Mercatus Site Feed http://mercatus.org/feeds/home en Five-Letter Words and Legal Language http://mercatus.org/expert_commentary/five-letter-words-and-legal-language <h5> Expert Commentary </h5> <p class="p1"><span class="s1">As the climate talks in Paris came to a conclusion this past December, <span class="s2"><a href="http://www.nytimes.com/interactive/projects/cp/climate/2015-paris-climate-talks/at-climate-talks-three-letters-almost-sunk-the-deal">some contention arose</a>&nbsp;</span>around the use of a five-letter word: "shall." Whether rich countries "shall" or "should" contribute money for poor countries' transitions may seem like a trivial difference, but it was certainly not "just semantics" to U.S. negotiators. In international agreements, "shall" implies a binding legal requirement, and Secretary of State John Kerry made it clear that unless "shall" became the much squishier "should," the world's largest economy would have no part in the most serious climate change resolution to date.</span></p> <p class="p2"><span class="s1">As important as "shall" may be in international diplomacy, its significance in domestic matters should not be underestimated. While "shall" is most often used as a synonym for "will" in common conversation, in legal writing, the word is closer in meaning to "must." In fact, Congress has even passed laws that explicitly acknowledges the strength of these restricting terms, as well as others, in various contexts. For instance, in Title 21 of the Code of Federal Regulations (the title in which the Food and Drug Administration [FDA] publishes its regulations), <a href="http://www.ecfr.gov/cgi-bin/text-idx?SID=cda2a092d3d22d6e33a46f0f44cb2c9e&amp;mc=true&amp;node=pt21.1.10&amp;rgn=div5#se21.1.10_1115"><span class="s2">clear guidelines are enumerated</span></a> to keep these potent words out of intentionally weak "guidance documents" for regulations:</span></p> <p class="p1"><span class="s1">Guidance documents must not include mandatory language such as "shall," "must," "required," or "requirement," unless FDA is using these words to describe a statutory or regulatory requirement.</span></p> <p class="p1"><span class="s1">While the general public might not care so much about whether regulators use "shall" or "must" in legal language, the specific intent with which they use these restrictions offers a useful proxy to measure how many regulatory requirements exist overall. This was the approach that was used in the creation of <a href="http://regdata.org/"><span class="s2">RegData</span></a>, a free database that quantifies federal regulation by industry, by agency and over time.</span></p> <p class="p1"><span class="s1">One statistic that RegData produces is a measure of how restrictive specific sections of regulatory text are, and to do this, RegData counts up occurrences of restrictions like "shall" and "must." We took a look at the 2014 Code of Federal Regulations to see just how common these words actually are in regulations. As it turns out, both the words "shall" and "must" are extremely common in federal regulations — to the point that they are the first and third most common words in the entire 2014 Code of Federal Regulations (excluding articles like "the" and "a" and section headers, like "Sec."). The table below lists the top 10 most common words and the number of times we found each of them.</span></p><p class="p1"><span class="s1"><img style="vertical-align: middle;" src="http://mercatus.org/sites/default/files/mclaughlin-shall-should-chart.jpg" width="229" height="235" /></span></p><p class="p1"><span class="s1">The thousands of new instances of "shall," "must" and other binding restrictions that enter federal regulatory code each year <a href="http://mercatus.org/publication/consequences-regulatory-accumulation-and-proposed-solution"><span class="s2">accumulate over time</span></a>. And this accumulation of regulatory restrictions can have negative consequences: At some point, so many cumulated restrictions can impede judicious risk management, stifle innovation and ultimately stunt economic growth.</span></p> <p class="p1"><span class="s1">Thus, it makes sense that regulators and businesses often care a great deal about legal word choice; clarity is key when the economic consequences — either positive or negative — are this high. Yet despite its frequent usage in regulations, "shall" is actually not the best word for regulators to use when making an obligation or prohibition. While the FDA uses the term to indicate regulatory requirements, the Federal Aviation Administration <a href="https://www.faa.gov/about/initiatives/plain_language/articles/mandatory/"><span class="s2">has sided against the word</span></a>, telling its own lawyers, "If you mean mandatory, write 'must.'" Detracting further from the word's consistency, in <i>Gutierrez de Martinez v. Lamagno</i>, the U.S. Supreme Court ruled that "shall" can actually mean "may" in certain contexts.</span></p> <p class="p1"><span class="s1">Legal writing expert Bryan Garner <a href="http://www.abajournal.com/magazine/article/shall_we_abandon_shall"><span class="s2">advocated in 2012</span></a> for "shall" to be deleted entirely from legal prose:</span></p> <p class="p1"><span class="s1">In most legal instruments, shall violates the presumption of consistency: Words are presumed to have a consistent meaning in clause after clause, page after page. Which is why shall is among the most heavily litigated words in the English language (with hopelessly inconsistent court holdings).</span></p> <p class="p1"><span class="s1">Instead, the word "must" is preferred, because it is not ambiguous. And some agencies have issued <a href="https://www.faa.gov/about/initiatives/plain_language/articles/mandatory/"><span class="s2">formal internal guidance</span></a> to their own lawyers, instructing them that they must not use "shall" when creating legally binding obligations or prohibitions.</span></p> <p class="p1"><span class="s1">When billions of dollars of regulatory costs are on the line, it's important to pay attention to these semantic arguments over five-letter words. However, if proposals such as Garner's can circumvent these arguments altogether, they might make the labyrinthine regulations and laws more transparent and accessible, allowing the public to focus on the substance of the rules instead.</span></p> http://mercatus.org/expert_commentary/five-letter-words-and-legal-language Wed, 10 Feb 2016 13:42:24 -0500 Book Review: Nina M. Moore: The Political Roots of Racial Thinking in American Criminal Justice http://mercatus.org/publication/book-review-nina-m-moore-political-roots-racial-thinking-american-criminal-justice <h5> Publication </h5> <p>Book Review of Nina Moore's The Political Roots of Racial Thinking in American Criminal Justice.</p> http://mercatus.org/publication/book-review-nina-m-moore-political-roots-racial-thinking-american-criminal-justice Wed, 10 Feb 2016 12:18:13 -0500 Asserting Presidential Preferences in a Regulatory Review Bureaucracy http://mercatus.org/publication/asserting-presidential-preferences-regulatory-review-bureaucracy <h5> Publication </h5> <p>Asserting presidential preferences in a regulatory review bureaucracy US presidents face many challenges in executing their duties as CEOs of a mammoth sprawling bureaucracy known as the nation’s executive branch. Included among the many offices and bureaus in 2014 were 78 regulatory agencies with more than 276,000 employees who in recent years turned out annually some 80,000 Federal Register pages of rules and rule modifications. A successful president, e.g., one who can be reelected or help to pave the way for the party in the next election, must find ways to steer bureau activities in his preferred direction while delivering on regulatory promises made in the process of being elected. White House review of proposed regulations provides an opportunity for presidents to affect regulatory outcomes in ways that reward politically important interest groups. Our review of all empirical work on White House review as well as our own institutional and statistical findings yield strong support to the notion that the review process provides opportunities to make presidential preferences operational.</p> http://mercatus.org/publication/asserting-presidential-preferences-regulatory-review-bureaucracy Wed, 10 Feb 2016 11:56:03 -0500 Yes, the Fed's Errors Made Recession Worse http://mercatus.org/expert_commentary/yes-feds-errors-made-recession-worse <h5> Expert Commentary </h5> <p class="p1"><span class="s1">Bold theses should receive skeptical reactions, and ours did. We argued in the New York Times that, contrary to what just about everyone believes, the financial crisis and the Great Recession that blew up the American economy in 2008 were not the necessary consequences of a housing bust. They would not have happened if the Federal Reserve had responded appropriately to increasing economic weakness over the course of that year. <a href="http://www.bloombergview.com/articles/2016-01-28/confusion-about-the-financial-crisis-won-t-die"><span class="s2">Barry Ritholtz</span></a> (a Bloomberg View colleague), <a href="http://www.edwardconard.com/ponnuru-contributes-to-the-myths-surrounding-the-financial-crisis/"><span class="s2">Edward Conard</span></a>, <a href="http://rooseveltinstitute.org/ted-cruz-right-about-federal-reserve-and-great-recession/"><span class="s2">Mike Konczal</span></a> and <a href="http://krugman.blogs.nytimes.com/2016/01/29/the-anti-fed-two-step/?_r=0"><span class="s2">Paul Krugman</span></a> are among those who criticized our argument. Here we respond.</span></p><p class="p1"><span class="s1"><b>Things We Did Not Say</b></span></p> <p class="p1"><span class="s1">Since some criticisms were directed at arguments we didn’t actually make, we should clarify a few things.</span></p> <p class="p1"><span class="s1">First, we are not saying that the right Fed policy would have kept any recession from happening. As we noted, the recession began in December 2007, before the Fed mistakes we discussed: failing to cut interest rates between early April and early October 2008, and even spending much of that time suggesting rate increases were on the way. Our argument, rather, is that these mistakes turned what could have been a mild recession into a “great" one.</span></p> <p class="p1"><span class="s1">Second, we aren't saying that better Fed policy could have prevented serious financial turmoil. Again, we explicitly note that financial stress began before the Fed’s worst errors. Our argument is the errors made that stress much worse.</span></p> <p class="p1"><span class="s1">Third, we aren’t ignorant of the fact that the Fed lowered interest rates between October 2007 and April 2008. We stated it in our op-ed. Again, we were discussing mistakes made after this period.</span></p> <p class="p1"><span class="s1">Fourth, our article did not say that uncertainty about the value of mortgage-backed securities caused the decline of housing prices.</span></p> <p class="p1"><span class="s1"><b>How the Fed Mattered&nbsp;</b></span></p> <p class="p1"><span class="s1">By missing these points some of our critics misconstrue our views and make invalid arguments against them. They note, as though it contradicts our story, that Bear Stearns collapsed in March 2008. But that’s entirely consistent with our argument: Stress in the financial sector pre-dated the Fed’s errors, but that stress did not have a severely negative effect on the broader economy. Neither inflation expectations nor nominal spending declined at that time; they declined later, when expected future interest rates rose relative to the natural rate.