Reason Foundation

Business Start-Ups Creating Jobs

Posted on September 2, 2010, 8:35am | Anthony Randazzo

A recent report from Tim Kane, a senior fellow at the Kauffman foundation points to business start-ups, which need a confident capital market to really thrive, as the sole source of job creation in this economy. Vivek Wadhwa breaks it down:

Kauffman Senior Fellow Tim Kane analyzed a new data set from the U.S. government, called Business Dynamics Statistics, which provides details about the age and employment of businesses started in the U.S. since 1977.  What this showed was that startups aren’t just an important contributor to job growth: they’re the only thing. Without startups, there would be no net job growth in the U.S. economy. From 1977 to 2005, existing companies were net job destroyers, losing 1 million net jobs per year. In contrast, new businesses in their first year added an average of 3 million jobs annually. [...]

Half of the startups go out of business within five years; but overall they are still the ones that lead the charge in employment creation. Kauffman Foundation analyzed the average employment of all firms as they age from year zero (birth) to year five. When a given cohort of startups reaches age five, its employment level is 80 percent of what it was when it began. In 2000, for example, startups created 3,099,639 jobs. By 2005, the surviving firms had a total employment of 2,412,410, or about 78 percent of the number of jobs that existed when these firms were born.

This should raise some questions about the validity of stimulus job "creation" numbers.

Read Kane's full report here.

More Environmental “Thumping” This Time Internationally

Posted on September 2, 2010, 12:24am | Shirley Ybarra

My colleague Adrian Moore posted a blog entitled “Environmental Activist Groups Get Thumped” based on a Washington Post article on August 30, 2010. 

On the same day, the Washington Times reported that a review of the U.N climate panel called for changes:

 “The U.N.’s embattled climate change panel must make "fundamental changes" to avoid future errors and charges of bias, according to a comprehensive independent review released Monday.

The U.N. Intergovernmental Panel on Climate Change (IPCC) which has taken the lead in investigating the role of humans in climate change has been under fire since admitting in January that its 2007 report on global warming exaggerated the scope of melting Himalayan glaciers.”

(The IPCC is the panel that shared the Nobel Prize with Al Gore.)

This independent review said; “We found in the summary for policymakers that there were two kinds of errors that came up - one is the kind where they place high confidence in something where there is very little evidence. The other is the kind where you make a statement ... with no substantive value, in our judgment."

On the same day the Washington Times provided an editorial entitled “Global Warming Panel Feels the Heat.”

The editorial opines:
 
“The public already has taken notice of this lack of substance, but don't expect the IPCC to return its Nobel Peace Prize any time soon. According to a Rasmussen Reports poll released Saturday, more Americans believe natural forces were responsible for "global warming" than buy the story that humans are at fault. This lack of trust is what upset U.N. bureaucrats most. The effort to cook the books has been too obvious. It's hard to call for new austerity measures, taxes and regulations if nobody believes the headline-grabbing scare stories about melting ice, rising seas and looming disasters.”

Both articles are worth the read.

Could Congress Actually Accept Reduced Mortgage Origination

Posted on September 1, 2010, 3:56pm | Anthony Randazzo

One of the striking features of the housing bubble was the excessive origination of toxic mortgages. Government incentive programs—and the global savings glut's search for yield—directed too much credit towards housing and only temporarily juiced prices. It is all but certain that whatever reforms come for the housing market, there will be less credit available for mortgages than during the past decade.

But that is okay.

While we don't know exactly how much credit the housing market needs in an unencumbered market, supply and demand signals will necessarily determine this constantly evolving figure. We do know, though, that there was too much during the credit period. So it makes sense that there will be less credit available in the future. We can't return to unsustainability. We need to accept that a sustainable market will look different.

This is a politically unpopular message, though. And interested parties in the reform debate often talk about trying to ensure access to mortgages for Americans and promoting home ownership. If fixing Fannie Mae and Freddie Mac (with a silver steak) and an overhaul of housing finance is going to work, though Congressmen will have to change their way of thinking on this.

