it like it is did not do that when reporters questioned him about the phrase on the website:

“The Schools and Local Public Safety Protection Act of 2012 is a Millionaires’ Tax…”

Brown’s response to the challenge from the press that the measure really can’t be called a millionaire’s tax if it increases taxes starting at $250,000 was that those taxpayers in question would soon be millionaires. All it takes is four years at $250,000, the governor said.

We’ll assume the governor was trying to put some dry wit into the discussion with reporters with his observation on the soon to be millionaires. However, if you can declare someone a millionaire after four years if they bring in $250,000 a year, taxes — those income taxes the governor wants to increase – will knock that total take for four years below the million mark.

Here is illustrated another problem with government take on finances.

Taxpayers will react to the disincentive of higher taxes by trying to shelter their income. The governor’s comment, dry wit or not, reflects static thinking on taxes that is practiced too often in Sacramento.  The dynamic effect of a tax increase could mean less revenue than anticipated after taxpayers move to protect their resources. It is also possible that some of the true millionaires might decide to reside someplace other than California.

(Joel Fox is the Editor of Fox & Hounds and President of the Small Business Action Committee. Originally posted on Fox & Hounds.)

The student debt alarm is ringing

As college costs continue their upward spiral and students rack up more loan debt in pursuit of the almighty degree, a handful of perspicacious pundits have warned that we are in the midst of a higher education bubble that will inevitably follow the same destructive course as the housing bubble. Well, the next financial tsunami may finally be on the horizon: over a quarter of all student loan debt payments are now 30 days delinquent.

With outstanding student loan debt recently reaching the watershed $1 trillion mark, that means that about $270 billion in student loan payments are overdue.

In sane times, $270 billion in late payments should set off alarm bells. But these aren’t sane times. With a national debt nearing $16 trillion, it’s probably going to take a few more zeros tacked on to that figure to get anyone to sit up and take notice. There is one other mitigating factor that is helping keep the markets calm: many of those loans are federally guaranteed. In other words, they’re guaranteed by you, the U.S. taxpayer. If borrowers default, or are forgiven by government fiat, we’re all on the hook. Don’t you wish you had stuck around campus for an extra year or two?

As if on cue, calls for student loan debt forgiveness have already begun. Michigan Congressman Hansen Clarke recently introduced the “Student Loan Forgiveness Act of 2012,” which would provide “full loan forgiveness for current borrowers who have paid the equivalent of 10% of their discretionary income for 10 years or who are able to do so over the coming years.”

Opponents of the bank and auto industry bailouts rightly expressed concern over the moral hazard such interventionism represented. Saving private concerns from the consequences of their poor decisions has set a dangerous precedent. Given the right amount of political pull, one’s risks can be socialized and one’s benefits concentrated. Applying that precedent to countless holders of student debt increases moral hazard exponentially in a time where government has already tried its damnedest to diminish the importance of personal responsibility.

Instead of throwing good money after bad as Clarke has proposed, we should focus on eliminating the grants, transfer payments, and federally-backed student loans that make it possible for institutions of higher education to perpetually raise the cost of attaining a degree. As for those already saddled with debt, it makes far more sense to encourage economic growth – ultimately enabling graduates to earn enough to make their loan payments and live comfortably besides – than it does to provide yet another bailout.

(Graham Kozak is a senior at the University of Michigan and publisher of the Michigan Review, a biweekly campus newspaper. Originally posted on Michigan View.)

Crony Capitalism Keeps Blowing in the Wind

You would think crony capitalists would try to keep a low profile after Congressional hearings released a bombshell document Friday demonstrating that the ultimate Washington insider, Jon Corzine, former New Jersey Governor and Chairman of Goldman Sachs, appears to have ordered the looting of hundreds of millions of dollars from customers at commodity broker, MF Global. But after only a weekend of contrived outrage, our elected leader seem to have returned to business as usual with a bipartisan group of Senators, including Mark Udall (D- CO), Michael Bennet (D-CO), Chuck Grassley (R-Iowa), Scott Brown (R-MA) and Dean Heller (R-Nevada) introducing legislation to extend for another two years the subsidies for wind power labeled deceptively as “The American Energy and Job Promotion Act.” The real message coming from the U.S. Congress to taxpayers is: “we need either less corruption or more chances to participate in it.”

