Schoolchildren Will Be Basically Proficient

Writing from Miami, Florida

A few months ago I wrote how most states, when testing their schoolchildren, post results such as “80% of our state’s students are proficient in reading or math,” but when tested by the National Assessment of Educational Progress (NAEP), the number judged proficient falls to 30% or so. (See Every State Left Behind.) It was noted that local education officials are eager to tell parents and taxpayers that students are doing well. The NAEP test hasn’t felt such pressure.

Now a commentary in the February 27, 2006 Wall Street Journal by Chester E. Finn, Jr. and Diane Ravitch tells us that under No Child Left Behind (NCLB), which uses the NAEP tests — not the state tests — to measure student progress, there is pressure to water down the NAEP test so that more students test at the proficient level.

This movement to weaken the standards of what has to this point been an objective, nation-wide measure of student progress will let politicians at the federal level claim that students are doing better, just as politicians at the state and local level do with the dumbed-down state tests.

Politicians, education bureaucrats, and teachers unions will claim victory, citing “proof” that increased funding for schools has been successful in increasing student achievement. But with the standard of proficient slipping to what has been until now called basic, will the students even be able to understand how they’ve been harmed?

This is more evidence of why we need to take control of education away from the government.

How a good column on the bad lottery fell apart

Writing from Miami, Florida

A recent column in The Wichita Eagle by Randy Scholfield starts out fine, but falls apart near the end. (“Is the lottery the best bet for workers?” February 24, 2006, available at

Mr. Scholfield tells us how the lottery is not a very good bet. He references a survey that tells us how about half of us believe we have a better chance of obtaining a retirement nest egg through winning the lottery rather than by saving and investing.

He then tells us that the large majority of those playing the lottery are poor and don’t have college degrees.

What Mr. Scholfield writes is true. I’d like to illustrate in more detail just how true it is.

Here is how the math works: If you invest $1.00 each week of the year, and you earn 10% on those contributions, at the end of 30 years you will have $9,409. After 40 years you would have $25,316.

These amounts may not seem like much, but you get that for saving just $1.00 per week. If you saved $10.00 each week (I suspect many people spend that much or more on the lottery each week) you would have about $253,000 after 40 years. That’s a significant sum of money.

Plus, if you hold these savings in a Roth IRA, this money will be tax-free when you withdraw it. Lottery winnings are taxed.

Can you earn 10% on your savings? You almost certainly can if you invest these funds in a mutual fund that invests in a broad range of U.S. stocks. That is, invest in an index fund that is based on the S&P 500 index or a broader stock market index. (See Book Review: The Random Walk Guide to Investing.)

The 10% figure is approximately the return of the U.S. stock market over the last 100 or so years. Some years the market goes up more than that, and some years it goes down a lot. But over a long period of time, we can expect returns of about 10%. (If investing in something that has risk concerns you, consider the risk of gambling on the lottery.)

The index fund you select must have low costs. An index fund with high costs will return much less. An index fund that has expenses of 1.5% per year, which some do, would return only $16,682 instead of $25,316 for each dollar invested each week. That’s due to the power of compounding over long periods. You must also select a fund with no sales charges, called a “no-load” fund. If you selected a “load” fund, where part of what you save goes to sales commissions rather than shares of the fund, you might have less than $16,000 rather than the $25,316 you could have by selecting a no-load fund.

(To simply these calculations, I have assumed that you make the contribution for the whole year at the start of the year, rather than a little each week. This doesn’t have much impact on the final figures.)

Now consider the lottery: The average jackpot of the Super Kansas Cash game over the last year was about $360,000. By investing $22 each week as illustrated above, you would have about that much after 40 years.

If you instead spent $22 each week on this game (each play costing $.50, probability of jackpot is 1 in 2,517,200) for 40 years, you would have about a 1 in 28 chance of ever winning the jackpot. Contrast this with the near certainty of the long-term returns of the stock market.

There are other lesser prizes that you would certainly win many of as you made all these bets, and I haven’t considered these prizes. But offsetting these small prizes is the realization that you’d pay income tax on the jackpot from the lottery. The earnings in a Roth IRA, on the other hand, are yours tax-free.

So far, so good for Mr. Scholfield. But then his column takes a downward spiral. We’ll see just how far down it goes in a future post.

The Undercover Economist

The Undercover Economist
(Exposing Why the Rich Are Rich, The Poor Are Poor — And Why You Can Never Buy a Decent Used Car)
Tim Harford
Oxford University Press: 2006

This is an enjoyable book that explains the basics of how economics works, which is to say, how the world works. Mr. Harford doesn’t go into any technical detail at all, so there are no charts and graphs to decipher (although a very few are used for illustration), and there are no mathematical formulas.

Mr. Harford seems to believe more than I do that government may need to step in and correct some types of market failures. All in all, though, I agree with almost everything Mr. Harford writes.

In one chapter, Mr. Harford correctly assesses the current U.S. health care payment system as a mess. What he proposes as a solution is health savings accounts, where a low cost (about $1,500 per year) insurance policy to cover catastrophic charges is combined with individually owned health care savings accounts. People manage their own health care savings accounts. They get to keep what they don’t spend, so there is an incentive to spend wisely and reduce the need for health care through prevention.

Mr. Harford, with slight modification, believes in the random walk theory of security prices. I don’t think I would trust an economist who doesn’t.

In a chapter titled “Why Poor Countries Are Poor” he explains, using his trip to Cameroon, how terrible a plague political corruption is. That alone, he says, is the most important reason why most poor counties stay poor. He didn’t mention lack of formal property systems as described in Hernando De Soto’s book The Mystery of Capital.

A chapter on globalization explains relative advantage and how it contributes to the increased wealth of nations that participate in free trade. A quote:

Contrary to popular belief, it is simply not possible for trade to destroy all of our jobs and for us to import everything from abroad and export nothing. If we did, we would have nothing to buy the imports with. For there to be trade at all, somebody in America must be making something to sell to the outside world.

