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Why Is There No Milton Friedman Today?

Tue, 21 May 2013 14:57:12 -0400

Expert Commentary

Imagine that someone with all the endowments of a Milton Friedman were born in the 1960s or 1970s. Is it conceivable that such a person would develop into a ‘Milton Friedman’ like we know the actual Friedman to have been, including his academic eminence and his eloquent and influential advocacy of classical liberalism? Here leading economists address the question: Why is there no Milton Friedman today?

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Why Government Aid Programs Aren’t the Best Way to End Poverty

Christopher Coyne — Tue, 21 May 2013 14:52:35 -0400

Expert Commentary

Based on the high standards of living enjoyed by their citizens, you might think that the governments of First World countries know how to create development. They don’t. Development isn’t created by anyone, not least well-intentioned politicians or development “experts”. The process of improving well-being only takes place in an environment that encourages constant innovation and experimentation.

Unfortunately, the state-led aid industry not only neglects the realities of development, but often takes actions that actively undermine it. For First World countries, development does not mean allowing other societies to go through the same messy process they did themselves. It entails top-down planning and grandiose promises that – this time – their plans will end poverty and suffering for good. Just consider the $9bn (£5.9bn) pledged to Haiti following its 2010 earthquake. Only a small portion was delivered, and even that has proven ineffective. Haiti’s President Michel Martelly recently concluded that aid “isn’t showing results”.

There are two reasons why state-provided aid cannot create society-wide prosperity. First, policymakers do not have access to the knowledge needed to allocate scarce resources to their best uses. In his critique of socialism in the 1930s and 1940s, Nobel Laureate Friedrich Hayek made this exact point, noting that even the most qualified and benevolent planners lack the knowledge to produce even the most basic items in a cost-effective manner.

Investor Thomas Thwaites recently embarked on a fascinating endeavour, the Toaster Project, which illustrates Hayek’s point. Thwaites tried to build a simple toaster from scratch. He quickly found the task was overly complex, involving hundreds of parts and materials from many locations. After much travel and effort to extract and process these materials, he constructed his (extremely ugly) toaster. Upon being plugged into an electric socket, it burned out within seconds. Thwaites realised that “the scale of industry involved in making a toaster is ridiculous, but at the same time the chain of discoveries and small technological developments that occurred along the way make it entirely reasonable.” No central planner determined the process, yet toasters are readily available. This is economic development.

The perverse incentives associated with aid are a second reason governments can’t create development. These exist both within the recipient and donor governments. For recipients, aid creates the incentive for already dysfunctional governments to remain ineffective. A cross-country study by Stephen Knack of the World Bank found that foreign assistance undermines the quality of political institutions in recipient countries through weakened accountability of political actors, more corruption, greater chances of conflict, and a weakening of the incentive to reform inefficient institutions and policies.

For donors, government agencies tend to focus on spending money as quickly as possible on observable outputs to signal their importance and the need for more money. In the absence of clear lines of accountability, money is often wasted. Consider that a recent report by the Special Inspector General for the Iraq Reconstruction (SIGIR) identified $8bn in funds that were either wasted or unaccounted for. When people are not held responsible for their actions, they tend to act carelessly. Aid efforts are plagued by similar issues.

Economic freedom, which requires general protections of person and property, avoids both of these problems. It does not fall prey to the knowledge problem that Hayek warned of because it recognises that attempting to micromanage economic outcomes is doomed to fail. Likewise, it avoids creating perverse incentives because it limits direct political interventions into voluntary interaction between people.

What can be done? Instead of looking to fix other societies, developed nations should focus on their own policies towards people living elsewhere. As the Toaster Project illustrates, increasing the extent of the market is the best means of delivering more and cheaper goods and services. If the desired end is to help the worst off, this provides a benchmark for judging policies: does it contribute to increasing the extent of the voluntary market? If the answer is “yes”, those policies will be most effective at improving living standards and removing suffering.

Renewable-Energy Subsidies and Electricity Generation

Veronique de Rugy — Tue, 21 May 2013 11:41:51 -0400

Publication

This chart uses data from the US Energy Information Administration to compare federal investments in green energy and the share of green energy in electricity generation.

Wind energy receives the lion’s share of renewable-energy grants. The industry has received nearly $30 billion in federal subsidies and cash grants over the past 35 years, and Washington has promised another $12 billion in subsidies in the next decade.

Among the specific fuels and technologies, wind plants received the largest share of direct federal subsidies and support in fiscal year 2010, accounting for 46 percent of total electricity-related subsidies. From 2000 to 2010, federal wind subsidies grew by an average of 32 percent per year while subsidies for other energy sources remained relatively flat. Between fiscal years 2007 and 2010, annual wind subsidies grew from $476 million to nearly $5 billionalmost tenfold.

While the data of the full amount of subsidies is not available, as of March 21, 2013 DOE’s 1603 program funded $18.2 billion in cash grants for renewable energy projects. Furthermore, according to the National Renewable Energy Laboratory, the wind industry has received $8.4 billion in subsidies through May 2012.

Wind energy is subsidized through dozens of different federal credits, grants, and loan guarantees. These programs give wind producers significant pricing advantages over other, more reliable sources of energy. Despite this advantage and the extraordinary federal investments in wind energy, wind energy produced only four percent of the entire US electricity generation in 2012, coming in a distant fifth place behind coal, nuclear, natural gas, and hydropower.

Taxpayers should not be forced to shell out billions of dollars on subsidies for such a low-value energy generator that has already been heavily subsidized for 35 years.

