Mercatus Site Feed en Buchanan Speaker Series: Education, Inequality, and Incentives ( <h5> Events </h5> <p>Please join the <a href="">F. A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics</a> for the inaugural Buchanan Speaker Series event on “Education, Inequality, and Incentives” with Roland G. Fryer, Jr., the Henry Lee Professor of Economics at Harvard University and faculty director of the Education Innovation Laboratory.</p> <p><img style="float: left; margin-left: 10px; margin-right: 10px;" height="205" width="130" src="" /></p><p>Professor Fryer was awarded a MacArthur "Genius" Fellowship and the John Bates Clark Medal -- given by the American Economic Association to the best American Economist under age 40. Among other honors, he is a fellow of the American Academy of Arts and Sciences and a recipient of the Calvó-Armengol Prize and the Presidential Early Career Award for Scientists and Engineers. At age 30, he became the youngest African-American to receive tenure at Harvard.</p> <p>Professor Fryer's research combines economic theory, empirical evidence, and randomized experiments to help design more effective government policies. His work on education, inequality, and race has been widely cited in media outlets and Congressional testimony.</p> <p>His current research focuses on education reform, social interactions, and police use of force.</p> <p>The lecture will be followed by a <b>reception</b> from <b>6:00 to 7:30 PM</b> in the new offices of the F.A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics at the Mercatus Center in Mason Hall, Suite D101 on the George Mason University Fairfax campus.&nbsp;</p><p>Questions about this event? Please contact Brittany Hunter at <a href=""></a> or (703)-993-8297.</p><p><span style="text-decoration: underline;"><b>About the Buchanan Speaker Series</b></span></p><p>The Buchanan Speaker Series promotes Nobel Laureate James Buchanan’s intellectual legacy by promoting the application of Buchanan’s ideas applied to the pressing matters of our time.</p> <p>James Buchanan moved to George Mason University in the early 1980s. Buchanan’s importance to the developing agenda at the Mercatus Center is important in at least two ways.&nbsp;One is a broad research and educational vision that seeks to embrace both political economy and social philosophy.&nbsp;As Buchanan once put it when establishing his first academic center at the University of Virginia – The Thomas Jefferson Center for Studies in Political Economy in the late 1950s, the faculty will “strive to carry on the honorable tradition of ‘political economy’ – the study of what makes for a ‘good society.’&nbsp;Political economists stress the technical economic principles that one must understand in order to assess alternative arrangements for promoting peaceful cooperation and productive specialization among free men.&nbsp;Yet political economists go further and frankly try to bring out into the open the philosophical issues that necessarily underlie all discussions of the appropriate functions of government and all proposed economic policy measures.”</p> <p>The other lasting impression of Buchanan’s is his motto of “daring to be different.” Mercatus is grounded in the intellectual traditions best exemplified by F. A. Hayek, but our scholars also draw from the best work in contemporary social science and the humanities.&nbsp;As Buchanan noted in an essay honoring Hayek from 1979, “The diverse approaches of the intersecting ‘schools’ must be the bases for conciliation, not conflict. We must marry the property-rights, law-and-economics, public-choice, Austrian subjectivist approaches.” &nbsp;At George Mason and the Mercatus Center this intellectual marriage was established.</p> Tue, 13 Oct 2015 16:02:50 -0400 New Data Shows Large Insurer Losses on ACA Plans <h5> Expert Commentary </h5> <p class="p1">Risk corridor <a href="">data</a> released on October 1 by the administration shows that insurers lost a lot of money on Affordable Care Act (ACA) plans in 2014. The ACA established a three-year risk corridor program to transfer funds from insurers with lower-than-expected medical claims on ACA plans, i.e., profitable insurers, to insurers with higher-than-expected claims, i.e., insurers with losses. Despite administration <a href="">claims</a> that incoming payments from profitable insurers would cover losses from unprofitable ones, the risk corridor program shortfall exceeded $2.5 billion in 2014. Insurers with lower-than-anticipated claims owed about $360 million, and insurers with higher-than-anticipated claims requested about $2.9 billion from the program.</p> <p class="p1">Using available data, mostly from the administration, I estimate that insurance companies likely lost at least 12% on ACA plans in 2014. There are two explanations for such large losses, with both probably true to some extent. First, a larger share of older and sicker people enrolled for ACA coverage than insurers projected. Second, some insurers underpriced plans in order to capture market share and then raise rates in future years. Many people will stick to an insurance plan because of the hassle involved with switching plans. Moreover, the ACA’s reinsurance and risk corridor programs allowed insurers to price aggressively, anticipating that a large share of any initial losses would be heavily subsidized. Insurers’ large losses on ACA plans last year and Congress’s decision late last year to prohibit taxpayer money from filling in a risk corridor shortfall will undoubtedly put upward pressure on ACA plan premiums in the next few years.</p> <p class="p1"><b>3R Background</b></p> <p class="p1">The ACA’s 3Rs (risk adjustment, reinsurance, and risk corridors) were designed to assist insurance companies selling ACA plans.</p> <p class="p1">The risk adjustment program is a permanent, budget-neutral program that essentially transfers money from plans with healthier risk pools to plans with less healthy risk pools. In 2014, $4.6 billion was transferred among insurers through the risk adjustment program.</p> <p class="p1">Two other temporary programs—reinsurance and risk corridors—are in effect back-end subsidy programs for insurers offering ACA plans. The reinsurance program compensates insurers for people with extremely high medical expenses. In 2014, HHS <a href="">paid</a> insurers the full cost for enrollee’s claims between $45,000 and $250,000. This totaled $7.9 billion and was financed by a $63 tax on each person with private coverage.</p> <p class="p1">Insurers make risk corridor payments if expected claims were at least 3% greater than actual claims, and the government pays insurers if actual claims were at least 3% greater than expected claims. The figure below shows how risk corridor payments are calculated.</p> <p class="p1"><b>Estimates of Insurer Losses on ACA plans in 2014</b></p> <p class="p1">As the risk corridor formula shows, only a portion of the losses of insurers with actual expenses greater than expected expenses are subsidized. Using the net risk corridor deficit of $2.5 billion and the risk corridor formula, I estimate that insurers had actual claims in excess of expected claims by at least $4 billion on ACA plans in 2014. This is a rough approximation to how much insurers lost on ACA plans.</p> <p class="p1">In order to approximate how large the losses were as a percentage of premiums, I estimated the total premium insurers collected from selling ACA plans as follows. In July 2015, the IRS <a href="">projected</a> that about 4.8 million taxpayers claimed a premium tax credit for 2014 and that the total advanced premium tax credit (APTC) amount equaled about $15.5 billion. In June 2014, the Department of Health and Human Services (HHS) <a href="">estimated</a> that people with an APTC had their share of premiums reduced by 76%. Therefore, using the administration’s numbers, insurers collected total premiums of about $20.4 billion from subsidized exchange enrollees in 2014.</p> <p class="p1">HHS also reported that about 87% of people who signed up for exchange coverage at received subsidies. Assuming 87% of all exchange enrollees received subsidies and equivalence between the average premium chosen by subsidized and unsubsidized exchange enrollees, insurers collected about $23.4 billion in premiums from about 5.5 million exchange policyholders in 2014.</p> <p class="p1">The total amount of premiums that insurers collected for off-exchange ACA plans is more difficult to estimate because the number of off-exchange plan enrollees is not collected by HHS. <a href="">Humana</a> and many of the <a href="">Blues</a> released information showing the number of exchange plan enrollees relative to off-exchange plan enrollees. These insurers enrolled a little more than a quarter as many off-exchange enrollees as exchange enrollees. A recent Commonwealth Fund <a href="">study</a> observed that “insurers projected that only 21 percent of their anticipated 14 million ACA-compliant subscribers will be in plans sold only off the exchanges” in 2014.</p> <p class="p1">Some <a href="">surveys</a> of individuals suggest that the number of people enrolled in off-exchange ACA plans may be greater than what insurers have reported. After looking at the data and surveys, I assume that enrollment in off-exchange ACA plans was 50% of exchange enrollment in 2014. (The ACA only allows subsidies in exchange plans, which is a large incentive for people below 400% of the poverty level to purchase coverage in the exchange).</p> <p class="p1">Healthpocket <a href="">found</a> that exchange-only premiums are about 5 to 15% higher than plans sold both on and off the exchange. Assuming 2.7 million people enrolled in off-exchange ACA plans and that those average premiums were about 10% less than the average exchange premium, insurers collected about $10.3 billion in premiums from enrollees in off-exchange ACA plans. Altogether, I estimate that insurers collected about $33.7 billion in premiums from ACA individual market plans in 2014.</p> <p class="p1">Assuming net insurer losses on ACA plans of $4 billion means that insurers’ losses on those plans equaled about 12% of premiums in 2014. Admittedly, this is a crude estimate. However, because of the assumptions I made for the calculations, the 12% estimated loss seems more likely too low than too high.