Mercatus Site Feed en PAs Key to Better Healthcare in Kentucky <h5> Expert Commentary </h5> <p class="p1"><span class="s1">The commonwealth&nbsp;of Kentucky is famous for many great things: fried chicken, a major horse race&nbsp;and baseball equipment,&nbsp;to name a few. Unfortunately for the citizens of the Bluegrass State, it is also&nbsp;the only state that does not allow physician assistants to prescribe controlled substances.</span></p> <p class="p1"><span class="s1">According to the U.S. Census, Kentucky has a larger share of its population in rural areas than most other states. More than 40 percent of its&nbsp;population resides in a rural area&nbsp;–&nbsp;and just seven states have larger rural populations. According to <a href=""><span class="s2">data collected by Syracuse University</span></a>, Kentucky has two counties (Carlisle and Owsley) with zero physicians. Residents of these counties may have to travel significant distances to find health care. In addition, research conducted by the University of Kentucky Medical School indicates that more than two-thirds&nbsp;of the counties in Kentucky (81 out of 120)&nbsp;<a href=""><span class="s2">have a shortage of medical professionals</span></a>.</span></p> <p class="p1"><span class="s1">Unfortunately for Kentucky residents, it has been <a href=""><span class="s2">well documented</span></a> that physicians often&nbsp;prefer to live in urban areas. It’s therefore unlikely that the state&nbsp;can resolve&nbsp;the lack of access to health care in its rural counties with&nbsp;new physicians.</span></p> <p class="p1"><span class="s1">Advancements in technology can help fill in some of&nbsp;these gaps. Telemedicine, in many instances, can allow rural patients to access top medical specialists <a href=""><span class="s2">at a relatively lower cost</span></a>. In some cases, however, patients require face-to-face meetings with medical professionals.</span></p> <p class="p1"><span class="s1">The fact that Kentucky is now the only state that does not allow physician assistants to prescribe controlled substances is certainly not helping the situation. In a recent research paper that I authored for the Mercatus Center at George Mason University, I <a href=""><span class="s2">document</span></a> whether each state allows physician assistants and nurse practitioners to prescribe controlled substances. The results suggest that granting physician assistants broader prescriptive authority is associated with outpatient Medicaid costs decreasing by 11 percent.</span></p> <p class="p1"><span class="s1">Granting physician assistants further autonomy will allow them to better serve patients. Kentucky should consider granting its nurse practitioners further autonomy as well. Several states allow nurse practitioners to prescribe controlled substances without physician supervision&nbsp;–&nbsp;effectively letting nurse practitioners to practice autonomously. Kentucky does grant nurse practitioners some degree of autonomy, but this&nbsp;change would allow nurse practitioners to viably substitute for primary care physicians.</span></p> <p class="p1"><span class="s1">Certificate-of-need laws,&nbsp;which are in place in Kentucky,&nbsp;also are not helping rural residents. Recent <a href=""><span class="s2">research suggests</span></a> that that these laws work to reduce access to health care for rural residents.</span></p> <p class="p1"><span class="s1">Kentucky faces many of the same challenges as&nbsp;other states with large rural populations. Yet it is making a mistake by standing apart from them by&nbsp;not allowing physician assistants to prescribe controlled substances. Reconsidering this stance and removing some of the barriers present in the market for healthcare would go a long way to&nbsp;improving access to care for rural residents of the Bluegrass State.</span></p> Fri, 29 Apr 2016 18:40:05 -0400 Michael Farren: This Is How You Regulate Uber <h5> Expert Commentary </h5> <p class="p1"><span class="s1">This month, Detroit’s operating agreements with Uber and Lyft will end, placing ride-sharing in the Motor City in legal limbo. Over the last two years, 32 states have passed ride-sharing laws and another 15 are currently considering legislation, including Michigan.</span></p> <p class="p1"><span class="s1">Ride-sharing legislation offers a great opportunity to show how working people can benefit from a few simple policy principles: generality of application, low barriers to entry and permissionless innovation. On the other hand, taxi regulations provide a frustrating counter-example of how ignoring these principles can harm an industry and the customers it serves.</span></p> <p class="p1"><span class="s1">Laws and regulations should not discriminate between different people or companies. Everyone and every business should face the same set of legal requirements. To do otherwise provides a government-granted privilege to whomever a policy favors, or to whomever benefits when a competitor is restrained.</span></p> <p class="p1"><span class="s1">Michigan’s current transportation regulations apply different rules to taxis, limos, buses and shuttles. The Michigan Department of Transportation has called for a better approach. Rather than creating yet another category of regulations for Uber and Lyft, MDOT <a href=""><span class="s2">urged</span></a> the Legislature to instead apply a single set of regulations to every transportation provider.</span></p> <p class="p1"><span class="s1">But even generality of application can go wrong when it results in roadblocks to new drivers or companies seeking to enter the industry. Barriers to entry restrict competitive challenges from entrepreneurs, protecting established or well-connected companies, and giving them a degree of monopoly power.</span></p> <p class="p1"><span class="s1">Transportation regulations contain an endless variety of barriers to entry, like Detroit’s limit of 1,310 taxi bond certificates, which has led to horror stories like that told by famous consumer advocate Ralph Nader after his visit to the city in 1992. He told of taxis with holes in the floor, malfunctioning exhaust systems and shocks so worn that “I thought I was on a toboggan ride.” Such experiences would have never happened if Detroit’s taxi regulations had allowed for competition to drive out the bad service providers.</span></p> <p class="p1"><span class="s1">Entrepreneurs shouldn’t have to ask regulators for a permission slip before trying something new, as long as it’s within reason. Rather than setting the specific business practices of current companies in regulatory stone — such as mandating a cab driver’s uniform or a taxi’s paint job — regulators must emphasize the real goal: for example, ensuring public safety in for-hire transportation.</span></p> <p class="p1"><span class="s1">Simple, outcome-based regulations, like holding companies accountable for the safety of their drivers and vehicles, allow businesses the creative space to find new and better ways to meet those goals. It incentivizes companies to focus on what the law is actually trying to achieve, rather than simply conforming to a bureaucratic checklist.</span></p> <p class="p1"><span class="s1">Lastly, sunset clauses, which require a law to be reauthorized every five years or so, should be a requirement for all ride-sharing legislation. This offers policymakers the opportunity to double-check whether they’ve unintentionally stifled the industry and avoid repeating the mistakes of past taxi regulation.</span></p> <p class="p1"><span class="s1">Michigan is ahead of the curve so far, but other states and cities haven’t set the bar very high. If policymakers adhere to these principles, they can fix the decades-long malaise in the transportation industry.</span></p> Fri, 29 Apr 2016 15:31:28 -0400 How to Respond to 'Unfair' Trade <h5> Expert Commentary </h5> <p class="p1"><span class="s1">Protectionists today rarely admit to being protectionists. Most of them proclaim their allegiance to free trade but quickly follow up with a “but” — as in “but it must be fair trade.”</span></p> <p class="p1"><span class="s1">“Fair trade” is code for “unfree trade.”</span></p> <p class="p1"><span class="s1">Of course, no one endorses trade that is genuinely unfair. The crucial questions, however, are just what is unfair trade and what is the best way to deal with it. Protectionists in America want you to think that any imports whose producers receive any assistance at all from foreign governments are unfair. They want you also to uncritically accept their assumption that the best way to deal with unfair trade is for Uncle Sam to raise tariffs — that is, taxes — on American consumers.</span></p> <p class="p1"><span class="s1">Never mind the hypocrisy at work when Uncle Sam — itself a major subsidizer of many U.S. exporters, such as Boeing and Dow Chemical — uses charges of “unfair trade” as an excuse to punitively tax Americans who purchase imports.</span></p> <p class="p1"><span class="s1">For the sake of argument, let's assume that, say, the Chinese government subsidizes Chinese steel producers so heavily that imported steel from China causes American steel producers to scale back their operations. These subsidies are indeed unfair. But they are unfair not to Americans; they are unfair only to Chinese taxpayers from whom resources are extracted to fund these subsidies.</span></p> <p class="p1"><span class="s1">American steel producers and workers scream “No! These subsidies are unfair to us because they cause us to lose market share and jobs.” But no producer has any right to the patronage of any consumers. Consumers do not exist to promote the interests of producers; producers exist to promote the interests of consumers.</span></p> <p class="p1"><span class="s1">Yet when Uncle Sam raises tariffs on Chinese steel on the grounds that Beijing subsidizes that steel, it helps American steel producers by inflicting harm on American steel consumers without doing anything to help the actual victims of the subsidies: Chinese taxpayers.</span></p> <p class="p1"><span class="s1">Even if we grant that Beijing subsidizes Chinese steel unfairly, there are no grounds for Uncle Sam to respond by protecting American producers at the expense of American consumers.</span></p> <p class="p1"><span class="s1">So who should respond to these unfair subsidies? One plausible answer is “no one other than the Chinese themselves.” When Beijing subsidizes steel, it actually helps rather than harms Americans. Those subsidies are a transfer of wealth from Chinese taxpayers to American consumers — a transfer that makes Americans as a whole richer.</span></p> <p class="p1"><span class="s1">No one person's refusal to buy Chinese steel will cause Beijing to end its subsidizing ways. But if enough Americans really do feel strongly that these subsidies are unfair, they can and should voluntarily put their own money where their mouths are. If enough American consumers do so, their actions will be no less likely than are Uncle Sam's higher tariffs to help save Chinese taxpayers from Beijing's unfair policies.</span></p> <p class="p1"><span class="s1">And, being voluntary, these actions by American consumers will also be much more fair than mandated higher tariffs.</span></p> Fri, 29 Apr 2016 15:27:36 -0400 Should Puerto Rico Be Allowed to Restructure Its Debt? A Mercatus Debate <h5> Publication </h5> <p class="p1">After 10 years of recession and poor fiscal management, Puerto Rico is facing a major fiscal crisis. With $72 billion in debt (the equivalent of the commonwealth’s entire economy), deeply distressed pensions, high unemployment, and outmigration, Puerto Rico is insolvent. Congress is deliberating on legislation to provide a framework for Puerto Rico to restructure its finances under the guidance of a federal control board. The most contested point in the current proposal is whether to allow the board broad authority to restructure debt. One view is that debt restructuring violates creditors’ contracts and provides an indirect bailout of a fiscally profligate lender. Another view is that the triple tax exemption given to Puerto Rico debt subsidized the increase in debt loads that pushed Puerto Rico into its current crisis and, as a result, bondholders should anticipate a reduction in interest rate payments or delayed principal payments. J. W. Verret and Marc Joffe debate whether Puerto Rico should be allowed to restructure its debt.</p> <p class="p1"><span class="s1"><b>J. W. VERRET: NO.</b></span></p> <p class="p1">Puerto Rico’s dim prospects for resolution have prompted federal intervention. While this may be necessary, there are far more productive and responsible ideas that can be implemented at the federal level to help Puerto Rico than the quasi-bankruptcy approach embodied in the most recent draft of the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA).</p> <p class="p1">The “collective action” clause in PROMESA is a disaster for property rights, bondholders, and the people of Puerto Rico. This clause is rightfully regarded by many as both counterproductive to a successful resolution of Puerto Rico’s looming debt default and a violation of the traditional American belief in property rights.