Out of Control

Given the current state of the economy—and the government's chicken-with-its-head-cut-off response to it—people may want to consider the following:

Before the massive government interventions of the 1930s, all recessions were short-lived. The severe depression of 1921 was over so rapidly, for example, that Secretary of Commerce Hoover, despite his interventionist inclinations, was not able to convince President Harding to intervene rapidly enough; by the time Harding was persuaded to intervene, the depression was already over, and prosperity had arrived. When the stock market crash arrived in October, 1929, Herbert Hoover, now the president, intervened so rapidly and so massively that the market-adjustment process was paralyzed, and the Hoover-Roosevelt New Deal policies managed to bring about a permanent and massive depression, from which we were only rescued by the advent of World War II. Laissez-faire—a strict policy of non-intervention by the government—is the only course that can assure a rapid recovery in any depression crisis.

In this time of confusion and despair, then, the Austrian School offers us both an explanation and a prescription for our current ills. It is a prescription that is just as radical as, and perhaps even more politically unpalatable than, the idea of scrapping the free economy altogether and moving toward a totalitarian and unworkable system of collectivist economic planning. The Austrian prescription is precisely the opposite: we can only surmount the present and future crisis by ending government intervention in the economy, and specifically by ending governmental inflation and control of the money supply, as well as interference in any recession-adjustment process. In times of breakdown, mere tinkering reforms are not enough; we must take the radical step of getting the government out of the economic picture, of separating government completely from the money supply and the economy, and advancing toward a truly free and unhampered market and enterprise economy.

The above words are not recent, although they might as well be. In fact, they were written in 1975 by economist and author Murray N. Rothbard during another of the busts of the boom-and-bust cycle created by government monetary policy (see Rothbard's introduction to his famous America's Great Depression, p. xxix). After exhausting every other solution, perhaps the geniuses in government responsible for the nation's current economic calamities will turn to the economic theory that both predicted the recent economic fallout and offers a way out of the mess. The correction cannot be painless (years of inflationary monetary policy and interest rate manipulation have already seen to that), but perhaps government will realize that it should at least "do no more harm" and simply get out of the way. For those interested in a more detailed description of the "Austrian School" of economics, I highly recommend taking a look at the excellent writings on the Ludwig von Mises Institute Web site.

While it seems that all of the public pension news lately has been bad, especially here in California (losses to public pension funds will require higher taxpayer contributions to make up for the shortfalls, excessive pension benefits have driven the City of Vallejo into bankruptcy and run others, like the City of San Diego, to the brink of bankruptcy, etc. -- see my previous post below or here for more on this), the recent elections did produce a couple of local victories for taxpayers on the pension issue.

In Pacific Grove, voters approved Measure Y, an advisory vote on whether the city should shift out of the traditional defined-benefit pension system of the California Public Employees' Retirement System (CalPERS) and establish its own 401(k)-style defined-contribution retirement plan, with over 56% of the vote. According to Mayor Dan Cort (Monterey County Herald, "Pacific Grove: Voters approve leaving pension plan, November 6, 2008, available in paid archive at http://www.montereyherald.com/archivesearch), who just won his re-election bid, "It's [the state retirement system is] a burden, expensive, an unfunded liability." Added Cort, "Cities all across California are being crushed by pensions."

In Orange County, voters overwhelmingly approved a proposal to require voter approval of all future benefits increases for county employees (not including general cost-of-living adjustments). Similar voter approval requirements have helped even "liberal" local governments such as San Francisco fare relatively well in terms of their pension system health, while supposedly "conservative" areas like San Diego and Orange County have been choked by excessive benefits. (San Diego finally adopted a similar measure in November 2006.) Measure J was unanimously supported by the county supervisors and passed with a commanding 75% of the vote. The measure also requires county officials to present voters with an actuarial study detailing the full costs of any benefits increases and their effect on the county's unfunded pension liability. Orange County's pension system is currently only 73% funded and is running a $3 billion unfunded liability. County Supervisors' Chairman John Moorlach labeled Measure J "an insurance policy for the taxpayer," because it would prevent the kind of private labor negotiations that led to significant benefits increases in 2001 and 2004, and which were largely rubber-stamped by county supervisors.

While both the Pacific Grove and Orange County efforts represent positive steps in the right direction, they can only address future pension costs. Since existing benefits levels are already locked into law and cannot be reduced, the costs that have been racked up (and will continue to rack up) under these plans must be paid for one way or another. If Pacific Grove is successful in moving out of the CalPERS defined-benefit system into a more reasonable 401(k)-style defined-contribution plan, that should be the model for other state and local governments looking to avoid the pension disasters of Vallejo, San Diego, and others.

Following up on a recent post, it's increasingly looking like Georgia may drop plans to privatize one state-run psychiatric hospital and instead privatize all of them:

Under pressure to fix its mental health system, Georgia is embarking on an uncharted course: the total privatization of state psychiatric hospitals.

In an escalation of earlier plans for limited privatization, officials now want to hire for-profit companies to build and operate three new psychiatric facilities to replace all seven existing state hospitals, according to documents obtained by The Atlanta Journal-Constitution. The last of the old facilities would close by 2012.

The move would end 150 years of state-provided psychiatric care in Georgia, marked by frequent revelations of horrid conditions, reforms, more revelations and more reforms. Now the state confronts a confluence of challenges: up to 10 percent budget cuts and an investigation of the hospitals by the U.S. Justice Department. [. . .]

Now, however, they are proposing a complete reshaping of the system. Psychiatric units for children and adolescents would close. Adult patients would be housed in one of two new hospitals; one somewhere in metro Atlanta, the other in south central Georgia. And criminal defendants who may be mentally incompetent to stand trial would be brought from across the state to a single forensics facility, in Milledgeville, for evaluation and treatment. [. . .]

The state began examining its psychiatric hospitals last year after the Journal-Constitution reported that abuse, neglect and poor medical care contributed to 136 deaths from 2002 through 2007.

The Justice Department investigation added urgency to state efforts. In May, the department cited an “unabated” failure to address dangerous conditions that have caused preventable deaths, injuries and illnesses. State officials are negotiating an agreement that would forestall a lawsuit charging Georgia with violating patients’ civil rights.

Similar investigations in other states have led to massive spending to upgrade or replace hospitals. Georgia ranks near the bottom in per-person spending on mental health care; reaching the average spending level would add at least $480 million to the current budget of more than $700 million.

The expanded privatization plan appears to be intended to make dramatic changes without proportionate increases in spending, according to organizations briefed by Walker.

“Everybody’s take is that there’s no [new] money,” said Terry Norris, executive vice president of the sheriffs’ association. “They’re trying to maximize what they’ve got.”

The last quote is key—Georgia officials are embracing privatization as a primary strategy for doing more with less. As I alluded to in my Reason.com column last week, I suspect we're going to be hearing an increasing number of similar refrains from state officials across a spectrum of policy areas as they reckon with growing budget shortfalls.

More on state psychiatric hospital privatization here.

» Reason's Annual Privatization Report 2008
» Reason's Privatization Research and Commentary

While the private sector has been shifting away from traditional defined-benefit pension plans for some 30 years, government employee union strength has allowed them to remain the predominant retirement system in the public sector. According to a recent report from the Center for Retirement Research at Boston College, of those with some kind of retirement plan, 80% of public-sector employees rely solely on a defined-benefit plan, while more than 60% of those in the private sector rely solely on a 401(k)-style defined-contribution plan. The report also notes that between October 9, 2007, and October 9, 2008, equity assets in retirement plans have dropped $4 trillion in value.

The structure of traditional public pension plans is such that whenever there is a financial downturn, such as we are currently experiencing, taxpayers are hit twice: first, because the value of their own retirement accounts decline, and second, because they must make up for the shortfall in public pension funds because the benefit levels are guaranteed and state and local governments (i.e., taxpayers) are on the hook for whatever cannot be paid from pension fund returns. What is even more maddening is that public pension increases made during the boom times were often applied retroactively! As a recent Los Angeles Daily News editorial ("Double whammy: Bill for public pensions seems unfair," October 29, 2008, available from paid archive at http://www.dailynews.com/archivesearch) exclaimed,

We've already been paying more each year to cover the increasing cost of retirement benefits for city, county and state workers. But when the real estate market was booming, the stock market was hot and public coffers were full, nobody really paid attention to the extra expense.

Now, with the nation's stock market in the tank and investments worth significantly less than a few months ago, taxpayers are going to have to foot the bill to keep public-employee pensions fully funded in the coming years.

The California Public Employees' Retirement System (CalPERS) reported that it had lost $48 billion (approximately 20%) of its value between July 1 and October 10 of this year, and a whopping $68 billion going back to last October (and that doesn't even count the most recent market losses of the past six weeks). While CalPERS and government employees unions have claimed that market losses would not affect state and local governments because losses are spread out over a number of years, CalPERS has now warned that state and local governments will have to pay an estimated 2% to 4% more into the system, starting July 2010 for the state and school districts and July 2011 for cities and counties that participate in the CalPERS system, to make up for the losses. And note that California's contributions to CalPERS jumped from $321 million in 2000-01 to $7.3 billion last year!