Data note: electricity generation data from the EIA were updated in May 2013; subsidy data were not. Therefore, we use the 2010 figures in order to compare total subsidies, support received, and share in total generation. Solar provided 0.02 percent of total electricity generation in 2010.

Current Good Manufacturing Practice and Hazard Analysis and Risk-Based Preventive Controls for Human Food

Michael L. Marlow — Mon, 20 May 2013 17:09:27 -0400

Publication

Introduction

The Regulatory Studies Program of the Mercatus Center at George Mason University is dedicated to advancing knowledge about the economic effects of regulation on society. As part of its mission, the program conducts careful and independent analyses that employ contemporary economic scholarship to assess rulemaking proposals and their effects on the economic opportunities and the social well-being available to all members of American society.

This comment addresses the efficiency and efficacy of this proposed rule from an economic point of view. Specifically, it examines how the proposed rule may be improved by more closely examining the societal goals the rule intends to achieve and whether the proposed regulation will successfully achieve those goals. In many instances, regulations can be substantially improved by choosing more effective regulatory options or more carefully assessing the actual societal problem.

Summary

The proposed rule revises the FDA’s current good manufacturing practice (CGMP) regulations regarding the manufacturing, processing, packing, or holding of human food in two ways. First, it adds preventive controls provisions as required by the FDA Food Safety Modernization Act (FSMA) that generally apply to facilities under the FDA’s current food facility registration regulations. It includes requirements for covered facilities to maintain a food safety plan, perform a hazard analysis, institute preventive controls for the mitigation of those hazards, monitor their controls, verify that they are effective, take any appropriate corrective actions, and maintain records documenting these actions. Second, the proposed rule updates, revises, or otherwise clarifies certain requirements of CGMP regulations, which were last updated in 1986. The FDA states that the primary benefit of this rule would be a decrease in the expected incidence of illnesses caused by the manufacturing, processing, packing or holding practices of human food.

My comment argues that the FDA has failed to conduct a thorough and quantitative analysis. The FDA admits it is unable to quantify health benefits derived from this rule. Instead, the FDA has developed a qualitative assessment that describes how implementing this rule would likely reduce the level of foodborne illness. The FDA estimates the “breakeven illness percentage” for each of three closely related regulatory options that are not developed within a model of optimal food safety. The FDA thus does not conduct an in-depth benefit-cost analysis of this major revision of our nation’s food safety regulations.

This rule is a Hazard Analysis Critical Control Point (HACCP) rule without calling it that. The FDA has two HACCP rules in place for seafood and juice that, by now, should have generated ample evidence as to how well these two rules have reduced the rate of foodborne disease. The most logical one to study is rule for seafood, as the FDA promised in the final rule to analyze it and determine if it had been effective, whereas the juice rule primarily moved raw fruit juice producers to either pasteurize their products or go out of business. The analysis for the seafood rule has not been done, but it should be done before implementing HACCP for all other foods under FDA’s jurisdiction. The measure of the seafood HACCP program’s success would be the first indicator of the likely effectiveness of this program for other foods.

Even before that the FDA needs a baseline risk assessment that attributes different pathogens and other contaminants both to specific food categories as well as to failures at the processing level, failures that this proposed rule is intended to address.

Finally, the FDA needs to consider a wider set of alternatives within a model of an optimal level of food safety that can be quantitatively assessed through conventional benefit-cost analysis.

Standards for the Growing, Harvesting, Packing, and Holding of Produce for Human Consumption

Michael L. Marlow — Mon, 20 May 2013 17:00:56 -0400

Publication

Introduction

The Regulatory Studies Program of the Mercatus Center at George Mason University is dedicated to advancing knowledge about the effects of regulation on society. As part of its mission, the program conducts careful and independent analyses that employ contemporary economic scholarship to assess rulemaking proposals and their effects on the economic opportunities and the social well-being available to all members of American society.

This comment addresses the efficiency and efficacy of this proposed rule from an economic point of view. Specifically, it examines how the proposed rule may be improved by more closely examining the societal goals the rule intends to achieve and whether this proposed regulation will successfully achieve those goals. In many instances, regulations can be substantially improved by choosing more effective regulatory options or more carefully assessing the actual societal problem.

Summary

The proposed regulation is designed to meet Section 105(a) of the FDA Food Safety and Modernization Act (FSMA) requirement that “not later than 1 year after enactment, the Secretary . . . shall publish a notice of proposed rulemaking to establish science-based minimum standards for the safe production and harvesting of those types of fruits and vegetables, including specific mixes or categories of fruits and vegetables, that are raw agricultural commodities for which the Secretary has determined that such standards minimize the risk of serious adverse health consequences or death.”

The FDA argues that the proposed rule would establish science-based minimum standards for the safe growing, harvesting, packing, and holding of produce on farms. It would address microbiological risks from all agricultural inputs (people, agricultural water, biological soil amendments, and tools and equipment), from unsanitary conditions in buildings, and from contact with wild and domesticated animals during growing, harvesting, packing, and holding activities of covered produce, including sprouts intended for human consumption. The primary benefit of the provisions in this rule is an expected decrease in the incidence of illnesses relating microbial contamination of produce.

I argue that the FDA needs to conduct a more comprehensive analysis. There is insufficient effort to establish the current state of food safety practices and little to no connection is made between those practices and public health. The FDA has not even presented a careful economic modeling of what an optimal set of rules for food safety practices would look like. Rather, the FDA wants to impose a “shotgun” approach on all covered foods rather than one that focuses on those foods or farms that pose the greatest risks. The FDA has acknowledged that it is required by law, by the Food Safety Modernization Act, to pass these standards. However, it is also required by OMB guidelines to analyze options that are not currently legal so as to inform the President and Congress when there are more efficient ways of solving a particular social problem than Congress had envisioned. The FDA should rethink its proposed regulation since there is little to suggest that it is the most efficient or effective option to improve public health.