</p> <p class="p1">The first draft of the bill contained a “cram down” on creditors as is found in a typical bankruptcy proceeding. The new version of the bill then inserted a collective-action restructuring provision to demonstrate the appearance of adherence to freedom-of-contract and rule-of-law principles. But the bait and switch is transparent.</p> <p class="p1">Collective action clauses can be a useful device in bankruptcy, when they are anticipated in advance. However, PROMESA is not supposed to be a bankruptcy process. Additionally, Puerto Rico government bonds were not sold with the prospect of bankruptcy as part of the deal.&nbsp;</p> <p class="p1">These bonds were sold with the expectation that any creditor would have a chance to be the “holdout” creditor, and the holdout option was priced into the initial purchase. It is a clear violation of the creditors’ contractual rights to now take away that contract right. If Puerto Rico wanted to deny creditors a holdout right, it should have specified that in its debt contracts.</p> <p class="p1">The cram-down provision is being defended on the grounds that the property rights of a group of creditors are less legitimate, solely because they have purchased the bonds at a discount. Further, American taxpayers have long supported Puerto Rico with generous subsidies and grants, while Puerto Ricans do not pay federal income taxes. American taxpayers have been incentivized to purchase Puerto Rico debt. It does not follow that it is legitimate to repudiate—partially or in full—debts that are purchased in the market and defined according to contract.&nbsp;</p> <p class="p1">A principle that flows from the property-rights centered design of the US Constitution is that the market price paid to obtain a contractual right in the securities or debt markets should not impact the legal protection afforded to that right. Hedge funds may exercise their free speech to prevent diminution of those contractual rights. The protection of investors’ contract rights is not to be confused with rent-seeking.</p> <p class="p1">A far better approach than cram-down legislation would be to carefully consider the federal policies that could create sustainable growth for Puerto Rico. PROMESA takes a promising first step toward such an approach by reconsidering Puerto Rico’s minimum wage. The union-backed Jones Act, which heavily subsidizes union labor in ports and also inadvertently increased lawsuit abuse for the shipping industry, should also be eliminated on this struggling port island.</p> <p class="p1"><span class="s1">A truly groundbreaking initiative might consider making Puerto Rico the gateway to a repatriation of corporate profits maintained overseas to avoid the United States’s abusive corporate tax system. Many conservatives and moderate democrats have long favored a more territorial tax system, in which US corporations pay taxes on money earned abroad only in the country they are earned. Such an approach could make Puerto Rico the next Cayman Islands. The Caymans have long been a haven for corporate entities, and as a result the Caymans have a per capita GDP that is 26 percent higher than Puerto Rico’s, despite an otherwise similar economy and natural resources.</span></p> <p class="p1">Permitting quasi-bankruptcy for Puerto Rico would violate bondholders’ property rights, and it would reduce all US municipalities’ access to credit. Rather than restructuring its debt, Puerto Rico should seek to reform its tax and regulatory climates to foster economic growth.</p> <p class="p3"><span class="s1"><b>MARC JOFFE: YES.</b></span></p> <p class="p1">Owing to inadequate constitutional debt limits, fiscal mismanagement, and the unintended consequences of previous federal actions, Puerto Rico has accumulated $70 billion of bonded debt and over $40 billion in unfunded public employee pension liabilities. In total, these obligations exceed Puerto Rico’s GDP, which has been shrinking because of overregulation and out-migration. With Puerto Rico locked out of the capital markets and unable to balance its books, the situation has become unsustainable and is now the subject of federal action.</p> <p class="p1">The Territorial Clause of the Constitution gives Congress the power to create a regime under which Puerto Rico’s bonded debts can be restructured. By limiting this mechanism to territories, Congress can avoid any possibility that it will be later applied to US states. To prevent a disorderly default on all classes of Puerto Rico debt, years of costly litigation, and repercussions for the municipal bond market on the US mainland, Congress should use its power to create a territorial debt adjustment regime for Puerto Rico as part of a larger reform package that includes strong federal oversight.</p> <p class="p1">One argument made by opponents of this approach is that it thwarts the rights of individual bondholders to obtain relief in court. Since a debt adjustment mechanism did not previously exist, the allegation is that Congress is effectively abrogating contracts between bondholders and Puerto Rico government entities. This is seen as an insult to bondholders’ contractual rights, because it changes the rules in the middle of the game.&nbsp;</p> <p class="p1">However, this type of federal intervention has a clear precedent: the addition of Chapter 9 to the bankruptcy code in 1934 provided a mechanism for defaulting cities across the United States to restructure bonds issued before they were eligible for a bankruptcy process. The belief that government bonds should enjoy the same protection as other contracts has been challenged by free-market thinkers on numerous occasions, because the fulfillment of these agreements require coercive taxation. A number of these scholars have even advocated the outright repudiation of government bonds.</p> <p class="p1">I would not go so far as to advocate a full repudiation of Puerto Rico government debt (or any other public debt). In a modern mixed economy, we require well-functioning government debt markets, with some level of investor protection to fund civil infrastructure. But delayed principal repayment and interest rate reduction both have 20th-century precedents in entities roughly comparable to Puerto Rico. These cases, in such diverse places as Arkansas, Alberta, and Australia (prior to full independence), did not disrupt the overall functioning of government bond markets.</p> <p class="p1"><span class="s1">Municipal market disruption is legitimate cause for worry in the case of Puerto Rico, because its securities are so widely held on the US mainland. Since interest on Puerto Rico bonds is exempt from all state and local taxes, they appear in many municipal bond fund portfolios. A full repudiation could cause substantial losses in these funds, souring investors on the municipal bond asset category, and thus driving up state and local borrowing costs. However, if the present value of payments on Puerto Rico bonds is adjusted down to something approximating their current depressed market value (recently in the range of 50–70 cents on the dollar), fund investors will not experience further mark-to-market losses. This suggests that beyond reduced coupons and delayed maturities, the market could tolerate some degree of principal reduction.</span></p> <p class="p1">Much of Puerto Rico’s debt has already been purchased by hedge funds at distressed levels. Managers of these funds are wagering that they can use the legal process to extract a substantial premium over purchase price from Puerto Rico, undoubtedly inspired by hedge funds obtaining favorable terms from Argentina after most other bondholders had settled for a substantial loss. The hedge funds are thus opposed to congressional actions that would restrict their ability to litigate.</p> <p class="p1">We should be concerned about powerful interests using the political process to extract economic rents. Gains for hedge funds will be financed not only by Puerto Rico taxpayers, but also by US mainland taxpayers who provide one-third of Puerto Rico’s revenue through a variety of federal grants. Free-market thinkers have historically advocated equal rights under the law. Lobbying by well-funded special interests in the pursuit of taxpayer-funded rents does not seem consistent with the free-market tradition.</p> Thu, 28 Apr 2016 11:17:18 -0400 San Jose Supporter and Friend Lunch <h5> Events </h5> <p style="font-weight: normal; font-style: normal; font-size: 12px; font-family: Helvetica, Arial, sans-serif;">When companies are allowed to compete freely, the market thrives and the consumer benefits. Unfortunately, entrepreneurs are being held back by old laws and risk-averse regulators. Outdated and unnecessary regulations, corporate welfare, and cronyism are all waging a war on American entrepreneurship, combining to discourage innovation and prevent new goods and services from entering the market. We see the effects in a variety of industries: certificate-of-need laws inhibit health care providers from offering new and better treatments; craft brewers must jump through regulatory hoops to sell their hops; and ridesharing services are under constant scrutiny.</p><p style="font-weight: normal; font-style: normal; font-size: 12px; font-family: Helvetica, Arial, sans-serif;">What could American innovators accomplish if they weren’t discouraged by cronyism and regulations that were enacted before the development of today’s technology?</p><p style="font-weight: normal; font-style: normal; font-size: 12px; font-family: Helvetica, Arial, sans-serif;">Join us for a discussion with Mercatus Research Fellow Christopher Koopman, who will explain the greatest threats to capitalism today and what reforms could put us on the path to the next Industrial Revolution.</p><p style="font-weight: normal; font-style: normal; font-size: 12px; font-family: Helvetica, Arial, sans-serif;">This is not a fundraising event, and there is no charge to join us. We are pleased to have you as our guest to show our thanks and appreciation to our donors. Dress is business casual.</p><p style="font-weight: normal; font-style: normal; font-size: 12px; font-family: Helvetica, Arial, sans-serif;">To RSVP for this event, please contact Caitlyn Schmidt at&nbsp;<a href="" style="font-size: 12px; color: #666699;"></a>&nbsp;or 703-993-4925.</p> Wed, 27 Apr 2016 21:52:09 -0400 Gigs, Jobs, and Smart Machines <h5> Expert Commentary </h5> <p class="p1"><span class="s1">The Gig Economy enrages certain political quarters. Ironically, anti-giggers demonize companies like Uber, Lyft, and Airbnb by romanticizing and reinforcing the most hated aspects of post-1800 employment—subordination of and control over employees by employers. This blinkered nostalgia threatens employability in a world of smart machines.</span></p> <p class="p1"><span class="s1"><b>I’ve Been Working on the Railroad</b><br /> <br /> The Industrial Revolution transformed generalists who made their own food, clothes, shelter, and medicine into specialists with long-term, full-time jobs in hierarchical organizations. As <a href=""><span class="s2">Don Boudreaux notes</span></a>, “Having a job only makes sense in a modern world, where each individual typically does only one type of work.”<br /> <br /> Today, you likely have a boss who also has a boss. Hierarchy reduces transaction costs. (The SVP for Marketing doesn’t have to negotiate delivery prices with the mail-room clerk.) Long-term, full-time jobs enable employees to accumulate highly specialized knowledge. (London cabbies spend years absorbing the city’s map and drive constantly to maintain that knowledge.)<br /> <br /> <a href=""><span class="s2">Dierdre McCloskey</span></a> characterizes economic history as tens of thousands of years of impoverished stasis, followed by a sixteen fold or more increase in per capita wealth in 200 years. Hierarchical, long-term, full-time jobs made this possible.<br /> <br /> <b>Working 9 to 5</b><br /> <br /> But humankind’s sudden wealth came at a terrible price—perpetual tension between bosses and subordinates. A steady paycheck demands permanent subservience. Karl Marx boiled up from this tension, along with two centuries of conflict, revolution, war, and slaughter. The boss who offers a job has a dozen tethers controlling the most intimate aspects of your life:</span></p> <ol><li class="li2"><span class="s1">Mandating the hours and days you work;</span></li> <li class="li2"><span class="s1">Dictating where you work and live;</span></li> <li class="li2"><span class="s1">Limiting time off for illness, fatigue, family, or leisure;</span></li> <li class="li2"><span class="s1">Forcing you to work closely with ghastly people;</span></li> <li class="li2"><span class="s1">Limiting and homogenizing your skills and routine;</span></li> <li class="li2"><span class="s1">Preventing you from exploring new opportunities;</span></li> <li class="li2"><span class="s1">Spending your earnings on benefits you didn’t choose;</span></li> <li class="li2"><span class="s1">Delegating aspects of your life to unseen people;</span></li> <li class="li2"><span class="s1">Invading your privacy;</span></li> <li class="li2"><span class="s1">Reconfiguring all the above on whim;</span></li> <li class="li2"><span class="s1">Plunging you instantly from comfort to destitution; and</span></li> <li class="li2"><span class="s1">Poisoning your future employment prospects.