Mercatus Site Feed en Uber under Attack: What Critics Get Wrong <h5> Expert Commentary </h5> <p class="p1">Recent worldwide bans and regulations on Uber have reignited the <a href="">debate</a> surrounding the ride service in the United States. Most prominently, critics continue to decry the supposed mistreatment of Uber workers, which sparked a national Uber <a href="">strike</a> weekend in October. The company is also facing a class-action lawsuit in California by drivers challenging its business model and seeking to be treated like employees.</p> <p class="p1">Opponents argue that Uber harms both the welfare of the welfare of taxi drivers and its own workers. The taxi drivers are supposedly harmed because they are losing customers to Uber. And Uber drivers are supposedly harmed because the company does not treat them like real employees. Neither of these arguments holds ground.</p> <p class="p1">If people care about the welfare of drivers, they should support a competitive labor industry for them. When only a few employers control an industry, it can lead to the abuse of employees because they have fewer exit options given their relevant skills. Most people are aware of the dangers of monopolies where there is a single seller, yet few extend the same analysis into monopsonies, in which there is a “single buyer.” In the labor market, employees are harmed when there is a single “buyer” for a specific job. More companies competing for employees usually results in better wages, benefits and treatment of workers.</p> <p class="p1">Take for example drivers in New York City. About <a href="">82 percent</a> of taxi drivers in New York City are immigrants who have limited employment options but have cultivated one major skill: driving in the city. Knowing this, large taxi fleets are notorious for <a href="">abusing</a> and mistreating their drivers. Drivers pay $75 to $130 a day to lease medallion rights and end up driving 12 hour shifts in the hopes of recouping their cost and making some profit. On some days, they lose money.</p> <p class="p1">The owners also abuse the drivers by adding on miscellaneous fees, such as for “new models” and “new drivers.” Further, drivers have to bribe dispatchers or else they’ll get bad shifts or no shifts at all. An <a href="">undercover exposé</a>&nbsp;revealed that this phenomenon occurs in cities beyond New York as well.</p> <p class="p1">Before Uber and Lyft, if owners or dispatchers abused cab drivers, the cabbies didn’t have many other choices but to put up with it. With new companies entering the market, if cab drivers suffer abuse and high fees, they can merely switch to Uber or Lyft and not have to bribe dispatchers or pay outrageous fees.</p> <p class="p1">This is precisely what’s happening. Drivers have been switching to Uber and Lyft and creating a graveyard of taxi cabs. One worker at the taxi dispatch company McGuiness <a href="">explained</a>: “Business is getting so bad that people are just dropping their cabs off here. Everyone is going to Uber, where they don't have to pay a lease, and they don't have to deal with a dispatch.”</p> <p class="p1">And these Uber drivers are getting <a href="">paid</a> better, too. A <a href="">study</a> of Los Angeles cab drivers found that, on average, they worked on 72 hours a week for a wage of $8.39 an hour. Uber drivers, on average, worked less than 35 hours a week for $19 an hour.</p> <p class="p1">While it may be true that Uber drivers aren’t working in heavenly conditions, these jobs are far superior to the alternative, and there is much hope for driver conditions improving even more as Lyft and Sidecar gain popularity. With new companies competing for drivers, this could put pressure on Uber to offer better benefits. Those who advocate better conditions for drivers should support new companies entering the market and offering more employment options.</p> Tue, 01 Dec 2015 10:20:37 -0500 Crisis in Social Security Disability Insurance Averted, but Not Gone <h5> Expert Commentary </h5> <p class="p1">President Obama recently signed into law the <a href="">Bipartisan Budget Act of 2015</a>, which along with suspending the debt limit and setting the framework for federal spending over the next two years, also contained provisions that removed a Social Security retirement-claiming strategy and extended the solvency of the Social Security Disability Insurance (SSDI) Trust Fund. (For two articles on the claiming strategy changes, see contributors<a href=""> Robert Klein</a> and <a href="">Robert Powell</a>.)</p> <p class="p1">Along with other adjustments to improve the SSDI program integrity and pilot innovative program changes, these actions prevented the possibility of a 20% cut in benefits near the end of 2016 for all SSDI beneficiaries. This was done through a reallocation of the payroll-tax rate — directing slightly more of Americans' payroll taxes to SSDI — which will allow for full payment of benefits through 2022.</p> <p class="p1">For the SSDI program, the agreement was a step in the right direction. Make no mistake, allowing the SSDI Trust Fund to become insolvent would not only be irresponsible, but also unconscionable for individuals with disabilities who rely upon this program. But now, further legislation will be required to once again prevent a cut in SSDI benefits, and that action is better taken sooner rather than later.</p> <p class="p1">As things stand now, the SSDI Trust Fund will almost certainly need additional revenue past 2022. Even with major changes to program eligibility or substantial modifications to the benefit formula, it will be almost prohibitively difficult to close the financing gap in such a short time. And the longer meaningful reforms are put off, the more additional revenue the program will need.</p> <p class="p1">Financing aside, the SSDI program also needs significant improvement. Though the new law provides for additional demonstration authority to help beneficiaries who seek to return to work and remain attached to the workforce, more still needs to be done.</p> <p class="p1">While SSDI program rules contain an array of work incentives and supports, other provisions serve as barriers to those whose conditions improve and who wish to test their capacity to work.</p> <p class="p1">For example, if an SSDI beneficiary earns even one dollar above the substantial-gainful-activity level (currently set at $1,090 per month), they risk losing their entire benefit. The new law allows for program changes and pilots that would explore ways to smooth this "cash cliff" so beneficiaries can attempt to work without fear of steep financial penalties.</p> <p class="p1">The Social Security Administration (SSA) should fully utilize this expanded demonstration authority to test innovative approaches to facilitate return-to-work efforts so that, by 2022, policymakers will have strong evidence of what works and what does not.</p> <p class="p1">A number of changes that would improve the effectiveness of the procedures by which SSA evaluates applications to the program and periodically reviews benefits were also a part of the new law. However, adequate funding, along with efficient use of resources by SSA, will be necessary to achieve these results and now Congress must follow through and appropriate those funds next month.</p> <p class="p1">The recently approved payroll-tax reallocation and advancements in program integrity and operations will not solve the long-term financing problems of SSDI. Furthermore, the pilot programs contained in the deal do not go far enough in supporting those with disabilities seeking to work. But together, these changes did provide the funds necessary to pay full benefits through 2022 and also some breathing room for pilots to be designed, implemented, and analyzed for lessons that could potentially inform long-term improvements to the SSDI program. The passage of the Bipartisan Budget Act of 2015 is just the beginning, not the end, of the work to be done on SSDI.