</p> <p class="p1"><b>Moving Forward</b></p> <p class="p1">The insurers that tended to make the most costly pricing mistakes appear to be the new health care cooperatives established by the ACA with large federal start-up loans. Six of the nearly two dozen co-ops – those in <a href="">Iowa/Nebraska</a>, <a href="">Kentucky</a>,<a href="">Louisiana</a>, <a href="">Nevada</a>, <a href="">New York</a>, and <a href="">Vermont</a> – have gone out of business already. (Vermont’s co-op actually never even started.) Most of the other co-ops <a href="">are</a> in terrible financial shape. The news that HHS is limited to pay out just 12.6% of insurer risk corridor claims <a href="">may lead</a> to the collapse of additional co-ops and other smaller health insurers.</p> <p class="p1">It is important to remember that insurers lost such significant money in 2014 on ACA plans even including the $7.9 billion reinsurance program subsidy they received. Assuming $33.7 billion in total ACA plan premiums, reinsurance payments equaled about 23% of premiums collected in 2014. As the reinsurance program phases out and the risk corridor program provides much less relief than insurers had assumed, next year’s <a href="">high premium increases</a> are likely to be replicated for at least one more year. While subsidized enrollees are somewhat insulated from premium increases, unsubsidized enrollees are not. Since ACA plans <a href="">have already failed</a> to attract many people with income more than twice the poverty line, sharply higher premiums will likely cause additional adverse selection in the individual market in the near term.</p> Tue, 13 Oct 2015 11:14:55 -0400 Ex-Im: Lessons from a Government Failure <h5> Expert Commentary </h5> <p class="p1">Though it's been hibernating for the past three months, the Export-Import Bank <a href=""><b>may be on the cusp of revival</b></a>. We learned on Friday that in the midst of the chaos surrounding the leadership vacuum in the House of Representatives, a group of congressmen plan to employ a rare procedural tactic to bring Ex-Im directly to the House floor without going through a committee. A vote is likely to come on October 26. Perhaps the best thing about this is that it will be a boon to civics teachers.</p> <p class="p1">If you want to decode the mysteries of economics, shed light on the dark recesses of modern democracy, and get students excited about the power of ideas, I can think of no better teaching tool than the controversial federal agency.</p> <p class="p1">Yes, I know. Even the bank's name sounds boring. And that is the first lesson.</p><p class="p1"><i><b>Lesson 1: In politics, it's often what you don't see that matters.</b></i></p> <p class="p1">Back in 1962, political scientists Peter Bachrach and Morton Baratz wrote an <a href=""><b>important article</b></a> on political power. Their thesis was at once simple and profound: Power has two faces. The first face (or should we say talking head?) is what dominates observed public conflict. It concerns the highly salient issues that consume all of the oxygen in Washington. Think: immigration, the Iran deal, The Donald's latest insult. The second face of power — arguably the true face — is all about agenda-setting. It concerns the ability to keep certain items <i>out</i> of public scrutiny and <i>not</i> talked about. Think: the farm bill's rarely discussed <a href=""><b>orgy of privileges</b></a> to some of the nation's wealthiest households, or the tax code's unquestioned <a href=""><b>preferences</b></a> for high-income homeowners.</p> <p class="p1">The more arcane, complex, and — yes — boring the policy, the easier it is for those who wield the second face of political power to keep the issue off the agenda. The Export-Import Bank is just such an issue. A relic of World War II, the federal agency was created to aid a country that no longer exists, the USSR. Now, the agency's <a href=""><b>main purpose is to subsidize ten highly</b></a> profitable corporations, including Boeing, GE, Bechtel, Exon Mobile, and Caterpillar. In fact, about 35 percent of the agency's subsidies benefit just one company: Boeing.</p> <p class="p1">The agency <a href=""><b>privileges these firms</b></a> by offering taxpayer-backed loan guarantees, working capital guarantees, direct loans, and export-credit insurance. At the moment, the agency's preferred form of subsidy is a loan guarantee. Here is how it works: When a U.S. manufacturer such as Boeing tries to sell a plane to a <a href=""><b>foreign-owned company</b></a> such as Emirates Airline, <a href=""><b>a large bank</b></a> such as JP Morgan usually finances the deal. But in the event that the foreign buyer defaults on its loan to JP Morgan, the Ex-Im Bank (quite generously) will cover up to 85 percent of the outstanding balance. The agency covers its day-to-day costs by charging fees to the foreign buyers. But when major defaults happen (and they have), the <a href=""><b>bank relies on U.S. taxpayers</b></a> for support.</p><p class="p1"><i><b>Lesson 2: There is no such thing as a free lunch.</b></i></p> <p class="p1">If you listen to the agency's staff and its boosters (which include the Chamber of Commerce and the National Association of Manufacturers), you'd think the Ex-Im Bank is all upside and no downside. Clearly, manufacturers like Boeing benefit from its programs. So do big banks like JP Morgan. Foreign buyers also benefit, unless the Ex-Im Bank's subsidies lure them into deals they can ill afford, as <a href=""><b>happened</b></a> to Air Nauru a few years back.</p> <p class="p1">But as any student of economics will tell you, there is no such thing as a free lunch. These benefits to manufacturers, buyers, and financiers are paid for by others. Namely: taxpayers, consumers, and other borrowers.</p> <p class="p1">Taxpayers, of course, bear a risk — facing a cost of up to $2 billion between now and 2024, according to fair-value accounting estimates by the <a href=""><b>Congressional Budget Office</b></a>.</p> <p class="p1">Consumers bear a cost. Because the Ex-Im Bank artificially boosts demand for products such as aircraft, the agency's subsidies raise the prices of these items. Some of this cost is passed along to you and me when we buy airline tickets. And some of it is borne by the investors and employees of the airlines themselves. This is one reason why Delta — which buys Boeing planes — has <a href=""><b>complained</b></a> about the Ex-Im Bank. Delta also doesn't like that the agency subsidizes foreign airlines with whom it competes.</p> <p class="p1">And finally, other borrowers bear a cost. All else being equal, a bank like JP Morgan would prefer to finance the purchase of an airplane and pass along 85 percent of the risk to taxpayers, rather than finance a new startup and bear 100 percent of the risk itself. That means that some capital is inevitably channeled away from non-subsidized projects.</p> <p class="p1">So which is greater: the benefits bestowed on a handful of major corporations and banks or the costs foisted on a large number of taxpayers, customers, and borrowers?</p> <p class="p1">As demonstrated in <a href=""><b>a new paper</b></a> by economists Robert Beekman and Brian Kench, the costs outweigh the benefits. Economists even have a colorful phrase for these excess costs. They call them "deadweight losses." And they can be quite substantial.</p> <p class="p1">But beyond these traditional losses there are others. One is <a href=""><b>"rent seeking"</b></a>&nbsp;loss. The money that a firm like Boeing makes from the Ex-Im Bank's support is known to economists as "rent." Rent has nothing to do with apartments. It's the term we economists use to describe the extra profit that one earns from an artificially contrived, exclusive benefit such as a subsidy. As the late economist Gordon Tullock demonstrated in a landmark <a href=""><b>series</b></a> of <a href=""><b>articles</b></a>, "rent seeking" is socially wasteful. Firms seeking rent will lobby. They'll donate to PACs. And they will change their production decisions to satisfy political desires instead of customer desires. All of this comes at a cost. The overwhelming weight of evidence suggests that rent-seeking societies are poor societies.</p> <p class="p1">And as I argued in a piece called <a href=""><b>"Pathology of Privilege,"</b></a>&nbsp;other costs attend corporate favoritism as well. When firms are shielded from competition, they pay little attention to consumer desires or to production costs. They have little incentive to innovate and change. And their managers waste their entrepreneurial talents devising new ways to protect their privileged positions instead of new ways to create value. In short, I concluded, "government-granted privilege is an extraordinarily destructive force. It misdirects resources, impedes genuine economic progress, breeds corruption, and undermines the legitimacy of both the government and the private sector."</p> <p class="p2"><i><b>Lesson 3: Concentrated interests usually win.</b></i></p> <p class="p1">If the Ex-Im Bank is so costly, why has the agency stuck around for so long? It's outlasted 13 presidents and 39 Congresses. What is its secret to longevity? The answer lies in a simple observation made by the economist Mancur Olson in an insightful though not particularly readable <a href=";qid=1441914090&amp;sr=8-1&amp;keywords=olson%2C+the+logic+of+collective+action"><b>book</b></a> first published a half-century ago. (For an accessible version of Olson's ideas, I'd highly recommend Jonathan Rauch's <a href=";qid=1441914150&amp;sr=8-1&amp;keywords=government%27s+end"><b>"Government's End."</b></a>) Olson's insight begins with the observation that all collective action is costly. It takes time, money, and effort to set up a PAC, to lobby Congress, or to organize a series of campaign ads. What's more, those of us who stand to gain from such action can free-ride on the efforts of others. His next insight is that smaller and more concentrated groups (such as a handful of manufacturers) will tend to find it far easier to overcome the collective-action problem than a large and diffuse group of people (such as consumers, borrowers, or taxpayers).</p> <p class="p1">To put it in stark terms: You, me, and some 321,000,000 other taxpayers, consumers, and borrowers each stand to gain by organizing political opposition to the Ex-Im Bank. But while the aggregate savings from eliminating the agency are large, the individual savings for any one of us are modest. And besides, that's a lot of cats to corral. In contrast, Boeing, GE, and JP Morgan each stand to gain <a href=""><b>billions</b></a> by organizing political support for the Ex-Im Bank. And while their total gains are smaller than the combined losses of taxpayers, consumers, and borrowers, their individual gains are immense. What's more, they have only a few cats to corral, so it's relatively easy for them to get politically organized.</p> <p class="p1">The lesson is that concentrated interests tend to prevail over diffuse interests.</p><p class="p1"><i><b>Lesson 4: Ideas &gt; interests.