Today’s Washington: Headless and Heedless

December 14, 2009

Before taking office, President Barack Obama and his team said they would take a rigorous, “evidence-based” approach to public policy. But the president and Congress are whitewashing scholarly policy research or simply ignoring it across the economic spectrum – in public expenditures, industrial policy, health-care reform and regulation of the auto and financial industries.

Recently, the administration claimed that the stimulus had been responsible for an increase of three to four percentage points in third-quarter GDP. The proper question is whether the projects that the stimulus funded can be justified. Do their benefits exceed their costs? My research suggests that they don’t, so it is hard to believe that they are spurring much growth.

Public-highway and airport expenditures are extremely wasteful because funds are broadly distributed across the country, often to locales with little traffic, instead of being targeted to metropolitan areas with the greatest highway and airport congestion.

Two tiny villages in Alaska are getting $28 million in airport funding, more than New York and other large metro areas. Nearly $1 million is going to design a project at a Delaware air park. Some $700,000 is going to a small, poorly managed airport in Kentucky.

On highway projects: Washington state is allocating little federal money to Seattle, although it’s one of the most congested cities in the country, because the state legislature decided most of the money should be given to other regions. West Virginia is using some of its funds for the infamous “Corridor H,” supposedly to better connect itself to the Eastern seaboard – even though Virginia has no plans to link up with the eastern end of the highway.

The administration credited the cash-for-clunkers program with having boosted gross domestic product by $3.6 billion, ignoring empirical evidence to the contrary: New cars are driven more than older vehicles, and the new cars that were purchased don’t get much greater mileage than the clunkers. One academic study has found that the program’s costs outweighed the benefits by nearly $1.5 billion.

The administration claimed that General Motors and Chrysler had to be bailed out lest the American manufacturing base disappear overnight. But where was the evidence? Instead of carefully weighing benefits to individual workers and customers, the White House hit all taxpayers with a cost of $90 billion.

The evidence indicates that consumers have been able to purchase better and cheaper cars from foreign auto makers building vehicles in the U.S. with American labor. Why not let this trend continue, instead of claiming without evidence that a liquidated GM and Chrysler would take down the entire industry?

The administration also has taken a tough stand on fuel economy. It plans to require that new cars and light trucks average 35.5 miles per gallon by 2016, four years sooner than current law requires. But it has failed to acknowledge the research showing that the indirect costs of fuel-economy standards include higher vehicle prices, additional driving because operating costs are lower, greater emissions as people retain used vehicles longer, and reduced safety for drivers and passengers. These outweigh the direct benefits of greater fuel economy.

Looking at the financial sector, the Obama administration has acknowledged that current regulations have gaps and weaknesses. It has called for greater oversight and transparency of financial markets and greater protection of consumers and investors. But its proposed regulatory overhaul sidesteps the evidence that numerous efforts, from the Securities Act of 1933 to the Sarbanes-Oxley Act of 2002, failed to reveal the existence of serious information imperfections in financial markets. To be sure, the current crisis revealed the existence of serious information problems, but the administration hasn’t offered any evidence that its reforms can address those problems or prevent future ones.

Health-care reform legislation continues to move forward without any persuasive evidence that it will slow spiraling health-care costs. Experts warn, for example, that expanding preventive services won’t stop medical spending from escalating, but the administration hasn’t listened.

Inattention to academic research even pervades the Department of Justice. Christine Varney, the new head of the antitrust division, wasted little time in announcing that the department planned to restore an aggressive enforcement policy against corporations that abuse their market dominance to keep competitors from gaining share. There is little scholarly evidence indicating that antitrust policy has improved consumer welfare, but Varney hasn’t explained why vigorous prosecution is preferable to relying on the market to promote competition.

Overall, Congress and the Obama administration are focusing on alleged problems, ignoring academic scholarship that identifies weaknesses in spending and regulatory solutions. If history is any guide, the result will be ideology-based public policies that lack sound empirical justification and that turn out to be ineffective, if not counterproductive. In other words, President Obama hasn’t shown that he believes constructive policy reform should be based on the assessment of professional expertise.

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