</p> Tue, 01 Dec 2015 15:43:07 -0500 Congress and the FDA Are Blocking Medical Innovation <h5> Expert Commentary </h5> <p class="p1">Where does innovation come from? The new devices for sale on Black Friday and Cyber Monday? It's certainly not driven by the government. Rather, it's all about tinkerers who ultimately drive scientific discoveries. No matter how smart our leaders are, they are never going to outperform the vast power of the millions of dabblers and dreamers in each of their individual pursuits. Tinkerers often don't start with dreams of riches; they just see a better way. They are, as my Mercatus Center colleague Bob Graboyes describes it, on <a href="">the frontier, not in the fortress</a>.</p> <p class="p1">But lately, these tinkerers face too many obstacles to truly generate economic growth. Want to invent a medical device? The time, money and complexity of going through the Food and Drug Administration's process is bound to discourage most. That's why it's so depressing to read about attempts to improve innovation with more central funding, guidance and big meetings. Is that really what we need to take advantage of the fantastic new sciences of robotics, nanotechnology, genetic manipulation and more to enhance our health? Certainly from Washington's limited vision, all solutions must start and end within the 61 square miles of the District of Columbia.</p><p class="p1"><a href="">Continue reading</a></p> Tue, 01 Dec 2015 15:13:19 -0500 The Midas Paradox: Financial Markets, Government Policy Shocks, and the Great Depression <h5> Publication </h5> <p class="p1">Purchase a copy at the <a href="">Independent Institute</a> website&nbsp;or <a href="">Amazon</a>.</p><p class="p1">Economic historians have made great progress in unraveling the causes of the Great Depression, but not until Scott Sumner came along has anyone explained the multitude of twists and turns the economy took. In <i>The Midas Paradox: Financial Markets, Government Policy Shocks, and the Great Depression</i>, Sumner offers his magnum opus—the first book to comprehensively explain both monetary and non-monetary causes of that cataclysm.&nbsp;</p> <p class="p1">Drawing on financial market data and contemporaneous news stories, Sumner shows that the Great Depression is ultimately a story of incredibly bad policymaking—by central bankers, legislators, and two presidents—especially mistakes related to monetary policy and wage rates. He also shows that macroeconomic thought has long been captive to a false narrative that continues to misguide policymakers in their quixotic quest to promote robust and sustainable economic growth.</p> <p class="p1"><i>The Midas Paradox</i> is a landmark treatise that solves mysteries that have long perplexed economic historians, and corrects misconceptions about the true causes, consequences, and cures of macroeconomic instability. Like Milton Friedman and Anna J. Schwartz’s <i>A Monetary History of the United States, 1867–1960</i>, it is one of those rare books destined to shape all future research on the subject.</p> Tue, 01 Dec 2015 15:19:33 -0500 Will There Be an ACA Bailout of Insurers? <h5> Expert Commentary </h5> <p class="p1">The Affordable Care Act (ACA) is not working out the way many insurance companies thought it would. Despite the individual mandate and massive new government subsidies delivered directly to insurers, many participating insurers, whose continued participation is essential to the ACA’s future, are losing substantial money.</p> <p class="p1">In order to assist those insurers, the administration is now <a href="">seeking</a> a taxpayer-financed bailout for them. Congress can block taxpayer funds from being used for this purpose by extending language contained in the 2015 government funding bill. Congress could also look to end the back-end subsidy that transfers money from people with workplace coverage to insurers selling ACA plans – plans that satisfy all of the new rules of the law.</p> <p class="p1"><b>Insurers Losing Money on ACA plans</b></p> <p class="p1">On November 19, <a href="">UnitedHealth Group</a> <a href=""><b>UNH -1.79%</b></a>, the largest insurer in the country, <a href="">announced</a> it may pull out of the exchanges because of massive losses incurred selling ACA plans. United has <a href="">pulled</a> back on advertising for ACA plans, and its CEO <a href="">suggests</a> that people are taking advantage of the ACA’s new rules by enrolling for insurance, raking up large claims, and then dropping coverage.</p> <p class="p1"><a href="">Aetna</a> <a href=""><b>AET -1.96%</b></a> executives have <a href=";destination=node/86783">made</a> similar comments about people gaming the ACA’s new rules. Former Aetna CEO Ron Williams suggested that people who know about a potential need for <a href="">health</a> care services are using the special enrollment period to sign up for coverage.</p> <p class="p1">Wellmark of Iowa <a href="">reported</a> that its “ACA members are using substantially more services and are receiving care for more chronic and critical diseases than anticipated.” According to Wellmark, “135 members who signed up for coverage, received several million dollars in health care services, and then terminated their coverage.” Wellmark also said that many people purchased the most generous coverage, used a large amount of services, and then used the special enrollment period to downgrade plans.</p> <p class="p1">Twelve of the 23 health insurance companies – dubbed co-ops – established by the ACA with large federal loans have shut down because of large losses.</p> <p class="p1">While there is not yet data for 2015, I <a href="">estimate</a> that insurers lost about $4 billion selling ACA plans in 2014. A recent <a href=";SctArtId=352088&amp;from=CM&amp;nsl_code=LIME&amp;sourceObjectId=9401106&amp;sourceRevId=5&amp;fee_ind=N&amp;exp_date=20251105-19:10:01">analysis</a> from Standard and Poor’s shows insurers are likely to incur steep losses in 2015 as well.</p> Mon, 30 Nov 2015 18:00:06 -0500 Corruption and Entrepreneurship <h5> Publication </h5> <p><span style="font-family: 'Helvetica Neue', Arial, Helvetica, sans-serif; font-size: 13px; font-style: normal; line-height: normal; font-weight: normal; color: #333333;">We estimate the effect of corruption on business activity in Brazilian municipalities. We employ a new measure of corruption based on data from random audits of municipal governments. Our results suggest that higher levels of corruption are generally associated with reductions in the number of business establishments. Furthermore, we find that these effects become larger over time, suggesting that corruption is particularly detrimental over the long-run. However, we also find that the effect of corruption on business activity can be insignificant or even positive conditional on institutional quality being very poor. This is consistent with the “grease the wheels” hypothesis, which argues that corruption provides entrepreneurs with means to avoid burdensome regulations and taxes.</span></p><p><span style="font-family: 'Helvetica Neue', Arial, Helvetica, sans-serif; font-size: 13px; font-style: normal; line-height: normal; font-weight: normal; color: #333333;">Find the article <a href="">here</a>.</span></p> Mon, 30 Nov 2015 14:59:36 -0500 Regulating Your Neighbors for Fun and Profit <h5> Expert Commentary </h5> <p class="p1">Airbnb has just avoided death by regulation in the city of its birth. This month San Francisco voters soundly defeated a ballot measure that would have placed arbitrary limits on what a person can do with his or her home.&nbsp;<a href=",_Proposition_F_%28November_2015%29">Proposition F</a>—known colloquially as the “Airbnb Initiative”—would have significantly restricted a resident’s ability to offer his or her residence as a short-term housing rental by creating considerable bureaucratic, legal, and social deterrents.</p> <p class="p1">The proposal would have tasked San Francisco’s Planning Department with approving and policing short-term rental units. Alarmingly, it would have also deputized neighbors and housing organizations—like the San Francisco Tenants Union—to file private action lawsuits and recover fines of up to&nbsp;<a href="">$1,000 per day</a>&nbsp;against people whom they suspected of breaking this law, even if the Planning Department had determined there was no violation!