Mercatus Site Feed http://mercatus.org/feeds/home/publication/adam-thierer/People/id.70 en A Warning from the Medicare Trustees http://mercatus.org/expert_commentary/warning-medicare-trustees-0 <h5> Expert Commentary </h5> <p class="p1">My <a href="http://economics21.org/commentary/time-running-out-fix-social-security">most recent article</a> for e21 summarized the 2015 <a href="http://www.socialsecurity.gov/oact/tr/2015/tr2015.pdf">Social Security</a> trustees’ report released last week. This companion piece does the same for the&nbsp;<a href="http://www.cms.gov/research-statistics-data-and-systems/statistics-trends-and-reports/reportstrustfunds/downloads/tr2015.pdf">Medicare</a> report. These are the last annual reports in which I participated as a public trustee based on my term that ended last autumn. The Medicare report shows that the program is on an unsustainable path. Following is some key information from the report about Medicare finances.</p> <p class="p1"><b>Understanding Medicare finances involves much more than just tracking the solvency status of a trust fund.</b> Medicare has two trust funds, one for Hospital Insurance (HI), the other for Supplementary Medical Insurance (SMI). The HI trust fund operates in some ways analogous to Social Security. For example, it is financed primarily by a payroll tax on wages, it receives some income from taxing Social Security benefits, and each year the trustees estimate its actuarial status and projected duration of solvency.&nbsp;</p> <p class="p1">The SMI trust fund (from which physician services and prescription drug benefits are financed) operates quite differently. It receives about three-quarters of its revenue from the general government fund, a good portion of the remainder from beneficiary premiums, and is always kept solvent by statutory design. Thus, when SMI cost growth produces financial strains, these are manifested not in the threat of trust fund depletion but in rising cost obligations facing the federal budget as well as program participants.&nbsp;</p> <p class="p1">HI is the only part of Medicare for which the trustees produce solvency calculations, yet it is less than half of Medicare’s whole. In 2014 Medicare spent $269 billion from its HI trust fund but a larger <a href="http://www.socialsecurity.gov/OACT/TRSUM/tr15summary.pdf">$344 billion</a> from its SMI trust fund. Any undue emphasis on the trustees’ estimates of actuarial balance will miss well more than half of Medicare’s larger financial picture.</p><p class="p1"><a href="http://www.economics21.org/commentary/medicare-trust-fund-hospital-insurance-HI-SMI-07-30-2015">Continue reading</a></p> http://mercatus.org/expert_commentary/warning-medicare-trustees-0 Mon, 03 Aug 2015 14:08:06 -0400 Taking Control of Rent Control http://mercatus.org/expert_commentary/taking-control-rent-control <h5> Expert Commentary </h5> <p class="p1">Cities across the country occasionally flirt with rent control as a way to combat rising housing prices. Seattle is the latest metropolis to consider capping rents, as its city council recently took up the <a href="http://www.komonews.com/news/local/Rent-control-proposed-for-Seattles-affordable-housing-crisis-317743161.html">debate</a> despite the fact that the state of Washington currently doesn’t allow rent control. While nobody likes to have their rent go up, it’s important to understand why rent increases occur before taking action to prevent them.</p> <p class="p1">When the demand for a good like housing increases the price will increase. That higher price serves a purpose: It’s a signal to both producers and consumers that housing has become scarcer. The higher price incentivizes consumers to buy less housing while simultaneously encouraging producers to build more. If a policy like rent control is in place the price will be unable to adjust, which eliminates the consumer’s incentive to economize and the producers’ incentive to build. In such a scenario there will be a shortage, which is the result of having more people trying to rent housing than there is housing available. Housing shortages inevitably lead to long search times for apartments and a gradual decline in the quality of rental units. In Sweden, for example, <a href="http://www.bloomberg.com/news/articles/2014-08-28/sweden-s-home-shortage-sparks-attack-on-rent-regulations">rent control has contributed to apartment waiting times measured—not in weeks or months—but in years</a>.</p> <p class="p1">Seattle is certainly experiencing an increase in demand for housing. From 2005 to 2014 <a href="https://www.census.gov/popest/data/cities/totals/2013/">Seattle’s population increased by over 93,000 people, a 16 percent increase</a>. However, even this large increase in population only reflects a portion of the actual demand for housing in Seattle, since there are likely many people who want to live there but don’t due to the high cost of housing. The potential residents who don’t live in the city still contribute to the high prices since they bid them up when they compete with other consumers for apartments and houses.</p> <p class="p1">In response to this increased demand developers would normally build more housing, but in Seattle that’s not easy to do. Local land-use rules like the tower-spacing rule—designed to preserve views in the downtown area—<a href="http://www.seattletimes.com/business/real-estate/rules-preserving-city-views-set-up-clash-among-towers-competing-to-be-first-and-biggest/">make it difficult for developers to construct new units</a>. <a href="http://censtats.census.gov/bldg/bldgprmt.shtml">There were 43,524 single family and large apartment building units</a> constructed in Seattle from 2005 to 2014. And while this may sound like a lot, contrast that number with Houston, where over the same time period 115,749 units were constructed. Houston grew by over 160,000 people from 2005 to 2014—67,000 more than in Seattle—but <a href="http://www.realtor.org/topics/metropolitan-median-area-prices-and-affordability">home prices there are still much lower than in Seattle</a>. Both cities are experiencing higher demand for housing, but only in Houston is the amount of housing growing at a pace that aligns with that demand.</p> <p class="p1">In the long run there are only two ways to decrease housing prices in Seattle: decrease demand or increase supply. So what’s the city to do?</p> <p class="p1">Seattle’s city council probably doesn’t want to decrease demand, as this would mean that the city is becoming a less attractive place to live. So the only real option is to increase supply. Rent control doesn’t increase supply, but instead does the opposite: It discourages new construction by preventing prices from rising. Many cities across the country are having a difficult time attracting residents so Seattle shouldn’t take its growth for granted. But if Seattle and similar high-growth, expensive cities want to be affordable places to live they need to allow more housing.</p> http://mercatus.org/expert_commentary/taking-control-rent-control Mon, 03 Aug 2015 13:28:00 -0400 Regulators Need to Do Risk Assessment Right http://mercatus.org/expert_commentary/regulators-need-do-risk-assessment-right <h5> Expert Commentary </h5> <p class="p1">Risk science is the study of the effect of exposure to certain substances and activities on public health and safety. The effects produced may be beneficial or harmful, depending on the substance or activity under study and the dose to which one is exposed. As is commonly known, too little water is as harmful as too much water, while a moderate amount is very beneficial. In addition, a deadly substance that only exists on Saturn is of no concern to humans because our exposure to it is zero.</p> <p class="p1">Risk science is, of course, more complex than these two simple examples imply. It must take into account many factors, consider their interactions, and try to uncover the true effect hidden under many layers of complexity. Just like any science, risk science is a systematized study. Yet as long as the best process is carefully and transparently followed, we can trust that objective knowledge will eventually prevail. The danger, as in any science, is when the study is done ad hoc and behind closed doors. The scientific method cannot be jeopardized for the sake of superficially gratifying regulatory policies made contrary to evidence or under unacceptable levels of uncertainty.</p><p class="p1"><a href="http://www.usnews.com/opinion/economic-intelligence/2015/08/03/regulators-need-to-do-risk-assessment-right">Continue reading</a></p> http://mercatus.org/expert_commentary/regulators-need-do-risk-assessment-right Mon, 03 Aug 2015 13:23:05 -0400 The Consumer Financial Protection Bureau’s Arbitration Study http://mercatus.org/publication/consumer-financial-protection-bureau-arbitration-study-summary-critique <h5> Publication </h5> <p class="p1">The Dodd-Frank Act requires the Consumer Financial Protection Bureau (CFPB) to provide Congress with a report on the use of arbitration agreements in disputes between consumers and providers of consumer financial products. After issuing its report, the CFPB is empowered to promulgate regulations designed to protect consumers from agreements the CFPB deems harmful. In March 2015, the CFPB released its final report to Congress, and the tone and conclusions of the report suggest that the CFPB intends to aggressively regulate arbitration agreements in consumer credit contracts. The CFPB could also implement an outright ban on mandatory arbitration clauses.</p> <p class="p1">In a new study for the Mercatus Center at George Mason University, law professors Jason Scott Johnston and Todd Zywicki provide an overview and critique of the CFPB’s report. The study criticizes the report using primarily evidence supplied by the report itself. The CFPB’s findings show that arbitration is relatively fair and successful at resolving a range of disputes between consumers and providers of consumer financial products, and that regulatory efforts to limit the use of arbitration will likely leave consumers worse off. Moreover, owing to flaws in the report’s design and a lack of information, the report should not be used as the basis for any legislative or regulatory proposal to limit the use of consumer arbitration.</p> <p class="p2">To read the study in its entirety and learn more about its authors, see “<a href="http://mercatus.org/sites/default/files/Johnston-CFPB-Arbitration.pdf">The Consumer Financial Protection Bureau’s Arbitration Study: A Summary and Critique</a>.”</p> <p class="p4">BACKGROUND: ARBITRATION VS. LITIGATION</p> <p class="p1">Most people handle a dispute with the provider of a financial service—such as an erroneous credit card charge—by complaining to the provider, and by switching providers if the original provider does not respond to their satisfaction. For the few who want to take further action when their financial services provider refuses to provide relief, AAA (American Arbitration Association) consumer arbitration can offer a low-cost, speedy avenue of dispute resolution. Arbitration has become cheaper and easier over the years, and more and more companies—such as cellphone providers—offer to pay amounts as large as $10,000 to consumers who win in arbitration, regardless of the size of the charge or fee that the consumer contests.</p> <p class="p1">In contrast, most people who get a notice in the mail explaining that they are part of a class action lawsuit and might receive compensation if they fill out a claim form never take the time and trouble to fill out the form. The reason is that they are unlikely to get more than a couple of hundred dollars (often much less)—and if they do get anything, it will be many years later. Arbitration is often a superior and more efficient type of dispute resolution, yet the CFPB’s study condemns it based on faulty information and analysis.</p> <p class="p4">KEY ISSUES WITH THE CFPB REPORT</p> <ul class="ul1"> <li class="li5"><i>Comparing class action settlements with arbitration awards is methodologically flawed.</i> The CFPB was not given access to information about the terms of consumer arbitration settlements. Most consumer arbitrations settle, just as most consumer class actions do. Because of this, the CFPB’s study does not allow a meaningful comparison of how consumers fare in arbitration versus how they fare as members of class actions.&nbsp;</li> <li class="li5"><i>The CFPB paints a misleading picture of class action outcomes.</i> Even if the CFPB had data on arbitration settlements, its data on class action settlements—which show attorneys’ fees that are an unexpectedly low percentage of total class recovery and class compensation rates that are unexpectedly high—cannot be used to compare arbitration and class actions. These data reflect primarily settlements in fewer than a dozen huge class actions, and mask much lower class payout rates and higher attorneys’ fees in typical consumer class action settlements. Moreover, most of the class action settlements studied by the CFPB involved debt collection cases, but these rarely involve defendants even covered by an arbitration clause, so they should have been excluded as irrelevant to the issues the CFPB was examining.</li> <li class="li5"><i>The market’s solution to inaccurate charges works better than either arbitration or litigation.</i> The CFPB’s survey found that most consumers prefer the market response of canceling a credit card when they feel an issuer has failed to respond fairly to a complaint about charges, and that these consumers do not know much about either arbitration or class actions. This is exactly what should be expected given data showing that banks usually respond to consumer complaints by canceling or reversing charges. For consumers, the market response is far superior to ex post disputing via either arbitration or litigation.</li> <li class="li5"><i>Consumers perform better in arbitration than in litigation.</i> The majority of AAA consumer claimants represented by counsel, as well as the majority of AAA consumer claimants in general, realize higher rates of overall success (likely settlements or awards on the merits) compared to individual consumer litigants in federal court.