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The 2013 Mercatus Holiday Book Guide

The Editors — Wed, 11 Dec 2013 15:52:37 -0500

Expert Commentary

With just two short weeks until Christmas, there’s still time to get the perfect gift for the policy wonk in your life. These Mercatus Center books fit together as an economist’s macro wish list, but they also work as individual stocking stuffers for anyone interested in today’s important policy debates, economic theory, and classical liberal philosophy.

Average Is Over: Powering America Beyond the Age of the Great Stagnation
By Tyler Cowen

If you want one of the most talked about economics books in 2013, look no further than Tyler Cowen’s Average is Over. Cowen’s follow-up to his New York Times bestseller The Great Stagnation acts as a user's guide to living and prospering despite new and growing inequality. [Buy on Amazon]

Liberalism and Cronyism: Two Rival Political and Economic Systems
By Randall Holcombe and Andrea Castillo

By examining how real governments have operated, this book demonstrates why—despite their diverse designs—in practice all political and economic systems are variants of either liberalism or cronyism. [Buy on Amazon]

Regulation: A Primer
By Susan Dudley and Jerry Brito

There are currently over a million restrictions from federal regulations affecting nearly every area of our lives, yet many people have no idea how regulations are developed or how they cost us money, jobs, and time. Regulation: A Primer by Susan Dudley and Jerry Brito provides an accessible overview of regulatory theory, analysis, and practice. [Buy on Amazon]

Dodd-Frank: What It Does and Why It’s Flawed
Edited by Hester Peirce and James Broughel

The Dodd-Frank Wall Street Reform and Consumer Protection Act is the longest and most complex piece of financial legislation in American history. Taking a hard look at the law’s celebrated objectives, this book reveals that Dodd-Frank not only fails to achieve many of its stated goals, it also creates dangerous regulatory pathologies that could lay the groundwork for the next crisis. [Buy on Amazon]

House of Cards: Reforming America’s Housing Finance System
By Dwight Jaffe, Arnold Kling, Peter Wallison, Lawrence J. White, Michael Leah, Edward Glasser, and edited by Satya Thallam

Fannie Mae and Freddie Mac played a crucial role in inflating America’s housing bubble. Now that the bubble has burst and their mistakes have resulted in huge taxpayer losses, it’s time to address the problems inherent to them. In this compendium, six leading mortgage and real-estate finance scholars present their proposals to reform America’s housing finance system in ways that are productive yet sensitive to the fragile state of the current recovery. [Buy on Amazon]

Living Economics: Yesterday, Today, and Tomorrow
By Peter Boettke

This lively book illuminates how economics affects all walks of life, whether in the marketplace, voting booth, church, family, or any human activity. A consummate teacher, Boettke shows that economics is not merely a game to be played by clever professionals but a discipline that touches on the most pressing practical issues at any historical juncture. [Buy on Amazon]

Doing Bad By Doing Good: Why Humanitarian Action Fails
By Christopher Coyne

Doing Bad by Doing Good uses the economic way of thinking to focus on the constraints and realities facing humanitarians. In a field littered with the unintended consequences of good intentions, this book explains how and why humanitarian efforts not only fail but, in a twist of tragic irony, impose harms on those who are already suffering. [Buy on Amazon]

Institutional Diversity and Political Economy
By Paul Dragos Aligica

Building on the work of Nobel laureate Elinor Ostrom, Aligica challenges standard assumptions that homogenize and normalize individuals, ultimately showing how heterogeneity is a resource for a self-governing society of free individuals. Aligica discusses some of the most challenging ideas emerging out of the research program on institutional diversity associated with Ostrom and her associates, while outlining a set of new research directions and an original interpretation of the significance and future of this program. [Buy on Amazon]

The Clash of Economic Ideas: The Great Policy Debates and Experiments of the Last Hundred Years
By Lawrence H. White

For every movement, there is an equal and opposite counter-movement—or just about. As White shows in The Clash of Economic Ideas, behind movements and counter-movements in economic policy lies an ongoing and dramatic clash of economic ideas. He interweaves the economic history of the last hundred years with the history of economic doctrines to understand how contrasting ideas have originated and developed over time to become the ideas we encounter today. [Buy on Amazon]

Bourgeois Dignity: Why Economics Can’t Explain the Modern World
By Deirdre McCloskey

Deirdre McCloskey explains how our modern world was not the product of new markets and innovations, but rather the result of shifting opinions about them. During this time, talk of private property, commerce, and even the bourgeoisie itself radically altered, becoming far more approving and flying in the face of prejudices several millennia old. Bourgeois Dignity is a feast of intellectual riches from one of our most spirited and ambitious historians—a work that will forever change our understanding of how the power of persuasion shapes our economic lives. [Buy on Amazon]

For more recommendations, see the Holiday PPE Reading List.

Medicaid Overview

Jason J. Fichtner, John Pulito — Wed, 11 Dec 2013 13:37:59 -0500

Publication

Often called an afterthought to the Medicare program, Medicaid was signed into law under Title XIX of the Social Security Act. Unlike Medicare, which was created to provide health care coverage to those over the age of 65, Medicaid’s intent was the provision of care for individuals of any age who were financially limited. In 1966, Medicaid provided health insurance to 10 million beneficiaries.¹ Currently with approximately 57 million people enrolled, Medicaid has evolved into the largest health insurance provider in the United States.²

This policy brief will provide an overview of the Medicaid system, its budget implications at the state and federal levels, and the implications of the Patient Protection and Affordable Care Act (ACA) for states’ Medicaid programs.

What is Medicaid?

