Mercatus Site Feed en Privacy and the Internet: An Overview of Key Issues <h5> Publication </h5> <p><iframe src="//" width="427" height="356" frameborder="0" marginwidth="0" marginheight="0" scrolling="no" style="border: 1px solid #CCC; border-width: 1px; margin-bottom: 5px; max-width: 100%;"> </iframe></p> <div style="margin-bottom: 5px;"><strong> <a href="" title="Thierer Internet Privacy Regulation" target="_blank">Thierer Internet Privacy Regulation</a> </strong> from <strong><a href="" target="_blank">Mercatus</a></strong></div> Wed, 20 Aug 2014 16:18:07 -0400 “Permissionless Innovation” & the Grand Tech Policy Clash of Visions to Come <h5> Publication </h5> <p><iframe style="border: 1px solid #CCC; border-width: 1px; margin-bottom: 5px; max-width: 100%;" scrolling="no" marginheight="0" marginwidth="0" frameborder="0" height="356" width="427" src="//"> </iframe></p> <div style="margin-bottom: 5px;"><strong> <a target="_blank" title="“Permissionless Innovation” &amp; the Grand Tech Policy Clash of Visions to Come" href="">“Permissionless Innovation” &amp; the Grand Tech Policy Clash of Visions to Come</a> </strong> from <strong><a target="_blank" href="">Mercatus</a></strong></div> Wed, 20 Aug 2014 16:10:01 -0400 Patrick McLaughlin Discusses Government Regulation on Wall Street Journal Opinion <h5> Video </h5> <iframe width="480" height="360" src="//" frameborder="0" allowfullscreen></iframe> <p>Patrick McLaughlin Discusses Government Regulation on Wall Street Journal Opinion&nbsp;</p><div class="field field-type-text field-field-embed-code"> <div class="field-label">Embed Code:&nbsp;</div> <div class="field-items"> <div class="field-item odd"> &lt;iframe width=&quot;480&quot; height=&quot;360&quot; src=&quot;//; frameborder=&quot;0&quot; allowfullscreen&gt;&lt;/iframe&gt; </div> </div> </div> Wed, 20 Aug 2014 23:13:21 -0400 Introducing RegData 2.0: A New Way of Measuring the Size and Scope of Federal Regulation <h5> Expert Commentary </h5> <p class="p1"><span style="font-size: 12px;">Today, the </span><a href=";utm_medium=RSP&amp;utm_campaign=Newsletter" style="font-size: 12px;">Mercatus Center at George Mason University</a><span style="font-size: 12px;"> launched the latest version of </span><a href=";utm_medium=RSP&amp;utm_campaign=Newsletter" style="font-size: 12px;"><b>RegData</b></a><span style="font-size: 12px;">, a tool created by </span><a href=";utm_medium=RSP&amp;utm_campaign=Newsletter" style="font-size: 12px;">Patrick McLaughlin</a><span style="font-size: 12px;"> and </span><a href=";utm_medium=RSP&amp;utm_campaign=Newsletter" style="font-size: 12px;">Omar Al-Ubaydli</a><span style="font-size: 12px;"> that improves the way we measure the size and scope of federal regulations.</span></p> <p class="p1">In today's edition of <a href=";utm_medium=RSP&amp;utm_campaign=Newsletter"><i>The Hill</i></a>, McLaughlin explains how <b>RegData 2.0</b> offers novel metrics of an important input in our economy — federal regulation — and takes the first step in using a "Moneyball" approach to improving the regulatory system.</p> <p class="p1"><b>How Is RegData Different?</b></p> <p class="p1">RegData significantly improves upon previous methods to measure regulation by searching the federal register and counting the number of restrictions. Previous methods, such as counting pages in the federal register, lack the accuracy of counting the number of command words in the federal register’s text. All of the data is accessible and available for download on the website.</p> <p class="p1"><b>How Can I Use RegData?</b></p> <ul class="ul1"><li class="li3">Go beyond 'page' or 'rule' count: RegData 2.0 allows you to assess regulations by number of restrictions per regulator, or restrictions relative to total words</li> <li class="li3">See how the regulatory metrics compare across industries</li> <li class="li3">See how much regulation comes from a particular agency, bureau, committee, or administration per year</li> <li class="li3">See how regulatory restrictions have changed over time in a particular industry</li> <li class="li3">Examine whether agency regulatory production rates change after major acts of Congress</li> </ul> <p class="p1">To learn more about how to use RegData, watch <a href=";utm_medium=RSP&amp;utm_campaign=Newsletter">this tutorial</a> from Patrick McLaughlin.</p><p class="p1"><a href=""><img height="1212" width="585" src="" /></a></p> Wed, 20 Aug 2014 14:32:44 -0400 FDA Fails to Account for E-Cigarettes’ Health Benefits <h5> Expert Commentary </h5> <p class="p1">Nevada Attorney General Catherine Cortez Masto joined 28 other state attorneys general last week in a letter supporting the Food and Drug Administration’s proposal to expand its regulatory umbrella over tobacco products to include electronic cigarettes. Unfortunately, the FDA jeopardizes public health by not adequately assessing the costs of suppressing the e-cigarette market.</p> <p class="p1">The FDA errs on the side of assuming e-cigarettes pose more of a health risk than an opportunity to improve public health. Numerous studies, however, show that e-cigarettes help some smokers reduce or quit smoking. Studies also suggest that e-cigarettes are at least as effective, if not more, than FDA-approved nicotine replacement therapies such as patches, gums and pills. Their effectiveness appears to be related to how they mimic the act of smoking.</p> <p class="p1">Federal regulators dismiss “harm reduction theory” — the theory that minimizing damage from risky behavior may promote public health more effectively than simply banning risky behavior. Such a model is in line with estimates that up to 98 percent of tobacco-related deaths are attributable to combustible products such as cigarettes, pipes and cigars.</p> <p class="p1">The FDA downplays the possibility that noncombustible products such as e-cigarettes are substantially less dangerous than combustible tobacco products by claiming lack of evidence.</p> <p class="p1">The American Medical Association may disagree. As AMA explains, e-cigarettes do not contain tobacco, the main reason regular cigarettes are so harmful. Moreover, vapor from e-cigarettes is much less toxic than secondhand tobacco smoke. And while e-cigarettes do contain nicotine, which is also not healthy, nicotine probably does not contribute nearly as much to smoking-related diseases as tobacco.</p> <p class="p1">The proposed rule would impose labeling requirements and warning statements for packages and advertisements. However, public health will likely be harmed if manufacturers are prohibited from marketing their products as safer alternatives to tobacco cigarettes or even inform consumers that their products do not contain tobacco. The proposed regulation will push manufacturers to tout other factors — such as flavor, price, and convenience — thus steering manufacturers away from developing new products aimed at helping smokers reduce or quit smoking.</p> <p class="p1">Unintended consequences abound. As the costs of bringing products to market rise, those costs will be passed on to consumers. Raising e-cigarette prices on smokers who are interested in quitting is unlikely to promote public health.</p> <p class="p1">If manufacturers are unable to inform smokers that e-cigarettes are safer alternatives, the FDA may unwittingly promote tobacco use. The proposed rule thus weakens the creative destruction that the e-cigarette industry might otherwise exert on the tobacco industry.</p> <p class="p1">There is evidence that smokers are interested in quitting, or at least want safer alternatives. A recent Gallup poll found that 74 percent of U.S. smokers want to quit. And one top tobacco analyst, Bonnie Herzog of Wells Fargo Securities, estimated e-cigarette sales in the United States topped $1.7 billion last year.</p> <p class="p1">The Centers for Disease Control and Prevention estimates the annual costs attributed to smoking in the United States are between $289 billion and $333 billion. In light of these costs, the possibility that e-cigarettes represent a market response that fills the need for harm reduction by the 32.2 million smokers wanting to quit is worth pursuing.</p> <p class="p1">This does not mean that the FDA should not regulate e-cigarettes. Prohibiting sales to youth and requiring a clear description of product ingredients may be appropriate. But prohibiting any information regarding potential harm reduction is hard to justify. The FDA needs to develop a regulatory strategy that fully considers the potential benefits of e-cigarettes and the unintended adverse effects on public health of stymieing the evolution of a promising harm-reduction tool.