</b></i></p> <p class="p1">The next lesson is that Lesson 3 is sometimes wrong. While concentrated interests <i>are</i> a formidable force, so too are ideas. And in the very long run, ideas can trump interests. Edward Lopez and Wayne Leighton explore this concept in their <a href=";qid=1441915411&amp;sr=8-1&amp;keywords=lopez%2C+leighton%2C+scribblers"><b>superb 2014 study of social change</b></a>. Their book centers on a rare point of agreement between the intellectual arch-nemeses John Maynard Keynes and F.A. Hayek. Keynes wrote of "academic scribblers" whose ideas influenced kings and world leaders (who were themselves typically oblivious to this influence). And Hayek talked about the "intellectuals" who refined the ideas of academics and shaped them into social change. Both men believed that ideas — whether right or wrong — shape history.</p> <p class="p1">In the last two years, a powerful idea has taken hold: Government favoritism is a deeply destructive phenomenon. This idea has been gestating for quite some time. It animated the Constitution's general welfare clause, conveying the quaint notion that government ought to serve the general welfare of the masses and not the specific welfare of special interests. It can also be found in the writings of progressives like <a href=";qid=1441917280&amp;sr=8-1&amp;keywords=gabriel+kolko%2C+triumph"><b>Gabriel Kolko</b></a> and <a href=""><b>Ralph Nader</b></a>. And it appears in the thinking of free-market economists such as <a href=""><b>George Stigler</b></a> and <a href=""><b>Milton Friedman</b></a>. There was a time when even Barack Obama (then a senator) <a href=""><b>denounced corporate welfare</b></a>, specifically singling out the Ex-Im Bank. But for much of the last century, the concentrated interests wielded the second face of power to keep this idea off of the agenda.</p> <p class="p1">But now government favoritism is very much on the national political agenda. And the Ex-Im Bank, the obscure, boring federal agency that oversees complicated financial deals, is at the center of this discussion. Earlier this summer, for the first time in its 80 year history, the Ex-Im Bank's congressional authorization lapsed. And now nearly every presidential candidate has had to take a position on the Ex-Im Bank.</p> <p class="p1">How did this happen? Ideas.</p> <p class="p1"><i>Politico </i>just identified the <a href=""><b>50 most influential</b></a> "thinkers, doers, and visionaries transforming American politics" for 2015. The list is a who's who of Keynesian scribblers and Hayekian intellectuals. Among those <a href=""><b>recognized</b></a> were my colleague <a href=""><b>Veronique de Rugy</b></a> and my friend <a href=""><b>Timothy Carney</b></a>. In articles, posts, interviews, testimony, charts, and more charts, these individuals have done more to shed light on the inefficiencies and inequities of the Ex-Im Bank than anyone else in the last eight decades. And their ideas are making a difference.</p><p class="p1"><i><b>Lesson 5: Politics is messed up.</b></i></p> <p class="p1">If political markets were efficient, the agency would be permanently shuttered. But the final lesson is that political markets are far from efficient. They do not maximize utility, as the economist would say. Predictably, the concentrated interests who benefit from the agency are working feverishly to see that it is reinstated.</p> <p class="p1">This lesson is handed down to us by a generation of thinkers, including Gordon Tullock and the late Nobel Laureate James Buchanan. There are many reasons to believe that political markets are inefficient. The three most important, in my view, are externalities, "logrolling," and rational ignorance.</p> <p class="p1">Most students of economics are familiar with private externalities, such as pollution from factories.</p> <p class="p1">Unfortunately, most students are <i>not</i> taught that political markets almost always entail externalities as well, despite the fact that Tullock first pointed this out in <a href=""><b>1959</b></a>. Majorities routinely select policies without accounting for the costs that spill over onto minorities; representatives frequently buy local pork-barrel projects for their constituents and foist the costs onto the whole nation.</p> <p class="p1">Political externalities are facilitated through vote-swap agreements or logrolls. Through such agreements, everyone in the majority agrees to support the concentrated interests of everyone else in the majority. This explains why Professor Thomas Stratmann <a href=""><b>has found</b></a> that members representing dairy and sugar interests tend to vote for peanut interests, and vice versa.</p> <p class="p1">Right now, the concentrated interests who benefit from the Ex-Im Bank are trying to arrange just such an agreement. This summer, the Senate voted to tie the Bank's reauthorization to the highway bill, and it is possible that is how it will ultimately pass. Members whose constituents include the handful of firms that reap the lion's share of the agency's benefits are hoping that in agreeing to support highways in other members' districts, they can bring home the bacon.</p> <p class="p1">Now Ex-Im boosters are pushing another tactic, a rare legislative procedure known as a "discharge petition." It allows them to bypass the normal committee process and bring an Ex-Im vote to the House floor. Like so much in politics, the procedure takes advantage of what the political economist <a href=";qid=1444403626&amp;sr=8-1&amp;keywords=an+economic+theory+of+democracy%2C+downs"><b>Anthony Downs</b></a> called voters' "rational ignorance." Since most voters have very little influence over political outcomes, it makes no sense for them to invest time and effort in studying policy. Thus, 218 members of Congress can be <a href=""><b>expected</b></a> to support a measure that will do more harm than good for their unsuspecting constituents.</p> <p class="p1">Taxpayers, borrowers, consumers, and progress be damned. What a lesson.</p> Tue, 13 Oct 2015 15:47:19 -0400 Credit Insurance Is Your Peace of Mind <h5> Expert Commentary </h5> <p class="p1">Although life insurance agents and lenders provide socially important products, few people get lively when thinking about them. Fewer still get excited about lenders who also sell life insurance on loans. While few people have even heard of an important insurance product known as credit insurance, many borrowers rely on this product for peace of mind.</p> <p class="p1">What is credit insurance? Borrowers sometimes worry that they will not be able to pay back their loan due to unforeseen events. The market, of course, provides a way to calm these anxious borrowers by allowing them to add a product to their loan: credit insurance.</p> <p class="p1">There are three basic types of credit insurance. Credit life insurance pays off the remaining loan balance if the borrower dies before paying off the loan. Credit disability insurance makes the monthly loan payments, up to policy limits, if the borrower becomes infirmed or disabled. Credit involuntary unemployment insurance similarly makes the payments if a borrower loses his job.</p> <p class="p1">Many, though by no means all, borrowers purchase one or more of these kinds of insurance on a loan. As with other kinds of insurance, risk averse individuals purchase credit insurance when they feel that it is a good way to protect themselves against some possible financially catastrophic event. Likely buyers of credit insurance are borrowers without much traditional life insurance or savings, older borrowers, smokers, those who know they are unhealthy, and those who are worried about layoffs. Such a risk pool is clearly not favorable to the sellers of credit insurance.</p> <p class="p1">In 2012, the Federal Reserve Board published <a href=""><b>research results</b></a> by one of us and a colleague that showed about one quarter of installment loan borrowers purchased credit insurance. By contrast, 40 years ago, almost two thirds of such borrowers bought credit insurance.</p> <p class="p1">Credit insurance remains an attractive product for some borrowers. If consumerist policy advocates get their way, however, the product will not be available to them.</p> <p class="p1">For example, a <a href=""><b>recent publication</b></a> by The National Consumer Law Center (NCLC) uses the term "exorbitantly expensive" when describing the cost of credit insurance.</p> <p class="p1">These allegations are serious, but the NCLC offers no supporting analysis or current data to buttress them. Instead, the NCLC chose to rely on one decades-old court case (FDIC v. Gulf Life Ins. Co), statements made elsewhere by the NCLC, and statements made by those partial to the leanings of the NCLC. These reeds are weak.</p> <p class="p1">As an example, consider credit life insurance. This product is the largest component of credit insurance. All states regulate the price of credit life insurance, and one can easily find data about this product. A recent Consumer Credit Industry Association (CCIA) publication based on figures from state insurance departments shows the average regulated premium nationwide in 2013 was $0.50 per $100 per year. On a $2,000 one-year installment loan, such a premium is $10.00-less than a dollar a month. At this price, credit life insurance might well be an attractive product to some otherwise underinsured lower middle income borrowers.</p> <p class="p1">From this premium, insurers must cover the claims on the policies-46 percent of the premium-according to the CCIA publication. The remaining $5.40 must help cover the share of operating costs of the insurance company and the building of reserves to protect borrowers and to meet state requirements. To attract capital to this insurance enterprise, companies must earn a normal profit.</p> <p class="p1">To be sure, just like the sale of any insurance product, some of the premium goes to the lender who sells the product as a commission. The lender, however, must use a portion of this commission to pay for employee time, operating expenses to book the sale of the product, the filling out of paperwork to satisfy auditors and regulators, and claims processing expenses. There might be a residual that is a "profit" for the lender, but the amount is likely puny.</p> <p class="p1">Some consumer advocates propose to include the insurance premium in the cost of the loan for Truth in Lending (TIL) disclosure purposes. This idea damages consumers because such an inclusion makes credit shopping more difficult: Sometimes the insurance premium is included, and sometimes it is not. Moreover, including credit insurance in the loan cost could send borrowers the implicit message that they are expected to buy credit insurance. This product is voluntary, and it should be kept that way.