The Hidden Costs of Tax Compliance

Jason J. Fichtner, Jacob Feldman — Mon, 20 May 2013 16:48:20 -0400

Publication

The tax code, far beyond simply collecting revenue to fund the operations of the federal government, attempts to perform policy and political functions as well. This paper does not examine the normative value of these provisions, but instead examines the hidden costs of today’s tax code: time and money spent submitting tax forms, foregone economic growth, lobbying expenditures, and gaps in revenue collection. These problems grow larger as the Internal Revenue Code becomes more complicated and temporary.[1] Based on the studies reviewed in this paper, we estimate that hidden costs range from $215 billion to $987 billion and that the tax code results in a $452 billion revenue gap in unreported taxes. The economic costs are substantial relative to the $2.45 trillion in revenues raised by the federal government in 2012.[2]

The structure of individual and corporate income taxes in the United States— accounting for over 55 percent of total tax revenue—reflects policymakers’ agglomerated attempts to increase fairness, conduct social policy, encourage economic growth, and promote favored industries.[3] According to the National Taxpayer Advocate, between 2001 and 2010 there were 4,428 changes to the Internal Revenue Code, including an estimated 579 changes in 2010 alone.[4] To put this in perspective, it means the tax code averages more than one change per day. The complexity of tax code is largely responsible for the $67 billion to $378 billion of accounting costs incurred in the process of filing taxes. A simpler tax system with fewer deductions would assist in alleviating these costs.

Revenue collected by the government through taxes prevents economic transactions from occurring. The economic size of these purchases and business deals that do not occur is larger than the revenues collected by the government. Net estimates of foregone economic growth range from $148 billion to $609 billion (see table 3, page 13).

Along with accounting costs and economic costs, lobbying costs are a third cost of today’s tax code. Although we do not have an estimate of annual lobbying costs, between 2002 and 2011 lobbyists spent $27.6 billion petitioning federal, state, and local governments for policy preferences (see figure 2, page 14). More significantly for long-term economic growth, a tax code open to lobbyists incentivizes the pur- suit of rent-seeking careers, rather than innovation, to protect and expand tax advantages.[5]

Finally, although it is not an economic cost, the structure of the tax code affects the government’s ability to raise revenues efficiently and equitably. The United States has a tax-reporting compliance rate of 85.5 percent—leaving a revenue gap of $452 billion in unreported taxes. The government’s failure to collect revenues that are owed by law creates a social cost of inequitable tax burdens among similar taxpayers.[6] Policymakers intending to collect more revenues for the federal government will need to understand the risks/benefits taxpayers assume by not report- ing taxable income. One case study from Russia suggests that shifting the tax code toward a flat tax holds promise for reducing the revenue gap.[7]

The extent to which many of these costs could be quantitatively reduced by reforms is beyond the scope of this paper. The purpose of the paper is to use the relevant scholarly literature to document the cost of the US tax system. In section VI, we provide qualitative recommendations based on successful tax reform in Russia and on the 1986 Tax Reform Act. Tax reform today must negate the incentives for both legal and illegal tax sheltering. Curtailing the hidden costs of taxation will require a simpler tax code with lower rates.

The Federal Reserve Ignores Its Own Role in the Financial Crisis

Steven Horwitz — Tue, 21 May 2013 11:55:03 -0400

Expert Commentary

Since the financial meltdown in 2008, the Federal Reserve's range of powers have expanded, as have the kinds of financial institutions it monitors and regulates. Fed Chairman Ben Bernanke is now saying that the Fed's oversight has expanded beyond strictly financial institutions to wide swaths of the economy that might, in his words, provide evidence of "emerging vulnerabilities."

The justification for all of these new powers is that the Fed is best able to prevent a repeat of the 2008 meltdown by keeping in check the potential systemic problems revealed in that crisis. But the notion that the Fed is the firefighter standing by with the hose to douse any reignited embers of 2008 ignores its own role in creating those problems in the first place.

The Fed's own policy choices were central to the housing boom and bust and the associated financial crisis. In trying to soften the possibility of a post-9/11 recession, and then wrongly worrying about deflation, the Fed expanded the money supply, dropping interest rates to unsustainably low levels in the mid-2000s. The nominal Federal Funds rate was well below the benchmark of the widely-recognized Taylor Rule. Worse, the real Federal Funds rate (the nominal rate minus inflation) was actually negative for roughly two years. A negative interest rate means people are essentially being paid to borrow.

Hard To Find the Return on Green Energy Investments

Veronique de Rugy — Mon, 20 May 2013 13:46:42 -0400

Expert Commentary

Wind energy is the darling of the green energy sector. Over the past 35 years, the industry has received nearly $30 billion in federal subsidies and cash grants, and Washington has promised another $12 billion in subsidies over the next decade.

Thus, the argument goes, subsidizing wind energy will not only help boost economic growth and create jobs, it will also promote a cleaner environment. However, evidence shows these arguments to be at best a stretch, and at worst outright false. Let's review.

The wind industry's main subsidy, the Renewable Energy Production Tax Credit, was created in 1992 to provide temporary assistance for promoting investments in energy technology. But 21 years later, the subsidy is still in effect.