</p> <p class="p1">In other words, the FDA should not remove the financial incentive to develop safer smoking products. Instead, it should foster a competitive market that empowers consumers to make wise decisions about what they choose to put in their bodies.</p> Tue, 19 Aug 2014 11:25:30 -0400 How the Top Ten Regulators of 2012 Changed over Ten Years <h5> Publication </h5> <p><a href="">RegData 2.0</a> is a newly launched regulation database that permits users to view regulatory statistics for hundreds of federal agencies. The chart below uses statistics pulled from the new RegData website to determine which federal regulators published the most restrictions in the year 2012 and compare the number of restrictions from these regulators in 2012 to the number of restrictions they published ten years earlier.</p><p><a href=""><img src="" /></a></p><p><span style="font-size: 12px;">The bars in the chart show the number of restrictions published by the ten regulators with the most restrictions in 2012 alongside those regulators’ restriction counts in 2002. The doughnut chart shows that these regulators accounted for almost one-third of all restrictions published in 2012. RegData can compare agency-specific regulatory statistics in one year to another year, as done here; it can also plot year-to-year growth for all years between 1997 and 2012. As the figure above shows, growth trends can be quite different from one regulator to another.</span></p> <p>Restriction counts are an example of one statistic available with <a href="">RegData 2.0</a>, which uses text analysis software to search for specific sets of keywords. This particular set of keywords—restrictions—is defined as words likely to create a legally binding obligation to take some action or prohibition from doing so. The specific strings included in this set are “shall,” “must,” “may not,” “prohibited,” and “required.”<span style="font-size: 11.818181991577148px;">&nbsp;</span></p> <p>Regulators are defined in RegData 2.0 according to the<a href=""> Office of Management and Budget’s MAX system</a> (OMB MAX), with the exception of the Environmental Protection Agency (EPA). The EPA (which is treated as one single regulator by OMB MAX) was divided into different agencies according to the names of the chapters of regulatory text the EPA publishes, such as “Air Programs,” “Water Programs,” and “Pesticide Programs.”</p> <p>RegData objectively creates a “big picture” window into regulation. It measures not only that overall regulation tends to grow over time, but also which agencies account for that growth. Researchers and analysts can use the data created by RegData to better understand the causes and effects of regulation from specific agencies and on specific industries.</p> Tue, 19 Aug 2014 08:55:33 -0400 2014 Trustees’ Reports: Long-Term Medicare Program Cost Projections <h5> Publication </h5> <p class="p1">The recently released <a href="">2014 Social Security and Medicare Trustees’ Reports</a>, which project rising long-term costs under a number of assumed scenarios, should prompt a serious examination of the trust funds’ financial status.</p> <p class="p2"><a href=""><img src="" width="585" height="424" /></a></p> <p class="p1">This chart series includes updated versions of previous Mercatus Center charts presenting the <a href="">long-term projections</a> for Medicare programs. The first chart compares total Medicare cost projections under a current law assumption with two alternative projections under more realistic baseline assumptions, measured as a percentage of the economy. The second, third, and fourth charts compare cost projections under these various assumptions for Medicare Part B, Medicare Hospital Insurance (HI), and Medicare Part D expenditures, respectively.</p> <p class="p1">The charts display the long-term projections for all Medicare costs using current law assumptions along with two supplemental projections—called “projected baseline” and “alternative to baseline”—that incorporate alternative assumptions. The “projected baseline” scenario assumes a continuation of the historical pattern of sustainable growth rate (SGR) overrides, that is, the formula that establishes physician fee schedule payments under Medicare Parts B and D. The “alternative to baseline” scenario additionally assumes that certain controversial elements of the 2010 Affordable Care Act (ACA) are either scaled back during the period from 2020 to 2034 or eliminated altogether.</p> <p class="p1">These labels reflect a key change in this year’s report. The projected baseline and alternative baseline projections were called “first alternative” and “full alternative” scenarios in previous reports. This change demonstrates that the Trustees recognize that the current law projections likely understate expected costs and are emphasizing the projected baseline projections as more realistic.&nbsp;</p> <p class="p1">As the first chart shows, Medicare cost projections vary considerably in the long run, depending on the assumptions. A difference of one percentage point of GDP between calculations can yield enormous divergences in realized costs. For example, if the assumptions of the alternative baseline prove correct, then Medicare expenditures in 2080 could be about 45 percent greater than projected under current law. The chart shows that current law projections predict Medicare costs will be 6.26 percent of GDP in 2080. Under the projected baseline, total costs will be 6.78 percent of GDP in 2080. In the alternative to the baseline, total Medicare costs climb to 8.09 percent of GDP by 2080. In other words, total projected Medicare costs are on track to rise faster than GDP. If lawmakers continue to override the physician payment formula and decline to cut physician reimbursement, total Medicare costs will be substantially higher than projected in the long run under current law.</p><p class="p1"><a href=""><img height="425" width="585" src="" /></a></p><p class="p1"><span style="font-size: 12px;">The second chart limits the same analysis to the Medicare Part B program. Under current law, Part B spending is projected to increase from 1.47 percent of GDP in 2013 to 1.56 percent by 2020 and 2.56 percent of GDP by 2080. For the projected baseline, Part B almost doubles as a share of GDP between 2020 and 2080, growing from 1.62 percent of GDP in 2020 to 3.09 percent of GDP by 2080. In alternative baseline scenario, Part B is expected to reach 3.16 percent of GDP by 2080.</span></p> <p class="p1"><a href=""><img height="424" width="585" src="" /></a></p><p class="p1">The third chart displays cost projections for Medicare Hospital Insurance (HI). Under current law, HI costs are projected to increase from 1.56 percent of GDP in 2013 to 2.38 percent in 2080. The projected baseline just barely differs from the current law projection, predicting HI costs equal to 2.37 percent of GDP in 2080. This is because the only difference between the current law and baseline projections is the SGR override, which only affect the programs that draw from the Supplementary Medicare Insurance (SMI) trust fund. Since HI does not draw from this fund, there is little difference between the current law and baseline projections. The alternative to the baseline projects HI costs to exceed 3.5 percent of GDP by 2080.<span style="font-size: 12px;">&nbsp;</span></p> <p class="p1">The Medicare Hospital Insurance trust fund is now expected to run out of assets in 2030—that’s four years later than projected last year. This is nothing to celebrate—it’s not clear that these projections will materialize because the Trustees report that “the fund is not adequately financed over the next 10 years.” The HI trust fund, like the Social Security trust fund, determines the spending authority of the programs. Without an adequate trust fund balance, payouts will be limited to what the program collects by itself (Medicare HI also gets some income from premiums and from payments by states), which will result in sharp curtailment of payments.</p> <p class="p6"><a href=""><img src="" width="585" height="398" /></a></p> <p class="p1">The last chart displays cost projections for Medicare Part D expenditures. Compared to other programs, there appears to be very little difference between the various scenarios for Part D expenditures. This can be explained by the legislatively mandated solvency inherent in the design of Part D. As Mercatus fellow and Trustee Charles Blahous <a href="">explains</a>, “Payments for physician services (Part B) as well as prescription drugs (Part D) are made from Medicare’s Supplementary Medical Insurance (SMI) trust fund ($317 billion spent in 2013). SMI is kept solvent by statutory design; only about one-quarter of its revenues are provided by beneficiary premiums, the other three-quarters provided from the government’s general fund in whatever amounts are necessary to finance benefits.”