</p> <p class="p1">These advocates seemingly forget that the costs of the loan and the cost of the insurance are already required TIL disclosures. The <a href=""><b>TIL disclosures</b></a> are appropriately separate because these are separate products. This appropriate separation has been TIL policy since 1969, i.e., since implementation. That many borrowers choose not to buy credit insurance underscores the fact that credit insurance is not part and parcel of the loan. Consumers benefit from seeing separate costs.</p> <p class="p1">Credit insurance is not right for every borrower, but it makes life better for some. These borrowers, informed by existing disclosures, should be permitted to choose credit insurance products. As is currently required, the costs of these products should be disclosed separately from the costs of the loan. Why make consumers worse off by haphazardly merging credit insurance costs with loan costs?</p> Tue, 13 Oct 2015 10:43:53 -0400 Hayek Speaker Series: The Continuing Relevance of Hayek's 'The Constitution of Liberty' with Richard Epstein <h5> Video </h5> <iframe width="560" height="315" src="" frameborder="0" allowfullscreen></iframe> <p>The <a href="">F.A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics</a> hosts a consideration of “The Continuing Relevance of Hayek’s The Constitution of Liberty” with remarks by eminent legal scholar Richard Epstein, the Laurence A. Tisch Professor of Law and Director of the Classical Liberal Institute at New York University School of Law. Read more about this event and the Hayek Speaker Series at <a href="">;</a></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> Tue, 13 Oct 2015 16:08:47 -0400 The Delegate-And-Forget-About-It Doctrine and Government's Fourth Branch <h5> Expert Commentary </h5> <p class="p1">It's been a long time coming, but structural reforms to the regulatory process are finally starting to <a href=""><b>reach the mainstream</b></a>. Presidential candidates, and sitting members of Congress alike, are increasingly proposing ideas and legislation that would change the way regulatory agencies go about making regulations, rather than reacting to each individual regulation as it is produced (although, to be sure, that still happens, too). And it's for good reason that more and more people want to change the regulatory process.</p> <p class="p2">In years past, it may have been easy for politicians to delegate responsibility to agencies and then act as if the issue had been solved. But the delegate-and-forget-about-it doctrine led to a fourth branch of government — the regulatory agencies — producing far more law than Congress itself, and accumulating a stockpile of regulations that is so large that it would require <a href=""><b>nearly three years</b></a> for a person to read through the current federal regulatory code.</p> <p class="p1">The legal authority for regulation comes originally from Congress. But agencies often receive broad or even vague mandates in legislation, and Supreme Court precedents (e.g.,<a href=",_Inc._v._Natural_Resources_Defense_Council,_Inc."><b><i>Chevron U.S.A. v. Natural Resources Defense Council</i></b></a>, which led to "<a href=""><b>Chevron deference</b></a>") give the agencies wide latitude in interpretation. As a result, even relatively concise congressional legislation can grow over time.</p> <p class="p1">And grow they do. For our <a href=""><b>RegData</b></a> project, we counted the number of individual restrictions — words and phrases that indicate a specific prohibited or mandatory activity — contained in the Code of Federal Regulations (CFR). In the 2014 CFR, we found about 1.1 million restrictions, each one every bit as legally binding as a law passed by Congress and signed by the president.</p> <p class="p1">According to the <a href=""><b><i>2016 Regulator's Budget</i></b></a> by Susan Dudley and Melinda Warren, taxpayers spent about $62 billion on the production and enforcement of regulations, although that figure excludes a number of significant regulators for technical reasons — and both the budget and number of restrictions have grown consistently over the time they have been measured. Over the last 20 years, the regulatory budget has more than doubled in real terms, while the number of total restrictions has grown by about 220,000 — a 25 percent increase.</p> <p class="p1">The agencies with the highest regulatory output, as measured by regulatory restrictions printed in federal regulatory code, are familiar: the Environmental Protection Agency (EPA), the IRS, the Coast Guard, the Occupational Safety and Health Administration (OSHA) and the Federal Communications Commission (FCC). Between them, these five agencies account for more than 314,000 restrictions, nearly a third of the overall total.</p> <p class="p1">The EPA, however, stands out even from that crowd. The EPA alone is responsible for about 14 percent of all federal regulatory restrictions. In fact, at more than 150,000 restrictions, the EPA more than doubles the next largest agency, the IRS, at about 58,000. This preeminence is particularly noteworthy because it was only created in 1973; many other significant regulators were born out of the New Deal, giving them a four-decade head start.</p> <p class="p1">But the growth of EPA restrictions has been unmatched. The EPA accounts for nearly 80,000 of the overall 220,000-restriction increase witnessed over the past 20 years. In its 20 years of existence, the EPA added more restrictions than any other agency has written over its entire existence, despite being much younger than many other agencies.</p> <p class="p1">Should we expect to see differences in statistical measures of regulation when Republicans hold the White House versus when Democrats do? After all, regulatory agencies are (mostly) housed in the executive branch and are ostensibly controlled by the president. We prefer to let the data answer that question. Year after year, the body of regulatory law has grown steadily, without regard to which party held Congress or the White House, as the nearby figure shows. Regulation has grown <a href=""><b>under every president for which we have data</b></a>, and at nearly the same rate — with the exceptions of Reagan's second term and Clinton's second term.</p><p><a href=""><img src="" width="585" height="418" /> </a></p><p class="p1"><a href=""></a>It seems that once lawmaking authority is delegated to regulatory agencies, they act like perpetual motion machines (well, except that the fuel for their motion comes in the form of outlays appropriated by Congress). This fact may be driving the desire for meaningful reform to the process, since it seems that controlling the White House is not sufficient to alter the path of regulatory accumulation.</p> Fri, 09 Oct 2015 15:08:31 -0400 All Taxes Start as Good Intentions, but Don't End That Way <h5> Expert Commentary </h5> <p class="p1">Good intentions are one of the least scarce resources on the planet. The trick, of course, is put all those good intentions to work in ways that actually achieve desired goals. In a world where virtually every other resource is in short supply, the targets of one’s good intentions must be focused on actions that address the most pressing issues.</p> <p class="p1">The “Chicago Sweetened-Beverage Tax,” now being considered by the city’s Health and Environmental Protection Committee, is long on good intentions and short both on prioritization and on understanding of the economic principles of public finance.</p> <p class="p1">The ordinance, introduced at the end of July, will, if passed, impose an excise tax of one cent per ounce on all sugary soft drinks sold within the city’s limits to curb consumption of “the number one source of sugar in the American diet.” As the ordinance’s preamble states, “numerous studies” have implicated sugar as contributing to a modern obesity “epidemic, along with the health problems associated with excessive body weight, including Type II (adult-onset) diabetes, asthma, and heart disease.</p> <p class="p1">The proposed ordinance assumes that a one-penny per ounce tax will lead to a 23.5 percent reduction in retail sales of sugar-sweetened beverages (SSBs), whether pre-bottled or mixed from syrup or powder at restaurants and convenience store fountains, purchases of which are subject to the same penny per ounce tax. A 23.5 percent reduction in sales, in turn, is projected to lower youth obesity rates by 9.3 percent and to cut them by 5.2 percent in adults.</p> <p class="p1">That estimate of a nearly one-fourth drop in sales assumes that (1) the new excise tax will be passed on fully to consumers in higher retail prices (a 12 cent increase for a 12-ounce serving, which works out to a 12 percent price hike if an untaxed container costs $1.00), (2) consumers will not respond by switching to (untaxed) diet sodas, which mounting evidence shows to be just as unhealthful as sugary soft drinks, or (3) buy untaxed or lesser taxed SSBs beyond Chicago’s city limits.</p> <p class="p1">None of those assumptions is warranted. A study of the impact of a similar SSB tax implemented in Berkeley, Calif., on January 1, 2015, found that only 22% of the tax there – not 100% – found its way into higher retail prices. Our own research, published by the Mercatus Center, suggests that a 12 percent increase in SSB prices triggers only about a 6 percent reduction in retail sales.</p> <p class="p1">The tax supporters’ good intentions thus will fall far short of expectations.</p> <p class="p1">How will the projected SSB tax revenue be spent? Most of it is dedicated to a special “Wellness Fund” created by the same ordinance. Twenty percent of the fund’s receipts will sponsor studies on obesity and 75 percent will be spent on educational programs emphasizing the benefits of healthy eating and physical fitness. The revenue therefore largely will flow to educators and researchers, not ordinary people.</p> <p class="p1">Between one and two percent of the revenue is earmarked for studies of the tax’s actual effects on Chicagoans. But scholars of public finance already have documented the effects of selective excise taxes on producers and consumers, not just in theory, but also in practice.</p> <p class="p1">It likewise is well known that the burdens of selective excise taxes on sugary drinks, like all retail taxes, fall heaviest on low-income households. Berkeley tried to avoid the regressive effects of its SSB tax by exempting soda purchases made with food stamps, but we also know that poor people disproportionately suffer the health consequences of poor diet choices.