Medicaid is a government health insurance program providing coverage to individuals who are limited in their ability to pay for medical care. The program is run by the states using federal cost sharing dollars. Though state participation in Medicaid is voluntary, all 50 states and the District of Columbia participate. Each state, using federal matching funds, establishes and administers its own Medicaid program. As long as a state follows federal guidelines, it has the flexibility to determine the type and scope of services provided. Additionally, each state has the option of charging enrollees’ premiums and establishing out-of-pocket spending requirements such as copayments, coinsurance, and deductibles.

Although Medicaid eligibility varies dramatically from state to state, in order to qualify for federal funding each state must provide coverage to limited income families with children as well as individuals who are aged, blind, or disabled (see the percentage breakdown in figure 1 on the next page).³

Though the income threshold varies by state, an individual or family applying for Medicaid cannot exceed a certain income threshold, which is calculated in relation to a percentage of the Federal Poverty Level (FPL). Today, the FPL ranges from $11,490 for a family of one to $39,630 for a family of eight.⁵ For example, consider a pregnant woman comprising a family of one and fitting categorically into one of Medicaid’s mandatory eligibility groups. In 2013, the median (across 50 states and the District of Columbia) Medicaid threshold for this individual was 185 percent of the FPL.⁶ Therefore, she would be eligible for Medicaid if she earned less than $21,257.

It is important to note that states may offer a greater number and additional types of services offered that go above and beyond what is mandated by the Department of Health and Human Services (HHS). Through Section 1115 of the Social Security Act, the federal government has encouraged states to tailor the Medicaid program to their unique political and economic environments.⁷ Building upon Section 1115 of the Social Security Act, the Health Insurance Flexibility and Accountability (HIFA) demonstration initiative gives states enhanced “waiver flexibility to streamline benefits packages, create public-private partnerships, and increase cost-sharing for optional and expansion populations covered under Medicaid.” ⁸ Contingent on approval by the HHS Secretary, leaders are empowered to develop a unique program that meets their states needs.

Fearing Freedom: The Intellectual and Spiritual Challenge to Liberalism

Peter J. Boettke — Wed, 11 Dec 2013 09:42:03 -0500

Publication

The absence of dominion and discrimination in human relationships is a cardinal feature of a free and just society, according to James Buchanan. If classical liberals emphasized this benefit, they would help assuage the public’s fears about having to take on greater responsibilities if the welfare state were repealed.

Find the article at The Independent Institute.

Symposium on James M. Buchanan: Introduction

Christopher Coyne — Wed, 11 Dec 2013 09:37:35 -0500

Publication

Nobel laureate James M. Buchanan laid down a new foundation for political economy and classical liberalism. To understand its development, it’s helpful to note Buchanan’s indebtedness to the writings of Frank Knight, Knut Wicksell, and Italian public-finance scholars.

Find the article at The Independent Institute.

Federal Spending and Sequestration

Veronique de Rugy — Wed, 11 Dec 2013 09:23:13 -0500

Publication

These charts use the most recent Congressional Budget Office Updated Budget Projection figures from May 2013 to examine the effects of the sequester, or automatic spending reductions, on both general and non-war defense federal spending over the next ten years.

While the sequester has been widely presented as deeply cutting federal spending over a ten-year period, there is no actual reduction in overall spending levels. Rather, sequestration merely slows the overall growth in spending slightly between 2013 and 2023. Total spending will increase by $2.31 trillion during that time period. From 2013 to 2021, the period when automatic spending cuts are to be enforced, spending will grow by $1.73 trillion, or 49 percent. Non-war defense spending in particular takes a hit in 2014 but increases in 2015 and keeps rising by $92 billion to $590 billion, or 18 percent, in 2021. In the absence of the sequester, federal spending during that time would have been $1.87 billion. The impact of sequestration on overall federal spending represents a small reduction in the growth of spending rather than an actual spending cut.

As these charts show, federal spending will still increase considerably under sequestration. Furthermore, the decrease in the growth rate of federal spending mainly targets discretionary outlays, leaving big ticket programs such as Social Security, Medicare, and Medicaid largely untouched. These entitlement programs are the main drivers of the growing public debt.

The reluctance to accept such small cuts to the growth rate of federal spending, even as public debt spirals out of control, underlines the deep dysfunction in Washington. We will only see fundamental reform when our policymakers face reality and acknowledge the urgency and severity of our dire fiscal position.

Data Notes:

For general federal spending, the CBO outlines (in Table 1-1) its baseline, including the impact of sequestration. CBO’s previous Budget and Economic Outlook (February 2013) Table 1-7 projects the budgetary impact of removing the effect of the automatic enforcement procedures specified in the BCA. We use the data from Table 1-7 to estimate spending without sequestration. While not perfect, it seems a reasonable assumption based on the statement by CBO that “discretionary outlays will drop by $35 billion and mandatory spending will be reduced by $9 billion this year as a direct result of [the sequester]; additional reductions in outlays attributable to the cuts in 2013 funding will occur in later years.” That’s a total of $44 billion for FY 2013. Table 1-7 projects that repealing sequestration would add $42 billion to the debt in FY 2013. The spending increases and growth rates were calculated relative to FY 2012.

For non-war defense spending, the CBO outlines (in Table 1-5) its baseline discretionary spending on defense, including the impact of sequestration. We used the same data from Table 1-7 to estimate defense spending without sequestration. The same qualifications apply. Table 1-7 projects that repealing sequestration would add $43 billion to the debt in FY 2013. The spending increases and growth rates were calculated relative to FY 2012.

These are the most recently updated federal defense spending and general spending sequestration charts given the May 14, 2013 release of the latest CBO data. Previously on February 27, 2013, Mercatus Center senior research fellow Veronique de Rugy published a chart using data from CBO’s February Budget and Economic Outlook. On November 7, 2011, de Rugy published a chart using data from CBO’s 2011 baseline to examine the estimated growth in spending without and with sequestration. Also, on December 5, 2011, de Rugy published a chart using data from the CBO, OMB, and Department of Defense to examine defense budget authority (excluding war funding) with and without sequestration.