&nbsp;</p> <p class="p9">As we’ve seen before, even these grim numbers might be too optimistic because&nbsp;some of the expected revenue or cost savings&nbsp;in the current law may never materialize. In fact,&nbsp;a&nbsp;section in an appendix of the 2014&nbsp;Trustees’ Report,&nbsp;called “Statement of Actuarial Opinion,” makes that point very clearly. (p. 276)&nbsp;For instance, Paul&nbsp;Spitalnic, the acting&nbsp;chief actuary of the program,&nbsp;explains that “current law would require a physician fee reduction of an estimated 21 percent on January 1, 2015—an implausible expectation.”</p> <p class="p9">The report projects dwindling trust funds, greater enrollment, higher costs per beneficiary, and insufficient revenues to fund future payouts. These charts show that a slight change in economic assumptions in the present can yield dramatic effects in the long run that further undermine program solvency. These programs are in dire need of fundamental reform, and time is running out.</p> Mon, 18 Aug 2014 14:43:14 -0400 Cutting Taxes Is Patriotic <h5> Expert Commentary </h5> <p class="p1">Several states cut a wide variety of taxes this summer. Indiana and Rhode Island, for example, cut the conventional corporate tax. Idaho, meanwhile, took an unconventional route by cutting sales taxes on software purchased through “the cloud.” When revenues are on the rise, some states choose to lower taxes, while others prefer to spend the tax windfall. Both moves could be wrong.</p> <p class="p1">All states except for Vermont must balance their budgets, making state finances very pro-cyclical. In other words, tax revenues rise during good economic times and fall during hard times. The latter can often force policymakers to raise taxes when residents can least afford it.</p> <p class="p1">A wise policy would be to stash budget surpluses in a rainy day fund to help pay for government spending in tough times without raising taxes. Regrettably, policymakers often end up with their hands in the fiscal cookie jar and quickly spend the accumulated surpluses even in good times. Government spending must be low enough and taxes must be high enough to maintain a balanced budget, on average, over many decades.</p> <p class="p1"><a href="">Continue reading</a></p> Tue, 19 Aug 2014 12:55:33 -0400 Regulatory Measurement Can Lead to Actionable Knowledge <h5> Expert Commentary </h5> <p class="p1">Scientific progress requires measurement, especially when working with a complex system such as the economy or the human body. For example, our understanding of the relationship between cholesterol and human health <a href="">continues to evolve</a>, but it has only gotten to the point where we debate the merits of "good" cholesterol and "bad" cholesterol via a <a href="">century of investigation</a> and the development of measurement techniques. Similarly, although in a very different field, professional sports teams increasingly develop new, quantitative metrics of player performance in order to optimize team performance — as described by the book and movie "Moneyball."</p> <p class="p1">Good governance also can develop over time through careful measurement combined with scientific inquiry. To that end, I developed (along with my colleague, George Mason University economics professor Omar Al-Ubaydli) a new set of metrics of federal regulation called <a href="">RegData</a>.</p> <p class="p2">RegData offers novel metrics of an important input in our economy — federal regulation — and takes the first step in using a "Moneyball" approach to improving the regulatory system. This tool creates statistics based on the actual text in federal regulation, and these statistics can be <a href=";Productivity_v1.pdf">used</a> by <a href="">researchers</a> to create a better understanding of the causes and consequences of regulation. This week, a new version — RegData 2.0 — will be available for use, and it's no longer just for researchers. RegData 2.0 can provide insights on the regulatory climate for anyone with a more than casual interest in regulations and public policy.</p> <p class="p1">RegData 2.0 relies on custom-made text analysis software. With this software, federal regulatory text, as published annually in the Code of Federal Regulations (CFR), can be searched for different sets of key words. Moreover, the regulatory text can be divided up according to the regulator that created it, allowing the creation of regulator-specific quantifications of regulation. Two of RegData's regulator-specific measurements are word counts and restriction counts. Word counts are what you imagine — the total number of words contained in a regulator's text. Figure 1 below was created with data given <a href=";regulator%5b%5d=295">here</a>, and shows word count data for the Commodity Futures Trading Commission (CFTC) — the regulator in charge of futures and options markets. From 1997 to 2010, the CFTC's regulatory text grew from 302,087 to 355,842 words. Years 2011 and 2012, however, saw a precipitous growth in regulation from CFTC, with the word count reaching 480,544 in 2012. This is most likely the result of new regulations caused by the Dodd-Frank Act of 2010.</p> <p class="p1"><img src="" /></p> <p class="p1">RegData also permits the examination of restrictions. <a href=";regulator%5b%5d=295">Restrictions</a> are words that create binding legal obligations to engage in some activity or prohibition from doing so. Lawyers will recognize these restrictions — they are words like "shall," "must," and "may not." Just as regulators differ in terms of how much text they produce, some regulators' text may be more restrictive than others'. A RegData user can look at restriction data for entire departments, such as the Department of Transportation, or for smaller units within departments. RegData defines a regulator according to the <a href="">Office of Management and Budget (OMB) MAX budget system</a>, with the exception of the Environmental Protection Agency (EPA). The EPA (which is treated as one single regulator by OMB MAX) was divided into different agencies according to the names of the chapters of regulatory text EPA publishes, such as "Air Programs," "Water Programs," and "Pesticide Programs." Figure 2 shows the 10 regulators that published the most restrictions in 2012. These 10 regulators accounted for about 31 percent of all restrictions published in the CFR in 2012.</p> <p class="p1"><img src="" width="585" height="449" /></p> <p class="p1"><i><sup>Source: Accessed Aug. 18, 2014.<br /></sup></i><i style="font-family: inherit; font-weight: inherit;"><sup>Produced by Patrick McLaughlin and Rizqi Rachmat, Mercatus Center at George Mason University.</sup></i></p> <p class="p1">Perhaps the most innovative feature of RegData is its industry-specific measurements of regulation. Using search terms that are derived from industry descriptions given in the North American Industry Classification System, RegData can paint a picture of which industries are mentioned most often in regulatory text and by which regulator, as well as how that changes over time. For example, rail transportation is a major industry in the United States. RegData offers data on how often rail transportation-related search terms were found each year in the regulatory text of all federal regulators. Figure 3 offers a sample of just five of these regulators. Each of these series spans 1997 to 2012, with the exception of FMSCA — an agency that did not exist until the year 2000. It is not surprising to see the Federal Railroad Administration (FRA) mention railroads relatively often. But perhaps it is informative to learn that the Pipelines and Hazardous Materials Safety Administration (PHMSA) actually mentions them even more.<br /><br /></p> <p class="p1"><img src="" width="585" height="422" /></p> <p class="p1"><br />As with all exercises in measurement, RegData is not perfect. There are other ways that restrictions can be created, for example, than those indicated by words like "shall" and "must." We also don't know the object of the restriction, or its severity. Similarly, there are sections of regulatory text that apply to specific industries without using any of RegData's industry-specific search terms.