</span></p> <p class="p1"><span class="s1">Konczal says that the <a href="https://jenner.com/lehman"><span class="s2">Valukas report</span></a> on the collapse of Lehman Brothers in September 2008 does not indicate that a looser Fed policy would have staved it off. But here’s what the report says in its introduction: “There are many reasons Lehman failed, and the responsibility is shared. Lehman was more the consequence than the cause of a deteriorating economic climate.” We agree with that assessment. Our view is that raising expected future interest rates was a contractionary move, taken at an especially unfortunate time, and contributed greatly to that climate.</span></p> <p class="p1"><span class="s1">Krugman thinks the behavior of long-term real interest rates contradicts our thesis. They rose in the middle of 2008, but not, he says, catastrophically, as they should have if the Fed were really running a much-too-tight policy. Krugman is incorrect about the implications of our account. We would expect the Fed’s contractionary mistakes to have led to an increase in the risk premium. It did. We would also expect it to reduce the prospects of economic growth and thus lead to a decline in long-term real interest rates adjusted for the risk premium. Again, that’s what happened.</span></p> <p class="p1"><b>Yes, the Fed Was Wrong</b></p> <p class="p1"><span class="s1">The critics offer different reasons for thinking we are too hard on the Fed. Inflation was “showing unsettling signs of picking up” in 2008, writes Ritholtz, and it’s a “fundamental error” on our part to dismiss the concern the Fed had at the time. But we’re not just applying hindsight: Market expectations of inflation, as measured by TIPS spreads, were declining rather than rising. And those expectations turned out to be correct.</span></p> <p class="p1"><span class="s1">Conard says that monetary loosening in 2008 would not have spurred more lending and would have punished savers. But the decline of lending was an important symptom of the economic crisis, not the cause. Higher nominal income and higher expected nominal income would have increased asset values, which would have increased lending. And savers would have been better off with the higher interest rates they would have received once the economy had strengthened.</span></p> <p class="p1"><span class="s1">Konczal suggests that when Fed officials warned during the spring and summer of 2008 that inflation was rising, they may have helped the economy by increasing the expectations that this would happen. But the Fed’s most powerful way of shaping economic expectations is not by speculating about the future but by indicating what its policy will be. The Fed was signaling that monetary policy would tighten in the future: a contractionary move.</span></p> <p class="p1"><span class="s1">And this brings us to another point. Our critics say or imply that our story just can’t be true: that it’s implausible that the combination of a failure to cut interest rates and some rhetoric about future monetary tightening, even if these were ill-advised, had such disastrous effects. We believe they are thinking about monetary policy too mechanically.</span></p> <p class="p1"><span class="s1">Under most circumstances, the difference for the economy between cutting interest rates and not cutting interest rates would be small. In most circumstances, the difference between taking antibiotics and not taking them would also be small: if, for example, you’re not sick. In certain circumstances, however, the difference is profound.</span></p> <p class="p1"><span class="s1">At a moment of great uncertainty, the Fed signaled that it was more likely to take action to throttle inflation -- a threat markets did not believe existed -- than to prevent a panic. It kept signaling it as that panic grew. And more than signaling: Even after Lehman Brothers collapsed, the Fed’s first policy change was a contractionary one. It started paying interest on excess reserves.</span></p> <p class="p1"><b style="font-family: inherit; font-style: inherit;">Terminiology, Motives, and Other Distractions</b></p><p class="p1"><b style="font-family: inherit; font-style: inherit;"></b><span style="font-size: 12px;">Several of our critics suggest that our argument amounts to saying that the Fed should have prevented a severe recession by taking quicker action, and that we are wrong to say it caused the collapse by tightening money. In truth, we pointed to Fed errors of both omission and commission, but the difference between these types of mistakes does not strike us as especially important in this context. If you don’t turn the ship’s wheel when you’re headed for an iceberg, is that “just” a failure to act?</span></p> <p class="p1"><span class="s1">What matters here is the underlying reality, not the words used to describe it. If our critics come to agree with us that a better Fed policy would have led to a better outcome in 2008, we can agree to disagree on terminology.</span></p> <p class="p1"><span class="s1">Krugman questions our motives. He says that like Milton Friedman before us, we are blaming the Fed for an economic calamity to bolster our laissez-faire ideology. The ideological stakes are not as high, though, as he implies. Even if we are right about the Fed’s responsibility for the Great Recession, it does not mean that, for example, everything was fine in the financial industry and that increasing regulation on it was a mistake. It just means that it is less important to get financial regulatory policy right than we would otherwise have thought, and more important to get monetary policy right.</span></p> <p class="p1"><span class="s1">It is true that, like Milton Friedman, we have views about public policy; it is true that these views are related to one another; and it is true that our political views may have affected our understanding. We daresay all these things are also true of Krugman. Whatever the motives, the arguments have to stand or fall on their own merits. Those merits are strong enough to withstand the criticisms that have been lodged against them.</span></p> http://mercatus.org/expert_commentary/yes-feds-errors-made-recession-worse Wed, 10 Feb 2016 11:12:06 -0500 Congress Should Press Janet Yellen on Federal Reserve's Regulatory Role http://mercatus.org/expert_commentary/congress-should-press-janet-yellen-federal-reserves-regulatory-role <h5> Expert Commentary </h5> <p class="p1"><span class="s1">When Federal Reserve Chair Janet Yellen testifies before the House Financial Services Committee later this week, much of the attention will understandably focus on a few key numbers: 25 basis points – the magnitude of December's <a href="http://www.federalreserve.gov/newsevents/press/monetary/20151216a.htm"><span class="s2">interest rate hike</span></a>; nine years – the time since the Fed's last rate hike; and $4.5 trillion – the size of the <a href="http://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm"><span class="s2">Fed's balance sheet</span></a>.</span></p> <p class="p1"><span class="s1">There, is, however, a less well-known number that should capture the attention of committee chair Rep. Jeb Hensarling and ranking member Rep. Maxine Waters: 13,071. That's the number of regulatory restrictions linked to the Federal Reserve. Put another way, it's the number of things that banks and other financial institutions regulated by the Fed "shall," "may" or "may not" do (not counting rules from other regulatory agencies).</span></p> <p class="p1"><span class="s2"><a href="http://mercatus.org/publication/dodd-frank-and-federal-reserve-s-regulations">Our recent analysis</a></span><span class="s1"> of the Dodd-Frank Wall Street Reform and Consumer Protection Act's effects on the Fed's regulatory role is striking. In the few years following its passage, the Fed added more than 3,000 new restrictions. For perspective, that's similar to the amount of regulatory growth seen from the Fed over the entire 15-year period leading up to 2010.&nbsp;</span></p> <p class="p2"><a href="http://www.usnews.com/opinion/economic-intelligence/articles/2016-02-08/congress-should-press-janet-yellen-on-federal-reserves-regulatory-role" target="_blank">Continue reading</a></p> http://mercatus.org/expert_commentary/congress-should-press-janet-yellen-federal-reserves-regulatory-role Wed, 10 Feb 2016 11:11:03 -0500 Ignoring the Adverse Effects of the Minimum Wage May Cost Taxpayers Billions http://mercatus.org/expert_commentary/ignoring-adverse-effects-minimum-wage-may-cost-taxpayers-billions <h5> Expert Commentary </h5> <p class="p1"><span class="s1">On Feb. 4</span><span class="s2"><sup>th</sup></span><span class="s1"> the Obama administration proposed <a href="https://www.whitehouse.gov/the-press-office/2016/02/04/fact-sheet-president-obama-proposes-new-first-job-funding-connect-young"><span class="s3">a ‘First Job’</span></a> initiative. The main goal of the aptly titled initiative is to help unemployed young people obtain their first job by spending $5.5 billion on grants, training, and direct wages. Unfortunately – but unsurprisingly – the press release failed to acknowledge the most significant factor impeding employment in this age group: the minimum wage.</span></p> <p class="p1"><span class="s1">Everyone knows that a first job is a vital step in a young person’s development. Research has shown that work experience at a young age <a href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2645566"><span class="s3">teaches positive work habits, time management, perseverance, and improves self-confidence</span></a>. Increases in teenage employment also <a href="http://www.sciencemag.org/news/2014/12/summer-jobs-lower-violent-crime-rate-urban-teens"><span class="s3">reduce the rate of violent crime</span></a>. Yet despite these well-known benefits, the US maintains a minimum wage policy that makes it very difficult for all but the most productive teenagers to find a job.</span></p> <p class="p1"><span class="s1">When the minimum wage was discussed in the late 19</span><span class="s2"><sup>th</sup></span><span class="s1"> and early 20</span><span class="s2"><sup>th</sup></span><span class="s1"> century it was in the context of preventing the least skilled, most “undesirable” workers<a href="http://fee.org/articles/the-eugenics-plot-of-the-minimum-wage/"><span class="s3"> from finding a job,</span></a>&nbsp;with the goal of eradicating the unemployable people. For the next 80-plus years it was common knowledge that a minimum wage would reduce employment among the least-skilled workers. The only debate was about whether such a reduction was desirable from society’s perspective, as many of the appalling eugenicists of the time contended.</span></p> <p class="p1"><span class="s1">As late as 1987, the New York Times editorial staff <a href="http://www.nytimes.com/1987/01/14/opinion/the-right-minimum-wage-0.00.html"><span class="s3">recommended a minimum wage of $0</span></a> because of its negative effects on employment. The Times argued that the minimum wage was an ineffective anti-poverty tool whose employment costs outweighed any benefits from higher wages.