</span></li></ol> <p class="p1"><span class="s1">No matter how much you like your job and your boss, you’re unlikely to enjoy these tethers. To temper employers’ excesses, laws and regulations limit employer discretion over firing, pay, harassment, hours, and so forth, but the tethers remain, and the limits create new ones. For example, legal privileges for full-time employees implicitly deny those privileges to part-time employees. The employee wishing to scale back to 30 hours in order to acquire new skills, tend to children, or relieve exhaustion must plunge over a financial cliff to do so.<br /> <br /> Yet the anti-giggers’ demands for employee benefits, 40-hour privileges, and so forth reinforce the tethers.<br /> <br /> <b>Sixteen Tons</b><br /> <br /> The romantic attachment to benefits is ironic. From the mid-19th century, mines, mills, and manufacturers routinely “gave” employees housing and scrip (pseudo-money usable only in the company store). Nonmonetary payments-in-kind comprised the “truck system” and were despised by unions. The labor movement understood that companies didn’t “give” housing, food, and clothing to employees but, in fact, forced employees to buy them via reduced wages. The truck system discouraged entrepreneurs from providing better housing, food, and clothing. The result was low disposable income, substandard goods, exorbitant prices, punitive credit terms, and handcuffs to jobs. (Employees who quit lost housing and accumulated scrip.)Merle Travis’s 1947 classic, “Sixteen Tons,” was a bitter elegy to the truck system:</span></p> <p class="p3"><span class="s1"><i>You load sixteen tons and what do you get?<br /> <br /> Another day older and deeper in debt.<br /> <br /> St. Peter don’t you call me, cause I can’t go.<br /> <br /> I owe my soul to the company store.</i></span></p> <p class="p1"><span class="s1">Yet, just as Travis recorded “Sixteen Tons,” big labor demanded a newer, bigger truck system built of life insurance, health insurance, and retirement accounts. This high-tech company store replicated every pathology of the old truck system.</span></p> <p class="p1"><span class="s1"><b>Take This Job and Shove It</b><br /> <br /> Entrepreneurship has been the primary escape from the tethers, but starting a business requires special talents and entails great costs and risks—quitting your steady job or building your business during the crevices of time between work, sleep, and other activities.The Gig Economy effectively offers the benefits of entrepreneurship to a broader population at lower cost and risk. Drive an <a href=""><span class="s2">Uber</span></a> or rent an <a href=""><span class="s2">Airbnb</span></a> space, and no one dictates your hours or location. If you find routine as oppressive as the factory in <a href=""><span class="s2"><i>Modern Times</i></span></a>, divide your efforts between Uber, Airbnb,<a href=""><span class="s2">eBay</span></a>, <a href=""><span class="s2">DogVacay</span></a>, and <a href=""><span class="s2">Zaarly</span></a>. If you like fishing, spend four days at the lake and work long hours the other three days. If your productivity depends on a two-hour midday nap, take a nap.<br /> <br /> For many, the variety of multiple jobs, the freedom to fit work hours to one's personal rhythms, and the absence of employer-employee tensions make life far more pleasant.</span></p> <p class="p1"><span class="s1">Perhaps more importantly, the Gig Economy gives workers flexibility to continuously upgrade skills in a rapidly changing economy or pursue dreams that are incompatible with a 9-to-5 routine. No permission is needed to take off hours or days or weeks—even on the spur of the moment—to attend classes, acquire new skills, compose music, or invent the next killer app or cancer cure.<br /> <br /> <b>John Henry</b><br /> <br /> All this is possible because connectivity and artificial intelligence massively shrink transaction costs and learning curves. Consider those London cabbies:<br /> <br /> Traditionally, anyone wishing to drive a cab through London’s medieval labyrinth had to first spend several years acquiring “<a href=""><span class="s2">the knowledge</span></a>”—internalizing the map and optimal pathways between any two points. Maintaining the knowledge required continuous, full-time driving.<br /> <br /> The knowledge <a href=""><span class="s2">visibly alters</span></a> the cabbie’s physical brain structure. When the driver retires, his enlarged hippocampus shrinks back.<br /> <br /> But in theory, Uber can crystallize the knowledge into an artificial brain and impart it instantaneously to novices and part-timers. For now, the unique complexity of London’s streets means cabbies still retain an advantage over ridesharing. But three or four more years of Moore's Law should dissolve the difference between the knowledge and a GPS device.<br /> <br /> Established business and labor groupings rage against the shift to gigs for two reasons: protectionism and paternalism. They correctly perceive the Gig Economy as a threat to their long-established turfs. And they genuinely fear the loss of protections against the tethers without perceiving that smart machines are fraying the tethers themselves.<br /> <br /> <b>Brother Can You Spare a Dime?</b><br /> <br /> Optimists expect the workforce will adjust to artificial intelligence by acquiring new skills, as post-1800 workers adjusted to steam and electricity. Others aren’t so certain. In his book, <a href=""><span class="s2"><i>Average is Over</i></span></a>, Tyler Cowen cautiously worries that machines will turn some individuals into unemployable “zero-marginal-product workers” as skills fall out of sync with contemporary production. In <a href=""><span class="s2"><i>The Second Machine Age</i></span></a>, Erik Brynjolfsson and Andrew McAfee wonder whether technological change will proceed faster than many workers can adjust their skills. In <a href=""><span class="s2"><i>Rise of the Robots</i></span></a>, Martin Ford warns of chronic machine-induced joblessness.<br /> <br /> Whether people can adapt is a legitimate concern, and it’s prudent to avoid both extreme optimism and pessimism at this juncture. Re-tooling will be essential for many, and it’s prudent to remove whichever obstacles stand in the way of re-tooling. Laws and regulations obstructing the Gig Economy constitute a massive obstacle to adjustment.<br /> <br /> For a person whose skills are approaching obsolescence, a 40-hour job with fixed hours may make it impossible to take retraining classes, obtain a new degree, or do part-time work in a different field that may provide his next full-time job. A Gig Economy worker has the flexibility to rearrange the calendar.<br /> <br /> Uber drivers I’ve encountered recently include: an undergraduate hoping to avoid student loans; a medical student with a highly irregular schedule; a software programmer between jobs; three deaf drivers; a young cancer survivor, ready to earn money but unable to work more than four hours at a stretch; a Chicago resident visiting his parents in Washington, with a few spare hours now and then; a foreign diplomat’s husband who spoke little English. All were five-star drivers. None had equivalent options in the Job Economy.<br /> <br /> Ridesharing keeps these people solvent while giving flexibility to pursue other parts of their lives—ramping up Uber when they have free time and cutting back when they don’t. Unlike, say, a restaurant job, there are zero transaction costs in reconfiguring a gig schedule. If the med student needs an extra two hours to study, there’s no need to plead with a boss for time off—or risk the boss saying no.<br /> <br /> <b>Xanadu</b><br /> <br /> The Gig Economy will never completely replace the Job Economy. The issue is whether law and regulation should favor jobs and discourage gigs, or whether individuals should freely choose one or the other, based on highly personalized considerations.<br /> <br /> Uber and Airbnb are the leading edge of the sharing economy, but not its limits. Uber-like technologies are spreading into higher-paying areas, like medicine. In California,<a href=""><span class="s2">Heal</span></a> provides physician house calls.<br /> <br /> As the sharing economy moves into higher-end activities, previously nonexistent opportunities appear. In the early 1960s, my family doctor, <a href=""><span class="s2">Milton Ende</span></a>, pioneered stem-cell therapy by performing the world’s first cord-blood transplants on cancer patients. This occurred while he maintained an extraordinarily busy internal medicine practice in our small Virginia hometown. His research and writing had to fit into whatever scraps of time he had left. If a sudden insight flashed in his mind, he couldn’t shelve his medical practice for an hour or a week to flesh out his idea, so his findings languished in obscurity for decades. A Gig Economy doctor, in contrast, might have that essential flexibility. For a creative mind, the traditional full-time, fixed-hour job is a perpetual <a href=""><span class="s2">Person from Porlock</span></a>—interrupting or extinguishing nascent strokes of genius. How many would-be Flemings, Listers, Salks, or Ventners are obliterated by the need to fit creativity, innovation, and invention around work, rather than the reverse?<br /> <br /> <b>Wichita Lineman</b><br /> <br /> The Gig Economy does for work what packet-switching did for communication. It lets one atomize and reassemble time and resources in ways incompatible with hierarchical, full-time jobs.<br /> <br /> In pre-digital days, a telephone call between two parties monopolized lines connecting the two telephones for the duration of the call. When the callers were silent, the lines remained unavailable to others. If all lines were occupied, new callers were shut out of the telephone system. Packet-switching shatters one caller’s words into fragments sent out across multiple pathways; an instant later, fragments rejoin and the other caller hears the words in real time just as they were spoken.<br /> <br /> Packet-switching lets vast numbers of conversations travel over the same line. It also creates multiple pathways, so a call no longer depends entirely on the integrity of a single line.<br /> <br /> In a traditional job, a slow workday means twiddling thumbs and staring out of windows. There is little capacity to turn idle time productive. If the employee’s one job disappears, his income stream ceases as suddenly and as completely as a phone call did when a pre-digital wire failed.<br /> <br /> In the Gig Economy (perhaps we should call it the “Packet Economy”?), workers who so choose can fragment their time and work—to engage in multiple productive endeavors in discontinuous packets of time rather than five eight-hour lumps of time, 50 weeks a year. By engaging in multiple activities and modulating the division of their efforts over time, they will no longer have to put all of their financial eggs in a single basket. They will have the flexibility to modulate their work enough to update skills on a continuous basis. In a sense, the Gig Economy transforms the division of labor from an interpersonal concept to an intrapersonal one.<br /> <br /> An unfettered Gig Economy will not guarantee that we avoid the jobless future that Cowen, Brynjolfsson and McAfee, and Ford ponder. But it may be the best way to stave off the obsolescence and alienation that Rust Belt steel workers experienced when public policy fought a furious, futile battle to preserve an old way of working.</span></p> Fri, 29 Apr 2016 12:29:10 -0400 More Than “Just One iPhone”: Law Enforcement Cites All Writs Act to Access Many Devices <h5> Publication </h5> <p>The FBI’s recent conflict with Apple over accessing a locked iPhone in its investigation of the San Bernardino terrorist attack eventually settled out of court when an external party was able to unlock the device. Contrary to the government’s <a href="">claims</a> that this incident was about just one iPhone, this was far from the first time that law enforcement cited the All Writs Act of 1789 (AWA) to compel private companies to compromise secure devices. This week’s chart shows that law enforcement agencies have attempted to apply this law numerous times in recent years for a range of criminal offenses, particularly drug-related crimes.</p> <p>The chart uses a <a href="">dataset</a> from the American Civil Liberties Union (ACLU) listing compiled court documents in cases where law enforcement bodies have appealed to the AWA to get access to devices with operating systems from Apple and Google. The data show that the AWA has been invoked to access data on devices in at least 63 other cases.&nbsp;</p> <p><a href=""><img src="" width="585" height="424" /></a></p> <p><span style="font-size: 12px;">We further analyzed the data to discern the nature of the crimes involved in each case, and we were able to determine the crime involved in 41 of the cases. We categorized each case according to the primary nature of the crime: drug crimes, sexual crimes, fraud and counterfeiting, identity theft, and terrorism. The “other” category includes four cases involving gambling, carjacking, exporting carbon fiber, and illegal possession of weapons. Each of these categories is displayed on the pie chart above. Our dataset contains links to each case and a description of the crime involved.