Mercatus Site Feed http://mercatus.org/feeds/home/people/id.70%2Ccfilter.0/satya-thallam en Operation and Certification of Small Unmanned Aircraft Systems http://mercatus.org/publication/operation-and-certification-small-unmanned-aircraft-systems <h5> Publication </h5> <p class="p1">In this notice of proposed rulemaking (NPRM), the FAA proposes to adopt rules to integrate some small UASs into the national airspace. While this action is welcome, we believe it is unduly cautious in some respects. As far as possible, we advocate an environment of “permissionless innovation” to reap the greatest benefit from our airspace. The FAA’s rules do not foster this environment. In addition, we believe the FAA has fallen short of its obligations under Executive Order 12866 to provide thorough benefit-cost analysis. We point out some shortcomings in the FAA’s regulatory evaluation. Finally, we conclude with assorted comments on the FAA’s proposed rules, including areas in which we support the FAA’s approach.&nbsp;</p> <p class="p2"><b>PERMISSIONLESS INNOVATION AS A GENERAL APPROACH&nbsp;</b></p> <p class="p1">We are currently living in an age of wondrous innovation. Among the most promising developments is commercial UAS technologies, which have captured the public interest for their potentially life-altering prospects. The entire economy stands to benefit in some capacity from this rapidly developing field of technology.&nbsp;</p> <p class="p1">The FAA’s proposed rules for UAS integration and commercialization place significant restrictions on some of the most beneficial aspects of this new and exciting technology. If the United States is to be a world leader in unmanned technologies, the FAA must adopt a flexible regulatory approach to this field. An overly precautionary approach will discourage the many benefits associated with this rapidly evolving class of aerial technologies.&nbsp;</p> <p class="p1">As Mercatus scholars noted in an April 2013 filing to the FAA, “Like the Internet, airspace is a platform for commercial and social innovation.”<sup>1</sup> Indeed, some of America’s most innovative Internet companies, including Google,<sup>2</sup> Amazon,<sup>3</sup> and Facebook<sup>4</sup> are already experimenting with UASs. But it is impossible to know now what additional creative applications await. Only time and the freedom to experiment with new and better ways of using these technologies will provide an answer to that question. Unfortunately, these companies have so far been exporting their development of these technologies abroad because of the uncertainty of the regulatory environment here in the United States.<sup>5</sup>&nbsp;</p> <p class="p1">That is why humility and flexibility must be the touchstones of the FAA’s approach to these issues. A recent book by Adam Thierer highlighted the benefits of adopting a policy disposition of “permissionless innovation” in this and other areas.<sup>6</sup> This phrase refers to the notion that experimentation with new technologies and business models should generally be permitted by default.<sup>7</sup>&nbsp;</p> <p class="p1">Permissionless innovation has been the primary driver of entrepreneurialism and economic growth in many sectors of the economy, most notably the Internet and the digital economy.<sup>8</sup> As an open and lightly regulated platform, the Internet allows entrepreneurs to experiment with new business models and offer new services without seeking the blessing of regulators beforehand.&nbsp;</p> <p class="p1">Generally speaking, this same model can and should guide policy decisions in other sectors, including the nation’s airspace.<sup>9</sup> While safety-related considerations can merit some precautionary policies, it is important that those regulations leave ample space for unpredictable innovation opportunities. In light of this imperative, our comments focus on whether several of the restrictions in the proposed rule pass benefit-cost analysis, particularly when the unpredictable nature of innovation is taken into account.&nbsp;</p><p class="p1"><a href="http://mercatus.org/sites/default/files/Dourado-UAS-PIC.pdf">Continue reading</a></p> http://mercatus.org/publication/operation-and-certification-small-unmanned-aircraft-systems Fri, 24 Apr 2015 09:34:48 -0400 Regulation In the Form of Big Bank Coercion http://mercatus.org/expert_commentary/regulation-form-big-bank-coercion <h5> Expert Commentary </h5> <p class="p1">One of Dodd-Frank's aspirations was increased competition to dilute the power of large financial institutions. The status quo, however, plays right into impatient regulators' hands. It's easy to force changes in the global financial industry by nudging-gently or otherwise-large banks to fall in line with regulators' wishes. Bank regulators are not shy about exercising this kind of control. As convenient as such regulatory strong-arming might seem to be, it sidesteps the regulatory processes designed to ensure accountability, public input, and transparency.</p> <p class="p1">The most recent example-<a href="http://www.wsj.com/articles/regulators-call-for-short-term-loan-changes-to-handle-too-big-to-fail-1429051454"><b>reported</b></a> last week by the <i>Wall Street Journal</i>-is an effort to force contractual changes in securities lending and repurchase (repo) agreements. These short-term borrowing arrangements among financial institutions can aggravate liquidity demands during periods of financial stress. As the Journal's Katy Burne reports, if regulators get their way, "firms trading with a troubled financial institution would agree to temporary waivers of certain contractual rights they currently enjoy, such as the ability to terminate their contracts early, buying regulators and the firm time to arrange a lifeline."</p> <p class="p1">The Financial Stability Board (FSB), a fraternity of financial regulators from different countries, is behind the latest effort. The FSB concocts global regulatory prescriptions for the financial industry. Although the FSB lacks the authority to directly regulate private companies, its members dutifully apply FSB prescriptions in their home countries. The FSB uses a peer review system to ensure follow through. The <a href="http://www.financialstabilityboard.org/about/"><b>FSB explains</b></a> that it "operates by moral suasion and peer pressure, in order to set internationally agreed policies and minimum standards that its members commit to implementing at national level."</p> <p class="p1">U.S. regulators typically adopt regulations that include the FSB standards. The rulemaking process, however, requires regulators-before adopting rules-to solicit and consider public input and to think methodically about whether and how rules will work.</p> <p class="p1">The FSB and its member regulators apparently find these administrative processes tiresome. So they have embraced "voluntary" agreement approach pursuant to which industry members embed FSB prescriptions in their private contracts. No need to bother with rules if all the big banks fall into line without a drop of rulemaking ink being spilt.</p> <p class="p1">The relatively small number of key players in important global financial markets make such non-rulemaking rulemaking possible. Trade groups that represent these banks make the task even easier. Banks and their trade groups have little choice but to work to implement regulators' demands and to smile all the while.</p> <p class="p1">The FSB used such an approach last fall when it arranged for the International Swaps and Derivatives Association to change its standard contract to prevent parties to derivatives contracts from terminating their contracts with a financial institution that regulators are trying to resolve. Mark Carney-Governor of the Bank of England and head of the FSB-<a href="http://www.financialstabilityboard.org/wp-content/uploads/FSB-Chair%E2%80%99s-Letter-to-G20-Leaders-on-Financial-Reforms-Completing-the-Job-and-Looking-Ahead.pdf"><b>explained</b></a> that the 18 bank signatories covered 90 percent of the derivatives market. Convening 18 banks in a trade association backroom and telling them what to do is a lot easier than inviting everyone, including nonbanks, to hash out rules in a public rulemaking process.</p> <p class="p1">There is nothing wrong with regulators and firms thinking creatively, cooperatively, and globally about how to increase financial stability. The changes effected in the contractual agreements may help to keep markets functioning during future financial crises.</p> <p class="p1">But FSB-orchestrated strong-arming of big industry players to modify private contracts is no substitute for legislation or, when appropriate, orderly rulemaking conducted in the public eye. All interested parties deserve an opportunity to raise concerns about major regulatory initiatives, as does Congress-to which financial regulators are supposed to be accountable.</p> http://mercatus.org/expert_commentary/regulation-form-big-bank-coercion Thu, 23 Apr 2015 13:35:01 -0400 Bootleggers and Baptists in the Garden of Good and Evil: Understanding America's Entangled Economy http://mercatus.org/events/bootleggers-and-baptists-garden-good-and-evil-understanding-americas-entangled-economy <h5> Events </h5> <p>The U.S. economy is no longer performing at historic levels of growth.&nbsp;Today, there is a new, slow growth economy entangled with regulation.