</span></p> <p class="p1"><span class="s1">Fast forward to the early 1990s, when an economic study purported to show that a slight increase in the minimum wage <a href="http://www.nber.org/papers/w4509"><span class="s3">may not reduce employment </span></a>after all. Despite&nbsp;<a href="http://www.nber.org/papers/w5224"><span class="s3">the tenuous results of this study</span></a>, it provided minimum wage supporters with the ammunition they needed to push for increases in the minimum wage at the federal, state, and local level without worrying about declines in employment. This misinformed thinking continues and is the basis for modern calls to raise the <a href="https://www.whitehouse.gov/raise-the-wage"><span class="s3">federal minimum wage to $10.10 per hour</span></a> or even $15 per hour, as <a href="http://murray.seattle.gov/minimumwage/#sthash.6xQZ5kqQ.dpbs"><span class="s3">some cities</span></a> have already done.</span></p> <p class="p1"><span class="s1">Meanwhile, the labour force participation rate for 16-19 year olds <a href="https://research.stlouisfed.org/fred2/series/LNS11300012"><span class="s3">has fallen from over 50% in the early 1990s to 35% in January 2016</span></a>. Some of this is due to more young people engaging in extra-curricular activities and attending college, but if those were the only causes then the Obama administration would have little reason to be concerned about teenage employment.</span></p> <p class="p1"><span class="s1">Despite the decline of teenagers in the labour market and <a href="http://neighborhoodeffects.mercatus.org/2015/10/26/teenage-unemployment-in-cities/"><span class="s3">the numerous recent studies</span></a> that show that the minimum wage has adverse effects on teenage employment, the minimum wage continues to be viewed by many as an effective anti-poverty tool with little to no adverse effects. It is this line of thinking that has encouraged the newest proposal calling for billions of taxpayer dollars to provide jobs; the labor market, not the government, is the problem and so the government should intervene.</span></p> <p class="p1"><span class="s1">An all too common occurrence in US policy is that government intervention causes a problem that the government then tries to solve with more intervention, completely ignoring the possibility that the initial intervention was the source of the problem. In this case, price controls at the bottom of the labor-market ladder have prevented young people from getting on the first rung, so now the government wants to roll over a $5.5 billion dollar taxpayer-funded stool to give them a boost.</span></p> <p class="p1"><span class="s1">Government programs rarely achieve their goal so there is good reason to be skeptical of this one, especially since it fails to address the root cause of the problem. A better, more effective solution for helping teenagers gain valuable job skills would be to set the minimum wage at the proper level of $0 and let the labour market work.</span></p> http://mercatus.org/expert_commentary/ignoring-adverse-effects-minimum-wage-may-cost-taxpayers-billions Wed, 10 Feb 2016 10:39:13 -0500 An Examination of Federal Reserve Policy http://mercatus.org/events/examination-federal-reserve-policy <h5> Events </h5> <p style="margin: 0in 0in 0.0001pt; line-height: 12.75pt; background-image: initial; background-attachment: initial; background-size: initial; background-origin: initial; background-clip: initial; background-position: initial; background-repeat: initial;"><span style="font-size: 9pt; font-family: Helvetica, sans-serif;">Please join the Mercatus Center’s Program on Monetary Policy Director <a href="http://mercatus.org/scott-sumner">Scott Sumner</a>, and Visiting Scholar <a href="http://mercatus.org/david-beckworth">David Beckworth</a>, for an in-depth discussion on the Federal Reserve. Just a week after Federal Reserve Chair Janet Yellen’s Congressional testimony, Mercatus scholars will analyze current Federal Reserve policy (like the December rate hike), and lead an informative discussion on the future of monetary policy.<o:p></o:p></span></p> <p style="margin: 0in 0in 0.0001pt; line-height: 12.75pt; background-image: initial; background-attachment: initial; background-size: initial; background-origin: initial; background-clip: initial; background-position: initial; background-repeat: initial;"><span style="font-size: 9pt; font-family: Helvetica, sans-serif;">&nbsp;</span></p> <p style="margin: 0in 0in 0.0001pt; line-height: 12.75pt; background-image: initial; background-attachment: initial; background-size: initial; background-origin: initial; background-clip: initial; background-position: initial; background-repeat: initial;"><span style="font-size: 9pt; font-family: Helvetica, sans-serif;">Scott Sumner, who blogs at <a href="http://www.themoneyillusion.com/">The Money Illusion</a>, is one of the nation’s leading economists. Tied with former Federal Reserve Chair Ben Bernanke on Foreign Policy’s 2012 rankings of the Top 100 Global Thinkers list, Prof. Sumner’s research portfolio includes prediction markets, monetary policy. Prof. Sumner’s work has been the focal point for “nominal GDP targeting,” a monetary policy reform proposal. His most recent work includes a comprehensive explanation of the causes of the <a href="https://books.google.com/books?id=kh5sngEACAAJ">Great Depression</a>.<o:p></o:p></span></p> <p style="margin: 0in 0in 0.0001pt; line-height: 12.75pt; background-image: initial; background-attachment: initial; background-size: initial; background-origin: initial; background-clip: initial; background-position: initial; background-repeat: initial;"><span style="font-size: 9pt; font-family: Helvetica, sans-serif;">&nbsp;</span></p> <p style="margin: 0in 0in 0.0001pt; line-height: 12.75pt; background-image: initial; background-attachment: initial; background-size: initial; background-origin: initial; background-clip: initial; background-position: initial; background-repeat: initial;"><span style="font-size: 9pt; font-family: Helvetica, sans-serif;">David Beckworth, who blogs at <a href="http://macromarketmusings.blogspot.com/">Macro and Other Market Musings</a>, is a professor of economics at Western Kentucky University, and served as an international economist at the US Department of the Treasury. His primary research focus is monetary policy, and he has recently written about the need for <a href="http://mercatus.org/expert_commentary/fed-must-be-transparent-natural-rate-estimate">additional transparency</a> at the Federal Reserve, and why inflation targeting should be replaced with “<a href="http://mercatus.org/publication/inflation-targeting-monetary-policy-regime-whose-time-has-come-and-gone">a more robust monetary policy regime</a>.” His writing has been featured in numerous outlets, including the <a href="http://www.nytimes.com/2016/01/27/opinion/subprime-reasoning-on-housing.html">New York Times</a>.<o:p></o:p></span></p> <p style="margin: 0in 0in 0.0001pt; line-height: 12.75pt; background-image: initial; background-attachment: initial; background-size: initial; background-origin: initial; background-clip: initial; background-position: initial; background-repeat: initial;"><span style="font-size: 9pt; font-family: Helvetica, sans-serif;">&nbsp;</span></p> <p style="margin: 0in 0in 0.0001pt; line-height: 12.75pt; background-image: initial; background-attachment: initial; background-size: initial; background-origin: initial; background-clip: initial; background-position: initial; background-repeat: initial;"><span style="font-size: 9pt; font-family: Helvetica, sans-serif;">Both Prof. Sumner and Beckworth are global leaders on a variety of important issues, including Chinese and European economic policy.<o:p></o:p></span></p> <p style="margin: 0in 0in 0.0001pt; line-height: 12.75pt; background-image: initial; background-attachment: initial; background-size: initial; background-origin: initial; background-clip: initial; background-position: initial; background-repeat: initial;"><span style="font-size: 9pt; font-family: Helvetica, sans-serif;">&nbsp;</span></p> <p style="margin: 0in 0in 0.25in; line-height: 12.75pt; background-image: initial; background-attachment: initial; background-size: initial; background-origin: initial; background-clip: initial; background-position: initial; background-repeat: initial;"><span style="font-size: 9pt; font-family: Helvetica, sans-serif;">Space is limited. Please register online for this event.<o:p></o:p></span></p> <p style="margin: 0in 0in 0.25in; line-height: 12.75pt; background-image: initial; background-attachment: initial; background-size: initial; background-origin: initial; background-clip: initial; background-position: initial; background-repeat: initial;"><span style="font-size: 9pt; font-family: Helvetica, sans-serif;">If you are not able to attend in person, please consider forwarding this invitation to one of your colleagues.<o:p></o:p></span></p> <p style="margin: 0in 0in 0.25in; line-height: 12.75pt; background-image: initial; background-attachment: initial; background-size: initial; background-origin: initial; background-clip: initial; background-position: initial; background-repeat: initial;"><span style="font-size: 9pt; font-family: Helvetica, sans-serif;">This event is free and open to all congressional and federal agency staff. Food will be provided. Please contact Jen Campbell with any dietary restrictions. Due to space constraints, please no interns. Questions? <b><i>Please contact Jen Campbell at <a href="mailto:jcampbell@mercatus.gmu.edu">jcampbell@mercatus.gmu.edu</a>.</i></b><o:p></o:p></span></p> http://mercatus.org/events/examination-federal-reserve-policy Wed, 10 Feb 2016 13:04:19 -0500 The Congressional Budget Office’s Latest Forecast: More Spending and Debt http://mercatus.org/publication/congressional-budget-office-s-latest-forecast-more-spending-and-debt <h5> Publication </h5> <p>The <a href="https://www.cbo.gov/publication/51129">latest federal budget projections</a> from the Congressional Budget Office (CBO) should set off alarm bells on Capitol Hill. According to CBO’s baseline, federal debt held by the public will climb from $14 trillion this year to almost $24 trillion in fiscal year 2026. Measured as a share of the economy, publicly held debt as a percentage of GDP is projected to jump substantially, from 75.6 percent to 86.1 percent in the next 11 years. As the following chart shows, current debt levels are already disconcertingly high.</p> <p><img src="http://mercatus.org/sites/default/files/deRugy-CBO-Budget-chart1-debt-final.png" width="585" height="452" /></p> <p>Policymakers seeking to get federal debt under control will need to rein in the debt’s main driver: federal spending. The following chart shows major categories of federal spending as a share of total spending under CBO’s forecast.</p> <p><img src="http://mercatus.org/sites/default/files/deRugy-CBO-Budget-chart2-outlays-final.png" width="585" height="452" /></p> <p>The chart shows that expenditures for Social Security and the government’s major&nbsp;healthcare&nbsp;programs (Medicare and Medicaid), which already dominate the federal budget, will account for most of the projected growth of total federal outlays. Also notable is the projected growth of interest on the federal debt. And for those who believe that increasing the burden on taxpayers is the solution to the debt problem, CBO notes that federal revenues as a share of GDP are already projected to be higher in the next decade than the average over the past 50 years.</p> <p>There is no viable alternative to controlling federal spending if policymakers are to address to the problem of federal debt.