</p> <p class="p1">Finally, we also know that reelection-seeking politicians will raid any public treasury account like the “Wellness Fund” whenever other budget priorities become more salient. Does anyone expect the Wellness Fund to be spent as intended if potholes in Chicago’s streets must be filled or if the pension funds for police and firefighters go deeper into the red?</p> <p class="p1">We think not. We also think that Chicago’s proposed SSB tax, although grounded in good intentions, simply is another political ploy to raise revenue on the backs of poor Chicagoans who are less able to pay it than commuters and middle and upper income households.</p> Fri, 09 Oct 2015 12:55:38 -0400 Medicare Does a Bad Job Setting Fees <h5> Expert Commentary </h5> <p class="p1">Traditional "fee-for-service" (FFS) Medicare — which pays providers a fee for each service delivered — is the nation's largest health-insurance program, enrolling 38.1 million aged and disabled beneficiaries in 2014. The program pays more than 200 million claims for inpatient hospital admissions and home-health-care visits each year, and 1 billion claims for doctors' services. There are about 10,000 different services for doctors alone, and each of these fees is set through an administrative process that attempts to discern the cost of producing that service — called the "relative value" — in terms of the costs of physician work, practice expenses, and liability insurance.</p> <p class="p1">Not surprisingly, Medicare fees substantially influence the prices that private-sector insurers pay for services. To save time and effort in developing their own fee schedules, many private payers have adopted the Medicare fees outright. And when Medicare raises its fees, private insurers have to go along to some degree, or else providers will become less likely to see privately insured patients.</p> <p class="p1">But FFS Medicare does a bad job of setting these fees. A&nbsp;<a href=""><b>new analysis</b></a> that we conducted for the <a href=""><b>Mercatus Center</b></a> at George Mason University explains why — and suggests how to fix the system.</p> <p class="p1">We focused on the fees for doctors' services, although much of our analysis applies to the fees that Medicare pays for hospital admissions as well. For doctors, the program has struggled for many years to increase the value of "evaluation and management" services — think of these as "primary care" — in relation to tests and procedures. Evaluation and management services are vital for managing the health of aged and disabled Medicare beneficiaries, many of whom have multiple chronic health problems.</p> <p class="p1">In principle, Medicare could collect fine-grained data on medical costs from a representative sample of physicians. Instead, the data are collected, and updates to the fees are recommended, by a private body whose committees are drawn disproportionately from the major specialty societies. This body, known as the Relative Value Scale Update Committee or RUC, resists rebalancing the fees, despite advances in technology that have reduced the cost of tests and procedures.</p> <p class="p1">Conflicts of interest are not the only problem with the fee-setting process. The RUC relies on flawed surveys to determine the relative values of different services. It sometimes cherry-picks the results if the data are deemed to be flawed or incomplete. And it often uses unrealistic assumptions that inflate the cost of the equipment that is used for diagnostic testing.</p> <p class="p1">Part of the blame can be laid at the door of the Centers for Medicare and Medicaid Services, the government agency that oversees Medicare and reviews the recommendations coming from the RUC, though its performance has improved in recent years. In the past, CMS almost always accepted the RUC's recommendations, but substantial changes in the oversight process have given the agency more authority and funding. It now accepts only about half of the RUC's recommendations.</p> <p class="p1">But even if CMS could collect unbiased data and evaluate it in a neutral manner, the fee-setting process still would be flawed until its deeper assumptions were challenged. Most important is the assumption that physicians' fees should be based on administrative data, in an attempt to create a semblance of market prices.</p> <p class="p1">Medicare fees indeed should reflect market prices. Unfortunately, it's impossible for a government agency to set prices that replicate those resulting from millions of independent transactions between buyers and sellers in a competitive market. But CMS can do better, by harnessing the power of actual competition instead of relying on administrative data.</p> <p class="p1">We suggest having providers bid on the fee schedule or bundles of services, and then using the bids to set Medicare fees. Providers could set their prices wherever they liked, but those with higher bids would be placed in higher tiers. Medicare beneficiaries would pay higher out-of-pocket costs for providers in higher tiers — a strategy that has worked in the private sector. This already happens to some extent with hospital admissions, but it could be extended to bundles of services that include outpatient care.</p> <p class="p1">For this system to be effective, beneficiaries would have to care about the higher cost of higher-tier providers. This form of exposure has been difficult in the past, because many FFS Medicare beneficiaries buy "Medigap" policies that cover some out-of-pocket costs. A key part of any reform must be to prevent these policies from insulating beneficiaries from the added cost of more expensive providers — providers we know are more expensive because <i>they have told us so,</i> in their bids.</p> <p class="p1">Medicare needs to find a new way to set fees. A bidding system could be the solution — but for this to be successful, beneficiaries must have some skin in the game.</p> Fri, 09 Oct 2015 14:55:01 -0400 Speak Now, Congress, or Forever Maintain the Status Quo <h5> Expert Commentary </h5> <p style="text-align: left;" class="p1">The House of Representatives is looking for a new speaker. Such times of change present a perfect opportunity for Congress to reflect on what it should aspire to achieve.</p> <p style="text-align: left;" class="p1">On top of the list is getting control of our fiscal situation by restraining government spending in ways that are consistent with a healthy and vibrant private sector. This will also make better tax policy more likely and help restrain debt levels.</p> <p style="text-align: left;" class="p1">As we know, the drivers of our Greek fiscal future are so-called entitlement programs, such as Medicare, Social Security, Medicaid and Affordable Care Act subsidies. Though there is little chance of a short-term political victory with a divided government, Congress should nonetheless move some real reform proposals through committees to get the ball rolling.</p> <p style="text-align: left;" class="p1">The free market movement has provided many reform ideas over the years, so lawmakers have plenty of options to choose from. On Social Security, they range from private accounts to an expansion of Roth IRAs or traditional individual retirement accounts. On health care, they range from freeing the provision of health care from government-imposed constraints that cause ever-rising costs to Rep. Paul Ryan's plan and medical savings accounts. Many plans have also been proposed to replace or repeal the Affordable Care Act.</p> <p style="text-align: left;" class="p1">Regarding tax policy, one of my favorite options so far is a system of universal savings accounts like what Canada has. The Cato Institute's Chris Edwards explains: "Such accounts would be like (Roth IRAs), but for all types of savings, not just retirement savings. People would contribute after-tax income to USAs, and then all earnings and withdrawals would be completely tax-free." In other words, you could save for your retirement, kids' college education, vacations or health care spending in one flexible account. It could also be a good alternative to Social Security and other failing programs.</p> <p style="text-align: left;" class="p1">Universal accounts would also kill (or at least wound) three birds with one stone — addressing our tax code's punishing double taxation of savings, encouraging savings and boosting personal financial security.</p> <p style="text-align: left;" class="p1">That leads me to fundamental tax reform.</p> <p>Tax reform is always on any Republican candidate's "if you vote for me" promise list, but the current Congress has failed to advance a comprehensive tax reform agenda — and that in spite of the biggest majority since 1928. Our tax code is complex and burdensome; it has 80,000 pages; it's expensive to understand and comply with; and it's a serious inhibitor of growth and innovation. It's also biased toward special interests.</p><p style="text-align: left;" class="p1">It should be easy to come up with legislation that free market Republicans could support, seeing as many of the Republicans running for president have issued their own plans to get rid of special carve-outs, lower the rates and end the tax code's biases against saving and investment.</p> <p style="text-align: left;" class="p1">On the spending front, the biggest victory of the past seven years has been the implementation of spending caps, which in turn led to a certain level of budget restraint. These limits should stay in place, even if it means aggravating defense hawks and President Barack Obama. It would send a strong signal that this Congress is serious about fiscal responsibility.</p> <p style="text-align: left;" class="p1">Indeed, the caps could be expanded, as proposed by Rep. Kevin Brady's MAP Act. The lawmaker from Texas would extend the caps to cover so-called mandatory spending. And his plan should have broad GOP support because the defense budget no longer would be disproportionately impacted.</p> <p style="text-align: left;" class="p1">Finally, we can only hope that the current change in Congress will encourage a true dialogue about the need to move away from the many programs that exist for the sole purpose of boosting a few companies or an entire industry's bottom line. Special interest politics is bad economics and bad policy. A first step would be, of course, to keep the Export-Import Bank closed permanently and to move forward with a plan to wind down its activities.</p> <p style="text-align: left;" class="p1">There is much more to do — for example, fundamentally reforming the way we fund highways, addressing overregulation and freeing higher education from the nation's accreditation cartel — but those are some good conversation starters.