</p> <p>The Mercatus Center at George Mason University invites you to join Dr. Bruce Yandle, distinguished Mercatus Center adjunct professor of economics at George Mason University, for a Capitol Hill Campus presentation examining the regulation-entangled U.S. economy.</p> <p>Dr. Yandle will</p> <ul><li>Discuss the economy in terms of the <a href="http://www.cato.org/sites/cato.org/files/serials/files/regulation/1983/5/v7n3-3.pdf">Bootlegger/Baptist political model</a>, noting how regulation can be a tool to suppress competition and protect profits; </li><li>Present the adverse effects of command-and-control regulation on small firms and employment growth; and</li><li>Explore the role of the legislative process in alleviating the burden of entangling regulations. </li></ul> <p class="p1">Space is limited. Please register online for this event.&nbsp;</p> <p class="p1">This event is free and open to all congressional and federal agency staff. This event is not open to the general public. Lunch will be provided. Due to space constraints, this event is not open to interns. <i>Questions? Please contact Caitlyn Van Orden, event coordinator, at </i><a href="mailto:cvanorden@mercatus.gmu.edu"><i>cvanorden@mercatus.gmu.edu</i></a><i> or (703) 993-4925.</i></p> http://mercatus.org/events/bootleggers-and-baptists-garden-good-and-evil-understanding-americas-entangled-economy Fri, 24 Apr 2015 10:37:08 -0400 Think Licensing Laws Are Unfair? It Gets Worse http://mercatus.org/expert_commentary/think-licensing-laws-are-unfair-it-gets-worse <h5> Expert Commentary </h5> <p class="p1">The historian James Truslow Adams first coined the phrase "the American Dream" in 1931, to describe Americans' long-standing "belief in the common man and the insistence upon his having, as far as possible, equal opportunity in every way with the rich one." Central to that dream is the chance to start a business for oneself, be one's own boss, and maybe even make a fortune.</p> <p class="p1">Sadly, eight decades later, licensing laws often block people from earning a living or starting new businesses, simply to protect politically powerful companies from competition. Licensing requirements are supposed to ensure that professionals, such as doctors or pharmacists, are qualified and honest — but these laws often do nothing more than create cartels, block the path to economic opportunity, and raise prices for consumers.</p> <p class="p1">Most egregious are laws that require a type of license called a Certificate of Need (CON). Unlike ordinary licenses, CON laws do not require a person to be qualified. Instead, they prohibit anyone from starting a business if the community doesn't "need" it — which means, in reality, if the existing companies don't want competition. That may sound crazy, but it's the law in most states, and it applies to a wide variety of industries — everything from moving companies to taxi businesses to hospitals and even car dealerships.</p> <p class="p1">Any entrepreneur who applies for a CON must first notify all the established firms and allow them to object to his application. The objections need not show that the newcomer is unqualified or dishonest — simply that he would increase competition. And whenever an objection is filed, the applicant must hire a lawyer and attend a hearing, to prove to bureaucrats that a new business is "needed."</p> <p class="p1">It's doubtful that government officials — who typically don't conduct market research — can predict what sort of businesses are "needed," but it gets worse: Most CON laws leave it up to bureaucrats to define "need." The whole process can be expensive and time-consuming, since hiring a lawyer is a big cost for a business just starting out, and there's no way to ensure one will get a license.</p> <p class="p1">Economists have long warned that when government can block economic competition or redistribute wealth, that power becomes a prize in a political contest — a contest in which experienced lobbyists have the advantage over unknown entrepreneurs.</p> <p class="p1">In <a href="http://mercatus.org/publication/state-competitor-veto-laws-right-to-earn-a-living-federal-reform"><b>my new paper</b></a> published by the <a href="http://mercatus.org/"><b>Mercatus Center</b></a>, I explain how CON laws restrict economic opportunity — not to protect the public, but to benefit existing businesses that know how to manipulate the system. I focus on the case of Raleigh Bruner, who tried to start a moving business in Kentucky but didn't have the required CON. In the five years before his company started, 19 applicants for CONs had been protested by movers who openly admitted that they objected solely to block competition. Knowing a hearing would be expensive and take months to resolve, all but three of the 19 applicants simply abandoned their applications or bought CONs from existing companies. (The existing companies never objected to that.)</p> <p class="p1">The three applicants who persisted were refused CONs, regardless of their qualifications, because bureaucrats deemed current moving services "adequate." In one case, officials refused to issue a CON to a man who had been in the business for 35 years, even though the same companies that protested against him testified that he would "make a great mover."</p> <p class="p1">The Constitution's guarantee of "due process of law" <a href="http://www.cato-unbound.org/2012/02/06/timothy-sandefur/why-substantive-due-process-makes-sense"><b>prohibits</b></a> states from using licensing laws solely to benefit cronies. That guarantee, <a href="https://scholar.google.com/scholar_case?q=419+U.S.+565&amp;hl=en&amp;as_sdt=806&amp;case=602626968104745027&amp;scilh=0"><b>as the Supreme Court has explained</b></a>, "forbids arbitrary deprivations of liberty," but a law that blocks some people from practicing a trade merely to increase the profits of those with more political clout arbitrarily violates the right of those less privileged to earn a living. That's why <a href="https://scholar.google.com/scholar_case?q=schware+v.+board+of+examiners&amp;hl=en&amp;as_sdt=806&amp;case=9656421124030669324&amp;scilh=0"><b>the Court declared in 1957</b></a> that licensing laws "must have a rational connection with the applicant's fitness or capacity to practice" the trade. My colleagues at the <a href="http://www.pacificlegal.org/"><b>Pacific Legal Foundation</b></a> and I sued on Bruner's behalf, arguing that Kentucky's CON law deprived him of his constitutional right to earn a living. Last February, a federal judge <a href="https://scholar.google.com/scholar_case?q=bruner+v.+zawacki&amp;hl=en&amp;as_sdt=806&amp;case=17969311784130373979&amp;scilh=0"><b>struck down the law</b></a>, labeling it a "Competitor's Veto" that allowed established firms to "essentially 'veto' competitors ... for any reason at all, completely unrelated to safety or societal costs."</p> <p class="p1">That victory was only the first step. As part of our nationwide campaign against Competitor's Veto laws, my colleagues and I are now challenging CON requirements in <a href="http://www.pacificlegal.org/releases/1-29-15-Pabst-15-309"><b>Montana</b></a>, <a href="http://www.pacificlegal.org/cases/Moving-roadblocks-to-competition-and-free-enterprise-in-Nevada"><b>Nevada</b></a>, and other states, and previous cases persuaded <a href="https://www.youtube.com/watch?v=rzJDEJJJNHM"><b>Oregon</b></a> and <a href="http://www.pacificlegal.org/page.aspx?pid=4154"><b>Missouri</b></a> to repeal similar restrictions. Such laws make no pretense at protecting the public; they exist to protect businesses who don't want to compete economically and want to outlaw entrepreneurship instead.</p> <p class="p1">Yet entrepreneurship is central to the American Dream, and to the Constitution's guarantee of liberty. Abolishing unjust and unconstitutional Competitor's Veto laws would be an important step toward vindicating our nation's promise of equal opportunity for the common man.</p> http://mercatus.org/expert_commentary/think-licensing-laws-are-unfair-it-gets-worse Tue, 21 Apr 2015 10:18:32 -0400 Federal Subsidies to the States Remain High http://mercatus.org/publication/federal-subsidies-states-remain-high <h5> Publication </h5> <p class="p1">State governors and legislators often complain about the federal government’s heavy-handed presence in state and local affairs. Republican state policymakers have been particularly vocal in arguing that Washington should mind its own business and leave each state to its own devices.</p> <p class="p1">While state policymakers don’t appreciate federal policymakers telling them what to do, they are highly dependent on federal tax dollars. As the first chart below shows, 30 percent of the total amount spent by state governments in fiscal year 2014 came from federal sources. That figure is down from the federal “stimulus” high of 35 percent in fiscal 2010, but remains above levels seen in the previous decade.</p> <p class="p2"><a href="http://mercatus.org/sites/default/files/C1-State-Spending-Federal-Shares_0.png"><img height="398" width="585" src="http://mercatus.org/sites/default/files/C1-State-Spending-Federal-Shares_0.png" /></a></p> <p class="p1">The federal government was originally given responsibility for a small, defined list of responsibilities that were national in scope (e.g., providing for the national defense) in the Constitution. The Tenth Amendment made it clear that everything else was supposed to be “reserved to the States respectively, or to the people.” But as the second chart illustrates, the notion that the federal government and the states would have divided spheres of responsibility (i.e., “federalism”) was eviscerated in the 20th century.