</p> http://mercatus.org/publication/congressional-budget-office-s-latest-forecast-more-spending-and-debt Wed, 10 Feb 2016 12:03:43 -0500 Health Care Bootcamp: Understanding the U.S. Health Care System http://mercatus.org/events/health-care-bootcamp-understanding-us-health-care-system <h5> Events </h5> <p>The Affordable Care Act fundamentally changed the landscape of the U.S. health care system. With more than five years since the law’s passage, questions remain about how to fix a system that remains broken despite recent reform efforts. Did the Affordable Care Act adequately reform a failing health system, or did that prescription only treat the symptoms of a much larger illness?</p> <p>The Mercatus Center at George Mason University invites you to join Brian Blase, Senior Research Fellow at the Mercatus Center, and panelist Megan McArdle for an update on the current situation followed by more detailed discussions on reforms to Medicaid and how to promote innovation in health technologies.<br /> <br /></p> <p><b>Program Agenda</b></p> <p>8:45 am – 9:20 am<br /> <b>Registration</b> (coffee and light breakfast served)</p> <p>9:20 am – 9:30 am<br /> <b>Introduction and Welcome</b><br /> Karen Czarnecki, Senior Director for Outreach, Mercatus Center</p> <p>9:30 am – 10: 30 am<br /> <b>Keynote Panel</b><br /> Moderator: Brian Blase, Senior Research Fellow, Mercatus Center<br /> Megan McArdle, Columnist, Bloomberg View</p> <p>10:30 am – 10:40 am<br /> Transition to breakout sessions</p> <p>10:40 am – 11:50 am <br /> <b>Breakout Sessions</b><br /> 1. Opportunities for Innovation in Health Care<br /> 2. An Overview of Medicaid and Ideas for Reform</p> <p>11:50 am – 12:00 pm<br /> <b>Closing Remarks</b></p> <p>Space is limited. Please register online for this event.</p> <p>This event is free and open to all congressional and federal agency staff. Lunch will be provided. Due to space constraints, this event is not open to interns.&nbsp;<b><i>Questions? Please contact Jennifer Campbell at </i></b><a href="mailto:jcampbell@mercatus.gmu.edu"><b><i>jcampbell@mercatus.gmu.edu</i></b></a><b><i>.</i></b></p> http://mercatus.org/events/health-care-bootcamp-understanding-us-health-care-system Mon, 08 Feb 2016 16:47:27 -0500 ACA's Very Disappointing 2016 Enrollment Period http://mercatus.org/expert_commentary/acas-very-disappointing-2016-enrollment-period <h5> Expert Commentary </h5> <p class="p1"><span class="s1">With the <a href="http://www.cnbc.com/2016/02/04/obamacare-final-enrollment-tally-127-million.html"><span class="s2">results</span></a> now in from the Affordable Care Act’s (ACA) third open enrollment period, it’s getting increasingly difficult to sugarcoat the extremely low numbers of enrollees relative to original projections. The 12.7 million people who signed up for an exchange plan amounts to just&nbsp;half as many enrollees as was projected&nbsp;by government and private sector research organizations when the ACA passed.&nbsp;The Rand Corporation <a href="http://www.rand.org/content/dam/rand/pubs/research_briefs/2010/RAND_RB9514.pdf"><span class="s2">predicted</span></a> 27 million, the Centers for Medicare and Medicaid Services <a href="https://www.cms.gov/Research-Statistics-Data-and-Systems/Research/ActuarialStudies/downloads/ppaca_medicare_2010-04-22.pdf"><span class="s2">predicted</span></a> 24.8 million, the Urban Institute <a href="http://www.urban.org/research/publication/america-under-affordable-care-act"><span class="s2">predicted</span></a> 23.1 million, and the Congressional Budget Office <a href="https://www.cbo.gov/publication/21351"><span class="s2">predicted</span></a> 21 million.</span></p> <p class="p1"><span class="s1">At the end of open enrollment last year, the Obama administration <a href="http://www.hhs.gov/about/news/2015/03/10/nationwide-nearly-11-point-7-million-consumers-are-enrolled-in-2015-health-insurance-marketplace-coverage.html"><span class="s2">announced</span></a> 11.7 million sign-ups. However, one month later, there were <a href="http://money.cnn.com/2015/06/02/news/economy/obamacare-enrollment/"><span class="s2">only</span></a> 10.2 million people with effectuated exchange coverage. Assuming a similar trend this year, even accounting for the administration beginning to purge some people who have already failed to pay premiums, means that there are likely at most 12 million people currently&nbsp;enrolled in an exchange plan.</span></p> <p class="p1"><span class="s1">Over the past two years, overall exchange enrollment declined by about 2% per month as people who drop exchange plans during the year exceed those who sign up during special enrollment periods. A similar trend this year would result in&nbsp;about 10 million exchange enrollees at the end of December. This translates into roughly 11 million exchange enrollees on average during 2016—54% fewer enrollees than the consensus of experts in 2010.</span></p> <p class="p1"><span class="s1"><b>Young, Healthy People in the Middle Class Are Shunning Exchange Plans</b></span></p> <p class="p1"><span class="s1">As I discussed&nbsp;in a November <a href="http://mercatus.org/publication/downgrading-affordable-care-act-aca-unattractive-health-insurance-and-lower-enrollment"><span class="s2">study</span></a> for the Mercatus Center, low overall exchange enrollment is only part of the explanation for why the ACA is failing to deliver what was promised. Enrollment of younger, relatively healthy people with a middle class income is particularly low and has left <a href="http://www.forbes.com/risk/"><span class="s2">risk</span></a> pools filled with older and poorer people with more expensive health conditions.</span></p> <p class="p1"><span class="s1">The design of the ACA’s financial support is likely the reason that the only people buying exchange plans in large numbers are those whose incomes fall below 200% of the <a href="https://www.healthcare.gov/glossary/federal-poverty-level-FPL/"><span class="s2">federal poverty level</span></a> (FPL)—an amount equal to roughly $23,760 for a single person and $48,600 for a family of four. People earning below that level qualify for tax credits that significantly reduce their premiums and subsidies that substantially lower deductibles and other types of cost-sharing.</span></p> <p class="p1"><span class="s1">For people above 200% of the FPL, exchange plans generally contain too little benefit to be worth the cost. For example, a family of four in Roanoke, VA headed by a 40-year old couple with $60,000 in income faced a $5,080 annual premium, after applying about a $5,000 tax credit they qualified for, and a $5,000 deductible for the second-lowest cost silver plan available on the exchange. Each additional dollar of income earned by the family reduces the tax credit by about 14 cents.&nbsp;If this family earned income above $97,200, they would not qualify for any tax credit.</span></p> <p class="p1"><span class="s1">A recent <a href="http://www.nber.org/papers/w21565"><span class="s2">study</span></a> from three Wharton economists at the <a href="http://www.forbes.com/colleges/university-of-pennsylvania/"><span class="s2">University of Pennsylvania</span></a> found that “[t]he minority of high risks among the middle class uninsured may gain [from the ACA], but most uninsured will lose and, according to our estimates, will prefer to remain uninsured at the current penalty levels for violating the individual mandate.” According to their estimates, the ACA made a typical person without insurance who earns about $40,000 worse off by around $2,000 to $3,000.</span></p> <p class="p1"><span class="s1">The following table shows the projected enrollment distribution by income <a href="http://www.urban.org/sites/default/files/alfresco/publication-pdfs/2000062-The-Implications-King-vs-Burwell.pdf"><span class="s2">produced</span></a> by the Urban Institute just one year&nbsp;ago compared to the actual enrollment distribution reported by the administration for 2015 and 2016. As the table shows, Urban expected 36% of enrollees to be below 200% of the FPL and 25% of enrollees to be above 400% of the FPL. It turns out that in both <a href="https://aspe.hhs.gov/pdf-report/health-insurance-marketplace-2015-open-enrollment-period-march-enrollment-report"><span class="s2">2015</span></a> and <a href="https://aspe.hhs.gov/health-insurance-marketplaces-2016-open-enrollment-period-january-enrollment-report"><span class="s2">2016</span></a> a far higher percentage of enrollees are below 200% of the FPL and very few people with income above 400% of the FPL enrolled in an exchange plan.</span></p> <p class="p3"><img height="240" width="585" src="http://mercatus.org/sites/default/files/Screen Shot 2016-02-08 at 1.48.32 PM.png" /></p><p class="p3"><span class="s1"><span style="font-size: 12px;">The Congressional Budget Office also projected too many higher-income enrollees. </span><a style="font-size: 12px;" href="https://www.cbo.gov/sites/default/files/cbofiles/attachments/43900-2015-03-ACAtables.pdf"><span class="s2">Last March</span></a><span style="font-size: 12px;">, CBO projected that 6 million of the 21 million projected exchange enrollees would have income too high to qualify for tax credits. It now appears CBO’s estimate of unsubsidized enrollees from last year was too high by at least a factor of four.</span></span></p> <p class="p1"><span class="s1">In addition to enrollees being poorer than expected, they are also older than insurers anticipated. During the 2014 open enrollment period, insurers <a href="https://oversight.house.gov/wp-content/uploads/2014/07/WH-Involvement-in-ObamaCare-Taxpayer-Bailout-with-Appendix.pdf"><span class="s2">reported</span></a> that they expected only 18% of enrollees to be over the age of 55. In 2015, about 26% of enrollees were over the age of 55 and the early data for 2016 indicates that 28% of enrollees are over the age of 55. Older people tend to have more expensive health conditions than younger people and the ACA prohibited insurers from properly pricing for that difference. This means insurers had to enroll enough young enrollees to cross-subsidize artificially low premiums for older enrollees—but this has not happened.</span></p> <p class="p1"><span class="s1"><b>Large Insurer Losses and Growing Need to Replace the Law</b></span></p> <p class="p1"><span class="s1">The best evidence of poor risk pools are the large aggregate losses suffered by insurers selling exchange plans. This has led several insurers to <a href="http://www.thefiscaltimes.com/Columns/2015/11/05/Collapsing-Obamacare-Co-ops-Signal-Big-Trouble-Come"><span class="s2">collapse</span></a>, and others, including large ones like United and <a href="http://www.forbes.com/companies/cigna"><span class="s2">Cigna,</span></a> to question whether they will continue offering exchange plans. It has also <a href="http://www.benefitspro.com/2016/02/04/broker-commissions-eliminated-for-special-enrollme"><span class="s2">led</span></a> to insurers like Anthem, Aetna, Cigna, and United—apparently burned by the administration’s allowance of people to enroll during special enrollment periods without proper verification in 2014 and 2015—to stop paying commissions to brokers who enroll people outside of the open enrollment period.