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David Primo Testifies before the House Judiciary Committee on Constitutional and Budgetary Reform

David Primo — Fri, 25 Jul 2014 11:28:47 -0400

Video

David Primo Testifies before the House Judiciary Committee on Constitutional and Budgetary Reform

Social Security Disability Insurance's Effect on Labor Force Participation

Keith Hall — Fri, 25 Jul 2014 10:09:13 -0400

Expert Commentary

The labor force participation rate for the prime working-age population — those between 25 and 54 years old — has been declining in the U.S. since 1997. One of the big reasons is a rise in the disability rate, which hit a record 5.2 percent in 2013. Since the start of the Great Recession, the withdrawal rate due to disability has accelerated. In fact, 90 percent of the labor force decline for those who were in their prime working ages for the entire six-year span was from disability. Most of this — three quarters — was from those receiving Social Security Disability Insurance (SSDI) benefits.

In 2007, 83 percent of the prime working-age population was in the labor force and accounted for over two-thirds of our total labor force. Today, after six years of recession and weak recovery, labor force participation by this group has plummeted. Nearly five million out of the 125 million of them dropped out of the labor force. But why? How much of this is due to retirement? What else contributed to this decline?

For those who aged out of their prime working years — those now between 55 and 60 years old — about 2.4 million dropped out of the labor force. As you might expect, most (about 70 percent) moved into retirement. The rest exited the labor force due to disability. An underappreciated aspect of baby boomer retirements is the fact that they have not reduced their participation as much as prior generations. In fact, for those aged 55 and above, the participation rate was below 30 percent just 20 years ago — yet for the past five years, it has been higher than 40 percent.

For those who remain in their prime working years — now between 31 and 54 years old — the story is different. As with the older workers, the decline in participation has been significant — over 2.5 million have dropped out of the labor force. But while some moved into retirement, a shocking nine out of 10 individuals of the younger group report that they exited the labor force due to a disability.

In fact, overall the number of Americans removed from the labor force because of a reported disability is at a record 14 million — up from about 11 million just six years ago. What appears to have enabled so many of the prime working age population to exit the labor force has been a single program: SSDI. For those who were in their working prime in 2007 and remain there today, there was a 1.7 million increase in those taking SSDI. This one program alone accounts for three-quarters of the disability exits and therefore, for most of the decline in labor force participation by the prime working-age population.

The SSDI program is the largest federal insurance program for lost income from a disability. To qualify, someone must have a minimum work history and a physical or mental condition that prevents them from engaging in any "substantial gainful activity" for at least 12 months. Use of the program has grown significantly — generally over 4 percent per year. Although it was never meant to be an unemployment insurance program, both the applications and acceptances into the program follow the unemployment rate.

Many have expressed concerns over the sustainability of the growth in spending on SSDI, and the Social Security Administration projects the program to be insolvent in just two years. One aspect of this is concern over whether the incentives of the program are encouraging people with disabilities to substitute SSDI benefits for labor market participation. If this is happening, more may be at stake than viability of the program. It may be undermining one of the important purposes of the Americans with Disabilities Act that tries to make sure people with disabilities access the same employment opportunities and benefits as everyone else.

In the Matter of Amendment of the Commission’s Rules Related to Retransmission Consent, Report and Order and Further Notice of Proposed Rulemaking

Brent Skorup — Thu, 24 Jul 2014 13:59:32 -0400

Publication

The FCC proposes to repeal its syndicated exclusivity and network nonduplication rules,¹ which the Commission first devised in the 1960s and 1970s. The rules were intended to limit cable television growth and to protect the growth of fledgling UHF broadcast stations.² We agree with commenters³ that these rules are vestigial and potentially anticompetitive interventions into television markets from a bygone era.⁴

Television rules from the past are increasingly socially costly as technologies and business models change—particularly as content moves online—and it is time to start repealing old regulations. Experts view television regulations as “a Rube Goldberg regulatory structure,” a complex system that performs simple tasks in indirect, convoluted ways.⁵ The Copyright Office characterizes the FCC’s network nonduplication and syndicated exclusivity rules as “highly complex” and “a paradox” because FCC rules both encourage and discourage importation of distant broadcast transmissions.⁶ The Congressional Research Service similarly has said that “the negotiations between programmers and distributors, although private, are strongly affected by statutory and regulatory requirements and cannot be properly characterized as free-market.”

