A recurring concern we have heard since the financial crisis erupted is that banks are simply not lending, and that this is holding back economic activity. If only banks would lend, the economy would grow. As usual, the truth is a little more complex. 

Unlike in the Great Depression, and despite about 300 bank failures, the balance sheets and deposits of insured commercial banks and thrifts has been steady, if slowly, expanding throughout the financial crisis and recess. Banks have continued lending during this time; however, they have changed who they are lending to. Over the last two years we have witnessed a massive shift from lending to the private sector to lending to the public.

The chart below shows banking business lending and bank holdings of U.S. government securities. The chart suggests that the approximately $500 billion increase in bank lending to Uncle Sam came at the expense of a $400 billion decline in lending to private business. If one assumes that bank balance sheets have either been stable or increased slightly, then a loan to the government must off-set a loan otherwise made somewhere else.

While its hard to exactly measure the job impact of this reduced business lending, some estimates have been made on the impact of SBA lending. According to one study, every $41,600 in new small business loans is associated with 1 new job created. While this number should be taken with a grain of salt, it implies that the $400 billion reduction in business lending has cost over 9 million jobs. Of course, one might argue that the half-trillion in lending to the govt has created or “saved” some jobs. Accepting the difficulty of coming up with a reliable estimate, I think its fair to say that on net a few million jobs have been lost due to this shift of lending from the private to the public sector.

Also of interest is that since the financial crisis, and despite the failures of Fannie and Freddie, commercial banks and thrifts have increased their holdings of Fannie/​Freddie/​Ginnie securities by over $300 billion.

Textbook economics usually teaches that government crowding out of private investment only really occurs when we are near full-employment. Yet looking at the balance sheets of our commercial banks and thrifts, would suggest that U.S. Treasuries and Agency securities have crowded out significant lending that would otherwise go to the private sector. But this should come as no surprise, since banks can borrow for close to zero and invest risk-free in government debt, earning a nice spread of 3 to 4 percentage points.

The Brookings Institution released a new study today on charter schooling—assessing how well it’s working and what the federal government should do about it. One of the recommendations reads as follows:

Student participation in lotteries for admissions to any public [charter] school and the results of such lotteries should be a required student data element in state or district longitudinal data systems supported with federal funds.

Why? Because it would make it a lot easier to measure relative school quality, by permitting more widespread use of randomized, control group experiments. Experiments are certainly great from a researcher’s standpoint, but mandating that schools must admit students on a random basis has a catch:

an observer effect as subtle as an 80-foot fire-breathing robot. One of the reasons markets work is that exchanges are mutually voluntary, and producers and consumers don’t enter into an exchange unless each perceives it to be beneficial. If you eliminate the mutually voluntary character of an exchange in the process of trying to observe how beneficial it is to one of the parties, you’re affecting the very thing you’re trying to measure. It becomes more likely that you will have students assigned to schools that are not well equipped to serve their particular needs, injuring such students’ educational prospects.

Lottery admission to oversubscribed charter schools appeals to people’s desire for fairness, but a much better solution is to adopt a true market approach to education in which oversubscribed schools have not only the freedom but the incentives to expand as demand increases. For-profit enterprises, schools among them, do not generally ignore rising demand for their services. Kumon, the for-profit tutoring service, does not turn students away when it reaches capacity at a given location, it grows that location or opens a new one. As a result, it now serves about four million students in 42 countries.

Rather than figuring out how to ration good schools, why don’t we just unleash the market forces that will grow and replicate them?

President Obama released his Afghanistan war review today. It highlights progress on the battlefield against insurgents, the success of Special Forces operations and drone strikes, and achievements in training the Afghan security forces.

I have four thoughts on the matter:

First, scattered throughout the document are passages such as “al-Qa’ida’s senior leadership in Pakistan is weaker,” “[a]l‑Qa’ida’s senior leadership has been depleted,” and “al-Qa’ida’s leadership cadre have diminished.” However, can we deter more jihadists than our efforts help to inspire? After all, “fighting them over there so they don’t fight us here” did not deter Pakistani-American Faisal Shahzad and his incompetently constructed bomb in Times Square. “Fighting them over there so they don’t fight us here” did not deter failed British “shoe-bomber” Richard Reid. “Fighting them over there so they don’t fight us here” did not deter Umar Farouk Abdulmutallab, the so-called “underwear bomber,” who tried to blow up a Detroit-bound airliner on Christmas Day.