</span><span style="font-size: 12px;">&nbsp;</span></p> <p>Of the 41 cases in which the associated crimes are known, 19 involve drugs, and only the San Bernardino attack involves terrorism. Overall, of the 41 cases for which an offense is known, two-thirds related to nonviolent crimes.</p> <p>Public officials often justify the necessity of such practices as a necessary trade-off between privacy and public safety. For example, in his congressional testimony on the recent dispute with Apple, FBI Director James Comey framed the agency’s application of the AWA as a question of “how to balance the privacy we so treasure . . . and also achieve public safety which we all very much treasure.” However, the data suggest that many of these orders to compromise secure devices are not in fact related primarily with public safety.</p> <p><span style="font-size: 12px;">Instead, these cases show that much of law enforcement’s interest in accessing encrypted data on personal devices has more to do with </span><a href="" style="font-size: 12px;">pursuing the vexed social policy of the “war on drugs”</a><span style="font-size: 12px;"> than with combating terrorism or other literal threats to public safety. If law enforcement officials wish to discuss the tradeoffs raised by the widespread use of strong encryption, then it must be forthright about its policy goals.</span></p> Wed, 27 Apr 2016 14:48:11 -0400 FCC Meddles in Cable-Box Market. Is Streaming TV Next? <h5> Expert Commentary </h5> <p class="p1"><span class="s1">This February, the Federal Communications Commission (FCC)&nbsp;<a href=""><span class="s2">announced a plan</span></a> to intervene in the cable set-top box (STB) market with its "<a href=""><span class="s2">Unlock The Box</span></a>" proposal. The telecommunications regulatory body sings a libertarian tune in press releases about the program, extolling the virtues of "<a href=""><span class="s2">creating choice and innovation</span></a>" and bringing "<a href=""><span class="s2">competitive solutions</span></a>" to that dusty old cable box in your living room. But this is rather misleading. We are already witnessing a renaissance of competition and innovation in media distribution without the FCC’s help.&nbsp;Reading between the lines, it appears the FCC is not primarily interested in STBs at all. Rather, the agency may be building a foundation to&nbsp;<a href=""><span class="s2">exert more control over online content services</span></a>&nbsp;such as Netflix.</span><span style="font-size: 12px;">&nbsp;</span></p> <p class="p3"><span class="s1">The lowly set top box has few fans. For years, many of us have begrudgingly forked over STB rental fees to our cable providers just to be treated to slow, unintuitive software and poor user experience. But because it was the only option we had, we grumbled and took it. That is, until the rise of online content provides such as Chromecast, Hulu, and Apple TV, provided an alternative. These newcomers won over consumers with their thoughtful user interfaces, ease of use, and lack of annoying rental fees.&nbsp;</span></p> <p class="p3"><span class="s1">It’s not hard to understand why, after taking a quick comparison of their futuristic Roku device and their bulky set top box, some viewers decided to cut cable altogether and stick with the stick. Since 2002,&nbsp;<a href=""><span class="s2">cable TV operators lost around 15 million subscribers</span></a>&nbsp;as tech-savvy consumers sought out more cutting-edge technologies. Thus, these technologies improved. This is the beauty of creative destruction. Cable companies were eventually forced to adapt and improve, too. For example,&nbsp;<a href=""><span class="s2">Comcast recently announced a new plan</span></a>&nbsp;for its Xfinity TV service that will be compatible with streaming devices like Roku instead of an old-school set top box.</span></p><p class="p3"><span class="s1"><a href="">Continue reading</a></span></p> Tue, 26 Apr 2016 16:05:38 -0400 Minimum Wage Laws Are Barriers to Employment <h5> Expert Commentary </h5> <p class="p1"><span class="s1">Minimum wage laws are much in the news these days. <a href=""><span class="s2">New York</span></a>, California and various US cities have recently enacted legislation to raise minimum wage requirements to $15 an hour. In this context it is especially worthwhile to revisit the purpose and effect of minimum wage laws.</span></p><p class="p1"><span class="s1"> Two policy questions are closely connected to the minimum wage debate:</span></p> <ol><li class="li2"><span class="s1">Whether government should ensure that workers receive no less than a certain amount of compensation for their labor; and</span></li> <li class="li2"><span class="s1">Whether government should establish a price barrier to employment, and if so how high it should be.</span></li></ol> <p class="p1"><span class="s1">The minimum wage debate is often reported as though it is about the first of these two policy issues. It is actually about the second.</span></p><p class="p1"><span class="s1"> If society’s pertinent policy objective were to ensure that workers receive a minimum level of support for their labor, we would almost certainly pursue this objective very differently than through minimum wage laws. Federal or state governments could provide <a href=""><span class="s2">direct income support</span></a> to workers, which could be designed to be a function of their employment earnings or even of total work hours. Society could make a transparent value judgment about how to balance the income needs of workers with the level of support others are willing to finance. The costs of this support could be broadly distributed among all taxpayers rather than concentrated on certain business activity. Importantly, such a policy would not create direct barriers between low-income workers and jobs.</span></p><p class="p1"><span class="s1"> Thus we don’t enact minimum wage laws primarily to ensure income adequacy for workers, which could be done in less problematic ways. The more accurate way to think of minimum wage law is as a government decision to prohibit low-wage employment. Such law expressly prevents an employer from hiring a worker for a job earning less than the legislated minimum wage, even if that worker would otherwise consider it in his/her interest to accept it.</span></p><p class="p1"><span class="s1"> Government does not and cannot compel employers to hire workers and pay them a given wage. What government does instead through minimum wage laws is to prohibit employment at lower wages. There is no guarantee that every job made illegal by this prohibition will be replaced by another higher-paying one. Indeed it is a virtual certainty that at least some jobs will not be.</span></p><p class="p1"><span class="s1"> Thus, <a href=""><span class="s2">minimum wage laws reduce employment</span></a>. Even without an advanced mastery of economics it is easy to understand how. If the price of something (in this case labor) is raised, a purchaser (in this case a potential employer) is not only less willing but less able to buy it. To construct a deliberately extreme example; if you could hire a plumber for $1 to unplug your drain, you would probably be delighted to do so. If instead the government required that you pay a plumber $10,000 to unplug it, you would almost certainly find a way to just do it yourself. The job would simply be eliminated. It is difficult to say for certain where this line is crossed for every job – but every job has such a line. Minimum wage laws push the <a href=""><span class="s2">lowest-skill workers</span></a> from the employable to the <a href=""><span class="s2">unemployable</span></a> side of that line.</span></p><p class="p1"><span class="s1"> There is a debate among economists as to how large a minimum wage increase must be before it creates an unambiguous, measurable adverse impact upon jobs. Advocates of minimum wage increases often cite academic research by <a href=""><span class="s2">Alan Krueger</span></a>and <a href=";rep=rep1&amp;type=pdf"><span class="s2">David Card</span></a> suggesting that specific past minimum wage increases did not lead to increased unemployment. But most academic research reaches the expected conclusion that minimum wage laws do reduce jobs, including research by <a href=""><span class="s2">Jeffrey Clemens</span></a>, <a href=""><span class="s2">David Neumark</span></a> and <a href=""><span class="s2">Jonathan Meer</span></a>. Even <a href=""><span class="s2">Krueger</span></a> recently editorialized that raising the minimum wage to $15 an hour would “risk undesirable and unintended consequences.” Thus economists widely agree that raising the minimum wage lowers employment; the only serious arguments are about when the effect is large enough to be discoverable.</span></p><p class="p1"><span class="s1"> None of this is to denigrate the motives of those who advocate raising such barriers to employment. To some eyes it is a form of exploitation if work is performed for pay below a certain level. Returning to our example of the plumber; some might regard it as unacceptably unfair to pay him only $1 to unplug your drain – holding this viewpoint so strongly that they would forbid the two of you from mutually agreeing to the transaction. That the job might simply be eliminated strikes some as an acceptable price to prevent this perceived exploitation. The same logic holds that it would be preferable for a person to remain unemployed than to perform a low-wage job at, for example, Walmart or McDonald’s.</span></p><p class="p1"><span class="s1"> This means however that minimum wage laws inevitably price some <a href=""><span class="s2">workers</span></a> out of the job market. Workers most vulnerable to displacement include those with the weakest job skills, perhaps because they lack sufficient education or training, or because they are young workers just entering the job market. Specific sectors such as the <a href=""><span class="s2">restaurant business </span></a>often operate with thin profit margins that leave them little room to adjust to sudden changes in their labor costs other than by eliminating jobs.</span></p><p class="p1"><span class="s1"> An underrated problem with pricing low-skill workers out of the job market is that their earnings losses are not limited to their period of unemployment. It is usually while holding a job that an individual acquires the skills necessary to achieve higher future earnings. It is therefore usually better for that individual to be employed for a low wage than not to be employed at all. This too is widely recognized. A <a href=""><span class="s2">working paper</span></a> from the Boston Fed recently found that “the earnings of displaced workers do not catch up to those of their nondisplaced counterparts for nearly 20 years.” As the paper further states, “the longer a worker is unemployed, the more his or her skills. . . depreciate, making the worker less valuable to a new employer.”</span></p> <p class="p1"><span class="s1">This effect is of particular concern right now when <a href=""><span class="s2">young adults</span></a> – those most often harmed by minimum wage increases -- are falling out of the workforce in rising numbers. No one knows for sure why this is happening, but the effect on these workers will be lower earnings for many years to come. This trend, as seen in Figure 1 reproduced from the <a href=""><span class="s2">St. Louis Fed</span></a>, should give lawmakers pause before erecting further barriers to employment.</span></p> <p class="p1"><span class="s1"><b>Figure 1: Labor Force Participation Rate for Workers Age 20-24, 2006-16</b></span></p> <p class="p1"><img src="" width="500" height="276" /></p><p class="p1"><span class="s1"><i>Labor Force Participation- FRED</i></span></p> <p class="p2"><span class="s1">It is appropriate for lawmakers to consider policies to raise worker living standards, including the compensation they receive for their labor. The amount of income support low-wage workers should receive beyond the amount they can freely earn is an important societal value judgment. However, it is a separate value judgment from whether and where to set a minimum wage, which is instead effectively a decision about how stringently to prohibit individuals from working.