By law, pension promises made to current government employees cannot be rolled back (although, as noted above, the unions have no problem applying benefit increases retroactively!). We can, however, close lavish benefit plans to new government employees and, at the very least, establish more reasonable benefits packages. Given the overwhelming temptation to ratchet benefits ever upwards (and the union strength to make it happen), however, we would be better off acknowledging the excessive volatility and ultimate unfeasibility of the defined-benefit retirement system (as the U.S. auto industry is now discovering) and shifting new government employees to a 401(k)-style defined-contribution system similar to that in the private sector.

December is here and the end of 2008 is approaching. As the two year term for the 110th Congress enters its last month there is talk of an auto industry bailout, a stimulus package, and increasing concern over the Fed's freewheeling monetary policy. While House Speaker Nancy Pelosi has indicated that Congress may come back for one final session, most believe only the auto bailout would be discussed, as House Majority Leader Steny Hoyer has indicated that the 111th Congress will try to have a stimulus package on President-elect Obama's desk by his inauguration.

But if Congress should come back to session this month, they would do well to head the age old wisdom: let cooler heads prevail.

The government's speed to action when the financial crisis was first emerging has probably done more to hurt the nation long-term than help it. Treasury Secretary Paulson told us without tacit totalitarian control of the nation's economy the world would end. It wasn't true. And Congress will probably look back with regret at passing "The Bailout" so quickly (and hopefully they'll regret passing it at all).

In England, there is already discussion that the UK should abandon the Pound Sterling in favor of the Euro. European Commission President Jose Manuel Barroso said Sunday, "We are now closer than ever before [to England adopting the Euro]. I'm not going to break the confidentiality of certain conversations, but some British politicians have already told me: 'If we had the euro, we would have been better off'." Since the inception of the Euro the Pound has been consistently stronger, one of the strongest currencies in the world. At the start of last summer the Pound was trading 2-1 to the US dollar. Rash action such as abandoning the Pound is unwise.

That is not to say whether England should or should not eventually join the Euro, or even to say that state issued currency is the best financial practice. But it is to say that we would all do well to take time in considering what the best economic policies governments should pursue.

Missouri Department of Transportation (MoDot) has come up with something called "Practical Design."

"Many DOTs across the nation are finding it more and more difficult to work within their budgets due to rising fuel and construction materials costs, growing economic concerns and decreasing state and federal funds," said MoDOT Chief Engineer Kevin Keith. "Money is dwindling while the competition for these resources is increasing. That is requiring DOTs to find ways to get the biggest bang for every transportation buck."

By using Practical Design, MoDot saves money by customizing its highway construction projects to fit specific needs rather than applying generic standards across the board. The "generic standards" approach is used by most highway departements across the nation. It's easy to just look up the standard(s), apply it whether it's needed or not.

Over the past three years, this method has saved more than $500 million that has been reinvested in additional transportation improvements. So far in fiscal year 2009, MoDOT has delivered $118 million of work with a savings of $2.4 million, or 2 percent, under budget.

While 2% does not sound huge, in a time of rapidly rising prices for constuction materials this is significant savings.

Pete Rahn and Kevin Keith are to be commended for finding a way to bring a practical money saving and common sense idea to the Missouri transportaion proram.

Like ohter states.Oregon is seriously short of transportation funds and struggling to make ends meet. http://www.oregonlive.com/news/index.ssf/2008/11/kulongski_proposes_gas_tax_and.html

“Oregon falls $1.3 billion short in maintaining state highways to handle the current level of traffic, state officials estimate. That doesn't include all the deferred maintenance on city and county roadways. “

“The governor proposed about half a dozen tax and fee increases, including a 2-cent gas tax hike, and more than doubling the annual fees for car title and registration. He also would borrow $600 million, raise the tobacco tax by 2 1/2 cents and take $16 million in lottery money to pay for railroad, mass transit and port projects.”

We commend the Governor for the experiment of charging for the number of miles traveled.. This is likely to be the wave of the future to replace the gas tax. And

The governor did urge some steps beyond tax and fee increases. He advocates a pilot project that would charge motorists for the miles they actually drive, not the amount of gas they buy

However, missing from his package is a proposal for public private partnerships to bring private sector funding and ideas to solve the "crisis" that Oregon faces.

Interesting that this is not a part of of the solutions suggested by the Governor. A missed opportunity indeed.

One thing Obama showed an interest in while in Congress was transparency and accountability for government agencies and programs. This column in Government Executive points out a good place for the new President to start on a management agenda, by building from Bush's PART to incoropate the cutting edge objective perfomrance measurement efforts by executives at the state and local level.

I don't think anyone could be more cynical than I am about how outrageous CA state spending is, but I was stunned by this post from Dan Walters in the Sacto Bee:

Cal by far the highest-spending state

In the midst of a historically severe state budget crisis, the Census Bureau has released new data indicating that when it comes to spending money, California stands alone among the states.

The new Census Bureau report tags total state spending last year at $233.6 billion, roughly 15 percent of the state's economic output. The total includes not only the state's general fund spending, roughly $100 billion, but proceeds of special fund revenues, such as gasoline taxes, borrowed money and federal funds.

California's total is about half-again as big as the second-place state, New York, and well over twice that of Texas. It is, moreover, 65 times as much as that of the least-spending state, South Dakota.

Not surprisingly, California's total spending last year was $33 billion more than its total revenues, with bond proceeds accounting for most of the difference. The largest spending category was education at $72.8 billion, followed by welfare at $56.3 billion and health care, including hospitals, at $17.7 billion.

The Census Bureau says California was $114.7 billion in debt last year. The full report, including finances of other states, is available here.

Since CA voters approved more than $12 billion in bonds last month, there is no sign they know or care about this. Hence, it isn't likely to get better any time soon.

Hat tip to Mike Turnipseed's Kerntax eletter.

My friend and colleague Ben Powell, who works with the Independent Institute and the Beacon Hill Institute and teaches economics at Suffolk University, has written an illuminating column on the Pilgrim's early years and the tragic lesson they learned from their communal economic system. From the article:

Many people believe that after suffering through a severe winter, the Pilgrims’ food shortages were resolved the following spring when the Native Americans taught them to plant corn and a Thanksgiving celebration resulted. In fact, the pilgrims continued to face chronic food shortages for three years until the harvest of 1623. Bad weather or lack of farming knowledge did not cause the pilgrims’ shortages. Bad economic incentives did.

In 1620 Plymouth Plantation was founded with a system of communal property rights. Food and supplies were held in common and then distributed based on "equality" and "need" as determined by Plantation officials. People received the same rations whether or not they contributed to producing the food, and residents were forbidden from producing their own food. Governor William Bradford, in his 1647 history, Of Plymouth Plantation, wrote that this system "was found to breed much confusion and discontent and retard much employment that would have been to their benefit and comfort." The problem was that "young men, that were most able and fit for labour, did repine that they should spend their time and strength to work for other men’s wives and children without any recompense." Because of the poor incentives, little food was produced.

Faced with potential starvation in the spring of 1623, the colony decided to implement a new economic system. Every family was assigned a private parcel of land. They could then keep all they grew for themselves, but now they alone were responsible for feeding themselves. While not a complete private property system, the move away from communal ownership had dramatic results.

This change, Bradford wrote, "had very good success, for it made all hands very industrious, so as much more corn was planted than otherwise would have been." Giving people economic incentives changed their behavior. Once the new system of property rights was in place, "the women now went willingly into the field, and took their little ones with them to set corn; which before would allege weakness and inability."

Once the Pilgrims in the Plymouth Plantation abandoned their communal economic system and adopted one with greater individual property rights, they never again faced the starvation and food shortages of the first three years. It was only after allowing greater property rights that they could feast without worrying that famine was just around the corner.

[. . .]

It is customary in many families to "give thanks to the hands that prepared this feast" during the Thanksgiving dinner blessing. Perhaps we should also be thankful for the millions of other hands that helped get the dinner to the table: the grocer who sold us the turkey, the truck driver who delivered it to the store, and the farmer who raised it all contributed to our Thanksgiving dinner because our economic system rewards them. That’s the real lesson of Thanksgiving. The economic incentives provided by private competitive markets where people are left free to make their own choices make bountiful feasts possible.

We should keep this lesson in mind as more and more politicians and bureaucrats--and even so-called "conservative" economists--are clamoring for ever more central planning of our economic system. Pumping trillions of dollars in liquidity (created out of thin air!) and fiscal "stimulus" will only add to the distortions already built into the economy through Federal Reserve manipulation of interest rates and the money supply and government programs designed to encourage people to take on more debt than they could afford, and thus will only make the necessary correction to economic rationality longer and more severe. The malinvestments made during the "boom" would be weeded out and corrected much more quickly and less painfully if the government would simply get out of the way and stop trying to fix a problem it clearly does not understand.

That said, I am still very grateful to live in a land with such relative economic and individual freedom. Wishing all a very happy Thanksgiving!

Apparently talk about reviving the Fairness Doctrine is out. The call for “localism” is in.