Department of Energy data show that as of March 1, 2010, 86 percent of all renewable-energy grants went to wind projects. From 2000 to 2010, federal wind subsidies grew by an average of 32 percent per year compared to the nearly flat growth rate in other energy sources.

Between fiscal years 2007 and 2010, annual wind subsidies grew from $476 million to nearly $5 billion -- a nearly tenfold increase.

What is the outcome of these extraordinary federal investments in wind energy? As it turns out, wind subsidies have not been found to stimulate the economy -- and the jobs created come at enormous cost.

The Manhattan Institute calculates a one-year extension of the wind production tax credit will cost about $329,000 per job and add more than $12 billion to the federal deficit. Even with these subsidies, the physical limitations of wind power make it uncompetitive with other energy sources.

No amount of federal support can predict when and where the wind will blow. And as the New York Times points out, "Wind sometimes blows the hardest in remote plains, far from cities that need the energy, which requires the building of transmission lines which is expensive and difficult."

So the alleged benefits of geographically dispersed wind turbines come with a huge cost from the additional transmission lines needed for city hubs.

To make matters worse, wind energy companies have become accustomed to large benefits from their political ties. In a recent op-ed in the Wall Street Journal, Patrick Jenevein, a green-energy businessman, argued that "government subsidies to new wind farms have only made the industry less focused on reducing costs, and more on producing a product that isn't as efficient or cheap as it might be if we focused less on working the political system and more on research and development."

As the Government Accountability Office reports, wind energy is subsidized through dozens of different federal credits, grants and loan guarantees, and many of these programs give wind producers unparalleled advantages over other more reliable sources of energy.

We should take heed of Jenevein's advice. "If Washington sent a little less 'green' our way, it would be good for the industry." We must eliminate these misguided subsidies. Taxpayers should not continue to shell out billions of dollars on subsidies for such a low-value energy generator that has already been heavily subsidized for 35 years.

Keith Hall Discusses Employment after Graduation on Fox 5

Keith Hall — Mon, 20 May 2013 16:16:56 -0400

Video

Doing Bad by Doing Good, Why Humanitarian Action Fails Book Panel

Christopher Coyne, Peter J. Boettke — Wed, 15 May 2013 11:32:45 -0400

Video

Optional Medicaid Expansion: Considerations Facing the States

Charles Blahous — Wed, 15 May 2013 17:46:59 -0400

Video

Across the country, state governments have been considering whether to expand Medicaid coverage as envisioned by the Affordable Care Act (ACA or "Obamacare"). To help break down what's at stake, a new video—based on a recent study by Mercatus Center scholar Charles Blahous—reviews the key factors states must consider in this complex decision.

The video breaks down some of the key factors states must consider including:

How did the Supreme Court decision on the ACA change the calculus on Medicaid for state governments?
What is the difference between the law's new health exchanges and its Medicaid expansion? Who is eligible for each?
Can governors and state legislatures be confident that the federal government will be able to follow through on its promises for more Medicaid funding?

Public Debt Under Various FY 2014 Proposals

Veronique de Rugy — Mon, 20 May 2013 18:07:47 -0400

Publication

The president and numerous politicians claim that the United States does not have an immediate crisis in terms of debt. The president has gone so far as to say, "In fact, for the next 10 years, it's gonna be in a sustainable place."

The recent release of budget plans for fiscal year 2014 makes a proper perspective of projections of public debt even more important. This week’s chart shows the debt held by the public as a percentage of the gross domestic product (GDP) under various budget proposals.

Debt would end up equaling 73 percent of GDP by 2023 under the president’s plan. Projected debt under the Senate Democratic plan is only three percentage points below the president’s at 70 percent of GDP (blue lines). That figure nearly aligns with the Simpson-Bowles’s bipartisan plan (purple line), which projects debt at 69 percent of GDP, and stands substantially higher than the 55 percent target of the House Republican budget (red line).

The CBO projects that debt will equal 77 percent of GDP in 2023 under current law (orange line)—far above any of the budget plans. Changes to these laws, such as removing spending cuts from sequestration, will result in debt held by the public soaring to 87 percent of GDP by the end of 2023, as shown in the CBO alternative scenario (green line).

It’s hard to see how any of these budget plans represent a serious attempt to cut the debt, as most of the plans only leave us where we are today, if not worse off. Even the Ryan plan, which promises a 55 percent debt-to-GDP level by 2023, rests on optimistic GDP growth and revenue projections while failing to fully address the unsustainability of the current entitlement programs. The Ryan plan repeals Obama's health care law, but it pushes off urgent Medicare reforms until 2024 and leaves Social Security untouched.

These plans prove that Washington lacks the commitment necessary to address the true drivers of the debt: spending for entitlement programs and interest costs on the debt itself.

Five Reasons to Keep Government Out of Internet Governance

Eli Dourado — Mon, 13 May 2013 17:22:03 -0400

Expert Commentary

Starting on May 14, the International Telecommunication Union – an agency of the United Nations – is kicking off a meeting for governments and telecom companies to discuss "international Internet-related public policy matters." Up for debate are six draft opinions on various aspects of Internet policy, but the unifying question is: how much should governments (and intergovernmental organizations) involve themselves in the building and running of the Internet? Under the current system, governments do very little – and the Internet has flourished because of it.

Here are five reasons we should resist giving governments a bigger role in Internet governance:

1. Censorship: Some governments want to be more involved in managing the Internet so that they can better monitor who is saying what online. Reporters Without Borders lists five governments that it classifies as "State Enemies of the Internet," and there are several more that are nearly equally as repressive. A greater role in managing Internet resources, such as IP addresses, would make it even easier for these governments to monitor and censor speech online.