Every television industry segment has received some regulatory favors though the decades. However, the Copyright Office notes that there is “a thicket of communications law requirements aimed at protecting and supporting the broadcast industry.” ⁷ This thicket arises largely because the FCC has aspirations for broadcast—namely localism, free television, competition, and diverse voices—that are often in tension with each other.⁸These conflicting goals also tend to disadvantage pay-TV providers, particularly smaller operators.⁹

The existing rules have prevented a freer media market for forty years and should be repealed. As the Commission has said, “If the [exclusivity] rules should ultimately prove unnecessary or need modification in light of the passage of time, congressional action or other factors, they can be modified or rescinded.” ¹⁰ Repealing the rules would not be a panacea for what ails television markets, but as one operator noted, eliminating these rules at issue “would be an important step in the right direction . . . .” ¹¹

Municipal Fiscal Emergency Laws: Background and Guide to State-Based Approaches

Eric A. Scorsone — Thu, 24 Jul 2014 12:34:00 -0400

Publication

Beginning with the Great Recession in 2008, hundreds of cities across the country have suffered from fiscal emergencies, with some even declaring bankruptcy. Detroit filed last June, and Michigan's response–forcing the the city to cede control of some of its functions to the state government–was not surprising.

The use of emergency state financial intervention in struggling cities has become increasingly common. In sixteen states ranging from Michigan to New Jersey, governments have developed legal approaches to take over municipalities in crisis.

Given the increasing frequency of this measure, it is crucial for journalists and policymakers to understand the background and effectiveness of state takeovers. In a new Mercatus Center at George Mason University paper, “Municipal Fiscal Emergency Laws: Background and Guide to State Based Approaches,” Eric Scorsone provides an overview of the process, including:

What constitutes a local fiscal emergency
Relevant state laws implemented in recent years
Factors explaining why states assume one strategy over another

Key takeaways for policymakers include:

Laws should acknowledge the importance of institutional factors within cities rather than focusing exclusively on poor management and policymaking.
Policymakers should consider new tools to dissolve or merge municipal corporations, new revenue options, strategies to address the significant burden of pension and retiree health care costs, and reductions in state mandates.

Export-Import Bank Subsidies Benefit Very Few Exports and Export Jobs

Andrea Castillo — Thu, 24 Jul 2014 09:49:52 -0400

Expert Commentary

Sabrina Eaton's July 16 article, "Boon or boondoggle? Congress to decide fate of Export-Import Bank," provides a fair description of the Export-Import Bank debate. However, some of the claims made by the Bank's defenders should be put into context so Ohioans know what's at stake.

Lobbyists at the Chamber of Commerce and National Association of Manufacturers, who represent some of Ex-Im's largest corporate beneficiaries, claim Ex-Im supports more than $37 billion in U.S. exports and 200,000 jobs. In Ohio, they say the Bank supported $2 billion in exports since 2007.

That sounds impressive — until you compare this to non-subsidized exports and jobs. Ex-Im subsidies only benefited 1.8 percent of the total $2.3 trillion in U.S. exports and 1.6 percent of the total 11.3 million export-related jobs last year. Similarly, Ex-Im subsidies only benefited 0.73 percent of the $330 billion in total exports from Ohio since 2007.

In other words, over 98 percent of all U.S. exports and export jobs, and over 99 percent of Ohio exports, receive no subsidies from Ex-Im.

Subsidized firms undoubtedly enjoy their government privileges — but we must remember the other 98 percent of us who do not have friends down at the Export-Import Bank.

Constitutional Solutions to Our Escalating National Debt: Examining Balanced Budget Amendments

David M. Primo — Fri, 25 Jul 2014 10:01:33 -0400

Publication

Chairman Goodlatte, Ranking Member Conyers, and members of the committee: Thank you for inviting me here today to discuss the need for a constitutional amendment to help achieve credible and sustainable fiscal reform.

I am an associate professor of political science and business administration at the University of Rochester, where I hold the Ani and Mark Gabrellian professorship. I am also a senior scholar at the Mercatus Center at George Mason University. I have written a book, Rules and Restraint (University of Chicago Press, 2007), and several articles regarding budget rules and fiscal policy.¹ I testified before this committee’s Subcommittee on the Constitution on May 13, 2011, on the same subject, and it is an honor to be asked back to address the full committee.²

My three-part message today is simple.

First, the United States’ current fiscal trajectory must change.

Second, the short-run focus in politics, combined with Congress’s institutional prerogatives, make achieving this change—in the form of durable, long-term reform—an elusive goal.

Third, a constitutional amendment, if properly designed, can create the pathway for Congress to do what’s needed to place the United States government’s finances on firm fiscal ground.