He explains the Lerner theorem, which says that a tax on imports is exactly equivalent to a tax on exports. Another interesting insight:

Trade can be thought of as another form of technology. Economist David Friedman observes, for instance, that there are two ways for the United States to produce automobiles: they can build them in Detroit, or they can grow them in Iowa. Growing them in Iowa makes use of a special technology that turns wheat into Toyotas: simply put the wheat onto ships and send them out into the Pacific Ocean. The ships come back a short while later with Toyotas on them. The technology use to turn wheat into Toyotas out in the Pacific is called “Japan,” but it could just as easily be a futuristic biofactory floating off the cost of Hawaii. Either way, auto workers in Detroit are in direct competition with farmers in Iowa. Import restriction on Japanese cars will help the auto workers and hurt the farmers; they are the modern-day equivalent of “frame breaking” [what Luddites did to mills and machines in England].

(Perhaps Mr. Harford has never been to Iowa, because in my experience, Iowa wheat fields are rare. Corn, however, is abundant.)

The problem is that the change that trade brings about affects different groups in different ways. Politicians love trade protection measures because they generally help a small, well-defined group immensely, at a lower and perhaps unnoticed cost to the rest of the people.

This book, combined with a few others such as Thomas Sowell’s works and Common Sense Economics: What Everyone Should Know About Wealth and Prosperity (all reviewed on this site) will work to increase anyone’s understanding of how economics works.

AirTran subsidy is harmful

(This is a longer version of my opinion piece that appeared in The Wichita Eagle last week.)

From the beginning, we in the Wichita area have been told each year that the AirTran subsidy was intended as a temporary measure, that soon AirTran would be able to stand on its own, and there will be no need to continue the subsidy. Mayor Mayans said as much last year, and so did City Manager Kolb this year.

But State Senator Carolyn McGinn, R-Sedgwick, on a recent television program, may have made a revealing slip when she referred to the AirTran subsidy as a “pilot program.” Now that the subsidy appears to be a permanent requirement, funded locally and perhaps statewide, we should ask ourselves if this subsidy is in our best interests.

The benefits of the subsidy are regularly overstated — and sometimes by huge amounts. In 2004, the Chairman of Fair Fares claimed that the Fair Fares program was worth $4.8 billion in economic benefit to the state. No reasonable analysis could make a conclusion that the benefit is as large as this.

Last year, the present Chairman of Fair Fares spoke before the Wichita City Council and equated what Wichita is doing to pricing in the airline industry with the role that Kansas played in the years before the Civil War. It hardly seems worth noting that one struggle was against the immoral institution of slavery; the other is a taxpayer-funded effort to override the natural workings of free markets.

Yes, it is undeniable. Low airfares are preferred over high airfares, and it is probably true that airfares are lower than what they would be without the subsidy. But the airline industry is changing. As an example, carriers tell us they have eliminated or reduced the very high fares for walkup ticket purchases. We simply do not know what airfares would be in Wichita if there had not been the subsidy, so any estimate of how much has been saved is merely a guess.

The harm the subsidy causes reveals itself in several ways. We may have less air service in Wichita due to the subsidy. Last year Delta canceled seven important daily flights. Was this in retaliation for Wichita’s decision to not subsidize Delta, as some claim? Or was it the law of supply and demand expressing itself: that when the price of something is lowered (lowering prices is the desired effect of the subsidy), less is supplied. There are fewer daily flights supplied to and from Wichita, from 56 last year to 42 today. As the subsidy lowers the price that airlines may charge for tickets but doesn’t do anything to reduce the costs of providing service, we should not be surprised to see more reductions in service.

Backers of the subsidy claim it is necessary to keep businesses from leaving and to attract new businesses to our area. We should consider the converse: have businesses considered Wichita, and seeing a meddlesome local government, one that picks and chooses winners and losers, decided not to locate here?

Local lawmakers abandon their principles to back the subsidy. Last year a Sedgwick County Commissioner assured me that he was a “free market” thinker, but was backing the subsidy nonetheless. Local business leaders, some who consider themselves believers in free markets, back the subsidy and have even formed private fundraising efforts to augment the subsidy.

Consider this: if a subsidy is good for economic development, why shouldn’t we try the subsidy approach with other businesses? If we feel that, say, advertising rates in Wichita are too high, why doesn’t the city select one local television station and subsidize its operations, thereby compelling other stations to match the subsidized price? Or to help people with something that really hits home, why not grant a subsidy to one chain of grocery stores so that other stores have to lower their prices? Or in the case of a monopoly such as a local daily newspaper, why doesn’t the city or county fund a startup to supply competition? I think most Wichitans would consider these measures extreme and contrary to fairness. I find it difficult, though, to differentiate these actions from the AirTran subsidy.

Whether to continue funding the AirTran subsidy is a bright line that we can choose to cross or not. On one side we see low airfares, and those airfares are highly visible. What we may not see as easily is the cost of a permanent expansion of government, government that intrudes increasingly on our lives and liberties. We also may not notice the loss of valuable information that prices in a free market supply, and without those price cues, we will not recognize the misallocation of capital and resources that follows.

On the other side of the line is the harsh realization that Wichita has factors such as low population that work against low airfares. On this side, however, we will find liberty and free markets. You will find me on this side, lonely though it is.

The “Free” Kansas Lottery Proceeds

An article titled “Nothing’s Free” by Russell Roberts, published in The Freeman: Ideas on Liberty explains that even though we might be accustomed to thinking that the state’s proceeds from taxes like those on the Kansas Lottery are “free,” this is not at all the case. As Mr. Roberts explains:

About 55 percent of the receipts go to prizes, 10 percent to expenses, and 35 percent to education or some similar unimpeachable cause. Because 35 percent goes to neither winners nor losers, the real cost of the lottery is that you win less often and the prizes are smaller than would be the case without a government monopoly. If government allowed competition or made gambling legal, people who like to gamble would have a higher chance of winning and there would be more money distributed to winners.