In someways, they already have. In the Dodd-Frank Act, Congress eliminated federal preemption for mortgage lenders that are subsidiaries of national banks. In the current market, large national banks can avoid having to deal with 50 different sets of regulatory requirements when operating in the 50 states because federal law preempts state law. With that provision going way, banks are now faced with a choice:

They can keep their mortgage subsidiaries as such, which would subject them to a patchwork of state consumer-protection laws. Alternatively, they can roll up their subsidiaries, retaining the federal preemption shield but losing the practical benefits of keeping the mortgage business in a stand-alone unit.

Industry lawyers expect most institutions to go the roll-up route, partly out of fear that sooner or later the states would try to force operating subsidiaries — and, potentially, their individual loan officers — to get state licenses. The burden of satisfying 50 state regulators would outweigh the cost in legal fees of restructuring.

While this reduction of mortgage lending operations doesn't necessarily mean there will be less mortgages originated, it certainly won't increase them. There will likely be private mortgage brokers that step into the void, but at least in the short-term this law is likely to mean less access to credit for home buyers on some level.

Even if the reduction in credit is marginal, lawmakers have shown their willingness to potentially decrease access to mortgage credit if they think it is for the right reason. The preemption provision in Dodd-Frank unnecessarily complicates an already uncertain marketplace, and shouldn't have been passed. But at the very least, lawmakers should recognize what it means to access to credit.

When the housing finance reform battle heats up early next year, lawmakers should recognize that they have a price for reducing mortgage interest: a perceived beneficial law. And if getting the government out of the housing finance market reduces access to credit that shouldn't matter—as long as the benefit is a more sustainable and stable housing market. Certainly that is worth less mortgages originated.

Disability Pensions Are Costing Local Governments in San Bernardino County and Elsewhere

Posted on August 31, 2010, 11:13pm | Adam Summers

Here is an article from the San Bernardino County Sun that examines a lesser analyzed aspect of rising public employee pension costs. The article looks at the high incidence of government public-safety workers receiving disability pensions, also known as "medical retirements." According to the article, "between 1975 and 2006, about 89 percent of retiring Redlands police officers took medical retirements." Other local jurisdictions in San Bernardino County had high medical retirement rates as well. For example,

In San Bernardino, about 46 percent of police and firefighters who retired since 2000 received a medical retirement. Councilman Fred Shorett said it's not necessarily a sign of malfeasance, but he also said he'd like the city to look into the number of medical retirements granted.

"I think when it's around 50 percent, there's something that doesn't look exactly right," he said. "You wouldn't find that in the private sector."

Disability pension rates varied widely across the county, however, and some local governments had rather low rates. Pomona, Ontario, and Montclair, for example, all had public-safety employee medical retirement rates of less than 20%.

High disability pension rates are significant because these benefits are more generous than regular public-safety pensions, which are typically already rather generous (public-safety workers oftentimes can retire with maximum benefits of 90% of their final salaries after 30 years of work as early as age 50 or 55). Unlike regular pensions, half the amount of the disability pension is tax free, retirees receive fully paid medical care for the rest of their lives, and 100 percent of the disability pension can be inherited by a spouse upon the retiree’s death, compared to the 65 percent limit offered to spouses under regular pensions.

Curiously, according to Redlands councilman Mike Gallagher, in virtually every medical retirement case he has seen in the five years he has been on the City Council, officers seeking disability pensions have either retired already or reached typical retirement age. As I told reporter James Koren, author of the Sun story, the high rate of disability pensions and the fact that they tend to come at the very end (or after the end) of careers suggests that there is some gaming of the system going on.