THE STATUS QUO MUST CHANGE

We have made promises to current and future generations that we have no hope of fulfi lling given current revenue streams. The US Treasury estimates that the national debt will approach 250 percent of GDP by 2080 (see figure 1).³ For the record, I do not believe this estimate. It’s not that I dispute the Treasury’s calculations. The problem is that the economy or the US government’s fi nances—or both— will implode long before then. This estimate, along with long-term projections from the Congressional Budget Offi ce (CBO) and others, sends a clear message: the current path is not sustainable.

Big-Business Bias

Veronique de Rugy — Tue, 22 Jul 2014 15:03:04 -0400

Expert Commentary

In your July 14 editorial "Closing the Export-Import Bank would hurt the economy" you wrongly claim that the bank extends assistance "when the private sector is unable or unwilling to do so."

First, South Carolinians should know that less than 15 percent of the value of Ex-Im-financed exports in their state went to small businesses. The data clearly show that the business of Ex-Im is big business.

These giant corporations that Ex-Im serves - such as the mining group Hancock Prospecting (which is owned by the richest woman in Australia) and Pemex, Mexico's government-owned oil company - would have no problem arranging financing without Ex-Im. They simply would not get a government-granted discount courtesy of U.S. taxpayers.

The bank's top beneficiary, Boeing, already has a large and capable financing arm to support aircraft exports, as do most of the giant manufacturers that Ex-Im benefits.

The data show that many Boeing jets are already sold without any Ex-Im assistance. In June 2012, Emirates Air bought two Boeing 777s using Ex-Im financing, which lowered the cost per plane by $20 million.

It also bought four Airbus A380s using private financing. In other words, Ex-Im unintentionally financed the purchase of foreign Airbus products by lowering the cost of the Boeing transaction.

This also goes to show that Emirates Air, like many other Ex-Im-backed borrowers, can certainly secure financing for worthy projects from private lenders.

What's more, a recent S&P report predicts that Boeing could find sufficient private financing for their jets without Ex-Im for the next few years.

Your editorial failed to consider the unfairness of a system that grants cheap loans to some companies at the expense of other non-subsidized companies. This is the fundamental debate.

Ex-Im Bank Does Little for Small Businesses

Veronique de Rugy — Tue, 22 Jul 2014 14:28:41 -0400

Expert Commentary

In the July 7 guest column "Re-authorize Ex-Im Bank to Grow Economy," Export-Import Bank beneficiary Michele LaNoue claims that critics want to shut the bank without regard for small and medium-sized Texas businesses. The opposite is true.

According to the Bank's own data, the vast majority of Ex-Im beneficiaries in Texas are large, politically connected firms like Bechtel and Nobel Drilling. From 2007 to 2014, less than 30 percent of Ex-Im's portfolio in Texas went to small businesses.

The data also reveal that most of Texas exports take place without the bank's help. The same is true on the national level: Over 98 percent of all U.S. exports occur without any help from Ex-Im at all.

What is good for LaNoue's company is not necessarily what's good for Texas. It certainly is not good for other firms in the state, such as Texas Valero Energy, which claims that its business and employees are hurt by Ex-Im subsidies.

The vast majority of Texan firms are put at a competitive disadvantage by their own federal government so that favored firms can enjoy political privileges.

After Dodd-Frank: The Future of Financial Markets

contact@mercatus.org (Mercatus.org) — Wed, 23 Jul 2014 22:07:34 -0400

Video

Four years after the Wall Street Reform and Consumer Financial Protection Act (Dodd-Frank) was signed into law, there are many open questions about what the Act has achieved and what lies ahead for the U.S. financial system. This two-day conference, hosted jointly by the Mercatus Center at George Mason University and the Cato Institute, explores some of the most hotly debated aspects of financial regulation and policies to improve financial markets in a post-Dodd-Frank world.

Daniel Rothschild and Dino Falaschetti Deliver Welcoming Remarks

John H. Cochrane Delivers Opening Keynote Address

Economic Analysis: Improving Transparency, Accountability, and Expertise in the Regulatory Process

Featured Roundtable Discussion: The Future of Financial Markets: A Conversation with the Regulators

The Meta-Regulators: Creating a Resilient Financial System

Keynote Address: Rep. Jeb Hensarling (R-TX), Chairman, House Financial Services Committee

Hester Peirce Discusses Dodd Frank on Al Jazeera

Hester Peirce — Tue, 22 Jul 2014 10:49:01 -0400

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Hester Peirce Discusses Dodd Frank on Al Jazeera

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Complaints About the CFPB's Complaint Database

Hester Peirce — Tue, 22 Jul 2014 10:17:57 -0400

Expert Commentary

Last week, as reported 10 Comments, the Consumer Financial Protection Bureau (CFPB) released a proposed policy statement for comment. The CFPB plans to expand its existing consumer complaint database to include narrative information, rather than the more limited information about complaints it now publishes. Whether in its current form or in its proposed expanded form, the database should be of concern to financial companies and their customers.

