By now everyone has heard about the fate of Central Falls High School in Providence where 93 teachers, guidance counselors and administrators were fired two weeks ago. Eleventh graders at the school had a 7% passing rate on a standardized math test this year. Fewer than half of the students graduate in four years. The school is clearly underperforming. Firing the teachers was not the Board’s first choice, but occurred after talks with the union broke down. The Superintendant was clear about his expectations and intentions well in advance, so the firings came as no surprise.

 My favorite version (tongue in cheek) of the story can be found at the Party for Socialism and Liberation website:

http://www.pslweb.org/site/News2/1499632738?page=NewsArticle&id=13738&news_iv_ctrl=1261

There you will find all of the reasons why the firings were justified, but I will focus on a few key points.

The main problem with government run schools like Central Halls is the government role and the structure it creates, not the teachers. Like any profession, there are good teachers and bad ones, but the system does little to distinguish between the two. Unions and most educators alike argue against “running a school like a business” because “the kids are too important.” Instead of emphasizing real outcomes, they concentrate on inputs such as certifications, degrees, years of experience, and following proper procedure in preparing lesson plans. There’s nothing wrong with any of these inputs per se, but they miss the point. In the end, it’s all about the progress kids make at the end of the year.

Educators often oppose the use of test scores and other outcomes for evaluating teacher effectiveness, arguing that teachers can’t control what goes on at home. This is both true and an obvious hindrance to good teaching. Teacher evaluations should be based on actual test scores, with an emphasis on the progress their students make—the difference between proficiency on day-1 and day-180 of the school year. Those who teach kids in poor neighborhoods shouldn’t get a complete pass because of the trying circumstances they must endure. Blaming the problem on “low funding” just doesn’t cut it.

Most of all, I am struck by the defense proffered by the fired teachers. I saw a photo of one holding a sign that read “We care about our students. Our students care about us. We are family!” Frankly, caring is just not good enough. This decision is about performance, and many teachers don’t seem to get it. We expect our mechanics to fix our cars, not care for them. We expect our doctors to cure our maladies, not just view us as a family member. Sure, caring about kids is a great thing, but it’s not sufficient. Schools should be managed for the benefit of the kids, not the teachers.

There’s another lesson here. Join a union and you get the union, for better or worse. I suspect that some of the fired teachers are doing a good job, but they were part of the collective. The good teachers in the group are now enduring the wrath that should have been directed at their poor performing colleagues.

I must close by giving tentative credit where it’s due. While I favor a reduced (or eliminated) federal role in education, Secretary Arne Duncan is one of the few competent Obama appointees. Obama and Duncan are arguing that the firings are necessary, at least for the time being. Frankly, I expect Obama to capitulate to union pressure on this issue in the coming months. I am guessing that some sort of “compromise” will be forged and many of these teachers will be “un-fired” before new ones are actually hired. The amount of federal education money flowing into education budgets is staggering, and this funding gives politicians and bureaucrats in Washington a lot of indirect control over what happens at the local level. For the kids’ sake, I hope that the Board in Providence stands its ground.

Last week Vice President Joe Biden proposed two new rules designed to help Americans avoid bad 401(k) and IRA investment advice: “If the rule is adopted, it would put in place safeguards preventing investment advisors from slanting their advice for their own financial benefit. [1] Investment advisors also would be required to disclose their fees, and [2] computer models used to offer advice would have to be certified as objective and unbiased.”

Biden’s proposal seems to make sense at first glance. What’s the problem with financial planners disclosing how they earn their money? It’s like reading the package before you purchase a product in the grocery store. However, there at least four serious problems with the certification requirement.

First, who exactly is going to certify computer models as objective and unbiased? In the end, Washington must either do the certifying or it must oversee those who do. With a financial track record that includes the likes of social security, Medicare, Amtrak and the post office, why would any reasonable person expect to receive better financial advice when bureaucrats are injected into the mix?

Second, a certification requirement could introduce a liability nightmare. Individuals whose investments lose value could claim that they acted on advice inconsistent with certified models. Financial advisors could find themselves at the mercy of juries often hostile to Corporate America and Wall Street.

Third, a certification requirement would likely result in a smaller number of highly similar computer models. There are sound investment principles of risk-reward and diversification, but financial advice is an inexact science, and there is no holy grail. In the end we must educate ourselves, make our own choices, and accept responsibility for the consequences. Well-intentioned government oversight would only limit our access to a wider array of financial recommendations.