So lottery-funded education is not free after all. Subsidizing education out of lottery proceeds punishes people who like to gamble. Those turn out on average to be people who are relatively poor with less education. Can you think of a more immoral solution for funding education than to take the money from those with the least education?

(I checked the Kansas Lottery’s website. Our state’s figures are close to the figures Mr. Roberts gives: “In fiscal year 2005 (July 1, 2004 through June 30, 2005), the Kansas Lottery paid out 54 percent in prizes. The State Gaming Revenues Fund received 31 percent of ticket sales; cost of sales was 5 percent (which covers online vendor fees, telecommunications costs and instant ticket printing); 6 percent was transferred to retailer earnings and 4 percent covered administrative expenses (salaries, advertising, depreciation, professional services and other administrative expenses.)”)

(By the way, for Kansas in fiscal year 2005, a year in which $65,400,000 was transferred to the state, a whopping $80,000 went to the Problem Gambling Grant Fund.)

What’s ironic is that gamblers are worse off playing against the State of Kansas than the mob-run numbers rackets. As a letter-writer in the New York Times wrote: “They [organized crime] paid out about 85 percent of the amounts that were bet, retaining 15 percent or less for profits and expenses like payoffs.”

If we want to let people gamble, let’s at least have a lottery where players have a decent chance of winning. From Mr. Roberts again: “Under a private, competitive lottery system, the prizes would be bigger and the odds of winning would be higher. It would be a better world than the one we now live in, where people in search of hope are forced to pay a 35 percent tax to finance the college education of mostly upper-class children.”

air subsidies

Yup…subsidies for AirTran pick a winner, and the losers. But consider the alternative. 400 dollar flights to anywhere. Do any free marketeers really prefer driving to Tulsa to fly to Austin? Wichita would shrivel up and blow away without economic development incentives. This one is not perfect. And, Delta has a gripe. But check prices ALL OVER THE COUNTRY sometime. Yes the market is changing, in a manner that offers NO benefits for the passengers they so blithely isolate in middle America. By the way, concerning Mr. Weeks’ column in the Eagle today: I admire this man a great deal but he mis-states free market forces just a wee bit when he says “when price is lowered, less is supplied.” Competition lowers prices…thus prices go down as MORE is offered. THAT is the free market at work. One has only to look at the diminishing price of internet subscriptions, computers, watches (I saw one for a quarter today). Lots and lots of availability…ever-dwindling prices. Keep this blog flying. there is much I admire about the libertarian movement…it sure beats the pants-load out of the alternatives today…conservatives who are not conservative, liberals who are just plain zany, and beholden to just about anyone…and political parties that look more and more like pigs at the trough every day.

The Mystery of Capital

The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else
Hernando De Soto
Basic Books, 2000

The problem with most third world countries, Mr. De Soto tells us, is not that there is no capital, it’s that the capital is dead. Dead in the sense that it can’t be used to its full economic potential. It can’t be mortgaged, it can’t be divided into shares, and it simply can’t be used in the same way we make productive use of our assets in the West.

What is the difference between the West and the third world? The answer is formal property systems that allow the economic potential stored in property to be put to work. Until these poor countries develop the type of formal property systems that Western countries did, mostly during the 19th century, they are destined to remain poor.

The obstacles in the way of development of formal property systems are many, including social, political, and legal issues. One interesting fact is that third world countries do have property systems, in the sense that it is possible to know who “owns” property, but that knowledge is extralegal and local. It isn’t as valuable as the knowledge contained in formal property systems, but it is there nonetheless.

We see advocates for poor people in third world countries constantly calling for more aid or debt relief for these countries. It is sadly true that many people are hungry and in poor health, and formal property system that unlock capital won’t help these people tomorrow. But until poor countries start the process of developing formal property systems, they are unlikely to change and develop economies that can support themselves.

Unfortunately, everyone does not hold capital and private property rights in high regard. In 1992 Libya burned all land titles. Former socialist states are reverting to their former ways. In America, not all people agree that capitalism is good.

This book contains some interesting history of how private property systems developed in the United States.

Lack of Literacy is Threat to Liberty

Writing in a recent commentary, Stephen M. Lilienthal of the Free Congress Foundation expresses concern over the literacy skills of recent college graduates. The findings of some recent studies are quite troubling.

A recent study by the American Institutes for Research (“AIR”) contains what should be very unsettling news. The study, funded by the Pew Charitable Trusts, surveyed the literacy skills of graduates of four-year colleges and two-year community and junior colleges. The ability of the students to analyze newspaper stories, comprehend documents and balance a checkbook was assessed. Over half the graduates of four-year colleges and three-quarters of the graduates of junior and community colleges could not be categorized as possessing these “proficient” skills. A link to the press release announcing the study is at Here are a few of the findings:

More than 75 percent of students at 2-year colleges and more than 50 percent of students at 4-year colleges do not score at the proficient level of literacy. This means that they lack the skills to perform complex literacy tasks, such as comparing credit card offers with different interest rates or summarizing the arguments of newspaper editorials.

Students in 2- and 4-year colleges have the greatest difficulty with quantitative literacy: approximately 30 percent of students in 2-year institutions and nearly 20 percent of students in 4-year institutions have only Basic quantitative literacy. Basic skills are those necessary to compare ticket prices or calculate the cost of a sandwich and a salad from a menu.

Students about to graduate from college have higher prose and document literacy than previous graduates with similar levels of education; for quantitative literacy, differences between current and former college graduates are not significant.

There are no significant differences in the literacy of students graduating from public and private institutions. Additionally, in assessing literacy levels, there are no differences between part-time and full-time students. No overall relationship exists between literacy and the length of time it takes to earn a degree, or between literacy and an academic major.