2. Technical expertise: Under the status quo, decisions about Internet governance are cooperatively made by some of the most talented network engineers around. The bottom-up, peer-production model of Internet standards-setting selects for the best ideas from this pool of great technical minds. In contrast, if these decisions were made by government bureaucrats, the quality of the engineers would go down and the decision-making process would be politicized. The Internet would likely be less robust and secure if governments and intergovernmental organizations like the U.N. were in charge.

Interstate Protectionism and the Dormant Commerce Clause

Jason Sorens — Fri, 10 May 2013 16:10:19 -0400

Expert Commentary

All 50 states ban the direct sales of motor vehicles from manufacturers to consumers. The politics of this regrettable policy are clear: auto dealers are powerful political players in every state, while only a few states actually have manufacturing facilities. Banning direct manufacturer sales benefits dealers while hurting manufacturers and consumers.

State governments continue to insert themselves into the contractual relationships between car manufacturers and dealers, typically to the ostensible benefit of the latter. The New Hampshire Senate recently passed a bill regulating the terms and conditions of dealer contracts with manufacturers, prohibiting manufacturers from requiring dealers to alter the appearance of their showrooms, for instance. (Disturbingly, the state director of Americans for Prosperity in New Hampshire supports the bill.) The bill is actually unlikely to change any “balance of power” between automakers and auto dealers. Automakers will simply respond by vetting potential dealerships far more closely and perhaps charging higher franchise fees. The onus of this response is likely to fall more on new dealerships than on incumbents. So the real losers from the bill are going to be potential entrants into the car dealer industry and, of course, consumers.

These are not the only examples of “state protectionism,” in which state governments adopt laws meant to reduce competition from out-of-state businesses for the benefit of local incumbents. Some states still prohibit certain out-of-state direct-to-consumer wine shipments. Regulatory barriers can accomplish the same ends. States have widely varying regulations on insurance products, making regulatory compliance a huge barrier for a company trying to market a standard policy in multiple states. For a long time, major life insurance companies lobbied Congress to adopt a national life insurance regulatory regime, pre-empting state laws. They were opposed by local life insurance agents, for whom knowledge of and compliance with distinctive state regulations were a significant source of competitive advantage. In the end, no national legislation materialized, but Congress authorized the formation of an interstate compact, essentially a contract among consenting states that sets up a single insurance regulator. More than 40 states have joined the Interstate Insurance Product Regulation Commission, which regulates life insurance and annuities.

Such state protectionism potentially runs afoul of the so-called “dormant commerce clause” of the U.S. Constitution. The commerce clause allows Congress to regulate trade among the several states. By implication, then, states are presumptively prohibited from burdening interstate trade, unless authorized by Congress. Unfortunately, courts have been reluctant to scrutinize state economic regulations that have an essentially protectionist character, although especially blatant discrimination against out-of-state imports has been overturned.

Beyond judicial intervention, however, another solution may be the interstate compact. The U.S. Constitution requires Congress to authorize interstate compacts, though, and given Congress’ dysfunctionality, that is often a tall order. Moreover, topic-by-topic compacts will fail to achieve the comprehensive results that something more along the lines of a World Trade Organization analogue would. For instance, few states would want to join a compact dedicated solely to liberalizing the rules on auto sales. The dealer lobby is too strong in most places. But they might have an interest in joining a compact setting up an Interstate Trade Organization to liberalize rules on many different kinds of commerce. In that context, “exporters” might gain enough political influence to outweigh the demands of “import-competing” industries. The key is the ability for state governments to make policy “trades” across different dimensions, increasing the scope of the interstate organization’s remit. A state might “lose” (politically) on one dimension, like direct auto sales, but gain on another dimension of greater importance to its own export industries, like direct wine sales. As Koremenos, Lipson, and Snidal (2001: 770) note in their article, “The Rational Design of International Institutions”:

Sometimes two seemingly unrelated issues are linked. A trade issue, for example, may be linked to a security issue to facilitate agreement and compliance. Or a side payment may be offered, as when the Nuclear Nonproliferation Treaty offered the transfer of peaceful nuclear technology to states that agreed to forgo nuclear weapons. Such side payments are clear evidence that scope is being manipulated to facilitate cooperation.

Koremenos et al. conjecture that the “scope” of an organization increases with the heterogeneity and number of the members and the severity of the “distribution problem” (for instance, prisoner’s dilemmas as against coordination games) and of the “enforcement problem” (how to punish defectors). For state governments engaging in protectionist policies, just as for national governments doing the same, all of these problems loom large. Therefore, wide scope is likely to be important for any organization dedicated to trade liberalization.

Beyond Unemployment: The Full Labor Market Picture of Ohio

Keith Hall, Robert Greene — Fri, 10 May 2013 13:06:18 -0400

Publication

Much like the rest of the United States, Ohio’s economy was severely affected by the Great Recession and is recovering very slowly. Long periods of unemployment experienced by many jobless Ohioans have caused unprecedented disengagement from the labor force. These disengaged workers—those without jobs and not actively searching for work—no longer participate in the labor force and are not counted as unemployed. If participation in the labor force by Ohioans today were at the same level as before the recession, Ohio’s unemployment rate would be significantly higher. Ohio’s decline in labor force participation has particularly harmed the labor market for Ohioans 34 and younger and has outpaced the national average. To improve Ohio’s labor market, policymakers should consider reducing the state’s regulatory and tax burdens, which may be hindering economic recovery and job creation.