Finally, the logic behind both provisions is that conflicts of interest among financial advisors impair the recommendations they make to their clients. But Washington has its own conflicts of interest. Bureaucrats might favor models that encourage investments in companies in which the federal government has financial or political interests like General Motors or General Electric. They might frown on models that “bet against the Fed” such as diversification into gold and silver.

Like most leftwing meddling into the economy, this proposal assumes that government is honest, fair, efficient, and objective, while those in the private sector simply cannot be trusted. Moreover, it assumes that the profit motive, by definition, creates a conflict of interest. To be frank, I don’t care how much my financial planner makes. All things equal, I want him to have some skin in the game and profit proportionally to the quality of advice he gives me. The profit motive creates more of an incentive for performance than it does any conflict of interest.

There’s an irony here. You may recall that President Bush’s proposed social security reform included an option to invest a small percentage of one’s social security contributions into a limited array of market investments. The left rejected and defeated this proposal, arguing that social security should be secure and guaranteed, and the government should not become entangled with investments in the stock market. Besides, individuals are free to set up their own IRA’s and invest as they wish. Biden is singing a different tune now.

The problem with Biden’s proposal is the same as with many of the ideas that come from the left—(presumably) unintended consequences. More times than not, the increase in the bureaucracy and the perverse incentives created when Washington inserts itself into the private affairs of individual citizens far outweighs any benefit derived from the regulation. If Biden wants to promote a secure retirement, he would be well advised to fix social security and keep his hands off of private investment decisions.

It’s been leaked that Obama’s new healthcare initiative seeks to grant Washington the authority to veto price increases on health insurance premiums. This “get even with your insurance company” scheme might sound attractive to the masses, but it is another in a series of bad ideas from the left.

Whether on gas or healthcare, price controls ALWAYS reduce quality and/or create shortages. Businesses in competitive markets raise prices primarily because they seek more revenue to cover their expenses. The profit motive is there as well, but when other providers offer competing services, no single firm can unilaterally raise its prices just to make more money, lest its’ customers migrate to the competition. Increased profits come from innovation—new ways of doing things that are preferred by customers and/or cut costs. In other words, when buyers have choices, the market itself already maximizes quality and keeps prices as low as possible. Buyers can choose the combination of quality and price that they prefer.

If businesses in a competitive market seek to raise prices to cover increases in expenses, then not allowing them to do so will force them to reduce expenses by cutting quality or by offering their services to fewer customers. Cutting quality means that co-pays could rise or benefits could be restricted. Offering services to fewer customers means that providers must find ways to restrict access to their most costly customers, usually those who need coverage the most. Magically complying with the government mandate without these changes is not an option. There is no free lunch.

Needless to say, the response to price controls I just described would initiate a response from Washington that would force firms to offer more for less. In the end, providers would be required by law to offer consumers exactly what Washington wanted at a price Washington sets. In other words, we’d get the rationing of a single payer system through government control of private insurance companies.

Government control is not the solution here, but the problem. More competition is the key. If Obama wants better quality at lower prices, then he should keep government OUT of the equation. Instead, he should work with Republicans to allow providers more flexibility in their insurance offerings and enable consumers to purchase across state lines. More flexibility for providers will foster innovations that deliver more “bang for the buck.” More choices for consumers will force companies to innovate. None of this can happen because of government mandate.

There is a common misconception that CEOs are, by definition, capitalists. But this is not always the case. Executives—especially those in large firms—often welcome government intervention when it serves their own purposes. A recent example illustrates this principle well.

The CEOs of two large financial institutions—Deutche Bank and Barclays—recently announced support for a global bank levy to help cover the cost of any future “too big to fail” bank bailouts. Why would these executives support another tax? The answer is quite simple.

These executives are not being “socially responsible” by volunteering to pay more taxes. They are looking out for their own interests. Note that they are asking for a GLOBAL tax, which means no banks would be exempt based on nation. Everyone must pay, so no bank would get any cost advantage relative to any other. This means each bank could simply pass along the tax to its customers through higher fees of its own, knowing that its competitors must do the same. The net cost to the banks would be minimal, and its customers would pay the freight. Hence, they are really arguing for a tax on their customers.