</p> <p class="p1">Nonetheless, some of the largest gains in research come from the creation of new data and measurement techniques. Nate Silver <a href="">compares</a> new data's first pass to "the way a vacuum's first sweep of the living-room floor picks up a lot more dust and dirt than the second and third attempts." The questions are: How much signal is RegData picking up, and how much noise? The answer will be told as researchers use the database to delve into questions such as whether and how regulation affects labor productivity, whether lobbying affects regulatory production, and how long-term regulatory trends might play into economic growth patterns. In turn, policymakers can learn from this research and hopefully improve future choices according to what we learn.</p> Mon, 18 Aug 2014 21:22:26 -0400 End Toxic Alliance with Big Business <h5> Expert Commentary </h5> <p class="p1">Great leaders make the right decisions, even when they are inconvenient. Serious policy analysts understand that not reauthorizing the New Deal-era corporate welfare program known as the Export-Import Bank is good economics. Leaders in Congress should let the government bank’s charter expire.</p> <p class="p1">It is also good politics. Ohioans and Americans in general are tired of the toxic alliance between big business and big government. Whether through the Occupy Wall Street or the Tea Party movements, more people are expressing opposition to noxious cronyism, of which the Ex-Im Bank is the epitome. Americans simply will not stand for it anymore.</p> <p class="p1">The Ex-Im Bank uses its special borrowing privileges with the Treasury Department to finance foreign purchases from a chosen few U.S. exporters. It provides taxpayer-backed loans, insurance, and loan guarantees for foreign companies, like Air China, to buy products from select U.S. exporters, like Boeing. In other words, it picks winners and losers by manipulating credit markets with below-market lending.</p> <p class="p1">The program's cheerleaders, like beneficiary lobbyists and the Chamber of Commerce, claim it is critical to sustain exports. Economists disagree. Export-subsidy schemes like Ex-Im Bank have a negligible effect on national trade.</p> <p class="p1">The data are clear. Ex-Im Bank backs less than 2 percent of total U.S. exports and less than 1 percent of small business exports each year. More than 60 percent of its activities benefit a handful of politically connected firms.</p> <p class="p1">In Ohio, Ex-Im Bank is even more insignificant. It backed only 0.73 percent of all exports and less than 0.4 percent of small business exports from 2007 to 2014. Don’t buy the spin: Most of Ex-Im Banks’s benefits in Ohio only benefit General Electric subsidiaries at the expense of everyone else.</p> <p class="p1">The Ex-Im Bank is a fat treat for General Electric in Ohio, but it hurts average citizens in the Buckeye State.</p> <p class="p1">Consumers in Ohio wind up paying higher final prices for Ex-Im Bank’s subsidized goods. Workers in unsubsidized Ohio companies may find their hours reduced, raises dampened, or their jobs threatened because of Ex-Im Bank. Small business owners in Ohio can attract less capital because Ex-Im Bank gave their competitors an unfair government boost. All taxpayers bear the outlandish $140 billion in risk that rightfully belongs to subsidized firms.</p> <p class="p1">There are no grounds to claim that closing Ex-Im Bank would be catastrophic for exports or small businesses in Ohio or nationwide. Rather, it would end political privilege, encourage firms to compete on their merits, and ensure that corporations – not taxpayers – bear their own market risks.</p> <p class="p1">By opposing the Ex-Im Bank’s reauthorization, leaders in Congress would firmly express their loyalty to average Americans and businesses and lead the country toward a fairer, less corporatist future.</p> Wed, 20 Aug 2014 10:53:50 -0400 Unsustainable Platitudes <h5> Expert Commentary </h5> <p class="p1">Platitudes are a poor basis for policy. The reason is that, no matter how melodious they sound, platitudes are practically meaningless. People who utter platitudes often seem to be saying something meaningful when in fact they're merely stating the obvious.</p> <p class="p2">A good way to test if someone is speaking in platitudes is to ask yourself if you can imagine a normal human adult believing the opposite.</p> <p class="p2">Suppose someone informs you that he favors policies that promote human happiness. Can you imagine, say, your neighbor responding, “I disagree. I favor policies that promote human misery”? Probably not.</p> <p class="p2">If you cannot imagine any normal person disagreeing with some proclamation, then that proclamation is a platitude. It tells you nothing of substance.</p> <p class="p2">Consider today's fashionable calls for “sustainability.” The academy, media, cyberspace are full of people proclaiming support for policies that promote economic and environmental “sustainability.” So whenever you hear such proclamations, ask if you can envision a sane adult sincerely disagreeing.</p> <p class="p2">You'll discover, of course, that you can't imagine anyone seriously supporting “unsustainability.” Therefore, you should conclude that mere expressions of support for “sustainability” are empty. And they can be downright harmful if they mislead people into supporting counterproductive government policies.</p> <p class="p2">Substantive issues involving sustainability invoke questions that have non-obvious answers. For example: At what rate must the supply of a resource fall before we conclude that continued use of that resource is unsustainable? Fifty percent annually? Ten percent? One percent?</p> <p class="p2">Because the correct answer to this question depends (among other factors) on how much humans care about the future — and because there's no good reason why we humans should care about the world as it might be many years from now as much as we care about the world as it might be a few days from now — policies and activities that will eventually result in the depletion of some resource are not necessarily unsustainable in any sense that really matters to humans today. If the appropriate human time horizon is, say, 500 years, then activities that will cause petroleum supplies to be exhausted in 550 years are “sustainable” within our relevant time horizon.</p> <p class="p2">Economically sophisticated readers will respond, “Not so fast! Even if we won't completely run out of petroleum until well past the time that is relevant for human beings alive today, falling supplies of petroleum will start to raise the price of petroleum long before 500 years from now.” This claim is true — but it's a reason to worry less, not more, about “sustainability.”</p> <p class="p2">A rising price of petroleum serves as a spur to sustainable practices. First, the rising price prompts consumers voluntarily to cut back on the use of petroleum. Second, this rising price creates incentives for entrepreneurs to find or create petroleum substitutes. And the steeper the price rise, the stronger are these incentives.</p> <p class="p2">Nearly every resource commonly used today likely has potential substitutes — recall that newly discovered petroleum in the 19th century quickly substituted for wood, coal and whale oil. So to focus only on “sustainability” of resources commonly used today is to lose sight of the fact that these resources likely have substitutes that will become available if supplies of today's resources fall below critical levels.</p> Thu, 14 Aug 2014 14:35:12 -0400 OIRA Regulatory Review: Responding to Agency Avoidance <h5> Events </h5> <p>One of the President’s major regulatory oversight offices is the Office of Information and Regulatory Affairs. Agencies can take a “cooperate with OIRA” approach or an “avoid OIRA” approach when they pursue new regulatory initiatives. Understanding agency avoidance tactics is an important step in deciding whether and how to shift agency incentives away from avoidance and toward cooperation.</p> <p>This Regulation University program by Professors of Law Nina Mendelson of University of Michigan Law School and Jonathan Wiener of Duke University will:</p> <ul><li>Give an overview of the system of presidential regulatory oversight through OIRA review;</li><li>Review the broad array of agency avoidance tactics and corresponding response options available to OIRA, the President, Congress, and the courts, and</li><li>Suggest ways to identify avoidance tactics that require closer scrutiny.</li></ul><div><p style="font-style: normal; font-size: 12px; font-family: Helvetica, Arial, sans-serif;">Space is limited. Please register online for this event.</p><p style="font-style: normal; font-size: 12px; font-family: Helvetica, Arial, sans-serif;">This event is free and open to all congressional and federal agency staff. This event is not open to the general public. Food will be provided. Due to space constraints, please no interns.