Democratic leaders in Congress, including House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid have made no secret of their wish to re-impose the misnamed Fairness Doctrine on AM radio. The rule, which requires stations to give equal time to all viewpoints, is aimed at reducing the amount of conservative-oriented political programming, typified by such personalities as Rush Limbaugh and Sean Hannity, on AM radio.

Well aware of the constitutional problems behind such a move, the new tactic has been to cloak calls for political content control under the veil of “localism.” Here’s an excerpt from a Hollywood Reporter article today available through msnbc.com.

[President-elect Barack] Obama has called on Henry Rivera, who was a commissioner in the 1980s when the Fairness Doctrine existed, to oversee the FCC transition process. Rivera is a supporter of bringing back the [Fairness Doctrine] provisions. And heading Obama's overall transition team is John Podesta, head of liberal think tank the Center for American Progress. Last year, the CAP issued a report called "The Structural Imbalance of Political Talk Radio."

While the CAP stopped short of advocating a return of the Fairness Doctrine, it did support more stringent adherence to so-called localism, which critics consider a back door to requiring that stations ditch some of their conservative hosts.

The FCC is considering the matter now, weighing such questions as whether to require stations to create community advisory boards made up of local officials and other community leaders. The boards would tell radio executives whether the content they broadcast is adequately addressing the needs of the community, subject to the board's interpretation.

Of course, there’s another way the community tells a radio station whether they are addressing local needs—ratings. To the Democrats’ consternation, however, they go up when conservative personalities are on the air and down when liberal hosts take the mike. And even that’s a generalization. As you might expect, in markets where the population skews liberal, liberal radio personalities such as Bree Walker and Stephanie Miller do quite well.

What’s truly disturbing, however, is that the Congressional Democrats and the media issue advisors on Obama’s transition team make it clear that they see the preponderance of conservative opinion on talk radio as a problem that needs coercive rectification. Before going any further, they need to explain why. Arguing that a station’s right-wing talk format does not appeal to 100 percent of local listenership doesn’t fly. If this were truly the aim, “localism” supporters would be demanding that Top 40 format stations set aside time for classical music; or that sports talk stations set aside several hours a day to cover the local arts scene.

Furthermore, no newspaper, magazine, local theater group or arts council would countenance a law the requiring it to hold forums with “local officials” and “community leaders” (read politicians and political activists) and face federal fines if, in the opinion of those "officials" and "leaders," its material did not toe a satisfactory political line. It’s not up to the government to fashion laws designed to force radio, or any other platform for speech, to be either more “progressive” or less.

“Localism,” or what ever name you want to give it, is censorship. It is all about one thing: regulating the political viewpoints that can be expressed on local radio.

The Variety link Anthony Randazzo provides below is worth checking out for reasons other than it being yet another prospective bailout case.

In the article, author Michael Schneider puts forth a number of scenarios of how the four broadcast networks might react to shrinking revenues and loss of viewers to other media.

Among the most provocative is the idea that the networks may abandon over-the-air broadcasting and become cable networks. This arrangement, among other things, would provide them with two revenue streams—advertising dollars and subscriber fees.

It’s not too far-fetched. The Big Four, or their parent companies, all own cable networks already. A few years back, the networks began experimenting with repeating broadcast content on cable outlets. Earlier this year, NBC Universal moved one of its franchise shows, Law and Order: Criminal Intent (my favorite of the bunch), to USA Network. Slowly but surely, the networks have been losing their cachet as the sole place for top-tier programs. Monk, The Shield and Battlestar Galactica are just three titles that have had enormous success on cable networks in terms of quality and audiences. Now comes news that ESPN won the rights to broadcast the BCS college bowl games beginning in 2011.

The upcoming digital TV conversion in February could be the deciding factor. Right now, it’s the networks’ local over-the-air broadcast infrastructure that accounts for their ratings margin over cable, a margin that grows slimmer every day nonetheless. As of 2006, 59 percent of U.S. households subscribed to cable service and another 25 percent to satellite. If DTV conversion pushes more consumers to either services (both are digital-ready), as many think it will, network viewership will be further diluted.

What happens when networks decide that supporting local ownership and affiliations is just not worth it? The only question remaining is whether the government would allow them to do it. Given its track record, anything that that the telecom, Internet and media industry might do to respond to market changes gets immediate resistance if it forces departure from a long-time status quo. I recall a few Congressmen grumbled about stopping ABC from shifting Monday Night Football to ESPN. The FCC may get especially agitated because such a move might take it completely out of TV regulation. Hence, the attempts its made over the last few years to extend its regulatory mandate to cable TV may become even more intense. Look for the commission and its Congressional sympathizers to play the same “nostalgia card” is does with copper-based dial tone phone service, expressing sentiments to the effect of how tragic and unthinkable it would be if an institution such as broadcast TV were to disappear. Come to think of it, the whole DTV onslaught, in fact, is a similar example of nostalgia-based regulation. The government is giving up to $80 per household so they can preserve obsolete TV sets. Meanwhile, FCC Chairman Kevin Martin has asked Congress for $20 million more to promote awareness of the DTV change—for programs like a $350,000 sponsorship of a NASCAR race car.

The spending continues in Washington, and while concerns about moral hazard or quasi-nationalism have all but been thrown aside, a more troubling reality is emerging: not only has the country not stopped to ask "how this happened" and settle on a firm answer, but in the process of scrambling to save a ship we think is sinking, we're repeating the same errors that got us here in the first place.

It is difficult to get your mind completely around the numbers being thrown around. We've had a monetary perspective inflation over the past months, as "just another 100 billion or trillion dollars" doesn't seem large anymore. It can safely be estimated that we've spent or loaned at least $4 trillion dollars over the past several months--either by direct loan, bailout buy ups, or through the Fed's discount window--according to these numbers posted on OCO earlier this month and this story from Dividend Daily. To put $4 trillion in perspective, you could lay dollar bills end to end from New York City to Los Angeles and they would stack nearly 50 feet high all the way across by the time you laid out $4 trillion.

Just recently, according to Bloomberg, Secretary Paulson has injected $270 billion in to the banks as a recapitalization project. Citigroup got an extra $20 billion share to help them through their stock slump (and the moral to the story there is just have your investors pull out so the government will give you more cash). Oh, and AIG got yet another $40 billion.

But news from Secretary Paulson today about increasing consumer credit protection is the real worry. In the midst of all the financial shenanigans in the past decade was a nasty trend in reduced underwriting standards. This is the trend that allowed a couple earning $8 per hour at McDonalds to get at $600,000 loan. Low interest rates in the early 00s encouraged lending, but it was the underwriting standards that let so many uncollateralized loans infect the market. The lesson we should learn from this is to not give money to people just because they want to buy a house and that helps the market, but only give money to people who have the capacity to pay it back.

And yet, reports today say the Fed, by means of the new Term Asset-Back Securities Loan Facility, will "lend as much as $200 billion on a non-recourse basis to holders of AAA-rated asset-backed securities backed by 'newly and recently originated' loans, such as for education, credit cards, automobiles and loans guaranteed by the Small Business Administration." Additionally, the Treasury will commit $20 billion of the TARP money to support consumer and small-business loans.

There is a fear that credit firms--such as American Express, Visa, or smaller creditors--might not have enough capital to get through the holiday spending period. Creditors have extended large lines of credit that haven't yet been used, and a rush at that money might force the firms to put up more cash against those loans then they have on hand. As a result, consumer credit has dried up as firms try to limit the credit they've placed on the line. The Fed and Treasury are essentially saying: hey, keep giving out money so people can spend, we've got your back if you run out.

The push for spending has the holiday in mind, as well as an attempt to restore consumer confidence. The Black Friday to Boxing Day period is a major sales time that companies depend on for fiscal solvency. Not only does the government want to increase current spending levels, but it wants to make sure a dip in spending during the holiday season doesn't take a lot of companies with it.

While that fear is understandable, increasing the public ability to get credit without ensuring that underwriting standards and rating agency problems are corrected will just lead us back to this place again down the road. This is classic short-term, static thinking that amounts to a stimulus by another name.

The too big to fail faux-doctrine may seem to make sense to some people, but only if they have blinders on. The more pundits insist that firms like Citigroup are too intertwined in our financial system to allow to go bankrupt, the greater the possibility that a new "critical" industry will feel entitled to taxpayer money. Banks and insurance firms were the first beggars. Then came the auto companies. Then credit card firms. And cities and states. Next up: TV.

Yes, there is talk that the major television networks might be in need of bailout money because of falling ad revenues. The Big Three car companies are the nations biggest advertisers, and losing their business could sink CBS, NBC, ABC or some other network. These firms provide free service to American homes, are outlets the government uses to get messages to the American people. How many people are employed by TV networks around the country, or by producers that create products for those networks? That's a lot of jobs! In short, if necessary, TV networks could make a case that they are too big to fail that would be no less incredulous than some of the other bailout requests. But ultimately its all crazy.

If you think this is starting to sound like a bad reality TV show... you're right.

The principal argument of the free market is that government can not effectively pick winners and losers in the marketplace. There simply is not enough centralized knowledge to make these decisions. Price signals and the laws of supply and demand are infinitely better at directing resources to the best possible use.