</p> <p class="p1">To publicly identify these mavericks, the Planning Department would have been required to send out letters informing all neighbors and <a href="">“interested parties”</a>&nbsp;that a housing unit had been approved to offer short-term rentals. As if that were not enough,&nbsp;<a href="">the proposal would have obligated the Planning Department to place a sign on the property</a>, proclaiming the resident’s short-term rental shame for all to see. Nathaniel Hawthorne might have dubbed them “The Scarlet Renters.”</p> <p class="p1">What was the reasoning behind the ballot measure to restrict home rentals in San Francisco? Proponents claim that short-term rentals reduce the number of available apartments, driving up the cost of housing. The city is in the throes of an ever-worsening housing affordability crisis, but this is caused primarily by the city’s own&nbsp;<a href="">severe rent controls and land use regulations</a>. In fact, voters also defeated&nbsp;<a href=",_Proposition_I_%28November_2015%29">Proposition I</a>, which would have added to the problem by creating even more restrictions on the construction of new housing.</p> <p class="p1"><a href="">A recent study by Sanford Ikeda and Emily Washington of the&nbsp;Mercatus&nbsp;Center</a>&nbsp;found that land use regulations are a key factor in driving up the cost of housing. This tends to&nbsp;<a href="">hurt poorer people more</a>, since they spend a higher proportion of their income on housing.</p> <p class="p1">Ironically, short-term rentals mitigate San Francisco’s high cost of living by allowing low-income households and retired empty-nesters to rent out their spare rooms for extra cash. In fact, Airbnb was created for that exact reason. The company’s founders needed help making ends meet and came up with the idea of renting out their living room as an extra bedroom using air mattresses—hence the name.</p> <p class="p1">Having to ask a government regulator for permission is bad enough, but having to ask your neighbor is downright strange. Proposition F was an&nbsp;<a href="">admittedly candid attempt to crush the short-term housing market</a>. The restrictions, bureaucracy, penalties, and&nbsp;<a href="">potential for unmerited lawsuits</a>&nbsp;would have created insurmountable barriers to entry and fostered a climate of fear.</p> <p class="p1">It would have prevented city residents from engaging in voluntary, mutually beneficial interactions with tourists and business travelers. It’s good that it was rejected, but it’s still scary that&nbsp;<a href=",_Proposition_F_%28November_2015%29">60,000 San Franciscans</a>&nbsp;thought they had the right to regulate their neighbors.</p> Mon, 30 Nov 2015 12:58:58 -0500 Medicare Waste, Fraud, Abuse and Deja Vu <h5> Expert Commentary </h5> <p class="p1">An office manager in Louisiana who billed Medicare for services that weren't needed or even provided was recently sentenced to four years in prison and ordered to pay $14.1 million in restitution. Twelve other defendants are awaiting sentencing for their roles in the $50 million scheme to defraud Medicare. The next day, a Detroit-area physician was sentenced to six years in prison and ordered to pay $2 million in restitution for his role in a $4.2 million Medicare fraud scheme.</p> <p class="p1">Medicare is rife with fraud, and every year, billions of dollars are improperly paid out by the federal government's giant health care bureaucracy. According to the government's latest estimates, Medicare fee-for-service (parts A and B) made $46 billion in improper payments last year. And Medicare Advantage (Part C) and Medicare Prescription Drug Coverage (Part D) combined for another $15 billion in improper payments. Even more disturbing is the possibility that these numbers underestimate the annual losses to taxpayers from fraud and bureaucratic bungling. According to the work of Harvard University's Malcolm Sparrow, fraud could account for as much as 20 percent of total federal health care spending, which would be considerably higher than what the government's figures indicate.</p> <p class="p1">One might think that government officials would try a little harder to reduce these embarrassing figures. Sadly, one would be wrong. That's because the Centers for Medicare &amp; Medicaid Services is instead looking to gut its Recovery Audit Contractor program, which has been successful in recovering taxpayer dollars that otherwise would have been lost to improper payments. The RAC program is geared toward correcting improper payments instead of punishing perpetrators. It's tasked with finding both overpayments and underpayments, but because the system is already stacked toward handing out taxpayer money without accountability, overpayments are what the RACs typically find.</p> <p class="p1">RACs are paid on a contingency fee basis at a rate negotiated when their contract is awarded.</p> <p class="p2">The auditors thus pay for themselves with the money they recoup instead of simply being handed a lump-sum check. That the RAC program has an incentive to reduce wasteful spending and save taxpayers money makes it fairly unusual among government initiatives. In 2014, RACs returned a net $2.2 billion to taxpayers. They did even better in 2013, when $3.7 billion was recovered. However, CMS scaled back certain audit activities and temporarily suspended the program for several months.</p> <p class="p1">Medicare needs all the help it can get. The Medicare trust fund is persistently in the red, with almost half of its $600 billion budget financed through deficit spending. It is projected to be insolvent by 2030.</p> <p class="p1">Despite all evidence pointing toward the need to expand the RAC program and recover even more lost taxpayer dollars, bureaucrats are set to greatly diminish the program's effectiveness in 2016. Rather than empower these fraud hunters, they are drastically reducing the number of paid claims that auditors can review every 45 days (from 2 percent down to just 0.5 percent). The new limits will make it that much harder for auditors — whose cost already amounts to just a drop in the bucket — to recoup taxpayer losses. Agency failure is routinely rewarded in Washington with bigger budgets and greater authority, but here success will not be.</p> <p class="p1">Sen. Orrin Hatch, R-Utah, to his credit, recently authored a letter calling for CMS to account for the change and present a plan to undo the recent increases in improper Medicare payments. Unfortunately, the rest of Washington is either apathetic or in the pocket of health care providers who would prefer to keep the Medicare dollars flowing without those pesky auditors getting in the way.</p> <p class="p1">Absent the major reforms that Medicare needs, programs such as RAC provide a modicum of accountability for an otherwise out-of-control and unaffordable welfare state. That's why the RAC program has been a persistent target of hospitals and other beneficiaries of wrongful payments. Congress could not only compel CMS to change course but also ensure that more auditors are commissioned to track down improper payments on behalf of taxpayers.</p> Mon, 30 Nov 2015 12:25:45 -0500 Eli Dourado Discusses Consumer Drone Regulations on C-SPAN’s Washington Journal <h5> Video </h5> <iframe src="" width="500" height="281" frameborder="0" webkitallowfullscreen mozallowfullscreen allowfullscreen></iframe> <p class="p1"><span class="s1">As the holiday season approaches, there are predictions that upwards of 1,000,000 drones will be purchased by Christmas. The FAA is currently working to create regulations on these consumer drones. Eli Dourado discusses these regulations and what the FAA should do on C-SPAN’s Washington Journal.</span></p><div class="field field-type-text field-field-embed-code"> <div class="field-label">Embed Code:&nbsp;</div> <div class="field-items"> <div class="field-item odd"> &lt;iframe src=&quot;; width=&quot;500&quot; height=&quot;281&quot; frameborder=&quot;0&quot; webkitallowfullscreen mozallowfullscreen allowfullscreen&gt;&lt;/iframe&gt; </div> </div> </div> Tue, 01 Dec 2015 16:10:53 -0500 Remembering Doug North <h5> Expert Commentary </h5> <p class="p1">Douglass Cecil North passed away at the age of 95 on Nov. 23, 2015 at his home in Michigan.