Virgil Storr: Cultural Spirit Gives Rise to Economic Spirit

Virgil Storr — Tue, 10 Dec 2013 14:11:41 -0500

Video

Dr. Virgil Storr argues that every market is animated by economic spirits that affect economic outcomes, and that these spirits are cultural phenomena, giving the example of St. Bernard's Parish's recovery following Hurricane Katrina in 2005.

Embed Code:

Proposed OSHA Standards on Silica Fail to Promote Worker Health

Michael L. Marlow — Tue, 10 Dec 2013 09:59:55 -0500

Expert Commentary

Tightening workplace standards in place since 1971, the Occupational Safety and Health Administration is proposing a new standard on silica exposure. Silica refers to very small particles at least 100 times smaller than ordinary sand created during work operations (e.g., cutting, sawing, grinding, drilling, and crushing) involving stone, rock, concrete, brick, block, mortar, and industrial sand. Silica exposure may cause fatal illnesses such as the lung disease silicosis.

Unfortunately, OSHA fails to adequately enforce current standards. Until it finds a way to ensure that businesses follow the current rules for protecting workers, a more stringent limit on silica exposure likely will not help improve worker safety.

OSHA is proposing a permissible exposure limit (PEL) of 50 micrograms per cubic meter of air, thus halving the silica exposure allowed for general industry and maritime workers—and reducing it by 80 percent for those in the construction industry. OSHA claims this stricter standard will eventually save 700 lives and prevent 1,600 new cases of silicosis per year.

However, the National Institute for Occupational Safety and Health reports that as much as 40 percent of OSHA-collected silica samples exceed current standards in the construction industry. OSHA itself admits that many workers are currently exposed to silica in excess of five times the proposed PEL of 50, and multiples of current standards.

OSHA’s far-from-perfect track record matters much here because its cost-benefit analysis for the new rules and requirements assumes businesses perfectly comply with all standards, past and present.

The following example demonstrates how perfect compliance exaggerates benefits: Suppose we pass a law mandating that all workers exercise each day for one hour. OSHA would estimate huge health benefits based on the assumption that all workers would, indeed, now exercise for a full hour each day. Of course, we all know that our actions rarely match up to our intentions and actual hours exercised will be far below estimates.

The same goes for OSHA’s assumption that the new silica standard will reduce the number of silicosis cases by 1,600 per year and therefore provide billions of dollars in benefits. These naïve estimates assume that all workers are exposed to no more than the more stringent standard—an unlikely scenario given the lack of success of the current standards.

Thus OSHA’s conclusion—that benefits from the proposed standard greatly outmatch the current standard—are already “baked-into-the-cake.” But this is an invalid comparison, akin to comparing the benefits of a revamped hypothetical law mandating two hours of exercise each day versus one hour. Does anyone believe the entire working population would now double the decreed dose of exercise when the original prescription was quixotic to begin with?

Much of this particularly bad regulatory move’s burden is borne by workers in small businesses. OSHA estimates that 2.2 million workers are exposed to silica, but 1.3 million workers (59 percent) are employed by 470,000 small businesses. Very small businesses—as defined by those with fewer than 20 workers—account for 580,000 (26 percent) of workers exposed to silica, with many working in foundries, construction and dental labs.

OSHA also mandates silica mitigation through dust control methods (e.g., water sprays, dust collectors, enclosed cabs on equipment, or prohibiting activities such as dry sweeping) that require businesses rely on personal protection equipment (PPE), like a gas mask, as a very last resort. Common sense suggests that encouraging the use of PPE may be a cost-effective method of limiting silica exposure, especially for small businesses struggling to make their weekly payrolls. Surprisingly, even though OSHA admits that the stricter proposed standards still pose significant risks, it does not appear to believe that PPE offers an added layer of protection.

Why does OSHA only suggest PPE as a last resort? Because it believes workers might not wear or properly maintain PPEs. But a little common sense suggests that these same arguments may be leveled against approved mandated methods of dust control—strong possibilities given OHSA’s track record on enforcing current standards.

The bottom line remains that OSHA unevenly enforces its well-intentioned rules, so tightening standards for regulations may not help protect workers as much as the agency claims. Similarly, even under perfect compliance with the new standard, PPEs would provide a low-cost option for greater protection from silica dust; yet OSHA bypassed including tighter rules for the use of such equipment. OSHA needs to go back to the drawing board and provide workers with a reasonable, sound and realistic law that protects them from the hazards of silica exposure.

The Volcker Rule Isn't the Best Way to Prevent Risky Bank Trading

Hester Peirce — Mon, 09 Dec 2013 16:26:44 -0500

Expert Commentary

Federal financial regulators are getting set to vote on the long-awaited Volcker rule, a key part of the Dodd-Frank financial reform law that aims to prohibit banks relying on deposit insurance from engaging in risky trading activities. In the words of the provision's authors, it reflects the view "that high-risk, conflict-ridden trading should not be subsidized by taxpayer insured deposits and cheap credit from the Federal Reserve."

That laudable goal must be assessed in light of the provision's unintended consequences and its administrative complexities. Policymakers have other options that could address the issue of taxpayer-subsidized risk-taking more effectively than the Volcker rule will.

Lawmakers included the Volcker rule in Dodd-Frank based on rhetoric rather than careful deliberation. Proprietary trades were not a significant cause of the financial crisis. More importantly, it is not clear that prohibiting firms from trading will make them safer.

Read full article

President Obama’s Budding Nanny State

Richard Williams — Mon, 09 Dec 2013 19:03:41 -0500

Expert Commentary

Parents often try to motivate their children with rewards, from stickers to ice cream to toys. Thousands of books and websites offer suggestions for how to get kids to do homework or clean up their rooms. But is it a mayor’s job to motivate you to drink less soda? Is it government’s job to urge you to sign up for health care by way of schools stealthily sending messages home through your children? Should bureaucrats find ways to change your mind about which washing machine you buy?

