The American Income Crisis: The FED Could Stop It

David Malpass wrote in the September 2, 2013 issue of Forbes                      

President Obama has an opportunity to transform the country’s economic course when he chooses a Federal Reserve chairman to replace Ben Bernanke. While the rich have seen big increases in their share of income, the nation’s inflation-adjusted median income–the middle of the middle class–has been declining sharply.

This is harmful and largely the fault of expansionary government. The solution is for the President to downsize, with a new direction for the Fed as a timely starting point.

In his July 24 speech in Galesburg, Ill., President Obama said he’d like to stop the slide in middle-class living standards: “The average American earns less than he or she did in 1999 … reversing these trends has to be Washington‘s highest priority.”

IRS Security Breach; China's Sex Scandal Steve Forbes Steve Forbes Forbes Staff

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Barack Obama Has Been Talking About Helping The Middle Class Since 2008 Robert Lenzner Robert Lenzner Forbes Staff

The President is right about that. The record is terrible, and the trends need to be reversed. From 1999 through 2007 the real median household income fell 1%. It fell another 4% during the 2008-09 recession. And then, incredibly, the real median income fell again during the recovery, dropping an estimated 5% in 2010-13.

Rationalizing this as the “new normal” diminishes the past achievements of our economic system. Normal policy increases jobs, growth and real incomes, but we’ve gone backward. Unemployment was still over 7% in July–14% if workers who are underemployed or too discouraged to job-hunt are counted.

The poor performance is the result of policies that seem designed to make the rich richer and leave the middle class stagnant and more dependent on government. While massive growth in government spending is presented to the public as income redistribution, the reality is even worse. Much of the spending ends up in the greater Washington area, which has one of the highest and fastest-growing median incomes in the nation.

The Fed manages what has become the biggest transfer program to the rich, channeling cheap credit to the government and big business. It comes at the expense of small businesses, where most of the entry-level jobs are created. Black teen unemployment stood at 41.6% in July, a stark challenge for the Fed, which has a mandate to achieve maximum employment.

Once a champion of market prices, the Fed is setting short-term interest rates artificially low. This distorts the economy and markets, keeps the dollar weak and increases commodity prices. That benefits the rich, who own and trade commodities, but hammers average Americans, who need low prices and can’t hedge against asset price inflation. The Fed’s policy of lowering long-term interest rates helps the rich even more–they do most of the long-term borrowing, using their high incomes and valuable assets as collateral. The burden falls on the retirement funds and savings accounts of the middle class.

As the President considers candidates for the Federal Reserve, at stake is the current policy of transferring income and wealth from the middle class to the rich. The theory is that a bigger government and an interventionist Fed are somehow reducing the maldistribution of income–”making the rich pay their fair share.” This ignores history, recent performance and the reality of the global economy: The income and wealth of the rich will move toward lower tax rates and strong and stable currencies, burdening the middle class with their government’s debt.

It’s Wall Street that’s cheering the loudest for Bernanke’s successor to keep the status quo–massive bond buying, promises of low future interest rates, high commodity prices and currency volatility to boost trading profits. The risk from an immodest Fed is that it will remain the center of attention, dominating finance and markets. The Fed and its chairman aren’t supposed to be that consequential. Their duty is to keep the dollar and prices relatively stable, facilitating maximum employment.

The President has an opportunity to guide the U.S. economy in a better direction by downsizing the Fed in order to create more growth and jobs and raise the median income.

'A Nation of Sullen Paranoids'

Peggy Noonan wrote in WSJ:

Too much security can produce a kind of madness.

Three items on the continuing National Security Agency controversy: the information that came out this week, a prescient warning from a veteran British intelligence hand, and a prophecy from an interesting source.

Siobhan Gorman and Jennifer Valentino-DeVries reported in this newspaper that the NSA, which is supposed to have only limited authority to spy on U.S. citizens, has built a surveillance network that covers substantially more communications than had been disclosed. The system is able to reach roughly 75% of all U.S. Internet traffic: "In some cases it retains the written content of emails sent between citizens within the U.S. and also filters domestic phone call made with Internet technology." Sources on the story were current and former intelligence and government officials.

Also this week, a finding was revealed that the NSA violated the Constitution for three years running by collecting as many as 56,000 purely domestic communications without appropriate privacy protections. The secret Foreign Intelligence Surveillance Court slammed the agency for "misrepresenting" its practices to the court, and noted it was the third time in less than three years the government misrepresented the scope of a collection program.

All this in just the past few days. Makes you wonder what might be coming in a Labor Day weekend document dump, doesn't it?