</p> <p class="p2"><a href="http://mercatus.org/sites/default/files/C2-Fed-Sub-to-State-and-Local.png"> <img src="http://mercatus.org/sites/default/files/C2-Fed-Sub-to-State-and-Local.png" width="585" height="393" /></a></p> <p class="p1">Separated into health and non-health subsidies, the chart shows the dramatic growth in federal subsidies to the states (adjusted for inflation) since 1940. Non-health subsidies have receded a bit in recent years following the conclusion of federal stimulus funding. However, health subsidies continue to reach new highs thanks in part to the expansion of Medicaid under Obamacare. As a whole, federal subsidies to the states will reach a combined $628 billion in fiscal 2015, which is more than the Department of Defense will likely spend this year.</p> <p class="p1">In spite of their complaints about federal overreach, state policymakers are addicted to handouts from Washington because it allows them to spend “free” money instead of asking their constituents to come up with funds via higher taxes. Unfortunately, federal money is not “free,” and the consequence of the federal government’s funding what are properly state and local responsibilities is excessive growth of government at all levels.</p> http://mercatus.org/publication/federal-subsidies-states-remain-high Wed, 22 Apr 2015 10:15:36 -0400 More Data Collection Won't Stop Future Financial Crises http://mercatus.org/expert_commentary/more-data-collection-wont-stop-future-financial-crises <h5> Expert Commentary </h5> <p class="p1"><a href="http://time.com/3693483/obama-restricts-intelligence-data/">National Security Agency data collection</a> has received considerable attention of late, and some have <a href="http://www.thenewamerican.com/usnews/constitution/item/15859-consumer-financial-protection-bureau-nsa-of-the-financial-world">likened</a> the Consumer Financial Protection Bureau’s data collection efforts – like collecting information on 991 million credit card accounts – to those of the NSA. While its director, Richard Cordray, has&nbsp;<a href="http://www.nationaljournal.com/technology/cfpb-director-yes-we-have-data-no-we-re-not-the-nsa-20140128">denied</a>&nbsp;the comparison, this data collection seems excessive and won’t stop future crises.</p> <p class="p1">Having people in government collect information about your credit records and income seems as valid a cause for concern as having people collect information about your telephone calls. (If that doesn’t trouble you, consider the rise in federal government <a href="http://mercatus.org/publication/federal-cybersecurity-breaches-mount-despite-increased-spending">cybersecurity breaches</a> documented by my colleagues, Andrea Castillo and Eli Dourado.)</p> <p class="p1">Maybe the staff at the&nbsp;Consumer Financial Protection Bureau&nbsp;don’t have to collect so much consumer finance data. My colleague, Thomas Stratmann, a professor of economics at George Mason University, observed that the bureau could conduct <a href="http://mercatus.org/sites/default/files/StratmannCFPBStatisticMethods.pdf">thorough analysis with much smaller samples</a>. He found that instead of collecting information on nearly one billion credit card accounts, a sample of about 1 percent of all U.S. credit card accounts would work just as well.</p><p class="p1"><a href="http://www.usnews.com/opinion/economic-intelligence/2015/04/20/more-data-collection-wont-stop-future-financial-crises">Continue reading</a></p> http://mercatus.org/expert_commentary/more-data-collection-wont-stop-future-financial-crises Mon, 20 Apr 2015 16:51:04 -0400 Credit Is a Powerful Tool for American Families http://mercatus.org/expert_commentary/credit-powerful-tool-american-families <h5> Expert Commentary </h5> <p class="p1">Americans have an ambivalent relationship with non-mortgage consumer credit: We all use it, yet we feel as if there is something&nbsp;slightly wrong about it. Should we?</p> <p class="p1">Consumer credit is often thought to be just a way to live beyond one’s means and to shift consumption – to spend today instead&nbsp;of saving for tomorrow. But the assumption that families use credit profligately is misleading. To understand how consumers&nbsp;use credit – and why it is a boon to American families and the economy – it is useful to understand how businesses use credit.</p> <p class="p1">Businesses use it for two basic reasons: to invest in capital goods and to smooth income and expenses. Capital goods generate&nbsp;a stream of benefits over time – for example, a construction company could employ workers with shovels to dig foundations&nbsp;for buildings or buy a backhoe to do the same work and finance it out of the crew’s increased productivity.</p> <p class="p1">Similarly, businesses&nbsp;can use credit to deal with short-term fluctuations in revenue and expenses – a retailer might finance its operations on credit&nbsp;during lean times and then pay it back when profits return and more inventory is needed.</p> <p class="p1">But what is often not appreciated is that households overwhelmingly use credit for the same purposes. Much of our use of consumer&nbsp;credit is for investment purposes, such as to buy a home or to use student loans to increase our human capital and earn a&nbsp;higher-paying job.</p> <p class="p1">But most of our big-ticket expenditures have this same characteristic: cars, refrigerators, televisions and other household&nbsp;durables. Consider, for example, the humble washing machine. Its value is the time and money it saves from not having to schlep&nbsp;to the laundromat every weekend with a pocket full of quarters. Refrigerators save us time-consuming trips to the grocery&nbsp;store or eating out; cars expand our job options. In short, the bulk of non-mortgage consumer credit is used to buy consumer&nbsp;durables that generate a stream of benefits over time.</p><p class="p1"><a href="http://www.washingtonpost.com/news/get-there/wp/2015/04/17/credit-is-a-powerful-tool-for-american-families/">Continue reading</a></p> http://mercatus.org/expert_commentary/credit-powerful-tool-american-families Tue, 21 Apr 2015 10:44:45 -0400 What America's Decline in Economic Freedom Means for Entrepreneurship and Prosperity http://mercatus.org/publication/what-americas-decline-economic-freedom-means-entrepreneurship-and-prosperity-0 <h5> Publication </h5> <p class="p1">The United States’ tepid recovery from the 2008 financial crisis is raising concerns about the future of the American economy. Entrepreneurship—the great driver of widespread prosperity and economic growth—is on the wane. Small business start-ups are down, large corporations’ cash hoards are up, and innovation is threatened as a result.</p> <p class="p1">Why? The most likely culprit is the decline, especially since 2008, of economic freedom in America. The United States is today only the <i>ninth</i> freest nation in the developed world, according to the <i>Economic Freedom of the World: 2014 Annual Report</i>. If the United States were a smaller and less iconic nation, this decline would be less troubling. But given America’s size and historical role in the global economy, the current outpouring of regulations, taxes, and fiscal and monetary irresponsibility from Washington throttle not only the US economy, but the world economy as well. Everyone is made poorer.</p> <p class="p1">The essays in this volume explore this timely issue. Anyone concerned about the current economic malaise will find in these pages a compelling explanation for our troubles and guideposts for reinvigorating economic freedom and entrepreneurship in America and, by extension, the rest of the world.</p><p>Find the entire book at <a href="http://www.fraserinstitute.org/research-news/display.aspx?id=22470">Fraser Institute</a>.&nbsp;</p> http://mercatus.org/publication/what-americas-decline-economic-freedom-means-entrepreneurship-and-prosperity-0 Thu, 23 Apr 2015 17:08:02 -0400 Economic Freedom in the World: Where Does America Stand? http://mercatus.org/events/economic-freedom-world-where-does-america-stand contact@mercatus.org (Mercatus.org) <h5> Events </h5> <p>The tepid, abnormally slow recovery of the U.S. economy after the 2008 recession has generated numerous debates about which government policy or market practice is a culprit or champion.&nbsp; While vigorous, such deliberations have made little progress in changing the status quo.&nbsp; Moving from debate to meaningful action requires a cogent understanding of the underlying causes of our economic malaise and using that knowledge to identify changes that can generate the robust recovery and prosperity that has been uniquely American.&nbsp; The collected essays in <i>What America’s Decline in Economic Freedom Means for Entrepreneurship and Prosperity </i>offers the first cohesive analytic resource on the causes of the dismal economic recovery and what can be done to unlock our nation’s prosperity potential.</p> <p>The Fraser Institute and the Mercatus Center at George Mason University invite you to a panel discussion where we will review the findings of these essays, authored by Liya Palagashvili, Russell Sobel, Robert Lawson, Roger Meiners, Andrew Morriss and Wayne Crews, and edited by Don Boudreaux, which identify entrepreneurship as the principal element for a prosperous economy, and the degree of economic freedom as the element that determines the quantity and quality of entrepreneurship a nation can generate.