Whether you realize it or not, this so-called “nudging” of consumer choice, at the hand of government, is underway: Earlier this year, the White House revealed that it is establishing a task force dedicated to studying how to motivate you—just as parents do—to do what the government thinks is best for you. Maya Shankar, a senior adviser in the White House Office of Science and Technology Policy who is assembling the team, recently told the New York Times the task force will use “evidence-based policymaking” so that “government services are efficient, effective, and serve the needs of the American people.” To be clear, Congress did not pass legislation authorizing such activity; this is something dreamt up by bureaucracies to force their own preferences on citizens, whether by combatting obesity or discouraging procrastination when it comes to saving for retirement.

If the idea of federal government officials treating you like a child makes you squeamish, you must first understand the rise of “behavioral economics” in politics—a practice that is expanding rapidly with very little public involvement, transparency, or oversight.

Behavioral economics—the study of how psychology affects people’s decisions—most recently became a buzzword when former White House official Cass Sunstein co-authored, with University of Chicago economist Richard Thaler, the book Nudge while Sunstein was still a law professor at Harvard. In 2009, Obama appointed him as administrator of the Office of Information and Regulatory Affairs, where Sunstein championed cost-benefit analysis of regulation, as well as “nudges.” Sunstein left government in 2012 to return to academia, but the “nudge” school of thought has clearly lingered in the Oval Office: The newly created behavioral economics task force is the most prominent—and most disconcerting—example yet.

In May of this year, the White House convened a group of experts for a workshop—along with the National Institute on Aging (part of the National Institutes of Health), the White House Office of Science and Technology Policy, the White House Council of Economic Advisers and the Association for Psychological Science—to discuss how behavioral economics can better serve public policy. The NIA says that while it “does not support policy research per se, findings from the basic behavioral and social science research that it does support are an important resource for informing policies.” Much of this research is now featured on the NIA’s website, under its Division of Behavioral and Social Research.

According to a government document obtained by Fox News, the task force is modeled after Britain’s Behavioural Insights Team, or “nudge unit,” which is itself based on Sunstein and Thaler’s ideas. The American version will consist of four to five behavioral science experts working with more than a dozen federal departments and agencies to “help design public policies that work better, cost less, and help people to achieve their goals.” While most uses for behavioral economics fall to regulation, the task force has not announced exactly how it will function or whether it is confined just to the regulatory process. In fact, there is very little public information about the team at all.

But behavioral economics carries serious risks, because it’s not really about helping you achieve your own goals. Think about the range of questions you might ask yourself when buying a new car: Which is the safest, or the cheapest? Which gets good gas mileage? Which is the best fit for your family? Which has enough payload capacity to meet your small-business needs? Now think about what would happen if, instead of you answering these questions for yourself, it was government bureaucrats nudging you away from your preferences and toward theirs.

The Economic Situation: A Quarterly Commentary December 2013

Bruce Yandle — Mon, 09 Dec 2013 12:03:34 -0500

Publication

Prospering and Tapering in a Struggling Economy

With autumn leaves falling and leftover Halloween jack-o-lanterns still grinning, first estimates for 3Q2013 GDP growth and news of October’s employment went bump in the night and rattled the spirits of Washington’s chatterbox. GDP growth came in with a “lofty” 2.8 percent real growth, which was much more than most soothsayers expected. Tapering is on the way! Or so it seemed. The stock marked tanked. Then the Bureau of Labor Statistics announced that 204,000 jobs had been added to the economy in October; this also exceeded analysts’ expectations. The market recovered; the economy can handle tapering!

But while 2.8 percent growth surely looked good, when folded into a four-quarter moving average, the 2013 economy was still operating well below the 3.14 percent long-run average pace. Buried in the labor data were numbers indicating most of the growth was in relatively low-paying sectors. But they were jobs!

As indicated in the next chart, GDP’s par 3.14 percent has not been meaningfully exceeded since the early 2000s, when the economy was responding to tax cuts, increased spending, and accelerated government-sponsored home lending. We know what that witch’s brew fomented.

Digging into the GDP Numbers

Probing a bit deeper into the GDP analysis, one finds that the higher than expected numbers were associated with lower than expected consumer purchases. This means that about 0.8 percentage points of the 2.8 percent growth came with a run-up in final good inventories—stuff retailers hoped to sell but didn’t. This doesn’t augur well for 4Q2013 GDP growth, as those retailers may cut their purchases to bring inventories in line with expected sales.

But it’s not likely that Black Friday and later holiday shopping will give the economy a shot in the arm. Back-to-school sales, which generally foreshadow December’s holiday shopping, were below expectations this year. Big-ticket durable goods purchased partly with low-interest debt set a high pace. Retailers offered large discounts to get apparel and lower-priced goods off the shelf and out the door. There are always surprises, but fourth quarter performance will likely be well below the 2.8 percent first estimate for 3Q2013.

Probing Additional Data

The stronger than expected job numbers put the effects of the government shutdown under a statistical magnifying glass. The data seem to say the government closing did not hit the economy as hard as some expected. After all, there was full expectation that furloughed workers would be paid later.

There are more data to consider. According to the Institute for Supply Management’s monthly monitors, the US economy is clearly accelerating. The recent ISM numbers are well above 50—the neutral point—for both the manufacturing and nonmanufacturing economies. Perhaps more importantly, the forward-looking Manufacturer’s Alliance for Productivity Improvement’s leading indicator, shown below with the ISM numbers, is pointing north, which predicts higher growth in 2014’s second half.