</li></ul> <p class="p4">CONCLUSION</p> <p class="p1">The CFPB’s arbitration report contains substantial methodological flaws and does not support a ban on arbitration clauses in consumer credit contracts. To the contrary, the data presented in the report show that consumers on balance are better off if they have the arbitration process available to them for dispute resolution. Rather than relying on flawed methodology and inaccurate data, the CFPB should focus on the actual benefits arbitration provides to consumers.</p> http://mercatus.org/publication/consumer-financial-protection-bureau-arbitration-study-summary-critique Mon, 03 Aug 2015 12:30:39 -0400 The Accumulation of Regulatory Restrictions across Presidential Administrations http://mercatus.org/publication/accumulation-regulatory-restrictions-across-presidential-administrations <h5> Publication </h5> <p class="p1">Presidents and their administrations wield extraordinary authority over federal regulation. While executive agencies can only write rules within the bounds set by Congress, their mandates are often expansive. Presidents set priorities, appoint and direct agency leadership, and determine how and when to review proposed or existing rules for cost-efficiency and consistency. These decisions materially affect the pace of regulatory accumulation during a president’s time in office, which in turn affects the cost and complexity of doing business in the United States.</p> <p class="p1">This accumulation can be measured by counting individual restrictions in the <i>Code of Federal Regulations</i> (CFR). RegData identifies individual restrictions using specific words and phrases—<i>shall</i>, <i>must</i>, <i>may not</i>, <i>prohibited</i>, and <i>required</i>—that typically mark a specific action either required or forbidden by the regulation. The CFR contains all regulations currently in force, so its annual publication allows us to collect a running tally of individual restrictions.</p> <p class="p1">These charts show the accumulation of regulation during all administrations since President Carter’s through 2014. The first shows the trend of total restrictions across each president’s time in office.</p> <p class="p2"><a href="http://mercatus.org/sites/default/files/McLaughlin-New-Restrictions-Chart-1.png"><img height="418" width="585" src="http://mercatus.org/sites/default/files/McLaughlin-New-Restrictions-Chart-1.png" /></a></p> <p class="p1">Every term shows a visible increase in the total number of regulatory restrictions, except for Reagan’s second term, which shows a flat trend. Across no president’s term did the total number of regulatory restrictions actually decline. The cumulative effect of these increases by successive presidents is a near-doubling of total regulatory restrictions, from about 580,000 when President Carter took office to about 1,070,000 in 2014.</p> <p class="p1">Which presidents contributed most to the accumulation of restrictions? The second chart shows the absolute increase of regulatory restrictions in each presidential term.</p> <p class="p2"><a href="http://mercatus.org/sites/default/files/chart-2-McLaughlin-Increase-Regulatory-Restrictions.png"><img src="http://mercatus.org/sites/default/files/chart-2-McLaughlin-Increase-Regulatory-Restrictions.png" width="585" height="392" /></a></p><p class="p2"><span style="font-size: 12px;">President Obama not only oversaw the greatest increase in regulatory restrictions in a single term, his first, but as of 2014 he has edged past President George W. Bush as the president with the greatest total increase in restrictions since 1976. Presidents Carter and George H. W. Bush both had increases of more than 70,000 in their first terms, but both lost their reelection bids. Interestingly, while Presidents George W. Bush and Clinton both added regulations at similar rates across their two terms—with Clinton adding significantly fewer restrictions overall compared to Bush—President Reagan oversaw a large increase in regulation during his first term, but a relatively small increase during his second term.</span></p> <p class="p1">From these charts, a picture emerges of a 40-year bipartisan trend of regulatory accumulation, with the last two presidents adding the most regulatory restrictions. However, some presidents, such as President Clinton and President Reagan in his second term, were able to significantly restrain the growth of regulation. Future presidents will need to look to their predecessors to determine how to effectively manage the cumulative effect of regulation and maintain the necessary conditions for entrepreneurship and growth.</p> http://mercatus.org/publication/accumulation-regulatory-restrictions-across-presidential-administrations Mon, 03 Aug 2015 10:57:26 -0400 Biting the Hand That Houses Them http://mercatus.org/expert_commentary/biting-hand-houses-them <h5> Expert Commentary </h5> <p class="p1">Forbes recently found San Francisco to be America’s worst city for renters. On top of this, households earning the median income ($100,400) could only afford 11 percent of the homes for sale — by far the lowest percentage in the entire study. The fact that home prices are more than twice the cost compared to New York City — and rental prices are the highest in the nation — is not a failure of the housing market. It’s a failure of governmental policies restricting the construction of new housing.</p> <p class="p1">Soaring rents in the Bay Area can be partly attributed to economic growth in the tech industry, but the already rising prices are exacerbated by misguided, albeit well-intentioned, housing regulations. The Board of Supervisors decided against expanding short-term rental regulations, but now San Francisco voters will be asked to decide whether even more restrictive regulations — limiting all short-term rentals to 75 days per year — are justifiable.</p> <p class="p1">This ballot measure would worsen the existing housing problem by reducing incentives to build new homes and would impair The City’s ability to attract visitors. Since tourism is The City’s largest industry and contributed $10.7 billion to local spending in 2014, the laws targeting short-term rentals would amount to city residents biting the hand that feeds them.</p> <p class="p1">It’s a consistent and nearly unanimous conclusion among economists that rent-control laws inhibit new housing construction and disincentivize maintenance of existing properties. Nobel Laureates on both the right — like Friedrich Hayek, Milton Friedman and George Stigler — and the left — like Gunnar Myrdal and Paul Krugman — agree on this. In fact, Assar Lindbeck, who sat on the Nobel Prize committee, famously quipped, “Next to bombing, rent control seems in many cases to be the most efficient technique so far known for destroying cities.”</p> <p class="p1">While San Francisco is far from a bombed-out ruin, economists have empirical evidence to back up the economic theory. Harvard’s Ed Glaeser discovered a strong link between strict land-use controls and high housing prices. Daniel Fetter of the National Bureau of Economic Research added to this by studying how WWII-era rent-control laws led to a reduction in available rental properties — the regulations made the properties relatively more valuable when sold as owner-occupied homes. Similarly, sociologist Charles Hohm surveyed San Diego landlords, finding that rent controls would incentivize them to either leave the market or stop investing in their properties.</p> <p class="p1">The City by the Bay is no exception to this curse of unintended consequences, as the San Francisco Tenants Union has seen a “serious and steady depletion” of thousands of rental units. Similarly, laws that restrict a landlord’s ability to evict troublesome tenants incentivize some homeowners to never even consider renting out their extra rooms. The New York Times reported an estimated 10,000 to 25,000 units are kept off the market by landlords who are reluctant to deal with rental regulations — far more than the estimated 350 units removed by Airbnb. Clearly, short-term rentals are not at the heart of San Francisco’s long-running housing shortage.</p> <p class="p1">Furthermore, constraints on new construction limit the ability of property owners to address the shortage of housing. In fact, barely a year ago voters approved Proposition B, which even further restricted building heights. This prompted Gabriel Metcalf, The City’s own urban think tank director, to lament that San Francisco “effectively shut off thousands of future housing units.” So it’s not surprising to find that, according to the Census Bureau, more than 75 percent of San Francisco housing is more than 45 years old, and nearly half of its housing units were built before 1939.</p> <p class="p1">If San Francisco’s residents and city leaders want to solve their never-ending affordable housing shortage, they should take Glaeser’s advice to reduce housing regulations and “unleash the cranes.” If they tear down the damming regulations, they’ll find a flood of entrepreneurs waiting to sweep away the housing crisis.</p> http://mercatus.org/expert_commentary/biting-hand-houses-them Fri, 31 Jul 2015 10:56:19 -0400 Time is Running Out to Fix Social Security http://mercatus.org/expert_commentary/time-running-out-fix-social-security <h5> Expert Commentary </h5> <p class="p1">Last week saw the publication of the annual <a href="http://www.socialsecurity.gov/OACT/TR/2015/tr2015.pdf">Social Security</a> and <a href="http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/ReportsTrustFunds/Downloads/TR2015.pdf">Medicare</a> trustees’ reports, along with an accompanying <a href="http://www.socialsecurity.gov/OACT/TRSUM/tr15summary.pdf">summary</a>. The occasion was bittersweet for me, these being the last such reports in which I participated as a public trustee on the basis of my term ending last autumn. &nbsp;It has been a high honor to serve, largely because of the privilege of working alongside the other trustees – most especially my remarkable fellow public trustee Robert Reischauer – as well as the many dedicated, knowledgeable staff who strive so hard to put together these vital annual reports.&nbsp;</p> <p class="p1">This column summarizes key information from this year’s Social Security report. A follow-up companion piece will do the same for the Medicare report.</p> <p class="p1"><b>Social Security finances are on an unsustainable trajectory requiring legislated corrections as soon as they can be enacted.</b>&nbsp;The essential problem is that the program’s costs are growing faster than its tax base. This is inherently unsustainable and requires correction. The sooner the pace of cost growth can be slowed to a sustainable rate the better, both in terms of equity across generations, and to fix the problem before it becomes intractably large.</p><p class="p1"><a href="http://economics21.org/commentary/time-running-out-fix-social-security">Continue reading</a></p> http://mercatus.org/expert_commentary/time-running-out-fix-social-security Thu, 30 Jul 2015 15:33:06 -0400 A Process for Examining the Budget of an Agency within a Federal Department http://mercatus.org/publication/process-examining-budget-agency-within-federal-department <h5> Publication </h5> <p class="p1">The process of budget examination requires identifying success and failure, quantifying benefits and costs, and evaluating the results expected in terms of public benefits. Budget examination should also identify priorities. An examination of an agency budget request should reveal whether the agency delivered services to the public in an effective and efficient manner. Further, a proper budget examination informs Congress and the public whether the agency is a good steward of the public trust. A budget examination also informs the discussion about whether to increase or decrease the agency’s budget and where its resources should be devoted.</p> <p class="p1">This paper describes a series of questions and procedures to be followed by congressional staff in analyzing and preparing for a hearing on the budget of an agency. The items outlined in this paper are general principles and can be used to examine most agency budgets. For purposes of illustration, however, the paper uses the FDA, an agency within the Department of Health and Human Services (HHS), as an example.</p> <p class="p1">If the process of budget analysis should expose evidence of what activities work well and produce significant public benefit, then the incentive would be to support that activity with continued funding. However, if the analysis shows evidence that the activity produces little or no public benefit, then it is much harder to justify continued funding for that activity. A useful tool in making this decision is to identify the cost per unit of success and then eliminate activities with high costs and low levels of success. This theory is at the heart of “evidence-based budgeting.”</p> <p class="p1"><b>Defining Titles</b></p> <p class="p1">The two descriptive terms used in this paper define somewhat complementary approaches to budget development. Zero-based budgeting requires a review of the total amount of spending on each budget item in the budget process. Evidence-based budgeting<b> </b>requires that the entire budget be reviewed item by item using evidence of last year’s results to guide funding decisions.</p> <p class="p1"><b>Applying a Zero-Based and an Evidence-Based Budgeting Mindset to the Analysis of Expenditures</b></p> <p class="p1">Evidence-based budgeting demands evidence of what was achieved with the resources used in the last fiscal period. Using analysis of evidence of previous performance, it is possible to identify what expenditures will maximize the public benefit from this policy. Using this approach, it is possible to develop advice supported by evidence on what expenditures to maintain at current levels, request improved productivity from the same amount of money, or even recommend increases in funding to achieve significantly more in public benefits.