This brought to mind some investigations of "chief's disease" arrangements that came to light a little over five years ago when I was researching public pension issues for my first pension study, The Gathering Pension Storm: How Government Pensions Are Breaking the Bank and Strategies for Reform (see pages 60-62). As I wrote in that study,

Here’s how the scheme works. Fire and sheriff’s employees file a workers’ compensation claim under California Labor Code 4850 a year before their retirement dates. They are then allowed to take a one-year leave of absence while collecting their full salaries tax free. Since taxes are not taken out of their pay, their salaries effectively increase. Since pension benefits are calculated based, in part, on final (or highest) salary rates, this increases their pensions as well. Moreover, the leave of absence means they get credit for an extra year of work without actually having to work. Since length of service also figures into pension benefits calculations, this boosts their pensions even further. For many, this is only the first step. Next, the employee may file for a job-related disability pension.

Generous rules about what ailments make one eligible for disability benefits contribute to the high medical retirement rates.

But fighting a medical retirement application can be difficult, especially because state labor law says if a police officer or firefighter has certain conditions—including heart disease, pneumonia and lower-back ailments—the maladies are presumed to have been caused by their jobs."

Heart disease, hypertension, cancer—some of these are common diseases, and in many cases, we don't have a choice" but to approve medical retirements, said Redlands Councilman Jerry Bean. "There are many other reasons for hypertension and heart problems than stress on the job."

He said the state should look at changing some of those so-called presumptions as a way to curtail medical retirements.

There have even been cases like the one in which a four-pack-a-day smoker in Ventura County received a disability pension because his cancer was deemed to be a job-related disease.

Some argue that because the main benefit of a disability pension is better tax treatment, it doesn't really cost a local government anything to approve the more generous medical retirements. But San Bernardino City Attorney James F. Penman and San Bernardino councilman Shorett note that there is no such thing as a free lunch.

"The effect on the taxpayer is that the disability retirements for safety (employees) is ... 50 percent tax free," Penman said. "Other taxpayers are subsidizing them."

Shorett said the tax break costs the state and federal government, which in turn costs everyone.

"If it's costing the government, it's costing us," he said.

Schwarzenegger Plan: Borrow from Underfunded CalPERS to Patch Underfunded State Budget

Posted on August 31, 2010, 7:06pm | Adam Summers

According to a recent Sacramento Bee article, California Governor Arnold Schwarzenegger has privately proposed borrowing $2 billion from the state's biggest pension fund (the California Public Employees' Retirement System, or CalPERS) to help plug the state's massive budget deficit. You read that right: the governor wants to fill a $19 billion budget gap by borrowing from a pension system that has an estimated unfunded liability of about $500 billion (see a couple of academic studies pegging the pension deficit around the half-trillion-dollar mark here and here, pp. 197-199). What could go wrong?

Gov. Schwarzenegger, who has rightly called the state's pension system "unsustainable," now wants to siphon more money from this unsustainable system. California has a history of relying on borrowing schemes to purportedly balance its budget. It has often been said that this is like taking out one credit card to pay off another. The current proposal is more like one broke person asking his even more broke brother for a loan, hoping that somehow, someday the brother's ship is going to come in (all evidence to the contrary notwithstanding).

The logic is that the borrowing would be coupled with the governor's proposal to roll back pension benefits for all new hires to pre-1999 levels, when a pension sweetener bill increased state employees' pensions by as much as 50%. The administration estimates that this would save $93 billion in pension and retiree health-care costs over 30 years. Since the lower benefits would only apply to new employees, however, it will take a number of years for significant savings to materialize, as workers are incorporated into the new system. Thus, the governor wants to borrow this $2 billion in savings against all of the savings that would come later on—assuming, of course, that CalPERS and the legislature go along with the plan. (Note that if the aforementioned academic studies are anywhere even remotely accurate, the governor's reform plan still would not generate nearly enough savings to cover the pension system's unfunded liability.)