***

Readers of my columns and blog posts see an NSA theme: There are too many built-in dynamics that make the national-security state want to grow, from legitimate fears of terrorism, to bureaucratic pride, to the flaws in human nature. And there are too many dynamics that will allow it to grow. The aftermath of 9/11 happened to coincide with a new burst in American technological innovation and discovery: The government has the ways and means to do pretty much anything now, and if they can do it they will do it.

If the citizens of the United States don't put up a halting hand, the government can't be expected to. It is in the nature of security professionals to always want more, and since their mission is worthy they're less likely to have constitutional qualms, to dwell on such abstractions as abuse of the Fourth Amendment and the impact of that abuse on the First.

If you assume all the information that can and will be gleaned will be confined to NSA and national security purposes, you are not sufficiently imaginative or informed. If you believe the information will never be used wrongly or recklessly, you are touchingly innocent.

If you assume you can trust the administration on this issue you are not following the bouncing ball, from Director of National Intelligence James Clapper, who told Congress under oath the NSA didn't gather "any type of data at all on millions or hundreds of millions of Americans" (he later had to apologize) to President Obama, who told Jay Leno: "We don't have a domestic program." What we do have, the president said, is "some mechanism that can track a phone number or an email address that is connected to a terrorist attack."

Oh, we have more than that.

Almost every politician in America lives in fear of one big thing: a terrorist attack they can later be accused of not having done everything to stop. And so they'll do anything. They are looking to preserve their political viability and historical standing. We, as citizens, must keep other things in mind, such as the rights we are born with as Americans, one of which is privacy.

I happened to pick up "Open Secret," the memoir of Stella Rimington, who in the early 1990s served as director-general of MI5, the British domestic spy agency. I knew a little of her. She was the agency's first female chief, she fell into spy work by accident, and she didn't come from a fancy English family, meaning she didn't proceed professionally with an air of entitlement or a crouch of guilt. So I thought she might have her head screwed on right regarding the surveillance state. She does.

In the preface of the 2002 edition she is already concerned about a loss of civil liberties. Terrorism didn't begin on 9/11, she says, it has been with the modern world since at least the late 1960s, and it isn't going away anytime soon. We must commit ourselves to do everything we can, within the law and within our most valued traditions, to oppose and thwart it. But, she suggests, you don't want to lose your country—the thing you are so anxious to defend—in your effort to save your country.

In a career in what she calls "the secret state," she learned that at the heart of countering terrorism is intelligence, and the most valuable sources against terrorism are human beings—long-term penetration efforts. This must be heavily supplemented by technical intelligence—phones, the Internet—and the more expert the better.

But democratic nations must always balance "the citizens' right to live their lives in freedom, with minimum interference with their privacy from the security agencies" against the governments' responsibility "to protect their citizens from harm." That balance, she warned, had already begun to swing toward "more emphasis to our safety than our civil liberties." It has become more acceptable "for the government . . . to take more powers." She laments this. Pointedly: There is a danger, she observes, that "security can become an industry in itself and will not be protecting what is truly at risk."

Terrorism will continue to appeal to extremists, to "weak minded" individuals drawn by passionate causes. But lack of attentiveness to our liberties will not help us succeed against them, and it can damage us. I wrote in the margins: "She's saying we can't become suicide bombers of our own rights."

Finally, I heard this week from a respected former U.S. senator, a many-termed moderate conservative who was never known as the excitable type. He wrote in reaction to Nat Hentoff's warnings regarding the potentially corrosive effect of extreme surveillance on free speech. "All this scares me to death," the man wrote. "How many times do we have to watch government, with the best of intentions, I am sure (or almost so), do things 'for us'? Now 'security' and 'terrorism' argue for and justify the case for ever more intrusions—all in the name of protecting us. The truly frightening thing is that we are told we have to depend on government to police itself. Not a comforting thought, for we already have far too much evidence of the lack of such self-supervision. These actions, as Nat Hentoff said, will sooner than later curtail free speech.

"If so, I am fearful that this will ultimately lead a nation of sullen paranoids, ever more dependent upon government, ever more fearful of it. A free society, it will not be."

"A nation of sullen paranoids." Boy, is that it. This picks up on a point a friend, a veteran of Republican White Houses, said near the time the controversies were beginning. He told me of a sophisticated person he knew, experienced in journalism and the ways of government, who thought the U.S. government might have had the reporter Michael Hastings killed.

He said, musingly, "The future is paranoia."

Unless, of course, we stop it.