&nbsp; Joint recipient of the 1993 Alfred Nobel Memorial Prize in Economics, he will be remembered for his path breaking contributions to the field of economic history and his central role in creating the New Institutional Economics.&nbsp; He spent most of his academic career at two institutions — the University of Washington in Seattle, and Washington University in St. Louis.&nbsp; For much of the last two decades, he also maintained an association with the Hoover Institution at Stanford University.</p> <p class="p1">Doug will be remembered for many things and others can go through his list of honors, awards, and accomplishments.&nbsp; But for me, two things will always stand out — his devotion to his students and his personal role in my life as mentor, colleague, and friend.</p> <p class="p1">On the first point, one could note the large number of great scholars who emerged under his supervision in both Seattle and St. Louis or those who were simply inspired by his teaching to pursue careers in academia.&nbsp; But perhaps it is sufficient to observe that when the Jonathan Hughes Memorial Prize in teaching was instituted by the Economic History Society, North was the first recipient and an overwhelming favorite — not least of which because Jon Hughes had been one of Douglass’s first graduate students.&nbsp; On the day North received the Nobel prize, he cut off his interviewers to teach his regular courses, and reporters got a first-hand look at North the teacher.</p> <p class="p1">In my own life, North played an outsized role.&nbsp; He hired me at Washington University in St. Louis straight out of Northwestern where I’d completed a Ph.D. under Joel Mokyr.&nbsp; I remember the day he came to NU to speak.&nbsp; The room was packed with students and faculty.&nbsp; I tried asking a couple of questions, but of course, the faculty got the bulk of his attention.&nbsp; But he came up to me later and asked me what had troubled me about his talk.&nbsp; He then asked me to write a detailed letter of critique that he could read back in St. Louis, which I promptly sent off to him the following week.&nbsp; A short while later he called me up to interview for a position in the Economics Department.&nbsp; I spent 22 stimulating and wonderful years in St. Louis and I was there to observe the birth of the New Institutional Economics as a full-blown movement and not just a set of ideas.&nbsp; Political economy, economic history, and institutional discussion flourished at St. Louis in those days.</p> <p class="p1">At various times in the 1980s up through the mid-nineties we had Barry Weingast, Ken Shepsle, Lee and Alexandra Benham, James Alt, Randy Calvert, Gary Miller, Bob Parks, and Art Denzau as regular participants at the political economy workshop and at the informal Friday lunches that Doug organized.&nbsp; Jean Ensminger from Anthropology and I from Economics were the juniors in the group and we were later joined by Jack Knight, Norman Schofield and Itai Sened in Political Science, and John Drobak from the Law School.&nbsp; For a few years we also benefited from the participation of Gary Cox and Matt McCubbins when they were at the business school.&nbsp; Many of the leading young historians of the day, including Avner Greif and Jean Laurent Rosenthal, first spoke at Wash U. at these informal Friday lunches.&nbsp; Most of the other great scholars and leaders in political economy – from Mancur Olson and Ronald Coase to Yoram Barzel, Gary Becker, Robert Fogel, Oliver Williamson, and Elinor Ostrom were regular speakers at our Thursday Political Economy seminars.&nbsp; And of course, St. Louis hosted the first conference of the newly formed International Society for the New Institutional Economics with Coase serving as its honorary first president and North succeeding Coase.</p> <p class="p1">I well remember the pattern of the informal Friday lunches before they became a formal seminar workshop with many invited speakers.&nbsp;&nbsp; A group of us would walk over to a restaurant on Delmar while Doug talked about the ideas he was working on — having first given us a draft to look over.&nbsp; At the restaurant, the group would tear into his ideas and argue and scream at each other for a good 45 minutes or so.&nbsp; Then we would begin our walk back while Doug would try to finish up his defense before we made it back to the department.&nbsp; The thing is, no one ever seemed to like the first drafts of Doug’s work, but Doug patiently took copious notes.&nbsp; And each time, the drafts got better and better, till they became the full-fledged work that was to establish his fame and reputation.</p> <p class="p1">He was a marvelous colleague and mentor.&nbsp; When I was struggling with the writing of my book, Doug egged me on by having me give him a chapter every two weeks to read, discuss, and to take apart.&nbsp; His door was always open to students and faculty and he relished chatting with one and all about anything and everything.&nbsp; I have never met anyone as welcoming of criticism and as generous with his time and attention as Doug.&nbsp; When we were both at Hoover one year, a family emergency required my flying to the Far East late at night and Douglass insisted on driving me to the San Francisco airport from Palo Alto.</p> <p class="p1">I well remember that I when I was finally promoted with tenure at Washington U, Doug came up to me and handed me a bottle of wine saying:&nbsp; “This is almost ready to drink and it’s my last bottle.&nbsp; Take good care of it.” It was a bottle of the 1970 Mouton Rothschild.&nbsp; When it was time for me to leave St. Louis for good, he repeated the gesture, this time with a bottle of Chateau d’Yquem.</p> <p class="p1">I have met so many people who can recount an endless number of similar stories that I suspect the laws of physics were allowed to bend around Doug.</p> <p class="p1">When I moved to Fairfax one of the hardest things for me was losing regular contact with Doug, but fortunately we stayed in touch almost to the end.&nbsp; When I saw him a few months ago, he was clearly suffering and weak, but he still played the genial host and was eager to discuss ideas.&nbsp; In particular he was always quick to boast about the latest and greatest work he was doing.&nbsp; He never tired of discussing economics and he never lost his love for research, discussion, and ideas.</p> <p class="p1">As a scholar, he was one of the giants.&nbsp; But he was also a Prince among men.&nbsp; Even at 95, he was too young when he passed away.</p> Mon, 30 Nov 2015 10:57:23 -0500 The Monetary Mechanism of Stateless Somalia <h5> Publication </h5> <p><span style="font-family: 'Helvetica Neue', Arial, Helvetica, sans-serif; font-size: 13px; font-style: normal; line-height: normal; font-weight: normal; color: #333333;">A peculiar monetary institution emerged during the period of interregnum in Somalia from January 1991 to August 2012. Without a functioning government to restrict the supply of notes in circulation, Somalis found it profitable to contract with foreign printers and import forgeries. The exchange value of the largest denomination Somali shillings note fell from US $0.30 in 1991 to US $0.03 in 2008. However, the purchasing power eventually stabilized at the cost of producing additional notes.</span></p><p><span style="font-family: 'Helvetica Neue', Arial, Helvetica, sans-serif; font-size: 13px; font-style: normal; line-height: normal; font-weight: normal; color: #333333;">Find the article <a href="">here</a>.</span></p> Mon, 30 Nov 2015 10:03:01 -0500 Nobelist Douglass North Taught Us Institutions Matter Most <h5> Expert Commentary </h5> <p class="p1"><a href="">Douglass C. North</a> passed away on Nov. 23, 2015, at the age of 95. A <a href="">recipient</a> of the Nobel Memorial Prize in Economics, he was one of the most cited and influential scholars of his generation—not just in economics, but also in law, political science, history, and development. Though he started as a conscientious objector and even a Marxist before World War 2, North's views constantly evolved and in the end, he did more than anyone to restore to the study of economics the importance of good institutions as the basis for the success of modern market capitalism.