</p> Thu, 08 Oct 2015 09:45:40 -0400 Scottsdale Supporter and Friend Lunch <h5> Events </h5> <p>In <a href="">new research for the Mercatus Center at George Mason University</a>, Senior Research Fellow&nbsp;Eileen Norcross&nbsp;ranks each U.S. state’s financial health based on short- and long-term debt and other key fiscal obligations, including unfunded pensions and health care benefits. The study, which builds on&nbsp;previous Mercatus research about state fiscal conditions, provides information from the states’ audited financial reports in an easily accessible format, presenting an accurate snapshot of each state’s fiscal health.</p><p>Arizona’s position in the rankings? Number 32.</p> <p>Join us for a lunchtime discussion as Eileen explains what criteria were used to determine Arizona’s ranking, what’s keeping Arizona in the bottom half of the rankings, and what policy changes would help the state improve its fiscal health.</p> <p>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. Please invite friends or associates who might be interested.</p><p>To RSVP for this event, please contact Matthew Owens at <a href=""></a> or 703-993-9062.</p> Mon, 05 Oct 2015 15:53:24 -0400 Sarasota's Anti-Regulation Vote Settles the Uber-Taxi Feud <h5> Expert Commentary </h5> <p class="p1">Last month in Florida, the <a href="">Sarasota City Commission did the unthinkable</a>. It unanimously voted to end unnecessary regulation of taxis in its city. In an era where the political feud between taxis and ridesharing companies seems to reach new heights every day – and has already boiled over into violent protests in <a href="">France</a>, <a href="">Mexico</a> and <a href="">India</a> – the city of Sarasota provided an admirable example of how to release the tension surrounding a contentious issue.</p> <p class="p1">The city commission recognized that the regulations it had in mind – background checks, insurance requirements and vehicle standards – were similar to policies already being practiced by ridesharing companies. In their desire to satisfy their customers, Uber, Lyft and the others are actually <a href="">self-regulating</a>. This is the unanticipated beauty of the market – that competition between companies leads to increasingly better provision of services. If a company fails in this, Sarasota Commissioner Liz Alpert observed, "<a href="">they're going to be out of business</a>."</p><p class="p1"><a href="">Continue reading</a></p> Tue, 06 Oct 2015 15:01:20 -0400 Distinguishing Policy from Politics in the Cadillac Plan Tax <h5> Expert Commentary </h5> <p class="p1">The Affordable Care Act’s “Cadillac plan tax” has been much in the news of late. &nbsp;A motley collection of <a href="">health sector companies</a>, <a href="">conservative ACA opponents</a>, <a href="">labor unions</a> and <a href="">presidential candidates</a> is working for repeal. &nbsp;On the other side&nbsp;<a href="">101 health policy experts</a> recently wrote to urge Congress to retain the tax “unless it enacts an alternative tax change that would more effectively curtail (health care) cost growth.” This piece will explain the basics of the Cadillac plan tax, some of the policy and political reasons for its enactment, and why its current precarious status was both predictable and predicted.</p> <p class="p1">The Cadillac plan tax is a 40 percent excise tax, starting in 2018, on the amount by which health insurance plans’ annual premiums exceed $10,200 (individual) or $27,500 (family). &nbsp;After 2020 these threshold amounts are indexed to general price inflation which – because health costs tend to rise faster than that – means that over time more and more plans will be subject to the tax. &nbsp;The finances of the ACA depend to a significant extent on this projection that the tax will hit increasing numbers of plans. &nbsp;This would produce a growing stream of <a href="">federal revenue</a>, funding part of the law’s ambitious expansion of subsidized health coverage.</p> <p class="p1">The origins of the tax lie in a longstanding health policy problem – specifically, the federal tax preference for employer-sponsored insurance (ESI). &nbsp;The problems with this longstanding tax distortion are too many to be fully described here, but among them are: it <a href="">depresses wages</a>, it <a href="">drives up health spending</a>, it’s <a href="">regressive</a>, and it makes it harder for people with enduring health conditions to <a href="">change jobs</a> or enter the individual insurance market. &nbsp;Health economists across the ideological spectrum have long agreed the tax distortion is <a href="">bad policy</a>. &nbsp;Numerous plans have been put forward over the years to eliminate it and to replace it with either a <a href="">standard deduction or tax credit</a> available to all insurance purchasers, not only those with coverage through their employer. &nbsp;</p> <p class="p1">Had the 2009-10 health reform debate been conducted solely on the policy merits, eliminating or at least scaling back the ESI tax preference would have been a centerpiece of the discussion. &nbsp;But unfortunately the ACA was debated shortly after defeated presidential candidate <a href="">John McCain</a> had been successfully attacked for his proposal to replace the ESI preference with a standard credit. The ACA could not become law without the support of many who had joined or countenanced these attacks. &nbsp;Sponsors thus devised the Cadillac plan tax to achieve similar policy objectives but in a different way. &nbsp;The result does not eliminate the underlying tax distortion (i.e., the ESI tax preference), but rather creates a second countervailing distortion (i.e., a new tax), one that starts relatively smaller but is deliberately indexed to expand its reach over time. &nbsp;The intent was that the new tax would both pay for some of the ACA’s spending, while also countering some of the longstanding tax distortion’s effect of driving up general health care costs.</p> <p class="p1">One reason the public discussion over the Cadillac plan tax is so muddled is because of frequent mixing of policy and political considerations. &nbsp;Keeping those issues separate is essential to thinking clearly about the tax. &nbsp;Toward that end, a key policy point experts should communicate clearly to lawmakers is a simple hierarchy of best to worst options:</p> <p class="p1">1) Best: eliminate or scale back the damaging distortion (i.e., no tax preference for ESI)</p> <p class="p1">2) Mixed bag: continue it but have a countervailing distortion (e.g., the Cadillac plan tax)</p> <p class="p1">3) Worst: Continue the distortion without mitigation (ESI preference yes, Cadillac plan tax no)</p> <p class="p1">Purely on policy grounds, consensus expert opinion would rank these choices as above. &nbsp;But too often the public statements of experts, such as in the <a href="">aforementioned letter</a>, obscure this policy guidance. &nbsp;Here this is because some have concluded that political factors require choosing a second-best policy (#2 above) over the best policy of option #1. &nbsp;A weakness of such reasoning is that based on politics alone, #2 is not as attractive as #3, which is the worst policy. &nbsp;So we now have a new tax that is not optimal policy, and which faces rising political opposition as well.</p> <p class="p1">I do not pretend to know the size of the gaps in political attractiveness between #1 and #2, or between #2 and #3. &nbsp;My general philosophy, however, is that policy analysts like myself should remain focused on the relative policy merits, leaving it to elected officials and their staffs to work out political practicalities. &nbsp;There are simply too many ways to go wrong when academics incorporate political counsel into policy pronouncements. &nbsp;Doing so risks going beyond both our expertise and appropriate role.&nbsp;</p> <p class="p1">The Cadillac plan tax is a prototypical example of the complexities of political calculation. &nbsp;It was devised to be more attractive politically than transparently attacking the ESI tax preference. &nbsp;But now it faces strong opposition both from labor unions on the left and anti-tax conservatives on the right, in addition to industry interests. &nbsp;From the outset it was unclear whether the tax was an example of political shrewdness or of being too clever by half. &nbsp;For, as I wrote in my <a href="">2012 paper</a> on the ACA’s fiscal effects:</p> <p class="p1">“Of all of the provisions of the ACA, the Cadillac-plan tax in its current-law form perhaps warrants the greatest skepticism. It is expressly designed to expose an increasing share of health insurance benefits to taxation over time. Moreover, it did not survive its initial clash with political pressures; the form of the tax enacted with the ACA was almost simultaneously amended in accompanying reconciliation legislation, changes that both postponed the effective date and increased the thresholds below which the tax would not apply. . . To assume that the tax will always be applied to the letter of current law is to assume that political actors in the future will be far more committed to this tax than even the original authors of ACA were.”</p> <p class="p1">At the time, I wrote this not to criticize the policy intent of the Cadillac plan tax but to note that it was imprudent to commit to all the ACA’s new spending before it was known whether this politically untested tax would produce all of its projected revenue.</p> <p class="p1">In conclusion, let’s consider two possible answers to a legislator’s hypothetical question, “Should we repeal the Cadillac plan tax?”</p> <p class="p1">1) No, unless you pass an alternative tax change that helps mitigate health care cost growth.</p> <p class="p1">2) Yes, you should replace it with a law eliminating the current tax preference for employee compensation in the form of health benefits.</p> <p class="p1">The two answers are substantively very similar. &nbsp;But answer #2 is the superior answer (and in my view what experts should say) because it conveys the most information to lawmakers about optimal policy. &nbsp;#1 can only be justified as the better answer if one incorporates judgments of political feasibility that academics are not generally in a position to make. &nbsp;</p> <p class="p1">It is perhaps ironic that the Cadillac plan tax, born of some political opportunism, is now a target of same. In any case, there are plenty of people much more qualified than I (and other policy analysts) to determine the optimal balance of policy and politics. &nbsp;But if unelected nonpartisan experts don’t make the direct case for best policy, no one else will. &nbsp;We should all be clear that the appropriate policy goal is to remove the current-law tax distortion that has done so much damage to our health care system.