A version of this article appeared August 23, 2013, on page A11 in the U.S. edition of The Wall Street Journal, with the headline: 'A Nation of Sullen Paranoids'.

Copyright 2012 Dow Jones & Company, Inc. All Rights Reserved

Richard Vedder: The Real Reason College Costs So Much

Allysia Finley wrote in WSJ:

The expert on the economics of higher education explains how subsidies fuel rising prices and why there's a 'bubble' in student loans and college enrollment.

Another school year beckons, which means it's time for President Obama to go on another college retreat. "He loves college tours," says Ohio University's Richard Vedder, who directs the Center for College Affordability and Productivity. "Colleges are an escape from reality. Believe me, I've lived in one for half a century. It's like living in Disneyland. They're these little isolated enclaves of nonreality."
Mr. Vedder, age 72, has taught college economics since 1965 and published papers on the likes of Scandinavian migration, racial disparities in unemployment and tax reform. Over the last decade he's made himself America's foremost expert on the economics of higher education, which he distilled in his 2004 book "Going Broke by Degree: Why College Costs Too Much." His analysis isn't the same as President Obama's.
This week on his back-to-school tour of New York and Pennsylvania colleges, Mr. Obama presented a new plan to make college more affordable. "If the federal government keeps on putting more and more money in the system," he noted at the State University of New York at Buffalo on Thursday, and "if the cost is going up by 250%" and "tax revenues aren't going up 250%," at "some point, the government will run out of money."
Note that for the record: Mr. Obama has admitted some theoretical limit to how much the federal government can spend.

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His solution consists of tieing financial aid to college performance, using government funds as a "catalyst to innovation," and making it easier for borrowers to discharge their debts. "In fairness to the president, some of his ideas make some decent, even good sense," Mr. Vedder says, such as providing students with more information about college costs and graduation rates. But his plan addresses just "the tip of the iceberg. He's not dealing with the fundamental problems."
College costs have continued to explode despite 50 years of ostensibly benevolent government interventions, according to Mr. Vedder, and the president's new plan could exacerbate the trend. By Mr. Vedder's lights, the cost conundrum started with the Higher Education Act of 1965, a Great Society program that created federal scholarships and low-interest loans aimed at making college more accessible.
In 1964, federal student aid was a mere $231 million. By 1981, the feds were spending $7 billion on loans alone, an amount that doubled during the 1980s and nearly tripled in each of the following two decades, and is about $105 billion today. Taxpayers now stand behind nearly $1 trillion in student loans.
Meanwhile, grants have increased to $49 billion from $6.4 billion in 1981. By expanding eligibility and boosting the maximum Pell Grant by $500 to $5,350, the 2009 stimulus bill accelerated higher ed's evolution into a middle-class entitlement. Fewer than 2% of Pell Grant recipients came from families making between $60,000 and $80,000 a year in 2007. Now roughly 18% do.
This growth in subsidies, Mr. Vedder argues, has fueled rising prices: "It gives every incentive and every opportunity for colleges to raise their fees."
Many colleges, he notes, are using federal largess to finance Hilton-like dorms and Club Med amenities. Stanford offers more classes in yoga than Shakespeare. A warning to parents whose kids sign up for "Core Training": The course isn't a rigorous study of the classics, but rather involves rigorous exercise to strengthen the gluts and abs.