Windmills have been around for hundreds of years to lift well water and grind grain, but the father of the recent renewable energy scam is none other than Kenneth Lay, the infamous former CEO of Enron. In January 1997, Enron acquired Zond Corporation of California, the largest developer of wind-powered electricity at the time. Enron then lobbied the State of Texas to enact a broad electricity restructuring bill with a “renewable portfolio standard” that mandated private electric utilities buy a minimum 2,000 mega- watts qualifying renewable energy by 2009 and 10,000 mega-watts by 2025. Enron also lobbied Congress to successfully amend Title XXII of the Energy Policy Act of 1992 to direct the federal government to authorize tax incentives for renewable wind energy technologies.

Mr. Lay’s wheeling and dealing eventually drove the Enron leveraged empire into bankruptcy court four years later. His scams cost investors $10 billion dollars and over 20,000 employees lost their jobs and retirement benefits in the largest bankruptcy in American history. Mr. Lay died prior to facing a possible life sentence for his crimes, but Enron’s crony tax credits, mandates, and regulations did not die with him. In May of 2002, General Electric acquired Enron Wind Systems and renamed it GE Wind Energy.

GE’s corporate motto is “Imagination”, but it was lobbying muscle that drove wind power. GE’s $23 million lobbying in 2005 was rewarded with Congressional passage of the Energy Policy Act of 2005 that provided new tax incentives and loan guarantees for renewable energy. As GE lobbying rose to $26 million in 2009, Congress amended Section 406, the Energy Policy Act of 2005 authorizes loan guarantees to wind power as an “innovative technology that avoid greenhouse gases.” In 2010, GE lobbying soared to $39 million as the American Recovery and Reinvestment Act of 2009 spiked Congressional funding to $27.2 billion in grants for renewable energy.

Wind power has so much in the way of accelerated depreciation tax break, production tax credits, and renewable energy credits that GE has been able to recoup its capital investments within a few years. The concept of actually selling power is far down the list of priorities for wind power. Electricity usage peaks in the cold winter and the hot summer, yet wind tends to blow the hardest in the low usage spring and fall. Consequently, electric utilities must traditionally have fuel power plants ready at all times to cover 100% of electricity demand. But under law, if wind turbines do begin spinning the utilities are required to pay approximately twice the going rate for any wind power that is transmitted to their power grid.

A good example of the economic silliness of “wind farming” takes place along the Columbia River Gorge where there are a high number of wind turbines. The local electrical operator is Bonneville Power Authority (BPA). Last year, BPA had to shut down the wind farms for nearly 200 hours over 38 days. By law, Bonneville is required to compensate wind companies for half their lost revenue. This year’s rebate bill could reach up to $50 million a year.

The extension of the crony renewable energy subsidies were originally buried deep in the legislation authorizing the Keystone XL pipeline, but the Senate rejected the measure on a largely party-line vote. According to the U.S. Energy Information Agency statistics, wind energy subsidies exceeded the subsidies of all other conventional sources of electricity, combined. The Keystone XL pipeline bill failed because it would have bought cheap and abundant power to most Americans. The American Energy and Job Promotion Act seems to be headed for easy passage, because it brings abundant amounts of subsidies to GE and other huge multi-national insiders.

(Chriss Street is a financial writer and speaker, and is author of the book, “The Third Way.”  Visit his blog for more information.)

Should the Constitution be a mere parchment barrier?

Constitutional law is supposed to be different from other types of law. But as the government’s defense of Obamacare and the parallel campaign taking place in the media shows, liberal interpreters of the Constitution have forgotten the distinction.

In common law, intended to maintain the continuity of legitimate expectations, later rulings carry more precedential weight than earlier rulings. Similarly, later legislation can change earlier laws. But the Constitution is supposed to remain “the supreme law of the land;” later deviations are not to create precedents that effectively re-write the Constitution.

Nowhere is the distinctiveness of constitutional law made clearer than in Federalist 78, by Alexander Hamilton, ironically the most “big government” of our founders.

“[C]ourts of justice are to be considered as the bulwarks of a limited Constitution against legislative encroachments.”

“[A] limited Constitution…can be preserved in practice no other way than through the medium of courts of justice, whose duty it must be to declare all acts contrary to the manifest tenor of the Constitution void. Without this, all the reservations of particular rights or privileges would amount to nothing.”

“[T]he courts were designed…to keep the [legislature] within the limits assigned to their authority.”

“[W]here the will of the legislature, declared in its statues, stands in opposition to that of the people, declared in the Constitution, the judges ought to be governed by the latter rather than the former.”