Second, although there is a persuasive case to be made that the United States should disrupt, dismantle, and defeat al Qaeda in Afghanistan and Pakistan, the administration never clarifies explicitly how it will encourage Pakistan to do more to fight militants that frequently attack U.S. forces in Afghanistan. The review claims “improved understanding of Pakistan’s strategic priorities,” but policy considerations seem to fail to take into account that no amount of pressure or persuasion will affect Pakistan’s decision to tackle extremism, particularly when its strategic priorities are tied directly to reinforcing Islamist bonds across its borders as a buffer against Indian encirclement.

The third core reality ignored in the review is the importance of regional actors, namely Iran, India, Saudi Arabia, Russia, China, and Afghanistan’s Central Asian neighbors (this list is not meant to preclude the inclusion of other countries). As long as the United States is at war, regional rivalries and insecurities will play out in Afghanistan at the expense of Afghan civilians and coalition forces.

Lastly, if the United States insists on pursuing the so far fruitless mission to create a viable Afghan government and economy, then U.S. officials should stop saying that the United States is not nation building in Afghanistan (and stop using the oft-repeated euphemism “capacity building”). After all, what is nation building? Perhaps in the words of Secretary of State Hillary Clinton it is providing Afghanistan’s pervasively corrupt and predatory government with “economic, social and political development, as well as continued training of Afghan security forces.”

Overall, modest and ephemeral tactical gains have given the administration cause for optimism. It also gives the military a chance to buy more time, which means that the president will stick to his pledge to begin withdrawing troops in July 2011. But a residual U.S. troop presence will remain in the country long after that official date.

Any policy, including war, makes sense only insofar as the United States and its citizens receive significant benefits in exchange for that policy’s political and economic costs. The Afghan War’s current cost-benefit disparity would call for a scale-down in mission objectives and correspondingly in troop presence. But for now, the United States would rather fixate on pipe dreams and on asserting America’s permanent role in Central Asia.

Today’s hearing in Pensacola built on Monday’s ruling out of Richmond: Judge Roger Vinson is likely to hold the individual mandate unconstitutional. And such a decision would be the most significant development possible at the district court level because the Florida case involved 20 states, with more joining the lawsuit when new governors and attorneys general assume office in January. It is unprecedented for this number of states — again, soon to be a majority — to sue the federal government and it shows the singular and extreme nature of the government’s assertion of raw power here.

As Judge Vinson said during the hearing, the Supreme Court has held that the outer bounds of Congress’s regulatory power under the Commerce Clause (as exercised via the Necessary and Proper Clause) is activity that has a substantial effect in interstate commerce. If the government were to prevail under its theory that Congress can regulate any decision with economic ramifications — as two district courts have unfortunately held — then there is no principled limit on federal power. At that point, we might as well throw the Constitution out the window and admit that Congress is the judge of its own authority.

Finally, while Judge Vinson was more skeptical of the Medicaid-related claim that is unique to the Florida lawsuit, it is similarly impossible to draw limits to federal power if we allow Congress to impose a Hobson’s Choice on states of either withdrawing from Medicaid or implementing budget-crippling regulations. At a certain point the strings that Congress attaches to federal funding become coercive — particularly when the new shape of a government program (here, Medicaid) radically transforms the compact states originally joined and have inextricably relied on.

That’s the title of an upcoming FOX News Channel feature program with John Stossel, in which Cato Executive Vice President David Boaz and Director of Health Policy Studies Michael F. Cannon weigh in on some of the hidden, unforeseen, and unintended consequences of the attempts to deliver on promises our politicians make.