The AIR study is not the only source of bad news regarding adult literacy. As Mr. Lilienthal reports:

The AIR Study follows the release last November of a study by the Association of American Colleges and Universities (“AACU”) which reported a disparity between what students believed they were learning in college and national studies that measure their writing, mathematical and critical-thinking skills. An AACU press release issued in conjunction with the report states, “While 77 percent of students report significant improvements in their writing skills in college, standardized tests show that only 11 percent of seniors scored at a ‘proficient’ level in writing. Standardized tests results indicate that only 6 percent of seniors graduate at the ‘proficient’ level in critical thinking skills, while 87 percent of students believe that college contributed a great deal to improving their skills in this area.”

A significant point of the AIR study is that “rapid changes in technology make it necessary for adults of all ages to use written information in new and more complex ways.” Higher levels of literacy are needed to enable workers to adjust to increased demands.

Some conclusions that we may make:

First, what does this tell us about the state of our schools, especially public schools and universities? When the majority of college graduates — presumably having learned at least something more than what they knew when they graduated from high school — aren’t considered proficient at basic intellectual tasks, how can we have confidence in the quality of our schools? For those who believe our schools are performing well, I would ask what they make of these findings.

Second, it is not surprising that people who can’t balance a checkbook have trouble with other financial matters. Things like understanding a credit card offer and agreement, what it means to be in debt, understanding the implications of different types of mortgages, understanding the powerful effects of compounding over time, or how to save and invest for the future seem to be beyond the grasp of someone who has trouble with a checkbook.

Third, we should also not be surprised that people fail to understand, or even to be interested in, the policies of our various governmental bodies and how they impact our lives. That is, how these policies really impact us, rather than how politicians say they impact us. This is what I see as the greatest threat to liberty. A society with more liberty, which is to say one with less government, places greater responsibility on individuals to provide for themselves and their families. In order to defend our liberty, we must be on the alert for false arguments and faulty reasoning. This requires citizens who care about liberty and are equipped to defend it.

As an illustration, recently I wrote how an advocate for increased spending on schools in Kansas (I was going to say increased spending on education, but given the findings of the above studies, I am hesitant to call it that) made a misleading argument. (See Kansas Families United for Public Education (KFUPE) on State Aid to Schools.) To show how it is misleading, I had to perform some calculations to convert nominal dollars to real dollars, that is, spending adjusted by the rate of inflation. Now I wonder if many people understand the difference and its importance, much less whether many people could analyze this evidence in the way that I did. Converting nominal dollars to real dollars, I should mention, is not very difficult to do.

If converting nominal dollars to real dollars appears difficult, then what about more thoughtful analysis of our economy and government policies? Analyzing policy means looking at the obvious effects, but also seeking to discover what might not be obvious: the unseen effects. Frederic Bastiat, in his pamphlet titled “That Which is Seen, and That Which is Not Seen” said this:

Between a good and a bad economist this constitutes the whole difference — the one takes account of the visible effect; the other takes account both of the effects which are seen, and also of those which it is necessary to foresee. Now this difference is enormous, for it almost always happens that when the immediate consequence is favourable, the ultimate consequences are fatal, and the converse. Hence it follows that the bad economist pursues a small present good, which will be followed by a great evil to come, while the true economist pursues a great good to come, — at the risk of a small present evil.

The economist Walter E. Williams summarizes the broken window fallacy that Bastiat recognized in his article:

Bastiat wrote a parable about this that has become known as the “Broken Window Fallacy.” A shopkeeper’s window is broken by a vandal. A crowd forms, sympathizing with the man, but pretty soon, the people start to suggest the boy wasn’t guilty of vandalism; instead, he was a public benefactor, creating economic benefits for everyone in town. After all, fixing the broken window creates employment for the glazier, who will then buy bread and benefit the baker, who will then buy shoes and benefit the cobbler, and so forth.

Those are the seen effects of the broken window. What’s unseen is what the shopkeeper would have done with the money had the vandal not broken his window. He might have employed the tailor by purchasing a suit. The broken window produced at least two unseen effects. First, it shifted unemployment from the glazier, who now has a job, to the tailor, who doesn’t. Second, it reduced the shopkeeper’s wealth. Explicitly, had it not been for the vandalism, the shopkeeper would have had a window and a suit; now, he has just a window.

As Professor Williams also brought to our attention, even educated people such as Princeton economist Paul Krugman failed to take into account all factors — the broken window fallacy that Bastiat illustrates — when he wrote in The New York Times that the destruction of the World Trade Center “could do some economic good.”

By failing to perform a little analysis on our own, we are liable to fall for whatever arguments politicians may make. But given the state of adult literacy, literacy that is a product of our public schools, how can we expect to be any different?

More good computer and Internet things


“Bloglines is a FREE online service for searching, subscribing, creating and sharing news feeds, blogs and rich web content.” That quote from Bloglines accurately describes what Bloglines is, but doesn’t really communicate its benefit. Here’s what Bloglines does for me: I like to keep current with the content of about two dozen blogs, mostly blogs in Kansas that might not publish new articles very often. (You can see a list of some of them here.) Instead of visiting each of these sites every day or so, I simply add them to my list of “feeds” in Bloglines. Then, Bloglines periodically checks the blogs for me and shows me which blogs have new or revised items. I can view the blogs through the Bloglines website, or by visiting the blog itself.

Bloglines works very well, but for it to work at all for a blog, the blog you’re interested in must publish a feed, and not all do. Try it at

Microsoft AntiSpyware

Previously I have been recommending Sypbot: Search and Destroy for antispyware. Recently I started to use Microsoft Antispyware and now recommend it. I believe its ease of use, automatic updating, and continuous background monitoring is better for most people. You can download it at

Google Analytics

If you have a website, you may be interested in knowing how many people visit your site. There are many web counters and other services to give counts of visitors and other statistics, but nothing I have seen comes close to Google Analytics. This free service, available at, provides detailed analysis of the traffic that visits your website. I recommend it for anyone with a website who wants to know more about the site’s visitors.