</span></p> <p class="p1"><span class="s1">In sum, the ACA is not doing nearly as well as was predicted six years ago. As documented in a Mercatus <a href="http://mercatus.org/publication/explaining-growth-healthcare-spending-state-level-variation-income-insurance"><span class="s2">study</span></a> released this week, the ACA has almost certainly caused overall health care costs to increase even as exchange enrollment this year will likely amount to&nbsp;less than half of initial expectations. The main coverage gains have occurred through Medicaid, a program that economists at MIT, Harvard, and Dartmouth recently <a href="http://economics.mit.edu/files/10580"><span class="s2">found</span></a> delivers enrollees with only 20 to 40 cents of value for each dollar of government spending. It is becoming increasingly clear that the next Congress and administration may have no other choice but to significantly repair, if not replace, this law.</span></p> http://mercatus.org/expert_commentary/acas-very-disappointing-2016-enrollment-period Mon, 08 Feb 2016 13:50:16 -0500 Look before You Leap: A Key Principle of Regulation http://mercatus.org/expert_commentary/look-you-leap-key-principle-regulation <h5> Expert Commentary </h5> <p class="p1"><span class="s1">“Look before your leap” is such an ancient adage that you might think it would be second nature to those wise souls who write the laws and regulations we live under. Not quite. More than 100 years since the federal government wrote its first regulation, Congress is finally considering legislation telling regulatory agencies that they have to understand what causes a problem before writing a regulation to solve it.&nbsp;</span></p> <p class="p1"><span class="s1">The House and Senate have both considered legislation that would require regulatory agencies to publish an analysis of the nature and significance of the problem they are trying to solve before proposing rules with significant economic impacts. The Early Participation in Regulations Act, sponsored by Sens. Lankford (R-Okla.), Heitkamp (D-N.D.) and Ayotte (R-N.H.), would implement this requirement. It is also contained in the Regulatory Accountability Act, which passed the House and was reported by the Senate Committee on Homeland Security and Governmental Affairs last fall. For those who think regulations should provide effective solutions to problems that actually exist, such reforms are long overdue.&nbsp;</span></p> <p class="p2"><span class="s1">In September, for example, the Food and Drug Administration adopted a regulation requiring that companies that produce or handle animal food must have procedures in place to ensure that animal food is as safe as human food. Most of the available evidence, however, shows that the main contamination problem is with pet food, not all animal feed. The FDA imposed a regulation that is much broader and more costly than necessary to protect people and pets from impurities in pet food.&nbsp;</span></p> <p class="p1"><span class="s1">Why does this happen? For more than three decades, executive orders have required executive branch regulatory agencies to assess the nature and cause of the problem they are trying to solve. But this analysis does not have to be published until the agency proposes a regulation in the Federal Register for public comment.&nbsp;</span></p> <p class="p1"><span class="s1">The dirty little secret is that agencies often already decide what regulation they want to write before they ask their analysts to assess the problem. Interviews with agency economists reveal that they are often pressured to produce an analysis that supports the regulation, instead of performing analysis to help figure out whether or how to regulate. One of my colleagues at the Mercatus Center, Dr. Richard Williams, spent 27 years at the FDA. <a href="http://mercatus.org/sites/default/files/publication/WP0815_Regulatory%20Economists.pdf"><span class="s2">He recounts</span></a> that when he estimated that the costs a regulation the agency wanted to impose exceeded benefits by a factor of 10, he was told on a Friday that if he could not “find” more benefits over the weekend, he did not need to bother coming back to work on Monday. &nbsp;</span></p> <p class="p1"><span class="s1">Sometimes there’s virtually no assessment of the problem at all. <a href="http://mercatus.org/reportcards"><span class="s2">The Regulatory Report Card project</span></a> at the Mercatus Center at George Mason University evaluated the quality of economic analysis accompanying 130 major regulations proposed between 2008 and 2013. Half of these regulations were accompanied by no significant evidence demonstrating the existence, size, or cause of the problem.&nbsp;</span></p> <p class="p1"><span class="s1">And these were important regulations. All had benefits, costs, or other economic effects exceeding $100 million annually.&nbsp;</span></p> <p class="p1"><span class="s1">A rational regulatory system would require agencies to understand the nature and significance of the problem they’re addressing before they decide what regulations to write. One way to encourage agencies to do so is to require them to publish their analysis of the problem for public comment before they publish a proposed regulation. Pre-proposal publication of the analysis would also give the public a chance to offer suggestions for improvement of the analysis before the agency publishes a regulatory proposal it feels it must defend.&nbsp;</span></p> <p class="p1"><span class="s1">In other words, regulators should look before they leap.</span></p> http://mercatus.org/expert_commentary/look-you-leap-key-principle-regulation Tue, 09 Feb 2016 09:19:04 -0500 Conversations with Tyler: A Conversation with Kareem Abdul-Jabbar http://mercatus.org/video/conversations-tyler-conversation-kareem-abdul-jabbar <h5> Video </h5> <p>Kareem Abdul-Jabbar joins Tyler Cowen for a conversation on segregation, Islam, Harlem vs. LA, Earl Manigault, jazz, fighting Bruce Lee, Kareem’s conservatism, dancing with Thelonious Monk, and why no one today can shoot a skyhook.</p><p><iframe width="580" height="326" src="https://www.youtube.com/embed/lIRr6C62Hzk?list=PLS8aEHTqDvpInY9kslUOOK8Qj_-B91o_W" frameborder="0"></iframe></p><p>&nbsp;</p> http://mercatus.org/video/conversations-tyler-conversation-kareem-abdul-jabbar Fri, 05 Feb 2016 15:28:21 -0500 Veronique de Rugy Testifies on Federal Spending and the Debt Limit http://mercatus.org/video/veronique-de-rugy-testifies-federal-spending-and-debt-limit <h5> Video </h5> <p><iframe frameborder="0" height="360" width="640" src="http://www.cato.org/longtail-iframe/node/62720/field_longtail_player/0"></iframe><a href="http://mercatus.org/publication/fundamental-spending-reform-solution-debt-ceiling-debate">Click here</a> to read the full testimony.</p> http://mercatus.org/video/veronique-de-rugy-testifies-federal-spending-and-debt-limit Fri, 05 Feb 2016 15:16:16 -0500 The Food and Drug Administration Needs to Change After 110 Years http://mercatus.org/expert_commentary/food-and-drug-administration-needs-change-after-110-years <h5> Expert Commentary </h5> <p><span style="font-size: 12px;">A </span><a href="http://health.usnews.com/health-news/health-wellness/articles/2015/06/08/the-secret-lives-of-supercentenarians" style="font-size: 12px;"><span class="s2">supercentenarian</span></a><span style="font-size: 12px;"> is a person who has lived passed their 110th birthday. We celebrate that for people, but it's not clear that we should celebrate it for a federal agency like the Food and Drug Administration , which turns 110 this year.&nbsp;</span></p> <p class="p1"><span class="s1">It's certainly time to re-evaluate precisely what such an agency ought to be doing, not to mention what it should not be doing. Two things that federal agencies like the FDA should avoid in particular are scandals and poor outcomes.</span></p> <p class="p1"><span class="s1">Typically the <a href="http://www.nationalreview.com/article/389681/making-harding-look-good-victor-davis-hanson"><span class="s2">scandals</span></a> are what dominate the news, but what may be most damaging to the country are the poor outcomes from these agencies. Some, such as the chronically <a href="http://freebeacon.com/issues/poor-care-at-phoenix-va-led-to-deaths-of-veterans-with-cancer/"><span class="s2">poor care</span></a> at veteran's hospitals, are easy to see and document. These sorts of highly visible scandals and outcomes outrage the public and Congress – and action usually follows – but there's no parallel outrage for poor outcomes that are widely distributed and difficult to attribute.</span></p><p class="p1"><a href="http://www.usnews.com/opinion/blogs/policy-dose/articles/2016-02-01/the-food-and-drug-administration-needs-to-change-after-110-years">Continue reading</a></p> http://mercatus.org/expert_commentary/food-and-drug-administration-needs-change-after-110-years Fri, 05 Feb 2016 11:12:59 -0500 ACA: 2016 and 2017 http://mercatus.org/expert_commentary/aca-2016-and-2017 <h5> Expert Commentary </h5> <p class="p1"><span class="s1">There is no debating that the ACA contains benefits and costs and that the law continues to sharply divide the country. Its supporters say that it is working, while its opponents argue otherwise and continue pressing to undo the law. In January, Congress sent a bill to the president's desk that would have repealed large swaths of the law, including most of its taxes and much of its spending; as expected, the president vetoed the bill. Let's take a closer look at how ACA is working so far.</span></p> <p class="p1"><span class="s1"><b>ACAs Impact on Coverage</b></span></p><p class="p1"><span class="s1"><i> The numbers have increased</i>: ACA supporters primarily and repeatedly cite the decrease in the number of people without health insurance. The Obama administration estimates that 12.6 million people gained insurance coverage from 2010 to 2014. However, several million people became uninsured during the financial crash of 2008-2009. Part of the post-2010 increase simply reflects a return to pre-recession coverage levels as the economy has slowly improved. Using a 2008 starting point reveals that the number of uninsured fell by only 6.7 million people through 2014.</span></p> <p class="p1"><span class="s1"><i>Most of the increase is Medicaid</i>: The net gains in health insurance have come mainly through Medicaid and not private insurance, since the number of people covered by employer-sponsored insurance has somewhat declined. Medicaid is a program for lower-income people and is plagued with problems, including poor access to care for enrollees. A recent study found that enrollees receive only 20 to 40 cents of benefit for each dollar that Medicaid spends on their behalf.</span></p> <p class="p1"><span class="s1"><i>Exchanges are doing poorly</i>: Overall enrollments on the ACA exchanges are far lower than the government had previously forecast. The only people signing up in large numbers are those who receive large subsidies to reduce their premiums and deductibles.</span></p> <p class="p1"><span class="s1">Importantly, increasing the number of people with insurance cards does not guarantee that those people gain anything in terms of health, as numerous studies have indicated a loose connection between health insurance and health.</span></p> <p class="p1"><span class="s1"><b>ACA's Impact on Insurance and Premiums</b></span></p><p class="p1"><span class="s1"><i> Premiums soar</i>: President Obama told Americans that ACA would reduce family premiums by $2,500. However, since ACA was signed into law, family premiums for employer plans have soared — increasing by more than $4,000 since 2009.