The complaint database is essentially unfiltered. The CFPB explains that "We don't verify all the facts alleged in these complaints but we take steps to confirm a commercial relationship between the consumer and company." In other words, as long as the complainant is a customer, her complaint goes into the database. The value of a database that treats all complaints as valid is limited, but has great potential to harm the reputation of consumer financial services providers. Adding the narrative to the database only exacerbates the potential harm.

Regardless of disclaimers, a government-run complaint database such as this one invites people to assume that its contents have been vetted and found credible by impartial government employees. The CFPB, however, seems to view its database as nothing more than a community forum through which consumers "share their experience with other consumers." In the CFPB's words, adding narrative discussion to the complaints will "be impactful by making the complaint data personal (the powerful first person voice of the consumer talking about their [sic] experience), local (the ability for local stakeholders to highlight consumer experiences in their community), and empowering (by encouraging similarly situated consumers to speak up and be heard)."

In addition to being impactful, local and empowering, the database is likely to be misleading. Some of the CFPB's complainants may be motivated by a desire to harm the reputation of a particular company. For example, the advertisements my bank runs are annoying enough to drive some customers to gin up complaints in retribution. But even the majority of complaining customers who are well-intentioned may — as most people do — describe the situation in the light most favorable to themselves. Others may simply have fuzzy memories of what transpired. A narrative written in anger immediately after a frustrating interaction with an impolite customer service representative may sound a lot worse than one written after a more productive follow-up conversation with another bank employee.

The CFPB acknowledges that "the narratives may contain factually incorrect information," but believes its policy of publishing company responses along with the complaints will mitigate this problem. Companies will not be able to include personal information in their published responses and will be reluctant to aggressively counter inaccuracies. So they will hesitate to publicly push back against unfounded complaints or fill in details of incomplete customer narratives.

The CFPB sees its proposed policy as "establishing itself as a leader in the realm of open government and open data" and cites the Office of Management and Budget's Open Government Directive in support of its proposal. That directive notes that agencies should not disclose information if doing so would damage compelling interests, such as confidentiality. The CFPB plans to take steps to protect the confidentiality of the people who submit complaints, but the business interests of wrongly accused companies are also compelling. Publishing untested complaints also may run counter to the directive's emphasis on information quality.

The CFPB expects that the database will influence consumer behavior, yet knows the database will include some information that is factually inaccurate. Encouraging consumers to act on such information is inconsistent with the CFPB's objectives of protecting consumers from deceptive acts and practices and making sure that they have access to "understandable information to make responsible decisions about financial transactions." Let's hope the financial companies it regulates do not follow its lead.

Regulation by Stealth: Time to Re-Examine Federal Agencies

John D. Graham , James Broughel — Tue, 22 Jul 2014 10:03:00 -0400

Expert Commentary

In recent weeks, President Barack Obama announced plans to use executive authority to implement immigration reforms in absence of cooperation from Congress. House Speaker John A. Boehner also announced plans to initiate a lawsuit designed to check the president's power to take unilateral executive actions. Given this tension, it's a good time to consider how exactly the executive branch is able to implement policy without congressional consent.

The executive branch has many devices at its disposal if it decides to act unilaterally. Indeed, executive branch regulatory agencies evade Congress and other accountability checks seemingly all the time. For instance, agencies issue guidance documents, policy memoranda and other similar documents. Some of these are necessary, but some elicit behavioral changes by the public that look a lot like how regulations work.

For example, in 2012, then-Secretary of Homeland Security Janet Napolitano issued a memo changing deportation policy towards certain illegal immigrants who came to the United States as children. Some blame this policy for partially contributing to the large influx of child immigrants coming from Central America to the U.S. in recent months.

The Internal Revenue Service issued similar policy documents when altering deadlines related to the Affordable Care Act. Agencies sometimes fail to enforce rules that are already on the books, or fail to enforce statutes that are passed by Congress. The failure to implement the "employer mandate" requirement in the ACA is one reason cited for Boehner's lawsuit against the president.