Tax increment financing in Iowa

Writing from Cedar Rapids, Iowa

Readers of The Voice For Liberty in Wichita are well aware that I believe that when the government provides subsidies to businesses — either in the form of cash payments or preferential tax treatment — we create a corrosive business environment. Government picks winners and losers for political reasons, rather than letting the market decide which companies are doing a good job. Government also spends money inefficiently. Instead of letting the market decide where to best allocate capital, government chooses who receives capital taken from the people through taxation according to the whims of politicians spending other peoples’ money.

It is no wonder that government-favored enterprises rarely do well. Capital markets are quite efficient, and if there is an unmet need, capital usually flows to fill the need. The fact that capital is not flowing to fill a need strongly suggests that the need is not real. Yet, governments may feel that a need is not being met, and they will allocate taxpayers’ capital to fill it, even though taxpayers on their own do not select to invest in the subject project.

This practice is not limited to the State of Kansas. There is a paper titled “Do Tax Increment Finance Districts in Iowa Spur Regional Economic and Demographic Growth?” written by two economics professors at Iowa State University. (The paper may be read at This paper shows that despite the claims of politicians and the very obvious benefit to the companies that receive the TIF financing, there is no benefit to the state as a whole.

Following are some quotes from the paper’s conclusion:

“There are several issues to consider about TIF ordinances and TIF outcomes in Iowa. From our research here and from our larger study of the topic, it seems apparent that the ease with which TIF district designation can be done in Iowa, along with the multiplicity of uses that TIF districts can be put, that the law now has become a de facto entitlement for new industry and housing development in much of the state with little to no evidence of overall public benefit or meaningful discussion of the mean costs of the practice. It also seems apparent that given the ease with which these districts can be developed that many cities may be preemptively capturing new valuation and tax revenues in the name of economic development, but that in the main, this preemption is likely yielding much more collective fiscal harm across taxing districts in the long run than good.”

“City officials believe that the TIF action was instrumental in job growth in their town and in their region. How could it not be? We have an investment, and we have a firm with jobs. On net, however, except for the increment to manufacturing jobs, there is no evidence of economy wide benefits (trade, all nonfarm jobs), fiscal benefits, or population gains. There is indirect statistical evidence that this profligate practice is resulting in a direct transfer of resources from existing tax payers to new firms without yielding region-wide economic and social gains to justify the public’s investment.”

“This analysis suggests that the enabling legislation for tax based incentives deserves revisiting. Though the TIF programs is highly popular among city government officials, and why wouldn’t it be given the growth in property tax yield over the years, there is virtually no evidence of broad economic or social benefits in light of the costs.”

Kansas Families United for Public Education (KFUPE) on state aid to schools

As of today (February 2, 2006), the website for Kansas Families United for Public Education (KFUPE) (located at states, under the heading “The Crisis”: “State aid has failed to keep pace with inflation.”

I was puzzled by this statement, as I thought we were spending more and more on education each year. So I decided to investigate.

The Kansas State Department of Education has a table of recent education expenditures in Kansas. The data is located at

Here is the table of spending data:

Spending in Nominal Dollars
Total Spending Per Student
School FTE* State Federal Local Total State Federal Local Total Total
Year Enrollment Aid Aid Revenue Expenditures** Aid Aid Revenue Expenditures Increase
1993-1994 437,210.1 1,468,606,823 137,260,114 1,011,858,024 2,617,724,961 3,359 314 2,314 5,987 3.44
1994-1995 440,684.2 1,558,335,916 140,485,296 1,012,554,570 2,711,375,782 3,536 319 2,298 6,153 2.77
1995-1996 442,465.9 1,604,933,171 150,316,623 1,061,918,793 2,817,168,587 3,627 340 2,400 6,367 3.48
1996-1997 445,767.3 1,618,449,030 181,533,320 1,121,816,183 2,921,798,533 3,631 407 2,517 6,555 2.95
1997-1998 448,609.0 1,815,684,144 189,120,462 1,058,428,663 3,063,233,269 4,047 422 2,359 6,828 4.16
1998-1999 448,925.7 2,035,194,082 202,565,725 1,004,736,639 3,242,496,446 4,533 451 2,238 7,223 5.79
1999-2000 448,610.3 2,110,484,390 220,780,350 1,071,444,132 3,402,708,872 4,704 492 2,388 7,585 5.01
2000-2001 446,969.9 2,152,622,486 261,038,153 1,172,918,480 3,586,579,119 4,816 584 2,624 8,024 5.79
2001-2002 445,376.6 2,200,529,799 310,104,678 1,269,928,113 3,780,562,590 4,941 696 2,851 8,488 5.78
2002-2003 444,541.4 2,277,804,680 340,728,648 1,335,185,546 3,953,718,874 5,124 766 3,004 8,894 4.78
2003-2004 443,301.8 2,124,578,761 376,908,121 1,592,564,728 4,094,051,610 4,793 850 3,593 9,235 3.83
2004-2005 441,867.6 2,362,223,172 398,667,040 1,528,524,331 4,289,414,543 5,346 902 3,459 9,707 5.11

Here is the Consumer Price Index for the relevant years:

(1982-84 = 100)
Year CPI Inflation
1993 144.5
1994 148.2 2.6%
1995 152.4 2.8%
1996 156.9 3.0%
1997 160.5 2.3%
1998 163.0 1.6%
1999 166.6 2.2%
2000 172.2 3.4%
2001 177.1 2.8%
2002 179.9 1.6%
2003 184.0 2.3%
2004 188.9 2.7%

Applying some arithmetic to the figures in the spending table produces this table of inflation-adjusted spending:

Spending Change Year to Year, Real Dollars
Total Spending Per Student
School FTE* State Federal Local Total State Federal Local Total
Year Enrollment Aid Aid Revenue Expenditures** Aid Aid Revenue Expenditures
1994-1995 0.8% 3.5% -0.2% -2.4% 1.0% 2.6% -0.9% -3.2% 0.2%
1995-1996 0.4% 0.2% 4.0% 2.0% 1.0% -0.3% 3.6% 1.6% 0.6%
1996-1997 0.7% -2.1% 17.3% 2.6% 0.7% -2.8% 16.3% 1.9% 0.0%
1997-1998 0.6% 9.7% 1.8% -7.8% 2.5% 9.0% 1.4% -8.4% 1.8%
1998-1999 0.1% 10.4% 5.5% -6.5% 4.2% 10.3% 5.2% -6.6% 4.2%
1999-2000 -0.1% 1.5% 6.6% 4.3% 2.7% 1.5% 6.7% 4.4% 2.7%
2000-2001 -0.4% -1.3% 14.4% 5.9% 2.0% -0.9% 14.8% 6.3% 2.3%
2001-2002 -0.4% -0.6% 15.5% 5.3% 2.5% -0.2% 15.9% 5.6% 2.9%
2002-2003 -0.2% 1.9% 8.2% 3.5% 3.0% 2.1% 8.3% 3.7% 3.2%
2003-2004 -0.3% -8.8% 8.2% 16.6% 1.2% -8.5% 8.5% 16.9% 1.5%
2004-2005 -0.3% 8.3% 3.0% -6.5% 2.1% 8.6% 3.4% -6.2% 2.4%

As you can see, there are some years, most notably 2000 to 2004, where the “State Aid” figures, adjusted for inflation, are mostly decreasing. The statement on the Kansas Families United for Public Education website, therefore, could be construed as true. But over the period 1994 to 2005, “State Aid” increased by 61%, while inflation increased by 41%. So to make that statement true, you have to be looking at only recent history.

Also, to make that statement true, you have to be looking at only a small part of the total picture. “State Aid” is only part of the total source of funds that schools have. Schools also receive money from “Federal Aid” and “Local Revenue.” For 2004-2005, “State Aid” was 55% of the total spent on schools in Kansas, and for the period in the tables above, “State Aid” was 57.6% of total spending. When you consider the total amount spent, there is no year in which the increase in total spending was less than the rate of inflation for that year.

Then, there is even the larger picture. In recent years the number of students in Kansas has been declining. This means that the total spent per student increases at a faster rate than total spending.

Does it matter that “State Aid” might not be increasing as fast as total school spending? I don’t think the schoolchildren in Kansas can tell. But I should not make such a hasty conclusion. Given the mountain of regulations that public schools must comply with, there may be restrictions on how funds from certain sources may be spent, and those regulations might mean that the total available for schools to spend can’t be allocated optimally.

But I think I can safely conclude this: when advocates for school spending make the case that “State aid has failed to keep pace with inflation,” we should examine the total picture.

Political Decision Making Increases Conflict

A column by economist Walter E. Williams (Why we’re a divided nation) strongly makes the case for more decision making by free markets rather than by the government through the political process.

When decisions are made through free markets, Dr. Williams says, both parties win, because in a free market, parties voluntarily enter into only those transactions that benefit them.

When decisions are made for us by the government, however, it is almost always the case that one party’s gain is someone else’s loss. Therefore, there is conflict. The more decisions made through politics, the more potential for conflict. Coalitions arise in order to try to get more from the government, and the most effective coalitions “are those with a proven record of being the most divisive — those based on race, ethnicity, religion and region.”

The final paragraph of the column is this: “The best thing the president and Congress can do to heal our country is to reduce the impact of government on our lives. Doing so will not only produce a less divided country and greater economic efficiency but bear greater faith and allegiance to the vision of America held by our founders — a country of limited government.”

In an earlier post, I mentioned some columns by Dr. Williams that I thought were important. This column is certainly one of his best, as it very simply, in one short page, shows us a major fault in our current political landscape.

John Bogle on Investing: The First 50 Years

John Bogle on Investing: The First 50 Years
John C. Bogle
McGraw-Hill, 2001

“The one great secret of investing is that there is no secret.”

“Investment success, it turns out, lies in simplicity as basic as the virtues of thrift, independence of thought, financial discipline, realistic expectations, and common sense.”

John C. Bogle, whom I greatly admire, founded Vanguard investment management company, a mutual fund company owned by its shareholders. He pioneered the no-load mutual fund and the index fund. These two ideas have made it possible for the average person to be in charge of their investments and do better than any of the Wall Street professionals that make up the financial establishment.

A no-load mutual fund is one that charges no sales fee or commission, either to buy or sell the funds.

An index fund is one that is managed to match the performance of a broad market index, such as the S&P 500 Index or the Wilshire 5000 Index for stocks. There are bond indexes, too. Investing in an index mutual fund is like buying everything (“the haystack”) instead of searching for needle.

Actively managed funds employ high-powered investment professionals who use many different techniques to select securities that they believe will perform better than other funds. It would seem that these funds should do much better than the passive index fund strategy. But the results don’t show this to be true. That’s what Mr. Bogle means when he says there is no secret.

For the period 1987 through 1997 (this is from a speech given in 1999), Morningstar selected what they term the equity fund “Manager of the Year.” For these managers, not even one of them beat the S&P 500 Index in the following year. Not even one was able to turn in an above average result.

From 1993 through 1998 the New York Times asked five investment managers to manage a hypothetical portfolio. The portfolios started with $50,000. At the end the average advisor portfolio grew to $103,500. Does that seem like a lot of growth? Most people would probably be happy with that. But the market average, as represented by the S&P 500 Index, grew to $156,100 over the same period.

Any comparison of index funds to actively managed funds will show that, over time, the index funds do better. For short periods, some actively managed funds will do better than the index funds. The problem is that we don’t know which funds will do better.

Why do index funds outperform actively managed funds over time? The answer, according to Mr. Bogle, is costs. Investors pay costs in the form of sales charges or loads when they buy (and sometimes when they sell) funds, actively managed funds often have some portion of their assets held as cash reserves, actively managed funds incur high transaction costs as they buy and sell securities, and actively managed funds usually charge higher management fees. Plus, actively managed funds can generate tax bills for their holders, too. These costs substantially reduce the return to investors in actively managed funds. The tyranny of compounding tells us that even small differences in returns can make huge differences in the amount of money one can have as they start retirement. An investment in the S&P Index would be worth about twice as much as an investment in the average equity fund over the period 1949 to 1998.