Just when you thought California was out of accounting gimmicks to "balance" the budget and put off the necessary difficult fiscal decisions yet another year, now the governor is contemplating borrowing against savings that have not actually been realized (not to mention the fact that borrowing against savings reduces the amount of savings and diminishes the impact of of the reform). Moreover, while the Schwarzenegger pension reform would represent somewhat of an improvement over the status quo, it does not go nearly far enough. The entire defined-benefit system is unsustainable. Besides, California tried to address pension costs by going to a two-tier pension system before, in 1991. We have seen firsthand how easy it was to undo that reform and raise benefits to levels more generous than ever in the infamous 1999 deal. The public sector needs to follow the lead of the private sector, which been switching to more reasonable 401(k)-style, defined-contribution retirement plans for the past 30 years or so. Tinkering around the edges of the current system would only leave in place the existing incentives to hide the true costs and fiscal health of the system, and maintain the moral hazard problem of allowing legislators to continue to reward union interests with greater benefits, knowing that the costs of those benefits will not be borne until they are long out of office.

Behind the Great China Traffic Jam

Posted on August 31, 2010, 12:49pm | Adrian Moore

This analysis of the traffic jam and transportation trends in Beijing is interesting.

First we need to understand that this was not a "Beijing" traffic jam at all,or even on the outskirts of Beijing. The traffic jam came no closer to Beijing than 150 miles (250 kilometers) away. . .

Beijing has achieved a car ownership rate almost equal to that of New York City's dense boroughs. In 2008, the dense boroughs of New York City had 0.52 cars per household, while Beijing had achieved a 0.51 rate. One report now places Beijing's car ownership one third higher than in 2008, which would place Beijing's car ownership rate 20% above that of New York City. . .

Meanwhile, there are reports that authorities have eased the traffic jam in Inner Mongolia. A longer term solution might be to add a couple of additional lanes in each direction. This should not be too difficult in a nation that by the end of the year will have nearly as many miles of freeway (43,000 or 70,000 kilometers) as the original US interstate system and will probably lead the world early in the next decade. This is a key to improving the competitiveness of Chinese urban areas. Sufficient roadway investment to handle growing travel demand will be just as important to maintain the competitiveness of US urban areas.

 

More (Mis)forecasting Folly from the Keynesians

Posted on August 30, 2010, 11:30pm | Samuel Staley

Clinton-era chair of the White House's Council of Economic Advisors Laura Tyson advocates for a second stimulus in a New York Times oped (8/30/2010), writing:

"Our national debate about fiscal policy has become skewed, with far too much focus on the deficit and far too little on unemployment. There is too much worry about the size of government, and too little appreciation for how stimulus spending has helped stabilize the economy and how more of the right kind of government spending could boost job creation and economic growth. By focusing on the wrong things, we are in serious danger of failing to do the right things to help the economy recover from its worst labor market crisis since the Great Depression.

"The primary cause of the labor market crisis is a collapse in private demand — the same problem that bedeviled the economy in the 1930s. In the wake of the financial shocks at the end of 2008, spending by American households and businesses plummeted, and companies responded by curbing production and shedding workers. By late 2009, in response to unprecedented fiscal and monetary stimulus, household and business spending began to recover."

The danger, she argues, is not following up the first stimulus with a second one. I respond directly in a post on National Review's blog The Corner, arguing that this one-sided view of the recession--that the only problem is a failure of demand/spending--ignores fundamental readjustments that have to be made on the supply side of the economy (more specifically investment), noting:

"Moreover, stimulus advocates like Tyson and Krugman still believe that spending, any spending, even if it’s poorly targeted and wasted on worthless projects, creates jobs and economic growth. They are wrong. These projects further distort investment and spending in the economy and set us up for prolonged economic stagnation, if not a double-dip recession. Investments have to be productive to have long-term economic viability and create wealth.

"Tyson’s op-ed shows that many of the Keynesians among mainstream economics professionals still haven’t learned the lessons of this recession. They continue to put faith above reason in their macroeconomic models even in though their models have been patently inept at diagnosing, let alone predicting the turns in the economy."

For more on my critique of macroeconomic forecasting and the stimulus, its limits and the implications for economic growth, see also my Out of Control blog post (August 5, 2010) on the Blinder and Zandi report on stimulus job creation and my articles in National Review "Naive Statistics" (November 2, 2009) and "Wrong Road" (December 15, 2008).