These types of activities allow agencies to evade not just Congress but other oversight mechanisms as well. For instance, the Administrative Procedure Act requires agencies to go through a formal procedure when promulgating regulations. Usually, this entails taking comments from the public before finalizing rules. Review of agency regulations by the Office of Information and Regulatory Affairs, known as OIRA, is another oversight mechanism. OIRA is located within the Office of Management and Budget and, among other things, reviews the economic analysis that agencies produce alongside their really large rules. OIRA review is designed to ensure that sound technical expertise is driving agency decisions.

Theoretically, Congress and the courts should provide a check on regulatory agency actions. Congress has oversight committees and also controls agency budgets. The courts have the ability to strike down regulations that aren't in line with authorizing statutes. In practice, however, Congress rarely reprimands agencies in a serious way and rarely cuts agency budgets significantly. In fact, agency spending increased dramatically in recent decades.

At the same time, courts give substantial deference to agencies, allowing enormous discretion in agency decision-making. The assumption behind giving agencies this latitude is that agencies are the experts and are more reliable than judges to make informed decisions about the proper course of action. Unfortunately, agencies often fail to like experts - as evidenced by the consistently poor quality of economic analyses produced by agencies - but this does not stop courts from being deferential to them.

To improve the present situation, OIRA needs more resources. The agency's budget and staffing levels have fallen significantly over time, even as regulatory agency spending continues to swell. OIRA should have the authority to review all guidance documents, policy memos, waivers and other agency publications. It should also be able to require that agencies go through the notice and comment process or produce economic analysis for policies the OIRA administrator believes will have significant economic effects. At the very least, the government should track agency activities in a more transparent manner, so researchers can better assess the extent of the evasion problem.

In the end, however, much of the problem lies with Congress. It is Congress, after all, that delegates so much of its legislative authority to the executive branch. Congress needs to begin holding agencies accountable, through oversight, setting agency budgets, and legislation that more clearly defines agency duties and powers. Until Congress admits its own role in creating these problems, agencies will continue to evade the checks and balances that have been put in place over the last century, and the American public can have little faith that agency actions actually advance the public interest.

The Export-Import Bank Assists a Tiny Portion of All US Small Business Jobs and Firms

Veronique de Rugy — Mon, 21 Jul 2014 15:13:51 -0400

Publication

In an effort to secure the survival of the Export Import Bank, its proponents are drawing attention to its support for small businesses and jobs—and away from allegations of endemic cronyism—by mobilizing small business beneficiaries to pressure legislators and communities to support the Ex-Im Bank’s reauthorization. But, as this week’s chart reveals, the overall effect of the Ex-Im Bank on small business employment and firms is negligible.

This week’s charts use data from the Export-Import Bank and the US Census Bureau to display the Ex-Im Bank’s effect on small business employment and firms in the context of all small business jobs and establishments in America for the year 2007.

The blue chart to the left displays the percent of all US small business jobs that were supported by the Ex-Im Bank compared to all US small business jobs that did not receive such assistance. The purple chart to the right displays the percent of all US small business establishments that were supported by the Ex-Im Bank compared to all US small business establishments that did not receive Ex-Im assistance. We will briefly explain our methods before discussing our results.

We were limited in the datasets that we could use because of the unusually expansive definition of “small business” used by the Ex-Im Bank. The Small Business Administration (and most federal agencies) set the base mark for a small business at firms with under 500 employees. The Ex-Im Bank, on the other hand, includes firms that have up to 1,500 in their definition of “small business.” For this reason, we had to use the Census Bureau’s Statistics of U.S. Businesses (SUSB) dataset for large employment sizes. We summed each variable for all firms that employed less than 1,500 workers and compared these values to those reported by the Export-Import Bank in its annual reports since 2007. (Note: The chart uses data from 2007 as that is the most recent year for which the SUSB data series listed estimated receipts for businesses by employment size was available.)

Unlike its more recent reports, the Ex-Im Bank’s annual report for 2007 does not provide a concrete number of jobs that it claims to have supported that fiscal year. The Bank claims that its activities helped to create or support a total of 1.2 million jobs from FY 2009 to FY 2013, which translates into an annual average of 240,000 jobs. We used this 240,000 average as an estimate of the Ex-Im Bank’s job numbers in 2007. The bank’s internal number may be slightly higher or lower than this estimate, but it is unlikely to be different enough to materially change the analysis.