“No legislative act, therefore, contrary to the Constitution can be valid. To deny this would be to affirm…that men acting by virtue of powers may do not only what their powers do not authorize, but what they forbid.”

“[I]t will be the duty of the judicial tribunals…to guard the Constitution and the rights of individuals…”

In Hamilton’s words, as in those of many of America’s founders, courts must actively maintain constitutional rights against executive or legislative overreaching of their enumerated powers. And that maintenance requires that later divergent precedents are not allowed to preempt the Constitution’s meaning.

However, the liberal “living Constitution” approach has turned the argument of Federalist 78 on its head. Divergent precedents are substituted for the Constitution, which effectively become the “new and improved” highest law of the land.

Perhaps the most striking example came from University of California, Irvine, Law School Dean Erwin Chemerinsky, a leading liberal Constitutional interpreter, in “Healthy care reform is constitutional,” written for Politico when Constitutional challenges to Obamacare made it clear it would end up before the Supreme Court.

In asserting that constitutional challenges have “no legal merit,” Chemerinsky made only one direct reference to the Constitution—Article I, Section 8’s Commerce Clause. Even then, his reasoning was not based on the Commerce Clause, but that “The Supreme Court has held that this included authority to regulate activities that have a substantial effect on interstate commerce” (a precedent which allowed the Commerce Clause to be vastly expanded, creating the sole supposedly constitutional justification for the far-reaching new federal regulatory powers that have since multiplied).

Unfortunately, Dean Chemerinsky ignored the Commerce Clause’s application for a century.

Federalist 11 described the Commerce Clause as “a prohibitory regulation, extending… throughout the states,” without which, “this intercourse would be fettered, interrupted and narrowed.” Similarly, Federalist 42 described its role as one of “restraints imposed on the authority of the States” to restrict interstate commerce, rather than authorizing federal dictation of anything remotely related to commerce.

Federalist 45 cemented the Commerce Clause’s narrow scope: “The powers delegated…to the Federal Government, are few and defined…The powers reserved to the several States will extend to all the objects, which, in the ordinary course of affairs, concern the lives, liberties and prosperities of the people; and the internal order, improvement, and prosperity of the State.” This stringent constraint on federal power made the Commerce Clause one “from which no apprehensions are entertained.” That last statement is particularly revealing, since founders determined to create a limited federal government with only enumerated powers would not have accepted a clause now jokingly called “the everything clause” in law schools, much less without apprehension about how it could turn a limited federal government into a virtually unlimited federal government.

Until 1887, the Commerce Clause was solely invoked to overturn state restrictions on interstate commerce. But then courts began re-interpreting its ban of state-imposed restrictions into an open invitation to almost unlimited federal dictates, particularly in Wickard v. Filburn, in 1942 (the precedent Chemerinsky refers to as definitive constitutional interpretation of the Commerce Clause).

Justice Jackson asserted that “Even if appellee’s activities be local and though it may not be regarded as commerce, it may still, whatever its nature, be reached by Congress if it exerts a substantial economic effect on interstate commerce.” In other words, the federal power to make interstate commerce regular was twisted to allow banning (far from “removing impediments” to) production (not commerce) occurring in a single state (not among states), on someone’s own private property (which Federalist 45 clearly placed under State control). Anything judged to have a “substantial” effect on commerce (now often equivalent to “having any tenuous connection to”) became fair game for federal regulation.

While never again referring to the Constitution itself, Dean Chemerinsky then used various versions of “the Supreme Court has held” (or said) seven more times in his article, as if multiplying such precedents proves Obamacare is constitutional.

However, four of those references are to cases that accepted the Wickard precedent (while two important cases limiting its application were omitted), so they do not really represent additional precedents, for the question is whether Wickard’s ruling upholds the Constitution, making it a valid precedent, or whether it is inconsistent with the Constitution, in which case it should be considered invalid.

Yet another reference to Wickard was that “the Supreme Court never has said that the commerce power is limited to regulating those who are engaged in commercial activity.” However, whether the Supreme Court has said that is irrelevant, since a century of usage made clear that only commercial activity was in view (and, at least as important, the power envisioned was the power to strike down state restrictions on interstate commerce.

(Gary Galles is a Professor of Economics at Pepperdine University in Malibu.)

Inequality and Economic Growth

There has been news and conversation  about economic inequality and economic growth lately, mostly because the former  is increasing steadily and the latter has been less than stellar.