Over the past few months, the government has been engaged in a high stakes game of winner and loser picking as it seeks to "fix" the market. It chose to let Lehman fail and to save AIG. As it turns out AIG's leadership has proven very ineffective post-bailout and has needed near double the funds initially pledged to help it out and has spent large amounts of cash on corporate retreats. Bad pick government.

Now Citigroup is on the brink--again. What this failure shows is the inability of government to fully understand the stability or sustainability of any one firm. Back in September, when the FDIC first brokered a deal in which Citi would purchase Wachovia, there was widespread belief that this was a federal vote of confidence in the capital strength and stability of Citigroup.

The government should let the market pick winners and losers. The Treasury Secretary, SEC Chairman, Fed Chairman, and their various staff are not dumb people. President-elect Obama's economic team is not comprised of idiots. They are all well educated and doing their best. But the simple fact is that it is impossible to have all the data, know all the variables, and be able to predict the market. Citigroup's capital may have been fine, but the market lost confidence in them. That's unknowable, and its best not to play with taxpayer dollars like you might a game of poker.

The Sacramento Unified school district is unwilling to share the school enrollment process with Sacramento charter schools. Even though Sacramento charters are legally public schools, the district treats them like private competitors when it comes to providing information to parents. Here are the rules the district has set up for charter school enrollment. The Sacramento Bee reports:

The proposed policy has some terrible parts that require a start-over:

• Access to placement on the district Web site. Charter schools from New Technology High School to the Language Academy to Sacramento Charter High School would be listed only on a "case-by-case basis." Placement would be a "privilege." These schools would have to show they are in "good standing" and then "enter into an agreement." This is nonsense. The district already does annual reviews of its charter schools and extensive reviews during the five-year renewal process.

• Access to schools for open houses and "Options Nights." The district has six comprehensive high schools and six small high schools (some charters, some not). These schools recruit at the middle schools leading up to the open enrollment process. In the past, individual principals could decide to include charter schools or not. That arbitrary policy was bad enough, but now things are worse. This year, charter schools run by nonprofits (independent charters), such as Sacramento High, will not be allowed access to middle school campuses for recruiting.

Where is the level playing field? Perhaps the fix should be that only district schools that are in "good standing" should be listed on the district website or allowed to recruit at district schools.

This seems like such an obvious win-win situation. Creating new revenue for a school district and giving charter schools desperately needed facilities. The St. Paul, Minnesota Star Tribune reports on the deal:

Under the proposal:

• Franklin Middle School, 1501 Aldrich Av. N.: Likely would be sold to WISE Charter School, a K-7 program on the North Side that serves about 300 students and plans to expand to eighth grade next year. Sale price: $5.3 million

• Putnam Elementary, 1616 NE. Buchanan St.: Yinghua Academy, one of the state's first Mandarin Chinese immersion programs, would relocate to Putnam from a site in St. Paul. Sale price: $2.4 million

• Morris Park Elementary, 3810 E. 56th St.: Hiawatha Leadership Academy, a K-2 that serves a large Latino population, would move into the school. Sale price: $2.9 million.

All three charter schools expect to see their enrollment increase in the near future and have agreed to partner with Minneapolis on joint training programs for teachers. They will also open their facilities to the community for enrichment and recreation programs.

Minneapolis closed five schools on the North Side during the past five years and began an ambitious plan to improve achievement at the remaining 10 schools. So far, the results of those changes have been mixed. While the charter schools won't be sponsored by Minneapolis or increase its enrollment in the short term, the prospect of adding WISE as a feeder school for North High is important because the school has faced sharper enrollment declines in recent years than high schools in south Minneapolis.

Comprehensive road pricing requires charging users based on the amount of roadway they use. Conceptually, this implies a mileage-based charge for road users. Economists have long favored this approach as the most efficient approach to managing our roads (and, incidently, privatizing them).

One of the more important objections to this approach, however, revolves around the potential for the technology used to measure mileage of travelers to enable "big brother." If the government can calculate your mileage and send you the bill, it must know where you are. This is an important and legitimate concern, but, as Randal O'Toole points out on his blog "The Antiplanner," it can be addressed relatively easily.

a new paper by the Antiplanner’s faithful ally Gabriel Roth and an engineer named Bern Grush propose an intermediate model that uses the kind of system made for anonymous cell phones. In this model, the GPS transponders send basic data to proxy servers that calculate the user fees and pass that information to a payment operator that matches the billing to either a prepaid account (assuring total privacy) or a credit card (which could let authorities know how much people have spent on tolls but not where or when they spent it). This system would reduce the up-front cost of the GPS transponder and eliminate the need for a subscription service.

At least three companies currently have technologies that allow privatcy to be protected in this way: Skymeter, Transcore, and Siemens.

Bailout heaven continues as Citigroup agrees to letting the government become a major equity stakeholder in exchange for loan guarantees. See this article in the New York Times for more information.

The complex plan calls for the government to back about $306 billion in loans and securities and directly invest about $20 billion in the company. The plan, emerging after a harrowing week in the financial markets, is the government’s third effort in three months to contain the deepening economic crisis and may set the precedent for other multibillion-dollar financial rescues....

Under the agreement, Citigroup and regulators will back up to $306 billion of largely residential and commercial real estate loans and certain other assets, which will remain on the bank’s balance sheet. Citigroup will shoulder losses on the first $29 billion of that portfolio.

Any remaining losses will be split between Citigroup and the government, with the bank absorbing 10 percent and the government absorbing 90 percent. The Treasury Department will use its bailout fund to assume up to $5 billion of losses. If necessary, the Federal Deposit Insurance Corporation will bear the next $10 billion of losses. Beyond that, the Federal Reserve will guarantee any additional losses.

In exchange, Citigroup will issue $7 billion of preferred stock to government regulators. In addition, the government is buying $20 billion of preferred stock in Citigroup. The preferred shares will pay an 8 percent dividend and will slightly erode the value of shares held by investors.

Citigroup also agrees to restraints on executive compensation, and will let federal government regulators review compensation agreements.

Hey, who needs capitalism where firms might actually fail when they make bad decisions when you can rely on the federal government to manage your company even better?

One thing is evident today: President-elect Barrack Obama is demonstrating about every quality necessary to show the world he has the hutzpah, skills, and political savvy to lead the United States. He has moved swifty and competently to line up a new leadership team for his new administration. He has recognized the weakness of his political enemies (the Republicans) and shown no quarter on his political agenda even as he makes rhetorical overtures about inclusiveness. He has grasped the full sense of the pessimism and uncertainty among the American electorate and seized it as a political opportunity to shape his first 100 days.

No where is this as evident in his handling of the US economy. Somehow, with unemployment well below levels of the recession of the early 1980s, and major sectors of the economy showing signs of weakness only in the last two months, Obama has successfully parlayed the current economic slump into a "crisis of historic proportions." He has taken this recession to create the political capital necessary to implement far reaching federal intervention into the economy that would please FDR's brain trust. He is going to propose a "vast" economic stimulus package of perhaps $300 billion to "save or create" 2.5 million jobs over the next two years. He is going to bailout US companies with the provision that they tow the federal government line about appropriate investments and labor agreements (including restraints on executive pay and probably more influence for unions). He is going to launch a 10-year initiative to remake the US economy by subsidizing and redirecting American capital to "green jobs" and industries.

What is remarkable about these initiatives is not that they are a surprise--everyone one of them was discussed on the campaign trail and usually explicitly outlined in his economic program. No, the remarkable aspect of his economic initiatives is that they rest on a politicallly concocted economic crisis. Few analysts doubt we are in a recession, but recessions are not crises. They are part--and a necessary part--of the business cycle. Moreover, we are far, far away from a depression. Indeed, many analysts such as Thomas Friedman talk about the importance of addressing the psychological aspects of the current climate--economic pessimism, uncertainty on wall street--not the substance of where the economy actually is. Writes Friedman in today's New York Times column:

Yet, it is obvious that President Bush can’t mobilize the tools to defuse them — a massive stimulus program to improve infrastructure and create jobs, a broad-based homeowner initiative to limit foreclosures and stabilize housing prices, and therefore mortgage assets, more capital for bank balance sheets and, most importantly, a huge injection of optimism and confidence that we can and will pull out of this with a new economic team at the helm.

The last point is something only a new President Obama can inject. What ails us right now is as much a loss of confidence — in our financial system and our leadership — as anything else. I have no illusions that Obama’s arrival on the scene will be a magic wand, but it would help.

Just think: a few months ago economists were worried about inflation hopping along at 5.3%, not deflation, which now represents the current rallying cry for federal intervention.

By seizing on real crises in the housing market and financial services sectors (the two go together), Obama and his economic advisors have recognized the political usefulness of creating the aura of crisis to implement large chunks of the economic agenda that predated all the crisis talk. The New York Times notes:

Nearly every spending program and tax cut that Mr. Obama proposed during the campaign could well end up in the stimulus package, advisers indicated. For example, Mr. Obama’s proposals to invest in energy alternatives and advanced “green” technologies will most likely be part of the package, rather than proposed later in his administration.

In effect, the stimulus will be seen by the Obama administration as “a down payment,” as one adviser put it, on Mr. Obama’s entire domestic platform, allowing him to try to take maximum advantage of the first year of his presidency. Traditionally, the first year is the one in which modern presidents have achieved most of their major victories.