&nbsp;</p> <p>Since 2000, when the United States was one of the world leaders in economic freedom, its ranking has declined over the past decade as the growth in regulation and other government interventions weakened the rule of law that sustains economic freedom. Learn how this chain of causation works and how reform can restore the elements that propel prosperity.</p> <p>Questions? Please contact Bethany Stalter at <a href="mailto:bstalter@mercatus.gmu.edu">bstalter@mercatus.gmu.edu</a> or (703) 993-4889.<i></i></p> http://mercatus.org/events/economic-freedom-world-where-does-america-stand Thu, 16 Apr 2015 16:41:41 -0400 Occupational Licensing Gone Wild? Why Licensing Is Not Always the Answer http://mercatus.org/publication/occupational-licensing-gone-wild-why-licensing-not-always-answer <h5> Publication </h5> <p class="p1">Chairman Buck, Representative Breaux, and distinguished members of the committee: thank you for inviting me to testify on the subject of occupational licensing and certifications in the state of Indiana.&nbsp;</p> <p class="p1">I am an associate professor of economics in the department of business administration at Saint Francis University. I wrote my doctoral dissertation on the effects of occupational licensing and have also published several papers on the subject. Most of my comments below are based on a recent study I co-authored for the Mercatus Center at George Mason University titled “Bringing the Effects of Occupational Licensing into Focus: Optician Licensing in the United States” (attached). As the state discusses voluntary certification and creation of a registry I hope my comments may help provide context for policy relating to various licensed and certified occupations in the state of Indiana.&nbsp;</p> <p class="p1">Occupational licensing has significantly expanded in both breadth and scope the last several decades, resulting in higher costs of entry for many occupations and also higher prices for consumers. In this testimony, I will focus on the following points:&nbsp;</p> <ol class="ol1"> <li class="li2">Occupational licensing imposes substantial costs, while its benefits are unclear. </li> <li class="li2">A careful examination of the data shows that occupational licensing of barbers and opticians increases the earnings of the professionals without any measurable benefit to consumers. </li> <li class="li2">Occupational licensing is not always the optimal policy choice for regulation of a profession, from the standpoint of consumer protection. Certification might offer a lower cost and more effective regulatory alternative. </li> </ol> <p class="p3"><b>THE SCOPE OF OCCUPATIONAL LICENSING LAWS&nbsp;</b></p> <p class="p1">As of 2006, 29 percent of the workforce in the United States is subject to occupational licensing laws.<sup>1</sup> At least 800 occupations in the United States are subject to occupational licensing in at least one state.<sup>2</sup> The intention of these laws is to signal to consumers that individuals who are licensed meet minimum quality standards. While the intention is honorable, it is not clear that the imposed standards change the quality of service. What is clear is that occupational licensing imposes costs.&nbsp;</p> <p class="p1">Minimum quality standards set by licensing statutes can quickly become the maximum quality standards, as a decline in competition will lead to less incentive to improve and innovate.<sup>3</sup> Licensing imposes standards that are passed on to all customers, despite clear differences in how each customer values the quality of service.<sup>4</sup> It would appear that licensing may not necessarily be in the best interest of consumers for all occupations.&nbsp;</p> <p class="p3"><b>INDIANA’S LICENSING OF LOW-INCOME PROFESSIONS&nbsp;</b></p> <p class="p1">I have reviewed the Indiana Professional Licensing Agency’s report entitled “Establishing a Process for Self-Certification Registration” and largely agree with the economic testimony provided in the report. My contribution to the discussion is a focus on the economic effects of occupational licensing of low-income occupations.&nbsp;</p> <p class="p1">Occupational licensing laws often vary tremendously from state to state with no clear reason. Here I will focus on laws related to two professions: barbers and opticians. Our purpose here is not to identify occupations that would be candidates for deregulation—this is also not the purpose of the proposed Registry of Certified Professions. Instead, our purpose here is to identify the costs of occupational licensing as an institution and make the case that it might not always represent the ideal method of establishing <i>new regulation </i>for a profession from the standpoint of consumers.&nbsp;</p> <p class="p1"><i>Barbers. </i>Aspiring barbers in Colorado, Massachusetts, Missouri, New York, Vermont, and Washington can become licensed with 1,000 hours of training. In Iowa and Nebraska, more than double the number of hours (2,100) is required. Research suggests that tougher barber licensing provisions are associated with higher barber pay (an 11–22 percent premium).<sup>5</sup> For several years, Alabama was the lone state to not license barbers.<sup>6</sup> A recent law, effective in September 2013, reinstituted barber licensing. Curiously, the number of training hours required to be a barber (1,000) is one-third the number of hours required to be a cosmetologist (3,000). The sole difference between cosmetology and barbering as defined by Alabama statutes is that cosmetologists are allowed to perform manicures and pedicures and barbers are not. This strange discrepancy is a microcosm of the arbitrary nature of occupational licensing laws.&nbsp;</p> <p class="p1"><i>Opticians</i>. Unlike barbers, opticians are not licensed in all states. Opticians are able to dispense eyeglasses and contact lenses, but they do not have the authority to diagnose and treat eye diseases or perform eye examinations as ophthalmologists can. For reasons that we can only speculate, there has been little momentum to expand regulation of the profession. Opticians are licensed in 21 states, and as with the other two professions, the requirements to obtain a license vary extensively across states. Opticians in California can obtain licensure without completing any educational requirements, but in bordering Nevada, opticians must complete 1,128 days of education.&nbsp;</p> <p class="p1">In a recent study published by the Mercatus Center at George Mason University, my co-author and I estimated the effect that licensing has had on the earnings of opticians and the quality of service delivered to consumers.<sup>7</sup> We found that in states with licensing statutes, opticians earn from 0.3 to 0.5 percent more per year the statute is in place. We also found that opticians earn approximately 3 percent more per each additional licensing exam and for every additional 100 hours of education required.&nbsp;</p> <p class="p1">Quality of a service is a difficult metric to study, but using vision insurance premiums and optician malpractice insurance rates as a proxy we found there to be little evidence of an increase in quality. If licensure was associated with a higher quality of care from licensed opticians, this would allow them to charge higher prices and result in higher vision insurance premiums. We found the opposite: premiums were $14.16 in licensed states compared to $14.34 in unlicensed states. To supplement this finding we analyzed malpractice insurance rates. If optician licensing was increasing the quality of service, we hypothesized that state malpractice insurance premiums in unlicensed states should have been higher than in licensed states to compensate insurers for additional risk. We found that malpractice rates were exactly the same across both licensed and unlicensed states (except for the Commonwealth of Virginia, which was $25 higher and the only exception).&nbsp;</p> <p class="p1">Our inability to observe differences in the quality of optician services provided to consumers between licensed and unlicensed states also manifests itself in the Texas certification program. Texas does not require opticians to be licensed, but rather gives opticians the option of obtaining certification from the Texas Opticians Registry. After examining the public records of the Texas Opticians Registry, we discovered that only 2.8 percent of opticians in Texas are certified. This low participation rate implies that consumers do not see a difference in quality between the certified and the uncertified opticians: most opticians in Texas choose to not obtain certification and the vision services market appears to function normally.&nbsp;</p> <p class="p3"><b>CONCLUSION&nbsp;</b></p> <p class="p1">In our examination of occupational licensing of two low-income occupations, licensing increases the earnings of professionals without providing a measurable benefit to consumers. For many occupations not currently regulated in states, occupational licensing may not serve as an ideal means of protecting consumers. For newly regulated occupations, certification may serve as a lower cost option for providing consumers the necessary protection from incompetent or unscrupulous professionals.