How Labor Force Participation Affects Unemployment in Ohio

From the end of 2007 until the end of 2009, Ohio lost over 400,000 nonfarm payroll jobs.[1] Nonfarm payroll jobs data function as an indicator of nonfarm private sector employment.[2] This rapid two-year decline represented an over 7.7 percent loss of total jobs—a noticeably more severe drop than the national two-year decline of roughly 6.3 percent.[3] Although Ohio has seen steady job gains over the last four years, the state’s job losses since the recession began greatly exceed the national average (see Graph 1).

Ohio’s labor force participation rate—the percentage of the population aged 16 and older with employment or without it but actively looking for employment—has fallen consistently since the beginning of the recession (see Graph 2) and remains near its 30-year low.[4] In recent years, Ohio’s decline in labor force participation has occurred at a faster pace than the decline of the national average (see Graph 2). As a result, Ohio’s labor force participation rate—which previously ran 0.5 to 0.8 percent in excess of the national average for years—has finally come into convergence with the national average of 63.7 percent.

The comparatively rapid labor force disengagement in Ohio has meant a falling unemployment rate without a significant increase in employment. The unemployment rate is the number of persons as a percentage of the labor force actively looking for employment. When unemployed persons give up looking for work, they no longer are counted as part of the labor force. The unemployment rate therefore decreases not only when unemployed persons are hired, but also when then they simply give up searching for work.

The effect of declining labor force participation on unemployment in Ohio appears to be substantial. The state’s official unemployment rate peaked at 10.2 percent in 2009 and has since fallen steadily to its current official level of 7.2 percent (see Graph 3). However, if Ohio’s labor force participation rate had remained at its 2007 level of 66.8 percent (see Graph 2), then the state’s unemployment rate would be 11.5 percent (see Graph 3).[5]

Where the Jobs Have Been Lost

The number of private sector jobs in the United States remains 2.8 percent below the number of jobs in 2007 (see Graph 4). In Ohio, there are 4.7 percent fewer private sector jobs compared to the number in 2007. Different industries have experienced varying degrees of severity of job loss. Since 2007, Ohio has experienced a 14.9 percent decline in the number of manufacturing jobs and a 20 percent decline in the number of construction jobs. Job losses in Ohio since 2007 have outpaced the national average in the following sectors: trade, transportation, and utilities; manufacturing; leisure and hospitality; information; financial activities; government; and other services. Only two sectors in Ohio—mining and logging, and education and health services—have experienced significant job gains since 2007.

Young Ohioans have been particularly hard hit by the poor labor market since 2007 (see Graph 5). Between 2007 and 2012, labor force participation for 16- to 19-year-olds in Ohio declined almost 9 percent. For 20- to 24-year-olds, it declined almost 2 percent. For 25- to 34-year-olds, it declined roughly 3 percent. Yet for those 65 and older, labor force participation has increased 3.6 percent. Unemployment rates by age group display a similar trend (see Graph 6). The unemployment rate of those 34 and younger exceeds the statewide average, while the unemployment rate for those 35 and older rests below the statewide average.

Explaining and Reversing the Trends

In 2011, Ohio’s real economic growth—1.1 percent—lagged behind the national average of 1.5 percent.[6] This sluggish growth has meant that Ohio’s labor market recovery has also been slower than the national average. Ohio’s comparatively strict labor regulations and high taxes may be hindering its economic growth and thus also its labor market recovery. The National Federation of Independent Business’s most recent quarterly survey of small businesses found taxes and regulations to be the two most important problems facing businesses.[7] In the Mercatus Center’s recent Freedom in the 50 States Index, William Ruger and Jason Sorens found Ohio’s tax burden to be the thirteenth heaviest in the United States, and its regulatory burden is higher than nearby Michigan, Indiana, and Wisconsin.[8] They recommend that the state lower taxes, adopt regulatory policy reforms, and follow neighboring Indiana and Michigan in adopting a right-to-work law. Further research would increase understanding of the effects that regulatory and tax reforms would have on Ohio’s labor market.

Conclusion

Although Ohio’s unemployment rate does appear to be declining, the rapid and continuing fall in the labor force participation rate indicates that many Ohio workers are continuing to disengage from the workforce. This trend of widescale worker disengagement—not of labor market improvement—is driving down Ohio’s unemployment rate. Ohio’s unemployment rate would be 11.5 percent with a prerecession labor force participation rate. The labor market recovery in Ohio is far from complete and has been far from equal between age groups. The decline in labor force participation and the increase in unemployment for Ohioans under 35 years old is particularly troubling. Ohio’s job gains have in large part occurred from jobs in education and health services—sectors highly influenced by government. In most other sectors, Ohio’s recovery has underperformed the national average and significantly fewer jobs exist than before the recession. Ohio policymakers should examine ways to reverse these troubling trends. Modifying Ohio’s regulatory environment and tax regime may be a good place to start, as doing so could help Ohio stimulate more private sector job creation.