</p> <p class="p1">Federal budgeting currently follows an incremental approach that concentrates primarily on changing the funding levels from year to year. Generally, it operates from the premise that all programs and activities should continue, with the main issue being whether annual funding should increase, decrease, or remain the same. By contrast, zero-based and evidence-based budgeting require each program and activity to justify why it should receive funding every year. These approaches are much more likely to ask what outcomes a program has achieved, what alternatives exist, and whether the program has outlived its usefulness. Applying these core principles can greatly enhance the quality of budget analysis, particularly for major regulatory and funding programs. Many of the specific lines of inquiry below reflect these principles.</p> <p class="p1"><b>Take Advantage of the Many Sources Available to Inform and Enhance Budget Analysis</b></p> <p class="p1">Numerous sources within and outside government can be called upon to support rigorous analysis of federal programs and agency performance. These include annual reports compliant with the Government Performance and Results Act (GPRA); audit reports; Office of Inspector General reports; Government Accountability Office (GAO) High Risk List reports; congressional committee oversight reports; program evaluations; GPRA strategic plans; and a variety of special purpose investigative reports. This information can add important context for funding decisions.&nbsp;</p> <p class="p1"><b>Legal Authorities and the Agency Mission</b></p> <p class="p1">It is important to examine the statute that created the agency, as well as any other statutes it implements, in order to confirm that the agency is using its budget resources in compliance with the law. It is also important to ensure that the agency’s mission and functions remain worthy of continued funding in terms of the goals pursued and performance results. Analysts should at this stage identify all programs and activities that are not part of the agency’s core business or do not advance its mission goals. These noncore activities should be recommended for transfer to another agency or for termination.&nbsp;</p> <p class="p1">If the agency has regulatory powers, analysts should determine whether the agency is acting in compliance with government-wide and agency-specific requirements governing regulatory activities.</p> <p class="p1"><b>Funding Authorization and Budget Resolutions</b></p> <p class="p1">Congressional rules generally require that appropriations be authorized by law. However, each year Congress appropriates billions of dollars for programs without a current authorization. Unauthorized spending for fiscal year (FY) 2015 totaled at least $294 billion. Authorization laws provide Congress with a key control over federal programs and federal agencies. The authorization process is an important tool available to Congress to review the longer-term achievements of programs and decide whether the program should continue or is now redundant. Thus, a budget examination should determine whether agency and program funding requests have appropriate authorizations. If the authorization is not current, these agencies or programs should be recommended for immediate reauthorization or termination.</p> <p class="p1">Analysts also should ensure that agency appropriations comply with funding levels and other conditions in any applicable congressional budget resolutions adopted pursuant to the Congressional Budget Act.&nbsp;</p> <p class="p1"><b>Performance, Effectiveness, and Outcomes</b></p> <p class="p1">A budget examination requires an analysis of agency performance; it asks whether the agency is effectively spending public dollars to deliver the expected outcomes efficiently. The agency’s reporting under GPRA provides a key resource for assessing goals and performance results. For example, GPRA reports should identify whether the agency’s mission goals are expressed as outcomes that capture intended public benefits and whether its performance measures are outcome-oriented and clearly related to its goals. Further, performance reports should describe how well the agency has performed against its goals and measures, how its performance can be improved, and whether there are agency programs that are outdated, redundant, or inferior to alternative approaches and should be reformed or terminated.&nbsp;</p> <p class="p1">If the agency has regulatory functions, analysts should consult the Mercatus Center’s Regulatory Report Card in assessing the agency’s performance. The FDA’s average score on seven regulations reviewed by Mercatus graders since 2008 is 12.6 out of 30, or 42 percent—a failing grade.</p> <p class="p1"><b>Oversight issues</b></p> <p class="p1">In addition to examining program effectiveness, the appropriations process is an ideal venue for conducting oversight of agency financial and program management, economy, and efficiency. Following are some key oversight subjects.</p> <p class="p1"><i>GAO high-risk list</i>. The GAO issues a biennial list of federal operations that it deems most vulnerable to fraud, waste, abuse, mismanagement, or other major deficiencies. The current list contains 32 high-risk areas, many of which have languished on the list for years or even decades. Any area on the GAO high-risk list should be a prime target for oversight. The FDA is the subject of one high-risk area: “Improving Federal Oversight of Food Safety.”</p> <p class="p1"><i>Inspector general list of most serious challenges</i>. Inspectors general are required by law to issue annual reports on the most serious management and performance challenges facing their agencies. These reports are like agency-specific high-risk lists and are equally important for oversight. The FDA is the subject of one quite broad HHS inspector general–designated challenge: “Ensuring the Safety of Food, Drugs, and Medical Devices.”</p> <p class="p1"><i>Financial stewardship</i>. Agencies are required by law to submit audited financial statements. Analysts should examine the agency’s annual financial audit and report in order to assess its performance as a steward of public funds. The auditor’s report will highlight any material weaknesses or other significant financial management problems. Failing audits or qualified audits should be unacceptable and the agency’s plan to become compliant should be examined closely.</p> <p class="p1"><i>Improper payments</i>. Agencies are required to report annually on estimated improper payments. It is estimated that across the federal government, improper payments for FY 2014 cost taxpayers $124.7 billion—up significantly from $105.8 billion in the prior year. This is pure fraud, waste, and abuse. Where improper payments are evident, analysts should ask for the agency’s plan and timeline to eliminate them.&nbsp;</p> <p class="p1"><b>Conclusion</b></p> <p class="p1">Having gathered the pertinent information for a hearing, the remaining task is to organize that information so it can be effectively used at the hearing. Demonstrating where there is a high return on taxpayer dollars is important, but equally important is demonstrating where there is a negligible or zero rate of return on taxpayer dollars spent. This type of critical information is most likely to influence budgetary spending decisions. This process to organize information will push the most relevant information to the forefront, but will have available the sources of the information. The relevant passages of laws, rules, and quotes from other hearings or reports should also be available. When questions are asked the relevant evidence should be immediately available.</p> http://mercatus.org/publication/process-examining-budget-agency-within-federal-department Wed, 29 Jul 2015 16:44:43 -0400 Mercatus Scholars on Barriers to Entry and Occupational Licensing http://mercatus.org/expert_commentary/mercatus-barriers-entry-and-occupational-licensing <h5> Expert Commentary </h5> <p class="p1">Mercatus Center scholars&nbsp;have repeatedly documented the costs of occupational licensing and offered suggestions for how to reform or eliminate unnecessary licensing practices.</p><p class="p1"><span style="font-size: 12px;"><b>Research</b></span></p><ul class="ul1" style="font-size: 12px;"><li class="li4">Mercatus research paper, “<a href="http://mercatus.org/sites/default/files/Horwitz-Breaking-Down-Barriers.pdf">Breaking Down the Barriers: Three Ways State and Local Governments Can Get Out of the Way and Improve the Lives of the Poor</a>” by Steve Horowitz (July 21 2015).</li><li class="li3">Testimony before the South Carolina Health Planning Committee department of Health and Environmental Control, “<a href="http://mercatus.org/publication/certificate-need-laws-implications-south-carolina-testimony">Certificate-of-Need laws: Implications for South Carolina</a>” by Christopher Koopman, Thomas Stratmann, and Mohamad Elbarasse (June 12, 2015).</li><li class="li3">Mercatus on Policy, “<a href="http://mercatus.org/publication/certificate-need-laws-implications-arkansas">Certificate-of-Need Laws: Implications for Arkansas</a>” by Christopher Koopman, Thomas Stratmann, and Mohamad Elbarasse (June 9, 2015).&nbsp;</li><li class="li3">Mercatus on Policy, “<a href="http://mercatus.org/publication/certificate-need-laws-implications-west-virginia">Certificate-Of Need Laws: Implications for West Virginia</a>” by Christopher Koopman and Thomas Stratmann (June 2, 2015).</li><li class="li3">Mercatus working paper, “<a href="http://mercatus.org/publication/how-internet-sharing-economy-and-reputational-feedback-mechanisms-solve-lemons-problem">How the Internet, the Sharing Economy, and Reputational Feedback Mechanisms Solve the “ Lemons Problem</a>” by Adam Thierer, Christopher Koopman, Anne Hobson, and Chris Kuiper (May 26, 2015).</li><li class="li3">Mercatus FTC filing, “<a href="http://mercatus.org/sites/default/files/Koopman-Sharing-Economy-FTC-filing.pdf">The Sharing Economy: Issues Facing Platforms, Participants, and Regulators</a>” by Christopher Koopman, Matthew Mitchell, and Adam Thierer (May 26, 2015).</li><li class="li3">Mercatus on Policy, “<a href="http://mercatus.org/publication/certificate-need-laws-implications-kentucky">Certificate-Of Need Laws: Implications for Kentucky</a>” by Christopher Koopman, Thomas Stratmann and Mohamad Elbarasse (May 26, 2015).</li><li class="li3">Mercatus on Policy, “<a href="http://mercatus.org/publication/certificate-need-laws-implications-michigan">Certificate-Of Need Laws: Implications for Michigan</a>” by Christopher Koopman, Thomas Stratmann and Mohamad Elbarasse (May 19, 2015).</li><li class="li3">Mercatus publication, “<a href="file:///C:%5C%5CUsers%5C%5Ckmartin2%5C%5CAppData%5C%5CLocal%5C%5CMicrosoft%5C%5CWindows%5C%5CTemporary">How state CON Laws restrict Access to Health Care</a>” by Christopher Koopman Thomas Stratmann, and Mohamad Elbarasse (May 13, 2015).</li><li class="li3"><span style="font-size: 12px;">Mercatus on Policy, “</span><a href="http://mercatus.org/publication/certificate-need-laws-implications-missouri" style="font-size: 12px;">Certificate-Of Need Laws: Implications for Missouri</a><span style="font-size: 12px;">” by Christopher Koopman, Thomas Stratmann and Mohamad Elbarasse (May 11, 2015).</span></li><li class="li3">Mercatus on Policy, “<a href="http://mercatus.org/publication/certificate-need-laws-implications-georgia">Certificate-Of Need Laws: Implications for Georgia</a>” by Christopher Mercatus on Policy, “<a href="http://mercatus.org/publication/certificate-need-laws-implications-south-carolina">Certificate-Of Need Laws: Implications for South Carolina</a>” by Christopher Koopman and Thomas Stratmann (May 5, 2015).</li><li class="li3">Testimony before the Indiana Senate Commerce and Technology Committee, “<a href="http://mercatus.org/sites/default/files/Timmons-testimony-4-13-15.pdf">Occupational Licensing Gone Wild? Why Licensing is Not Always the Answer</a>” by Edward Timmons (April 16, 2015).</li><li class="li3">Koopman, Thomas Stratmann and Mohamad Elbarasse (March 31, 2015).</li><li class="li3">Mercatus on Policy, “<a href="http://mercatus.org/publication/certificate-need-laws-implications-tennessee">Certificate-Of Need Laws: Implications for Tennessee</a>” by Christopher Koopman and Thomas Stratmann (March 24, 2015).</li><li class="li3">Mercatus on Policy, “<a href="http://mercatus.org/publication/certificate-need-laws-implications-florida">Certificate-of-Need Laws: Implications for Florida</a>” by Christopher Koopman and Thomas Stratmann (March 3, 2015).</li><li class="li3">Mercatus policy recommendations, “<a href="http://mercatus.org/publication/florida-fiscal-policy-responsible-budgeting-growing-state/policy-recommendations-0">Florida Fiscal Policy: Responsible Budgeting in a Growing State</a>” by Randall Holcombe (February 26, 2015).</li><li class="li3">Mercatus on Policy, “<a href="http://mercatus.org/publication/certificate-need-laws-implications-virginia">Certificate-Of Need Laws: Implications for Virginia</a>” by Christopher Koopman and Thomas Stratmann (February 24, 2015).</li><li class="li4">Mercatus working paper, “<a href="http://mercatus.org/sites/default/files/Timmons-OpticianLicensing.pdf">Bringing the Effects of Occupational Licensing into Focus: Optician Licensing in the United States</a>” by Edward Timmons and Anna Mills (February 17 2015).</li><li class="li3">Mercatus on Policy, “<a href="http://mercatus.org/publication/certificate-of-need-laws-implications-north-carolina">Certificate-Of Need Laws: Implications for North Carolina</a>” by Christopher Koopman and Thomas Stratmann (February 12, 2015).</li><li class="li3">Mercatus on Policy, “<a href="http://mercatus.org/publication/certificate-need-laws-implications-new-hampshire">Certificate-Of Need Laws: Implications for New Hampshire</a>” by Christopher Koopman and Thomas Stratmann (February 4, 2015).</li><li class="li3">Testimony before the New Hampshire House Health, Human Services and Elderly Affairs Committee, “<a href="http://mercatus.org/publication/certificate-need-laws-implications-new-hampshire-testimony">Certificate-of-Need laws: Implications for New Hampshire</a>” by Christopher Koopman and Thomas Stratmann (January 28, 2015).</li><li class="li3">Mercatus publication, “<a href="http://mercatus.org/publication/sharing-economy-and-consumer-protection-regulation-case-policy-change">The Sharing Economy and Consumer Protection Regulation: The Case for Policy Change</a>” by Christopher Koopman, Matthew Mitchell, and Adam Thierer (December 8, 2014).