</p> <p class="p1">Today, the idea that good formal and informal institutions (laws, norms, and their enforcement characteristics)—the rules of the game as he called them—are a crucial determinant of economic success or failure is almost a trite truism accepted by academics, NGOs, and most governments from Mumbai to Moscow, and from Berkeley to Beijing. So it is difficult to recall a time half a century ago, when most leading economists and bureaucrats could say or suggest that all that mattered for development were new technologies, capital transfer, and good Keynesian management of employment and aggregate demand. Leading surveys of growth in the 1950s were written as if the only differences between the economies of the United States, France, Sweden, and the Soviet Union were due to unemployment, technology transfer, capital accumulation, and demand management.</p><p class="p1"><a href="">Continue reading</a></p> Sun, 29 Nov 2015 09:54:59 -0500 Don't Blame Food Companies for Your High-Calorie Thanksgiving <h5> Expert Commentary </h5> <p class="p1">As Thanksgiving draws near, once again everyone's attention turns to festive holiday treats and the explosive number of calories contained therein. The usual <a href="">incriminations</a> of Big Food and its role in ballooning waistlines typically follow. Health advocates <a href="">blame</a> food companies for putting profits above consumers' well-being and for selling consumers cheap junk food loaded with fat and sugar but containing few nutrients. Consequently, they <a href="">call</a> for food regulations and taxes on junk food to counter the food industry's harmful effects. Yet health advocates are unlikely to achieve the outcomes they seek because they mistake the nature of the problem.</p> <p class="p1">To understand just how unusual the criticism of food companies is, it may be helpful to examine how food companies are judged compared to virtually any other industry. Imagine that you are buying an economy class airline ticket and at the end of the transaction, the airline asks you if you'd like to upgrade to business class for just a tiny fraction of your ticket's price. Now imagine that the airline offered this option to every single customer, not just a lucky few. Having been packed like a sardine into ever-fuller planes with ever-tighter seats, I'd guess this airline would be quite popular with its customers. If anyone criticized airline companies for giving their passengers more legroom, people would dismiss it as absurd.</p><p class="p1"><a href="">Continue reading</a></p> Tue, 24 Nov 2015 10:53:25 -0500 Modernizing Freight Rail Regulation: Recommendations from the TRB Study <h5> Publication </h5> <p><iframe src="//" width="510" height="420" frameborder="0" marginwidth="0" marginheight="0" scrolling="no" style="border: 1px solid #CCC; border-width: 1px; margin-bottom: 5px; max-width: 100%;"> </iframe></p> <div style="margin-bottom: 5px;"><strong> <a href="//" title="Modernizing Freight Rail Regulation: Recommendations from the TRB Study" target="_blank">Modernizing Freight Rail Regulation: Recommendations from the TRB Study</a> </strong> from <strong><a href="//" target="_blank">Mercatus</a></strong></div> <p class="p1">In June 2015, the National Academy of Sciences’ Transportation Research Board issued a report with recommendations to update and modernize economic regulation of rail freight transportation. Jerry Ellig served as a member of the committee that prepared the report. This presentation, given to the National Industrial Transportation League’s Railroad Transportation Committee in November 2015, &nbsp;summarizes the report’s main recommendations. For a short narrative that explains the recommendations, see Dr. Ellig’s commentary in <a href="">Real Clear Policy</a>.</p> Tue, 24 Nov 2015 10:11:45 -0500 An ACA Provision You've Never Heard of Could End up Being Very Costly <h5> Expert Commentary </h5> <p class="p1">One of the most consequential provisions of the Affordable Care Act (ACA) is also one of its most obscure.</p> <p class="p1">The “productivity adjustment factor,” inserted by the ACA into the Medicare program, is a massive spending cut, one of the largest in the program’s history. It was included to make room in the federal budget for the ACA’s expensive new health insurance subsidies. &nbsp;If Congress follows past practice, the ACA’s higher spending will be with us long after savings from the productivity adjustment factor have been reduced or eliminated altogether.</p> <p class="p1">The productivity adjustment factor is one of four ACA “indexing” provisions we examined <a href="">in a new research paper published by the Mercatus Center at George Mason University</a>. Indexing refers to adjustments that are made to keep tax and program benefit parameters consistent with policy preferences over time. &nbsp;The most familiar indexing provision in federal law is the Social Security cost-of-living adjustment, or COLA, which prevents purchasing-power erosion of Social Security checks due to inflation.</p> <p class="p1">In Medicare, the federal government makes a COLA-like adjustment to the payments made to hospitals and other facilities. The cost of running a hospital is measured by examining a “market basket” of goods and services typically purchased by inpatient facilities. The prices of items in the basket are tracked, creating an index used to maintain the inflation-adjusted value of Medicare’s payments for seniors’ hospital stays.</p> <p class="p1">Since 1983, when Congress established this prospective payment system for hospitals, Capitol Hill has frequently made ad hoc adjustments to the increase that otherwise would have applied to hospital payments. &nbsp;For instance, in 1990, as part of a large budget-cutting effort, Congress reduced the market basket increase for fiscal year 1991 by 2.0 percentage points for hospitals located in urban areas and 0.7 percentage points for facilities located in rural communities.</p> <p class="p1">The new ACA productivity adjustment factor is different from previous adjustments because it isn’t ad hoc (the formula for making the cut is written into the law) and it isn’t temporary (it will occur automatically every year). Under this provision, the annual updates to hospital and other facility payments will be reduced by a measure of economy-wide productivity increases -- thus it’s a productivity adjustment factor. The government actuaries who produce Medicare cost projections estimate that this factor will reduce the market basket index by, on average, 1.1 percentage points annually, dropping the average increase from 3.5 percent to 2.4 percent.</p> <p class="p1">The budgetary savings from this cut in payments are substantial -- at least on paper. The Congressional Budget Office has estimated it would reduce Medicare spending by $196 billion over 10 years -- making it the largest single spending reduction included in the ACA.</p> <p class="p1">But it is over the long run that the purported cost reductions are truly staggering because the annual cut compounds each year. Medicare’s actuaries have compared these cuts to a scenario in which hospital and other facility payment updates more closely track historical rates. That comparison shows the productivity adjustment factor reduces Medicare spending by about $4.0 trillion over seventy-five years, measured in present value terms.</p> <p class="p1">The actuaries are skeptical that the full cuts from the productivity adjustment factor can be sustained. They estimate that by 2040, half of all hospitals, 70 percent of skilled nursing facilities, and 90 percent of home health agencies would be losing money each year because of the deep cuts in their Medicare reimbursement rates. &nbsp;This would leave Medicare beneficiaries facing substantial barriers to accessing needed care. As the actuaries put it, “in practice, providers could not sustain continuing negative margins and, absent legislative changes, may have to withdraw from providing services to Medicare beneficiaries” or take actions to shift the cost of Medicare patients to other payers.