And there is no point in dissenting.

“I know that passing this plan won’t be easy,” Mr. Obama said. “I will need and seek support from Republicans and Democrats, and I’ll be welcome to ideas and suggestions from both sides of the aisle.

“But what is not negotiable is the need for immediate action.”

So, the crisis is here, Sen. Obama was elected president, so let's get on with the program and rally around it. The fact that federal spending hasn't shown to be an effective way to stimulate the economy is not really important. It's also a politically clever ploy on the part of Obama. In two years, the economy will likely be out of the recession without his program, yet he can claim the recovery as his own. It will be years before credible economic analysis is completed that can disentangle the effects of normal market adjustments versus the fiscal stimulus.

But, at the end of the day, it's about implementing Obama's economic agenda not turning around the economy. As his chief of staff recently said: "You don't ever want a crisis to go to waste."

Additional reporting on the economic stimulus can be found in this article from the Washington Post.

Many saw Franklin Delano Roosevelt's (FDR) presidency and the New Deal as the salvation of the American economy. In fact, recent empirical evidence by UCLA economists Harold Cole and Lee Ohanian suggests that FDR's economic policy added 7 years to the Great Depression. More importantly, much of that extended depressed state can be traced directly to the earliest years, when FDR explicitly implemented policies that allowed companies to fix prices at high levels to keep wages up.

Lee Ohanian was interviewed by Reason.tv and asked about the implications for addressing the current financial crisis. The press release from UCLA summarizes their research this way:

In an article in the August issue of the Journal of Political Economy, Ohanian and Cole blame specific anti-competition and pro-labor measures that Roosevelt promoted and signed into law June 16, 1933.

"President Roosevelt believed that excessive competition was responsible for the Depression by reducing prices and wages, and by extension reducing employment and demand for goods and services," said Cole, also a UCLA professor of economics. "So he came up with a recovery package that would be unimaginable today, allowing businesses in every industry to collude without the threat of antitrust prosecution and workers to demand salaries about 25 percent above where they ought to have been, given market forces. The economy was poised for a beautiful recovery, but that recovery was stalled by these misguided policies."

Using data collected in 1929 by the Conference Board and the Bureau of Labor Statistics, Cole and Ohanian were able to establish average wages and prices across a range of industries just prior to the Depression. By adjusting for annual increases in productivity, they were able to use the 1929 benchmark to figure out what prices and wages would have been during every year of the Depression had Roosevelt's policies not gone into effect. They then compared those figures with actual prices and wages as reflected in the Conference Board data.

In the three years following the implementation of Roosevelt's policies, wages in 11 key industries averaged 25 percent higher than they otherwise would have done, the economists calculate. But unemployment was also 25 percent higher than it should have been, given gains in productivity.

Meanwhile, prices across 19 industries averaged 23 percent above where they should have been, given the state of the economy. With goods and services that much harder for consumers to afford, demand stalled and the gross national product floundered at 27 percent below where it otherwise might have been.

Here's the abstract from Cole and Ohanian's article in the Journal of Political Economy (one of the top 2 or 3 academic journals in the economics profession):

There are two striking aspects of the recovery from the Great Depression in the United States: the recovery was very weak, and real wages in several sectors rose significantly above trend. These data contrast sharply with neoclassical theory, which predicts a strong recovery with low real wages. We evaluate the contribution to the persistence of the Depression of New Deal cartelization policies designed to limit competition and increase labor bargaining power. We develop a model of the bargaining process between labor and firms that occurred with these policies and embed that model within a multisector dynamic general equilibrium model. We find that New Deal cartelization policies are an important factor in accounting for the failure of the economy to recover back to trend.

The full article can be purchsed for $10 on-line from the Journal's web site.

The pick of Timothy F. Geithner, president of the New York Federal Reserve Bank, as head of the Treasury Department does not bode well for those hoping President-elect Obama would be steering a moderate course. He ranked near the bottom of Reason Foundation senior analyst Shikha Dalmia's list of candidates to fill this post. I'll let Shikha summarize her take on this pick:

Equally bad would be Timothy Geithner, president of the New York Federal Reserve Bank, a perennial bail-outer who has been involved in the bailouts of Mexico, Indonesia, Korea, Brazil, and Thailand. No surprise then that he was an aggressive proponent of the current bailout - recommending that the Treasury inject direct liquidity into banks by buying preferred stock even before Paulson eventually did this, thus opening the door to all kinds of government meddling. The New York Times reports that Geithner, and his mentor Summers, are fond of quoting Mexican president Ernesto Zedillo, saying since markets overreact, policy makers must overreact too.

The Washington Post seems to agree, as their report on the pick summarizes his views on the economy this way:

A Democrat and a relative unknown outside the world of high finance, Geithner has worked closely with Treasury Secretary Henry M. Paulson Jr. to devise responses to the most critical events of the market turmoil, including the bailouts of the investment bank Bear Stearns and the insurance giant American International Group. Like Paulson, Geithner believes that the Treasury should be given vast powers to develop experimental strategies for responding to the crisis and the flexibility to abandon them if they don't work.

The only possible bright spot is that Lawrence Summers is going to the White House as a senior economics advisor. Perhaps he will provide a policy check on the exuberance of Obama's emerging brain trust of young, smart turks who believe they are better at running the economy than the people that live it. It appears they believe the federal government is better at providing accountability than the market as they bailout and nationalize various industries. Markets, afterall are such as harsh task master they would actually force busineses into bankrupcty for bad management and the audacity of misreading market trends.

These these observations from the Washington Post were interesting and inisightful:

At 47, he [Guithner] is the same age as Obama and would represent a generational change in the highest levels of Washington economic policymaking, heading a remarkably young team of White House economic advisers tasked with sorting out one of the worst financial messes since the Great Depression.

Obama appears to be modeling his Administration on that of FDR.

London implemented it's congestion charging scheme in February 2003 with two goals: 1) reduce congestion in Central London and 2) raise money to fund public transport.

The first years seemed to demonstrate the wisdom of the scheme: cars entering the charging zone fell 15% to 20% and congestion seemed to fall by 25% to 30%. Public transport was a big winner, capturing more than half of the trips into Central London previously taken by automobile. (The remainder were trips routed around Central, trips switching to off peak periods, avoiding trips altogether.) These early results led a number of economists to conclude the program was a success, despite implementation costs about double what was projected.

Recent data call into question whether the program has really reduced congestion. Despite the initial success, data from Transport for London (TfL), the government agency responsible for managing the system, show that travel times have returned to their pre-charing levels.

But the latest figures show the average speed for driving to work in 2006-7 was 9.3 mph, down from 9.9mph before the scheme began in 2003.

A dedicated TfL vehicle, fitted with equipment to measure distances and journey times, travelled along 7,000 routes in Greater London to work out the average speed at different times of day, including the morning rush hour. The slowdown is thought to be caused in part by extra traffic entering the central zone since the west London extension in February. More drivers are now entitled to claim the 90 per cent residents' discount to drive inside the zone and many are making the most of the 80p rate.

Meanwhile, new bus lanes and schemes such as pavement widening have squeezed available road space and there has been a rise in the number of green vehicles exempt from the charge. Motoring experts have warned that the congestion could worsen if Mr Livingstone brings in exemptions for band A and B vehicles including Ford Fiestas, Nissan Micras and Volkswagen Polos.

See also this column in the Sunday Times of London.

This shouldn't be surprising. The congestion charge really isn't what it is billed to be. It taxes cars; it doesn't manage the transportation network based on levels of congestion or other criteria related to what transportation planners call "level of service." A true congestion charge would be a system of road pricing, like the 91 Express Lanes or I-15 HOT Lanes in Southern California, where the price is set to maintain free flow traffic levels and speeds.

The London approach is a narrowly targeted "cordon charge." A boundary (e.g., Central London) is established, and cars and trucks that enter into the zone are assessed a fee (now about $16 per entry). Green cars, taxis, and certain other vehicles are exempted, and the price is not tied to a clearly defined level of service, travel speeds, or other indicator of congestion. In short, the London program does not actively manage traffic in a way that gives real meaning to the spirit of a real congestion charge.

Of course, TfL believes the program is a great success. The number of cars is still down, even if the average speed has fallen to pre-2003 levels and the delay per kilometer traveled now exceeds 2002 levels.

President-elect Barack Obama has appointed two reportedly “network neutrality” advocates to his transition team, The Industry Standard reports.

The report says that the appointees, Susan Crawford, a professor at the University of Michigan Law School, and Kevin Werbach, a Wharton professor, a former FCC staffer, and organizer of the annual tech conference Supernova, are avid gamers. While that would make them sensitive to the notions of bandwidth caps being put forward by the telephone and cable companies, they might be equally aware of how a neutral network, where no applications could be optimized or improved, would slow down bandwidth-chugging interactive games.

Of the two, Crawford is the more doctrinaire, quoting the flawed ITU broadband penetration reports and stating she regards Internet access as a utility on a par with electricity and water (despite the fact that the telecom industry has shown more that competing infrastructure can flourish side by side).