&nbsp;</li><li class="li3">Mercatus interactive publication, “<a href="http://mercatus.org/publication/40-years-certificate-need-laws-across-america">40 Years of Certificate-of-Need Laws across America</a>,” by Matthew Mitchell and Christopher Koopman (October 14, 2014).</li><li class="li3">Mercatus working paper, <a href="http://mercatus.org/publication/do-certificate-need-laws-increase-indigent-care">“Do Certificate-of Need Laws Increase Indigent Care?”</a> by Thomas Stratmann and Jake Russ (July 15, 2014).</li><li class="li3">Mercatus working paper, “<a href="http://mercatus.org/publication/regulatory-reform-florida-opportunity-greater-competitiveness-and-economic-efficiency">Regulatory Reform in Florida: An Opportunity for Greater Competitiveness and Economic Efficiency</a>” by Patrick McLaughlin, Jerry Ellig, and Dima Yazji Shamoun (March 18, 2014).</li><li class="li3">Mercatus on policy, “<a href="http://mercatus.org/publication/tale-two-labor-markets-government-spendings-impact-virginia">A Tale of Two Labor Markets: Government Spending’s Impact on Virginia</a>” by Keith Hall and Robert Greene, (September 20, 2013).</li><li class="li4">Mercatus publication, “<a href="http://mercatus.org/publication/pathology-privilege-economic-consequences-government-favoritism">The Pathology of Privilege: The Economic Consequences of Government Favoritism</a>” by Matthew Mitchell, (July 8, 2012).</li><li class="li3">“<a href="http://mercatus.org/sites/default/files/Cronyism-infographic-addendum_0.pdf">Beyond Bailouts: What is Cronyism?</a>” by Matthew Mitchell, (July 8, 2012).</li></ul><p><span style="font-size: 12px;"><b>Journal Articles</b></span></p><ul class="ul1"><li><span style="font-size: 12px;">Published in Harvard Journal of Law and Public Policy, “</span><a style="font-size: 12px;" href="http://mercatus.org/publication/state-competitorss-veto-laws-and-right-earn-living-some-paths-federal-reform">State ‘Competitors's Veto’ Laws and the Right to Earn a Living: Some Paths to Federal Reform</a><span style="font-size: 12px;">,” by Timothy Sandefur (July 2015).</span></li><li style="font-size: 12px;" class="li3">Published in Econ Journal Watch, “<a href="http://econjwatch.org/articles/was-occupational-licensing-good-for-minorities-a-critique-of-marc-law-and-mindy-marks">Was Occupational Licensing Good for Minorities? A Critique of Marc Law and Mindy Marks</a>” by Daniel B. Klein, Benjamin Powell, and Evgeny S. Vorotnikov (September 2012).&nbsp;</li><li style="font-size: 12px;" class="li3"><span style="font-size: 12px;">Published in Cato Journal, “</span><a href="http://grad.mercatus.org/publication/occupational-licensing-and-asymmetric-information" style="font-size: 12px;">Occupational Licensing and Asymmetric Information</a><span style="font-size: 12px;">” by David Skarbek (Jan 2007).&nbsp;</span></li></ul><p><span style="font-size: 12px;"><b>Charts and Videos</b></span></p><ul class="ul1" style="font-size: 12px;"><li class="li4">“<a href="https://youtu.be/WBYEalkWNag">The Wrath of CON | How Certificate-Of-Need Laws Affect Access to Health Care</a>” by Matthew Mitchell (May 12, 2015).</li><li class="li4">"<a href="http://mercatus.org/publication/occupational-licensing-bad-competition-bad-low-income-workers">Occupational Licensing: Bad for Competition, Bad for Low-Income Workers</a>" by Veronique de Rugy (March 25, 2014).</li></ul><p><span style="font-size: 12px;"><b>Media</b></span></p><ul class="ul1" style="font-size: 12px;"><li class="li3">Christopher Koopman discusses certificate of need laws on <a href="http://mercatus.org/podcast/2015/05/11/chris-koopman-discusses-certificate-need-law-bill-lumaye-show-wptf-nc">The Bill LuMaye Show</a> on WPTF in North Carolina (5/11/2015).&nbsp;</li><li><span style="font-size: 12px;">Timothy Sandefur publishes, “</span><a style="font-size: 12px;" href="http://mercatus.org/expert_commentary/think-licensing-laws-are-unfair-it-gets-worse">Think Licensing Laws Are Unfair? It Gets Worse</a><span style="font-size: 12px;">,” at </span><i style="font-family: inherit; font-weight: inherit;">Real Clear Policy </i><span style="font-size: 12px;">(April 21, 2015)</span></li><li class="li3">Edward Timmons and Anna Mills publish, “<a href="http://www.usnews.com/opinion/economic-intelligence/2015/02/17/occupational-licensing-is-short-sighted-hurts-low-income-workers">Short-Sighted Policy</a>,” at <i>U.S. News and World Report</i> (2/17/15).</li><li class="li3">Veronique de Rugy publishes, “<a href="http://reason.com/archives/2014/06/07/free-the-horse-masseuses">Free the Horse Masseuses!</a>” in <i>Reason Magazine</i> (July 2014).&nbsp;</li><li class="li3">Veronique de Rugy discusses state occupational licensing on <a href="http://mercatus.org/podcast/2014/06/06/veronique-de-rugy-discusses-state-occupational-licensing-jimmy-barrett">Richmond’s Morning News</a> on WRVA in Virginia (6/6/14).&nbsp;</li><li class="li3">Veronique de Rugy publishes “<a href="http://www.washingtonexaminer.com/licensing-laws-protect-special-interests-at-the-expense-of-opportunity/article/2546445">Licensing laws protect special interests at the expense of opportunity</a>,” at <i>The Washington Examiner</i> (3/28/14).&nbsp;</li><li class="li3">Patrick McLaughlin discusses occupational licensing on <a href="http://mercatus.org/podcast/2014/03/27/patrick-mclaughlin-discusses-occupational-licensing-ed-dean-radio-show">The Ed Dean Show</a> in Florida (3/27/14).&nbsp;</li><li class="li3">Donald Boudreaux publishes “<a href="http://triblive.com/opinion/donaldboudreaux/5784021-74/licensing-government-occupational%22%20%5Cl%20%22axzz2x61LX0Eh">Occupational licensing: Reality differs from rhetoric</a>,” in <i>The Pittsburgh Tribune-Review</i> (3/25/14).</li><li class="li4">Emily Washington blogs “<a href="http://neighborhoodeffects.mercatus.org/2013/08/20/occupational-licensing-hurts-consumers-and-limits-entrepreneurship/">Occupational Licensing Hurts Consumers and Limits Entrepreneurship</a>,” at <i>Neighborhood Effects</i> (8/20/13).</li><li class="li3">Veronique de Rugy blogs “<a href="http://www.nationalreview.com/corner/353666/more-state-occupational-licensing-law-abuse-kentucky-edition-veronique-de-rugy">More State Occupational Licensing Law Abuse: Kentucky Edition</a>,” at <i>National Review’s The Corner</i> (7/17/13).</li><li class="li3">Emily Washington blogs “<a href="http://neighborhoodeffects.mercatus.org/2012/06/25/small-steps-in-va-occupational-licensing-reform/">Small steps in VA occupational licensing reform</a>,” at <i>Neighborhood Effects</i> (6/25/12).</li></ul><ul class="ul1"> </ul> http://mercatus.org/expert_commentary/mercatus-barriers-entry-and-occupational-licensing Mon, 03 Aug 2015 17:40:04 -0400 On Objective Risk http://mercatus.org/publication/objective-risk <h5> Publication </h5> <p class="p1">Over the last several decades, criticism of regulatory agency estimates of risk has come from a variety of institutions, including the National Research Council and the president’s Office of Management and Budget. As with other matters related to regulation, Congress has delegated the task of estimating risks to federal agencies, with the expectation that they will apply the necessary level of expertise. Debate over agency risk assessments has often focused almost exclusively on the accuracy of the assessment, with little attention to whether the assessment followed objective scientific processes.</p> <p class="p1">In a new paper published by the Mercatus Center at George Mason University, economist Dima Yazji Shamoun and toxicologist Edward J. Calabrese show that shifting the debate to process objectivity would allow better evaluation of risk assessments. In doing so, the paper draws from the government’s own guidance for best practices for performing risk assessments. This paper provides a crucial first step toward enabling those who monitor regulatory agencies to hold them to those practices.</p> <p class="p1">To read the paper in its entirety and learn more about its authors, see “<a href="http://mercatus.org/sites/default/files/Shamoun-On-Objective-Risk.pdf">On Objective Risk</a>.”</p> <p class="p3">BACKGROUND</p> <p class="p1">Health and safety questions concern every American household: How much seafood should I consume given the possibility of ingesting methyl mercury? Is air pollution causing my kids’ asthma attacks or my mother’s cardiovascular disease? What chemicals are responsible for increasing my cancer risk? Government regulatory agencies are charged with determining these risks and acting on them where appropriate, but the challenge is always in the details:</p> <ul class="ul1"> <li class="li4"><i>Environmental Protection Agency rules alone are responsible for 63%–82% of monetized benefits reported by all regulatory agencies.</i> Indeed, the vast majority of the federal government’s regulation of the economy depends on a process that determines how risky an activity or a chemical is and how much of that risk will be reduced by some regulatory action.</li> <li class="li4"><i>Too much focus on outcomes can introduce bias, which can increase costs and misallocate resources.</i> Americans depend on federal agencies to strike the right balance and regulate risks to health and safety in a way that neither under- nor overregulates risk. When an agency’s performance is evaluated based on the accuracy of its risk evaluations, bias toward certain outcomes may be introduced, which in turn may cause agencies to overregulate risks relative to the costs Americans pay—or, worse, may cause other risks to increase, making Americans less safe.</li> <li class="li4"><i>Process objectivity is a scientific means to ensure consistency across risk assessments.</i> Rather than debating the true risk involved with any particular case, those concerned about regulatory risk assessments should focus on whether the government followed an objective, standard process based on the scientific method. This paper provides the framework for evaluating all risk assessments performed by government agencies.</li></ul> <p class="p3">KEY PRINCIPLES</p> <p class="p1">Risk estimates and benefit estimates of health and safety regulations derive their objectivity from the process that brings them about. Consistent adherence to a process meant to produce objectivity yields objective results. Risk estimates derived from an ad hoc application of the objective process are biased and may be responsible for vast resource misallocation. A routine application of the objective process outlined in the paper will reduce error and achieve consistency across assessments.</p> <p class="p1">The paper proposes a novel methodology for testing the objectivity of the risk/benefit estimates of federal health and safety regulations:</p> <ul class="ul1"> <li class="li4">In order for the process to be objective, two factors are necessary: (1) adherence to a body of principles, applied consistently and in their entirety; and (2) an independent reassessment (by a third party outside the regulatory agencies), according to the body of principles, of the risk and benefit estimates of major health and safety regulations.</li> <li class="li4">There are four main categories of objective risk assessment: analysis, robustness, openness and transparency, and review. By following an objective process along the lines introduced in the paper—based on well-established principles already supposed to be in use by the federal government—risk assessments can be independently verified by a third party, such as a university-based research center.</li></ul> <p class="p3">CONCLUSION</p> <p class="p1">Taxpayers spend billions of dollars on regulatory agencies that promise to protect their health and safety by reducing their risk from exposure to myriad alleged hazards. Such regulatory decisions are based on highly technical and scientific documents, which leave both Congress and the majority of the public in the dark. Using the framework provided in the paper, all people interested in health and safety regulation can systematically review risk assessments and begin the process of holding agencies accountable.</p> http://mercatus.org/publication/objective-risk Thu, 30 Jul 2015 14:48:14 -0400 A Scholar's Scholar Retires http://mercatus.org/expert_commentary/scholars-scholar-retires <h5> Expert Commentary </h5> <p class="p1">My dear friends Bob and Elizabeth Higgs will soon move from Louisiana to a remote corner of Mexico. Bob says that visits north of the border will be few. The Higgses plan to retire away from it all with a completeness that few of us dare to attempt.</p> <p class="p2">Bob is one of our greatest living scholars. Specializing in economic history, Bob's first major work is his 1976 book, “Competition and Coercion.” In it, Bob documents the many ways that economic competition — including people's ability to move from place to place — enabled blacks to improve their economic situation after the Civil War. These improvements came despite the bigotry that then reigned in the South — and despite the activities of government.</p> <p class="p2">As summarized by the late Nobel laureate economist Robert Fogel in his review of Bob's book, “Those who seized control of the state machinery not only disenfranchised the blacks, but used their political power to transfer income from blacks to whites, to restrict blacks' access to such public institutions as schools and hospitals, to restrict the occupational mobility of blacks, and to bar them from certain occupations ... . While such coercion restricted the rate of black economic progress, it did not prevent it. Higgs concludes that the forces of competition proved strong enough to check the forces of coercion and made possible a fairly rapid rate of economic improvement.”</p> <p class="p2">Competition in the market is the best friend that disfavored people can have. Not so the state.</p> <p class="p2">Bob's most famous book is his 1987 study, “Crisis and Leviathan.” With a mastery of historical details, Bob explained that government's growth is fueled in part by crises — whether real, exaggerated or illusory. The other part of the fuel for government's growth is an ideology that demands government intervention during troubling times. As people's trust in markets and voluntary action weakens and as their faith in government strengthens, politicians grab more power. And when the country escapes each crisis, politicians seize credit for the salvation even when, as during the Great Depression, politicians' actions actually worsened the situation.