Comparing President Obama’s Early Budget with His Mid-Session Review

Veronique de Rugy — Tue, 10 Dec 2013 12:21:56 -0500

Publication

How realistic are presidential budget projections? Even the most careful calculations are susceptible to inappropriate assumptions, misplaced optimism about economic and political conditions, and unavoidable uncertainty about what the future will hold.This week’s charts use data from the Office of Management and Budget to compare the Obama administration’s different budget projections over time. The charts display budgetary estimates of expected revenues, outlays, and deficits from 2008 until 2019. The projections in the Obama administration’s first budget, “A New Era of Responsibility” (NER) are compared against his “Mid-Session Review” (MSR) to see how expectations aligned with reality.

The first chart analyzes the differences in revenue projections among the two estimates. The chart suggests that the revenue projections in the NER were far too optimistic. The Obama administration believed that revenues would climb to over $3,023 billion in 2013, but the revised MSR predicts a much more modest yield of $2,777 billion for this year. This trend continues throughout 2019: the original NER revenue projections are considerably more optimistic than the revised MSR calculations.The second chart, which compares outlay projections among the same sources, tells a similar story. The original NER outlay projections were more optimistic than what actually came to pass. Although President Obama hoped for a more ambitious stimulus program of almost $4,000 billion in outlays to pull the nation out of recession in 2009, actual outlays amounted to a more modest $3,518 billion. Only in 2011 did expected NER outlays match actual outlays. For all other years, the president’s revised MSR outlay projections appear much less sanguine than his rookie NER expectations.

The final chart displays deficit projections from the two budgets. In this case, the NER overestimated deficits in 2009, but its projections fell short of the deficits actually incurred from 2010 to 2013. Even though the administration spent less than planned in its original NER, the lackluster revenue performance during this time was enough to increase the deficit considerably more than anticipated.

The MSR projects that deficits will fall below the original NER projections by 2016, dropping under $500 billion by 2018. Like most budget projections beyond a short-time horizon, this should be taken with a grain of salt; long-term projections are based on uncertain assumptions that often fail to provide an accurate picture, as shown in the original NER projections. Why should we expect that the president’s revised MSR deficit projections will be any less incorrectly optimistic this time? If recent history is any guide, we should expect the MSR deficits to be similarly distorted by these rose-colored assumptions.

Labor Market Still Struggling Despite Positive November Gains

Keith Hall — Tue, 10 Dec 2013 12:22:12 -0500

Expert Commentary

Although the Bureau of Labor Statistics announcement that the economy added 203,000 jobs in November has been welcomed as positive news, the overall numbers show that the labor market remains a concern. Mercatus Center senior research fellow Keith Hall, a former BLS commissioner, notes that the labor force participation rate is still worryingly low.

“At 203,000 jobs this month and an average of 189,000 per month so far this year, we have averaged about the same rate of job growth as last year, and the unemployment rate rebounded from last month’s rise, dropping to 7.0 percent. However, while the November data is generally positive, it is hard to be too encouraged when labor force participation remains so low.

“After dropping by whopping 720,000 last month, we added back just 455,000 to the labor force. Over the past two months, the size of the labor force as a share of working age population (62.8 and 63.0 percent, respectively) has been at its lowest level in nearly 35 years.

So far this year, the working age population has grown by 2.2 million, but the labor force has declined by 217,000. This decline in the labor force has been entirely responsible for the drop in the unemployment rate over the past 11 months from 7.8 to 7.0 percent. In fact, if the participation rate had held constant this year, the unemployment rate would be a full percentage point higher at 8.0 percent.”

Exploring The Affordable Care Act: What Is The Impact and What Is Necessary for Successful Reform?

Robert Graboyes — Mon, 09 Dec 2013 18:50:34 -0500

Video

To explore the fiscal realities of the ACA and discuss principles for successful healthcare reform, the Mercatus Center at George Mason University hosted a new Capitol Hill Campus featuring Dr. Robert Graboyes, Mercatus Center senior research fellow specializing in the economics of healthcare. This discussion concentrated on the economic implications of healthcare reform.

Full video:

Current State of the Affordable Care Act:

Critique of Decentralizers:

Breaking the Health Care Cost Curve:

Ideal Health Care System: Why Is There No Steve Jobs?

Impediments to Innovative Medicine:

Health Insurance vs Health Care:

Closing Remarks on Innovation, Final Thoughts on Centralizers and Decentralizers:

A Reality Check on the Pension Crisis

Eileen Norcross — Fri, 06 Dec 2013 10:37:40 -0500

Expert Commentary

The New York Times Room for Debate posted this question:

It’s been a bad week for public workers. On Tuesday, in a ruling that has implications for other cities, a federal judge ruled that Detroit’s public employee pensions are not protected in a federal Chapter 9 bankruptcy. On that same day, the Illinois legislature passed a deal trimming retiree benefits and increasing state contributions, providing a template for other states to follow.

Amid all this, is the continuing refrain that Wall Street fat cats are responsible for “looting the pension funds.” Are government retirees being forced to pay for pension fund problems caused by bad investments? If so, what’s the solution?

Eileen Norcross provided the following response:

Judge Steven Rhodes’ ruling that Detroit may reduce pensions under Chapter 9 bankruptcy now means that all parties must face a hard mathematical reality with consequences for real people: The city cannot afford to pay the benefits it has promised.

Detroit’s unfunded pension liabilities are immense, at over $9 billion on a risk-free (guaranteed-to-be-paid) basis. Unfortunately, they were valued and funded incorrectly. For years, the city assumed it would earn 8 percent annually on plan assets, an uncertain expectation that did not match the certainty of pension payments.

Detroit’s story is a lesson for union leadership and for other cities.

This “asset-liability mismatch” means the plan took a gamble that didn’t pay off. Accounting tricks during boom years made the fund look flush giving the city the impression it could dole out "13th checks" for some employees.

