Testimony before the Senate Education Committee on Senate Bill 1506
By
Robert D. McTeer
Distinguished Fellow
National Center for Policy Analysis
March 29, 2007

Madam Chair, Senators, my name is Bob McTeer.  I'm representing the National Center for Policy Analysis, which is a nonpartisan, free-market think tank headquartered in Dallas.  Before coming to NCPA, I was Chancellor of the Texas A&M University System for two years, and before that I was President of the Federal Reserve Bank of Dallas for 14 years.

For the record, I attended public schools, both my sons attended public schools, and both my grandchildren attend public schools.  I believe in public schools, and I have the highest admiration for public school teachers. More school choice, in my opinion, will make public schools better-not harm them.

We did have some choice in where our sons attended school in Virginia and Maryland.  We moved to neighborhoods known to have excellent schools.  Homes were more expensive in those neighborhoods because of their schools, but we were fortunate enough to afford it-barely.  But I don't think choice should be limited to those who can afford it, and it shouldn't be based on real estate.

As an economist, I've witnessed the power of competition to improve quality everywhere I've seen it introduced.  I was a college student when we started importing high quality, low cost Honda's and Toyota's in large quantities.  Those who purchased them enjoyed those benefits immediately, but it wasn't long before the added competition began to improve our Fords and Chevrolets and our fathers' Oldsmobiles.

In the 1980s, I ran the Federal Reserve office that processed and cleared checks in the greater Washington, D.C. and Baltimore areas.  It was a large operation in part because we provided that service to banks free of charge.  Large correspondent banks couldn't compete effectively against our zero price-we had a monopoly. 

Then Congress opened up competition by requiring us to charge for our check and other services and recover our costs.  Overnight, our check volume fell by almost half.  Then we got serious about quality and service, and earned much of our lost volume back.  Competition and choice made us-the government provider-as efficient as the private sector.

As Chancellor of the A&M System, I became aware of how many of our high school graduates entered college unprepared for college level work and required remedial instruction-not so much at the flagships, but at most of our other universities.  Only later, when the Friedman Foundation study came out, did I realize how many of our students were dropping out before high school graduation.  Statewide, it was about a third.  In the inner cities, it was about half.

This is, of course, tragic for the dropouts. But it's also a major financial burden for the taxpayers of Texas-even those outside the areas covered by this pilot choice program.

We are in a new, global, information economy-an economy that requires education, knowledge and stills.  We are in an economy where the penalty for not having those attributes grows larger every day.  The Texas education system increasingly resembles that of an underdeveloped, third-world nation-elites at the top with the under-served below.

In this country, we have world-class universities, but second-class primary and secondary education in too many schools.  Why?  What is the source of the difference?  In higher education, we already have choice and competition.  In primary and secondary education, we have government monopoly.

It's not the teachers.  It's not the schools.  It's the system.  The system is broken, and more of the same-meaning more money-has not fixed it.

A limited school-choice pilot program is a necessary start to a better approach.  It may cost some money up front.  But any additional cost will be more than offset by higher state tax revenues and low medicade and prison costs.

And the cost of doing nothing is the highest cost of all.

Thank you.

Shortly after the liquid bomb scare and the new rules regarding  liquids in carry-on luggage, a sweet older lady in line ahead of me was turned away for having her small containers in a plastic baggy deemed too large by the TSA.  Her transparent baggie was not full, but it was slightly larger than the "official" quart size. Next time I packed, I decided to be extra good by using a transparent baggie even smaller than regulation size. For my trouble I received a lecture about appropriate baggy size-not too large, not too small, but just right. After all, rules is rules.

These episodes follow several others at the same little airport where one TSA agent would watch me show my boarding pass and picture I.D. to his colleague standing three feet away and then ask me for the same after I'd taken only one step. By the way, I learned that the required picture I.D. issued by the government does not mean a picture I.D. issued by the government.  I tried my official Chancellor's I.D. with picture issued by a state agency. But it was the wrong state agency, they decided.  It had to be the Department of Transportation.  They would only accept a driver's license. "No Chancellor, we have to see your driver's license. No exceptions." And these guys aren't even unionized yet.  Just wait.

Coincidentally, the Geezenslaw Brothers, a country music comedy duo alleged to be from Snook, Texas, less than 10 miles from the airport in question, have a song titled A Five Dollar Fine [for Whining] about "too many fools making too many rules." TSA people are not fools; they are good people and as smart as the rest of us, I'm sure.  But, as Lord Acton pointed out, power corrupts, and nobody is more powerful than a bureaucrat with attitude and the power to make you miss your flight.  How else can you explain making you walk the full cattle-walk maze at Love Field when traffic is light, when it's obviously designed for large crowds?  And Love is one of the friendliest airports in the country.  Yet, they make you walk back and forth, back and forth, for many laps, even when you are alone, before you can show your boarding pass and picture I.D. I guess the maze is to show us who is boss. Oh well, rules is rules.