But this is not the end of the story. In exchange for the tax, banks would obtain access to a rescue fund if they find themselves on the verge of bankruptcy. Such a plan actually encourages banks to make risky decisions without a fear of failure. Under such an arrangement, bank customers would finance a system that covers banks in the event that their risky decisions fail. All of this would be done in the name of stability and responsibility. No wonder bank executives are excited about this scheme.

There is a better approach. Banks should seek PRIVATE INSURANCE to cover their losses in the event of financial hardship. Private insurance companies would have a financial incentive to monitor bank activity more closely. A bank could disclose its private insurance to prospective customers, who would consider details of the arrangement and make informed banking decisions accordingly. In the end, only the most efficient approaches to limiting bank losses would survive. It is wasteful and counterproductive for governments to offer special protection to banks or other firms that are supposedly “too big to fail.” They should seek their own private protection—if they think they need it—and let their potential customers make their own decisions.

The truth is that corporate executives often act more like opportunists than capitalists. They appreciate free and unfettered access to markets and limited intervention while establishing their firms, but welcome government intervention that creates competitive barriers for up-and-coming rivals. We should not blindly support the interests of business per se. When executives stray from the tenets of capitalism, we must insist that they play fair. We should argue for liberty for buyers and sellers, and for the limited, rational governmental role in the process. Nobody should get special favors from the government.

Source: Financial Times, 30 January 2010 (page 1). “Bankers in favour of paying global tax.”

Commenting Tuesday (February 5) on the Toyota gas pedal situation, Transportation Secretary Ray LaHood used an interesting choice of words: “We’re not finished with Toyota…” Herein lies the heart of the matter.

We are familiar with the problems Toyota is having. The company is struggling to replace defective gas pedals on several of its models as fast as it can. As will most company crises of this magnitude, facts detailing how the crisis occurred and how it could have been avoided will disseminate in the coming weeks and months. For now, we must focus on the basics.

Toyota clearly erred in producing cars with the defective gas pedal. This is a serious problem, and Toyota bears the responsibility for resolving it as soon as possible. By all indications, the company is taking drastic steps to do just that. Offering no excuses, Toyota halted sales of affected vehicles while its engineers rapidly developed a solution. In Asian fashion, the company hesitates to defend itself and even apologized to its customers and asked for a second chance. Toyota’s crisis response appears to be responsive and appropriate.

Secretary LaHood’s response to Toyota, however, is suspect. Although it is LaHood’s responsibility to investigate the situation and take appropriate action, talking down the company is clearly inappropriate. In Tuesday’s statement, he added that DOT officials flew to Japan in December to remind the company “about its legal obligations,” as if Toyota was not keenly aware already. Meanwhile, a Congressional hearing is planning to investigate whether Toyota’s U.S. President Jim Lentz misrepresented the recall remedy. Expect CNN to cover this grilling intently. Like LaHood, the Democrats are seizing this opportunity to pile on. As Rahm Emaneul advised, one should “never let a good crisis go to waste.”

There are several reasons why this is happening. First and foremost, because the U.S. government has a controlling interest of GM, it also has the perverse incentive to use government power to beat down its competitors whenever it can. As I warned in a previous blog, the government will do whatever it has to do to make GM profitable again. The Toyota crisis also represents a golden opportunity to remind the public that corporations will cheat them whenever possible if the government doesn’t regulate them heavily. We’ve heard the “capitalism bad-government good” mantra ad infinitum for over a year now.

As we watch this crisis run its course, it’s worth considering two key questions. First, given the fact that vehicle recalls are commonplace, while do Democrats and the DOT feel the need to demonize Toyota in this particular case? Second, if the DOT (or more specifically, the NHTSA) is charged with protecting the safety of the general public, then why is the agency only taking aggressive action now, six model years after the earliest reported problem? Be careful…if your answer to the first question is that Toyota is getting what it deserves because its negligence was so gross and this particular problem is so widespread, then our government should have been on top of this a long time ago. Will the DOT be investigated for delaying action to “save the public?” Certainly not.

Early indications suggest that the problem is primarily with vehicles built in the U.S., not Japan. Regardless, rest assured that interesting facts will emerge in the next few months that shed light on the crisis. Some might not bode well for Toyota, but others will likely detail problems with federal regulators. You can also rest assured that the DOT will blame any shortcomings related to its response on Bush and/or budgetary problems, and will simply ask for more of your tax money to do a better job controlling the evil capitalists in the future.