&nbsp;<i>Questions? Please contact Caitlyn Van Orden, Event Coordinator, at&nbsp;</i><a href="" target="_blank" style="font-size: 12px; color: #666699;"></a>&nbsp;<i>or (703) 993-4925.</i></p></div> Thu, 14 Aug 2014 14:27:53 -0400 'Living Wills' for Banks are Pointless Without Market Discipline <h5> Expert Commentary </h5> <p class="p1">Last week's rejection of 11 large financial institutions' living wills was a dramatic gesture by the Federal Deposit Insurance Corporation and the Federal Reserve. The living wills are supposed to be a roadmap for the orderly resolution of these companies, should they run into trouble. Living wills make good sense, but until markets are forced to live by them, there is little incentive to get them right.</p> <p class="p1">The Fed and FDIC rejected the living wills, which were filed in October 2013, for falling short in a number of areas. Regulators took <a href=""><b>issue</b></a>, among other things, with the banks' "assumptions about the likely behavior of customers, counterparties, investors, central clearing facilities, and regulators" and their "failure to make, or even to identify, the kinds of changes in firm structure and practices that would be necessary to enhance the prospects for orderly resolution."</p> <p class="p1">The banking agencies sent the affected firms back to the drawing board and threatened to take matters into their own regulatory hands if the plans do not pass muster the next time around. Dodd-Frank empowers regulators to impose growth, leverage, capital, activity, and other restrictions on companies that do not produce credible living wills. If, after such a regulatory reprimand, a firm still fails to produce a credible living will, the regulators can force it to sell assets.</p> <p class="p1">The FDIC should not be surprised that the firms employed unduly rosy assumptions. After all, the FDIC's own <a href=""><b>assessment</b></a> of how it would have resolved Lehman under its new Dodd-Frank orderly liquidation authority was grounded in similar wishful thinking. The FDIC assumed, for example, that in an FDIC-run resolution Barclays would have acquired Lehman's assets and some of its liabilities without inciting concern from regulators in the United Kingdom and with only "minimal ... disruptions to the market." And Lehman's general unsecured creditors would have received 97 cents on the dollar because of how well the FDIC would run the bidding process.</p> <p class="p1">Living wills are a good idea. They help firms think through their organizational structures and points of vulnerability. A well-crafted living will provides useful insight to a firm's managers, shareholders, and creditors. As FDIC Director Thomas Hoenig explained in a statement last week, a credible living will is a powerful <a href=""><b>rejoinder</b></a> to the false notion that bankruptcy is not a viable option for large financial firms.</p> <p class="p1">Mr. Hoenig also argued that "a greater part of these plans should be made available to the market, providing it an opportunity to judge whether progress is being made toward having credible plans." Letting markets judge the credibility of living wills would not only harness the market's broad expertise, but also would send a message that regulators are serious about allowing firms to fail without government support. Speak now, bank creditors and shareholders, or forever hold your peace.</p> <p class="p1">The existence of Dodd-Frank's orderly liquidation authority undercuts that tough message and diminishes the urgency of crafting a credible plan. When push comes to shove, regulators accustomed to micromanaging financial firms likely will want to micromanage resolution. Title II of Dodd-Frank gives them the power to do so.</p> <p class="p1">When a friend of mine was set to deliver twins, she presented her birth plan-complete with musical choices and pain-killer preferences-to the doctor. "Birth plan!" he proclaimed with disdain as he shredded the carefully crafted plan. "We'll do things according to <i>my</i> plan." Good plans will only emerge if markets and regulators believe that resolution plans would actually be used in a time of crisis.</p> <p class="p1">As the big banks consider how to redo their living wills, policymakers should take parallel efforts to revamp the bankruptcy code and eliminate regulators' ability to skirt bankruptcy in a time of crisis.</p> Thu, 14 Aug 2014 14:27:16 -0400 Comments to the New York Department of Financial Services on the Proposed Virtual Currency Regulatory Framework <h5> Publication </h5> <p class="p1">On July 17, the New York Department of Financial Services (DFS) released its proposed BitLicense regulatory framework for virtual currency firms. We congratulate Superintendent Benjamin M. Lawsky and the entire department for the forward thinking they have demonstrated by making New York the first state to carefully consider the need to accommodate virtual currency firms in its regulatory system. This is a historic occasion in the evolution of money, and it may well be remembered for centuries to come. On July 23, the proposed rules were published in the New York State Register, setting off a 45-day period for public comment.</p> <p class="p2">The Technology Policy Program (TPP) of the Mercatus Center at George Mason University is dedicated to advancing knowledge of the impact of regulation on society. As part of its mission, TPP conducts careful and independent analyses employing contemporary economic scholarship to assess rulemaking proposals from the perspective of the public interest. Therefore, this comment on the DFS’s proposed regulatory framework does not represent the views of any particular affected party or special interest group, but is designed to assist the department as it continues to lead the world in supporting the responsible adoption of this important new technology.<span style="font-size: 12px;">&nbsp;</span></p> <p class="p5">INTRODUCTION</p> <p class="p6">As the Treasury Department’s Financial Crimes Enforcement Network has found, certain virtual currency businesses are money service businesses.<sup>1</sup> Typically such money service businesses engage in money transmission and as a result must acquire a money transmitter license in each state in which they do business. State financial regulators around the country have been working to apply their existing money transmission licensing statutes and regulations to new virtual currency businesses.<sup>2</sup> In many cases, existing rules do not take into account the unique properties of recent innovations like cryptocurrencies. With this in mind, the department sought to develop rules that were “tailored specifically to the unique characteristics of virtual currencies.”<sup>3</sup></p> <p class="p7">As Superintendent Lawsky has stated, the aim of this project is “to strike an appropriate balance that helps protect consumers and root out illegal activity—without stifling beneficial innovation.”<sup>4</sup> This is the right goal and one we applaud. It is a very difficult balance to strike, however, and we believe that the BitLicense regulatory framework as presently proposed misses the mark, for two main reasons.</p> <p class="p8">First, while doing much to take into account the unique properties of virtual currencies and virtual currency businesses, the proposal nevertheless fails to accommodate some of the most important attributes of software- based innovation. To the extent that one of its chief goals is to preserve and encourage innovation, the BitLicense proposal should be modified with these considerations in mind—and this can be done without sacrificing the protections that the rules will afford consumers. Taking into account the “unique characteristics” of virtual currencies is the key consideration that will foster innovation, and it is the reason why the department is creating a new BitLicense. The department should, therefore, make sure that it is indeed taking these features into account.</p> <p class="p9">Second, the purpose of a BitLicense should be to take the place of a money transmission license for virtual currency businesses. That is to say, but for the creation of a new BitLicense, virtual currency businesses would be subject to money transmission licensing. Therefore, to the extent that the goal behind the new BitLicense is to protect consumers while fostering innovation, the obligations faced by BitLicensees should not be any more burdensome than those faced by traditional money transmitters. Otherwise, the new regulatory framework will have the opposite effect of the one intended. If it is more costly and difficult to acquire a BitLicense than a money transmission license, we should expect less innovation. Additional regulatory burdens would put BitLicensees at a relative disadvantage, and in several instances the proposed regulatory framework is more onerous than traditional money transmitter licensing.