</span></p> <p class="p1"><span class="s1"><i>Young and healthy decline to subsidize old and sick</i>: ACA requires that health insurers offer a standardized health insurance product to all applicants, and that they charge the same premiums regardless of health status. Insurers are also prohibited from charging near-retirees more than three times the amount charged to twenty-somethings. As a result, ACA increased individual-market premiums, with younger and healthier people bearing the largest increases.</span></p> <p class="p1"><span class="s1">In 2014 and 2015, insurers selling exchange plans lost money as the plans attracted older and sicker enrollees than expected. In 2016, most exchange-plan premiums are increasing by double-digits. UnitedHealth, the largest insurer in the country, has announced that it may stop offering exchange plans altogether after 2016 because of market instability.</span></p> <p class="p1"><span class="s1"><i>Plans are becoming stingier</i>: Premiums would be even higher, but insurers designed exchange plans with very narrow provider networks and high deductibles and cost-sharing amounts. Many are discovering that their treatments are “covered” under their plans, but not actually paid for by their plans.</span></p> <p class="p1"><span class="s1"><b>ACA's Impact on Businesses and Workers</b></span></p><p class="p1"><span class="s1"><i> Employer mandate arrives in full force</i>: After two years of delay, the employer mandate takes full effect in 2016. The employer mandate requires that employers with at least 50 full-time workers offer acceptable coverage to their workers or pay tax penalties. These penalties can equal $2,000 per worker or $3,000 per worker receiving insurance subsidies on the exchanges. The mandate incentivizes employers to trim hours below 30 per week so workers are not considered full-time and reduce full-time workers (plus full-time equivalents) below 50.</span></p> <p class="p1"><span class="s1"><i>Paperwork will become heavy</i>: The IRS has created seven new forms for ACA. In particular, complying with the employer mandate will be a major paperwork burden for businesses. Businesses will have to report on their health-insurance offering as well as the monthly take-up rate for their workforce.</span></p> <p class="p1"><span class="s1"><i>SHOP exchanges are mostly failing</i>: The Small Business Health Option Program exchanges were designed to provide small businesses the ability to offer their workers more health-insurance options and lower overall premiums. Thus far, the SHOP exchanges have been a failure, enrolling only a small fraction of the number of people projected.</span></p> <p class="p1"><span class="s1"><i>Co-ops have failed</i>: All of the co-ops — state-based insurers established by the law through large federal startup loans — are underwater. More than half have already closed.</span></p> <p class="p1"><span class="s1"><i>Fewer jobs</i>: The Congressional Budget Office estimates that ACA will reduce the amount of full-time work in the economy by about 2 million jobs, decreasing American economic output by about half of 1 percent. This is largely the result of lower-wage workers' working less because additional work would reduce or eliminate subsidies.</span></p> <p class="p1"><span class="s1"><b>Moving Forward</b></span></p><p class="p1"><span class="s1"><i> Insurance-company subsidies were reduced and are ending</i>: ACA contained two back-end subsidy programs to assist insurers offering ACA plans. The first, called reinsurance, pays the majority of the costs of insurers' most expensive enrollees. The second, called risk corridors, collects money from insurers with profits and pays insurers with losses. Congressional action required the risk-corridor program to be budget-neutral so taxpayers would not be on the hook for insurers' losses. That made a big impact, since a lot more insurers lost money than made money on ACA plans in 2014 and 2015. Insurers were upset by this action and are lobbying for taxpayers to finance the risk-corridor deficit. Both reinsurance and risk corridors end after 2016, so ACA plan premiums in 2017 will have to rise, perhaps substantially, to account for the loss of these back-end subsidies.</span></p> <p class="p1"><span class="s1"><i>Individual mandate tops off</i>: ACA supporters hope that the increase in the individual-mandate penalty, which will now equal the greater of $695 per person or 2.5 percent of household income above the tax filing threshold, will incentivize more young and healthy people to purchase coverage and stabilize the risk pools. To date, the individual mandate has not been nearly as effective as many experts had predicted it would be.</span><span style="font-size: 12px;">&nbsp;</span></p> <p class="p1"><span class="s1"><i>Cadillac tax faces an uncertain future</i>: The Cadillac tax was primarily placed in the law as a way to deal with the tax exclusion for employer-provided insurance, which means that employer plans' premiums are not subject to federal income or payroll taxes. Economists generally agree that the tax exclusion causes numerous problems and contributes to the high cost of American health care. The Cadillac tax was slated to begin in 2018 and was a 40 percent excise tax on plans valued at more than $10,200 for single coverage and $27,500 for family coverage. After aggressive lobbying by business and labor groups, Congress delayed the Cadillac tax until 2020. Among people who believe the exclusion needs to be capped or limited, the Cadillac-tax delay raises concern that will ever happen.</span></p> <p class="p1"><span class="s1"><b>Summary</b></span></p><p class="p1"><span class="s1"> Six years after enactment, ACA remains a law very much in turmoil. The law has decreased the number of people without health insurance, and its regulations and subsidies have benefited some lower-income people and many with preexisting health conditions. Many more, however, find they have less freedom and that their coverage is deteriorating: higher premiums, fewer providers, higher out-of-pocket costs. Beyond the widely reported website problems, many of the law's fundamental institutions — individual exchanges, SHOP exchanges, co-ops, mandates — are failing to perform as expected.</span></p> <p class="p1"><span class="s1">The law will certainly be one factor in this year's elections. Obviously, its long-term future depends heavily upon who is elected president. But perhaps more important is whether public pressure from higher premiums, higher taxes, and reduced choices will boil over and force Washington to revisit the law regardless of who is elected president.</span></p> http://mercatus.org/expert_commentary/aca-2016-and-2017 Fri, 05 Feb 2016 15:00:08 -0500 Responses to Questions for the Record of Jerry Ellig on Moving to a Stronger Economy Through Regulatory Budgeting http://mercatus.org/publication/responses-questions-record-jerry-ellig-moving-stronger-economy-through-regulatory <h5> Publication </h5> <p class="p1"><span style="font-size: 12px;">February 3, 2016<br /></span><span style="font-size: 12px;"><br />Senator Michael B. Enzi<br /></span><span style="font-size: 12px;">Chairman<br /></span><span style="font-size: 12px;">Committee on the Budget<br /></span><span style="font-size: 12px;">United States Senate<br /></span><span style="font-size: 12px;">Washington, DC 20510<br /></span><span style="font-size: 12px;"><br />Dear Chairman Enzi:</span></p> <p class="p2"><span style="font-size: 12px;">Thank you for the opportunity to testify at the Senate Budget Committee’s December 9, 2015, hearing on the regulatory budget. Below are my responses to the four questions for the record:</span></p> <p class="p3"><b>Chairman Enzi Question 1:</b></p> <p class="p3"><span> </span><i>As you know OMB provides Congress annually with a report of The Costs and Benefits of Federal Regulations as required by the Regulatory Right to Know Act. Over the years that report has varied in its timeliness and quality. You have also seen various agency budgets showing the dollars spent on writing and enforcing regulations as well as studies on the cost of compliance with regulation in the private sector.</i><i style="font-family: inherit; font-weight: inherit;">&nbsp;</i></p> <p class="p3"><i><span> </span>How then would you recommend that Congress establish an initial regulatory baseline for a regulatory budget?</i></p> <p class="p3"><span> </span><b>Answer:</b> The initial baseline should be an estimate of the actual costs of existing regulations. To be useful in congressional decision-making about individual agencies, authorizing statutes, and appropriations, the baseline needs to identify the costs of individual regulations, regulatory programs, or authorizing statutes.</p> <p class="p3"><span> </span>Figures in the annual OMB report to Congress are inadequate for this task. The annual OMB report is a compendium of agencies’ prospective estimates of the costs of regulation, not a retrospective assessment of actual costs. The report covers only the small minority of federal regulations classified as “major,” includes only the regulations issued during the previous 10 years, and is based on agency regulatory impact analyses that are often seriously incomplete.<span style="font-size: 12px;">&nbsp;</span></p> <p class="p3"><span> </span>Figures from studies on the aggregate cost of regulation are also inadequate for this task. Such studies may be helpful in identifying some cumulative costs of regulation, but they do not attribute costs to individual regulations, regulatory programs, or authorizing statutes.</p> <p class="p3"><span> </span>As my Mercatus Center colleagues Jason Fichtner and Patrick McLaughlin noted in a study published in 2015, measuring regulatory costs is more difficult than counting federal outlays. Congress could consider using a proxy for total regulatory costs, such as paperwork costs or net costs to regulated entities, as has been done in other countries. As I noted in my oral response to a question during the hearing, a disadvantage of this approach is that it ignores significant social opportunity costs created by regulation, such as the increase in waiting time for passengers and increased highway deaths attributable to airport security regulation. <span class="s1">Correct estimation of the social cost of a regulation can require assessments of cause-and-effect relationships and monetary valuation challenges that are every bit as difficult as those involved in estimating benefits.&nbsp;</span></p> <p class="p3"><span> </span>Given the difficulties, it may be most practicable for Congress to take an incremental approach, selecting certain agencies or regulatory programs for a pilot study to explore different ways of establishing a baseline. Since the GPRA Modernization Act requires the federal government to identify the programs, tax expenditures, and regulations that contribute toward its high-priority goals, another option would be to conduct a pilot study using the regulations that agencies say are intended to advance high-priority goals. The pilot study should include provisions to disclose the methodology to the public and seek comment from experts to fine-tune a method that could be used across the federal government.