</p> <p class="p1">It’s ironic that Congress enacted the productivity adjustment factor in 2010 because, even then, it was clear that a similar effort to cut Medicare payments to physicians was not working. The so-called “sustainable growth rate,” or SGR, was enacted in 1997 and imposed a cap on total physician fees that was indexed to GDP growth. As health expenses outpaced economic growth, the gap between the amount of spending allowed by the cap and what was necessary to take care of patients grew wider every year. With formula-driven cuts exceeding 20 percent, the SGR became impractical to enforce. It was abandoned altogether earlier this year.</p> <p class="p1">Formulaic cuts are attractive to legislators because they create the illusion of improved solvency in Medicare. The productivity adjustment factor is a blunt instrument that simply lowers what Medicare will pay for services, by trillions of dollars. But if the solution were that easy, it would have been done long ago. The truth is that Medicare is only valuable to the program’s beneficiaries if hospitals and physicians are willing to take Medicare patients. &nbsp;There’s nothing to stop providers of medical care from catering to patients covered by private insurance and avoiding those on Medicare and Medicaid when the government payments fall too low.</p> <p class="p1">The ACA’s defenders say the law will reduce future federal budget deficits. But that will only be true if Congress sticks with the productivity adjustment factor even when beneficiaries complain of restricted access to care. Based on prior history, that’s an unlikely scenario, to say the least.</p> Sun, 29 Nov 2015 17:48:39 -0500 A Common-Sense Solution to the Uber vs. Taxi Wars <h5> Expert Commentary </h5> <p class="p1">Since <a href="">Uber</a>'s launch in San Francisco five years ago, government officials have wrestled with how to address this new type of transportation service. Meanwhile, taxi drivers have cried foul over the unequal regulatory environment. They face a mountain of rules, ranging from sensible to comical and even bizarre, while ride-share upstarts Uber and Lyft operate outside most taxi laws. Policymakers across the nation could learn from their peers in Florida, who may have found a way to level the playing field and still make way for innovation.</p> <p class="p1">Last month, Broward County commissioners voted to reduce excessive taxi and ride-sharing regulations, creating a single set of simple rules that apply equally to all transportation services. Days later, Collier County joined the cities of Sarasota and Gainesville in completely deregulating vehicle-for-hire services, putting taxis and ride-share companies on equal footing. Now others — including Miami-Dade County, Portland, Ore., and Cambridge, Mass. — are considering similar changes.</p> <p class="p1">What kinds of laws do traditional taxi drivers face? Here are some examples:</p> <p class="p1">Most cities set a dress code for drivers; many explicitly prohibit bathing suits. Los Angeles keeps it classy by specifying black dress pants, black dress shoes and socks, and a white dress shirt. Female drivers have the option of wearing a black skirt.</p> <p class="p1">In Miami, it's illegal to operate a taxi without hubcaps, but again, Los Angeles does this one better by requiring that all the hubcaps match. Los Angeles also stipulates the proper lettering for signs in the taxicab. Apparently someone on L.A.'s Board of Taxicab Commissioners has a problem with serif fonts.</p> <p class="p1">Some cities appear to regard taxi drivers as not-so-distant cousins of Neanderthals, restricting a driver to only the words "taxi" or "cab," or if they are feeling particularly verbose, "taxicab," when soliciting a passenger. But monosyllabic solicitation must also be civilized: The L.A. taxi code prohibits using a "loud or boisterous tone of voice."</p> <p class="p1">Cities even micromanage taxi paint jobs. Washington's City Council decided in 2012 that the cabs weren't colorful enough and put the Taxicab Commission in charge of coming up with a unified paint scheme. However, the paint schemes submitted were so stunningly terrible — one looked like the Brazilian flag — that council members immediately considered revising the legislation to require a new design. The final result probably won't please University of Michigan fans, though; scarlet and gray are Buckeye colors. Less amusing, taxi owners will have to pay about $500 a vehicle to comply with the law.</p> <p class="p1">We've singled out some of the more arcane regulations. Most rules, however, are unnecessary in a world in which cellphone apps offer both drivers and riders instant feedback on the other's behavior and reputation. The only valid reason to regulate the transportation service industry is to ensure public safety. But burdensome regulations do more harm than good by creating barriers to entry, which reduce competition.</p> <p class="p1">For example, a seemingly innocuous rule such as the one mandating unified paint schemes makes it difficult for taxi companies to compete via product differentiation. This prevents riders from easily distinguishing taxis with a reputation for safety and high quality from riskier, low-quality fleets. Companies, in turn, have little incentive to hire better drivers or use cabs with better safety features.</p> <p class="p1">Other common taxi regulations are more obviously anticompetitive. Many cities limit the total number of taxi licenses available, and some even mandate a minimum number of cabs per company, crowding out newcomers. Still others impose steep licensing fees, outlaw price competition or require an additional license to pick up airport passengers.</p> <p class="p1">Economists have long argued that stiff competition is often far better than detailed regulations when it comes to fostering safety and quality. Recent research by the Mercatus Center at George Mason University illustrates how new communication technologies used by Uber and Lyft, which allow drivers and riders to rate each other, can fill the information gap between rider and driver.</p> <p class="p1">It's likely that the simple-yet-powerful discipline instilled by genuine competition and easily accessible customer reviews would outmatch even New York's 350-page taxi manual.</p> <p class="p1">In many municipalities, the taxi lobby has convinced policymakers that there are only two solutions: Either level the playing field by forcing ride-sharing firms to obey excessive taxi regulations, or ban ride-sharing completely. Leaders in Florida have shown that there's another option: Embrace progress by removing needless rules for all transportation service companies.</p> Fri, 20 Nov 2015 11:12:25 -0500 New Research: Affordable Care Act Not Working as Intended <h5> Expert Commentary </h5> <p class="p1">When the Affordable Care Act or “Obamacare” passed five years ago, government prognosticators and private research organizations projected between 21 and 27 million exchange enrollees in 2016. But last month, the Obama administration <a href="">announced </a>that it reduced that target to just 10 million enrollees.</p> <p class="p1">In 2010, the Urban Institute, a left-of-center think tank, projected that almost as many people with income above four times the poverty level ($47,080 for a single person and $97,000 for a family-of-four in 2015) would enroll in exchange plans as people with income less than half these amounts. Urban’s projections, which were fairly representative of other groups, are in hindsight wildly optimistic. <a href="">It turns out</a> that more than 25 times as many people with income below twice the poverty level purchased an exchange plan as people with incomes above four times the poverty level.</p> <p class="p1">In a new <a href="">research study</a> published by the <a href="">Mercatus Center</a> at George Mason University, I explore why ACA enrollment projections were so wrong. Here are the most likely explanations:</p> <p class="p1">First, for most uninsured people, the costs of enrolling in ACA plans exceed the benefits. For example, a recent economics <a href="">study</a> found that a typical single person making $40,000 is generally $1,500 to $3,500 better off by remaining uninsured as opposed to purchasing an exchange plan.