Of course, there is always a tension between economic growth and equality.  Economic growth implies at least some inequality.  That’s because most people need incentives to create things people value.  They need a reward.  Creating perfect equality necessarily eliminates incentives.

The reward for innovation or effort doesn’t have to be the full value of an innovation or effort.  The person who invented the wheel did not collect the present value of the innovation.   Similarly, Bill Gates, rich as he is, or the late Steve Jobs, or George Mitchell, the man who helped developed “fracking” did not collect the full value of their innovations.  The fact that people voluntarily agree to pay income taxes demonstrates that they don’t have to consume the full value of their effort.   So, there is room for some redistribution.

Still, there has to be some reward, some incentives to work or innovate.  That incentive naturally will create inequality.

Call incentive the supply side.  If there is a supply side, there must be a demand side.  There is, and that comes from people, but it is not what you might think.

Economic theory is based on the concept that people are happier when they consume more or better products.  That turns out to not be true.  People are no happier than they were 100 years ago, and we consume a lot more than our great-great grandparents.

The fact is that since the 1950s in America, and now in many parts of the world, people have been free of the worst Malthusian constraints.  We have plenty to eat and on some measures we don’t really need any more.  Especially with current low birth rates, not just in advanced countries but also in much of the developing world, consumption growth is unnecessary.

So, why do we need economic growth?

We need economic growth because people need more than consumption.

The great cartoonist Al Capp, the creator of Li’l Abner, understood this.  Li’l Abner, his wife Daisy Mae, and the other  residents of Dogpatch sometimes benefitted from the presence of a creature  called a Shmoo.  Shmoos bred  prolifically, and could create or serve as anything humans wanted.  They were perfectly happy, ecstatic in fact, to be dinner.  With Schmoos around, all human consumption needs were fulfilled, with no effort on the part of the humans.  It didn’t work out so well.  The Shmoos were eventually killed by extermination teams to save humanity and the economy, except for two saved by  Li’l Abner and returned to repopulate the Valley of the Shmoon.

We have similar real-world examples, and it doesn’t work out so well here either.   It turns out that when all consumption needs are provided with little or no effort on the part of the recipient, something is lost.  Drug and alcohol abuse abounds in these populations.  Traditional families are destroyed.  Crime is high.  Violence, including domestic violence, is  high.  Morals are abandoned.  Relationships are fluid, frequently violent, and always temporary.  Health is poor, even when healthcare is provided.

It turns out that when people are  provided everything they need, self-destructive behavior is the norm.  It’s almost as if they have no reason to live, and it is a terrible price to pay for consumption.

It turns out that a job costs less than dependency, and that’s why we need economic growth.  Jobs and opportunity provide us with some things that consumption can’t.  I think those are pride, dignity, and purpose.

That doesn’t mean we should abandon the effort to provide a safety net.  People are different, and few of us would be comfortable with the how the least endowed would live without a safety net.  It is also true that the gods of chance can be cruel to even the most capable.  Most of us would like to see some protection provided the unlucky.

A safety net reduces inequality, and is redistributive.  The trick is to maintain incentives.

If we are to offer people jobs and opportunity, and we must, we need economic growth.  To realize economic growth, we need to maintain incentives for the most productive and innovative.  Punitive marginal tax rates are counterproductive.

How support is delivered to the recipients is also extraordinarily important.   The incentive issue should be paramount.   We owe it to the recipients to provide the support in a manner that preserves dignity and pride and always provides a healthy incentive to work.  Far too many existing programs have effective marginal tax rates near, at, or exceeding 100 percent.  This easily happens on means-tested programs, where the next dollar in income could cost the benefit plus the taxes on the  new income.  Here’s a quote from a report by the Employment Policies Institute:

“As an example, in states with ostensibly generous welfare benefits, Professor Shaviro shows that  a single mother with two children could increase her earned income from $10,000  per year to $25,000 per year and actually find herself with 2,540 fewer dollars  once she accounts for lost tax credits and benefits. Though her earned income  more than doubles, she is worse off financially.”

It makes no sense to have 100 percent  marginal tax rates on high-income individuals.   It makes even less sense to have 100 percent effective marginal tax  rates on the least advantaged.

(Bill Watkins is a professor at California Lutheran University and runs the Center for Economic Research and Forecasting, which can be found at Originally posted on Fox & Hounds.)