</p> Tue, 06 Oct 2015 13:01:33 -0400 Conversations with Tyler: A Conversation with Dani Rodrik <h5> Video </h5> <p><iframe frameborder="0" src="" height="305" width="585"></iframe></p> <p>Tyler and Dani Rodrik discuss premature deindustrialization, the world’s trilemmas, the political economy of John le Carré, what’s so special about manufacturing, Orhan Pamuk, RCTs, and why the world is second best at best.</p><p>For more episodes, visit:<br /><a href=";redir_token=cQLw2zu4FMeBtPXedZpaaWjQTeh8MTQ0Mzg4MzQwNUAxNDQzNzk3MDA1"></a></p> Sat, 03 Oct 2015 14:01:47 -0400 Conversations with Tyler: A Conversation with Luigi Zingales <h5> Video </h5> <p><iframe frameborder="0" src="" height="305" width="585"></iframe></p> <p class="p1">Tyler Cowen and Luigi Zingales discuss Italy, Donald Trump, Antonio Gramsci, Google and conglomeration, Luchino Visconti, Starbucks, and the surprisingly high productivity of Italian cafés.</p> <p class="p1">For more episodes, visit:<br /><a style="font-size: 12px;" href=";redir_token=cQLw2zu4FMeBtPXedZpaaWjQTeh8MTQ0Mzg4MzQwNUAxNDQzNzk3MDA1"></a></p> Fri, 02 Oct 2015 11:04:10 -0400 Adam Thierer | Internet of Things: Better Policy and Regulation | Regulation University <h5> Video </h5> <iframe width="560" height="315" src="" frameborder="0" allowfullscreen></iframe> <p>The world today is seemingly always plugged into the Internet and technologies are constantly sharing data about our personal and professional lives. Device connectivity is on an upward trend with Cisco estimating that 50 billion devices will be connected to the Internet by 2020. Collection and data sharing by these devices introduces a host of new vulnerabilities, raising concerns about safety, security, and privacy for policymakers and regulators.</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> Tue, 06 Oct 2015 15:31:46 -0400 The Future of Health Care in Virginia: A Discussion on Certificate of Public Need Laws <h5> Events </h5> <p>The U.S. health care system is as complex as it is crucial. Some of that complexity stems from a little known and less understood regulation, common in many states. Known as “certificate of need” (CON) laws these regulations require providers to obtain permission from a state board before they may open a new facility, expand an existing facility, offer a new service, or purchase a new piece of equipment.</p> <p>Currently, the <b>Commonwealth of Virginia </b>— along with 35 other states and the District of Columbia — maintains a CON program or as Virginia refers to it as “certificate of public need” (COPN) program. Many states contend that these programs increase care for the needy while many hospitals claim they are vital to ensuring quality health care.</p> <p>The <b>Mercatus Center at George Mason University</b> invites you to join Mercatus Center researchers Thomas Stratmann and Christopher Koopman as well as Vice President and General Counsel of the Virginia Hospital &amp; Healthcare Association <b><a href="">Brent Rawlings</a></b> for a discussion of Virginia’s COPN program. &nbsp;Former Virginia Delegate Chris Saxman will moderate the discussion.</p> <p>Though space is limited, this event is free and open to the public, all General Assembly Members, and all state agency staff. Lunch will be provided.<i> </i></p> <p><i>Questions? Please contact Brittany Hunter at </i><a href=""><i></i></a><i> or 703-993-8297.</i></p> Tue, 13 Oct 2015 14:23:18 -0400 How the Unseen Effect of Regulation Harms Economic Growth <h5> Expert Commentary </h5> <p class="p1">The <a href="">2015 Economic Freedom of the World report</a> was recently released and out of the 157 countries ranked the United States fell <a href="">from the 12th slot in 2014</a> to 16th. This includes an especially low rank of 49th in the category “Business regulations,” which is probably not surprising to any U.S. business owner.</p> <p class="p1">According to the Mercatus Center’s <a href=";regulator%5b%5d=0">RegData</a> database, federal restrictions on business activities increased 28 percent from 1997 to 2012. While these regulations may be well intentioned, excessive rules and restrictions can have pernicious effects on the economy.</p> <p class="p1">A new study that uses RegData shows that <a href="">federal regulations decrease new hiring</a>. In addition to this direct, negative effect on economic activity, there is an unseen effect — the businesses that are never started because potential entrepreneurs are discouraged by all the red tape in their path.</p> <p class="p1">Along with the decline in new hiring, the aforementioned study shows that more regulated industries experience fewer new entrants into the market each year. This unseen effect negatively affects economic growth in the long run and the short run.</p> <p class="p1">An agency rule, restriction or regulation may not seem like a big deal on its own, but the cumulative effect can be death by a thousand cuts. For instance, the combination of new $5-per-hour parking meters and a local rule requiring establishments to verify that at least 80 percent of their business comes from the local area contributed to the recent closure of a <a href="">100-year-old fruit store in Palm Beach, Fla</a>.</p> <p class="p1">If you talk to any local business owners you know, you may get a list of similar complaints about the costs — in money, time, effort and lost opportunities — that their local government places on them. How many hopeful entrepreneurs, discouraged by the plethora of local regulations obstructing their path, decide that starting a business just isn’t worth the hassle?</p> <p class="p1">Economists have long maintained that profit and loss are important signals, which relay information about the most efficient use of scarce resources. Like losses, firm failures also serve a useful function. A recent study in the Journal of Regional Science <a href=";jsessionid=19A77F3AACDC1B1F93E5AD2540CF6C10.f04t03?userIsAuthenticated=false&amp;deniedAccessCustomisedMessage=">finds evidence that both firm openings and closings positively affect subsequent entrepreneurship and employment growth</a> in metropolitan areas. The researchers contend that firm closings — when combined with new openings — transmit valuable information to future entrepreneurs about the local economic environment such as the level of demand, availability of financing, and quality of the labor force.</p> <p class="p1">The more information prospective entrepreneurs have, the less likely they are to err, which increases their chance of success. This conclusion is probably not surprising to anyone who has ever learned what not to do by watching someone else make a mistake.</p> <p class="p1">Regulations at both the federal and local level can prevent the information transmitted by firm openings and closings from ever materializing. This is because many regulations act as a barrier to entry that prevents entrepreneurs from ever serving a single customer. We can never know how many potential entrepreneurs have tried to start a business, only to run into some regulatory hurdle that made it impractical to continue. This type of “failure” is unseen and as such it doesn’t provide the same level of information to other entrepreneurs that traditional failures do.</p> <p class="p1">Federal regulations get most of the attention, but each local government has its own set of building codes, permit procedures, tax remittance laws, zoning regulations, architectural review boards, etc., which every entrepreneur must comply with. For example, local <a href="">Landmark Commissions</a> and Historical Preservation Boards <a href="">routinely block the demolition of vacant, privately owned buildings that haven’t been used in years</a>. This delays business plans and costs money.</p> <p class="p1">Cities and states that are struggling with population decline and business flight should take a serious look at their regulatory environment and get rid of unnecessary and overly burdensome regulations. Local governments that streamline their regulations will create a friendlier environment for aspiring entrepreneurs, and this can generate economic growth in both the short and long run.</p> Tue, 06 Oct 2015 15:00:40 -0400 How to Fix the Social Security Disability Insurance Program <h5> Expert Commentary </h5> <p class="p1">As I noted in my previous MarketWatch <a href="">column</a>, the Social Security Disability Insurance (SSDI) program faces real and increasingly urgent financial challenges. Absent legislative action to shore up the program's finances, benefits will automatically be cut by almost 20% upon the trust fund's depletion sometime near the end of 2016 — roughly one year from now. Such an outcome would be unconscionable for individuals with disabilities who rely upon this program, and bipartisan action must be taken to avoid it. Unfortunately, differences among policymakers over how best to address this issue have stymied action thus far.</p> <p class="p1">For this reason, the Bipartisan Policy Center (BPC) convened a <a href="">working group</a>, of which I am a member, to find areas of common ground for improving the SSDI program. The group includes members from across the political spectrum with a variety of backgrounds and viewpoints, including academics, policy researchers, advocates for people with disabilities, representatives of the labor and business communities, and former congressional and agency staff.</p> <p class="p1">Put simply, this was no easy task. Members of the group met regularly over the past year, put aside their differences and made compromises in order to develop a <a href="">package of recommendations</a> that all of us could support.</p> <p class="p1">The first finding of the group is that no realistic reform options are available to restore SSDI Trust Fund solvency in the near term. Decades of delay in addressing this financing problem have led to the current predicament. Significant tax increases are unlikely in the current political environment, and sudden reductions in benefits would harshly affect those most vulnerable in society. Thus, Congress and the President should pass legislation before the end of 2015 and not wait for the disability-trust-fund depletion near the end of 2016. Acting this year would eliminate the threat of overnight cuts and provide additional time for evidence-gathering and discussion of longer-term adjustments that could be made to the program.