</p> <p class="p2">Another of Bob's key contributions is his identification of the role of “regime uncertainty.” Regime uncertainty exists when investors worry that, as Bob describes it, “private property rights in their capital and the income it yields will be attenuated further by government action.”</p> <p class="p2">Bob first used regime uncertainty to explain the length of the Great Depression. In the early 1930s, President Herbert Hoover — responding to the slowing economy following the stock-market crash — launched the government into unprecedented heights of activity. FDR followed with even more interventions. These interventions frightened entrepreneurs and investors. And the fright was made worse by the intellectual climate that then regarded socialism as being inevitable. The insecurity that these developments injected into the U.S. economy kept it greatly depressed for more than a decade. Not until the less radical Truman replaced the increasingly radical Roosevelt and the less interventionist Republicans took Congress in 1946 from the Democrats did the economic climate once again encourage enough entrepreneurial activity to promote growth.</p> <p class="p2">No summary can capture the depth, breadth and wisdom of Bob's work. But I hope that I've at least sparked interest in some readers to encourage them to read Bob's contributions directly.</p> http://mercatus.org/expert_commentary/scholars-scholar-retires Wed, 29 Jul 2015 10:28:00 -0400 The International Corporate Tax Grab http://mercatus.org/expert_commentary/international-corporate-tax-grab-oecd-greece <h5> Expert Commentary </h5> <p style="text-align: left;" class="p1">If Greece's ongoing fiscal quagmire demonstrates anything, it's that Europe's largest welfare states live in denial. Even as the bills from decades of profligate spending came due, Greeks took to the streets, not to demand a new path but to insist on continuing the status quo. Even their European creditors, in calling for tax hikes instead of strictly pro-growth reforms, would perpetuate the tax-and-spend cycle. It thus comes as no surprise that these same nations are leading the charge through the Organisation for Economic Co-operation and Development to raise corporate tax rates globally.</p> <p style="text-align: left;" class="p1">This isn't the first effort by the OECD to undermine tax competition and coerce low-tax nations to change their tax policies for the benefit of irresponsible high-tax nations. Since 1998, acting on behalf of European high-tax nations, the OECD has sought to prop up bad tax policy and create an international tax cartel, largely with an indirect form of tax harmonization made possible by destroying financial privacy laws.</p> <p style="text-align: left;" class="p1">Now the OECD is targeting multinationals and has launched a new scheme to boost tax burdens on business. The underlying assumption behind the base erosion and profit shifting, or BEPS, project is that governments aren't seizing enough revenue from multinational companies. The OECD makes the case, as it did with individuals, that it is illegitimate for businesses to legally shift economic activity to jurisdictions that have more favorable tax laws.</p> <p style="text-align: left;" class="p1">Its solution is to force those companies that wisely structured their operations to benefit from low-tax jurisdictions to declare more income in high-tax nations. In other words, they want to harmonize rules and ensure that corporations pay the same regardless of where they choose to locate their business activities.</p> <p style="text-align: left;" class="p1">The expected outcome of BEPS is a higher overall tax burden on economic producers. The OECD insists the project is necessary because nations aren't collecting what they need under the current competitive system, yet its own reports acknowledge that corporate tax collection hasn't declined as a percentage of its members' gross domestic products over the long run.</p> <p style="text-align: left;" class="p1">Besides, corporate taxes rank among the most destructive to economic growth, making the OECD's efforts largely self-defeating.</p> <p>Removing the ability of companies to mitigate the damage of ill-conceived taxes will only enhance their destructive power. Far from filling government coffers in order to continue funding massive redistributive welfare regimes, BEPS will strangle global economic output and erode tax bases even further.</p><p>Reducing the size of bloated governments would be a better idea, but as with both Greece and its creditors, the obvious eludes the OECD.</p><p style="text-align: left;" class="p1">Sadly, the OECD is also rolling out information collection systems that could make the National Security Agency blush. So-called country-by-country reporting will require companies to hand over far more information than they currently release, including proprietary data related to their competitive positions. As any current or former federal employee can attest, there's almost no chance this information can be kept confidential and out of the hands of competitors or hackers.</p> <p style="text-align: left;" class="p1">It's also hard to take seriously OECD claims that reported information will be used only to observe trends and assess where there is the greatest risk of tax evasion. The far likelier outcome is that it provides a blueprint for squeezing more tax dollars from corporations, particularly U.S.-owned businesses that reinvest offshore to avoid the excessive 35 percent tax rate they would face if they brought earnings back to the United States.</p> <p style="text-align: left;" class="p1">Corporations provide an easy political target for tax-hungry politicians, but the burden of corporate taxes falls on ordinary citizens. Employees, shareholders and investors will bear the brunt of the OECD's corporate tax grab, all because European politicians refuse to accept responsibility for building bigger governments than their economies can sustain.</p> http://mercatus.org/expert_commentary/international-corporate-tax-grab-oecd-greece Wed, 29 Jul 2015 10:21:49 -0400 The Looming Economic Nightmare for the Tri-State Area http://mercatus.org/expert_commentary/looming-economic-nightmare-tri-state-area <h5> Expert Commentary </h5> <p class="p1">If there’s a lesson to draw from the financial disasters in Greece, Puerto Rico and Chicago, it’s this: When governments take on too much debt and continually defer their bills, it eventually spells trouble — for both taxpayers and those who rely on government pensions or services.</p> <p class="p1">It takes a long time, a lot of bad choices, and an economic shock or two to put a government on the brink.</p> <p class="p1">Will the tri-state area soon face the same painful choices as Chicago Mayor Rahm Emanuel — trying to decide whether to staff schools or fund pensions?</p> <p class="p1">It’s a question that led me to compile new state fiscal health rankings, using the most recent 50-state set of audited financial reports (from the 2013 fiscal year) and check their vital signs.</p> <p class="p1">Do states have enough cash to cover an emergency? Can they meet their annual budget? Do they have more liabilities or assets? What are the biggest risks?</p> <p class="p1">Three of the bottom five states in our union include New York, Connecticut and New Jersey.</p> <p class="p1">All experienced the same lingering post-recession stress: little cash to cover short-term liabilities and revenues that barely match expenses.</p> <p class="p1">And all three have large, ongoing expenses for public employees’ health care or other post-employment benefits (OPEB) and a tendency to use debt financing.</p> <p class="p1">New York ranks 46th, due to a weak cash position and a small deficit in FY 2013.</p> <p class="p1">The long-run measures show the state uses debt to finance everything from OPEB to local highways and bridges, mass transit and CUNY and SUNY expenses.</p> <p class="p1">Issuing debt isn’t unusual, nor does it spell imminent disaster, but it does add up.</p> <p class="p1">New York had $90 billion in long-term liabilities in FY 2013. That’s 63 percent of its total assets — among the highest in the nation. Its second-biggest liability is $15 billion for pay-as-you go health-care benefits for public-sector workers.</p> <p class="p1">Unfunded benefits can put stress on a state’s finances, especially during recessions.</p> <p class="p1">Connecticut is next at 47th.</p> <p class="p1">It has more long-term obligations than it does resources. Adding to its deficit is a reliance on bonds, including debt issued to cover pension contributions and pay for OPEB benefits and compensated absences for employees.</p> <p class="p1">New Jersey finishes at 49th, ahead of Illinois.</p> <p class="p1">The Garden State’s cash position was better than New York’s, but its budgetary position was slightly worse, with revenues falling short of expenses, necessitating a $5 billion transfer to cover the gap.</p> <p class="p1">Long-term obligations like the ongoing cost for pensions and OPEB are again the driver and are among the biggest liabilities on New Jersey’s balance sheet.</p> <p class="p1">Looking at a few self-reported numbers from one fiscal year only says so much.</p> <p class="p1">They’re blunt, basic, and point to broad areas where states face challenges. Like going to the doctor for the first time, the patient’s weight, blood pressure and temperature provide a benchmark, not a full diagnosis.</p> <p class="p1">But the news here is sobering.</p> <p class="p1">It may come as a surprise, but these rankings don’t assign blame to current governors, legislators or political parties.</p> <p class="p1">States’ economies, tax systems, and past fiscal decisions — some stretching back to the booming stock market days of the ’80s and ’90s, when pensions and benefit plans looked over-funded on paper — have placed policymakers in tough situations. Often, their choice is between a rock and a hard place.</p> <p class="p1">Public employees rightly expect to receive the benefits they’ve earned, and politicians must now figure out how to honor those promises while still funding ongoing services.</p> <p class="p1">There is also a lesson from the tri-state area for the top three states: Alaska, North Dakota and South Dakota. Windfall revenues and a hot economy can lead to short-term spending sprees and generous promises, which can blind policymakers to debts and lull legislatures into believing that the long-term never really arrives.</p> <p class="p1">But, as the tri-state area’s governors can tell them, it does.</p> http://mercatus.org/expert_commentary/looming-economic-nightmare-tri-state-area Wed, 29 Jul 2015 10:08:32 -0400 What's the Future of Finance, Innovation and Growth? http://mercatus.org/expert_commentary/whats-future-finance-innovation-and-growth-0 <h5> Expert Commentary </h5> <p class="p1">Several years ago, Stanford University Prof. Ulrike Malmendier and Stefan Nagel, now at the University of Michigan, <a href="https://www.gsb.stanford.edu/insights/stefan-nagel-how-personal-experience-affects-investment-behavior">shed light</a> on how extreme events, like a stock market crash, can affect the way people invest. Those who experienced low returns on their investments around a crash were less willing to take on risk in their financial decisions. It's no surprise that financial market experiences in turn could influence policy views around the world, too.</p> <p class="p1">After the recent crisis, economists have been debating the appropriate role of finance in an economy. Some think finance overall serves a useful <a href="http://faculty.chicagobooth.edu/john.cochrane/research/papers/Cochrane_jep_function_size_final.pdf">function</a>, while others <a href="http://faculty.chicagobooth.edu/luigi.zingales/papers/research/Finance.pdf">question</a> whether finance benefits society at all, or whether the financial sector is too large.</p><p class="p1"><a href="http://www.usnews.com/opinion/economic-intelligence/2015/07/27/whats-the-future-of-finance-innovation-and-growth">Continue reading</a></p> http://mercatus.org/expert_commentary/whats-future-finance-innovation-and-growth-0 Wed, 29 Jul 2015 09:27:46 -0400 Mid-Session Budget Review: More Revenue, More Spending http://mercatus.org/publication/mid-session-budget-review-more-revenue-more-spending <h5> Publication </h5> <p class="p1">The Office of Management and Budget recently released the Obama administration’s fiscal year (FY) 2016 mid-session budget review (MSR). The MSR is an annual update of the president’s initial budget proposal that incorporates subsequent changes in policy and the underlying economic assumptions used in forecasting the budget’s future path. <a href="http://mercatus.org/publication/president-obamas-fiscal-year-2016-budget-tax-and-spend">I reviewed the president’s budget proposal</a> when it was released in February and the updated figures show that the story remains the same: the White House envisions more tax revenues and higher levels of spending.</p> <p class="p1">The following chart shows projected revenues and spending under the president’s proposal according to the new figures provided by the MSR. The first graph displays the data in dollar amounts while the second shows revenues and spending as a share of the economy (GDP).</p><p class="p1"><a href="http://mercatus.org/sites/default/files/midessions-budget-fy16-2_0.png"><img src="http://mercatus.org/sites/default/files/midessions-budget-fy16-2_0.png" width="585" height="837" /></a></p> <p class="p2"><span style="font-size: 12px;">The top graph shows that revenues would climb from $3.6 trillion in FY 2016 to $5.4 trillion in FY 2025. Spending would jump from $4 trillion in FY 2016 to $6.1 trillion in FY 2025. Over that 10-year span, the federal government would take in $44 trillion in revenue and spend a combined $50 trillion. The resulting annual deficits would add $6 trillion to the federal debt held by the public, contributing to a total debt of over $20 trillion in FY 2025.