</p> <p class="p3"><b>Chairman Enzi Question 2:</b></p> <p class="p3"><span> </span><i>You have worked on two projects, the Performance Report Scorecard and the Regulatory Report Scorecard that have underscored the need for Congress to use and incentivize high-quality analysis. That involves knowing how to obtain, understand and analyze the information needed in decision making. Over the past three decades, legislation has been proposed to establish a separate Congressional Office of Regulatory Analysis.</i></p> <p class="p3"><i><span> </span>Do you support the establishment of such an office?</i></p> <p class="p3"><b><span> </span>Answer: </b>Establishment of a Congressional Office of Regulatory Analysis—either as a separate entity or as a division of the Congressional Budget Office or Government Accountability Office—could provide Congress with the systematic assessment of the effects of regulation that Congress currently lacks.</p> <p class="p3"><span> </span>Under the Government Performance and Results Act, the executive branch has a monopoly on the production of information about the performance of federal programs. Under Executive Order 12866, which governs regulatory analysis and review by the Office of Information and Regulatory Affairs, the executive branch has a monopoly on the production of information about the prospective and retrospective results of regulations. Mercatus Center research projects have found that GPRA and the executive orders on regulatory analysis have improved decision-makers’ knowledge about the results of programs and regulations. But as I noted in my testimony, we have also found that such analysis is often seriously incomplete.</p> <p class="p3"><span> </span>In the Budget Act of 1974, Congress created the Congressional Budget Office because lawmakers recognized that they needed an objective source of spending and revenue estimates independent of the executive branch. In contrast, Congress has no independent source of information on the effects of regulations. The current system provides Congress with a flood of information but little structured means to produce high-quality analysis of the problems that regulatory legislation seeks to solve and the benefits and costs of alternative solutions. For this reason, Congress needs to develop a system for obtaining impartial legislative impact analysis when it authorizes new regulation or reauthorizes existing regulation.</p> <p class="p3"><b>Ranking Member Sanders:</b></p> <p class="p3"><span> </span><i>Much of today’s hearing concerned the costs of regulation. However, as we’ve seen in recent years, there are massive costs associated with deregulation. The Wall Street crash in 2008 was precipitated by the deregulation of the financial sector. The costs associated with the Great Recession that resulted were massive, and we’re still paying the price with high unemployment and a huge deficit. Similarly, the Deepwater Horizon oil spill in 2010 – in which an explosion killed 11 people and almost 5 million barrels of oil spilled over an area estimated to be as large as 68,000 square miles – was also caused, in part, by what the Houston Chronicle called “a lax regulatory climate.”</i></p> <p class="p3"><i><span> </span>With these facts in mind, how would a regulatory budget account for the unforeseen economic and environmental costs of deregulation?</i></p> <p class="p3"><b><span> </span>Answer: </b>Like a family budget or the federal budget, a regulatory budget is a plan for the allocation of resources. The purpose of a budget is to place an overall limit on spending, based on the family’s or the government’s projected income, then divide that spending among competing priorities based on the expected benefits. No one would seriously suggest that the federal government operate without a budget; that would mean individual agencies could spend federal money as they parochially see fit, with no consideration of the government’s ability to pay or the implications such spending could have on other programs.&nbsp;</p> <p class="p3"><span> </span>Unfortunately, the current regulatory system creates an analogous dysfunctional situation. Regulatory agencies can direct individuals, businesses, and state, local, and tribal governments to sacrifice money, time, privacy, and other values with no consideration of the total cost to society of all regulations, as long as the regulation is intended to accomplish the agency’s goals.&nbsp;</p> <p class="p3"><span> </span>As with a family budget or the federal budget, cost is not the only factor relevant to resource allocation decisions in a regulatory budget. When dividing the total of regulatory costs among competing priorities, Congress should take account of the benefits expected from various regulations and regulatory programs. The expected benefit of regulations intended to prevent a financial crisis is the social cost of the crisis multiplied by the reduction in risk (of a crisis) created by the regulations. Similarly, the expected benefit of regulations intended to prevent oil spills is the social cost of the spill multiplied by the reduction in risk (of spills) created by the regulations. Given the high costs of financial crises and oil spills, regulations that significantly reduce the risk of their occurrence would likely be high priorities to retain. Regulations that are <i>intended</i> to reduce the risk but <i>in reality create little or no reduction in risk</i> should not be high priorities.&nbsp;</p> <p class="p3"><span> </span>Extensive research by my colleagues at the Mercatus Center has documented the phenomenon of regulatory accumulation: the tendency of the federal government to continually add new regulations without reexamining existing regulations to see if they are actually accomplishing their intended goals at a reasonable cost. By constraining the total social cost of regulation, a regulatory budget creates incentives for agencies and Congress to examine the actual results of regulations, eliminate the nonfunctional regulations, and retain the regulations that solve real problems at a reasonable cost.</p> <p class="p3"><b>Senator Whitehouse:</b>&nbsp;</p> <p class="p3"><span> </span><i>Does the Mercatus Center accept donations from donors with financial interests in regulated pollutants, regulated chemicals, regulated financial products, and/or regulated consumer products? Please describe any such entities, and the amount of the support of each to the Mercatus Center.</i></p> <p class="p3"><span> </span><b>Answer:</b> To preserve the academic freedom of our researchers, the Mercatus Center has an explicit policy regarding independence of research (<a href="http://mercatus.org/content/policy-regarding-independence-research">http://mercatus.org/content/policy-regarding-independence-research</a>). Accordingly, I am not involved in requesting or accepting donations.</p> <p class="p3"><span> </span>Thank you again for the opportunity to testify. These answers are being provided in a good faith effort to answer your questions. I nevertheless reserve the right to supplement these answers with any information that should be brought to my attention subsequent to this submission.</p> <p class="p3">Please let me know if I can be of further assistance to the committee on this or other topics related to federal regulatory process reform.</p> <p class="p3">Sincerely,<br /><span style="font-size: 12px;"><br /><br /><br />Jerry Ellig<br /></span><span style="font-size: 12px;">Senior Research Fellow</span></p> http://mercatus.org/publication/responses-questions-record-jerry-ellig-moving-stronger-economy-through-regulatory Fri, 05 Feb 2016 17:15:28 -0500 The Proper Role of the FDA in the Medical Ecosystem http://mercatus.org/expert_commentary/proper-role-fda-medical-ecosystem <h5> Expert Commentary </h5> <p class="p1"><span class="s1">When I received my driver’s license my father said to me, “Congratulations, son—now you really learn how to drive.” Driver education courses only ensured that I knew how to operate the vehicle safely and appropriately to get from point A to point B. I had eight fender-benders in my first decade behind the wheel, and I haven’t had one accident for the last decade. My father was right. I learned how to operate a car very well—after I had my license for a while.</span></p> <p class="p1"><span class="s1">If the Department of Motor Vehicles approved driver’s licenses like the Food and Drug Administration approved new drugs and devices, driving tests would go on for months and cost a tremendous amount of money. I would have been tested on driving to points B to Z and countless other scenarios. If the DMV started doing this, Americans would surely say the DMV had lost its way.</span></p> <p class="p1"><span class="s1">Well, the FDA has lost its way and as President Obama’s nominee for commissioner of the FDA—Dr. Robert Califf—moves through the nomination process, the agency’s proper role in the medical ecosystem should be scrutinized.</span></p><p class="p1"><span class="s1"> Congress intended the FDA to license drugs for approval, and then let the medical ecosystem prescribe the drugs in real world circumstances—guided by FDA’s licensing instructions, of course—to arrive at the most appropriate uses for individual patients.</span></p> <p class="p1"><span class="s1">The FDA’s role is clearly defined in the Federal Food Drug and Cosmetic Act (FD&amp;C): “to promote health by promptly and efficiently reviewing clinical research and taking appropriate action on the marketing of regulated products in a timely fashion.” This includes “ensuring that… drugs are safe and effective … [and] there is reasonable assurance of the safety and effectiveness of devices.”</span></p> <p class="p1"><span class="s1">The two most important parts of the FDA’s mission are to judge new products on the basis of safety and effectiveness, and to do so quickly. The median time of approval of novel drugs is 304 days. Considering that 10 months is the target review period for all new drug applications, the FDA is late half the time.</span></p> <p class="p1"><span class="s1">The reason that the FDA is incorrigibly late, and the reason that many companies don’t even try to develop drugs for many diseases that affect millions of Americans, is because the FDA has lost sight of its proper role. The FDA is supposed to be the gatekeeper of medicines that become available to the medical marketplace of physicians, patients, hospitals, payers, and medical community. Congress intended for the FDA to approve only those drugs that could be labeled for safe use and demonstrated the clinical effects claimed by drug developers.</span></p> <p class="p1"><span class="s1">Instead, the FDA is imposing its own standard for what constitutes a good drug. Rather than licensing products for use by doctors, the FDA is trying to dictate the practice of medicine. Rather than entering products that are safe and effective into the medical marketplace for the physicians to use and determine which are best for individual patients, the FDA is endeavoring to tell doctors and patients, upon approval, which drugs are best and how they are to be used. This is not how the system was set-up, nor is it possible.</span></p> <p class="p1"><span class="s1">In my recent research paper for the Mercatus Center on “On the Proper Role of the FDA,” we make the case for the FDA to return to its proper role: arbiters of safety and effectiveness, period. The FDA must be stopped from insisting on long-term outcomes that require humongous clinical trials, which are exceedingly difficult, time consuming, and costly to demonstrate, especially before approval. If the FDA were returned to its proper role, new drugs would be approved quickly, true personalized medicine would be facilitated, and both drug development costs and prices would be reduced.