</p> <p class="p1">Second, exchange plan deductibles are very high. In 2015, deductibles <a href="">averaged</a> about $3,000 for single coverage and $6,000 for family coverage for the most common type of plan. Tellingly, the only people who enrolled in exchange plans in large numbers—those below twice the poverty level—are the only ones who qualify for large subsidies to reduce these deductibles.</p> <p class="p1">Third, exchange plans <a href="">contain</a> fewer doctors and hospitals than expected.</p> <p class="p1">Fourth, the individual mandate isn’t motivating as many people to enroll as anticipated. The economic modelers <a href="">believed</a> that the mandate would create a “new social norm to have health coverage [that] can lead to behavioral responses much stronger than the nominal amount of the penalty would suggest.” However, few people who paid the mandate penalty in 2014 actually <a href="">signed up</a> for exchange plans in 2015 during a six-week special enrollment period created just for them. Moreover, hardship exemptions that relieve people who had any difficulty paying premiums from having to pay the penalty have weakened the mandate’s effectiveness.</p> <p class="p1">Fifth, the ACA requires insurers to offer coverage to all applicants at standard rates regardless of health condition. Large net attrition in exchange enrollment in both 2014 and 2015 suggests that many people may be dropping coverage after treatment.</p> <p class="p1">In addition to lower-than-expected enrollment, insurers are losing more money than anticipated. Just last year, the Congressional Budget Office <a href="">released</a> projections that insurers would make profits on exchange plans.</p> <p class="p1">Using <a href="">data</a> released by the administration, however, I <a href="">estimate</a> that insurers lost about 12 percent of ACA plan premiums in 2014. Insurers lost this much despite a huge government subsidy to cover most of the cost of their expensive enrollees. This subsidy delivered $8 billion to insurers in 2014, but it’s scheduled to end after the 2016 plan year. Starting in 2017, premiums will for the first time reflect the true cost of enrollees unless the administration devises a creative way to further subsidize insurers beyond what the law seemingly allows.</p> <p class="p1">In sum, double-digit premium increases in 2016 are a product of disappointing enrollment and insurers’ realization that a larger proportion of their enrollees are sicker and older than they expected. As premiums <a href="">increase</a>, deductibles are <a href="">rising</a> and provider networks are actually <a href="">shrinking</a>. These changes make ACA plans even less desirable to people who aren’t already sick or don’t qualify for large subsidies.</p> <p class="p1">The magnitude of the errors of initial predictions about the ACA’s effect is cause to re-examine our assumptions about health care markets. The failure of exchange plans to attract people who don’t receive giant subsidies should cause policymakers to revisit the law and allow people to purchase insurance products that they actually want.</p> Thu, 19 Nov 2015 12:07:15 -0500 A Downgraded ACA Baseline <h5> Expert Commentary </h5> <p class="p1">In a new <a href="">study</a> published today by the Mercatus Center at George Mason University, I assess key predictions made by both government and nonprofit research organizations about the Affordable Care Act’s (ACA) impact. The misestimates include: overestimating total exchange enrollment, overestimating enrollment of higher income people who do not qualify for subsidies to reduce premiums, projecting too many healthy enrollees relative to less healthy enrollees, and underestimating premium increases. This post focuses on the Congressional Budget Office’s (CBO) estimates. As CBO accounts for the first two years of the ACA’s implementation, its 2016 revised baseline will almost certainly&nbsp;show a lower overall budgetary cost for the law’s subsidies even as the average subsidy amount increases to account for a more adverse risk pool than expected.</p> <p class="p1"><b>CBO Overestimated Total Exchange Enrollment</b></p> <p class="p1">Right before the ACA passed Congress, <a href="">CBO projected</a> the law would have an average annual exchange enrollment of 8 million people in 2014, 13 million people in 2015, and 21 million people in 2016.</p> <p class="p1">It turns out these estimates were significantly&nbsp;too high in both 2014 and 2015 as only about 5.5 million people enrolled in 2014 and only about 9.5 million people enrolled in 2015. If the Obama administration’s recent <a href="">projection</a> of 2016 enrollment turns out to be correct, then CBO’s 2010 estimate of 2016 enrollment will be too high by about 50%.</p> <p class="p3"><b>CBO Overestimated Unsubsidized Enrollment</b></p> <p class="p1">In March 2015, <a href="">CBO released</a> downgraded expectations of exchange enrollment. In that update, CBO projected 11 million exchange enrollees with 3 million of them earning too much income to qualify for a premium subsidy.</p> <p class="p1">It turns out that CBO’s projection of 8 million subsidized enrollees was fairly accurate but its projection of unsubsidized enrollees was about double actual enrollment.</p> <p class="p1"><b>Enrollees More Expensive Than CBO Projected</b></p> <p class="p1">Under the risk corridor program, the government collects money from insurers with excess profits on ACA plans – exchange plans and ACA-compliant plans not sold through exchanges – and pays money to insurers with excess losses on these plans. In a <a href="">February 2014 estimate</a>, CBO projected that the government would receive an $8 billion windfall from the risk corridor program because of&nbsp;sizeable overall insurer profits. After the administration announced its intent to implement the program in a budget neutral manner, <a href="">CBO projected</a> that for the 2014 plan year profitable insurers would pay $1 billion for excess gains and unprofitable insurers would collect $1 billion for excess losses.</p> <p class="p1">It turns out that CBO significantly overestimated insurer profitability and thus expected generally healthier ACA plan enrollees than enrolled. Insurers with excess profits owed about $360 million and insurers with large losses requested about $2.9 billion. Using this data, I <a href="">estimate</a> that insurers’ losses on ACA plans in 2014, even with an $8 billion subsidy to cover the majority of the costs of their high expense enrollees, equaled about 12% of premiums. Standard and Poor’s<a href=";SctArtId=352088&amp;from=CM&amp;nsl_code=LIME&amp;sourceObjectId=9401106&amp;sourceRevId=5&amp;fee_ind=N&amp;exp_date=20251105-19%3A10%3A01">projects</a> that risk corridors will also run a significant deficit for the 2015 plan year.</p> <p class="p1"><b>CBO Underestimated Premium Increases</b></p> <p class="p1">In March 2015, <a href="">CBO projected</a> private health insurance spending per enrollee would grow by an average of 4.3% per year over the 2014-2018 period and that exchange plan premium increases would “generally reflect the underlying trend in spending by private health insurers.”</p> <p class="p1">It turns out that premiums will rise by double-digits next year. The weighted average <a href="">increase</a> is about 12%, with the average lowest cost silver and bronze plans <a href="">increasing</a> by 13% and 16%, respectively.</p> <p class="p1"><b>Anticipating Changes to CBO’s Revised ACA Baseline</b></p> <p class="p1">A large amount of uncertainty surrounds ACA projections given the magnitude of the changes made by the law. Although several of CBO’s projections have turned out to be well off the mark, it is worth noting that their projections tended to be better than those made by the <a href="">Centers for Medicare and Medicaid Services</a>, <a href="">The RAND Corporation</a>, and the&nbsp;<a href="">Urban Institute</a>.