</span></p> <p class="p1">The bottom graph shows that revenues and spending as a percentage of GDP would also increase. After spiking from 17.5 percent in FY 2014 to 19.2 percent in FY 2016, revenues would remain at an elevated level and gradually reach 19.7 percent in FY 2025. Spending as a percentage of GDP would see similar growth after going from 20.3 percent in FY 2014 to 21.5 percent in FY 2016. In FY 2025, spending would reach 22.4 percent of GDP. Federal debt held by the public would stay relatively flat as a percentage of GDP, but at 75 percent that’s not cause for celebration. Indeed, the Congressional Budget Office’s most recent <a href="http://mercatus.org/publication/long-term-budget-forecast-should-prompt-action-now">long-term budget forecast</a> shows that this already dangerous level of debt will eventually reach destructive levels in the absence of substantial spending reforms.</p> <p class="p1">By pursuing an agenda that essentially ignores the government’s long-term budget problems and instead encourages further expansion, the president is doing a disservice to the interests of future Americans, who would&nbsp; bear the brunt of the economic fallout under the current fiscal trajectory. While it is expected that the Republican-controlled Congress is unlikely to go along with the president’s tax-and-spend agenda, unfortunately, the <a href="http://mercatus.org/publication/republican-budget-resolutions-slower-spending-future-never-certain">GOP has yet to demonstrate</a> that it’s truly serious about addressing the federal government’s bleak budget picture either.</p> http://mercatus.org/publication/mid-session-budget-review-more-revenue-more-spending Fri, 31 Jul 2015 12:40:06 -0400 Should the US Export-Import Bank Be Reauthorized? http://mercatus.org/publication/should-us-export-import-bank-be-reauthorized <h5> Publication </h5> <p class="p1">The US Export-Import Bank (Ex-Im Bank) is a government credit agency that provides tax- payer-backed financing to private exporting businesses. An increasing body of evidence shows that the Ex-Im Bank provides subsidized financing to big businesses at the expense of smaller businesses and taxpayers while doing little to promote exports, create jobs, or improve competitiveness of US firms. Removing this source of government-granted privilege can only help US exporters.&nbsp;</p> <p class="p2"><b>BACKGROUND ON THE EX-IM BANK&nbsp;</b></p> <p class="p3">The Ex-Im Bank was initially created in 1934 to finance trade with the Soviet Union and was established as an independent government agency in 1945. <a href="http://www.presidency.ucsb.edu/ws/?pid=14772">Executive Order 6581</a> gave it the power to “aid in financing and facilitate exports of goods and services, imports, and the exchange of commodities and services” between the United States and foreign countries to create jobs in the United States.&nbsp;</p> <p class="p3"><a href="http://mercatus.org/publication/us-export-import-bank-review-debate-over-reauthorization">The Ex-Im Bank has four main tools to achieve these goals: loan guarantees, working capital guarantees, direct loans, and export-credit insurance.</a> Recent funding for the bank has increased from $12.37 billion in 2007 to $27.2 billion in 2013. A better way to understand these numbers is to look at the amount of exposure the bank has—that is, the financial risk the bank takes on, for which taxpayers are ultimately responsible. During the same period, the total exposure for the bank increased from $57.42 billion to $113.83 billion.&nbsp;</p> <p class="p3">In September 2013, after extensive debate over reauthorization of the bank, <a href="http://www.reuters.com/article/2014/09/17/us-usa-congress-funding-idUSKBN0HC2F520140917">Congress extended the bank’s ability to operate until June 30, 2015.</a> That authorization has ended, and Congress once again must consider the facts surrounding the Export-Import Bank’s reauthorization.&nbsp;</p> <p class="p2"><b>POLICY ANALYSIS OF THE EX-IM BANK&nbsp;</b></p> <p class="p3">The Ex-Im Bank is a Depression-era relic that no longer serves the purpose for which it was intended. The bank subsidizes the exports of a handful of large US firms while exposing tax-payers, borrowers, and consumers to risk. The Ex-Im Bank undermines the <a href="http://www.realclearmarkets.com/articles/2014/12/23/government_handouts_hurt_business_like_they_hurt_you_101452.html">legitimacy of both the government and markets</a> as it doles out favors to the politically connected while providing little support to small businesses. It fails to promote exports or level the playing field for US businesses. Eliminating the Ex-Im Bank will not result in job losses. Furthermore, far from being as asset to the Department of the Treasury, it suffers from a lack of transparency and exposes taxpayers to considerable risk.&nbsp;</p> <p class="p5"><b>1. The Ex-Im Bank Is an Example of Government-Created Privilege&nbsp;<br /></b><br /><span style="font-size: 12px;">The Export-Import Bank is a source of destructive <a href="http://mercatus.org/publication/pathology-privilege-economic-consequences-government-favoritism">government-granted privilege</a>, which is strikingly visible as politically connected businesses lobby for and collect subsidies. The unseen harms, however, are just as important.&nbsp;</span></p> <ul class="ul1"> <li class="li6">Among the top 10 domestic beneficiaries of the Ex-Im Bank is <a href="http://mercatus.org/publication/export-import-still-boeing-s-bank">Boeing</a>, which at a 40 percent share of total loan authorizations dwarfs the 25 percent share for all small businesses combined that received Ex-Im Bank loans in 2014. <a href="http://mercatus.org/sites/default/files/DeRugy-Ex-Im-Foreign-Buyers.pdf">On the foreign side, things aren’t much different—the subsidized financing largely benefits very large companies</a> that either collect massive subsidies as state-controlled entities or that could easily access private financing, such as Mexico’s Pemex, Ireland’s Ryanair, and Emirates airline. In a lawsuit, Delta Air Lines has alleged a loss of 7,500 American jobs stemming from the Ex-Im Bank’s activities. </li> <li class="li6">American businesses without political connections <a href="http://mercatus.org/publication/export-import-bank-winners-and-losers-government-granted-privilege">are put at a competitive disadvantage by their own government</a> because they compete against both domestic and foreign businesses with access to subsidized loans. </li> <li><span style="font-size: 12px;">The Ex-Im Bank also gives lenders an incentive to shift resources away from unsubsidized projects and toward subsidized ones—regardless of the merits of each project.&nbsp;</span></li></ul><p><span style="font-size: 12px;"><b> 2. The Ex-Im Bank Does Not Promote Exports or Level the Playing Field for US Businesses <br /></b></span><br style="font-family: inherit; font-style: inherit; font-weight: inherit;" /><span style="font-size: 12px;"> The Ex-Im Bank is supposed to address market imperfections, based on the assumption that high-value projects might not find funding. In the marketplace, however, high-risk projects with a low likelihood of repayment won’t find financing. When the government supports such projects for politically well-connected businesses, taxpayers ultimately bear the risk of failure and nonpayment. High-risk projects, however, only make up <a href="http://mercatus.org/publication/key-argument-export-import-bank-invalid">10.9 percent of the Ex-Im Bank’s portfolio</a>. Economic theory and evidence show that these projects are not successful and benefit only a handful of special interests rather than all US exports:</span></p><ul class="ul1"> </ul> <ul class="ul1"> <li class="li6"><i>&nbsp;</i><i>The bank fails to change the trade balance. </i><a href="http://www.gao.gov/assets/220/215530.pdf">According to the Government Accountability Office (GAO)</a>, export promotion programs like Ex-Im Bank subsidies “cannot produce a substantial change in the U.S. trade balance, because a country’s trade balance is largely determined by the underlying competitiveness of U.S. industry and by the macroeconomic policies of the United States and its trading partners.” </li> <li class="li6"><i></i><i>The vast majority of exports are unaffected by the Ex-Im Bank. </i><a href="http://mercatus.org/publication/key-argument-export-import-bank-invalid">Less than one-third of the estimated export value of the bank’s portfolio</a> is intended to counteract competitive disadvantages created by foreign governments. <a href="http://mercatus.org/publication/jobs-and-export-value-perspective-ex-im-backed-projects-constitute-tiny-portion-total-us">The Ex-Im Bank assists less than 2 percent of total exports</a>. This means that more than <a href="http://mercatus.org/publication/there-are-better-ways-help-us-exporters-compete-abroad-ex-im-bank">98 percent of US exports occur without government financing through the bank,</a> demonstrating that the bank is not critical to helping US exports thrive globally. </li> <li class="li6"><i></i><i>Benefits are conferred on only a few states, but all taxpayers bear the risk. </i><a href="http://mercatus.org/publication/ex-im-funds-flow-few-states-all-bear-risks">The vast majority of benefits conferred by the Ex-Im Bank are concentrated in a handful of states</a>—the top three being Washington state, Texas, and California. Washington state received 43.6 percent of total disbursements from 2007 to 2014, primarily because Boeing—the single largest beneficiary of Ex-Im Bank financing—builds its airplanes there. Forty-two states received less than 2 percent of disbursements and 35 states received less than 1 percent. Should the Ex-Im Bank portfolio fall into insolvency again, <a href="http://www.nytimes.com/1987/12/21/us/us-export-bank-seeks-3-billion.html">as it did in 1987</a>, taxpayers in all these states share equal responsibility for bailing out the bank.&nbsp;</li> </ul><p><i style="font-family: inherit; font-weight: inherit;"><b>3. The Ex-Im Bank Is Unlikely to Affect Net Job Creation&nbsp;<br /></b><br /></i><span style="font-size: 12px;">While the Ex-Im Bank’s supporters point to numbers showing that new jobs have been created through federal spending, funding for one industry or firm may take away more jobs from other industries and firms, resulting in a net job loss. At best, the bank redistributes employment away from smaller unsubsidized firms toward larger subsidized firms.&nbsp;</span></p><ul class="ul1"> </ul> <ul class="ul1"> <li class="li6"><i></i><i>Many industries lose jobs. The Ex-Im Bank claims that its subsidies supported approximately 164,000 jobs in 2014. </i><a href="https://www.youtube.com/watch?v=z4KL0WUaaRI">But this figure does not account for&nbsp;the unseen costs of the bank</a>, which include displaced employment among unsubsidized firms that compete with Ex-Im Bank–subsidized firms and firms that purchase products that are made more expensive by those subsidies. Each year, <a href="http://mercatus.org/publication/cato-institute-study-quantifies-ex-im-winners-and-losers">Ex-Im Bank subsidies impose net costs of about $3 billion on 189 US industries</a>. This means slimmer profit margins, lower growth, and dampened employment across firms that have to compete against firms receiving Ex-Im Bank subsidies. </li> <li class="li6"><i></i><i>Large businesses will not experience job losses in the absence of the bank.</i> Jobs will not be lost if the Ex-Im Bank ceases to extend new loans. The large corporations <br /> that are major recipients of subsidized financing from the Ex-Im Bank, including Boeing, Caterpillar, and General Electric,<a href="http://mercatus.org/publication/export-jobs-won-t-disappear-absent-ex-im-bank"> have millions of dollars—years worth— of backorders that will keep workers employed</a>.&nbsp;</li> </ul> <p class="p5"><b>4. The Ex-Im Bank Does Not Support Small Businesses&nbsp;<br /></b><br /><span style="font-size: 12px;">Proponents claim that the Ex-Im Bank supports small businesses and jobs by leveling the play- ing field, but the vast majority of US small businesses—over 99.9 percent—receive no benefits from the Ex-Im Bank. These small businesses are placed at a competitive disadvantage against large, subsidized competitors that are the primary beneficiaries of the Ex-Im Bank’s financing. Most of the Ex-Im Bank’s funding goes to <a href="http://mercatus.org/publication/export-import-still-boeing-s-bank">large corporations such as Boeing</a>. In fact, <a href="http://mercatus.org/publication/us-export-import-bank-review-debate-over-reauthorization">large corporations received roughly 75 percent of the bank’s total assistance</a> in 2013.&nbsp;</span></p> <ul class="ul1"> <li class="li6"><i></i><i>Large businesses benefit the most. </i>The Ex-Im Bank’s <a href="http://mercatus.org/sites/default/files/DeRugy-Ex-Im-Foreign-Buyers.pdf">top 10 overseas buyers are large corporations</a> (including Pemex, Ryanair, and Emirates airline) that primarily purchase exports from multinational conglomerates, challenging the narrative that the bank helps small businesses or even domestic businesses. </li> <li class="li6"><i></i><i>Small, minority-owned, and women-owned businesses are left out. </i>Between fiscal year (FY) 2007 and FY 2014, <a href="http://mercatus.org/publication/ex-im-bank-little-value-small-minority-owned-and-women-owned-businesses">only 23 percent of the bank’s financing benefited small businesses</a>, and minority-owned and women-owned small businesses received less than 2 percent of the bank’s total funding. When compared to the exporting economy as a whole for minority and women-owned businesses, <a href="http://mercatus.org/publication/public-data-suggest-ex-im-bank-not-everyone">the bank funds only 1 to 2 percent</a> of such business. <i><br /></i></li></ul><p><span style="font-size: 12px;"><b>5. The Ex-Im Bank’s Improper Accounting Practices Could Cost Taxpayers Billions of Dollars <br /></b></span><span style="font-family: inherit; font-weight: inherit;"><br /> Supporters of the bank claim that it saves taxpayer money and wisely invests taxpayer dollars. However, the bank uses improper accounting practices and miscalculates its budget savings. The Ex-Im Bank has a history of poor financial management—its accounting and risk assessment practices, which it uses to calculate cost projections, have been consistently criticized by </span><span style="font-family: inherit; font-weight: inherit;"><a href="http://www.gao.gov/products/GAO-13-620">the GAO</a> </span><span style="font-family: inherit; font-weight: inherit;">and its own inspector general for methodological weaknesses:&nbsp;</span></p><ul class="ul1"> </ul> <ul class="ul1"> <li class="li6"><i></i><i>Ex-Im Bank accounting incorrectly shows savings. </i>While the bank claims that $14 billion will be saved over the next decade, <a href="http://cbo.gov/sites/default/files/cbofiles/attachments/45383-FairValue.pdf">a federal accounting report</a> finds that Ex-Im programs will actually cost taxpayers $2 billion. </li> <li class="li6"><i></i><i>Financial safeguards fail to meet standards. </i>Numerous audits from the<a href="http://exim.gov/oig/upload/Final-20Report-20Complete-20Portfolio-20Risk-20120928-1.pdf"> bank’s internal inspector general</a> also show that that the bank’s risk analyses, default assumptions, internal reporting procedures, and financial reporting are inadequate to safely steward taxpayer funds and responsibly manage its vast portfolio.