</span></p> Tue, 26 Apr 2016 11:20:04 -0400 Conversations with Tyler: A Conversation with Cass Sunstein ( <h5> Events </h5> <p class="p1"><span class="s1"><b>PARTICIPANTS</b></span></p> <p class="p1"><span class="s2"><a href="">Tyler Cowen</a></span><span class="s1">&nbsp;–&nbsp;Holbert L. Harris Chair of Economics, George Mason University<br /></span><span class="s2" style="font-size: 12px;"><a href="">Cass Sunstein</a></span><span class="s1" style="font-size: 12px;">&nbsp;– Robert Walmsley University Professor, Harvard Law School</span><span style="font-size: 12px;">&nbsp;</span></p> <p class="p1"><span class="s3"><b>**Select VIP Seating Available for Media**<br /></b></span><span style="font-size: 12px;">Contact Bob Ewing, director of media relations<br /></span><span style="font-size: 12px;">703.993.4960 (office), 202.494.2567 (mobile),&nbsp;</span><a href="" style="font-size: 12px;"><span class="s2"></span></a><span style="font-size: 12px;">&nbsp;</span></p> <p class="p2"><span class="s1">Cass&nbsp;Sunstein—one of today’s&nbsp;most influential legal scholars and co-author of the&nbsp;<i>New York Times</i>&nbsp;bestselling book&nbsp;<a href=";ie=UTF8&amp;qid=1461598472&amp;sr=1-1"><span class="s4"><i>Nudge</i></span></a>—will join Tyler Cowen for a wide-ranging dialogue as part of the Mercatus Center’s&nbsp;<i>Conversations with Tyler</i>&nbsp;series.&nbsp;</span><span style="font-size: 12px;">&nbsp;</span></p> <p class="p2"><span class="s1">Not only is he the most frequently cited American legal scholar, Sunstein has also applied his keen and curious mind to a diverse array of topics, including marriage, animal rights, conspiracy theories, the&nbsp;spread of knowledge in society, and much more.&nbsp;His most recent book<i>,&nbsp;</i><a href=";ie=UTF8&amp;qid=1461598472&amp;sr=1-3"><span class="s4"><i>The World According to Star Wars</i></span></a>,&nbsp;is a celebration of George Lucas’ masterpiece as it relates to history, presidential politics, law, economics, fatherhood, and culture.</span></p> <p class="p1"><span class="s1">Sunstein’s work on “nudge” theory has popularized the idea that private and public institutions can influence people to make better choices by altering the way choices are presented based on knowledge of human behavior. His work not only brought behavioral economics to the mainstream, but it also shaped policy decisions in the United States and Great Britain.&nbsp;</span><span class="s5">Before joining Harvard and starting their Program on Behavioral Economics and Public Policy, he was the Administrator of the White House Office of Information and Regulatory Affairs in the Obama Administration from 2009-2012. Previously, he served as a professor in the law and political science departments at the University of Chicago.</span></p> <p class="p3"><span class="s6">Sunstein is author of over three dozen books including&nbsp;<a href=";ie=UTF8&amp;qid=1461598547&amp;sr=1-1&amp;"><span class="s7"></span></a>&nbsp;(2001),&nbsp;<a href=";ie=UTF8&amp;qid=1461598573&amp;sr=1-1&amp;keywords=risk+and+reason+cass+sunstein"><span class="s7"><i>Risk and Reason</i></span></a>&nbsp;(2002),&nbsp;<a href=";ie=UTF8&amp;qid=1461598601&amp;sr=1-1&amp;keywords=Why+societies+need+dissent+cass+sunstein"><span class="s7"><i>Why Societies Need Dissent</i></span></a>&nbsp;(2003),&nbsp;<a href=";ie=UTF8&amp;qid=1461598758&amp;sr=1-1&amp;keywords=The+Second+Bill+of+Rights+cass+sunstein"><span class="s7"><i>The Second Bill of Rights</i></span></a>&nbsp;(2004<i>),&nbsp;</i><a href=";ie=UTF8&amp;qid=1461598781&amp;sr=1-1&amp;keywords=Laws+of+Fear%3A+Beyond+the+Precautionary+Principle+cass+sunstein"><span class="s7"><i>Laws of Fear: Beyond the Precautionary Principle</i></span></a>&nbsp;(2005),&nbsp;<a href=";ie=UTF8&amp;qid=1461598803&amp;sr=1-1&amp;keywords=Worst-Case+Scenarios+cass+sunstein"><span class="s7"><i>Worst-Case Scenarios</i></span></a>&nbsp;(2001),&nbsp;<a href=";ie=UTF8&amp;qid=1461598878&amp;sr=1-1&amp;keywords=nudge+cass+sunstein"><span class="s7"><i>Nudge: Improving Decisions about Health, Wealth, and Happiness</i></span></a>&nbsp;(with Richard H. Thaler, 2008),&nbsp;<a href=";ie=UTF8&amp;qid=1461598895&amp;sr=1-1&amp;keywords=Simpler%3A+The+Future+of+Government+cass+sunstein"><span class="s7"><i>Simpler: The Future of Government</i></span></a>&nbsp;(2013),&nbsp;<a href=";ie=UTF8&amp;qid=1461598913&amp;sr=1-1&amp;keywords=Why+Nudge%3F+cass+sunstein"><span class="s7"><i>Why Nudge?</i></span></a>&nbsp;(2014) and&nbsp;<a href=";ie=UTF8&amp;qid=1461598930&amp;sr=1-1&amp;keywords=Conspiracy+Theories+and+Other+Dangerous+Ideas+cass+sunstein"><span class="s7"><i>Conspiracy Theories and Other Dangerous Ideas</i></span></a>&nbsp;(2014).</span></p> <p class="p1"><span class="s1">The conversation will be followed by a book signing and reception. Copies of&nbsp;<i>The World According to Star Wars</i>&nbsp;will be available for sale for $22.00. Any George Mason University faculty or staff member will receive a 10 percent discount. For questions, please contact Bethany Stalter at <a href=""></a>.</span></p> <p class="p1"><span class="s1"><b>About Tyler Cowen</b></span></p> <p class="p1"><span class="s1">Cowen is a world-renowned professor of economics, coauthor of the popular economics blog&nbsp;<i>Marginal Revolution</i>,&nbsp;cofounder of the award-winning online educational platform&nbsp;Marginal Revolution University, and chairman of the Board at the Mercatus Center at George Mason University.&nbsp;<i>Bloomberg Businessweek&nbsp;</i>profiled Cowen as “America’s Hottest Economist,”&nbsp;<i>Foreign Policy&nbsp;</i>named Cowen one of the “Top 100 Global Thinkers,” and an&nbsp;<i>Economist</i>&nbsp;survey counted Cowen as one of the most influential economists of the last decade.</span><span style="font-size: 12px;">&nbsp;</span></p> <p class="p1"><span class="s1"><b>About the&nbsp;Conversations with Tyler&nbsp;Event Series</b></span></p> <p class="p1"><span class="s1">The Mercatus Center’s&nbsp;Conversations with Tyler&nbsp;series hosts world-class thought leaders to discuss how ideas, cutting-edge research, and applied economics can bring solutions to society’s most pressing problems.</span></p> Thu, 28 Apr 2016 18:14:05 -0400 What If the US Regulatory Burden Were Its Own Country? <h5> Publication </h5> <p>In a new study, Bentley Coffey, Patrick A. McLaughlin, and Pietro Peretto explore the relationship between regulation, investment, and economic growth by asking two central questions:&nbsp;</p> <ol> <li>Does regulatory accumulation—the buildup of regulations over time—alter businesses’ decisions to make investments that lead to innovation and technological growth?&nbsp;</li> <li>How do these changes affect economic growth?&nbsp;</li> </ol> <p>Economic growth has been reduced by an average of 0.8 percent per year from 1980 to 2012 due to regulatory accumulation. Regulations force companies to invest less in activities that enhance productivity and growth, such as research and development, as companies must divert resources into regulatory compliance and similar activities. While 0.8 percent may seem small, economic growth is an exponential process—next year’s growth depends on this year’s growth, which depends on last year’s, and that means the gap between what the economy could be and what it is grows over time at an increasing rate.&nbsp;</p> <p>Compared to a scenario where regulations are held constant at levels observed in 1980, the study finds that the difference between the economy we are in and a hypothetical economy where regulatory accumulation halted in 1980 is approximately $4 trillion.</p> <p><a href=""><span style="font-size: 12px;"><img src="" width="585" height="546" /></span></a>&nbsp;</p> <p>How much is $4 trillion? It’s about one quarter of the US economy in 2012, and equals $13,000 per American. The $4 trillion dollars in lost GDP associated with regulatory accumulation would be the fourth largest economy in the world—larger than major countries like Germany, France, and India.</p> <p>The study and comparison in the chart above highlight the need for regulatory reform and problems associated with the accumulation of regulations. Federal regulations have piled up over time to the point that they contain more than 1 million individual regulatory restrictions. When regulators add more rules to the pile, analysts often consider the likely benefits and compliance costs of the additional rules. But regulations have a greater effect on the economy than an analysis of a single rule in isolation can convey. The buildup of regulations over time leads to duplicative, obsolete, conflicting, and even contradictory rules, and the multiplicity of regulatory constraints complicates and distorts the decision-making process of firms operating in the economy. This study shows that, by altering the investment choices of firms, regulatory accumulation slows the process of knowledge creation and the development of technology and innovation—the key drivers of economic growth over the long run.</p> <p>For more on the study’s methodology, please see “<a href="" target="_blank">The Cumulative Cost of Regulations</a>.”</p> Tue, 26 Apr 2016 11:08:03 -0400 New ACA Study Considers What Happens When Generous Government Subsidies End <h5> Expert Commentary </h5> <p class="p1"><span class="s1">A large subsidy program that has helped insurers offering Affordable Care Act (ACA) compliant coverage in the individual market expires this year. In 2017, for the first time, insurance premiums alone must cover expenses in the individual market. A new <a href=""><span class="s2">working paper</span></a> released today by the Mercatus Center at George Mason University measures the importance of this subsidy program, sheds new light on insurers’ generally poor results in 2014, and discusses what likely lies ahead for the law.</span><span style="font-size: 12px;">&nbsp;</span></p> <p class="p1"><span class="s1">The <a href=""><span class="s2">study</span></a>, authored by myself, Doug Badger of the Galen Institute and Ed Haislmaier of the Heritage Foundation contains two key findings. First, insurers incurred substantial losses overall despite receiving much larger back-end subsidies per enrollee through the ACA’s reinsurance program than they expected when they set their premiums for 2014. Second, we estimate that in the absence of the reinsurance program insurers would have had to set premiums 26% higher, on average, in order to avoid losses—assuming implausibly that the overall health of the risk pool would not have worsened as a result of the higher premiums. Our findings raise serious questions about the ACA’s future, particularly when the reinsurance program ends and premium revenue must be sufficient to cover expenses.</span><span style="font-size: 12px;">&nbsp;</span></p> <p class="p1"><span class="s1"><b>Big Losses Despite Larger Than Expected Subsidies&nbsp;</b></span></p> <p class="p1"><span class="s1">The ACA established the reinsurance program to assist insurers offering ACA-compliant plans so insurers could charge lower premiums and attract more enrollees as the law’s changes took effect. These payments are an explicit subsidy benefitting individual market ACA-compliant plans financed by fees on nearly everyone with private insurance.</span></p> <p class="p1"><span class="s1">Prior to insurers setting their 2014 premiums, the Department of Health and Human Services (HHS) announced that it would pay insurers 80% of the cost of claims incurred by enrollees between $60,000 and $250,000. As an example, an insurer could expect to receive a payment of $112,000 for an enrollee with $200,000 in claims ($200,000 − $60,000 = $140,000 x 0.8 = $112,000). The Congressional Budget Office <a href=""><span class="s2">estimates</span></a> that insurers were able to reduce premiums by 10% in 2014 because of expected reinsurance payments.<b>&nbsp;</b></span></p> <p class="p1"><span class="s1">Largely as a result of fewer enrollees than expected in 2014, HHS made the program more generous to insurers by agreeing to pay 100% of the cost of claims incurred by enrollees between $45,000 and $250,000. In the previous example, this formula change increased the payment received by the insurer for the high expense individual to $155,000. In 2014, net reinsurance payments received by individual market Qualified Health Plans (QHPs)—plans satisfying the ACA requirements and certified to be sold on exchanges—totaled $6.7 billion, nearly 20% of premium revenue. This amounted to an $833 subsidy for insurers per QHP enrollee.</span></p> <p class="p1"><span class="s1">In addition to the back-end subsidy through the reinsurance program, insurers also received front-end subsidies designed to make coverage more affordable for people, as well as an individual mandate penalizing people who failed to purchase their product. Despite these advantages, insurers made large losses in 2014 as the overall risk pool was much older and less healthy than they expected.</span><span style="font-size: 12px;">&nbsp;</span></p> <p class="p1"><span class="s1"><b>Premiums Going Much Higher &nbsp;</b></span><span style="font-size: 12px;">&nbsp;</span></p> <p class="p1"><span class="s1">In the <a href=""><span class="s2">study</span></a>, we calculated that insurers would have had to raise premiums by 26%, on average, in order to cover expenses—medical claims and administrative costs—in 2014 without the reinsurance program and assuming the same population enrolled and received the same services. If average premiums had been 26% higher, however, relatively healthy people as well as higher income enrollees, who qualify for little or no subsidies that make the insurance more attractive, would have been deterred to a greater degree than people who expected to use more health care services. This is the adverse selection spiral—higher premiums lead to a worse risk pool, which leads to higher premiums, which leads to an even worse risk pool, and so on.