</span></p> <p class="p1"><span class="s1">You and your doctor need to decide which therapies are best for you and which are most beneficial, not the FDA. The only way that can happen is if the agency assumes its proper role in the medical ecosystem.</span></p> http://mercatus.org/expert_commentary/proper-role-fda-medical-ecosystem Fri, 05 Feb 2016 15:34:19 -0500 $19 Trillion and Counting http://mercatus.org/expert_commentary/19-trillion-and-counting <h5> Expert Commentary </h5> <p class="p1"><span class="s1">The statutory limit on how much debt the federal government can accumulate is back in the news, but this time it's not because Washington is close to breaching it. That's not a present concern thanks to the year-end bipartisan spending spree that included a suspension of the debt limit until March 2017. The news is that a report from the House Financial Services Committee found that the Obama administration's Treasury Department has been repeatedly misleading the American public on the matter.</span></p> <p class="p1"><span class="s1">Treasury has routinely rejected the idea that once the government reaches the debt limit, federal spending could be prioritized to avoid a default. During a previous debate over the debt limit in 2011, my colleague Jason Fichtner and I wrote a paper explaining that even if Treasury is unable to issue more debt, it can still avoid a default and thus give policymakers more time to implement reforms that would put the government on a more sustainable fiscal path.</span></p> <p class="p1"><span class="s1">Contrary to Treasury's claims, we argued that it has several financial management options to continue paying the government's primary obligations. Specifically, Treasury could use incoming tax receipts to cover high priority claims including the interest on existing debt, the principal on that debt, Social Security benefits and more. Government assets could also be liquidated to pay bills.</span></p> <p class="p1"><span class="s1">Treasury claimed that such options were neither acceptable nor feasible, and thus the only choice was for Congress to promptly agree to increase the debt limit. Then-Treasury Secretary Timothy Geithner claimed that prioritizing was out of the question and that failing to pay any of the government's bills would be the equivalent of defaulting on the debt. The same thing happened again during the administration's 2013 showdown with Congress over lifting the debt limit. This time it was Geithner's replacement, Jacob Lew, claiming that prioritization was not an option.</span></p> <p class="p1"><span class="s1">We now know that the administration's claims were untrue.</span></p> <p class="p2"><span class="s1">As it turns out, documents subpoenaed by the House Financial Services Committee reveal that during the 2013 debt ceiling debate the Obama administration knew it was actually capable of prioritizing payments. Indeed, the Federal Reserve Bank of New York was conducting "tabletop exercises" in preparation for what the administration was publicly stating couldn't be done. The documents show that while Treasury was helping the administration scare the public, its behind-the-scenes actions proved otherwise.</span></p> <p class="p1"><span class="s1">While Treasury and the administration's deceptive behavior is disturbing, it's good news for the next battle over lifting the debt limit early next year. I have repeatedly made it clear in the past that I believe defaulting on the debt is not an acceptable option. However, continuing to raise the debt limit without making any substantive changes to the unsustainable financial path we are on is just as irresponsible. Under the watch of both Republicans and Democrats, the debt limit has been raised 20 times since 1993. The result is that the federal debt has ballooned from less than $5 trillion in 1993 to $19 trillion and counting today.</span></p> <p class="p1"><span class="s1">Deficits are also going back up thanks to a bipartisan inability to get spending under control. According to the Congressional Budget Office's latest projections, cumulative annual budget deficits will add another $9.4 trillion in debt to the federal government's mountain of red ink. That figure is $1.5 trillion higher than the CBO projected less than six months ago.</span></p> <p class="p1"><span class="s1">Will Rogers once said, "If you find yourself in a hole, stop digging." Policymakers need to stop digging and instead implement institutional reforms that constrain government spending, which is the underlying cause of the mounting debt. Indeed, that should be a precondition to raising the debt limit next year. And this time we will know that Treasury has the means to give Congress the time to finally get it done.</span></p> http://mercatus.org/expert_commentary/19-trillion-and-counting Fri, 05 Feb 2016 14:39:08 -0500 Federal Spending in Perspective: The Powerball Jackpot http://mercatus.org/publication/federal-spending-perspective-powerball-jackpot <h5> Publication </h5> <p>The recent record $1.6 billion Powerball lottery jackpot captured the nation’s attention. The sum is so immense, it’s hard for most of us to wrap our minds around. Another immense sum that’s hard for Americans to wrap their minds around is the amount of hardworking taxpayers’ money that the federal government spends on an annual and daily basis. In fiscal year 2015, the federal government spent $3,700 billion (or $3.7 trillion), which is more than $10 billion per day.</p> <p>This week’s chart shows that although the Powerball jackpot was massive, it was considerably smaller than how much the federal government spent per day, on average, last year. Indeed, the federal government spent almost half a billion dollars per hour. That means that it would have taken Uncle Sam only 3.8 hours to spend the entire jackpot!</p> <p><img height="351" width="585" src="http://mercatus.org/sites/default/files/de-Rugy-Powerball-chart-v1.png" /></p> <p>It’s worth noting that the federal government was also a winner. Assuming the three jackpot winners took the lump sum payout, the federal government will end up collecting around $400 million in taxes on it. Again, that is a massive sum, but it’s only equal to about one hour of federal spending.</p> http://mercatus.org/publication/federal-spending-perspective-powerball-jackpot Thu, 04 Feb 2016 13:53:27 -0500 Are Congress and the Fed Repeating the Mistakes of the Depression? http://mercatus.org/expert_commentary/are-congress-and-fed-repeating-mistakes-depression <h5> Expert Commentary </h5> <p class="p1">See if this sounds familiar. The economy is in a deep slump. The Fed cuts interest rates close to zero and then tries quantitative easing (QE). A banking crisis begins in the United States and then spreads to Europe, where even sovereign debt is no longer safe. Individual countries are locked into a single monetary regime and unable to stimulate their economies.</p> <p class="p1">Am I my describing the Great Recession? Yes, but I’m also describing the Great Depression of the early 1930s. Now let’s push the comparison a bit further.</p> <p class="p1">At the time, the Depression was widely viewed as representing the failure of unbridled capitalism. Monetary policy was assumed to be expansionary but ineffective. So far I'm still describing both the 1930s and recent history.</p> <p class="p1">Today, however, the Great Depression is seen very differently, thanks to the path-breaking research of Milton Friedman and Anna Schwartz. Even former Fed Chair Ben Bernanke admits that the Federal Reserve caused the Great Depression, with a highly contractionary monetary policy. But how could this be, given that the Fed cut interest rates close to zero and also did substantial QE during the 1930s?</p> <p class="p1">Bernanke provides an answer in an academic paper in which he points out that neither interest rates nor money creation are good indicators of the actual stance of monetary policy. Instead, Bernanke argues that you need to look at nominal GDP growth and inflation, both of which fell sharply during the early 1930s and more modestly in the 2008-09 period.</p> <p class="p1">During much of my academic career I studied the role of the gold standard in the Great Depression, and recently published <a href="http://mercatus.org/publication/midas-paradox-financial-markets-government-policy-shocks-and-great-depression">a book on my findings</a>. During the banking crisis of 2008 and the associated recession, I couldn't help but notice a number of parallels with the much deeper slump of the 1930s. One, which I've already alluded to, was the widespread misdiagnosis of the stance of monetary policy. Just as in the 1930s, most people — even most economists — initially assumed that the stance of monetary policy was highly expansionary in the period after 2008. As in the 1930s, people focused too much on the inputs into monetary policy, such as interest rates and QE, and not enough on the output, inflation and nominal GDP growth.</p> <p class="p1">But the parallels don't stop there. Perhaps the most striking similarity is between the Eurozone and the interwar gold standard. In both cases, individual countries had little or no control over monetary policy. And in both cases, the crisis was misdiagnosed. It was assumed that the financial crisis was causing a recession, whereas the reverse was more nearly true. The deep slump worsened the fiscal situation of countries in two ways: making the budget deficit larger and also reducing national income available to pay off sovereign debt.</p> <p class="p1">The U.S. economy finally began to recover after Franklin Roosevelt began devaluing the dollar in April 1933. Initially the recovery was quite rapid, with industrial production rising by 57 percent between March and July 1933. But then FDR issued an executive order that effectively pushed hourly wages up by roughly 20 percent in just two months. Industrial output leveled off until May 1935, when the Supreme Court declared the wage and price-fixing program to be unconstitutional.</p> <p class="p1">The wage shock of July 1933 would be just the first of five such shocks. In all five cases, growth in industrial production slowed sharply after wages were artificially increased by government policy changes, slowing the recovery. The economy remained deeply depressed as late as the spring of 1940 — seven years after FDR took office.</p> <p class="p1">There are many lessons from the Depression for today’s economy.</p> <p class="p1">Conservatives need to be more aware of the cost of large shortfalls in nominal GDP. When monetary policy allows NGDP to fall well below trend, unemployment increases and financial crises develop or intensify. But instead of blaming the Fed, most people blame capitalism, and we end up with counterproductive statist policies.</p> <p class="p1">Liberals need to be more cautious in advocating large increases in the minimum wage. It’s true that some studies suggest that small increases have little effect. But the minimum wage was already increased by roughly 40 percent right as we were sliding into the Great Recession. If it were to be doubled to $15, as some progressives now advocate, the cost in jobs could be quite significant.</p> http://mercatus.org/expert_commentary/are-congress-and-fed-repeating-mistakes-depression Wed, 10 Feb 2016 10:03:01 -0500