Fred Harper

Or consider Princeton, which recently built a resplendent $136 million student residence with leaded glass windows and a cavernous oak dining hall (paid for in part with a $30 million tax-deductible donation by Hewlett-Packard CEO Meg Whitman). The dorm's cost approached $300,000 per bed.
Universities, Mr. Vedder says, "are in the housing business, the entertainment business; they're in the lodging business; they're in the food business. Hell, my university runs a travel agency which ordinary people off the street can use."
Meanwhile, university endowments don't pay taxes on their income. Harvard's $31 billion endowment, which has been financed by tax-deductible donations, may be America's largest tax shelter.
Some college officials are also compensated more handsomely than CEOs. Since 2000, New York University has provided $90 million in loans, many of them zero-interest and forgivable, to administrators and faculty to buy houses and summer homes on Fire Island and the Hamptons.
Former Ohio State President Gordon Gee (who resigned in June after making defamatory remarks about Catholics) earned nearly $2 million in compensation last year while living in a 9,630 square-foot Tudor mansion on a 1.3-acre estate. The Columbus Camelot includes $673,000 in art decor and a $532 shower curtain in a guest bathroom. Ohio State also paid roughly $23,000 per month for Mr. Gee's soirees and half a million for him to travel the country on a private jet. Such taxpayer-funded extravagance has not made its way into Mr. Obama's speeches.
Colleges have also used the gusher of taxpayer dollars to hire more administrators to manage their bloated bureaucracies and proliferating multicultural programs. The University of California system employs 2,358 administrative staff in just its president's office.
"Every college today practically has a secretary of state, a vice provost for international studies, a zillion public relations specialists," Mr. Vedder says. "My university has a sustainability coordinator whose main message, as far as I can tell, is to go out and tell people to buy food grown locally. . . . Why? What's bad about tomatoes from Pennsylvania as opposed to Ohio?"
Mr. Vedder notes that, by contrast, "you don't have to worry about this at the University of Phoenix. One thing about the for-profits is that they are laser-like devoted to instruction." Although for-profits like the University of Phoenix and DeVry spend more money on marketing, they don't contain as much administrative overhead.
'The Obama administration has been beating up on [for-profits] pretty hard for the past two to three years," Mr. Vedder says. "It's true that drop-out rates are disproportionately higher at the for-profits, but it's also true that the for-profits are reaching the exact audience that Obama wants to reach"—low-income minorities, many of whom are the first in their family to attend college.
Today, only about 7% of recent college grads come from the bottom-income quartile compared with 12% in 1970 when federal aid was scarce. All the government subsidies intended to make college more accessible haven't done much for this population, says Mr. Vedder. They also haven't much improved student outcomes or graduation rates, which are around 55% at most universities (over six years).
Mr. Vedder is skeptical about the president's proposal to tie federal aid to graduation rates, among other performance metrics. "I can tell you right now, having taught at universities forever, that universities will do everything they can to get students to graduate," he chuckles. "If you think we have grade inflation now, you ought to think what will happen. If you breathe into a mirror and it fogs up, you'll get an A."
A better idea, Mr. Vedder suggests, would be to implement a national exam like the GRE (Graduate Record Examination) to measure how much students learn in college. This is not on Mr. Obama's list.
Nor is the president addressing what Mr. Vedder believes is a fundamental problem: too many kids going to college. "Thirty-percent of the adult population has college degrees," he notes. "The Department of Labor tells us that only 20% or so of jobs require college degrees. We have 115,520 janitors in the United States with bachelor's degrees or more. Why are we encouraging more kids to go to college?"
Mr. Vedder sees similarities between the government's higher education and housing policies, which created a bubble and precipitated the last financial crisis. "In housing, we had artificially low interest rates. The government encouraged people with low qualifications to buy a house. Today, we have low interest rates on student loans. The government is encouraging kids to go to school who are unqualified just as it encouraged people to buy a home who are unqualified."
The higher-ed bubble, he says, is "already in the process of bursting," which is reflected by all of the "unemployed or underemployed college graduates with big debts." The average student loan debt is $26,000, but many graduates, especially those with professional degrees, have six-figure balances.
Mr. Obama wants to help more students discharge their debts by capping their monthly payments at 10% of their discretionary income and forgiving their outstanding balances after 20 years. Grads who take jobs in government or at nonprofits already can discharge their debt after a decade.
"Somehow working for the private sector is bad and working for the public sector is good? I don't see on what basis one would make that conclusion," Mr. Veder says. "If I had to make some judgment, I would do just the opposite."
He adds that the president's approach "creates a moral hazard problem. What it signals to current and future loan borrowers is that I don't have to take these repayment of loans very seriously. . . . I don't have to worry too much about getting a high-paying job." It encourages "sociology and anthropology majors compared with math and engineering majors."
Can online education, which is being pioneered in some science disciplines, substantially reduce costs? Mr. Vedder says it can, but government won't do the innovating. "First of all, the Department of Education, to use K-12 as an example, has been littered with demonstration projects, innovation projects, proposals for new ways to do things for decades. And what has come out? Are American students learning any more today than a generation ago? Are they doing so at lower cost than a generation ago? No."
Innovation, he says, is being driven by entrepreneurs like Stanford computer science Prof. Sebastian Thrun, who founded the for-profit company Udacity that offers "massive open online courses" (MOOCs). Mr. Thrun began teaching artificial intelligence, first at Stanford and then at Udacity. Mr. Vedder notes that he quickly got "200,000 people to sign up for it. And it's a great course and people are learning like crazy."
Where the government can help, Mr. Vedder says, is to get out of the way of progress and encourage slow-moving accreditors to allow innovations to move forward more rapidly. But ultimately, the way to improve college affordability is for the government to disinvest in higher ed and wean students from subsidies.
Mr. Obama is dead set against that. "He wants to maintain that world" of nonreality in which demand is impervious to cost, Mr. Vedder sighs. "That world has to change."
Ms. Finley is an editorial writer for the Journal.