</span></p> <p class="p2"><span style="font-size: 12px;">Since 2016 is the last year of the reinsurance program, insurers can no longer count on these large back-end subsidies. Since reinsurance payments accounted for such a large share of premium revenue in 2014 and insurer performance offering QHPs does not seem to have improved yet, average premiums will likely go up considerably next year while insurers also shrink the number of doctors within QHP networks and attempt to more aggressively manage medical utilization of their enrollees.</span></p> <p class="p1"><span class="s1"><b>Performance Varied Across Insurers</b></span></p> <p class="p1"><span class="s1">Nearly 60% of the 8 million individual market QHP enrollees in 2014 were in a plan affiliated with Blue Cross Blue Shield. The performance of Blue carriers varied widely. QHPs offered by Anthem and Blue Shield of California, which <a href=""><span class="s2">tended</span></a> to have narrow provider networks, fared relatively well. However, other Blue carriers, particularly the five plans that comprise Health Care Service Corporation (HCSC) and Blue Cross Blue Shield of North Carolina, incurred huge losses.</span></p> <p class="p1"><span class="s1">Kaiser was the insurer with a sizeable market share that performed the best in 2014. QHPs offered by carriers whose principal pre-ACA business in the state was Medicaid managed care also performed relatively well in 2014.</span></p> <p class="p1"><span class="s1">The worst performing insurers were the health care cooperatives, started with funding authorized by the ACA. The co-ops’ average per-enrollee medical claims were much higher than for other insurers. Despite receiving net reinsurance payments of more than $1,100 per enrollee, co-op losses were staggering and likely exceeded $1,500 per enrollee.</span></p> <p class="p3"><span class="s1">&nbsp;</span><span class="s1" style="font-size: 12px;">If the ACA’s risk adjustment program was functioning as intended so that plans with healthier enrollees transferred money to plans with less healthy enrollees, our findings suggest that people with more expensive conditions were more attracted to plans that ended up losing money. We also found that the substantial variance across insurer performance was mostly driven by large differences in average medical claims across insurers and not differences in premium revenue.</span><span style="font-size: 12px;">&nbsp;</span></p> <p class="p1"><span class="s1"><b>ACA in Trouble</b></span><span style="font-size: 12px;">&nbsp;</span></p> <p class="p1"><span class="s1">The ACA’s first year did not go well. The problems with epitomized government failure on a shocking scale, but the first year’s problems were much broader. Insurers suffered large losses despite the reinsurance program paying out much more on a per enrollee basis than insurers expected.</span><span style="font-size: 12px;">&nbsp;</span></p> <p class="p1"><span class="s1">In retrospect, we know that many insurers significantly underpriced premiums in 2014. These lower premiums might have been expected to attract more young and healthy people to purchase coverage. Insurers need young and healthy people to enroll since the ACA’s general effect was to make selling insurance to older and less healthy people a losing proposition for them.</span></p> <p class="p1"><span class="s1">The ACA’s main failure thus far is that QHPs are not attractive to relatively young and healthy people who earn too much to receive subsidies large enough to substantially reduce premiums and deductibles. This failure is compounded by <a href=""><span class="s2">reports</span></a> that people have learned how to the game the ACA by purchasing insurance only when they need medical care and dropping it soon after.</span></p> <p class="p1"><span class="s1">The reinsurance and risk corridor programs expire at the end of this year, which means that in 2017, for the first time, premiums must cover expenses. In order to reverse their losses, insurers will undoubtedly have to raise premiums and redesign plans to make them less generous. Of course, these changes, particularly the premium increases, will make the coverage look less attractive for those who insurers most need to sign up.</span></p> Mon, 25 Apr 2016 13:50:39 -0400 Conversations with Tyler: A Conversation with Camille Paglia <h5> Video </h5> <iframe width="560" height="315" src="" frameborder="0" allowfullscreen></iframe> <p class="p1"><span class="s1">Camille Paglia joins Tyler Cowen for a conversation on the brilliance of Bowie, lamb vindaloo, her lifestyle of observation, why writers need real jobs, Star Wars, Harold Bloom, Amelia Earhart, Edmund Spenser, Brazil, and why she is most definitely not a cultural conservative.</span></p> <p class="p1"><span class="s1">Read a full transcript <a href="">here</a>.</span></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;560&quot; height=&quot;315&quot; src=&quot;; frameborder=&quot;0&quot; allowfullscreen&gt;&lt;/iframe&gt; </div> </div> </div> Mon, 25 Apr 2016 11:40:37 -0400 Privatizing Public Transit Lowers Costs and Saves Cities Money <h5> Expert Commentary </h5> <p class="p1"><span class="s1">The <a href=""><span class="s2">financial plight of many U.S. cities</span></a> has caught the attention of the Democratic presidential candidates, as both <a href=""><span class="s2">Hilary Clinton and Bernie Sanders discussed urban issues</span></a> during their recent debate in Brooklyn. Both candidates supported the idea of investing in city housing and infrastructure using federal tax dollars. But before any additional U.S. taxpayer money is redistributed to cities, city officials should be required to take steps to shore up their city’s finances. A good place to start is the privatization of public transit.</span></p> <p class="p1"><span class="s1">A <a href=""><span class="s2">new NBER working paper</span></a> compares the efficiency of local governments by looking at the costs of providing public bus transit.</span></p> <p class="p1"><span class="s1">The authors calculate that fully privatized bus transit would have resulted in cost savings of approximately $5.7 billion in 2011, which was 30% of total U.S. bus transit operating expenses that year. Furthermore, the increased use of bus transit that would occur due to lower prices would generate a welfare gain of $524 million. The positive effects of privatization would be largest in areas where union power is strongest. The study also provides evidence that the cost savings of privatization do not come at the expense of lower quality or reductions in service.</span></p> <p class="p1"><span class="s1">The figure below is from the paper and shows the positive correlation between union strength in a state and bus service operating costs per vehicle mile. States with strong union bargaining rights (the dashed line) have higher operating costs per mile on average and costs grew faster from 2002 to 2012.</span><span style="font-size: 12px;">&nbsp;</span></p> <p class="p1"><img src="" width="600" height="454" /></p> <p class="p3"><span class="s1"><i>Source: Jerch, Rhiannon, Matthew E. Kahn, Shanjun Li. “Efficient Local Government Service Provision: The Role of Privatization and Public Sector Unions”. NBER working paper 22088, March 2016.</i></span></p> <p class="p1"><span class="s1">The authors explain that transit unions increase costs in two different ways. First, they place substantial limits on the use of part-time workers. These limits make it difficult for transit agencies to increase the number of workers during peak rush hours and decrease the number of workers during the midday lull. Ultimately these restrictions require unionized transit agencies to hire more drivers and mechanics than necessary for a given level of service.</span></p> <p class="p1"><span class="s1">Second, unions are able to negotiate for wages above the market rate. Private, competitive firms have an incentive to minimize costs and consequently will be tough negotiators, while public officials tend to acquiesce at the bargaining table since transit unions are a powerful constituency in local politics.</span></p> <p class="p1"><span class="s1">This research has important implications for U.S. public transit. In New York City the transit group the Riders Alliance <a href=""><span class="s2">has launched a Fair Fares campaign</span></a> for the purpose of obtaining discounted bus and subway fares for lower-income residents. This campaign might be unnecessary if New York City officials lowered costs by privatizing more of the city’s public transit network.</span></p> <p class="p1"><span class="s1">The Washington D.C. metro is also in financial trouble, with a projected $150 million shortfall in 2018. Representatives from the Washington D.C. Metro Board <a href=""><span class="s2">recently requested $300 million per year from federal taxpayers</span></a> to fund operations. But again, this federal subsidy might not be necessary if the Washington Metropolitan Area Transit Authority (WMATA) privatized its bus operations since that would make more resources available for the metro. Or better yet, the WMATA could privatize both operations and lower costs across the board.</span><span style="font-size: 12px;">&nbsp;</span></p> <p class="p1"><span class="s1">Advocacy groups and progressive politicians are often receptive to providing subsidies to poorer transit riders but tend to be less willing to implement real cost-saving measures such as more privatization. The result is that residents of places like New York City not only pay more for the same quality of transit available in other cities, but are also asked to fund subsidies to poorer residents who are priced out by the high costs. This double burden could be reduced or potentially eliminated if officials in large, union-heavy cities let private companies that have the benefits of economies of scale and superior negotiation skills operate the city’s transit system. Privatization would also free up resources for other government responsibilities <a href=""><span class="s2">like local roads,</span></a> schools and public pension funding.</span></p> <p class="p1"><span class="s1">Before more federal dollars are distributed to cities local officials should be required to cut costs, even if doing so is politically uncomfortable, and public-transit privatization is a way to do that.</span></p> Mon, 25 Apr 2016 16:21:52 -0400 The Land of the Free, but Not until April 24 <h5> Expert Commentary </h5> <p class="p1"><span class="s1">Americans just finished filing and paying for their federal income taxes. It was painful and expensive. Collectively, we still have several more days to go before we are done paying for our entire tax bill.</span></p> <p class="p1"><span class="s1">In 2016, Tax Freedom Day is April 24. As the Tax Foundation explains in its annual report on the issue, "Tax Freedom Day is the day when the nation as a whole has earned enough money to pay off its total tax bill for the year." The tax bill in question includes all federal income taxes, payroll taxes and state and local taxes. In 2016, that's $4.99 trillion, including $3.3 trillion in federal taxes. That's 31 percent of national income.</span></p> <p class="p1"><span class="s1">If it sounds like a lot of money, it's because it is. As the report states, "Americans will collectively spend significantly more on taxes in 2016 than they will on food, clothing, and housing combined." Unfortunately, the system is designed so that many of us will never know how much more we pay in taxes than we spend on our other big budget items.</span></p> <p class="p1"><span class="s1">For one thing, most of the federal and state income taxes are withheld on each of your paychecks. We have Milton Friedman to thank for that! The payroll tax is even more opaque because not only is it withheld from your paychecks but also — even if you look closely at your document — you will only see your share of the tax as an employee, not how the employer side of the levy affects your wages.</span></p> <p class="p1"><span class="s1">But it gets worse: If you included annual federal borrowing, which represents future taxes owed, Tax Freedom Day would occur 16 days later, May 10. That shouldn't come as a surprise, because from 2002 on, the federal government has consistently spent more than it collects in revenue. It's also worth noting that for a few years after 2009, the deficit was over $1 trillion — and though it's lower now, it is scheduled to rise again starting this year.</span></p> <p class="p1"><span class="s1">The tax burden shouldered by individuals also varies depending on which state they live in. According to the Tax Foundation's report, thanks to a combo of high income taxes and higher state taxes, if you live in Connecticut, New Jersey or New York, your Tax Freedom Day isn't until May 21, May 12 or May 11, respectively. Residents of Mississippi were already freed from taxes April 5.