&nbsp;</p> http://mercatus.org/publication/occupational-licensing-gone-wild-why-licensing-not-always-answer Tue, 21 Apr 2015 11:13:07 -0400 State Government Becoming Increasingly Affordable http://mercatus.org/expert_commentary/state-government-becoming-increasingly-affordable-florida <h5> Expert Commentary </h5> <p class="p1">Fiscal horror stories from populous states like Illinois, California and New Jersey are becoming all too common these days, but Florida’s finances have yet to make the front pages of the national news. In an era when state governments are growing, and many strain to merely pay for past commitments, Florida has stood out for its fiscal responsibility.</p> <p class="p1">In a comprehensive new study published by the Mercatus Center at George Mason University, I document just how remarkable this is. The Sunshine State certainly has policy areas of concern — including homeowners insurance, land use regulation, pension accounting and rising health care costs. But for two decades, we’ve had a balanced budget without raising taxes, and have in many cases cut them.</p> <p class="p1">Florida’s state government appropriations as a percentage of Gross State Product (GSP) peaked in the 1994-95 budget at 11.86 percent. In the two decades since, this number has steadily declined to 10.38 percent in 2000, 9.89 percent in 2007, and 9.26 percent in 2014.</p> <p class="p1">State government employment shows a similar trend, peaking at 1.25 percent of the state’s population in 1995, and declining to 0.95 percent by 2012, the lowest percentage in the nation. In his latest budget, Gov. Scott has proposed cutting more than 1,000 state jobs — most, but not all, of which are vacant today. This move has spurred controversy, but critics and advocates agree that Florida's state government has taken a fiscally conservative turn over the last few decades.</p> <p class="p1">While other states (and the federal government) grappled with ways to raise taxes and maintain spending growth, Florida chose to live within its means, holding the line on taxes and reducing spending to match the decline in revenues.</p> <p class="p1">Our well-deserved reputation as a small-government state leads some to argue that we lose out on government services, so not everyone is happy about this. But while we are spending less on state government, are we really getting less?</p> <p class="p1">As a Floridian with three children who graduated from Florida high schools, and two who attend our state universities, I have been satisfied with the quality of their education. I sometimes get tied up in traffic, but don’t find our congestion (or other public services) worse than big-spending states like California, New York or Illinois.</p> <p class="p1">Regardless, Florida’s government seems to be giving its citizens a good deal. Spending less for what you get is desirable. Critics can argue that we should spend more, and in specific cases, they may have an argument. But we should be grateful that our leaders have resisted the spending temptations that are so harmful in other states.</p> http://mercatus.org/expert_commentary/state-government-becoming-increasingly-affordable-florida Tue, 21 Apr 2015 12:04:03 -0400 U.S. Regulations and Taxes Stifling Entrepreneurs http://mercatus.org/expert_commentary/us-regulations-and-taxes-stifling-entrepreneurs <h5> Expert Commentary </h5> <p class="p1">The current state of entrepreneurship is receiving considerable attention as debate simmers around questions of business dynamism in the United States. According to a <a href="http://www.gallup.com/businessjournal/180431/american-entrepreneurship-dead-alive.aspx">Gallup article</a>, the U.S. has dropped to 12th among developed nations in terms of business startups. Economists also recently <a href="https://www.aeaweb.org/articles.php?doi=10.1257/jep.28.3.3">found</a> evidence for this downward trend in business activity and attribute it to diminished incentives for entrepreneurs to start new firms.</p> <p class="p1">This raises some questions: What exactly are the factors leading to the decline in business activity in the United States? And what can be done to revive the American entrepreneurial environment?</p> <p class="p1">Economists identify the costs imposed on entrepreneurs by the regulatory environment as one of the most important influences on business dynamism. Where regulations make it difficult to start and operate businesses, entrepreneurs have a difficult time bringing new ideas and innovations to fruition. Promising entrepreneurs who face burdensome regulations might opt out of doing business or decide to take their ideas to countries with more favorable business climates.</p> <p class="p1"><a href="http://www.usnews.com/opinion/economic-intelligence/2015/04/15/us-regulations-and-taxes-stifling-entrepreneurs">Continue reading</a></p> http://mercatus.org/expert_commentary/us-regulations-and-taxes-stifling-entrepreneurs Wed, 22 Apr 2015 11:22:11 -0400 The Key to Reviving the U.S. Economy: New Book Explains the Importance of Economic Freedom and Entrepreneurship for U.S. Economic Growth http://mercatus.org/expert_commentary/key-reviving-us-economy-new-book-explains-importance-economic-freedom-and <h5> Expert Commentary </h5> <p class="p1">Why did the U.S. economy recover so slowly from the 2008 recession?&nbsp; What lessons have economists learned that can encourage economic growth in the future?&nbsp;</p> <p class="p1">A new book jointly published today by the&nbsp;Fraser Institute of Canada in conjunction&nbsp;with the Mercatus Center at George Mason University offers the answers.</p> <p class="p1">“The United States was once considered the land of opportunity, where entrepreneurs such as Henry Ford, Ray Kroc and Steve Jobs improved standards of living by providing new products and services at prices people were willing and able to pay,” said Donald J. Boudreaux, senior fellow at both the Fraser Institute and the Mercatus Center, and editor of <i>What America’s Decline in Economic Freedom Means for Entrepreneurship and Prosperity.</i></p> <p class="p3"><b>*Read the </b><a href="http://www.usnews.com/opinion/economic-intelligence/2015/04/15/us-regulations-and-taxes-stifling-entrepreneurs"><b>U.S. News&nbsp;&amp;&nbsp;World Report</b></a><b> column*</b></p> <p class="p1">Comprised of five essays by U.S. economists, the book connects the dots between entrepreneurship, economic freedom, and economic growth, detailing their interrelated roles in America’s sluggish economic recovery:</p> <p class="p1"><b>Liya Palagashvili of New York University and George Mason University</b> begins by detailing how&nbsp;entrepreneurship is central for both economic growth and long-term prosperity.</p> <p class="p1"><b>Russell Sobel of The&nbsp;Citadel&nbsp;</b>builds on Palagashvili’s chapter, providing further details on the relationship between entrepreneurship, high levels of economic freedom, and growth. As Sobel explains: “More economic freedom results in higher prosperity precisely because it results in higher levels of entrepreneurial activity.”</p> <p class="p1"><b>Robert Lawson of Southern Methodist University</b> examines the current situation in the United States.&nbsp; According to the Fraser Institute’s annual <a href="http://www.freetheworld.com/"><i>Economic Freedom of the World Index </i></a>(co-written by Lawson), economic freedom in the U.S. has dramatically fallen from its global rank of second in 2000 to 14<sup>th</sup> today.</p> <p class="p1">Lawson writes: “To a large degree, the United States has experienced a significant move away from rule of law and toward a highly regulated, politicized, and heavily policed state.”</p> <p class="p1"><b>Robert Meiners of the University of Texas at Arlington and Andrew P. Morris, Dean of Texas A&amp;M University School of Law&nbsp;</b>examine the role&nbsp;of the U.S. legal system and how special interests corrupt the legal and economic framework.&nbsp; They also explain the impact of regulation and the economy.</p> <p class="p1"><b>Clyde Wayne Crews, Jr. of the Competitive Enterprise Institute </b>captures the extent to which U.S. regulation has reached prodigious levels, writing: “Such examples scale down to the Consumer Product Safety Commission’s proposed window blinds regulation to FDA’s regulation of a serving size of breath mints.”</p> <p class="p1"><b>Donald Boudreaux of the Fraser Institute and Mercatus Center at George Mason University</b> concludes by noting that although American entrepreneurship is in decline, it is possible to reverse the trend:</p> <p class="p1">“For generations, American entrepreneurs and small business owners have played a vital role in our economy. But today that role is being diminished. The results can be seen in the lagging economic recovery since 2008.</p> <p class="p1">“The warning signs are all about us but it’s not too late to reverse course. Start with a simpler, understandable tax code, fewer regulations, greater enforceability of contracts – in short, put an end to government stifling of entrepreneurs and small businesses.”</p> <p class="p1">The Fraser Institute is an independent Canadian public policy research and educational organization.&nbsp;The Mercatus Center at George Mason University is the world’s leading university source for market-oriented ideas–&nbsp;bridging the gap between academic ideas and real-world&nbsp;problems.