GM and Feds Phoney Baloney IPO

Posted on August 30, 2010, 6:04pm | Adrian Moore

Shikha's latest Forbes column, "Obama's 'Mission Accomplished' GM Moment," points out that the GM IPO is calculated not to protect taxpayer "investment" in the company but shore up the November prospects of Democrats:

"The company is--rightly--eager to shed the sobriquet of Government Motors. So eager in fact that its outgoing CEO Ed Whitacre launched a campaign this spring misleadingly claiming that GM had paid back its government "loan" in full after returning only $6.7 billion. But even he thinks that the IPO is a dumb idea. He apparently wanted to wait until GM could command a better share price and then have the company go fully public at once instead of in several installments as per the current plan. Whitacre expressed his misgivings at a recent Management Briefing Seminar in Michigan's Traverse City, according to Sean McAlinden of the Ann Arbor-based Center for Automotive Research. "And then 48 hours later he was gone," McAlinden says.

But Whitacre's departure won't change the risk--"a big risk in my mind," says O' Keefe's Coulter--that the IPO could turn into a PR nightmare for GM if its opening price is too low.

Even if the IPO turns out to be less of a disaster, the Obama administration's wanton disregard for both taxpayers and the company shows just how desperate it is getting to deliver some sliver of economic good news to angry voters ahead of the November elections. But its actions only bespeak of the dangers of government bailouts...."

The whole thing here.

Environmental Activist Groups Get Thumped

Posted on August 30, 2010, 4:21pm | Adrian Moore

The Washington Post dissects the beating environmental activists took on climate change legislation and the subsequent flailing.

Most Americans want a better environment. Alas, they don't look as closely as they should at the government imposed "solutions" proffered by environmental activists. But they clearly do recognize there there are significant costs to those proposals, and during a major economic downturn were not willing to abide the job losses that would come with proposed climate change legislation.

The Failure of NOT Recognizing Successful Teachers at Los Angeles Unified

Posted on August 29, 2010, 4:18pm | Lisa Snell

For me the gift that the Los Angeles Times has given education reform through their series on evaluating teachers through value-added analysis is not the focus on the ineffective teachers but the notion that schools should have been learning from the effective teachers all along. Here is where a positive future for children and teaching can be found:

The Los Angeles Unified School District has hundreds of Jaime Escalantes — teachers who preside over remarkable successes, year after year, often against incredible odds, according to a Times analysis. But nobody is making a film about them.

Most are like Zenaida Tan, working in obscurity. No one asks them their secrets. Most of the time, no one even says, "Good job."

Frequently, even their own colleagues and principals don't know who they are.

As part of an effort to shed light on the work of Los Angeles teachers, The Times on Sunday is releasing a database of roughly 6,000 third- through fifth-grade teachers, ranked by their effectiveness in raising students' scores on standardized tests of math and English over a seven-year period.

Read the whole thing. One story that struck a chord with me was a teacher who received an average review yet added huge gains every year to her student's achievement in math and reading; yet her principal made a point of noting that she had been late three times to pick her class up at recess. This echoes my experience with my own children and their school administration's value of compliance over results.

 

 

Top 10 Transportation Megaprojects for the 21st Century

Posted on August 29, 2010, 8:30am | Samuel Staley

AOL News reports on what they think are the ten biggest transportation megaprojects looming in the 21st century. Some of the projects, such as the Second Avenue Subway Tunnel in New York City, are under construction. Others, like Canada's arctic ice road, are perennial. Still others, like a 3,100 mile long transatlantic train tunnel, are simply wisps in an transportation engineer's eye (although increasingly feasible).

Here are the top 10 (from 10th to 1st in AOL's ranking):

• Canada's arctic Ice Road;
• Transatlantic train tunnel
• New York's Second Avenue Subway (8.5 miles, $17 billion)
• Bering Straight bridge crossing from Alaska to Russia (50 miles)
• Shanghai sprawling rail system
• Straight of Gibralter crossing (either tunnel or bridge)
• Irish Sea tunnel connecting Britain
• A national U.S. bicycle route system and network
• Gotthard Switzerland's Base Tunnel (94 miles long, under construction)
• Turkey's earthquake proof Marmaray tube tunnel.