</p> <p class="p9">As Superintendent Lawsky has rightly stated, New York should avoid virtual currency rules that are “so burdensome or unwieldy that the technology can’t develop.”<sup>5</sup> The proposed BitLicense framework, while close, does not strike the right balance between consumer protection and innovation. For example, its approach to consumer protection through disclosures rather than prescriptive precautionary regulation is the right approach for giving entrepreneurs flxibility to innovate while ensuring that consumers have the information they need to make informed choices. Yet there is much that can be improved in the framework to reach the goal of balancing innovation and protection. Below we outline where the framework is missing the mark and recommend some modifications that will take into account the unique properties of virtual currencies and virtual currency businesses.</p> <p class="p10"><a href="">Continue reading</a></p> Thu, 14 Aug 2014 15:32:10 -0400 End the Ex-Im Bank? <h5> Expert Commentary </h5> <p class="p1">Margaret Harding’s July 23 Point of View, “ <a href="">A good-for-business bank</a>,” omits several important facts. Not only does the Export-Import Bank subsidize a negligible number of Tar Heel firms and workers, it does so at the expense of the vast majority of North Carolinians.</p> <p class="p1">Here are the facts: From 2007 to 2014, North Carolina exported $115.6 billion in goods, $2.5 billion of which were supported by Ex-Im subsidies or less than 2.3 percent. Only 0.89 percent of North Carolina exports were managed by small businesses receiving Ex-Im assistance. Furthermore, Ex-Im does not earn profits for taxpayers.</p> <p class="p1">The nonpartisan Congressional Budget Office recently projected that Ex-Im will lose $2 billion over the next decade. Economists have long known that export credit subsidies boost profits for subsidized firms at the expense of everyone else. Unsubsidized firms, workers and consumers are placed at a competitive disadvantage by their own government.</p> <p class="p1">It is the Ex-Im itself that “hurts the U.S. economy and jeopardizes the jobs of hundreds of thousands of Americans.” Ninety-eight percent of North Carolina businesses should not matter less than the other 2 percent because they lack friends in Washington. It is high time to end Ex-Im corporatism.</p> Wed, 13 Aug 2014 16:18:34 -0400 Small Pennsylvania Firms Don't Need Ex-Im Bank <h5> Expert Commentary </h5> <p class="p1">Letting the New Deal-era corporate welfare program known as the Export-Import Bank of the United States expire is good economics for Pennsylvanians. There are plenty of bad arguments to reauthorize the Ex-Im Bank's charter, but none is more misleading than the claim that this government bank serves small businesses.</p> <p class="p1">First, more than 80 percent of the bank's portfolio primarily benefits huge corporations. This leaves less than 20 percent of Ex-Im Bank's portfolio for small firms - which is in violation of its own charter.</p> <p class="p1">But even this is misleading, since the Ex-Im Bank's definition of a "small business" isn't exactly "small." Most government bodies set the threshold at firms with fewer than 500 employees. However, Ex-Im Bank will consider "small businesses" that are three times that large and can earn up to $21 million in annual revenues.</p> <p class="p1">For example, the Ex-Im Bank considers Pennsylvania company CyOptics Inc. a small business. While public records suggest the firm "employs a staff of approximately 100 to 249," it reportedly earns annual revenue of $50 million to $100 million. CyOptics should be proud of its success, but it is not "small" to most Americans and could be just as prosperous without the Ex-Im Bank.</p> <p class="p1">This kind of disingenuous labeling is typical of the Ex-Im Bank. Heritage Foundation economist Diane Katz documents many instances of the Ex-Im Bank touting such large corporations as great success stories of the bank's small-business outreach.</p> <p class="p1">Even if we were to accept the bank's questionable definition of small business, the data show that the Ex-Im Bank benefits a minuscule percent of small businesses and their employees in Pennsylvania and the rest of the country.</p> <p class="p1">Data from the Census Bureau's Statistics of U.S. Small Businesses and from the Ex-Im Bank's records show that only 0.3 percent of all small-business jobs received assistance from the bank in 2007, which is the most recent year for which the full Census dataset is available.</p> <p class="p1">If we make the unrealistic assumption that each small-business transaction through the Ex-Im Bank went to a unique small business, then only 0.04 percent of all small-business establishments were supported by Ex-Im Bank that year.</p> <p class="p1">Let those numbers sink in: More than 99.6 percent of American small-business jobs exist without any Ex-Im Bank assistance at all.</p> <p class="p1">What's more, when Ex-Im Bank subsidizes competitors, it comes at the expense of the vast swath of other U.S. small businesses and their employees. Indeed, when a company gets a cheap loan from the bank, it enjoys lower costs and a clear edge over the competition. Unsubsidized firms, on the other hand, may attract less capital as a result, incur higher costs, cut back on hiring, and grow less than they would have on a level playing field.</p> <p class="p1">These subsidies might be a good deal for those who get them, but most Pennsylvanians will find it unfair that the profits of the winners of this arbitrary government selection come at the expense of the hundreds of thousands of unsubsidized firms, employees, and consumers.</p> <p class="p1">Subsidized businesses should not matter more than unsubsidized firms in the Keystone State merely because they happen to have friends in Washington. We must end the Export-Import Bank to help the 99 percent.</p> Wed, 13 Aug 2014 11:20:43 -0400 Reforming Regulatory Analysis, Review, and Oversight: A Guide for the Perplexed <h5> Publication </h5> <p class="p1">Since President Reagan’s Executive Order 12291, all presidents have issued executive orders (EOs) requiring agencies to conduct comprehensive regulatory impact analyses (RIAs) for significant regulations to ensure that regulatory decisions solve social problems in a cost-beneficial manner. President Clinton’s Executive Order 12866, as amended by President Obama’s Executive Order 13563, outlines the principal requirements that currently apply. However, experience demonstrates that neither the executive orders nor the Office of Management and Budget (OMB) guidance implementing those orders have been sufficient to ensure that regulation accomplishes important public goals without imposing unnecessary costs on the economy. Even when agencies conduct detailed RIAs, there are often significant gaps in the analyses.</p> <p class="p2">Both the president and Congress have grappled in recent years with initiatives intended to reform the analytical requirements and oversight mechanisms that federal agencies must comply with when they propose and finalize regulations. The incoming Obama administration sparked significant speculation when it appointed Cass Sunstein as the administrator of the Office of Information and Regulatory Affairs (OIRA), which reviews executive branch agencies’ regulations and RIAs. In 2002, Sunstein coauthored a seminal article with Robert Hahn proposing a new executive order that would substantially expand RIA requirements and provide for judicial review of RIAs. The new administration sought public comment on revisions to Executive Order 12866. But instead of sweeping reform, the Obama administration produced marginal changes—reaffirming Executive Order 12866, requiring executive branch agencies to undertake retrospective reviews of existing regulations, and requesting that independent agencies abide by the principles of Executive Order 12866 and undertake their own retrospective review initiatives.</p> <p class="p2">Congress has not sat idly by in the debate over reforming regulatory impact analysis requirements. In 2011, the House of Representatives passed the Regulatory Accountability Act—the first major overhaul of the Administrative Procedure Act of 1946 (APA). Among its many provisions, the Regulatory Accountability Act would write many of the analytical requirements in Executive Order 12866 into law; require regulatory agencies to conduct RIAs and seek comment on them in an advance notice of proposed rulemaking (NPRM) before proposing regulations with economic impacts exceeding $100 million annually; require agencies to hold formal rulemaking hearings for regulations with costs or other economic impacts of $1 billion or more annually; and permit judicial review of agencies’ RIAs. This legislation passed the House again in 2013 but has not been acted upon in the Senate.