Endnotes

^{1. US Bureau of Labor Statistics. There were approximately 5.418 million Ohio nonfarm payroll jobs in December 2007. In December 2009, the number of Ohio nonfarm payroll jobs had declined to 5.002 million.}

^{2. US Bureau of Labor Statistics Glossary, http://www.bls.gov/bls
/glossary.htm (accessed May 6, 2012). According to the US Bureau of Labor Statistics, nonfarm payroll excludes payrolls from farm, government, private household, and some nonprofit employment.}

^{3. US Bureau of Labor Statistics. There were approximately 138.042 million US nonfarm payroll jobs in December 2007. In December 2009, the number of US nonfarm payroll jobs had declined to 129.373 million.}

^{4. US Bureau of Labor Statistics. In 1984, Ohio’s labor force participation rate was 63.6%, making the 2012 rate of 63.7% Ohio’s second lowest labor force participation rate of the last 30 years.}

^{5. This is, in effect, assuming that many of the discouraged jobless that are not counted as unemployed are part of the labor force despite a lack of current, active job search.}

^{6. Bureau of Economic Analysis, US Department of Commerce, “Widespread Economic Growth Across States in 2011,” June 2012, http://www.bea.gov/newsreleases/regional/gdp_state/gsp_newsrelease.htm.}

^{7. William C. Dunkelberg, Holly Wade, “Small Business Economic Trends Monthly Report,” National Federation of Independent Business, March 2013, http://www.nfib.com/Portals/0/PDF/sbet
/sbet201304.pdf.}

^{8. William Ruger and Jason Sorens, Freedom in the 50 States (Arlington, VA: Mercatus Center at George Mason University, March 2013).}

The SEC's Cross Border Regulatory Creep

Hester Peirce — Wed, 08 May 2013 09:36:41 -0400

Expert Commentary

Last week, the Securities and Exchange Commission proposed its cross-border security-based swaps rule under Dodd-Frank with great fanfare and a unanimous commission vote. Many outside the SEC have deemed the proposal a success, presumably because it is not as bad as the approach taken by the Commodity Futures Trading Commission that has angered regulators the world over. Exceeding the CFTC's low bar is a pretty poor metric for assessing regulatory success.

Dodd-Frank prohibits the SEC from applying its rules to security-based swaps businesses conducted "without the jurisdiction of the United States," except to the extent the firm violates SEC rules designed to prevent evasion of Dodd-Frank provisions. The SEC's proposed approach strays from the statute's territorial limitations and instead employs a nebulous approach based on conjecture about whether particular activities will be "conduits of risk into the U.S. financial system." As a consequence, the proposal departs from SEC precedent in selecting which market participants and transactions to regulate. Although the SEC's desire to safeguard the U.S. financial system from risks of foreign origin is understandable, its proposal is impractical and not respectful of other countries' very rigorous ongoing regulatory efforts.

The proposal, which offers detailed consideration of numerous, complicated cross-border implementation questions, is lengthy-the Web version is 650 pages, almost as long as Dodd-Frank itself. It proposes a framework governing the application of U.S. security-based swaps markets rules to international swaps transactions and foreign market participants. The proposal tells firms how to figure out if they need to register and which transaction-level and entity-level requirements apply once they are registered.

The proposal allows firms to apply for permission to bypass certain requirements on the basis of so-called substituted compliance, the centerpiece of the proposal. If the SEC signs off on substituted compliance for one firm in a foreign jurisdiction, all firms in the same jurisdiction will be permitted to comply with their home country rules instead of the SEC's rules. The catch is that firms have to obtain separate approval for each of four categories of regulations, and the proposal leaves the SEC the option of ignoring these categories and applying substituted compliance on a rule-by-rule basis. Moreover, the proposal tells one category of foreign market participants-major security-based swap participants-not to even bother applying for substituted compliance because the SEC doesn't know enough about them.

Substituted compliance will impose tremendous initial burdens on the SEC staff as they try to assess requests from firms eager to avoid having to comply with duplicative, and perhaps conflicting, regulatory regimes. Firms will also incur great costs to figure out which requirements apply to which transactions. If other countries follow suit, the costs and complexities will be even greater. Until a firm succeeds in obtaining a substituted compliance approval from each country with any potential tie to its security-based swap transactions, it would be forced to comply with every one of those countries' rules-rules that may be incompatible with one another. The SEC considered and rejected an approach that would have been easier to administer and easier for market participants to comply with, namely allowing "substituted compliance across the entire set of security-based swap requirements with respect to regimes that have implemented regulations consistent with the overall objectives of the G20 commitments."

The SEC's creep across the border is less dramatic than the CFTC's leap, and its proposal reflects a greater respect for important procedural issues such as economic analysis, meaningful opportunity for public comment, and thoughtful consideration of alternative approaches. Nevertheless, the SEC has avoided criticism of its security-based swaps rulemaking so far by being not quite as unreasonable as the CFTC. It's time to start applying a tougher standard to the SEC's efforts.

Capitol Hill Campus: The Pathology of Privilege: The Consequences of Government Favoritism

Matthew Mitchell — Tue, 14 May 2013 15:59:41 -0400

Events

Despite the ideological miles that separate them, activists in the Tea Party and Occupy Wall Street movements agree on one thing: both condemn the recent bailouts of wealthy and well-connected banks. But when it comes to government-granted privileges to particular firms or industries the bailouts were just the tip of the iceberg. What are some of the other ways that governments play favorites? And what are the consequences of economic favoritism?

For answers to these questions and more please join the Mercatus Center at George Mason University’s Capitol Hill Campus for a discussion outlining the negative consequences of policies that favor some firms over others.

This discussion will focus on the main points highlighted in Dr. Mitchell’s Pathology of Privilege paper:

• Types of privilege

• The economic and social costs of privilege

Space is limited.

The event is free and open to all congressional and federal agency staff. This event is not open to the general public. Food will be provided. Due to space constraints, please no interns. Questions? Please contact Erin Connolly, Event Associate, at econnolly@mercatus.gmu.edu or (703) 993-9913.