We can learn a lot about the cycle of socialism by watching Venezuelan President Hugo Chavez.

To be clear, Chavez is not a well-intentioned, misguided socialist. He seeks the power, world attention, and hemispheric domination we associate with tyrannical forms of government. Chavez assumed the presidency in 1998 on a platform of radical change designed to aid the poor and disenfranchised. Once elected, he began to “take back what belonged to the people” by nationalizing the oil, steel, and other industries. Revenues from oil—the lifeblood of the economy—financed many of his projects. As long as oil prices were high, things seemed to be going well.

Socialism always stifles the incentive to produce and innovate. Unlike private oil companies, Chavez failed to reinvest sufficient funds back into the business. Declining oil revenues began to take a toll on the country. Facing mounting criticism and economic hardship, Chavez attacked the press, closing down many of his television opponents in 2006. Today, TV stations are required to air his frequent speeches or risk prosecution.

Earlier this year, Chavez announced a currency devaluation to encourage Venezuelans to purchase more products manufactured at home, assuming local industries can actually meet the demand. The government also announced rotating blackouts to manage a power shortage. Meanwhile, frustrated Venezuelans have been told that they must sacrifice for the collective and think long term.

Venezuela is a textbook case of the socialism cycle. A leader is elected by appealing to the masses on the basis of class warfare. Some nationalization and wealth redistribution occurs after the political victory, but the engine of production sputters due to excessive government intervention and a lack of incentives. The newly elected leaders blame this problem on the capitalists for being greedy and not acting in the interest of society as a whole. Opposition mounts, and we begin to see restrictions on freedom of speech to keep it in check. Capitalism is denounced as completely degenerate, so more nationalization and government control follows. The standard of living declines and the masses are told that capitalists and foreigners (Americans) are the cause of all social and economic ills. The socialist utopia simply can’t work until all vestiges of greed are eliminated. Total failure is becoming more and more apparent, but the masses are told to stay the course.

Could the U.S. follow such as cycle? The tradition of liberty is probably strong enough to keep our country from going as far, but we already see the same pattern here. Obama was elected on a platform of hope and change based on class warfare. Once elected, he immediately addressed the “healthcare crisis” by demanding that businesses make sacrifices for the good of the country. Those that did were spared—temporarily—from further punishment—while that that did not were publically flogged as the villains. Although Obama has hinted at media control and a return to the “fairness doctrine,” such an effort has not yet materialized. Even after his massive stimulus spending, the economy remains in the tank. Obama is on the ropes and the public is waking up, yet he reminds us that our current problems are really Bush’s fault and challenges us to stay the course.

What does the future hold? History warns us that transitions from socialism to capitalism aren’t always peaceful. For Venezuela, let’s hope that the people get their country back soon without bloodshed. As for the U.S., Scott Brown’s election may stave off the left’s healthcare package for the time being, but more work needs to be done. Brown is not a real conservative, but he’s certainly better than Massachusetts has sent to the Senate in a long time. Cautious optimism is in order, but let’s not get too excited. A lot can happen between now and November.

In a 2003 ruling, Supreme Court Justice Sandra Day O’Connor suggested that using race as a factor in college admissions decisions might make sense only for a limited period of time. Now retired, O’Connor just published an essay with Cornell Law School Dean Stewart J. Schwab on the prospects for revisiting the need for race-conscious admissions policies at U.S. colleges (see The Next 25 Years: Affirmative Action in Higher Education in the United States and South Africa). In the essay, O’Connor and Schwab made a chilling statement about the role of the high court:

“When the time comes to reassess the constitutionality of considering race in higher-education admissions, we will need social scientists to clearly demonstrate the educational benefits of diverse student bodies, and to better understand the links between role models in one generation and aspirations and achievements of succeeding generations.”

Justice O’Connor, please tell me what social science research has to do with the constitutionality of anything? Using race as a factor in college admissions decisions is either constitutional or it’s not. Does this mean that gun control is constitutional if a group of social scientists suggest that such a policy might reduce crime? Should freedom of the press be curtailed if social scientists suggest that doing so might result in a more orderly society? A law or practice is constitutional if it is consistent with the original intent of the document itself. Neither public opinion nor current research should be a judicial consideration.