&nbsp;</li><li class="li6"><i style="font-family: inherit; font-weight: inherit;">Ex-Im Bank has a history of mismanagement. </i><span style="font-size: 12px;">The Ex-Im Bank has a history of poor financial management. In 1987, it <a href="http://www.nytimes.com/1987/12/21/us/us-export-bank-seeks-3-billion.html">requested a $3 billion federal bailout</a>, following seven years of <a href="http://mercatus.org/sites/default/files/deRugy-Ex-ImReview.pdf">losses of hundreds of millions of dollars</a>.&nbsp;</span></li></ul> <p class="p2"><b>CONCLUSION&nbsp;</b></p> <p class="p3">The Ex-Im Bank fails to promote exports, create jobs, or support small businesses. Rather, the&nbsp;<span style="font-size: 12px;">Ex-Im Bank privileges subsidized firms over their unsubsidized competitors, draws capital away from other unsubsidized borrowers, and puts taxpayer money at risk, all while making US businesses less dynamic and less efficient. There is a difference between favoring some businesses and being in favor of a free market: the Ex-Im Bank does not support a free market economy. If a government agency fails to meet its own stated objectives and leaves taxpayers on the hook to pay subsidies to large, well-financed, multinational corporations, it should no longer exist.&nbsp;</span></p> http://mercatus.org/publication/should-us-export-import-bank-be-reauthorized Mon, 03 Aug 2015 12:23:50 -0400 First Principles of Congressional Budgeting http://mercatus.org/publication/first-principles-congressional-budgeting <h5> Publication </h5> <p class="p1">Chairman Price, Ranking Member Van Hollen, and members of the committee: Thank you for inviting me here to discuss the need for a fundamental overhaul of the federal budget process. I applaud you for directing the House Budget Committee’s attention to this pivotal issue.&nbsp;</p> <p class="p1">My three-part message today is this. First, Congress should treat the budget process as a means, not an end, and enact reforms accordingly. Second, given the fiscal challenges facing the country, now is not the time for minor tweaking. Instead, now is the time to think big and craft a process that drives legislators to produce credible and sustainable fiscal policy by constraining federal spending both today and tomorrow. Third, any reform should include effective enforcement mechanisms, preferably constitutional in nature, to prevent the new process from suffering the same fate as the current one.</p> <p class="p1"><b>THE CURRENT BUDGET PROCESS IS A BROKEN TOOL</b></p> <p class="p1">I begin with a basic question: why should we care about failures in the budget process? Simple: The budget process is a tool, and if it does not work properly, it will hinder Congress’s ability to make progress on key fiscal issues. Yet, as Congress undertakes reform and identifies areas in need of change, it will be tempting to focus only on the mechanics of the process—for instance, whether Congress passes a budget resolution or completes all appropriations bills on time. This narrow approach to reform would be a mistake.</p> <p class="p1">Don’t misunderstand: the mechanics of the process <i>are</i> important, and the gears are creaky, at best. It is true—this year Congress, led by this committee, passed a joint budget resolution for the first time since 2009. But given progress to date, Congress will almost certainly fail to pass all appropriations bills by the statutory October 1<sup> </sup>deadline. Meanwhile, congressional budget rules are routinely gamed, ignored, or changed, which is not surprising given the lack of strong enforcement mechanisms. The process is also incomplete, as the major threat to the federal government’s fiscal future—entitlement spending—falls largely outside current procedures.</p> <p class="p1">That said, we should be concerned about process not for process’s sake, but rather because of our perilous fiscal situation. In the 40 years since the Congressional Budget and Impoundment Control Act was put into place, the federal government has run a unified budget deficit about 90 percent of the time, with the deficit exceeding 3 percent of GDP (the standard for EU countries) about half of the time. During the same time period, the national debt as a share of GDP has roughly tripled.</p> <p class="p1">Remarkably, the worst is yet to come. The Congressional Budget Office (CBO) estimates in its 2015 long-term budget outlook, using very realistic assumptions about the course of future policy, that the debt held by the public will increase to 175 percent of GDP by 2040.</p> <p class="p1"><b>THINKING BIG: PROCESS REFORM SHOULD PROMOTE CREDIBLE AND SUSTAINABLE FISCAL POLICY</b></p> <p class="p1">Given that the status quo is not sustainable, where do we go from here? A reformed budget process that is followed to the letter but fails to control spending in the near term—or that leads to small deficits today while allowing programs like Medicare to ratchet up the federal government’s long-term liabilities in relatively hidden ways—is no reform at all. To be effective, therefore, the process must place binding short-run and long-run constraints on spending, and in doing so, force lawmakers to make hard choices.&nbsp;</p> <p class="p1">In the short run, limits should be placed on deficits over a multiyear period while permitting some deficit spending in any given fiscal year to account for economic fluctuations. Switzerland and Germany are two countries that have adopted this “smoothing” approach.&nbsp;</p> <p class="p1">To address long-run fiscal concerns, budgets must account for long-term liabilities from programs like Medicare and Social Security. Congressional reelection motivations make it too tempting for lawmakers to leave difficult decisions about programs like these for tomorrow. Waiting until there is the “political will” to act, however, typically means waiting until a crisis occurs. To prevent such delays, budgets should adhere to targets regarding long-term liabilities at various points over the course of several decades, rather than simply looking 5 or 10 years into the future, as is current practice.</p> <p class="p1">These periodic targets would ensure any hard choices are made in a timely fashion and any significant changes to entitlement programs are implemented gradually to minimize transition costs. In addition, imposing this long-run perspective on budgeting for new policies would help make transparent instances when such programs or regulations create long-term liabilities that are obscured from view today.</p> <p class="p1">To implement rules focused on the long run necessitates the calculation of estimates that are, by their very nature, uncertain. Still, it is better to produce educated estimates than to ignore the problem. Nobody should reason, “I am not sure how long I will live, so there is no point in planning for retirement.” Yet, that is exactly how the federal government prepares its budgets.</p> <p class="p1"><b>THE BIGGEST CHALLENGE FOR REFORM SUCCESS: EFFECTIVE ENFORCEMENT MECHANISMS</b></p> <p class="p1">Having laid out the direction in which reform should head, I now want to discuss the biggest challenge Congress will face moving forward: making the changes stick. The true measure of success will come when difficult decisions must be made. Will policymakers actually use the process, or will they cast it aside in the interest of political expediency?&nbsp;</p> <p class="p1">History suggests that political expediency will win, and for good reason. Article I, section 5 of the Constitution reads in part, “each House may determine the rules of its proceedings.” This single line gives lawmakers great leeway and has helped create the problem Congress faces today: a budget process that is largely ignored.</p> <p class="p1">The most effective way to ensure durability is a constitutional amendment placing external, enforceable limits on Congress’s ability to tax and spend. A constitutional amendment would counteract the temptation to circumvent rules, and it would also provide a foundation on which the new budget process could be built. In the absence of a constitutional amendment, enforcement options will be much more limited, and success will depend heavily on leadership within the executive and legislative branches.</p> <p class="p1"><b>THE PATH FORWARD: MANY QUESTIONS REMAIN</b></p> <p class="p1">There is, of course, much more to consider if Congress is serious about reform. Should the congressional committee structure be changed? Should reconciliation be eliminated? How can direct spending programs like Medicare be brought into the budget process in a serious way? Can voters be educated so that electoral incentives encourage fiscal responsibility? How exactly should the country’s liabilities be estimated?</p> <p class="p1">Legislators must also pay careful attention to rule design. Appendix 1 of this testimony lists ten principles in this regard, including the importance of writing precise rules to prevent legislators from exploiting loopholes and gimmicks to get around the process.</p> <p class="p1"><b>CONCLUSION</b></p> <p class="p1">In closing, the congressional budget process is in dire need of replacement. Alice Rivlin, former director of both CBO and the Office of Management and Budget, has written, “Process can either hamper decision-making or facilitate it, but only at the margins.” I have a great deal of respect for Dr. Rivlin, and many in the policy community share her views about the limits of process reform. However, “marginal” improvements just won’t do if Congress is serious about tackling the country’s fiscal challenges. As they say, “Go big or go home.”</p> <p class="p1">Thank you again for inviting me to testify today. I welcome your questions.</p><h2><b>Ten Principles of Budget Rule Design<br /><br /></b></h2><ol class="ol1"> <li class="li1"><b>Use budget rules to change the terms of the debate.</b> Budget battles will be fought differently if fiscal responsibility is a requirement, not an option. </li> <li class="li1"><b>Apply rules permanently and to the entire federal budget. </b>Temporary rules or rules exempting certain programs won’t help in the long run. </li> <li class="li1"><b>Focus on spending. </b>Washington cannot address the looming budget crisis without gaining control of the unsustainable spending growth that drives it. </li> <li class="li1"><b>Build flexibility into rules by “smoothing.”</b> Tie budget rule targets or limits to a multiyear period or long-term economic performance to accommodate economic downturns or other transitory events. </li> <li class="li1"><b>Build flexibility into rules by incorporating limited, carefully constructed emergency provisions.</b> Account for major disruptions like war. </li> <li class="li1"><b>Be precise to prevent loopholes and gimmicks.</b> History proves that if there is a way around a rule, a legislator will find it. </li> <li class="li1"><b>Pay careful attention to “starting points.”</b> Consider cutting inflated spending levels (e.g., from stimulus) prior to pegging permissible increases to the current budget. </li> <li class="li1"><b>Fight against faux fiscal discipline and resist the temptation to compromise on rule design.</b> You are better off with no rule than a badly designed one. </li> <li class="li1"><b>Use a commission as a supplement to, not a replacement for, a budget rule.</b> Commissions are great for specifics, but they can’t produce change without some other external pressure.&nbsp;</li><li class="li1"><span style="font-family: inherit; font-style: inherit;"><b>Incorporate well-designed rules into the US Constitution.</b> </span><span style="font-size: 12px;">While there are pros and cons to constitutional rules, without this external enforcement, budget rules will always be vulnerable to legislators’ propensity to break them.&nbsp;</span></li></ol> http://mercatus.org/publication/first-principles-congressional-budgeting Tue, 28 Jul 2015 10:49:59 -0400 How Advances in Technology Keep Reducing Interventionist Policy Rationales http://mercatus.org/publication/how-advances-technology-keep-reducing-interventionist-policy-rationales <h5> Publication </h5> <p class="p1">Advances in technology enhance the ability of entrepreneurs and markets to solve problems successfully and efficiently. For example, technology can help define property rights, reduce information disparities, eliminate monopolies, provide collective goods, and handle externalities. Technology that empowers people reduces the justification for costly regulations, government interference, and politically motivated spending.</p> <p class="p1">A new paper published by the Mercatus Center at George Mason University explores several concrete examples of how technology is helping to reduce market deficiencies, dealing a blow to demands for government regulation. The political pressure to increase regulations in fields as diverse as environmental policy and consumer protection ignores the evidence that advancing technology is providing customers and entrepreneurs with the knowledge and tools to solve problems without government intervention.