Werbach is much more of a technologist, and his writing shows a willingness to depart from the usual activist talking points and consider the disruptive potential that technology has—including its remarkable ability to render policy issues, like network neutrality, that seem so critical today, absolutely meaningless tomorrow. His practical, empirical understanding of the industry may balance Crawford’s more regulatory bent.

Say what you want about their redistributionist agenda, at least there was a time once when you could count on liberals to be fun. These were the guys who celebrated the profanity of Lenny Bruce and inanity of Mad Magazine. These were the guys who baked marijuana into brownies for the church fundraiser. In one of the most pointed pranks of all time, it was leftist anarchist Abbie Hoffman who caused a near riot by dropping fistfuls dollar bills onto the floor of the New York Stock Exchange.

Even when they grew up, liberals invented the wine and cheese party, which Beth Fallon, the New York Daily News columnist, once wrote, was their one indisputable contribution to Western civilization.

So what happened? During the presidential campaign, in a candid moment from Barack Obama’s two young daughters, we learned the president-elect avoids ice cream because it’s too fattening. Goes to show how far liberal lifestyles have come from the tradition of the free love, bongs, rock-and-roll, and Zen and the Art of Motorcycle Maintenance. Being liberal today is all about self-denial, repression, censorship and control, albeit disguised as cultural or gender sensitivity, or that more annoying catch-all, “protecting the children.” The party that once embraced the non-conformist (and self-destructive) rebellion of Randall Patrick McMurphy has become an army of Nurse Ratcheds.

My Reason colleagues have covered efforts to ban or curtail smoking, fattening food, gambling and topless dancing. From my vantage point, media—new and old—has not been spared the glare of liberal disapproval either. While ordinarily a shift in political winds toward the Left might mean more tolerance for all things anti-establishment, and maybe a bit more gratuitous nudity in the movies (c’mon, even Jane Fonda made Barbarella), the growing trend of liberal Democrats to pander to all manner of groups seeking to reduce grown-up entertainment to political and socially inoffensive drivel suitable for seven-year-olds has me worried that we’ve exchanged one bunch of crotchety Mrs. Grundys for another.

Recall the Family Entertainment Protection Act. This would have stepped up regulation and enforcement video game ratings, despite the fact that the video game industry has proved among the best of new media industries at preventing sale of adult content to children. FEPA was hatched by Sens. Hillary Clinton, Joseph Lieberman, Tim Johnson and Evan Bayh, Democrats all, and would have allowed the government to review the industry the age-appropriate ratings of all published video game software. Lucky for gamers the bill died in committee back in 2006.

Sen. Jay Rockefeller, Democrat from West Virginia, sought to pressure the MPAA to give any movie that smoking an automatic R rating.

And rather than stand up for free speech on the airwaves, Democrat FCC Commissioners enthusiastically joined their three Republican colleagues in attempting to broaden the scope of language restrictions on broadcast TV. That case is now before the Supreme Court

Don’t forget the push to restore Fairness Doctrine, a favorite of both the House and Senate leadership, the aim of which is to knock conservative commentators off the air because they are funnier and more entertaining than their liberal counterparts.

Which brings us back to the beginning. Liberals: if you’re going to run the country, at least rediscover the open-minded spirit for free expression that drove your one-time passion for Lenny Bruce’s routines on the Catholic Church, Jimi Hendrix’s version of “The Star-Spangled Banner,” and films like Bonnie and Clyde, whose titular protagonists, as the film’s promotional tag bluntly put it, were young, in love and killed people. Any one of these examples, if they appeared today, would likely receive their loudest condemnations from the Democrat quarters as, respectively, religiously offensive, unpatriotic and glamorizing violence.

Lighten up. Make a promise to yourself today to download a photo from FHM.com, play Grand Theft Auto or rent a movie with no redeeming social value. What’s a party, even a Democratic one, without a little ice cream?

Congressional leaders didn't even vote on an auto bailout this week, in what is, at least temporarily, a victory for free market proponents. After what limited support there was for a Big Three bailout was sucked away by the dismal testimonies of Ford, GM, and Chrysler's CEOs--for future reference don't fly three multi-million dollar private jets to a hearing where you plan to beg for money to help you make more cars--Democratic leaders in the House and Senate decided any vote was doomed.

Instead of voting, Congress put off the issue until at least December and demanded the Big Three come back to them with a detailed plan proving that $25 billion would rescue them from their current plight. In a press conference yesterday House Speaker Nancy Pelosi said, "Until they show us the plan, we cannot show them the money." According to the AP, she also stressed that whatever the Big Three provided to Congress, it must show they had a plan for "viability and accountability," meaning that the were transforming their industry in a way that it would become competitive, and that they were clear about how the federal loan money was used.

It is somewhat unbelievable that the CEOs of these major companies would ask for cash without knowing how they were going to use it. Although such an oversight could be seen as indicative of how they've managed the Big Three over the past several years... poorly.

Senate Majority Leader Harry Reid and Pelosi said Detroit's automakers must submit their plan to lawmakers by Dec. 2. If this happens it is likely that the lame duck Congress will come back to DC to debate a legislative decision. But whether or not the companies can conjure up some economic statistics showing how $25 billion will keep them solvent will not negate the many reasons why Congress should not bailout the Big Three:

1. Taxpayer money should not be redistributed to cover the administrative mistakes of Detroit's Big Three, no matter what the potential job loss could be;
2. At a time when we've already spent over $4 trillion in 10 months in bailout and loan measures, we shouldn't be continuing to increase the national debt;
3. The theory of creative destruction informs us that the bankruptcy of one or more of the Big Three will not destroy the auto industry, but simply transform it into something better down the road;
4. The bankruptcy of the auto industry will not end these car companies, nor cause every auto worker to lose their jobs, it simply will reduce the size of the firms as they clear their debts, reset their management, develop new visions, and retool for the 21st Century (which they should have done a long time ago);
5. There are other policy solutions available, such as cutting taxes, that could be coupled with financial decisions, like cutting health benefits or paying the salaries of fired employees (the unions could also lower demands on their wage levels).

Congress should be commended for demanding a detailed plan before issuing $25 billion. And if they do hand out that cash they should measure and monitor the money to make sure it is used as promised (unlike the Treasury with its $700 billion bailout cash). Ultimately though, an auto bailout remains a bad idea if Detroit and the car companies want to foster long-term growth as opposed to maintaining the status quo.

In a new turn of events, Bloomberg News reported this morning that the Obama transition administration is considering a recommendation of bankruptcy. They are discussing with lawyers a so-called "prepackaged" bankruptcy, that essentially boils down to a fast track bankruptcy. Under this proposal, the Big Three could be out of bankruptcy within a year, as opposed to traditional Chapter 11 which could take as many as five years.

The Big Three have already considered this and rejected it, according to the Bloomberg story, though that is understandable. Ford, Chrysler, and GM would want to avoid bankruptcy at all costs because it will hurt their brand images and they worry many consumers may be unlikely to want to buy a car from a company in bankruptcy for fear that there would be no sustainable warranty. Going into bankruptcy is also almost assuredly a pride issue for them.

Still, bankruptcy--prepackaged or otherwise--is the appropriate free market step. This is the consequence of poor management. This is the consequence of poor PR. This is the consequence of competition. This is the consequence of not being willing to move with the times fast enough. This is the consequence of complacence. And this is ultimately just a part of industrial evolution.

See my recent commentary on why Congress Shouldn't Bailout the Big Three.

In his latest column, Reason Foundation's Leonard Gilroy looks at Chicago's recent privatization successes being spearheaded by Democratic Mayor Richard Daley:

As the economy has deteriorated in recent months, so too have the fiscal conditions in local government. Last Friday, the mayors of three big cities—Philadelphia, Atlanta, and Phoenix—sent a letter to Treasury Secretary Henry Paulson asking the feds to use a portion of the $700 billion bailout to assist local governments struggling with growing budget shortfalls. Fairfax County's current half-billion dollar shortfall may be a warning sign that many cities and counties in the Commonwealth too are in dire fiscal straits.

Rather than ask federal taxpayers to bail them out, cities and counties should embrace a variety of privatization strategies to help them do more with less. As one key example, in the business world financially-stressed firms often find it good practice to divest assets. Divisions or subsidiaries that are poorly run by a large conglomerate often receive a new lease on life under new, leaner management. The one-time windfall from the sale permits the seller to pay down debt or obtain capital for other needed investments—without having to engage in new borrowing. It should be no different within the context of local government assets.

In recent years, Chicago Mayor Richard Daley has brought this concept to local government, implementing a groundbreaking privatization strategy that relies on long-term leases of city assets, generating billions of dollars to boost the city's fiscal health.

Daley's no stranger to privatization, having privatized over three dozen services or activities within city government. But in 2005 he took privatization to a whole new level when he leased the Chicago Skyway to an international consortium for 99 years in return for a $1.8 billion upfront payment. The city paid off $825 million in outstanding debt, established a $500 million rainy day fund, set up a $375 million mid-term annuity to help cover city operating costs, and directed the remaining $100 million to a multi-year infusion for various human services and community investment programs.