Former Mayor Kwame Kilpatrick also engaged in “fancy financing” using pension bonds financed with interest rate swaps resulting in a $1.44 billion debt.

How does Detroit restructure public sector retirement in a “fair and equitable” manner for retirees and workers?

1. Stop the bleeding and close the defined-benefit system. Every day the defined-benefit plan is open, the liability grows.

2. Transition younger workers into a defined-contribution or private-annuity plan. They have more time to plan for retirement. Give them ownership over their retirement contributions.

3. Accurately value defined-benefit plans according to the likelihood of payment.

4. Invest the assets in a liability-matching portfolio. Do not rely on uncertain and volatile asset returns.

5. Current workers who have accrued benefits in the defined-benefit system should face higher retirement ages to collect full benefits.

6. Current retirees should bear the smallest burden. If it is necessary to trim their benefits, adjust future payments through cost of living adjustments, rather than cutting current payments.

Detroit’s story is a lesson for union leadership and for other cities. Accounting fiction and financial escapades produce the worst-case scenario for workers, retirees and residents. Toss the political rhetoric and face the real numbers before it’s too late: It’s the only way to ensure economic justice and retirement security for public-sector workers.

Shutting Down the Engines of Innovation

Nita Ghei — Fri, 06 Dec 2013 09:59:53 -0500

Expert Commentary

The unfolding drama between the Food and Drug Administration (FDA) and upstart genetic testing 23andMe is simply the latest in the long string of troubling overreach by regulators that will continue to stifle innovation and growth.

For far too long, Congress has delegated excessive power to unelected bureaucrats in Washington. The result is an alphabet soup of agencies, often acting at cross-purposes, issuing regulations based on less-than-adequate economic analysis despite being required to weigh benefits against costs, and blithely assuming engineering and technological standards that do not exist.

Caught between a rock and a hard place, businesses close, or decline to open in the first place, and the jobs are lost or never created. Nonetheless, the agencies continue issuing regulations unchecked, and regulators remain serenely unconcerned about their hubris, convinced they know better than the rest of us what is good for us.

23andMe offers a genetic-testing kit, which is essentially a tube into which the customer spits and returns to the company. The actual test is conducted at a lab that is regulated by yet another federal agency. As Cato Institute senior fellow Walter Olson points out, there are sound legal reasons for the FDA to have refrained from acting in this case. Instead, the agency chose to go after 23andMe aggressively for marketing a “medical device,” even though the only device involved is a plastic tube, and the client cannot undertake further action on the test results without consulting a health care provider. This kind of device is part of the new economy, with a strong push toward the free flow of information. It is at odds with the old, paternalistic model, in which regulators and the medical establishment control what patients learn.

The FDA’s claim of jurisdiction is questionable, but challenging a regulator is fraught with risk, as former Buckyballs CEO Craig Zucker discovered. Buckyballs are rare-earth magnets that were marketed as desk toys for adults, and came with warnings to keep them away from children. The Consumer Product Safety Commission nonetheless decided the magnets were dangerous and wanted them banned. When the company challenged the decision, the commission eventually chose to do something quite unprecedented: sue the CEO personally, after the company was forced to shut down.

Buckyballs are gone. 23andMe will probably either shut down or move offshore. In either case, regulators effectively clamp down on jobs and innovation. It doesn’t stop here.

The messy rollout of Obamacare serves as an illustration of a different kind of regulator hubris. The sustainability of the Obamacare model depends on having young, healthy people enroll in the exchanges. When policy cancellations started rolling in and Healthcare.gov didn’t work, President Obama announced that states could let people keep their old policies for a year. The problem is that it was not technically feasible for insurers to turn on a dime to make that happen within the short time window available while putting aside all the other problems.

The Renewable Fuel Standards, requiring the use of 35 billion gallons of alternative fuels by 2017, however, remain the epitome of wishful thinking by regulators. The Environmental Protection Agency enacted the standards back in 2007 with the admittedly laudable goal of promoting clean energy. Unfortunately, the goals failed to take into account the difficulty in converting that much corn into fuel, as well as the fact that the technology did not exist for producing some kinds of biofuels in commercial quantities. In addition, there were scientific studies that found that engines in older cars, which are likely to be driven disproportionately by poorer people, could be damaged by the new fuels being pushed by the agency, with increased risk of injury and death. The mandate required a significant increase in acreage planted with corn rather than soy, which is damaging to the soil and environment. The EPA has lowered this year’s goal, making virtue out of necessity but not abandoned the standards.

The latest entry in the hubris foray is the Occupational Safety and Health Administration (OSHA), which has proposed a rule to control silica exposure with little regard to current enforcement and feasibility. There is wide variation in silica exposure, and how well industries manage it. While there are many problems with the proposed regulation, Mercatus Center senior scholar Michael Marlow points out, OSHA is also contemplating a requirement that employers cut silica exposure to a level not technologically feasible. If an inspection reveals a level above this level, the facility would be subject to regular OSHA inspections.

Each regulatory excess stifles industry growth. When regulators try to fit round pegs into square holes, as is the case with 23andMe, we see innovative companies disappear. The United States has carefully cultivated a legal regime that encourages innovation over much of its existence. It would be a great pity if regulatory overreach destroyed that advantage.

Principles for Telecommunications Act Reform

Brent Skorup — Thu, 05 Dec 2013 14:42:32 -0500

Expert Commentary

Congressional lawmakers are currently considering updating the Telecommunications Act of 1996. Mercatus Center research fellow Brent Skorup says that the reform effort is long overdue and discusses how to improve and modernize the United States’ telecom, broadband, and video programming laws.

"We need a major re-write that eliminates regulatory distortions in communications, much as airlines and transportation were deregulated in the 1970s.