Unfortunately, O’Connor’s thinking is commonplace among activist judges. To them, assessing the constitutionality of a law or practice doesn’t really involve the Constitution at all. It’s all about what seems to make sense at the moment.

In a completely market driven economy, interest rates—like all other prices—are determined by supply and demand. The Fed largely determines interest rates in the U.S., however, and for this we pay a heavy price. Earlier this month, even Fed Chairman Ben Bernanke himself acknowledged that the Fed’s “easy money” policy during the early 2000s contributed to the housing boom and subsequent bust. Yet, the Fed is on course to repeat its mistakes once again.

Let’s say you ran a bank and were free to determine your own interest rates. How would you decide what to charge your customers? You might start with projected inflation to compensate for the fact that the money you get back in the future will be worth less than what you loan out today. Inflation would also be factored into the interest rate you pay on your deposits, a key source of the cash you need for loans. You’d also have to add enough to cover your overhead and the risk associated with the various types of loans (in case you don’t get your money back). Finally, you’d add some profit. Other banks would consider these factors as well, so rates would be driven down to levels that reflect the best management of risk and overhead, with only modest profits.

In a centrally planned economy, interest rates are determined by government officials who might consider some of these same factors before assigning rates based on sophisticated economic models and presumed acumen. Although our economy is relatively market-oriented, such is not the case in the banking industry. Instead of relying largely on savings to finance loans, banks can get their money directly from the Fed at lower rates set by Bernanke’s team. In effect, the Fed sets the rates charged by banks.

In a representative democracy like ours, allowing a quasi-government entity like the Fed to manipulate interest rates can be deadly. Political pressure mounts and the Fed usually responds with rates lower than the market would otherwise support, especially in a down economy. Few Americans complain because they like the lower rates. They just don’t understand the long term damage.

When the price of money—the interest rate—is too low, businesses and consumers will want to borrow more. This means more cars, houses, business expansion, consumer goods, and ultimately MORE DEBT. For any economic growth to be sustainable, debt must be supported by a commensurate level of savings (preferably not by the Chinese). If not, the house of cards will tumble down and create another crisis, more political pressure, and the need to artificially lower interest rates again. Add to this the irresponsible, unsustainable spending in Congress and it’s easy to see why BOOM AND BUST is common to our economy.

Many Keynesian economists are suggesting that the Fed raise the interest rates they charge to banks to address this problem. They are missing the point. No central planning entity—not even the Fed—is capable to calculating optimal interest rates. While most of us are comfortable letting market forces largely determine the price of consumer goods, we are told that only highly trained economists should determine the price of money. Nothing could be further from the truth.

The sooner we abolish the Fed the better. We need to rebuild our economy on solid footing, and the hocus pocus of both artificially low interest rates and massive government spending should be rejected. At the present rate, we are merely laying the foundation for the next economic collapse, and this one could be even bigger.

I hope you enjoyed the Christmas season, but let’s face it—2009 has been a tough year. The economy is in the tank, unemployment hovers around 10%, the national debt has spiraled out of control, and we are one big step closer to socialized medicine. What will 2010 bring? Here are a few things I anticipate:

1. IMMIGRATION REFORM (aka, amnesty) is a key objective of the Obama administration and the Democrats. Converting illegals into citizens is a voting boon for those on the left. We didn’t hear much about immigration in 2009 because the Democrats did not want the public to realize that the healthcare “reform” package would apply to tens of millions of NEW CITIZENS if an amnesty bill passes. I wonder if McCain and Graham will see things differently this time around. Democrats want to get immigration done before the 2010 elections. This is a battle we must win.

2. TAXES WILL RISE, as is already apparent in the healthcare legislation. There is talk of a bipartisan deficit-cutting commission. While not a bad idea in theory, such a commission infers that the current debt problem is bipartisan and that some sort of compromise is needed to resolve it. Such a commission would likely recommend tax hikes, a few token spending cuts, and means testing for programs like Social Security. Useful measures such as a rollback of the stimulus program would probably not be part of the deal. A bipartisan commission would allow Democrats to spread the blame associated with the 2009 spending spree and get Republicans to sign on to more wealth redistribution as part of the solution.