Not all rigid rules are made by government, however.  When they still had the remote terminal at DFW for American Eagle passengers, there was one little place where you could get a beer while waiting-one place, that is, if you could show proper proof of age.  Now, I'm all for proof of age to buy a beer, but for a 63 year old?

The first time I was "carded" there, I said, "You're kidding."  "Nope.  It's the rule.  No exceptions."  I told him I had two sons over 40 years old, and my grandkids were almost old enough to buy a beer legally.  "No exceptions."  Rules is rules.

I had that same conversation more than once on different occasions.  I kept thinking they would see the error of their ways.  My favorite occasion was during the same week that a ticket agent at the movies gave me the senior citizens discount without asking my age.  One guy gives me the senior citizens discount; another cards me during the same week. Go figure.

The first time I was called to jury duty, the accused was charged with possession of a very small amount of an illegal substance.  He was not charged with selling or intending to sell; just possessing.  He was probably guilty as charged, and more.  But the problem for me was a mandatory minimum sentence for that charge of several years in prison.  As a potential juror, I was questioned in the court room; I was questioned in the judge's chambers.  But I couldn't get past the fact that the crime and the mandatory punishment were way out of proportion. So, I was rejected as an unsuitable juror.  Some jury discretion on sentencing seems appropriate to me, but the government had apparently lost faith in the good judgment of its citizens.  In place of judgment, we now had a mandatory rule.  And rules is rules.

The book I wish I had written was actually written by Phillip Howard.  Titled The Death of Common Sense, it's about the unintended consequences that often result when those who write the laws (rules) try to cover all the bases in the laws themselves to eliminate the role of human judgment in their interpretation and application.  But, sometimes one size just doesn't fit all.  Zero tolerance sounds better in the abstract than it often does in its application.  Sometimes we need the freedom to cut each other some slack, or not.

What does all this have to do with anything?  What am I whining about?  It's my feeble attempt to give one explanation as to why I believe in limited government and individual liberty.  Lawmakers and law enforcers are good people who, in their minds, are doing the Lord's work.  But laws and rules are necessarily one size fits all.  By definition they are substitutes for individual choice and individual liberty.  So, by definition they sub-optimize our welfare.  Who knows each of us-our needs, our wants, our circumstances-better than we do, individually.

Let me be clear that I'm not talking about majority rule or democracy, which are good, but only when collective action is necessary.  Our welfare is maximized not by majority rule, but by individual liberty. Letting all the guys in the office vote on whether to wear bow ties or long neck ties is probably better than having the boss decide, but not as good as letting each individual decide for himself.

One problem with laws and government regulations is that they necessarily substitute collective judgment for individual judgment.  While this may be necessary at times, it shouldn't be undertaken lightly.  We can't individually provide for our national defense, or the resolution of legal disputes, or orderly traffic flow.  Modern government probably has to go beyond a traffic light and a constable, but it has no doubt gone farther than is necessary or desirable.  Maybe it's become necessary for the government to tell us how large our tube of toothpaste can be in carry-on luggage, but is it really necessary for government to mandate the size of the transparent baggy it goes in?

The Texas central time zone serves me well at night, especially on New Year's Eve when New York drops the ball at 11 PM. Mornings are another matter.  I have to rise before the rooster crows for my East Coast entertainment, which involves crowing and dropping of balls of a different kind.

The first Friday of the month (sometimes the second), however, is worth getting up for. That's when the talking heads on the financial news programs explain the newly-released employment numbers for the previous month. I always smile when they tell me that what matters isn't how much employment grew, but how much it grew relative to expectations.

Those expectations are like the yellow first-down line on TV football, presumably visible to everyone in TV land, but not to the players. Except that the amount needed for a first down in employment growth varies from month to month and often seems based on nothing in particular.

Just before last December's employment numbers were reported on January 5, CNBC put the all-important consensus expectation at 115,000 while the Wall Street Journal had it between 110,000 and 115,000.  The official estimate came in above those expectations, at 167,000, which made it a "strong" number. That strength pushed the stock market down for a few hours, presumably because investors and traders thought it made the Fed less likely to lower interest rates, and they apparently like the Fed's medicine for a weak economy more than they like a strong economy.

The December employment-growth estimate of 167,000 remained the official number until it was revised up to 206,000 on February 2, and on up to 226,000 on March 9. March 9 was also when the initial estimate for February was announced and when the January number, as well as the December number, was revised up, from the initial estimate of 110,000 to 146,000. If recent experience is a guide, it will be revised up once again next month.  Do you detect a pattern here?

For some time now, official employment estimates have been revised substantially upward, often more than once. The first estimates, which get most of the press and TV attention, have been rather lackluster, while the final numbers have been much stronger.  This must be a source of great frustration to economic policymakers and others in the Administration.  It contributes to the Rodney Dangerfield economy.