The Chicago Tribune recognized the benefits of the Skyway lease in an October 2, 2008 editorial: "The city's deal to lease the Chicago Skyway to a Spanish-Australian consortium for 99 years has demonstrated the benefits of leasing public assets judiciously. Chicago got a $1.8 billion windfall […] [t]hat raised the city's credit rating and lowered its borrowing costs." Indeed, Moody's Investor Service upgraded Chicago's bond rating to its highest level in 25 years soon thereafter, citing the "vital infusion" of lease proceeds as a key factor.

The Skyway lease was only the beginning. In 2006, Daley leased four adjacent underground parking garages beneath Grant and Millennium parks to Morgan Stanley in $563 million, 99-year concession. The city dedicated $278 million of the garage lease proceeds to retire debt, $157 million to civic and park improvements, and annuitized the remaining $120 million to kick off $5 million every year to shore up the parks budget. The deal also requires Morgan Stanley to invest over $550 million to rebuild garage infrastructure over the life of the deal.

Daley broke ground again in September 2008 when he announced the winning bidder for a $2.5 billion, 99-year lease of Midway Airport in what will be the first privatization of a domestic commercial airport. The deal was unanimously approved by the city council (49-0) last month and now awaits federal approval; financial close is expected by year-end. Under state law, 90 percent of the proceeds from the Midway lease must be dedicated to infrastructure improvements and to shore up city pension funds. The remainder will be unrestricted.

Chicago has several other precedent-setting privatization initiatives in the works. Earlier this year, the city accepted bids for a long-term lease of the city's downtown parking meter system. According to media reports, the lease is anticipated to be 50 years in length and will grant the operator the right to maintain and operate the meters in exchange for an upfront payment to the city. The city will retain parking enforcement authority and the right to set parking fees.

In addition, seven firms have expressed interest in pursuing long-term leases of the city's three material recycling and recovery facilities.

Daley's recent privatization deals have not spared the city from fiscal troubles in the economic downturn—the city currently faces an estimated FY2009 $469 million budget gap. But by investing the proceeds in a combination of short-, mid- and long-term investments, Daley has cushioned the fiscal blow and placed the city in a far better position to weather the storm.

While larger local governments like Fairfax County, Richmond, or Virginia Beach may have assets more conducive to Chicago-style leases, there are numerous privatization opportunities for smaller localities as well, as evidenced most dramatically by the recent wave of privatized city governments in metro Atlanta (including Sandy Springs and four other new cities) that are saving millions of taxpayer dollars while improving service delivery and customer satisfaction.

As cities and counties in Virginia and elsewhere begin to reckon with the magnitude of their budget gaps in the wake of the financial meltdown and looming recession, Mayor Daley's leadership on privatization should serve as a case study. His privatization initiatives provided opportunities to extract maximum value of its investments in non-core enterprises and apply the proceeds to short and long term fiscal needs, expanding the boundaries of what is possible for local governments with regard to privatization and asset leasing.

Reason's Annual Privatization Report
Government Innovators in Action

From today's San Francisco Chronicle:

Parking at a curbside meter in San Francisco could cost up to $18 an hour - or drop as low as 25 cents - under an experimental plan approved Tuesday at City Hall to set rates based on demand. The idea behind the project is to use pocketbook-policy to alter the behavior of drivers and reduce congestion.

In an article earlier this year about San Francisco's parking pricing scheme, UCLA parking expert Donald Shoup explained:

"Every city I go to thinks they’re unique, but one thing that’s the same is the parking problem. It’s not a green policy to put solar panels on buildings and have people circling their block for hours.”

“The only reason people are driving around in circles in New York and San Francisco is that the price of curb parking is so much lower than adjacent off-street parking, and if you want to park for an hour it’s a lot cheaper to drive around for 10 minutes looking for a spot.”

And hey, if pricing can work for parking, why not bridges?

Will Obama hit a hat-trick? After scraping the bottom of the barrel to appoint Janet Torch-Waco Reno’s deputy, Eric Holder, as Attorney General, Obama dipped down once again and picked former Democratic Senator from South Dakota, Tom Daschle, as the Secretary of Health and Human Services. (My analysis of great, good and ugly Obama nominees put them both in the "ugly" category.)

If civil libertarians have a reason to be depressed about Holder, economic libertarians have a reason to be super-depressed about Daschle. Daschle’s appointment squelches all hope that Obama would look for innovative solutions that empower patients to control escalating health care costs. Expect more regulations, more mandates, more price controls, more command-and-control.

Since voters threw Daschle out of office, he wrote a book, Critical: What We Can Do About America’s Health-Care Crisis, in which he recommends creating the equivalent of the Federal Reserve Board for health care to set treatment standards, performance requirements and impose other mandates on the industry. In short, create another layer of bureaucracy on top of the one that he would oversee and hand it even more powers. That’s because the Federal Reserve has done such a super job managing the financial markets!!

What’s particularly depressing about the Daschle pick is that it’s not like Obama didn’t have better choices. He did -- in fact right under his nose such as his advisor, Jason Furhman. Furhman wrote an excellent paper pointing out that the best way to cover the uninsured without breaking the federal budget is by making it easier for people to purchase their own coverage – not creating more bureaucracy. “The most promising way to move forward in all three dimensions, coverage, cost, and long-run fiscal situation, is to replace the employer exclusion with a tax credit,” he noted. Another good pick would have been former Democratic Louisiana Senator John Breaux.

Breaux, who headed Clinton’s Bipartisan Commission on the Future of Medicare, is similarly mindful of keeping a grip on government spending on health care – although he voted for extending Medicare coverage to prescription drugs, vastly increasing the program’s liabilities. While on the Commission, he demonstrated a great deal of openness to considering market-based reforms and supported Health Care Savings Accounts.

Now if Obama picks Hillary The-Saber- Rattler for State next, it will be a perfect troika that'll expand the government's power in matters of civil liberties, economics and foreign policy.

Way to go, Obama! Anyone missing Bush yet?

Concluding the series on Obama’s cabinet, Reason Foundation’s Shikha Dalmia discusses the best and worst choices Obama could make for Secretary of Energy:

Obama has pledged to move America toward a green energy economy. He markets this idea - on which he plans to spend $150 billion over 10 years - as a public works project that would allegedly create millions of new jobs. The money would supposedly go toward supporting: electric cars; a renewable energy portfolio standard for electricity utilities; and reductions in carbon emissions.

But there is a better way for Obama to promote green energy that doesn't involve breaking the federal bank: A zero subsidy energy policy, something that Carl Pope, former executive director of the Sierra Club, and Ed Crane, president of the CATO Institute, jointly advocated some years ago. Instead of asking taxpayers to subsidize green technologies, such a policy would simply eliminate existing subsidies for coal and oil that supply the vast bulk of American energy. It would also replace existing coal and oil taxes with pollution taxes to internalize emissions that pose actual harm to human health or property. This would create a level playing field in energy markets - whose absence environmentalists have long claimed is responsible for making solar, wind and other green fuels uncompetitive.

There are many names floating for this post but, by and large, Obama should stay away from industry insiders such as Federal Express CEO Fred Smith - whose views tend to be skewed toward their own needs - and crusaders such as former Vice President Al Gore - who are too deeply wedded to massive government interventions to be able to evaluate un-intrusive strategies with an open mind. (As previously noted, Fred Smith would be a great pick as Commerce Secretary, however.)

One of the best candidates for the job would be Daniel Yergin, founder of Cambridge Energy Associates, who was awarded the 1997 United States Energy Award for "lifelong achievements in energy and the promotion of international understanding." He does not fall for the energy cause de-jure of the moment - whether energy independence or the peak-oil crisis. He has cautioned against adopting an overly centralized approach to alternative fuels. "High [energy] prices combined with concerns about energy security and climate change are stimulating the most widespread drive for innovation the energy sector has ever seen," he has noted. It will take time for these investments to yield results and government meddling would be useless at best and counterproductive at worst, he suggests.

Also good would be Republican John Sununu - a fiscal conservative, a social liberal and a civil libertarian - who just lost his re-election bid for the Senate in New Hampshire. He co-sponsored the Clean Air Planning Act which, among some valid air pollution measures, unfortunately also tried to impose a cap-and-trade scheme to decrease carbon dioxide. But by and large, he is sound on energy issues. He supports more domestic fuel exploration - but opposes subsidies for that purpose. And he voted against steeper CAFÉ rules and more hydrogen cars.

Among the acceptable but not great candidates would be Philip Verleger, who was on Jimmy Carter's Council of Economic Advisors. He has a deep understanding of the political economy of oil and energy markets. He has cautioned against imposing price controls on energy markets - but favors a windfall profits tax on energy. Although Obama should avoid executives, one who might be tolerable is John Rowe, CEO of Exelon, a Chicago-based energy company. He is generally market-oriented, but believes ardently that the government should reduce greenhouse gas emissions through something akin to a Marshall Plan to jump-start low carbon fuels (maybe because his company owns the largest nuclear fleet in the country).