The innovations that Mr. Bogle has been responsible for are invaluable. The collections of speeches in this book are fascinating to read, and following the advice in them will lead to a lifetime of success in investing. It is not, however, the same advice you’ll get from a stockbroker or from most financial advisors.

John Todd on Eminent Domain in Kansas

To: The Kansas House/Senate Joint Committee on Economic Development.

Subject: Testimony Regarding Eminent Domain at the October 11, 2005 hearing.

My name is John Todd. I am a real estate broker and land developer from Wichita.

I support the proposition to amend article 15 of the constitution of the state of Kansas by adding a new section thereto, concerning eminent domain as follows:

“Private property shall not be taken except for public use, and private property shall not be taken without just compensation. The taking of private property with the intent to or in anticipation of selling, leasing or otherwise transferring any interest in the property to any private entity is not a valid public use and is prohibited.”

I also support the immediate passage of legislation that would codify into law the exact meaning of the above amendment language. This would replace existing statutes.

I do not support any additional language in the amendment or in any immediately passed legislation that would in any way mitigate the private property rights protection contained therein.

The keys to the economic freedoms we enjoy in this country are “individual liberty”, “private property rights” and the “free market system”. Examples of failed economic systems like the former Soviet Union emphasized the “collective good”, “state owned property” and “state controlled markets”. Allowing governments the power to take privately owned homes and businesses from individuals and turn them over to private developers for potentially more profitable, higher-tax uses, is a good example of eminent domain abuse done for the “collective” benefit of a community. Using eminent domain to seize property for private/public partnerships projects is the rage today, privatizing profits for the inside group, and reserving losses for public taxpayers. The governments participation in the process of taking private property from one private group for the benefit of another private group, and placing governments in a position to choose which business groups wins and which fails, flies in the face of private property rights, freedom, and free market economics.

A quote by Nobel Prize winning economists Milton Friedman, and Gary Becker as well as economics history Professor Douglass North in Tom Bethell’s book “The Noblest Triumph, Property and Prosperity Through The Ages” is appropriate here. “In an economically free society, the fundamental function of government is the protection of private property and the provision of a stable infrastructure for a voluntary exchange system. When a government fails to protect private property, takes property itself without full compensation, or establishes restrictions (and follows policies) that limit voluntary exchange, it violates the economic freedom of its citizens.”

Please support the eminent domain reforms I have suggested.

The Kansas Productivity Puzzle

The Kansas Productivity Puzzle

Lance Kinzer
Kansas State Representative, Dist. 14

Among the many interesting things that occurred during the first week of the legislative session perhaps the most compelling involved a presentation to the House Tax Committee by Professor Arthur Hall of the Center for Applied Economics at The University of Kansas. Dr. Hall’s presentation was focused on something he calls The Kansas Productivity Puzzle. Simply put, Kansas lags behind both the national average and other states in our region in the crucial economic category of productivity growth.

In economic terms productivity is the value of goods and services per worker. Kansas falls short with respect to productivity growth in every sector of our economy except durable goods manufacture. This is true not merely when the comparison is made against the nation as a whole, but also when the comparison is made against other agricultural states in our region. To understand why this matters it is important to recognize that productivity growth is a key factor in determining wages. It is also a crucial determinant in overall economic growth. If Kansas had enjoyed merely average productivity growth over the past 25 years our state economy would be some $18 billion dollars larger than it is at the current time. Furthermore, wages in Kansas lag some $5,000.00 per worker behind the national average for similarly educated workers.

The impact of sub-par productivity growth also has a negative impact on unit labor costs for Kansas businesses. This is merely a fancy way to say that businesses in Kansas get less bang for their buck than elsewhere in the country. Indeed, Dr. Hall reports that Kansas has the 3rd worst unit labor cost growth rate in the country. The data suggests that this ‘productivity puzzle” is both long term and systemic. Understanding all of the various factors that contribute to our productivity lag is a complicated question. That having been said, Dr. Hall’s current hypothesis is that there is an important relationship between the size of government in Kansas and our low productivity growth.

In particular, Dr. Hall points out that Kansas has the 4th highest number of local government employees per capita in the nation. Furthermore, the number of local government employees in Kansas is growing at the 4th highest per capita rate in the country. Part of this problem may result form the relatively large number of local government units that exist in Kansas. For a state of our size we have a large number of counties and school districts, and employment in these sectors of government is growing at a rapid rate.

Taking school districts as an example, during the 30 year period between 1972 and 2002 the total K-12 student population in Kansas decreased by 1%, yet the number of teachers and administrators employed by our schools have roughly doubled. Indeed, if the school district employee to student ratio in Kansas were the same today as it was when I was in high school about 15 years ago the cost savings would be approximately $400 million dollars per year. Looking at non-K-12 local government employees in the same way the cost savings would be more than $315 million dollars per year if local government worker per citizen numbers returned to their 1987 level.

The issues of slow productivity growth and fast government sector growth brought to light by Dr. Hall have serious implications that all Kansas citizens and policy makers should consider. While seemingly abstract economic categories like productivity growth may appear detached from everyday life, they have important real world implications. In sorting through how best to address the Kansas Productivity Puzzle it is important to remember that the only way to increase overall productivity is by helping individual Kansas businesses to improve their productivity. This involves enacting polices that provide grater access to the capital, both financial and intellectual, that leads to innovation and in turn growth. It is also crucial that we keep in mind the negative impact an ever growing government sector can have on productivity growth.

The solution to this complex problem may not then be so obscure after all. Policies that limit the size and growth of government and a tax and regulator structure that encourage business growth appear the best available solutions to addressing the Kansas Productivity Puzzle.