</p> <p class="p2">The number of regulations and their economic impact continue to grow. Yet the quality and use of economic analysis to inform regulatory decisions falls far short of the standards enunciated in executive orders governing regulatory analysis and review. Consider that in any given year, fewer than one-third of all major final rules are accompanied by analysis of both monetized benefits and monetized costs. This is a considerable failure, given that economically significant rules represent only about one percent of all rules. The need for more and better analysis, review, and oversight is even more urgent, given the new wave of regulations implementing the Dodd-Frank Act and the Affordable Care Act, both passed in 2010.</p> <p class="p2">As we detail below, regulatory scholars have identified numerous additional provisions that could strengthen regulatory analysis, review, and oversight. These changes could be implemented either as amendments to the current executive order or, in some cases, as legislation. These two solutions, of course, are not equivalent. Executive orders are instructions from the president to the executive branch agencies about how he wants them to carry out the enforcement of laws, including promulgating regulations. Only presidents can enforce executive orders, and the problems that presidents have controlling the executive branch have been well documented. Alternatively, unless specifically exempted, legislation can be enforced by the judicial branch where anyone with standing can bring suit to force agency compliance.&nbsp;</p><p class="p2"><a href="">Continue reading</a></p> Sat, 16 Aug 2014 10:46:18 -0400 A Guide to the 2014 Medicare Trustees Report <h5> Expert Commentary </h5> <p class="p1">My <a href="">last piece</a> summarized the trustees' 2014 Social Security report, which can be found <a href="">here</a>. This piece presents highlights of this year's <a href="">Medicare report</a>. A summary of both reports can be found <a href="">here</a>, and video of our press conference <a href="">here</a>.</p> <p class="p1"><b>Medicare Has Different Components Financed in Different Ways</b></p> <p class="p1">Each year there is enormous (I would say excessive) press interest in the projected date of depletion of Medicare's Hospital Insurance (HI) trust fund. This fund represents but one part of Medicare, and less than half of program spending at that ($266 billion in 2013). Payments for physician services (Part B) as well as prescription drugs (Part D) are made from Medicare's Supplementary Medical Insurance (SMI) trust fund ($317 billion spent in 2013). SMI is kept solvent by statutory design; only about one-quarter of its revenues are provided by beneficiary premiums, the other three-quarters provided from the government's general fund in whatever amounts are necessary to finance benefits. Thus for the majority of Medicare, solvency is not a meaningful concept. Medicare's financial strains are not principally manifested in the threat of trust fund depletion but in rising pressure on the federal budget and on premium-paying beneficiaries.</p> <p class="p1">There are other reasons why excessive attention to the projected HI trust fund depletion date (2030 in this report) is inadvisable. One is that the date is extremely sensitive to slight changes in the assumed rate of Medicare spending growth. This year we assumed a slower rate of future cost growth and so the date moved out from 2026 to 2030. In the 2011 report it went five years the other way, from 2029 to 2024. This variability exists in large part because the HI fund is not sitting on an enormous buildup of assets in the manner of the Social Security trust funds; at the start of this year the HI fund's assets were less (76 percent) than one year's costs. This percentage is down from 83 percent at the start of 2013. With such an insignificant trust fund balance it does not take much of a nudge in either direction to move the depletion date by several years. For example, if temporary sequestration under the Budget Control Act were overridden, the date would move closer again from 2030 to 2028.</p> <p class="p1"><b>Medicare is in Better or Worse Shape than Social Security Depending on One's Perspective&nbsp;</b></p> <p class="p1">Viewed from a narrow trust fund perspective, Social Security is in worse shape than Medicare; it faces the larger actuarial imbalance as well as the earliest threat of trust fund depletion (its DI fund, in 2016). Looked at from a broader budget perspective, Medicare poses the greater challenge. Its costs are rising faster than Social Security's and will put greater pressure on the overall federal budget in the years ahead. Total Medicare costs are 3.4 percent of GDP today but are projected to rise rapidly to 5.4 percent of GDP by 2035, and 6.9 percent by 2088.&nbsp;</p> <p class="p2"><i>Projected Social Security (OASI + DI) and Medicare (HI + SMI) Costs as a Percentage of GDP<br /><img src="" /></i><span style="font-size: 12px;">Together, $272 billion will flow from the federal government's general fund to Medicare's HI and SMI trust funds in 2014. Medicare's rising costs will create still greater budgetary pressure in the upcoming decades.</span></p> <p class="p2"><i>Medicare Cost and Non-Interest Income by Source as a Percentage of GDP<br /><img src="" /></i><b style="font-family: inherit; font-style: inherit;">As with Social Security, Demographics are the Greatest Challenge Facing Medicare</b></p> <p class="p1">Medicare's costs will rise most rapidly through the mid-2030s as the baby boomers join the beneficiary rolls. From the report: "While every beneficiary in 2013 had about 3.2 workers to pay for his or her HI benefit, in 2030 under the intermediate demographic assumptions there would be only about 2.3 workers for each beneficiary." After the boomers finish swelling the rolls, total spending growth tails off a bit, though still growing faster than GDP from the 2030s onward because of rising benefit costs per capita.</p> <p class="p1">Leading up to the passage of the Affordable Care Act (ACA) and afterward, our public discussion suffered from inadequate acknowledgment that for several decades to come Medicare's cost growth is driven more by demographics than by healthcare cost inflation. It was too tempting for <a href="">advocates</a> to suggest that our fiscal course could be corrected by painlessly making healthcare delivery more efficient through healthcare reform, rather than to confront the harder--yet more important--decisions as to how many people should receive subsidized health benefits, and for how much of their lives. Today there continues to be <a href="">disproportionate emphasis</a> on healthcare cost inflation when <a href="">demographics</a> have long been known to be the bigger factor well into the future.</p> <p class="p4"><b>This Year the Trustees Began to Emphasize a New Projected Baseline</b></p> <p class="p1">The trustees' reports have long emphasized a scenario that differs in one critical respect from actual law. Under law, benefit payments would be curtailed at the point that Medicare's HI trust fund is depleted. Nevertheless the preponderance of the report has always shown the cost of paying full scheduled benefits. This is done because otherwise the report would assume that "imbalances between payments and revenues would be automatically eliminated, and the report would not serve its essential purpose, which is to inform policy makers and the public about the size of any trust fund deficits that would need to be resolved to avert program insolvency."</p> <p class="p1">This year for the first time our report emphasizes a scenario that differs from current law in another important respect, namely that a 21 percent reduction in Medicare physician payments now scheduled for April 2015 (under the SGR formula) will be overridden in legislation. This projection does not represent a policy recommendation by the trustees, nor a political prediction, still less a recommendation that such a cost-increasing override need not be offset with other savings. Two reasons for this change stand out.