There is bipartisan agreement that the 1996 Telecom Act was antiquated only shortly after President Clinton’s signature had dried on the legislation. There is also consensus that spectrum policy, still largely grounded in the 1934 communications statute, absolutely distorts today’s wireless markets. And there is frequent criticism from thought leaders, right and left, that the FCC has been, for decades, too accommodating to the firms it regulates and too beholden to the status quo.

Five key reform principles would provide a good starting point for improving the legal and regulatory climate.

Eliminate regulatory silos and level the playing field through deregulation;
Comprehensively reform spectrum, not just through more auctioning but through clear property rights;
Replace the FCC’s amorphous 'public interest' standard with a more clearly defined consumer welfare standard, which is more well-established in field of antitrust law;
Reform universal service fee programs by either converting them to vouchers or giving control to the states and let them run manage their own telecom assistance programs; and
Significantly reform and downsize the scope of the FCC’s power of the modern information economy.

The FCC largely sees itself as a competition agency today, but the current statutes don’t represent that gradual change in purpose. The FCC is slow, arbitrary, Balkanizes industries artificially, and attempts to regulate in areas it isn’t equipped to regulate. These characteristics create a poor environment for substantial investments in technology and communications infrastructure. We need a framework that minimizes the effect of special interests in communications and encourages investments that improve consumers’ lives."

Breaking Down Illinois' Pension Crisis

Eileen Norcross — Fri, 06 Dec 2013 10:30:05 -0500

Expert Commentary

Illinois’ pension problems are big—far bigger than the $100 billion funding gap the legislature said it tackled earlier this week with a new set of reforms. The funding gap is actually double that—well over $200 billion—when calculated on a fair-market basis.

Illinois is committed to fully funding the actuarial liability (and some are encouraging the system to sue the state should the government not pay it). This is one of the reasons the state is in such a hole—they are well behind on payments, and those payments are calculated based on the overly optimistic expectation that they will earn 8 percent a year on investments.

The new law proposes to save $160 billion over 30 years with the following reforms:

a) Curtail cost of living adjustments for retirees on a sliding scale.

b) Offer a 401(k) option for employees.

c) Increase the retirement age for younger workers, while decreasing their contributions by 1 percent (thus increasing take home pay).

d) Guarantee the state makes its annual payment.

The plan is receiving “sniper fire from all sides,” as one lawmaker put it. Labor unions don’t like it and are certain to take the state to court, arguing that Illinois’ constitution prevents the impairment of benefits. Some legislators also don’t like it. They would prefer to see more significant structural reforms and are worried about the very large annual payments that will affect spending in other areas of the budget.

The fact is, the Illinois constitution does guarantee benefits, in strong terms, and that puts the state on the hook. Indeed, the payments, which the state grew accustomed to skipping or bonding, are going to be very painful. Yesterday’s reforms are an attempt at “shared sacrifice,” though given the actual size of the liability, legislators are overestimating the proposal’s fiscal effects.

If the proposed measures hold up to a court challenge, what will the effects be on employees?

The Center for Tax and Budget Accountability calculated three scenarios:

Employee 1: Retired teacher, 30 years of service:
Initial annual benefit: $67,000
annual pension benefit after 20 years of retirement, $120,680 a year under the current pension system; $91,000 under the proposed changes.
Cumulative 20-year decrease: $282,632.

Employee 2: Retired Department of Children and Family Services caseworker, 20 years of service:
Initial annual benefit: $50,000
annual pension benefit after 20 years of retirement, $90,306 under current system; $63,000 under proposed changes.
Cumulative 20-year decrease: $261,215.

Employee 3: Central Management Services data processor, age 43, planning to retire in 15 years with 30 years of service:
Initial annual benefit: $72,000
annual pension benefit after 20 years of retirement, $130,000 under current system; $85,400 under proposed changes.
Cumulative 20-year decrease: $441,700.

And that's just starting to solve the problem. The question legislators should be asking is: How do we stop the bleeding and finance the massive liability we’ve accumulated?

Regulatory Landscape: Burdens on Small Financial Institutions

Hester Peirce — Wed, 04 Dec 2013 16:59:35 -0500

Video

In her testimony before the House Committee on Small Business, Mercatus Senior Research Fellow Hester Peirce discusses how regulations impact small banks.

Read Peirce's testimony: Regulatory Landscape: Burdens on Small Financial Institutions

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Why Government Institutions Fail to Deliver on Their Promises: The Public Choice Explanation

Veronique de Rugy — Wed, 04 Dec 2013 10:56:06 -0500

Publication

Chairman Issa, Ranking Member Cummings, thank you for the opportunity to testify today regarding the limitations of government intervention.

Despite Washington’s recent focus on the disastrous Affordable Care Act website rollout, policymakers are missing what the rollout glitches symbolize: the fundamental flaws that imbue government intervention.

The work of public choice economists such as Nobel laureate James Buchanan, Gordon Tullock, Mancur Olson, and William Niskanen has shown that, despite good intentions and lavish use of taxpayer resources, government solutions are not only unlikely to solve most of our problems—they often make problems worse.

Public Choice Economics: Politics without Romance

Congress spends a great deal of time discussing the need to address market failures such as monopolies and pollution.

However, even when such a problem does exist, the policies implemented to address it are often ineffective or undesirable.¹ That’s because, as public choice economists have pointed out, while there may be market failures, there are also government failures. In his Nobel Prize acceptance speech, popularized in his famous essay “Public Choice: Politics without Romance,” James Buchanan explains why looking to government for solutions often results in more harm than good.²

Public choice theory applies economic analysis—or the study of how incentives influence behavior—to politics. For instance, economists assume that people interacting in the marketplace are mostly driven by self-interest. That doesn’t mean that people aren’t concerned about others, or can’t act charitably. It simply means that their dominant motive—whether they are employers, employees, or consumers—is a concern for themselves. Public choice economists make the same assumption about government actors. As Jane S. Shaw writes in a primer about public choice economics, “although people acting in the political marketplace have some concern for others, their main motive, whether they are voters, politicians, lobbyists, or bureaucrats, is self-interest.” ³

In other words, unlike many economists before them, public choice economists revolutionized the field of economics by having symmetric assumptions about humans in public and private settings and replacing “romantic and illusory notions about the workings of governments” with more realistic ones.