While the Ex-Im Bank distinguishes between small business and non-small business firms for their reporting on portfolio authorizations and number of transactions, it does not distinguish which jobs were supported for small businesses and which were supported for large corporations. However, we can estimate this breakdown using other data that the bank provides. The Ex-Im Bank reports that it entered into 2,793 total transactions in 2007, 2,390 of which were designated as for small businesses. If we assume, in a back of the envelope calculation,* that jobs created were divided proportionately between transactions, the Ex-Im Bank supported an estimated 205,371 small business jobs in FY 2007.

The blue chart on the left shows that the Ex-Im Bank benefits a negligible portion of all US small business employment. The Census Bureau reports that firms with fewer than 1,500 employees employed 69 million workers in FY 2007. If the Ex-Im Bank supported 205,371 small business jobs in FY 2007, this means that it can only claim to have supported less than one-third of one percent of all small business employment that year.

The purple chart on the right shows that the Ex-Im Bank benefits an even tinier portion of all US small businesses. The Census Bureau reports that there were 6,723,226 establishments that employed fewer than 1,500 workers in FY 2007. The Ex-Im Bank reports that it facilitated 2,390 transactions for small businesses that year. Assuming that each transaction went to a different small business, this means that the Bank only supported 0.04 percent of all small business establishments in 2007.

These charts show that small business establishments and employees that benefit from Ex-Im Bank assistance constitute a minuscule portion of all small businesses and related employment in the nation. Supporters of the Ex-Im Bank have little reason to claim that it meaningfully benefits American small business firms and their employees.

The Crony Capitalism Machine

Veronique de Rugy — Mon, 21 Jul 2014 14:02:53 -0400

Expert Commentary

This article appears in the August/September edition of Reason Magazine

Congress will soon debate the fate of the U.S. Export-Import Bank, an outfit that doles out money to favored corporations and foreign governments. For 80 years, the bank and the crony capitalists it supports have defeated every attempt to shut it down.

But that may slowly be changing. In recent months a few Republican lawmakers-including Reps. Jeb Hensarling of Texas, Tom McClintock of California, Scott Garrett of New Jersey, Mick Mulvaney of South Carolina, and Justin Amash of Michigan, along with Sens. Mike Lee of Utah and Ted Cruz of Texas-have been working to put an end to the boondoggle.

Back in the 1980s, then-Budget Director David Stockman tried but ultimately failed to abolish the Ex-Im Bank. He did manage to cut the institution's lending budget from $7 billion in 1981 to $3.2 billion in 1986, but that victory was short-lived: By 1989, lending had grown back to $12.5 billion, and taxpayer exposure rose to roughly $58 billion.

In the Eye of the Debt Storm

David M. Primo — Mon, 21 Jul 2014 13:11:05 -0400

Expert Commentary

In its July budget report to Congress, the White House’s Office of Management and Budget praised President Obama for presiding over the “most rapid sustained deficit reduction since World War II.” The president also deserves credit, we are told, for a budget that achieves a core goal of “fiscal sustainability.”

In its long-term budget outlook submitted to Congress less than a week later, the nonpartisan Congressional Budget Office was less sanguine, writing, “Between 2009 and 2012, the federal government recorded the largest budget deficits relative to the size of the economy since 1946, causing its debt to soar” to its highest levels as a share of the economy since World War II. Even worse, given current laws, the CBO warns that federal debt is on an “unsustainable” path.

Income Inequality Is Not Rising Globally. It's Falling.

Tyler Cowen — Mon, 21 Jul 2014 10:54:09 -0400

Expert Commentary

Income inequality has surged as a political and economic issue, but the numbers don’t show that inequality is rising from a global perspective. Yes, the problem has become more acute within most individual nations, yet income inequality for the world as a whole has been falling for most of the last 20 years. It’s a fact that hasn’t been noted often enough.

The finding comes from a recent investigation by Christoph Lakner, a consultant at the World Bank, and Branko Milanovic, senior scholar at the Luxembourg Income Study Center. And while such a framing may sound startling at first, it should be intuitive upon reflection. The economic surges of China, India and some other nations have been among the most egalitarian developments in history.

Of course, no one should use this observation as an excuse to stop helping the less fortunate. But it can help us see that higher income inequality is not always the most relevant problem, even for strict egalitarians. Policies on immigration and free trade, for example, sometimes increase inequality within a nation, yet can make the world a better place and often decrease inequality on the planet as a whole.