3. OBAMA WILL MOVE TO THE CENTER. With the midterm elections little more than 10 months away, we can expect more talk from the Democrats about fiscal responsibility and national security, lest the voters hold them accountable for the current malaise. Don’t be fooled. Obama’s record speaks for itself, and the Democrats in the House and Senate are his enablers.

4. THE DENIGRATION OF CONSERVATIVES IN THE MEDIA WILL INTENSIFY. The Democrats and the mainstream media will paint those who argue for fiscal responsibility, limited government, and border control as right wing extremists, especially as the midterm elections draw near. A few RINOs will become media darlings by calling for less extremism and more compromise with the left. This has been part of the Democrat playbook for years. Get on the offensive early, and don’t be surprised.

There’s a lot of work ahead. Maybe real conservatives will take back the House and 2010 will be a year of real change. Let’s keep fighting the good fight!

Amnesty is back. Rep. Luis Gutierrez has introduced a bill in the House that would ultimately provide citizenship for illegals who pay a $500 fine, learn English, and pass a background check, referring to such a plan as a “moral obligation.” Some of the unanswered questions are obvious:

1. Will illegals who cannot pay the $500 “fine” really be deported?
2. What level of English proficiency will be required, who will judge, who will provide the training, and how long will illegals have to pass the test?
3. If we have a moral responsibility to those in need who enter our country illegally, then don’t we have the same obligation to the rest of the developing world?

Asking these questions is worthwhile, but we should focus on the core issue. No illegal immigrant should be able to pass a background check anyway. Each committed a serious offense when he or she entered the US illegally. Of course, amnesty would create millions of new voters, most of whom would support the party of big government that facilitated their citizenship. This is why Democrats fight so hard for amnesty, and why many Republicans (Graham, McCain, etc.) are afraid to oppose it.

Illegal immigration costs Americans a fortune each year. While we might benefit from cheap farm, manufacturing, and construction labor, the hidden costs of public education, criminal justice, and healthcare alone are devastating. Heritage Foundation Senior Research Fellow Robert Rector has already done the math, so I won’t go over it again here. Suffice to say that the long term economic burden is huge. Unfortunately, many in corporate America favor various work schemes for illegals because they benefit from cheap labor while society at large pays the cost.

Predictably, the subtle and sometimes overt media bias is back as well. USA Today reported on December 15: “There are 12 million illegal immigrants in the USA. Activists call for an overhaul of immigration law that would offer them a way to earn legal status. Rep. Luis Gutierrez, D-Ill., introduced a bill Tuesday that would give illegal immigrants who pay fines, pass background checks and meet other requirements a path toward legal residency.” Note that illegals would only get a “way to earn legal status” or “a path toward legal residency.” Gutierrez clearly wants CITIZENSHIP, which means AMNESTY FOR ILLEGALS. USA Today avoids these terms because of its editors know where most Americans stand on the issue. The story also includes the obligatory heart-tugger, a reference to Rigoberto Padilla, a non-American whose dreams could be shattered by a cruel system called border enforcement. (http://www.usatoday.com/news/nation/2009-12-15-deport_N.htm)

For the record, I understand why a citizen another country would enter the US illegally. Many come to the US to work and help feed their families. Most are nice people and see the lack of immigration enforcement as the game it is. If I lived in poverty elsewhere and the US borders were open, I’d come also. We shouldn’t blame the illegals. We should blame ourselves. Amnesty, however, doesn’t fix the problem, it only exacerbates it.

Many of the arguments from the previous debate will remain unchanged when “immigration reform” takes center stage again, but there are two key differences. First, we will be told that most illegals are young workers who will help pay the taxes needed to finance near-bankrupt programs for older Americans like Social Security and healthcare. This argument is a simply an admission that programs like Social Security are merely vote-buying Ponzi schemes. How many more workers must be imported to pay the Social Security claims of these young workers several decades from now?

The second difference is political. Democrats largely favor amnesty, and there are more of them now than when Bush mistakenly supported the effort. Fortunately the 2010 elections are getting closer, and some Democrats might fear the wrath of voters if they support such a measure. Regardless, the key for stopping amnesty—sooner or later—is retaking the House in 2010 with REAL conservatives and passing real immigration reform that limits legal immigration at a reasonable level and controls the border. Let’s keep our eyes on the ball.