The Slow Recovery's Impact on Families

Veronique de Rugy, Keith Hall — Wed, 08 May 2013 10:45:46 -0400

Publication

Unsurprisingly, the slow recovery has been particularly hard on families. New data released last month by the Bureau of Labor Statistics show that 8.4 million families had at least one unemployed member. That makes the family unemployment rate 10.5 percent, well above the average national unemployment rate of 8.1 percent in 2012. Some 20 percent of families had no one working in 2012, a number that includes both the unemployed and looking for work and the jobless and not looking for work. The statistics are grim when we look at families with children under 18 years old, where 12.2 percent have no one working.

Craigslist Takes Upstart Competitors to Court

Jerry Brito — Tue, 07 May 2013 09:12:14 -0400

Expert Commentary

Classified-ads site Craigslist is a big, fat bully. That’s the conclusion many in tech policy circles have come to after a federal court ruled last week that the company can carry on with a suit against three smaller competitors. In Craigslist’s shoes, however, you might resort to bullying, too.

The defendants—3taps, PadMapper, and Lovely—have built their businesses by using Craigslist advertisements without permission. 3taps operated Craiggers, essentially a copy of Craigslist with an alternative interface that made navigating classifieds easier. As the site’s tagline put it, “Craigslist data, better than Craigslist!” PadMapper andLive Lovely take listings and display them on maps, which also makes it easier to search and browse ads.

Many of those critical of Craigslist focus on the fact that the defendants are making Craigslist’s better by offering features the company has so far refused to offer.

In an open letter to Craigslist founder Craig Newmark, Steve Schultze of Princeton’s Center for Information Technology Policy wrote that he was “at a loss about why Craigslist is taking such a scorched earth tactic against a site that appears to help more people find Craigslist postings.” And congressional-staffer-turned-copyright-activist Derek Khanna wrote that “instead of innovating, [Craigslist] has chosen to go after new market participants that have wanted to use Craigslist’s data on classified postings.”

In some respects, Craigslist had this backlash coming because it has long branded its service as something of a for-profit non-profit not averse to sharing. The site’s icon is a hippy peace symbol, and it operates not under a “.com,” but instead a “.org” domain, which it says “symbolizes the relatively non-commercial nature, public service mission, and non-corporate culture of craigslist.” Newmark has long held that the $1 billion company is not motivated by profit. So it’s little surprise that as the company has moved to fend off competitors that use its data without permission, tech elites have developed a negative perception of Craigslist best articulated by The New York Times: “It has dug an effective moat by cultivating an exaggerated image of ‘doing good’ that keeps its customers loyal, while behind the scenes, it bullies any rivals that come near and it stifles innovation.”

Yet it’s pretty easy to see why Craigslist should care that others are building on top of and extending its service. What makes the company so valuable is its strong network effect. People go to Craigslist because that’s where the people are. If it loses that, it loses its business.

PadMapper aggregates and presents listings not just from Craigslist, but from other apartment listing sites as well, including Apartments.com and Rent.com. This is great for users because they only need go to one site to browse all the listings across multiple databases. It’s bad for Craigslist, however, because it makes it less of a focal site. Such aggregators make it less important that an apartment be listed at Craigslist specifically as long as it is in the aggregated list.

PadMapper also offers listings of its own listings through its PadLister service. This means that PadMapper relies on the network effects that Craigslist has developed in order to draw in an audience, and then promotes and sells its own listing service to that audience. While that business model is certainly innovative, and may not violate copyright, it doesn’t sit well, either.

Craigslist disrupted the newspaper industry by decimating traditional classifieds. It did this by offering a better alternative to its competitors that attracted consumers away from newspapers. Craigslist didn’t copy newspaper ads to jumpstart its operation, just as Facebook didn’t jumpstart its network by copying over MySpace accounts. That’s true innovation: taking command of the network effect by offering a superior product. So shouldn’t we expect the same from new entrants in the classifieds space?

Some don’t think so. 3taps, for example, is pretty clear that it thinks data about classified ads should be “public property.” In several white papers that do violence to economics the company proposes a “data commons” and also calls for “exchange neutrality,” the idea that sites like eBay, Craigslist, Monster.com, and Match.com would have to make their users postings available for anyone else to take and use on their own sites because “[s]ociety at large, not just a few, should benefit from the coming breakthroughs in availability of exchange-related information.” It’s not clear what incentive new or existing posting services would have to operate or innovate if they were forced to give up any possibility of exclusive use of data.

This is not to say that Craigslist’s claims in court are all correct. The company should fail on its copyright claims. For one thing, a site like PadMapper only copies facts about a listing (i.e. 3 bedrooms, 800 sq. ft., $2,000 a month, etc.), and mere facts are not subject to copyright. Additionally, as the court ruled last week, in order to exclude others Craigslist would need an exclusive license to listings from its users, a high bar that it likely hasn’t met and can probably never meet. Additionally, Craigslist brought actions under the Computer Fraud and Abuse Act. This is problematic because, if successful, the charge would equate with hacking some common practices of many Internet users, such as using proxy servers.

It’s unfortunate that Craigslist has sought to rely on such claims to protect itself, but one can understand why it might have thrown the kitchen sink into its lawsuit. The common law legal theories otherwise available to it, like trespass to chattels and misappropriation, are controversial and somewhat untested in the Internet space. Perhaps this will be the case to flesh them out.

By billing itself as a public service, Craigslist certainly put itself in a position to be at the short end of the PR stick now that it’s acting like it cares about its market dominance. Despite this hypocrisy, and despite the fact it’s using some bad legal theories to advance its claims, we shouldn’t give up on the healthy notion that if others want to displace Craigslist, they should do so by building their own user base. It’s the least one can expect from an innovator.