</p> <p class="p1">But legislation addressing trust-fund depletion should not stop there. The working group strongly recommends that any legislation that results in shifting resources between Social Security's retirement trust fund and the disability trust fund, such as a payroll-tax reallocation or inter-fund borrowing, should also include a reform package to improve some of SSDI's program integrity issues, such as reducing barriers standing in the way of those wanting to return to work, and ensuring adequate funding for the Social Security Administration to do the job it has been tasked to do.</p> <p class="p1">While SSDI program rules contain an array of work incentives and supports, other provisions make it difficult to remain in, or return to, the workplace even for those whose conditions improve and who wish to test their capacity to work.</p> <p class="p1">For example, if an SSDI beneficiary earns even one dollar above the substantial-gainful-activity level (currently set at $1,090 per month), they risk losing their entire benefit. We propose program changes and pilots that would explore ways to smooth this "cash cliff" so beneficiaries can attempt to work without fear of steep financial penalties. This could result in higher employment and reduced reliance on the disability program in the future.</p> <p class="p1">The BPC also proposes a number of changes to improve the effectiveness of the procedures by which the Social Security Administration (SSA) evaluates applications to the program and periodically reviews benefits.</p> <p class="p1">Furthermore, it recommends that all of SSA's operations be fully funded and efficiently executed to help clear out a backlog of cases and provide each application and benefit review with the attention it deserves.</p> <p class="p1">To be sure, a payroll-tax reallocation or inter-fund borrowing, along with the group's suggested improvements to program integrity and operations, will not solve the long-term financing problems of SSDI. Also, the recommended pilot programs will not magically return everyone to work. But together, these changes will provide the funds necessary to pay full benefits beyond next year and some breathing room for pilot programs to be designed, implemented, and analyzed for lessons that can be applied to potential national reforms for the long-term improvement of the SSDI program.</p> Mon, 05 Oct 2015 12:14:16 -0400 Cheating Gets the Most Attention, but Doesn't Do the Most Damage <h5> Expert Commentary </h5> <p class="p1"><b><i>The New York Times Room for Debate</i>&nbsp;posted this question:<br /></b></p><p class="p1">Has the pervasiveness of cheating made moral behavior passé?</p><p class="p1"><b>Tyler Cowen provided the following response:</b></p><p class="p1">The behavior of Volkswagen has been heinous and the company and probably some of its executives deserve some serious punishments. Yet our reaction to the scandal is as illuminating as the misbehavior itself. We get much more upset when people do wrong out of deliberate fraudulent intent rather than through accidental negligence, or sheer inability to solve problems, even if the latter phenomena are often the greater risks.</p> <p class="p1">The falsification of Volkswagen emissions software has meant more nitrogen oxide in the air, but how costly is this extra pollution in economic terms? One plausible estimate suggests <a href="">this additional pollution has been killing 5 to 27 Americans each year</a>, with that number worldwide reaching up to 404 as a maximum.</p> <p class="p1">To put that number in context, the World Health Organization <a href="">estimates that about seven million people die each year worldwide from air pollution</a>. Even within the United States, early deaths from air pollution <a href="">have been estimated to run about 200,000 a year</a>, in comparison to which the losses from the Volkswagen scandal are a rounding error. For the American deaths, however, the culprits are often cars, trucks and cooking and heating emissions, so there is no single, evil, easily identified wrongdoer at fault. As Pogo recognized, often the real enemy is us.</p> <p class="p1">Although the practice is ethically controversial, some economists believe we can attach dollar values to human lives. A typical value of life, estimated by this method, <a href="">might run in the neighborhood of $7 million</a>. That would mean Volkswagen has been destroying perhaps around $100 million in value a year. To put that number in context, a single Picasso painting can cost that much, or a Hollywood studio might spend (waste?) that much money <a href="">marketing a single blockbuster movie</a>.</p> <p class="p1">Admittedly, the individuals and families who lose those lives don’t view the matter in such abstract, impersonal terms, but still if we had an extra $100 million we could save at least 5 to 27 lives through safety investments in other areas; in that sense the use of the figure is meaningful.</p> <p class="p1">We need to ensure that deliberate corporate fraud does not spread, but in the meantime let’s not forget that is not always the biggest problem. It just bugs us more.</p> Wed, 30 Sep 2015 13:44:32 -0400 Reconsidering the SIPC <h5> Publication </h5> <p class="p1">Chairman Crapo, Ranking Member Warner, and members of the Subcommittee, I appreciate the opportunity to testify today on your subcommittee’s oversight of the Securities Investor Protection Corporation.&nbsp;</p> <p class="p1">My name is J.W. Verret. I am an assistant professor of law at George Mason University Law School, where I teach corporate, securities, and banking law. I serve as a senior scholar at the Mercatus Center at George Mason University and until recently I was chief economist and senior counsel at the House Committee on Financial Services.&nbsp;</p> <p class="p1">The explosive growth in federally backed loan and guaranty programs has been an appropriate focus of congressional oversight in recent years. The Office of Management and Budget (OMB) estimates the federal government supports over $3 trillion in loans and guarantees. Those loans and guarantees are often shrouded by indirect government support and unreasonable assumptions in government accounting practices.<sup>1</sup>&nbsp;</p> <p class="p1">I submit that the Securities Investor Protection Corporation’s (SIPC) provision of securities custody insurance should be an appropriate part of that conversation. Government officials appoint SIPC directors and SIPC enjoys access to a $2.5 billion line of credit with the Department of the Treasury. Some may argue that statutory language that “SIPC shall—not be an agency or establishment of the United States Government” suggests otherwise.<sup>2</sup> We all recall how similar statutory language governing the government-sponsored enterprises proved meaningless when those companies were placed in federal conservatorship.&nbsp;</p> <p class="p1">Today I will argue that privatization of SIPC is the best solution to protect American taxpayers. I will identify unexplored solutions for victims of Ponzi schemes. Though I argue privatization is the first best solution, I am glad to constructively engage in this subcommittee’s discussion about additional SIPC reforms.&nbsp;</p> <p class="p2">REFORMING THE GOVERNMENT MONOPOLY&nbsp;</p> <p class="p1">Most broker-dealers and members of national exchanges are required by statute to be members of SIPC, and SIPC is funded by assessments on its membership. SIPC thereby enjoys a statutory monopoly over the provision of securities custody insurance beneath the ceiling of its coverage.&nbsp;</p> <p class="p1">Some of my fellow panelists may argue that SIPC serves an important role as a specialized liquidator of broker- dealers. Assuming that argument is true, it remains a tall leap of logic to further contend that a government monopoly in the provision of securities custody insurance is thereby warranted.&nbsp;</p> <p class="p1">SIPC’s board is currently composed of private sector and government members. I submit that privatization of SIPC’s insurance function is the first best solution to the problems presented by the current structure of the SIPC. We might begin by lowering the ceiling of coverage.&nbsp;</p> <p class="p1">I find it hard to accept that a market failure necessitates a government monopoly in this space. In fact, there are underwriters at Lloyd’s that sell “excess of SIPC” coverage for the portion of this market not crowded out by SIPC.<sup>3</sup>&nbsp;</p> <p class="p1">In the absence of full privatization, the public-private composition of SIPC’s board should not be viewed as a second best option. It would be better to officially recognize SIPC for the government entity that it is, remove the private-sector board members, establish a similar level of congressional accountability for SIPC to that required of other government agencies, and impose a term limit on its CEO.&nbsp;</p> <p class="p2">THE PROBLEM OF PONZI SCHEME VICTIMS&nbsp;</p> <p class="p1">The controversy and subsequent litigation between the SEC and SIPC with respect to the Allen Stanford Ponzi scheme, and issues with respect to Bernie Madoff victim claims, also suggest that a warning label should be provided as part of the legend describing SIPC coverage. This label would warn customers, “SIPC coverage only applies under limited circumstances, and SIPC reserves the right to deny claims despite reasonable expectations of coverage.” SIPC won the Stanford litigation as a result of regrettable stipulations of fact by the SEC. In the related Madoff litigation, SIPC utilized an aggressive valuation methodology from among a range of methods used in prior cases.&nbsp;</p> <p class="p1">My impression of both cases was that they were close calls that might have come out either way. It is nevertheless also clear to me that SIPC’s aggressive litigation position was designed to minimize claims to a fund that was unprepared for those claims, which suggests a clear conflict of interest for the receivers hired by SIPC and for SIPC itself.&nbsp;</p> <p class="p1">I am not here today to re-litigate those cases or to endorse legislation that might ultimately result in new assessments by SIPC. I sympathize with the victims, and I recognize they have been subjected to unusually aggressive legal posturing by SIPC, but I worry about action that might only further entrench SIPC’s insurance monopoly.&nbsp;</p> <p class="p1">I would suggest instead that this subcommittee consider whether undistributed funds in the SEC’s Fair Funds program or in the Consumer Financial Protection Bureau’s settlement awards would better serve the purpose of making these victims whole.&nbsp;</p> <p class="p1">I thank you for the opportunity to testify, and I look forward to answering your questions.&nbsp;</p> Wed, 30 Sep 2015 10:46:28 -0400