The February employment increase of 97,000 announced on March 9 was the smallest in some time, but the commentators didn't make much of it since it was close to their consensus estimate of 100,000. The companion announcement of the February unemployment rate was a decline from 4.6 percent to 4.5 percent.

How did the smallest employment gain in some time cause the unemployment rate to decline?

The general answer is that the employment number and the unemployment number that are reported together and discussed together aren't directly related.  The employment number comes from an establishment survey of payrolls while the unemployment rate is calculated from a separate household survey.  This has become a pet peeve of mine-not that they are separate and unrelated, but because they are reported together and discussed together as if they are related.

Usually when a decline in the unemployment rate accompanies only a small increase, or even a decrease in reported employment, it's because there was a larger increase in employment in  the household survey.  In the particular case of February, however, employment actually declined slightly in the household survey and the decline in the unemployment rate resulted from an even larger decline in the labor force, i.e., by more people who are not employed failing to look for a job during the survey period. 

Since I was going to be interviewed on the employment report later in the day, I listened carefully to see if anyone on financial TV or radio mentioned the household survey as the source of the apparent discrepancy between the reported employment and unemployment numbers.  If anyone mentioned the household survey at all, I never heard it.

The public would be better served if the Labor Department included the household data more prominently in its announcement and if the financial reporters gave it more attention.  As it is, I'm afraid that the apparent discrepancy between the reported headline numbers will cause the public to lose faith in the accuracy of our official statistics.

The discrepancy between the establishment and household survey results has become significant in recent years, both because if its size and its recent tendency not to converge quickly if at all. Conflicting signals are sent regarding the strength of the economy, which, I know for a fact, even policymakers aren't immune to. Misleading data can lead to bad policy.  

That was certainly the case earlier in the current expansion, when I wrote an op ed on it for the New York Sun. The favored payroll survey was persistently and substantially weaker than the household survey which exaggerated the impression of weakness in the economy. I kept asking my research staff at the Dallas Fed if the stronger household survey didn't better reflect the economy at the time, but they wouldn't humor me, largely because of the payroll survey's larger sample size. On their side of the argument was elite academic opinion, which I used to define as opinion coming from universities without good football teams.   

The answer to the "so what" question about that continues to be important.  During the past two years, net employment growth as measured by the household survey has been substantially greater than the establishment measure.  We aren't talking about monthly diversions here.  This one has lasted two years.

Whatever the merits of the two measures in absolute terms, the relative merits of the household survey are surely rising as our entrepreneurial job churn scatters workers across the landscape.  More and more of us are dropping off large establishment payrolls and working from home, as I am now. My favorite Texas picker-poet, Billy Joe Shaver, says, "I've got it down to one moving part, and that moving part is me."  You won't find Billy Joe on a payroll.

When I recently retired from a large university system, I followed the lead of another Texas poet and philosopher, Kinky Friedman.  Kinky said he wanted a profession that didn't require his actual presence, which he found as an author. I couldn't have said it better myself. I now work at home, thinking part-time for a think tank.  Along with Billy Joe and Kinky, if they're going to count us as employed, they're going to have to find us first.

For the past year or so, and especially since the FOMC "paused" in its tightening campaign, holding the federal funds rate at 5 ¼ percent, the question in financial markets and financial talk shows has been whether the next policy change will be further tightening to combat rising inflation or an easing to counter recessionary forces emanating from the deflating housing market.  Implicit in that either-or dichotomy is the supposedly defunct Phillips Curve, which says you can have less inflation only by accepting more unemployment or lower unemployment only by accepting higher inflation. In the opinion piece below, I argue that there is a third alternative:  faster growth with lower inflation if the impetus for growth comes from the supply side of the economy.  It was published in the Wall Street Journal on January 22, 2007.

P=MV/Q

From the Wall Street Journal

Printed January 23, 2007 

The main question on financial TV lately has been whether the economy will continue to weaken and possibly slip into recession, but allow inflation to decelerate, or whether it will pick up and cause inflation to accelerate. More slack in the economy, or a larger output gap, would reduce inflation; more output, it is presumed, would make inflation worse. While a weaker economy might well reduce inflation, that isn't a necessary condition. Faster growth can also reduce inflation.  

While inflation may respond to a reduction in aggregate demand, it would also logically respond to an increase in aggregate supply. In the simple equation of exchange, MV=PQ, so P=MV/Q. In other words, other things equal, prices respond positively to an increase in MV, or aggregate demand, and negatively to an increase in Q, or aggregate supply. This is not rocket science.  

But it is a truism rarely articulated. The Phillips Curve is rarely mentioned anymore, but it still pervades the common view that inflation can be tamed only through a weaker economy. Disinflationary growth is not considered an option, probably because we think of output as responding only passively to changes in aggregate demand, so that they rise together or fall together.  