Public Access, or lack there of

Dear Bob’s Blog, I recently moved to wichita from chicago… a while b4 i decided to move I had completed my Comcast public access certification. Comcast is basicaly the equivalence to Cox here. Un / Fortunately I was unable to put it to any good use while in Chicago due to some circumstances…. however I was searchin around the web and came across your blog entry on the lack of public acess for the public here in wichita. I wondered if you had any luck with your letter and/or knew any sources of information on the subject. I would be willing to put forth some effort in helping our voice be heard…

The decline In Kansas continues

The Decline In Kansas Continues
By Karl Peterjohn, Executive Director Kansas Taxpayers Network
January 17, 2006

The relative decline of Kansas continues. This decline is vividly demonstrated when state and federal revenue growth is examined.

Total federal revenues grew 13.9 percent last year to total $2.142 trillion dollars. This was an increase in federal revenues of $262 billion. This increase was almost twice the percentage rate of growth of Kansas state revenues that grew only 7.1 percent or $322 million in fiscal year 2005 that ended June 30, 2005. The federal revenue figures are for the fiscal year that ended September 30, 2005.

The variance in this growth between Kansas and the other 49 states is important. This data is another confirmation of two recent reports that compared Kansas economic trends and reported distressing results. K.U. economics professor Art Hall and Wichita State University’s Center for Economic Development and Business Research’s (CEDBR) Janet Harrah have issued separate reports indicating that Kansas is lagging in a number of key economic indicators.

Harrah’s 2005 report showed that income, population, and job growth were lagging in Kansas. This CEDBR study looked at all 50 states using six measurements for population growth, income, and jobs (see: Kansas lags nationally and, even more distressing, was at or near the bottom in almost every category used in this 10 year survey from 1994-2003. Harrah’s study used the most recent 10 year period of federal data that was available.

Professor Hall’s “Local Government and the Kansas Productivity Puzzle,” focused upon weak productivity in Kansas as well as the sizable growth in government that appears to be a factor in the poor level of productivity growth. Hall’s work was particularly distressing due to the fact that Kansas scored poorly among all plains regional states in most of the measurements he examined. So not only was Kansas lagging nationally, it was also lagging regionally (see:

Kansas is a laggard being pulled by the faster growing parts of the United States. This state has an economic growth problem that must be addressed due to the high taxes and resulting high level of government spending in this state. This is a reality that can certainly be ignored by state policy makers in Topeka. However, this is a reality that cannot be denied. Kansas is in economic trouble.

Attacking lobbyists wrong battle

The economist Walter E. Williams has a column dated January 18, 2006, that places the current lobbying scandal in proper perspective.

(We should caution Democrats against overindulging in schadenfreude [enjoyment obtained from the troubles of others] at this time. Democrats took money from Jack Abramoff too, and if there were more Democrats in positions of power, you can be sure there would be more money given to Democrats.)

Professor Williams explains to us that given the “awesome growth of government control over business, property, employment and other areas of our lives” Washington politicians (and I would add state and local politicians too) are in the position to grant valuable favors. “The greater their power to grant favors, the greater the value of being able to influence Congress, and there’s no better influence than money.”

Continuing: “The generic favor sought is to get Congress, under one ruse or another, to grant a privilege or right to one group of Americans that will be denied another group of Americans. A variant of this privilege is to get Congress to do something that would be criminal if done privately.”

“Here’s just one among possibly thousands of examples. If Archer Daniels Midland (ADM) used goons and violence to stop people from buying sugar from Caribbean producers so that sugar prices would rise, making it easier for ADM to sell more of its corn syrup sweetener, they’d wind up in jail. If they line the coffers of congressmen, they can buy the same result without risking imprisonment. Congress simply does the dirty work for them by enacting sugar import quotas and tariffs. The two most powerful committees of Congress are the House Ways and Means and the Senate Finance committees. These committees are in charge of granting tax favors. Their members are besieged with campaign contributions. Why? A tweak here and a tweak there in the tax code can mean millions of dollars.”

What is the solution? I believe, and I know Dr. Williams does too, that we should reduce the power that government has over our lives. I believe we should rely more on free markets for solutions to problems, as these markets are composed of people voluntarily entering into transactions, rather than a coercive government forcing decisions on us based on who lobbied the hardest. Dr. Williams also relates this story and solution: “Nearly two decades ago, during dinner with the late Nobel Laureate Friedrich Hayek, I asked him if he had the power to write one law that would get government out of our lives, what would that law be? Professor Hayek replied he’d write a law that read: Whatever Congress does for one American it must do for all Americans.”

Hayek also wrote in his book The Road to Serfdom: “As the coercive power of the state will alone decide who is to have what, the only power worth having will be a share in the exercise of this directing power.” We are well down this road, where government becomes more important than liberty and individuality. This is the battle we need to fight. Lobbying scandals are just a symptom and manifestation of the larger problem.

Who is more compassionate?

Arthur C. Brooks, writing in the January 16, 2006 Wall Street Journal, debunks a stereotype about conservatives (those in favor of smaller government) being less compassionate and caring than those who are in favor of more government spending on social programs.

Professor Brooks tells us that according to the General Social Survey in 2002, “the proponents of government spending are six percentage points less likely to give money to charity each year than the opponents, and a third less likely to give money away each month.” But that’s money. What about something else, like donating blood? “Once again, it is those opposed to government aid. These supposedly uncompassionate folks are 25% of the population, but donate more than 30% of the blood each year. Meanwhile, supporters of government spending to the poor are 28% of the population, but donate just 20% of the blood. If the whole population gave blood like opponents of social spending do, the blood supply would increase by more than a quarter. But if everyone in the population gave like government aid advocates, the supply would drop by about 30%.”

Is this an example of “do as I say, not as I do?” Or are advocates of big government really more comfortable with government-run social program than private programs?

Individual liberty, limited government, economic freedom, and free markets in Wichita and Kansas

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