</p> <p class="p1">One is that for years the trustees have warned that due to the historical pattern of overriding SGR payment reductions, actual costs are likely to be higher than under current schedules. This year, instead of emphasizing a projection likely to understate future costs, the trustees decided to emphasize a scenario that did not have this problem. The other reason for the change was to achieve greater consistency throughout the report. If we really expected the 21 percent physician payment reduction to occur, then we would also expect to see sudden access problems, corresponding reductions in the volume of healthcare services, lower Part B premiums, and a lower contingency reserve required for the SMI trust fund. Previous trustees' reports had projected none of these things. Implicitly, most of the report had always assumed continued SGR overrides; now our main cost projections are more consistent with that assumption.</p> <p class="p1"><b>Slower Health Expenditure Growth Is Not Eliminating the Problem</b></p> <p class="p1">This year the trustees somewhat lowered our healthcare cost growth projections in response to updated data, lowering our estimate of the 75-year imbalance in HI from 1.11 percent of taxable payroll to 0.87 percent. Per the message I co-authored with my fellow public trustee Robert Reischauer, "questions arose as to whether a recent slowdown in national health expenditure growth may indicate less urgency in legislating Medicare financing corrections. Unfortunately, this is not the case. The Trustees' projections have long assumed that over the long term NHE growth will slow relative to historical trends... even with the assumption of decelerating spending growth Medicare's financing shortfall, like Social Security's, remains a reality warranting legislative corrections."</p> <p class="p1"><b>No Funding Warning This Year</b></p> <p class="p1">By law the trustees are required to determine whether projected general revenue funding will exceed 45 percent of total Medicare outlays within the next 7 fiscal years. "Two consecutive such determinations trigger a <a href="">Medicare funding warning</a>." This test was established to "call attention to Medicare's impact on the Federal budget." In large part because of the recent Medicare spending slowdown, there is no funding warning in this year's report.</p> <p class="p1">In summary, the Medicare report continues to show that program finances are on an unsustainable long-term trajectory largely due to demographic change, placing rising pressure on the federal budget and requiring legislative corrections, despite favorable adjustments to recent and projected rates of Medicare spending growth.</p> Tue, 12 Aug 2014 14:02:11 -0400 Fixing the Garden State's Pension Problem <h5> Expert Commentary </h5> <p class="p1">Gov. Chris Christie is on tour this summer. The Republican is telling New Jersey residents, there’s “<a href="">no pain, no gain</a>” involved in fixing the state’s pension problems. And he’s announced that a special commission will be formed to study the issue.</p> <p class="p1">The governor’s right. Pension costs are consuming the budget. This year’s required contribution to fund the system is $4 billion and slated to rise to $4.8 billion by 2018. According to JP Morgan, debt service and retirement costs represent more than&nbsp;<a href="">35 percent of the Garden State’s revenues.</a></p> <p class="p1">But New Jersey’s pension woes aren’t news. For several years economists have warned of large liabilities facing many U.S. pension plans. The recession cast light on years of confused accounting, skipped payments and risk-taking in investment. To be sure, not every state is in the same bucket. With continued policy changes and better accounting, some states will be able to navigate out of the storm. Unfortunately, New Jersey isn’t among them.</p><p class="p1"><a href="">Continue reading</a></p> Tue, 12 Aug 2014 19:41:52 -0400 Social Security Crisis Closer than You Think <h5> Expert Commentary </h5> <p class="p1">The latest Social Security Trustees’ report shows the projected dates of insolvency for the program’s trust funds remain largely unchanged. Regrettably, some misinterpret this as an indication that Social Security doesn’t require immediate reform. Make no mistake: There is a Social Security crisis.</p> <p class="p1">Misunderstanding the critical state of the program’s financial health will lead to grave consequences for all of the program’s beneficiaries — both current and future.</p> <p class="p2">The 2014 report projects depletion of the combined Old Age, Survivors, and Disability Insurance trust funds in 2033. Social Security has no borrowing authority, and after the trust funds are exhausted there is only enough payroll tax revenue to cover a projected 77 percent of benefits; meaning future benefit payments must be reduced by about 23 percent. But the resulting cut in benefits will actually be much worse for retirees, workers and the economy if we don’t act now to reform Social Security.</p> <p class="p1">In 2013, total benefit costs offset by taxes on those benefits, plus administrative expenses, came to $832 billion. Most, but not all, of this cost was covered by payroll taxes ($726 billion), with the balance substantially covered by interest ($103 billion) on money Congress “borrowed” from the trust funds — which means Social Security is currently adding to the deficit.</p> <p class="p1">When the trust funds are depleted, the upcoming year’s benefits will be suddenly and immediately reduced by nearly $200 billion (in 2013 dollars), and not just for that year alone. The 23 percent haircut will persist indefinitely without legislative action. Gross Domestic Product includes government outlays, including spending on entitlement programs. Hence, less social security spending by definition results in a smaller GDP. Additionally, a sudden and large reduction of social security benefits would also result in less private consumption, since beneficiaries will have less money to spend, and this too would presumably result in an additional corresponding negative effect on GDP.</p> <p class="p1">If the economy shrinks, relative to where it was otherwise heading, the one-quarter reduction in Social Security benefits will have a reverse dynamic effect on the economy; as GDP falls, employment falls, income and taxable wages fall, and even less payroll tax revenue will come into the Social Security program, resulting in even further reductions to benefits beyond the 23 percent haircut that will occur when the trust funds are depleted in 2033.</p> <p class="p1">And don’t mistakenly believe we can just raise payroll taxes to cover any shortfall without also causing drastically harmful effects on the economy. If we raised the payroll tax rate today, it would have to rise from 12.4 percent to about 15.2 percent — that’s a nominal 23 percent increase in the payroll tax rate. If we wait until 2033, the rate would have to increase to approximately 16.5 percent; over 4 percentage points higher than the payroll tax rate is today and a nominal 33 percent increase.</p> <p class="p1">But wait, it’s actually much worse than that. Because Social Security benefits decline at a much slower rate than GDP and payroll taxes, the benefit formulas result in benefit level changes that considerably lag behind other changes in the economy, especially during periods of decline. Further, disability applications jump dramatically during economic downturns (increasing about 25 percent during the Great Recession), and disability payment increases then quickly follow. This puts even more financial pressure on Social Security. Finally, fertility and immigration rates tend to decline during times of economic stress — which, over the longer term, reduces revenue coming into the program and adversely affects Social Security financing.</p> <p class="p1">What this all means is that the Social Security crisis that appears to be coming in 2033 is actually here now.</p> <p class="p1">The Social Security Trustees recommend that “lawmakers address the projected trust fund shortfalls in a timely way in order to phase in necessary changes gradually and give workers and beneficiaries time to adjust to them.” While this phrasing reflects the traditionally reserved tone of the Trustees, we simply cannot get around the facts the trustees report lays out: the response to the Social Security crisis cannot wait until 2033. The crisis is here now, and is a tsunami that will drown us all and harm both retirees and workers. If we put off immediate, meaningful reform and passively wait for the trust funds to dry up, the ensuing reduction in Social Security benefits may well bring with it a vicious cycle from which neither Social Security nor the general economy will be able to escape.</p> Tue, 12 Aug 2014 22:07:30 -0400