Government Incentives

In the marketplace, scarcity guarantees that people compete for resources. In that environment, the price system and the risk of losses, combined with the prospect of potential profit, are powerful signals that guide people’s decisions to prudently buy, sell, invest, and save.

But unlike in the marketplace, the incentives for good management in government are very weak. For instance, even though lawmakers are expected to pursue the “public interest,” they make decisions that use other people’s money rather than their own. This means that their exposure to the risk of a bad decision is fairly limited, and there is little to no reward for spending taxpayers’ money wisely or providing a service effectively or efficiently.

Furthermore, because each voter bears a very small part of the cost of these bad decisions, and they have their daily lives to manage, voters lack the incentives to sufficiently monitor the government.⁴ And, as Shaw explains, voter ignorance can be quite rational:

Even though the result of an election may be very important, an individual’s vote rarely decides an election. Thus, the direct impact of casting a well-informed vote is almost nil; the voter has virtually no chance to determine the outcome of the election. So spending time following the issues is not personally worthwhile for the voter. Evidence for this claim is found in the fact that public opinion polls consistently find that less than half of all voting-age Americans can name their own congressional representative.

That is not, of course, the case in the private sector. Consumers have great incentives to make sure the car or the house they buy is worth the price they will pay for it. Employers also have great incentives to make sure they hire the best employees, as there is a high and direct cost for employing someone who can’t perform the job he or she is hired for.

Yet lawmakers—however well-intentioned—face serious difficulties in making the right decision. Many factors come into play, but it is worth highlighting the following two. First, the government does not have better information than private agents operating in the market, whether this be the health care market or any other market (financial, housing, etc.).⁵ Making matters worse, government decision-makers are usually insulated from market signals, and thus often lack important information about the problem at hand and the market itself.

Second, the resources government provides are often so enticing that companies may switch their focus from meeting the needs of customers to meeting the wishes of government officials—thus producing a less effective outcome.

Regulatory Conceit Is Strangling Tomorrow's Start-Ups

Hester Peirce — Wed, 04 Dec 2013 10:15:54 -0500

Expert Commentary

At Thanksgiving dinner last week, talk turned quickly from turkey to regulation. One of the dinner guests, along with a couple other computer whizzes, has designed software for which they think there is a real market. There is just one problem-regulation. The company can't even pilot test its product without first getting the blessing of state and federal regulators. The company's three employees know their way around computer codes, but regulatory codes are a different matter. The consequences of getting it wrong can be stiff penalties or, as my guest pointed out, "people get thrown in jail for this kind of stuff." The reality is that well-intentioned regulations may kill his company before its product goes live. If it does see the light of day, another set of regulations may make banks less likely to lend to the company.

My dinner guest's story is just one of thousands of similar ones. A great product and a willingness to pour hours into perfecting it are not enough. You also need regulatory expertise. Usually when two guys start a business in one of their garages, neither one of them is, aspires to be, or even knows a regulatory geek. Hourly rates driven by ever-increasing regulatory complexity make hiring an expert out of the question. You might set out to redesign your product so that the regulations don't cover it, but even that requires a deep understanding of government rules. So your only hope is to get bought out by a bigger company with a whole staff of regulatory experts.

Start-ups that do manage to figure their way through the regulatory maze may find themselves confronted by another problem-funding. The small banks that small companies often turn to for funding are themselves overwhelmed by regulation. Adding an extra compliance person to deal with the regulatory burdens emanating from Dodd-Frank, for example, may be the difference between a small bank staying in business and closing its doors or merging with another bank to spread out the regulatory costs.

A community banker may have sufficient familiarity with a local small business and the area in which it operates to know that a loan to the company will get repaid. But worries about justifying it to a regulator without the same local knowledge may keep him from making the loan. A banker that went into banking because she enjoyed working with growing small businesses in her community might leave banking because she does not enjoy working through an increasingly complex regulatory environment that steers time and resources away from customer service.

Regulators can create exemptions for small banks, but even figuring out whether an exemption applies and what its conditions are can be difficult work. For example, the staff of the Commodity Futures Trading Commission issued regulatory relief for small banks earlier this year in the form of a "no-action" letter. The letter allowed the banks an extra month to comply with a requirement that makes them eligible for an exemption from certain onerous CFTC rules, but not without reminding them that the requirement at issue "was expressly noted in the Federal Register" when the agency adopted the exemption. Expecting small bankers to have searched through thousands of pages of technical CFTC documents in order to find buried within them a brief mention of something pertinent to them seems impractical. Small banks are too busy absorbing regulations issued by their banking regulators to closely monitor the rulemaking activities of an agency that doesn't usually regulate them.

Even the people who devise complicated banking regulations are starting to ask whether they have gone a bit too far. Earlier this fall, the Bank for International Settlements-the institution that developed the international bank capital standards that are the basis for our domestic capital standards-issued a discussion paper about regulatory complexity. Rather timidly it suggests that "[t]here is some evidence that some parts of the capital framework have become unduly complex and that the marginal benefits from incremental complexity may be small, or even negative." While U.S. regulators have taken some steps to reduce the complexity of capital standards as they apply to small banks, they have a lot of regulatory simplification work yet to do.

Regulatory complexity should not be the stuff of Thanksgiving dinner conversations. But until we find effective ways to get rid of excess regulations and simplify the remaining ones, the people who run small banks and small businesses are going to be worrying about regulations, even during holiday dinners.