</p> <p class="p1">In its next ACA baseline, CBO will have to account for lower enrollment, particularly of people without subsidies, than it expected. Its new projections will also have to account for worse ACA plan risk pools and higher premium increases. These adjustments will cause other estimates to change, including the overall subsidy cost, the number of people with employer-sponsored insurance (ESI), and the amounts of revenue generated from the individual and employer mandates.</p><p class="p1"><a href="">Continue reading</a></p> Fri, 20 Nov 2015 11:27:18 -0500 The Unintended Consequences of CFPB Debt Reform <h5> Expert Commentary </h5> <p class="p1">While we can be confident that new regulations for the debt collection industry are <a href=""><b>on the way</b></a>, it's not yet clear whether those regulations will help or harm consumers. The result is largely dependent upon the Consumer Financial Protection Bureau (CFPB), which has the opportunity to either help facilitate open, constructive communication between consumers and debt collection firms, or to saddle the industry and consumers with hasty regulations that result in unintended consequences.</p> <p class="p1">The CFPB so far appears to be pursuing debt collection regulatory reform through the normal regulatory process, receiving more than 20,000 public comments in the wake of their proposal last year, and is surveying consumers about their experiences with debt collection. In addition to those laudable efforts, policymakers would do well to consider the lessons that can be learned from studying the <a href=""><b>historical legal and economic framework</b></a> of consumer debt collection regulation.</p> <p class="p1">As the CFPB contemplates new rules, it should remember that that consumer debt collection has been heavily regulated for decades at both the state and federal level. While the debt collection process is certainly not a pleasant experience, the worst practices of the industry's past have generally been outlawed. Because of that, the CFPB should prioritize <a href=""><b>comprehensive regulatory impact analysis</b></a> to determine whether the costs of additional regulatory burdens imposed on the industry will outweigh the limited marginal benefits.</p> <p class="p1">Fair and effective protections against fraudulent and abusive practices by debt collectors can help consumers by making them more willing to borrow without fear of harsh collection practices. To be willing to make a loan, however, lenders must be able to price the risk of the loan accurately (through the interest rate on the loan and other terms) or reduce their risk of loss (such as by lending less to riskier borrowers). Poorly designed or overzealous regulation of collection practices can result in higher interest rates or a reduction of access to credit for consumers. Those consumers who are deemed to be the riskiest borrowers (often lower-income consumers) will be the first to be denied credit, or will be priced out of their first-choice credit options. Since those consumers will still have a need for credit, that means forcing them to use less-preferred and more expensive options like payday lending or auto-title loans.</p> <p class="p1">Moreover, even those in the collection process can be harmed by poorly designed regulation, particularly those that limit communications between creditors and debtors, by leading to more lawsuits against consumers. Changing technology has created a number of ways in which consumer debt collectors might communicate more efficiently and proactively with those facing unpaid debts, which can lead to voluntary dispute resolutions.</p> <p class="p1">Lawsuits are expensive and unpleasant, for both consumers and firms, but if the less costly methods of achieving a debt resolution are removed or further limited via new regulations, we should expect firms to turn to courts more quickly in the debt collection process. Consumers may not even know that it would have been possible to achieve a resolution out of court if firms are barred from communicating with them.</p> <p class="p1">This is certainly not to say that the CFPB can or should do nothing.</p> <p class="p1">Today's debt collection rules were designed in an era when most communications were through landline phones and snail mail. Modernizing the rules governing consumer debt collection to enable firms to work constructively with consumers, such as allowing more flexibility to contact consumers by email and cell phone, while still protecting consumers' privacy could substantially improve the circumstances of consumers currently going through a debt collection process and those in need of access to reliable credit in the future.</p> <p class="p1">The CFPB should go about doing so carefully, however. There are decades of empirical research on the economic trade-offs involved in these regulatory decisions, and what initially looks like a well-meaning rule to protect consumers can quickly turn into a host of unintended consequences that hurt the most vulnerable.</p> Wed, 18 Nov 2015 15:40:22 -0500 Budget Deal Is Business-as-Usual in Washington <h5> Publication </h5> <p>The Bipartisan Budget Act of 2015, freshly signed into law by President Obama, suspends the $18.1 trillion federal debt ceiling until March 2017. It also busts the 2011 Budget Control Act—<a href="">which I previously discussed</a>—for the second time. It does so by raising the caps on discretionary funding by $50 billion for fiscal year (FY) 2016 and $30 billion for FY 2017.</p> <p>The deal’s defenders claim that it is fiscally responsible because the additional funding is paid for with a combination of revenue increases and funding reductions elsewhere. To be able to make this claim, however, the deal’s authors turned to a well-worn budget trick: the Congressional Budget Office’s (CBO) scoring of the legislation. The CBO score attempts to measure the fiscal effects of a particular piece of legislation over a 10-year period by estimating the changes in revenues and spending versus a baseline projection. In the case of the budget agreement, the CBO’s score shows that over the next decade the increased spending would be completely offset.</p> <p>But the devil is in the details.</p> <p>This week’s chart shows the CBO’s score of the budget deal broken down annually from FY 2016 to FY 2025. The red bars show the funding increases. The bars in two shades of blue show the offsetting combination of funding decreases elsewhere and revenue increases.</p><p><a href=""><img height="398" width="585" src="" /></a></p><p><span style="font-size: 12px;">While the funding increases occur up front, the offsets would largely occur in the future. Indeed, roughly half of the “savings” wouldn’t occur until the final year, FY 2025. That begs an obvious question: If Congress can’t muster the fortitude to abide by spending constraints now, why should it be expected to abide by them in the future? As noted, this is the second time Congress has failed to uphold the cap limits since they were enacted in 2011. And even though the ink has barely dried on the president’s signature, </span><a style="font-size: 12px;" href="">policymakers are already promising the farm lobby</a><span style="font-size: 12px;"> that they will scrap the $3 billion in savings from cuts to the federal crop insurance program.</span></p> <p>Unfortunately, the gimmickry doesn’t end there. As the <a href="">Center for a Responsible Federal Budget details</a> on its website, only half of the deal is “truly paid for” thanks to double-counted savings, “<a href="">pension smoothing</a>,” ignoring additional interest costs, and additional funding for the Overseas Contingency Operations account that the <a href="">deal’s authors made sure didn’t make it into the final score</a>.&nbsp;</p> <p>I had <a href="">previously warned</a> that with the Republicans wanting more military funding and the Democrats wanting more nondefense funding, the likely outcome would be a deal that increased both. Unfortunately, with this deal that has proven to be the case. Such business-as-usual budgeting is just more evidence that policymakers remain incapable of getting the federal government’s finances on <a href="">sustainable footing</a>. &nbsp;&nbsp;</p> Wed, 18 Nov 2015 15:38:44 -0500