That may be the usual case, but it doesn't have to be. Supply-side factors may stimulate output independent of aggregate demand, through shifts in investment, exports or shifts from imports to domestically produced goods. Or animal spirits.  

Monetary policy is currently in pause mode as far as interest rates are concerned, but moderate increases in the monetary base must be considered anti-inflationary whether output remains weak, or strengthens, as I expect.  

Supply-side economics is out of favor at universities that don't have good football teams. But that's largely because its bar for success has been raised too high. Tax-rate cuts may not fully pay for themselves at current rate levels, but they certainly have gone a long way in that direction, as the recent sharp decline in the budget deficit despite rapid spending growth clearly indicates. Tax-rate cuts that substantially pay for themselves in higher tax revenue are clearly a good thing.  

Our economy is remarkably healthy. Inflation has crept above our comfort zone, but current policies are bringing it down without a recession. Monetary policy is just about right, and is being helped in its fight against inflation by other factors: the Internet, globalization, China, India and other new players. Let's not be afraid of growth.

In July of 2005, while I was Chancellor of the Texas A&M University System, I wrote an opinion piece on school choice and competition. It ran in the Austin American Statesman on July 11, 2005, under the title "Competition is good-even for public schools." It ran the next day in the Bryan/College Station Eagle under the title, Schools need choice, competition.

That article is reprinted below:

In my first legislative session as chancellor of The Texas A&M University System, I was so focused on getting "our fair share" of higher education funds that I barely noticed the important effort to introduce choice and competition into Texas public education. The failure of that effort is arguably more detrimental to raising the educational achievement of Texans in the long run than the failure to approve tuition revenue bonds for needed university building programs.

Choice and competition work wonders. It wasn't that long ago that the introduction of high-quality Hondas and Toyotas into the U.S. market not only broadened the choices available to American consumers, but ultimately improved Ford and Chevrolet quality as well.

My first encounter with the idea of school choice and competition was in Milton Friedman's 1962 classic, "Capitalism and Freedom." Friedman has successfully advocated many market-based solutions to public policy problems throughout his distinguished, Nobel Prize-winning career. But in his 90s, he has singled out parental choice as his most important unfinished business and established a foundation to promote it.

In a June 9 opinion piece in The Wall Street Journal, Friedman summarized the frustrating history of getting choice programs adopted. He says the efforts usually start out with broad parental and public support as a means of dealing with at-risk students and failing school systems, but that organized resistance by trade union leaders and the education bureaucracy generally prevails.

I know firsthand how frightening competition can be to those long shielded from it. When the Monetary Control Act of 1980 required the Federal Reserve to begin charging for check services it had been providing free to financial institutions so private banks could better compete with us, I was only a month into my job as head of the Fed's Baltimore office. We promptly lost more than 40 percent of our check-processing business to private-sector competitors. But we eventually recovered most of it by improving our services and otherwise emulating private-sector profit incentives. Government monopolies are usually run by good people, but competition makes them better.

I met many fine students and teachers when I later became president of the Dallas Fed. We conducted an annual essay competition for high school students. We also sponsored a competition in which students studied economics and competed with mock meetings of the Fed's Federal Open Market Committee. I'm proud to say that our Texas teams won the national championship in three of the first four years we participated – Bryan High School in 1996-98 – and then Midland High School won in 2000.

The students I met through these competitions were awesome. But they were the cream of the crop. Although Texas has many excellent students in all its public schools, and has many excellent schools, it also has too many schools that don't measure up. Texas has a high dropout rate. Of those who do graduate, only half go on to college, and many of them require remedial work.

The Dallas Fed also conducts conferences and workshops to help teachers gear up to teach economics. I was pleased to learn recently that A&M System Universities and others, largely on behalf of the Texas Education Agency, actively support teacher education, not only by training new teachers, but also by helping existing teachers in nearby high schools raise their quality of instruction. I know that Texas has many competent and confident teachers. But, like the students I met, the teachers are probably the cream of the crop who self-select into improvement programs.

In contrast, I'm afraid that many teachers, being human, naturally fear competition and accountability. Even so, they owe it to the kiddos to suck it up and give choice and competition a chance. Courage is not the absence of fear, but the willingness to do what needs to be done despite fear. In this increasingly competitive, globalized world we live in, we can't afford to be second best. We can't afford to neglect improvement opportunities in order to remain in our comfort zone.

Many will say that I'm stepping over the line between higher education and public education – that I've stopped preaching and gone to meddling. Maybe so, but I do have a dog in this fight. If good players help make good coaches, then better prepared students are needed to help make Texas higher education world class. So, let's hope that, as our legislators grapple with the complexities of school finance, they will also try to find a way to introduce choice and competition into Texas schools.

Reprinted with permission of the Austin American-Statesman