</p> <p class="p1">To read the paper in its entirety and learn more about its authors, Fred E. Foldvary and Eric J. Hammer, please see “<a href="http://mercatus.org/sites/default/files/Foldvary-Interventionist-Rationales.pdf">How Advances in Technology Keep Reducing Interventionist Policy Rationales</a>.”</p> <p class="p3"><b>SUMMARY</b></p> <p class="p1">Proponents of government intervention into markets often cite four classic efficiency problems as warranting regulation to “fix” an asserted market failure: collective goods, asymmetric information, externalities, and monopoly. The theory suggests that because markets fail to fix these problems, government is in the best position to monitor markets for trouble and then regulate it away.</p> <p class="p1">This paper explores each of these perceived market failures by looking at examples of current government regulations and the technological advances that have made these regulations obsolete. These innovations have either corrected a problem better than the government could have or shifted the search for a solution from regulation to defining property rights. Governments have trouble adapting to rapidly advancing technology. Regulation often clings to the past while markets push toward a more efficient future. Regulation can also hamper technological progress by skewing and reducing incentives for businesses to adopt new technologies.</p> <p class="p3"><b>KEY EXAMPLES OF TECHNOLOGICAL ADVANCES</b></p> <p class="p1">Many economic problems that once were difficult for businesses and consumers to solve can now be handled more effectively because of better technology.</p> <p class="p4"><b>Traffic Congestion</b></p> <p class="p1">The notion that the government must provide and monitor all traffic services as a collective good funded by taxes is being rendered obsolete by technology. Private roads, bridges, and parking lots have long existed, as have private solutions to congestion, such as parking meters and tolls. However, paying with quarters was slow and inefficient. Now, with electronic payment systems, drivers can travel toll roads without delays and pay for parking without hoarding change. Private roads and parking lots become more effective as technology allows businesses to charge and consumers to pay with less hassle.</p> <p class="p1">The South Norfolk Jordan Bridge in South Hampton Roads, Virginia, was rebuilt by a private consortium. The new bridge opened in 2012 and is notable for the method by which it collects tolls while allowing a continuous flow of traffic. The bridge has no toll booths, so motorists crossing the bridge have their license plates photographed. Most pay for the crossing through E-ZPass, and those without E-ZPass are sent a bill in the mail.</p> <p class="p4"><b>Consumer Product Information</b></p> <p class="p1">The Internet enables consumers to access massive amounts of information about companies and products, reducing the need for costly government-provided consumer protection. Product quality and user experiences are routinely rated on retailers’ sites such as Amazon.com or NewEgg.com, and descriptions, evaluations, and recommendations of products and companies are also provided by subscription services such as Consumer Reports and Angie’s List. Consumers can receive information about products and services with the click of a button, so businesses have a strong incentive to ensure their reputations remain high and customers are satisfied. The need for the government to provide this information is decreasing rapidly.</p> <p class="p4"><b>Wildlife Preservation and Environmental Externalities</b></p> <p class="p1">Wildlife preservation has become more effective as the technology involved in tagging animals has advanced, allowing fish farms to protect their property and still provide fish for dinner. This advance means defining and defending property rights is no longer a function that only the government can or should perform. For example, transponder branding involves implanting a small device under the fish’s skin, much as pet owners inject their animals with a chip in case they become lost. Using this technology, aquaculturists can track their own fish and harvest them at optimal times, or allow third-party fishermen to capture the fish for a bounty. To avoid depleting the stock, fishermen can also be prohibited from catching unowned fish. In this way, fishermen can avoid many of the socially destructive externalities inherent in an open commons.</p> <p class="p1">Another way technology is helping avoid environmental externalities is by making information on good and bad behavior much more accessible. Just as restaurants fear bad online reviews, polluters can be shamed, boycotted, and otherwise avoided for their behaviors. The University of Massachusetts Amherst’s Political Economy Research Institute, for instance, compiles a Greenhouse 100 Polluters Index listing the organizations producing the most pollution in the United States.</p> <p class="p4"><b>Monopolies</b></p> <p class="p1">Monopolies are sometimes considered a market failure because a single firm without competition can charge higher prices relative to a competitive industry, and such firms are often slow to innovate when they are in a favorable position and protected by government. Yet in many markets formerly characterized by few suppliers, advancing technology has lowered barriers to entry, reducing firms’ power to set their own prices independent of the market.</p> <p class="p1">This change is in large part due to cheaper computing ability and easier access to products and information via the Internet. Technological progress requires dominant firms to innovate lest they fall behind. Companies that once dominated their industries, such as IBM and AOL, have lost their prime position within the last decade to new firms such as Microsoft, Google, and Facebook, or to firms such as Apple that reinvented themselves with creative technological and marketing leaps.</p> <p class="p1">Electricity generation and distribution is often considered a natural monopoly, but it exists as such largely due to government policies. Technological advances have reduced the cost of generating electricity, making on-site generation more affordable and large-scale distribution less important. Government regulation and subsidization of electricity has also limited markets’ ability to determine an efficient balance of conventional and alternative energy sources. Ultimately, the public bears the cost of an inefficient electricity-generating sector.</p> <p class="p3"><b>CONCLUSION</b></p> <p class="p1">If consumers and private enterprise have a greater ability to protect themselves from harm by their own efforts, they have less need of government regulations that raise prices and restrict consumer choice. Better technology enables private enterprise to become more competitive and productive while simultaneously providing consumers with more information than they ever had in the past.</p> http://mercatus.org/publication/how-advances-technology-keep-reducing-interventionist-policy-rationales Thu, 30 Jul 2015 14:45:49 -0400 Blahous, Fichtner on Medicare and Social Security Trustees Report http://mercatus.org/expert_commentary/blahous-fichtner-medicare-and-social-security-trustees-report-0 <h5> Expert Commentary </h5> <p class="p1">The Medicare and Social Security annual report, released yesterday, shows that the insolvency date for the Social Security Disability Insurance (DI) trust fund remains unchanged at 2016. While the fundamental outlook&nbsp;remains materially unchanged for both the Social Security Old Age and Survivors Insurance (OASI) trust fund and the combined (OASDI) trust funds, another year has been lost to inaction.&nbsp;</p> <p class="p1">Mercatus Center senior research fellow&nbsp;<a href="http://mercatus.org/charles-blahous">Charles Blahous</a>, along with fellow&nbsp;public trustee for Medicare and Social Security Robert Reischauer, warn&nbsp;not to mistake minor improvements in the projected solvency of either program for "financial viability."&nbsp;They note in the "<a href="http://www.ssa.gov/OACT/TRSUM/index.html">Message from the Public Trustees</a>":</p> <blockquote><p class="p2"><i>To ensure that [Medicare and Social Security] function adequately, policy makers will need to consult other information in [the trustees] reports beyond the mere projected duration of trust fund adequacy.</i></p></blockquote> <p class="p1">For Social Security, they caution policy makers on the hazards of further postponing "unavoidable corrective actions"&nbsp;and note that the program's current shortfall projection is much larger than that solved<i>—</i>with so much difficulty<i>—</i>by the 1983 reforms:</p> <blockquote><p class="p2"><i>...[W]hen the trust funds faced a threat of depletion in the early 1980s it was still fully possible, though difficult to be sure, to close the financing gap.</i></p><p class="p2"><i>Continued inaction…to the point where the combined trust funds near depletion would—unlike the situation in 1983—likely preclude any plausible opportunity to maintain Social Security’s historical financing structure.</i></p><p class="p2"><i>The imminent depletion of Social Security's Disability Insurance [DI] Trust Fund reserves is but the first financing crisis arising from&nbsp;program cost growth trends that have been evident for the past few decades.</i></p><p class="p2"><i>While legislative action is not yet necessary to prevent imminent reductions in Old-Age and Survivors Insurance&nbsp;[OASI] benefits…prompt action is needed to prevent Social Security’s aggregate financial shortfall from growing to an intractable size.</i></p></blockquote><p class="p1">Please click&nbsp;<a href="http://www.ssa.gov/OACT/TRSUM/index.html">here</a>&nbsp;to view the full letter, as well as the full summary of the 2015 Annual Reports of the Social Security and Medicare Boards of Trustees.</p> <p class="p1">Mercatus Center senior research fellow&nbsp;<a href="http://mercatus.org/jason-j-fichtner">Jason Fichtner</a>, former deputy commissioner and chief economist of the Social Security Administration, said the following in response to the report:</p> <blockquote><p class="p2"><i>I fear the slight improvement in the insolvency date for Social Security’s combined trust fund will give law makers and the public a false sense that the program’s financial problems are anything less than urgent—that reform can continue to be put off. Such a misunderstanding would lead to grave consequences for beneficiaries of both the disability and retirement programs.</i></p><p class="p2"><i>The delay in&nbsp;dealing with the needed structural and financial problems of the DI trust fund should be a wake up call for those concerned with the OASI retirement trust fund—delaying meaningful reforms only limits the options available.</i></p></blockquote> http://mercatus.org/expert_commentary/blahous-fichtner-medicare-and-social-security-trustees-report-0 Fri, 31 Jul 2015 16:52:43 -0400 The Export-Import Bank’s Small Business Program Supports Big Companies http://mercatus.org/publication/export-import-bank-s-small-business-program-supports-big-companies <h5> Publication </h5> <p class="p1">Among its four principal financial products, the Export-Import Bank has provided “working capital” loans and loan guarantees that assure repayment to private lenders in the event a borrower defaults. According to bank officials, this form of subsidized financing “primarily” benefits small business. In a July 16 letter to Sen. Marco Rubio and others, Ex-Im president Fred Hochberg characterized the bank’s working capital financing as “issued to mostly small businesses.”</p> <p class="p1">But as is the case with a great many claims from Ex-Im officials, the data tell a different story.</p> <p class="p2"><a href="http://mercatus.org/sites/default/files/precentage-EXIM-large-firms_0.png"><img src="http://mercatus.org/sites/default/files/precentage-EXIM-large-firms_0.png" width="585" height="425" /></a></p> <p class="p1">According to the Ex-Im Bank’s definition, a small businesses can have as many as 1,500 employees and up to $21.5 million in revenue. However, the data show that as much as 40 percent of the bank’s working capital loans and loan guarantees in a single year has benefitted large corporations with impressive market capitalization, as the chart above illustrates. (The data were derived from the Ex-Im Bank’s annual reports, and do not include the “supply chain finance program.”) This finding documents yet again that bank officials vastly overstate Ex-Im assistance to small business.</p> <p class="p1">Between 2007 and 2014, large corporations—rather than small businesses—collected between 19.6 and 40.1 percent of the Ex-Im Bank’s working capital loans and guarantees. These included two transactions totaling $711.5 million for Boeing Co. (the Bank’s No. 1 beneficiary, with a market cap of $108.8 billion) and three transactions totaling $850 million for Ford Motor Co. (with a market cap of $58.5 billion). So it’s a real stretch to claim a program “primarily” benefits small business when major companies consistently collect a third or more of the benefits.</p> <p class="p1">Lenders offer lower rates when loans and loan guarantees are backed by US taxpayers—up to 90 percent of principal and interest are backed by taxpayers in the case of working capital guarantees. That gives beneficiaries of the Ex-Im program a significant competitive advantage over firms that don’t have access to these cheaper loans. Other Ex-Im programs primarily finance foreign companies and countries. But the working capital program largely finances US firms, which means their domestic counterparts are put at an increased disadvantage.</p> <p class="p1">The lapse of the Ex-Im charter on June 30 means that the bank is prohibited from awarding any new loans or loan guarantees. But the bank’s proponents—principally big corporate interests—remain committed to winning reauthorization. In hopes of doing so, they will continue to claim that small business is the bank’s “core mission.” Don’t believe it. The truth is that a substantial share of the Ex-Im Bank’s benefits go to large, politically favored corporations.</p> http://mercatus.org/publication/export-import-bank-s-small-business-program-supports-big-companies Fri, 24 Jul 2015 11:58:49 -0400