 

China's Privatization Binge

Posted on August 28, 2010, 8:37am | Samuel Staley

Many people understandably are skeptical of China's privatization efforts, but this tidbit from The China Daily's business section (August 25, 2010) is worth highlighting:

LI Rangroong, "who has been the minister since SASAC's [the State-owned Assets Supervison and Administration Commmission] establishment in 2003, has led the restructuring and reform of central state-owned enterprises, the number of which has been cut to 123 to 196."

That's a 37.2 percent reduction in just seven years. Further, for context, 

"SASAC is a powerful agency that is in charge of 123 State-owned enterpirese, which range from Petro-China, China's top oil and gas producer, to China Mobile, the world's biggest mobile carrier."

LI Rongrong was recently replaced by WANG Yang, China's chief of government's quality inspection bureau.

The key point here is the trajectory of change and reform. While the government still controls the "commanding heights" of the economy, policymakers have been aggressively divesting central and provincial governments of many, many businesses. Some are complete divestitures, but many more are sales of large stakes of government shares of wholey owned state enterprises to private equity investors.

(Sorry, I'm in China right now and had trouble tracking down the linke on the web site.)

Disappointing Second Quarter Growth Numbers Bode Well For A..."Lost Decade"

Posted on August 27, 2010, 6:18pm | Samuel Staley

The U.S. Department's Bureau of Economic Analysis revised downward their estimates of second quarter 2010 growth by a dramatic one third to an anemic 1.6 percent. At least it wasn't as big of a drop as private economists had forecast, which was 1.4 percent (or perhaps it did?). I weigh in on what the numbers mean on the National Review's blog The Corner. In part, I say:

"While growth was still positive, its rate is downright anemic in the wake of such a steep recession. Moreover, estimates of consumer spending were adjusted upward, showing just how weak the Keynesian concept of demand-led growth, boosted by government spending, really is.

"Ultimately, the U.S. economy needs a major supply-side adjustment to bring investment in line with real consumer demand, not the smoke-and-mirrors kind promoted by federal largesse. The commercial real-estate market needs to sort itself out before meaningful, growth-inducing lending can occur, but with the economy in such disarray, many banks still don’t know how to value the  real-estate assets on their books."

Also, check out J.D. Foster's contribution to the discussion.

Also, check out Anthony Randazzo's policy study for Reason Foundation on Japan's Lost Decade as well as our more comprehensive analysis of the Great Recession, the bailouts, and the so-called Stimulus.

Beijing Traffic Jam Opens Room for Debate at New York Times

Posted on August 27, 2010, 7:27am | Samuel Staley

The 60-mile traffic jam on a expressway north of Beijing went viral on Internet news, and prompted the The New York Times to devote its web feature "Room for Debate" to the topic. I was asked to contribute (ironically writing from Chongqing, China). While the massive traffic jam is unlikely to repeat itself, even in Beijing, the incident still has lessons for U.S. cities and is a stark reminder for the need of keeping our transportation infrastructure up to snuff. Among other points, I note:

"A traffic jam of this sort is unlikely to appear in the U.S. Our road network has built-in redundancy that gives it a resilience that this stretch of highway in Beijing (and much of China) simply doesn't have. To avoid future traffic jams, the Chinese will have to build a true network of roads that allow drivers to find alternatives quickly and easily. Fortunately, many Chinese cities, Beijing proper included, have the core elements of this network: several ring roads plus local roads planned on a grid. The stretch of highway with the blocked traffic, however, didn't benefit from this spiderweb-like mesh of roads."

This is also a theme of our book Mobility First: A New Vision for Transportation in a Globally Competitive 21st Century, which also includes numerous references to transportation policy in China.