</span></p> <p class="p1"><span class="s1">When I asked the Tax Foundation whether it invented the Tax Freedom Day concept, the author of the report, Scott Greenberg, told me that it didn't: "Tax Freedom Day was created by Dallas Hostetler, a Florida businessman, in 1948. He transferred the trademark to the Tax Foundation in 1971, and we've been calculating it ever since."</span></p> <p class="p1"><span class="s1">Moreover, a look at historical data reveals that Americans' tax burden is growing significantly. In 2011, Tax Freedom Day was 11 days sooner than today — most likely because of the many tax hikes implemented under the Affordable Care Act but also thanks to an increase in the payroll tax and the expiration of Bush-era tax cuts on high-income earners. Greenberg wrote to me, "Since 1900, Tax Freedom Day has grown later and later in the calendar, as federal, state, and local governments have collected more and more of Americans' income in taxes."</span></p> <p class="p1"><span class="s1">That could change for the better or the worse. Greenberg noted, "In the coming years, the date of Tax Freedom Day could vary greatly, depending on whether Congress decides to increase Americans' tax burden, lower it, or leave it the same."</span></p> <p class="p1"><span class="s1">Until then, buckle down at your desk and work hard to pay our enormous and growing tax bill.</span></p> Fri, 22 Apr 2016 16:58:04 -0400 The Affordable Care Act in 2014: Significant Insurer Losses despite Substantial Subsidies <h5> Publication </h5> <p>The Affordable Care Act (ACA) significantly altered the individual insurance market through a host of new rules and requirements. Among its central changes, the ACA required insurers to offer coverage to any applicant but restricted insurers from charging premiums that properly reflect health status and age. This made health insurance relatively more attractive to older and less healthy people and relatively less attractive to younger and healthier people. For insurers offering Qualified Health Plans (QHPs)—plans certified to be sold on the new ACA exchanges—in the individual market, a key question was whether enough young and healthy people would enroll to create a stable risk pool. Achieving this balance is also the key determinant as to whether the law’s changes are sustainable, or whether they will lead to the deterioration of the individual market for insurance.&nbsp;</p> <p>This study is the first in a series from the Mercatus Center at George Mason University that is intended to provide a comprehensive analysis of the impact of the ACA on the individual and small group insurance markets in 2014. This study presents an overview of insurers’ performance selling QHPs in the individual market and discusses how insurer performance varied across carriers and states. In sum, it finds that insurers incurred sizeable losses on a per-enrollee basis—despite much higher government support through the law’s reinsurance program than they expected when they set premiums. It also finds that insurers would have needed to increase premiums by at least 26 percent, on average, to have avoided losses in 2014 without the reinsurance program.</p> <p>The subsequent studies in this series will focus on contrasting insurers’ performance selling individual QHPs and small group QHPs, analyzing the key factors that explain the variation in insurers’ performance, and assessing the overall function of the ACA’s three premium stabilization programs. Together, these analyses of the first-year performance of QHPs provide a comprehensive review of the law’s past performance and critical information in considering the law’s future, especially since reports indicate that insurers’ performance in 2015 was generally similar to their performance in 2014.</p> <p><b>KEY POINTS</b></p> <ul> <li><i>Insurers suffered significant losses selling individual market QHPs in 2014</i>. These losses were well in excess of $2.2 billion despite these insurers receiving net reinsurance payments of $6.7 billion or $833 per enrollee. These payments were at least 40 percent more per enrollee than insurers had expected through the reinsurance program when setting premiums.</li> <li><i>Premiums in 2014 would have needed to be more than 25 percent higher to cover insurers’ cost of offering individual market QHPs in the absence of the reinsurance program (which is set to expire this year) and assuming the same enrollment</i>. The premium increase would need to be much higher than that, however, to account for selection effects as relatively healthier people would be more deterred from the higher premiums than relatively less healthy people.</li> <li><i>There was wide variation in insurer performance selling QHPs in 2014</i>. Insurers with narrow provider networks appear to have done relatively well, while the health insurance cooperatives (co-ops), established with government funding, incurred the greatest losses.</li></ul> <p><b>BACKGROUND ON REINSURANCE PROGRAM</b></p> <p>To assist insurers in adjusting to the ACA’s new requirements and to mitigate their risk, the law contained three premium stabilization programs—risk adjustment, reinsurance, and risk corridors. The reinsurance program, a three-year program to compensate insurers for large claims incurred by “high risk individuals in the individual market,” is an explicit subsidy of individual market plans. When insurers set premiums for 2014, they expected that they would receive payment for 80 percent of per-enrollee claims between $60,000 and $250,000 through the reinsurance program. The Congressional Budget Office estimates that the reinsurance program lowered premiums by 10 percent in 2014.</p> <p><b>LARGE INSURER LOSSES DESPITE LARGER THAN EXPECTED REINSURANCE PAYMENTS&nbsp;</b></p> <p>Insurers suffered substantial losses in 2014 despite receiving much larger reinsurance payments per enrollee than they expected when setting premiums. Largely as a result of having fewer enrollees than expected, the reinsurance program was eventually made about 40 percent more generous than originally announced, paying 100 percent of the cost of per-enrollee claims between $45,000 and $250,000. The net reinsurance payments totaled $6.72 billion, or $833 per QHP enrollee in the individual market in 2014.</p> <p>In aggregate, the 289 individual market QHPs collected $35.76 billion in premium income and paid claims of nearly $37.30 billion in 2014. This does not account for administrative costs—additional expenses that typically amount to about 15 percent of premiums. The risk corridor program, which was intended to transfer money from generally profitable insurers selling QHPs to generally unprofitable ones, ran a deficit of nearly $2.2 billion for individual market QHPs in 2014. However, the risk corridor program was designed to reimburse only a portion of insurer losses, which means overall losses were substantially greater than $2.2 billion.</p> <p><b>PROJECTING PREMIUMS WITHOUT THE REINSURANCE PROGRAM</b></p> <p>Insurers incurred large losses in 2014 despite receiving $6.72 billion in net reinsurance payments for their individual market QHPs. The average loss ratio (medical claims paid divided by premium income) for the 289 QHPs equaled 1.110 when weighting QHPs by claims. This loss ratio suggests that premiums for individual market QHPs will have to rise significantly when the reinsurance program ends. Assuming that insurers generally need at least 15 percent of premiums to cover administrative expenses, premiums in 2014 were roughly 26 percent too low, on average, to cover insurers’ full costs of offering individual market QHPs.</p> <p>If average premiums had been 26 percent higher, however, that would have lowered total enrollment and increased selection effects. Relatively healthy people and higher income enrollees, who qualify for little or no subsidies that make the insurance more attractive, would have been deterred to a greater degree than people who expected to use more healthcare services. As a result of this dynamic effect, the average premium increase would likely have needed to be substantially greater than 26 percent for insurers to break even on their QHPs in 2014.</p> <p><b>INSURER PERFORMANCE VARIED SIGNIFICANTLY</b></p> <p>Although the evidence is not conclusive, differences in insurer performance in 2014 indicate that carriers with narrower networks were more successful in controlling claim costs. Kaiser was the insurer with a sizeable market share that performed the best in 2014. Blue Shield of California, which made the highest amount of payments into the risk corridor program, offered narrow network exchange plans in 2014. Moreover, QHPs offered by carriers whose principal pre-ACA business in the state was Medicaid managed care also performed relatively well in 2014.</p> <p>The insurance co-ops set up through the ACA were the worst performing group of insurers. The co-ops’ average per-enrollee medical claims equaled $6,120—more than 22 percent above the average for all insurers. The third paper in the series will offer a more detailed analysis of insurer performance in 2014, including an examination of the effects of state decisions to expand Medicaid and adopt the transition policy allowing non-ACA-compliant coverage to continue.</p> <p><b>CONCLUSION</b></p> <p>The 2014 data used in this study is the most recent available since the deadline for carriers to file 2015 plan year data is June 30, 2016. The findings are important and relevant because insurers’ performance in 2015, at least in the aggregate, has reportedly been comparable to 2014. Once the 2015 data is available and analyzed, we are likely to be left with a similar conclusion—QHPs have not yet attracted a broad enough risk pool for the individual market to stabilize despite the premium stabilization programs enabling carriers to set premiums significantly lower than they would absent those programs.</p> <p>It appears that QHPs with narrow provider networks performed better than QHPs with broader networks in 2014. That may suggest that healthier people disproportionately gravitated to plans with broader networks. This result may also have occurred because of more aggressive utilization management by insurers with more restrictive networks. As the end of the reinsurance and risk corridor programs approaches, and insurers face the reality that premiums for the first time must cover expenses, a key question emerges. Can insurers that continue offering QHPs reverse their losses through some combination of higher premiums and plan redesign, or are the ACA’s provisions unsustainable and in need of change?</p> Tue, 26 Apr 2016 12:04:56 -0400 Not Your Grandparents’ Workforce: How Regulation Can Harm Millennials <h5> Events </h5> <p>With millennials now making up the largest generation in the US workforce, studies have shown that they have different preferences on how to work and live. For instance, while previous generations preferred stability and work-life balance, millennials place higher value on flexibility and work-life integration. The question then arises, are many of the current workforce policies out of step with the employment evolution millennials desire?</p> <p><span style="font-size: 12px;">The Mercatus Center at George Mason University invites you to join us for a </span><i style="font-family: inherit; font-weight: inherit;">Regulation University</i><span style="font-size: 12px;"> event featuring:</span></p> <ul><li><a style="font-size: 12px;" href="">Liya Palagashvili</a><span style="font-size: 12px;">, Assistant Professor of Economics, SUNY-Purchase College</span></li><li><a style="font-size: 12px;" href="">Jared Meyer</a><span style="font-size: 12px;">, Fellow, Manhattan Institute</span></li><li><a href="" style="font-size: 12px;">Christopher Koopman</a><span style="font-size: 12px;">, Research Fellow, Mercatus Center</span></li></ul><p><span style="font-size: 12px;">The panelists will discuss: &nbsp;</span></p> <ul><li>The employment and entrepreneurial opportunities millennials value;</li><li>How traditional regulatory policies are creating barriers to entry in the job market; and</li><li>The influence that regulatory accumulation is having on entrepreneurs and start-ups.</li></ul> <p>&nbsp;<span style="font-size: 12px;">Space is limited. Please register online for this event.</span></p> <p><span style="font-size: 12px;">This educational discussion is planned in accordance with House Committee on Ethics’ exception for Educational Events and is open to all congressional and federal agency staff.</span></p> <p>&nbsp;<span style="font-size: 12px;">Lunch will be provided. Please contact Jen Campbell with any dietary restrictions. Due to space constraints, please no interns.</span></p> <p><b style="font-family: inherit; font-style: inherit;"><i>Questions? Please contact Jen Campbell at </i></b><b style="font-family: inherit; font-style: inherit;"><i><a href=""></a>&nbsp;or 703-993-4967</i></b><b style="font-family: inherit; font-style: inherit;"><i>.</i></b></p> <p>The Mercatus Center at George Mason University is the world's premier university source for market-oriented ideas—bridging the gap between academic ideas and real-world problems. From spending, to regulation, to health care, to cronyism, Mercatus scholars conduct research on a number of topics and produce a variety of products to be used by media and policymakers to connect academic learning with real-world practice.