</p> http://mercatus.org/expert_commentary/key-reviving-us-economy-new-book-explains-importance-economic-freedom-and Thu, 23 Apr 2015 16:51:29 -0400 Evaluating the Ex-Im Bank Based on the Facts http://mercatus.org/events/evaluating-ex-im-bank-based-facts <h5> Events </h5> <p>As the deadline for reauthorization of the Export-Import Bank of the United States draws near, Congress is faced with a choice of whether to keep the Bank or allow its charter to expire. Policymakers are carefully reconsidering the assumptions, mission, and activities of the federal government’s official export credit corporation in order to make an informed, fact-based decision.<o:p></o:p></p> <p>The Mercatus Center at George Mason University invites you to join Dr. Veronique de Rugy, senior research fellow for the Mercatus Center, for an examination of the justifications supporting continued authorization of the Bank and the economic realities of those claims.<o:p></o:p></p> <p>Space is limited. Please register online for this event.<o:p></o:p></p> <p>This event is free and open to all congressional and federal agency staff. This event is not open to the general public. Lunch will be provided. Due to space constraints, please no interns.&nbsp;<i>Questions? Please contact Caitlyn Van Orden </i>at<i> </i><a href="mailto:cvanorden@mercatus.gmu.edu"><i>cvanorden@mercatus.gmu.edu</i></a>.<o:p></o:p></p> http://mercatus.org/events/evaluating-ex-im-bank-based-facts Wed, 22 Apr 2015 10:52:47 -0400 Illustrating Retirement Income for Defined Contribution Plan Participants: A Critical Analysis of the Department of Labor Proposal http://mercatus.org/publication/illustrating-retirement-income-defined-contribution-plan-participants-critical-analysis <h5> Publication </h5> <p class="p1">Devising the best retirement income strategies is a challenge facing all Americans with individual retirement accounts. The Department of Labor recently proposed that personal retirement accounts include an illustration of the retirement income producible from the assets in the account through an immediate life annuity. This is a step toward helping people who are making decisions about saving for retirement and managing their assets during retirement, but the proposal can and should be improved.&nbsp;</p> <p class="p1">A new study for the Mercatus Center at George Mason University is the first to rigorously assess the details of the proposed regulation using empirical methodology widely accepted in the financial industry and comparing the proposed illustration to the Social Security statement. The regulation would require all defined contribution plans to inform their participants of the life annuity income equivalents of the current and projected balances in their individual accounts. The study examines several changes the Department of Labor can make to improve its proposal.&nbsp;</p> <p class="p2">To read the study in its entirety and learn more about its author, economist Mark J. Warshawsky, please see “<a href="http://mercatus.org/sites/default/files/Warshawsky-Retirement-Income.pdf">Illustrating Retirement Income for Defined Contribution Plan Participants: A Critical Analysis of the Department of Labor Proposal</a>.”&nbsp;</p> <p class="p1">SUMMARY&nbsp;</p> <p class="p1">When workers retire, they will have to manage their financial accounts in a responsible manner. Even for those with experience and understanding of personal financial management, it can be a daunting task to ensure that the money saved will be spent wisely and will still be around many years into the future. One way to assist workers who are planning their investment and spending choices is to provide an income illustration based on the funds in their account and projected to be in their account at the time of retirement.&nbsp;</p> <p class="p1">The Social Security Administration already provides such personalized information about the projected annual Social Security retirement benefits that workers can expect to receive if they retire at various claiming ages. This statement, automatically mailed to all covered workers every five years (and now available online), is designed to be used as part of the broader retirement income planning process.&nbsp;</p> <p class="p1">The Department of Labor’s proposed regulation would require defined contribution retirement plans to provide a similar statement, showing workers the income they could claim from their account at certain periods of time. Empirical analysis shows that the proposal could be effective if it incorporates some key improvements. There are several ways in which Department of Labor should make the statement more informative and relevant to workers as they plan their retirement and their retirement income strategies.&nbsp;</p> <p class="p1">KEY RECOMMENDATIONS&nbsp;</p> <p class="p1">The Department of Labor can improve its proposal in several ways:&nbsp;</p> <ul class="ul1"> <li class="li3"><i></i><i>Make the illustrations inflation-indexed. </i>The proposal should reflect an inflation-indexed life annuity rather than a nominal fixed annuity. </li> <li class="li3"><i></i><i>Base the illustrations on annual income. </i>The illustration should be based on annual rather than monthly income, consistent with the way salaries and many financial reports are structured. </li> <li class="li3"><i></i><i>Show a survivor annuity. </i>The proposal should show individual and joint-and-67%-to-survivor life annuity rates at the normal retirement age to all workers, rather than individual and joint-and-50% contingent rates just for married workers. Many insurers offer joint-and-67%- to-survivor life annuities, while joint-and-50% contingent options are not typically offered. </li> <li class="li3"><i></i><i>Use gender-distinct illustrations. </i>The illustrations should be provided on a gender-distinct rather than a gender-neutral basis (unless a gender-neutral annuity is offered within the plan). Few annuities are currently offered on a gender-neutral basis. </li> <li class="li3"><i></i><i>Provide data for several retirement ages. </i>The illustration should show older workers projections for several retirement ages, like the Social Security statement does. </li> <li class="li3"><i></i><i>Provide the illustrations annually. </i>The illustrations need not be provided more frequently than annually, which is the same frequency that the Social Security Administration pro- vides such personalized information to its participants. </li> <li class="li3"><i></i><i>Use the 10-year Treasury rate. </i>The assumed 7 percent investment return for projecting account balances forward is too high; illustrations should use the 10-year Treasury con- stant maturity rate instead. </li> <li class="li3"><i></i><i>Include IRAs. </i>The proposal should include individual retirement accounts. </li> </ul> <p class="p1">CONCLUSION&nbsp;</p> <p class="p1">The Department of Labor is on the right path when it proposes to require the illustration of the expected lifetime income that a 401(k) account can produce when its owner retires. However, its proposal can be improved to produce a more useful illustration for retirement planning and the selection of a retirement income strategy.&nbsp;</p> http://mercatus.org/publication/illustrating-retirement-income-defined-contribution-plan-participants-critical-analysis Thu, 16 Apr 2015 10:32:41 -0400 The Export-Import Bank’s Top Foreign Buyers http://mercatus.org/publication/export-import-bank-s-top-foreign-buyers <h5> Publication </h5> <p class="p1"><b>I</b>n lobbying for reauthorization of the Export-Import Bank of the United States (Ex-Im Bank), advocates emphasize its importance to small businesses and economic growth. As they tell it, taxpayer subsidies to foreign firms for the purchase of American exports grow Main Street businesses and create jobs. But the reality is quite different. A new analysis of government data reveals that Ex-Im Bank’s top 10 overseas buyers<sup>1</sup> are large corporations that primarily purchase exports from multinational conglomerates. Furthermore, the subsidies lavished on these foreign firms actually undercut American companies and workers that must compete without such government assistance.&nbsp;</p> <p class="p1">The numerous problems with Ex-Im Bank have been analyzed in a significant body of research.<sup>2</sup> For instance, previous research has documented that Ex-Im Bank financing principally benefits very large exporters.<sup>3</sup> This new analysis reveals that the primary beneficiaries on the buyer side of the transactions are also very large firms. Among the top 10 buyers, 5 are state-controlled and rake in millions of dollars from their own governments in addition to Ex-Im Bank subsidies. These multiple-subsidy streams offset operating costs, and provide a significant competitive advantage over unsubsidized US firms engaged in similar ventures.&nbsp;</p> <p class="p1">Five of the top 10 buyers are involved in the exploration, development, and production of oil or natural gas. These foreign concerns are collecting subsidies from American taxpayers at the same time that the Obama administration is restricting domestic oil and gas operations.<sup>4</sup> Consequently, the federal government doubly disadvantages US energy firms—through Washington’s excessive regulation and Ex-Im Bank subsidies granted to US firms’ foreign competitors.&nbsp;</p> <p class="p1">The other five top buyers are airlines that collectively have received more than $15 billion in Ex-Im Bank subsidies in the past seven years solely to purchase products from Boeing—the single largest US beneficiary of Ex-Im Bank financing.