International trade has drastically reduced poverty within developing nations, as evidenced by the export-led growth of China and other countries. Yet contrary to what many economists had promised, there is now good evidence that the rise of Chinese exports has held down the wages of some parts of the American middle class. This was demonstrated in a recent paper by the economists David H. Autor of the Massachusetts Institute of Technology, David Dorn of the Center for Monetary and Financial Studies in Madrid, and Gordon H. Hanson of the University of California, San Diego.

At the same time, Chinese economic growth has probably raised incomes of the top 1 percent in the United States, through exports that have increased the value of companies whose shares are often held by wealthy Americans. So while Chinese growth has added to income inequality in the United States, it has also increased prosperity and income equality globally.

The evidence also suggests that immigration of low-skilled workers to the United States has a modestly negative effect on the wages of American workers without a high school diploma, as shown, for instance, in research by George Borjas, a Harvard economics professor. Yet that same immigration greatly benefits those who move to wealthy countries like the United States. (It probably also helps top American earners, who can hire household and child-care workers at cheaper prices.) Again, income inequality within the nation may rise but global inequality probably declines, especially if the new arrivals send money back home.

From a narrowly nationalist point of view, these developments may not be auspicious for the United States. But that narrow viewpoint is the main problem. We have evolved a political debate where essentially nationalistic concerns have been hiding behind the gentler cloak of egalitarianism. To clear up this confusion, one recommendation would be to preface all discussions of inequality with a reminder that global inequality has been falling and that, in this regard, the world is headed in a fundamentally better direction.

The message from groups like Occupy Wall Street has been that inequality is up and that capitalism is failing us. A more correct and nuanced message is this: Although significant economic problems remain, we have been living in equalizing times for the world — a change that has been largely for the good. That may not make for convincing sloganeering, but it’s the truth.

A common view is that high and rising inequality within nations brings political trouble, maybe through violence or even revolution. So one might argue that a nationalistic perspective is important. But it’s hardly obvious that such predictions of political turmoil are true, especially for aging societies like the United States that are showing falling rates of crime.

Furthermore, public policy can adjust to accommodate some egalitarian concerns. We can improve our educational system, for example.

Still, to the extent that political worry about rising domestic inequality is justified, it suggests yet another reframing. If our domestic politics can’t handle changes in income distribution, maybe the problem isn’t that capitalism is fundamentally flawed but rather that our political institutions are inflexible. Our politics need not collapse under the pressure of a world that, over all, is becoming wealthier and fairer.

Many egalitarians push for policies to redistribute some income within nations, including the United States. That’s worth considering, but with a cautionary note. Such initiatives will prove more beneficial on the global level if there is more wealth to redistribute. In the United States, greater wealth would maintain the nation’s ability to invest abroad, buy foreign products, absorb immigrants and generate innovation, with significant benefit for global income and equality.

In other words, the true egalitarian should follow the economist’s inclination to seek wealth-maximizing policies, and that means worrying less about inequality within the nation.

Yes, we might consider some useful revisions to current debates on inequality. But globally minded egalitarians should be more optimistic about recent history, realizing that capitalism and economic growth are continuing their historical roles as the greatest and most effective equalizers the world has ever known.

Tom W. Bell Discusses Intellectual Property on Reason TV

Tom W. Bell — Fri, 18 Jul 2014 13:31:59 -0400

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Real Inequality: Why Things Are Better Than They Seem and Will Almost Surely Get Worse

John Nye — Fri, 18 Jul 2014 11:54:21 -0400

Expert Commentary

Thanks to the bestselling book by French economist Thomas Piketty — “Capital in the Twenty-First Century” — income inequality remains a hot topic of discussion. (Did it ever go away?) Dozens of pundits, scholars and bloggers have already weighed in on this issue, either to support his policy proposals or to denounce his ideas. I want to muddy the waters a bit further by getting us to think more about what it is we’re trying to measure. In so doing, I bring both good news and bad news.

I make two claims: that in a very fundamental sense, real inequality has almost certainly declined over the last few decades, despite the problems brought on by the financial crisis, but that improvements due to stronger growth, productivity, and higher incomes will only alleviate some of our concerns while exacerbating the perceptions of inequality — perceptions that I predict will surely grow in the coming decades.

“Because the areas with the highest wages tend to have higher costs, our measures of both wealth and income exaggerate perceived inequality.”

First, the (somewhat) good news. Dollar measures of income inequality always exaggerate differences because what matters to people is what they can buy for their money and how much value they derive from what they have purchased. Are you really richer if you must spend $40,000 per year for a two-bedroom flat in Brooklyn, New York, than someone earning a bit less who spends $20,000 on a nice three-bedroom house in Brooklyn, Wisconsin?