&nbsp;</p> Fri, 22 Apr 2016 11:47:23 -0400 Courts See the Light on MetLife, Hopefully Regulators Will, Too <h5> Expert Commentary </h5> <p class="p1"><span class="s1">District of Columbia Federal Judge, Rosemary Collyer, recently denied the Financial Stability Oversight Council's (FSOC's) request to dismiss MetLife's challenge to the FSOC's systemically important financial institution (SIFI) designation. Instead, Judge Collyer dismissed the FSOC's designation, determining MetLife was not "Too Big to Fail." Whether the decision holds up remains to be seen, but economically speaking that decision sounds right.</span></p> <p class="p1"><span class="s2"><a href="">Section 113</a></span><span class="s1"> of Dodd Frank stipulates that nonbank financial institutions can be hand-selected for SIFI designation based on criteria such as size, complexity or interconnectedness. However, the crisis was about regulations that encouraged holdings of the assets that went bust, rather than financial firm characteristics like size, complexity or interconnectedness, as Dodd Frank suggests.</span></p> <p class="p1"><span class="s1">To see why, first consider that MetLife is an insurance conglomerate and should be regulated as such, especially since it sold its banking subsidiary, MetLife Bank, in 2013. Between Q1 2006 and Q1 2009, total deposits at MetLife ranged from $4.5 billion to $7.5 billion, and MetLife had $6.4 billion in total deposits when MetLife Bank was <a href=""><span class="s2">sold</span></a> to GE Capital. Still, MetLife's total deposits were greatly exceeded by the firm's other liabilities such that deposits were usually under 1 percent and never exceeded 1.6 percent of liabilities between Q1 2006 and Q1 2009. For comparison, during that same time the average bank had about 80 percent of its liabilities in the form of deposits. Rather than firm liabilities, firm assets should be cause for concern.</span></p> <p class="p1"><span class="s1">Leading up to the crisis, when it still owned a banking subsidiary, MetLife invested in a fairly high fraction of the highly rated, private-label mortgage backed securities (MBSs) tranches that performed poorly during the crisis. Using a measure that Professors Isil Erel, Taylor Nadauld and Rene Stulz <a href=""><span class="s2">applied</span></a> to examine why banks held such assets, MetLife increased the fraction of its total assets allocated to those assets from 6.9 percent in Q1 2006 to 9.7 percent in Q1 2009.</span></p> <p class="p1"><span class="s1">For comparison, at one end of the spectrum, the average bank had only 1.6 percent in Q1 2006 and only 0.6 percent in Q1 2009-and at the other end of the spectrum Citigroup had 3.6 percent in Q1 2006 and 4.4 percent in Q1 2009. Of course, Citigroup also had an additional 5 percent of its investments allocated to highly rated tranches of Collateralized Debt Obligations (CDOs) that performed even worse than the highly rated, private-label MBS tranches.</span></p> <p class="p1"><span class="s1">As a recent Philadelphia Fed study <a href="file:///C:/Users/Owner/Downloads/wp11-30R.pdf"><span class="s2">showed</span></a>, CDOs were the instrument at the heart of the crisis because write-downs on the total volume issued averaged 60 percent. To understand why CDOs were so destructive, a study by Professors Coval, Jurek and Stafford <a href=""><span class="s2">showed</span></a>that CDOs were overpriced relative to similar securities, because the prices ignored risks in the broader economy, such as the housing market. The underlying CDO collateral not only had higher default risk, but also default correlations because the collateral was typically originated at roughly the same time and from the same region. Had they adequately reflected what was happening in the broader economy, the prices (and ratings) would have been lower and yields much higher.</span></p> <p class="p1"><span class="s1">In relative terms then, MetLife took a <a href=""><span class="s2">cautious</span></a> approach to investing in the highly rated tranches, while Citigroup took an <a href=""><span class="s2">aggressive</span></a> approach. The difference in approaches helps explains why when MetLife and Citigroup closing share prices hit their crisis-related low points on March 9, 2009, when MetLife was trading at close to $12 a share and Citigroup was trading at about $1. But why might an insurance company, which took a relatively cautious approach to highly rated tranche holdings, have invested in these securities?</span></p> <p class="p1"><span class="s1">A study by Professors Craig Merrill, Taylor Nadauld and Philip Strahan <a href=""><span class="s2">found</span></a> that insurance company capital requirements distorted balance sheets toward those holdings between 2003 and 2007. In particular, some insurance companies held those securities because they offered higher yields for a given dollar of capital. The effects were particularly evident in accounts that had disproportionately higher regulatory capital requirements for assets with low credit ratings, which encouraged them to find highly rated assets.</span></p> <p class="p1"><span class="s1">Thus, for insurance companies during the crisis, system-wide risks came from complex regulatory capital requirements that gave incentives to hold assets that went bust. This flaw could be addressed at the state, rather than federal level, with simpler, higher capital requirements.</span></p> Wed, 20 Apr 2016 15:18:26 -0400 The Persistence of Regionalism in Federal Regulations <h5> Expert Commentary </h5> <p class="p1"><span class="s1">Regional protectionism in regulatory policy was a term used several decades ago to describe the regional effects built into regulatory acts of Congress. At the time, Brookings Institution economist Robert Crandall and University of Chicago economist Peter Pashigian looked at the regional distribution of congressional support for specific elements of the Clean Air Act that would discourage the development of production facilities in the South and the West. Their studies showed that support came largely from high-income, low-growth states in the North and from urban and industrialized congressional districts in the North and Northeast.</span></p> <p class="p3"><span class="s1">Two salutary lessons that their scholarship exposed remain true today: First, regulations affect different regions differently, which alters the distribution of economic growth across regions. Second, the different impacts on different regions can be a deliberate design feature.</span></p> <p class="p1"><span class="s1">Early regulations on sulfur dioxide emissions specified that new industrial sources of pollutants — such as coal-fired power plants — would be required to install devices that would achieve the maximum possible percentage reduction in emissions, regardless of the actual level of emissions. The level can vary tremendously depending on the sulfur content of the coal used. For example, in Kentucky, West Virginia and other Appalachian states, coal is relatively abundant but also has a higher sulfur content than coal from many Western states. By requiring a focus on design, rather than performance, these regulations made the construction of new plants much costlier and thereby discouraged the migration of producers away from the North and Northeast to less developed and otherwise lower cost regions. While some may argue that regional differences are both inevitable in federal regulation and worthwhile, so long as the policy objective is achieved, Crandall found it telling that Congress "seemed uninterested" in assessing whether its regulatory policy actually was affecting air quality.</span></p> <p class="p1"><span class="s1">Those policies have evolved since then, and surely we have learned our lesson. Or have we? <a href=""><span class="s2">My colleague Oliver Sherouse and I recently released a study</span></a> that estimates the different impact of federal regulation on each state and the various regions of the country. We constructed a new index, called the Federal Regulation and State Enterprise (FRASE) index, that weights the incidence of federal regulation on each industry in the economy by the relative importance of those industries to each state. While we expected to find different impacts across the states, we were somewhat surprised to see that regional protectionism still appears to be a prominent feature of federal regulation, as the following "heat map" of our index suggests:</span></p> <p class="p1"><img src="" width="624" height="404" /></p><p class="p1"><span style="font-size: 12px;">This heat map is color coded to show impact relative to the national average. The "hotter" states, shaded in orange, are more impacted by federal regulation, while the "cooler" blue colors indicate states less impacted than the national average in the same year. The Northeast region, which played such a prominent role in Crandall's and Pashigian's analyses, stands out from the others because every single state is less impacted than the average.</span></p> <p class="p1"><span class="s1">Furthermore, the regional differences appear fairly persistent over the time period for which we had data. The nearby figure compares the FRASE index scores for the four regions of the United States. As the 2013 heat map indicates, important industries in the Northeast experience a lower incidence of federal regulation compared to those of other regions, and this remained true from 1997 to 2013. It also reveals that the Midwest has moved up in the rankings of regions. In 1997, it was the third least impacted of the four regions. By 2013, it had taken over the top spot.</span></p> <p class="p1"><img src="" width="609" height="457" /></p> <p class="p1"><span class="s1">Our index takes into account both the incidence of federal regulation on specific industries and the importance of industries in each state. That means some of the changes in regional impact is driven by the growth or decline of industry importance, while some of it is driven by changes in regulation. Of course, these two factors are not independent — policies that change the regulatory landscape for industries can lead to changes in those industries' economic importance. The FRASE index offers a way to understand and visualize the interaction of these forces over time and their implications for the unique mix of industries in each state and region.</span></p> <p class="p1"><span class="s1">Regional protectionism in regulatory policies was identified by Crandall and Pashigian &nbsp;nearly 40 years ago. New trends in regulation, driven by Congress's responses to events of the past two decades, are beginning to take shape as well, and they are certain to also have different impacts on different states and regions. The Dodd-Frank Act and the Affordable Care Act are both major regulatory acts that are likely to transform the economic outlook of several industries and the economy overall. For example, in New York, where financial services account for a substantial portion of the state's economy, the regulatory impact of Dodd-Frank is already evident, and the trend toward more financial regulation is unlikely to stop anytime soon.</span></p> <p class="p1"><span class="s1">Even if the different regional and state impacts of new regulatory policies are not deliberate design features, the fact remains that some areas feel more impact than others. The same logic applies now as 40 years ago: Given that federal regulations affect the distribution of economic growth and overall growth rate in the country, shouldn't Congress at least verify that its regulatory policies are achieving their intended outcomes?</span></p> Mon, 25 Apr 2016 11:57:42 -0400 Permissionless Innovation: Lunch and Discussion with Adam Thierer and Wendell Wallach <h5> Events </h5> <p>Technological innovation has exploded over the last two decades. Policymakers face new challenges as they consider the acceptable level of risk associated with new technologies while still allowing entrepreneurs to flourish.</p> <p>Please join us for a high-level discussion between two of the top scholars in the arena, who have very different responses to technology's impact on society.</p> <p><strong><a href="">Adam Thierer</a></strong>, Mercatus Center Senior Research Fellow and author of the newly-expanded <em>Permissionless Innovation: The Continuing Case for Comprehensive Technological Freedom, </em>argues that innovators should be left free to experiment with new technologies and business models with little interference from regulators.</p> <p><strong><a href="">Wendell Wallach</a></strong>, consultant, ethicist, and scholar at Yale University's Interdisciplinary Center for Bioethics and author of <em>A Dangerous Master: How to Keep Technology from Slipping Beyond our Control, </em>suggests policymakers should take a more cautious approach, emphasizing the need to consider the potential dangers and moral implications of emerging technologies.</p><p>Attendees will walk away with a deeper understanding of the many facets of the debate as well as a&nbsp;complimentary copy of <em>Permissionless Innovation</em>. A&nbsp;book signing will follow the discussion.</p> Tue, 19 Apr 2016 13:56:32 -0400