<sup>5</sup> The bank’s subsidization of foreign airlines has tripled since 2008, significantly increasing competitive pressure on domestic carriers.<sup>6</sup> In reality, Ex-Im Bank subsidies are a form of corporate welfare that is neither necessary nor appropriate.<sup>7</sup> If lawmakers truly want to nurture small businesses and economic growth, they should end the Ex-Im Bank favoritism that undermines domestic companies and focus instead on reducing the tax and regulatory barriers that choke investment, innovation, and job creation.<sup>8</sup>&nbsp;</p> <p class="p3"><b>A DEPRESSION-ERA RELIC&nbsp;</b></p> <p class="p1">The Export-Import Bank was incorporated in 1934 by President Franklin D. Roosevelt to finance trade with the Soviet Union. Congress later constituted the bank as an independent agency under the Export-Import Bank Act of 1945. The most recent authorization of the Ex-Im Bank was set to expire on September 30, 2014, but lawmakers extended the charter until June 30, 2015.<sup>9</sup>&nbsp;</p> <p class="p1">The bank provides loans and loan guarantees as well as capital and credit insurance to “facilitate” US exports. The financing is backed by the “full faith and credit” of the US government, which means taxpayers are on the hook for losses that bank reserves fail to cover. Ex-Im Bank’s current exposure exceeds $140 billion.&nbsp;</p> <p class="p1">President Roosevelt’s executive order authorizing the bank called for “remov[ing] obstacles to the free flow of interstate and foreign commerce” and “promoting the fullest possible utilization of the present productive capaci- ties of industries.”<sup>10</sup> In decades past, political and economic turmoil around the world did present barriers to international trade. But successive rounds of global trade negotiations, starting with the first General Agreement on Tariffs and Trade in 1947, and culminating in the establishment of the World Trade Organization in 1995, have secured massive lowering of such barriers. When Ex-Im Bank was created in 1934, the average tariff on dutiable imports was 46.7 percent. Now, it is below 5 percent.<sup>11&nbsp;</sup></p> <p class="p1">Not surprisingly, international trade has boomed as global trade barriers have shrunk. American businesses have benefitted from this, exporting $2.35 trillion worth of goods and services in 2014, hitting a record high for the fifth consecutive year.<sup>12 </sup>Ex-Im Bank plays a marginal role, assisting in only 2 percent of total US exports. The export picture would look almost the same without Ex-Im Bank because export credit subsidies only rearrange the distribution of exports, rather than raising the net level of exports overall.<sup>13</sup></p><p class="p1"><a href="http://mercatus.org/sites/default/files/DeRugy-Ex-Im-Foreign-Buyers.pdf">Continue reading<sup>&nbsp;</sup></a></p> http://mercatus.org/publication/export-import-bank-s-top-foreign-buyers Mon, 20 Apr 2015 10:10:02 -0400 Can Public Pensions Fulfill Their Promises? An Examination of Pennsylvania’s Two Largest Public Pensions http://mercatus.org/publication/can-public-pensions-fulfill-their-promises-examination-pennsylvania <h5> Publication </h5> <p class="p1">The financial health of state and local pensions has received considerable attention in recent years. One major concern is that public pensions, such as Pennsylvania’s Public School Employees’ Retirement System (PSERS) and State Employees’ Retirement System (SERS), likely will be unable to pay all their promised benefits in the future.</p> <p class="p1">A new study for the Mercatus Center at George Mason University is the first to examine whether public pensions that are funded at various levels will have sufficient assets to pay all promised future benefits. The study also looks at the distribution of the potential accumulation of assets for pensions that do have sufficient assets. Examining PSERS and SERS using financial modeling over a period of years, the study presents two conclusions applicable to all public pensions:</p> <ul class="ul1"> <li class="li2">Due to the volatility of a pension’s investment returns, there is less than a 50–50 chance that a fully funded pension will be able to pay all promised future benefits without additional contributions. Since most public pensions in the United States are funded at a level less than 100 percent, the problem is even more severe.</li> <li class="li2">If pensions make changes to increase the likelihood that all future benefits will be paid, there is an increased likelihood that the pension will accumulate “too many” assets, leading to political demands to distribute those assets through higher benefit payments, exacerbating future funding problems.</li> </ul> <p class="p1">To read the study in its entirety and learn more about its authors, Erick M. Elder and Gary A. Wagner, see “<a href="http://mercatus.org/sites/default/files/Elder-PA-Public-Pensions.pdf">Can Public Pensions Fulfill Their Promises? An Examination of Pennsylvania’s Two Largest Public Pensions</a>.”</p> <p class="p4"><b>PSERS AND SERS</b><br />Despite having combined assets of more than $75 billion, Pennsylvania’s two largest public pension plans, PSERS and SERS, may be underfunded by as much as $100 billion. The burden of pension underfunding will require either</p> <ul class="ul1"> <li class="li2">increases in contributions from employers, lowering take-home pay for employees; or</li> <li class="li2">increases in contributions from the Commonwealth of Pennsylvania or municipalities, leading to higher taxes or a reduction in government services.</li> </ul> <p class="p1">Due to the magnitude of unfunded pension liabilities, Pennsylvania has seen its general obligation bond ratings lowered by major credit rating agencies. As a result, Pennsylvania will be required to pay a higher interest rate on newly issued debt, raising the cost of government services and programs, such as building hospitals, new roads, and schools.</p> <p class="p1">The continued underfunding of PSERS and SERS should be a major concern for policymakers in Pennsylvania. The proper analysis of and solution to this problem has implications for all public pensions in the United States.</p> <p class="p4"><b>PENSION FUNDING THEORY</b><br />The funding ratio is a common metric for gauging the financial health of a public pension. Pensions that have funding ratios below 80 percent are generally considered underfunded, while pensions with funding ratios in excess of 100 percent are generally considered overfunded. But investment returns are critical to the true health of the plan, and those returns can be uncertain.</p> <p class="p4"><b>KEY FINDINGS</b><br />Long-term financial modeling based on current funding ratios and an assumed distribution of asset returns leads to several conclusions:</p> <ul class="ul1"> <li class="li2"><i>Funding is sufficient for the next five years.</i> Both PSERS and SERS have a 100 percent probability that the pensions will have sufficient assets to pay benefits without an increase in contributions for the next five years.</li> <li class="li2"><i>Future funding sufficiency is doubtful.</i> After five years, the probability of sufficient funding declines: by 2030, PSERS will have only a 31 percent chance of sufficient funding and SERS will have only a 16 percent chance of sufficient funding. In 50 years, the chances drop to 4 percent (PSERS) and 1.5 percent (SERS).</li> <li class="li2"><i>Even fully funded pensions may have insufficient assets.</i> Due to the nature of investment returns and volatility, a fully funded pension may not have sufficient assets at a certain point in time: there is a 50–50 chance that any pension will have sufficient funding to pay all benefits by the year 2040.</li> <li class="li2"><i>Overfunding pensions may lead to increased benefit payments.</i> Even an overfunded pension, such as one with 20 percent more assets on hand than the expected value of future liabilities, will have less than a certain chance of making all future payments: by 2040, the probability is only 73 percent. However, when a pension is actuarially overfunded, political demands for increasing benefit payments may arise, leading to an even greater chance of funding insufficiency.</li></ul> <p class="p4"><b>IMPACT ON PENSION REFORM AND TAXPAYERS</b><br />Due to the underfunding of these pensions, it is highly likely that some sort of pension reform will occur in the future. Reforms will affect current and future public-sector employees, current and future public-sector retirees, and taxpayers—because additional contributions to public pensions may require higher taxes to pay for them.</p> <p class="p4"><b>CONCLUSION</b><br />PSERS and SERS are severely underfunded based on traditional metrics and can only guarantee to finance promised obligations for the next five years. But even if the pensions were fully funded, they would have only a 50–50 chance of making all payments in the year 2040. However, rather than rush to fully fund the pension, reform-minded policymakers must consider the tradeoff of overfunding the pension. Future financial reports issued by each pension should include calculations indicating the likelihood that the pension will be able to meet its future obligations over different time periods.