Congress’s Obamacare Waiver

Michael F. Cannon wrote in National Review:

President Obama is buying votes from members of Congress — with stolen money.
 

America has a two-party system. But it’s not Republicans versus Democrats. It’s the ruling class — Republicans and Democrats — against everyone else. Consider how President Obama just gave Congress its very own Obamacare waiver.
Obamacare includes a provision that should cost each member of Congress and each staffer $5,000 to $11,000 per year. Needless to say, the ruling class was not pleased.
Congress wasn’t about to try to exempt itself from this provision explicitly, though. If John Q. Congressman voted to give himself an Obamacare waiver that his constituents don’t get, he wouldn’t be John Q. Congressman much longer. What’s an aristocrat to do?
On July 30, I predicted that, even though he had no authority to do so, President Obama would waive that provision at taxpayers’ expense. On August 1, he ignobly obliged the aristocracy by decreeing we peasants give each member and staffer $5,000 or $11,000, depending on whether they want self-only or family coverage. It’s good to be king.
The president’s supporters, like courtesans of old, are trying to quell a peasant uprising by denying there were any special favors. The denials ring hollow.
Obamacare imposes two costs on members of Congress and their staff. First, it kicks them out of their current health plans, leaving them to buy coverage on Obamacare’s health-insurance “exchanges.” Second, it makes no provision for the federal government to keep paying $5,000 or $11,000 toward the cost of their insurance as the Treasury does today. 
The second cost is by far the larger one; it amounts to a pay cut of $5,000 or $11,000. Many staffers were threatening to quit or retire early.
When the president’s supporters claim that Congress isn’t being exempted, they mean that Obama didn’t exempt them from Cost No. 1. Which is true. But he did exempt them from Cost No. 2.
Rescinding that pay cut may or may not have been the right thing to do. But it’s still a break that ordinary Americans like Kevin Pace don’t get. Pace is an adjunct music professor at Northern Virginia Community College. To avoid penalties under Obamacare, his employer cut his hours — sticking Pace with an $8,000 pay cut.
Supporters say President Obama merely held Congress harmless. Exactly. Kevin Pace and countless others like him aren’t being held harmless, because they’re not members of Congress. As Kevin Pace put it, “This isn’t right on any level.”
Things would be unseemly enough if Congress’s Obamacare waiver were legal. But experts say the president had no authority to grant it.
That didn’t stop even Republicans from praising him, however. Tin-eared Representative Chris Stewart (R., Utah) gushed:  “There’s no question it was the right thing to do. Not just for me, but for my staff. Heavens, I have staff who don’t make much money. This would be a really big bite for them.”
Congressman, you also have constituents who don’t make much money, and who can’t make it appear out of thin air. Enjoy your waiver.
How was I able to predict the president would grant illegal subsidies to members of Congress? He’s a repeat offender.
Obamacare actually kicked members of Congress out of their current health plans and imposed that $5,000 to $11,000 pay cut immediately upon enactment in 2010. But President Obama just ignored that part of the law. He let members and staff stay in their current health plans and kept the taxpayer money flowing in their direction.
I predicted President Obama would give illegal health-insurance subsidies to members of Congress because he is already in his fourth year of doing it.
Pretty much all Americans can point to some part of Obamacare that they hate. Seniors hate the Independent Payment Advisory Board, which even Howard Dean calls “a health-care rationing body.”
Unions, teacher assistants, bus drivers, cafeteria workers, and other school employees hate how the law is cutting their pay. Private-sector unions despise the “Cadillac tax” that forces them to fund subsidies their members don’t receive. Young adults hate the penalties for not buying health insurance. Okay, everybody hates those. In fact, a majority of Americans oppose the entire law.
But only Congress gets relief. Why?
Simple. President Obama doesn’t want Congress to reopen Obamacare. A significant share of congressional Democrats just voted to delay the individual mandate. With once-loyal Democrats now upset over how the law hurts them personally, who knows what else Congress would discard?
President Obama circumvented a potential legislative defeat by giving each member and staffer thousands of taxpayer dollars he had no authority to touch. He’s buying votes from members of Congress — with stolen money, no less.
— Michael F. Cannon is director of health-policy studies at the Cato Institute and coeditor of Replacing Obamacare.