Pushing the Apollo Plan for energy is Rep. Jay Insleem, a Washington Democrat, who should be avoided - even though Obama himself is proposing something similar. Essentially, his plan is to put in place a "unified and highly prioritized national program" under which Uncle Sam would offer loan guarantees for the construction of renewable energy facilities, cap-and-trade program to reduce greenhouse gas emission and stronger fuel efficiency measures. In the same category is Michigan Gov. Jennifer Granholm, who raised income taxes Michigan's economy entered a recession with an unemployment rate of 8 percent. Now she is pushing a renewable fuel mandate requiring utilities to produce 10 percent of their electricity from alternative sources - something that will raise energy prices and make Michigan even less competitive. She is precisely the kind of energy secretary the country does not need in a recession.

Any of these candidates would indicate that Obama wants to use this portfolio more for pie-in-the-sky, social engineering schemes rather than actually looking for genuinely workable green fuels capable of meeting the energy needs of the economy.

This the final installment of a three part series. Part one, with picks for Treasury, Education and Transportation, is available here. Part two, with Dalmia's picks for Secretary of State, Defense and Attorney General is here.

Continuing the final installment of the series on Obama’s cabinet, Reason Foundation’s Shikha Dalmia names the best and worst picks Obama could make for Secretary of Health and Human Services:

Nationalized health care has been a liberal fantasy for so long that Obama will face tremendous pressure to deliver it quickly-especially since he has a Democratic-controlled Congress at his disposal. Even if nationalized health care did not come with deadly side effects like long waiting lines and inferior care, the fact of the matter is that the country simply can't afford another big entitlement program when it is facing an annual deficit of half a trillion dollars and unfunded Medicare and Social Security liabilities in the tens of trillions. Under such circumstances, the best way for President-elect Obama to expand coverage would be by harnessing market forces to control the soaring costs of health insurance and putting affordable coverage within the grasp of more people. This would require, as influential economist Greg Mankiw has said, stealing some Republican ideas - and perhaps some Republicans.

They would certainly cut against the grain, but Obama has said he will name a Republican to his cabinet and two Republican governors would be particularly good for this job: Florida's former Gov. Jeb Bush and South Carolina Gov. Mark Sanford. Unlike folks in Washington who have opinions about how to reform health care, they both have a track record of actually implementing practical, market-based reforms.

Bush implemented a pilot program called Health Opportunity Accounts. Under it, Medicaid recipients get a fixed sum of money - adjusted for their health - to buy their own coverage from private insurers. The vast majority of recipients have opted for the program and the competition that this produced among insurance companies has curbed cost increases. Similarly, Sanford has implemented Health Savings Accounts under which Medicaid recipients get an upfront amount every year to buy coverage, rolling over what's left into the next year. This caps the state's liabilities while giving recipients an incentive to conserve their health care dollars. It is too early to tell whether the program will deliver promised results, but the point is that Sanford and Jeb Bush have demonstrated an openness to innovative solutions that empower patients, control costs, and improve coverage that would serve an Obama administration better than a believer in command-and-control, big government solutions.

Among the good picks would be Obama's economic advisor, Jason Furman, also under consideration for Commerce Secretary, and former Democratic Louisiana Senator John Breaux. Before John McCain unveiled his plan to reform the tax code to extend the health care deductions from employers to individuals during his presidential campaign, Furman wrote an excellent paper advocating exactly the same idea. He understands that the best way to cover the uninsured without breaking the federal budget is by making it easier for people to purchase their own coverage. "The most promising way to move forward in all three dimensions, coverage, cost, and long-run fiscal situation, is to replace the employer exclusion with a tax credit," he noted in his paper.

Breaux, who headed President Clinton's Bipartisan Commission on the Future of Medicare, is similarly mindful of keeping a grip on government spending on health care - although he voted for extending Medicare coverage to prescription drugs, vastly increasing the program's liabilities. While on the Commission, he demonstrated a great deal of openness to considering market-based reforms and supported Health Care Savings Accounts.

For libertarians, three poor picks would be chairman of the Democratic Party and former Vermont Governor Howard Dean, New York Sen. Hillary Clinton, rumored to be the frontrunner for Secretary of State, and former Democratic Senator from South Dakota Tom Daschle.

Dean, a doctor himself, tried to control soaring health care costs by expanding government control over insurance prices and hospital budgets. He also created a statewide insurance pool and formed a new bureaucracy to manage it. None of this worked and premiums - and the number of uninsured - increased under him.

Clinton, of course, tried to nationalize the health care industry in one fell swoop when her husband was in office. Even though she seems to have abandoned that plan, during her presidential campaign, she advocated forcing the uninsured to buy coverage - through penalties and fines if necessary - to achieve universal coverage.

Meanwhile, since leaving the Senate, Daschle has written a book titled, Critical: What We Can Do About America's Health-Care Crisis, in which he recommends creating the equivalent of the Federal Reserve Board for health care to set treatment standards, performance requirements and impose other mandates on the industry. In short, create another layer of bureaucracy on top of the one that he would oversee and hand it even more powers.

Either of them will signal a return of Big Government, big time.

Update: Reuters reports that Obama has picked Tom Daschle as Secretary of Health and Human Services.

Part one, with picks for Treasury, Education and Transportation, is available here. Part two, with Dalmia's picks for Secretary of State, Defense and Attorney General is here.

In the conclusion to the series on Obama’s cabinet, Reason Foundation’s Shikha Dalmia considers the best and works picks for Secretary of Commerce and U.S. Trade Representative:

Trade is one of those issues that will signal whether President-elect Obama intends to position himself as a centrist, New Democrat or an old-style liberal. He sent mixed signals during the presidential campaign, initially striking a free trade posture, only to retreat after his labor backers expressed annoyance. He invoked the mantra of "fair trade over free trade," which is code for protectionism. He blamed NAFTA for losses in the auto and other manufacturing industries - promising to renegotiate the treaty if elected president. But Austan Goolsbee, a University of Chicago economist and Obama adviser, told a Canadian delegation that Obama's NAFTA comments were "political maneuvering" that don't reflect his real views.

An early test of what Obama's views really are will come when a standing U.S. quota against Chinese textiles expires in January. If Obama wants to do the right thing - let the quota die - and set the proper tone for the rest of his presidency, he will need a Commerce Secretary and a trade representative capable of clearly articulating the case for free trade. And the two best people for those positions are: Grant Aldonas, a Senior Advisor at the Center for Strategic and International Studies who was Undersecretary of Commerce in the Bush administration, and Federal Express Founder and CEO Fred Smith.

Aldonas, who advised the McCain campaign and would certainly be an unusual pick, has repeatedly argued against blaming outsourcing for job losses in the United States. He understands the role that trade can play in promoting democracy and freedom and has called for expanded trade in every part of the world, including the Middle East. "Trade is a cornerstone of democracy," he has said. "While trade promotes the rule of law, it also promotes a free and stable government that protects the rights of individuals and institutions." He was an early supporter of normalizing trade relations with China and backed its bid to enter the World Trade Organization. He would be particularly suited to leading the Commerce Department, given that he has already managed it and is intimately familiar with it. The department is charged with keeping track of goods entering and leaving the country. This produces an institutional tendency toward mercantilism - namely, encouraging exports and discouraging imports - that Aldonas understands and will be able to counter.

Also good would be Smith. Ironically enough, he may be under consideration for energy secretary, a job for which he would be worrisome given his misguided support for energy independence. However, he is rock solid on trade issues. Evidently, he has not figured out that one cannot consistently advocate autarky with respect to energy markets while free trade with respect to everything else. Be that as it may, he has admirably advocated the equivalent of unilateral disarmament on trade - meaning that the United States should throw open its markets to foreign goods regardless of whether other countries open their markets to our goods. He calls U.S. agricultural subsidies immoral - because they keep Third World farmers poor by making their products uncompetitive in global markets while hurting U.S. consumers.

Among the satisfactory picks would be Austan Goolsbee, and Jason Furman, also an Obama advisor. Both of them are pro-traders but favor expanded social insurance - more unemployment benefits, skills training - for "trade's losers" or Americans who lose jobs to foreign competitors. Furman, director of the Hamilton Project, a centrist economic group, has expressed worries about the coming China-bashing, including a proposal asking Obama to slap a 27.5 percent tariff on Chinese goods because of a weak yuan - a good sign.

Goolsbee expresses similar positions, although he favors using the WTO to aggressively enforce of the labor and environmental standards that countries have signed in trade agreements, something that can become a backdoor way of hobbling competitors. But, on balance, as columnist and author George Will notes: "He seems to be the sort of person - amiable, reasonable and empirical - you would want at the elbow of a Democratic president..."

Completely disastrous would be Thea Lee, the Chief International Economist with the AFL-CIO. Dismissing the evidence before her eyes, she writes: "The logic of global capitalism as currently practiced is to drive down workers' wages, weaken their bargaining power and strip away their social protections in both rich and poor countries, while simultaneously encouraging and celebrating the excesses of debt-driven consumerism." Picking her-or any other representative of organized labor - would indicate that the Democratic Party has abandoned the legacy of free trade that Bill Clinton built.

Part one of the series, with picks for Treasury, Education and Transportation, is available here. Part two, with Dalmia's picks for Secretary of State, Defense and Attorney General is here.

Treasury Secretary Henry Pauls