</p> http://mercatus.org/publication/can-public-pensions-fulfill-their-promises-examination-pennsylvania Tue, 14 Apr 2015 22:47:38 -0400 Public-Sector Pension Reform in Pennsylvania and the Role of Transition Costs http://mercatus.org/publication/public-sector-pension-reform-pennsylvania-and-role-transition-costs <h5> Publication </h5> <p>Chairman Eichelberger, Minority Chair Blake, and distinguished members of the Senate Finance Committee:&nbsp;thank you for inviting me to testify on the subject of transition costs in pension reform in the Commonwealth ofPennsylvania.<br /><br />As part of my research for the State and Local Policy Project at the Mercatus Center at George Mason University,&nbsp;I have studied the accounting, economic, and fiscal principles at work in public-sector defined benefit plans. I&nbsp;have analyzed the state pension plans of New Jersey, Rhode Island, Delaware, and Alabama. I have also studied&nbsp;and commented on the pension systems of New Hampshire and Montana. On May 1, 2012, I provided testimony to the Pennsylvania House State Government Committee on the funded status and financial health of Pennsylvania’s pension plans.1<br /><br />As state and local governments assess the long-term sustainability of defined benefit plans, a growing number are&nbsp;choosing to close existing defined benefit plans and move either new hires or a portion of all employees to new&nbsp;systems. These systems may be defined contribution plans, as in Oklahoma, Michigan, and Alaska; cash balance&nbsp;plans, a type of defined benefit plan, as in Kansas and Kentucky; or hybrid plans that combine features of defined&nbsp;contribution and defined benefit plans, as in Rhode Island and Utah.<br /><br />These reforms aim to stop the growth of unfunded pension liabilities and establish retirement systems with&nbsp;stronger foundations and sounder funding for retirees. In each of these states, policymakers have projected the growing costs of keeping defined benefit plans open to new employees and found that switching to a new system&nbsp;is the best course for employees, taxpayers, and governments.</p><p>In some cases, proposed pension reforms have stalled over concerns by policymakers that closing defined benefit&nbsp;plans and moving employees to a new system will generate transition costs. These costs, it is argued, add shortterm&nbsp;expenses to already increasing fiscal burdens resulting from underfunded employee pension plans. Transition&nbsp;costs diminish as the closed plan pays out benefits to the remaining retirees.</p><p>Closing a defined benefit plan does not add liabilities to the plan. Rather, it changes how the plan’s liabilities are&nbsp;accounted for and changes the investment strategy for the plan’s assets. It reveals the economic value of the plan&nbsp;and makes the funding of the plan’s benefits more sound. Closing a defined benefit plan doesn’t add new costs; it&nbsp;makes the costs transparent, and it makes it easier to ensure that the benefits for retirees are fully funded.<br /><br />I will now explain what transition costs are and why they should not stand in the way of switching employees&nbsp;from defined benefit to defined contribution or hybrid plans. I will also address how pension plans, particularly&nbsp;closed ones, should invest their assets.<br /><br /><b>WHAT ARE TRANSITION COSTS?</b><br />Two types of transition costs are cited as budgetary barriers to switching public employees from a defined benefit&nbsp;plan to a defined contribution plan: accounting costs and investment costs.<br /><br />Both of these short-term costs, it is argued, rise in a closed defined benefit plan. While they dwindle as the number&nbsp;of retirees in the closed plan approaches zero, governments are hesitant to add costs to already strained budgets.&nbsp;Let me explain some misconceptions about these costs and why these are not a barrier to pension reform.&nbsp;</p><p>Claims of accounting-based transition costs stem from a misreading of Government Accounting Standards Board&nbsp;(GASB) accounting guidance regarding amortization schedules for closed defined benefit plans. Amortization&nbsp;refers to smoothing out debt payments—in the case of pensions—for past years of service. Plans are free to amortize,&nbsp;or structure the payments, of the closed plan’s liability using one of several approaches and can even stick with&nbsp;the existing amortization schedule. Alaska elected to use the existing amortization schedule for its closed plan.</p><p>Investment-based transition costs concern how the closed defined benefit plan should value and invest the plan’s&nbsp;assets. These costs arise from past accounting assumptions that have led plans to be underfunded by relying onunrealistically high-expected returns from riskier assets. Closed plans are required to switch to less risky and&nbsp;more liquid portfolios. This switch improves the closed plan’s funding and reduces the risks associated withunderfunding retiree benefits. When a plan’s assumed rate of return decreases, the present value of the liability&nbsp;increases, though the liability itself is gradually decreasing in the closed plan. Thus, investment-based transitioncosts serve a positive and necessary goal—fully paying out retiree benefits.</p><p>In general, transition costs refer to the employer’s contribution to the pension that funds employee benefits. This&nbsp;contribution has two parts. One is the normal cost, the annual cost for benefits earned by active employees in thecurrent year. The other is the amortization of the unfunded accrued liability (UAL), which covers unfunded benefits&nbsp;from past years. This latter portion is the focus of the accounting-based transition-cost critique.</p><p><a href="http://mercatus.org/sites/default/files/Norcross-PA--Testimony.pdf">Continue reading</a></p> http://mercatus.org/publication/public-sector-pension-reform-pennsylvania-and-role-transition-costs Wed, 15 Apr 2015 15:36:21 -0400 Regulatory Impact on Economic Growth: Why the “New Normal” Isn’t Normal http://mercatus.org/video/regulatory-impact-economic-growth-why-new-normal-isn-t-normal <h5> Video </h5> <iframe width="560" height="315" src="https://www.youtube.com/embed/hPf2yhJqX1U" frameborder="0" allowfullscreen></iframe> What are the benefits to low and middle income households if we close the current growth gap and how can we get the economy to generate those benefits?<div class="field field-type-text field-field-embed-code"> <div class="field-label">Embed Code:&nbsp;</div> <div class="field-items"> <div class="field-item odd"> &lt;iframe width=&quot;560&quot; height=&quot;315&quot; src=&quot;https://www.youtube.com/embed/hPf2yhJqX1U&quot; frameborder=&quot;0&quot; allowfullscreen&gt;&lt;/iframe&gt; </div> </div> </div> http://mercatus.org/video/regulatory-impact-economic-growth-why-new-normal-isn-t-normal Tue, 14 Apr 2015 13:57:40 -0400 Get Rid of State and Local Tax Deductions http://mercatus.org/expert_commentary/get-rid-state-and-local-tax-deductions <h5> Expert Commentary </h5> <p class="p1"><b>The New York Times Room for Debate&nbsp;posted this question:</b> What are the most useless, unfair or counterproductive personal tax breaks?<br /><br /></p> <p class="p1"><b>Veronique de Rugy provided the following response:<br /></b><span style="font-size: 12px;">Genuine income tax reform would lower tax rates, reduce double taxation of income that is saved and invested, and cut out loopholes that tilt the playing field in favor of politically connected interest groups.</span></p> <p class="p1">In this vein, we should get rid of deductions that let taxpayers write off state and local income taxes. I’m all for people keeping more of their income, but this exemption actually leads to bad policy by state and local government.</p> <p class="p1">This loophole lets politicians raise taxes without upsetting voters as much as they should be, because this additional burden can be deducted from their federal tax bill. But people in responsible low-tax states shouldn't be paying higher taxes to subsidize profligacy in high-tax states like California and Illinois to make up for this federal largesse.</p> <p class="p1">State and local governments are also encouraged to spend more wastefully by the federal income tax exemption on interest received for lending money to those governments through municipal bonds. That deduction should go, too. It encourages state officials to incur more debt and artificially steers private capital toward state and local government at the expense of private investments.</p> <p class="p1">But every penny of revenue raised by reforming state and local tax deductions should be used to lower marginal tax rates, not to finance bigger government.</p> <p class="p1">Of course, while all tax exemptions help crowd out other possible tax reforms, they aren’t equally bad. Tax provisions that merely allow people to avoid being double-taxed — such as those for retirement saving or the tax treatment of capital gains and dividends — mitigate biases embedded in the tax code. They don’t compare to the state and local government deductions — or even health care exclusions — which are mere handouts to special interests. Unfortunately, outfits like the Joint Committee on Taxation or the Congressional Budget office fail to make the distinction, compromising the potential for productive tax reform.</p> http://mercatus.org/expert_commentary/get-rid-state-and-local-tax-deductions Tue, 14 Apr 2015 10:52:41 -0400