Politicians promised that:

1. Cash for Clunkers would save the auto industry.
2. Increasing the minimum wage would be good for the working poor.
3. Title IX would end gender-based discrimination in college sports.
4. Mega-construction projects like stadiums, arenas, and conference centers would create jobs.
5. Changing the tax code would save small farmers and the environment.
6. Credit card reform would save us from banking fees.
7. Reforming the health care system would give us more affordable and more comprehensive care.
8. Ethanol would reduce our dependence on foreign oil and save the environment.
9. Home ownership for all would be good for America.

And the #1 promise politicians made that went awry?

Tune in to FOX News Channel this Friday, December 17, 2010 at 9:00 p.m. Eastern to find out. Use the #10Promises hashtag on Twitter during the program to follow the conversation.

Kindly note that while John Stossel’s programs normally air on the FOX Business Network, this feature program will appear on the FOX News Channel.

As Tim Lynch has already blogged — and as Cato is currently featuring on its front page, today is Bill of Rights Day. But of course, this is less of a big deal than Constitution Day (September 17, when we release the Cato Supreme Court Review at an annual conference) — because the Bill of Rights is essentially redundant of the Constitution’s original structural protections: Whenever the government exceeds its constitutionally granted powers, it violates rights of some sort.

Tim Sandefur explains over at the Pacific Legal Foundation’s blog:

Madison, along with his colleagues like James Wilson, Alexander Hamilton, and others, expected the Constitution to give Congress only a limited set of powers—powers that were listed in the text of the document. If it wasn’t listed in the text, then Congress couldn’t do it. So the federal government could collect taxes or run a post office, but it couldn’t do other things—like run a national health care program, for instance. Since Congress’s powers were, in Madison’s words, “few and defined,” there was no need to add a bill of rights to declare that the federal government couldn’t do such-and-such, because they already couldn’t do such-and-such.

Indeed, the argument went, if you enumerate various rights, some will later claim that this is an exhaustive list — even though it’s impossible to list all of our rights at every conceivable level of specificity — with everything else subject to state regulation and control and perhaps implied powers too. That concern is why, even though Jefferson and others won the debate over whether to have a bill of rights, Madison and others ensured that the Ninth Amendment would be included as a safeguard against those who would “deny or disparage” other rights that are “retained by the people.” And why the Tenth Amendment reiterated that, conversely, the powers “not delegated to the United States” are “reserved to the States respectively, or to the people.”

We’re fortunate that both Jefferson and Madison got their way because, as we’ve seen over the last 70+ years, the Supreme Court read out of the Constitution the structural protections for liberty that are plainly there in the pre-amended Constitution. Not that the Court has done a very good job on the “rights” side of the coin, either — think eminent domain abuses (earlier this week it denied cert. in the Columbia University case, by the way), or the Second Amendment before Heller, or, perhaps most infamously, economic liberties since the rights bifurcation of 1937’s Carolene Products footnote 4 — but if it weren’t for these little bones that it has thrown our way, why the government would always be the sole judge of its own powers. (Which, of course, is what Obamacare proponents argue, that the check on Congress’s power is purely political.)

In any event, bully for the Bill of Rights, even if it’s not — as many people think — the most important part of the Constitution.

The REAL ID Act—the 2005 national ID law rejected by the states asked to implement it—continues its long slow death. The latest nail in the coffin: moves in Congress to defund the “hub” system that would share driver information nationwide.

The House-passed “Full-Year Continuing Appropriations Act” contains the following language in the section that funds U.S. Citizen and Immigration Services: “none of the funds made available in this section shall be available for development of the system commonly known as the ‘REAL ID hub’.”

And also: “From unobligated balances of prior year appropriations made available for United States Citizenship and Immigration Services for the program commonly known as the ‘REAL ID hub’, $16,500,000 is rescinded.”

Senator Inouye’s (D‑HI) amendment in the Senate also denies USCIS funding for the REAL ID hub. And it, too, rescinds $16.5 million in prior-year funding.

Money spent on REAL ID is waste. That money should be put to better uses, including deficit reduction. No future money should go to the national ID boondoggle, and REAL ID should be repealed once and for all.