In other words, our measures of inequality are imperfect and rely to a great extent on our ability to obtain good prices with which to compare nominal incomes over time. For example, if we simply take people’s dollar incomes (or wealth, the point is the same) we need to deflate this by the cost of living. But whose cost of living? If we measure income inequality using average prices for the U.S. as a whole, we will be exaggerating differences in inequality between high-cost and low-cost areas. Whether $50,000 a year is a good salary depends a lot on whether you live in the urban Northeast or rural Midwest. Because the areas with the highest wages tend to have higher costs, our measures of both wealth and income exaggerate perceived inequality.

Consumption inequality

But ultimately, income is not a question of how many zeroes are in your bank account, but how much you can buy in goods and services. People have tried to circumvent this by measuring not just income but consumption. The data on consumption, derived from the government’s Consumer Expenditure Surveys, shows that consumption inequality has not matched the rise in income inequality over the last two to three decades.

Moreover, even consumption, as measured by dollars spent, overstates inequality. Thus if I spent $400 a month on food and you spent $200 per month, my food consumption is double yours even if we bought exactly the same things at different prices. Measures of consumption expenditure ignore differences in the prices of what we consume. This is true even when statisticians leave out rural areas to make comparability easier. But even within urban areas, if those with lower incomes are concentrated in lower-cost areas relative to higher-income areas, then using an expenditure measure is likely to overstate the differences in actual consumption. If you buy the exact same sandwich or haircut as I do but at a higher price, in what sense is your consumption greater than mine?

Many researchers feel that consumption inequality is understated and that true measures of consumption expenditure show much greater inequality. But these adjustments focus on dollar expenditures that aren’t corrected for cost differences. They just assume if you spend more, you’ve consumed more. But to assess real inequality, we care about how different the mix of goods and services is that different people consume.

There is an even deeper problem that causes us to exaggerate differences in consumption between the rich and the poor: changes in the quality of goods are not properly accounted. The march of technology means the good becomes commonplace and the best is often only incrementally better, but usually costs a lot more money.

Doubling the price of an item doesn’t give you twice as much. As technology progresses, the price differences between low-end and high-end goods conceal relatively small differences in functionality. To take a simple example: If a good 25-inch cathode ray tube color TV cost $500 in 1990 and a larger flat screen TV cost about $2,000 in the same year, would you think that someone buying a TV today would get as much of a jump in quality for the equivalent price difference? For $500 today, you could get a flat screen TV not that much worse and only somewhat smaller than you could buy for $2,000. Some of the differences, such as 3-D capability, might not even matter to most consumers. Yet in both cases, statisticians treat the higher spending person as having consumed four times as much as the one buying the cheaper TV.

Or think of coffee. That one person spends less than a dollar a day on coffee and another spends $5 may reflect differences in quantity or the fact that one brews at home and the other goes to Starbucks. That’s not the kind of difference that would have been felt much earlier in the 20th century, when having regular coffee of any grade was itself a small luxury.

“Technology has turned many luxuries into commodities and made it much harder for the rich to distinguish what they consume from the cheaper but functionally similar products used by the average person.”

Likewise, sugar and salt were historically expensive goods, yet in our time, they cost so little that the average family does not rush to stock up if salt falls in price by 50 percent. Or think of watches: Fifty years ago, a $1,000 Swiss watch was functionally superior to one that you might have bought for $100. Today, a $10,000 Swiss watch might be no better and, if it has a spring-driven mechanism, would actually tell time worse than a $10 Quartz wristwatch.

A better way to see how ignoring the relatively small differences in quality and functionality between many, even most, cheap and expensive goods distorts inequality comparisons is to do a thought experiment. Take two families. Family A lives in a distant suburb on take-home pay of $30,000 a year in a small two-bedroom apartment. Family B lives on $150,000 a year in the big city in a similarly sized two-bedroom flat. Despite the similarity in flat sizes, we would agree that the first family will be much more constrained in its choices than the second one. Family B gets to buy mostly more and better goods than Family A.

Now pretend that a magical box is invented so that for pennies, either family can produce any material item they desire of any arbitrary quality. Want clothes? Punch in the design, and for a nickel, you have the latest fashions. Need a computer? That too will pop out cheaply. Ditto for food and drugs. We would all agree that no matter what their dollar incomes, the families with that technology would be more equal than Families A and B are today.

So imagine that in this futuristic scenario, the two families are essentially equal on most margins with this magical box, but Family B earns 10 times as much as Family A ($300,000 versus $30,000) and both have to spend most of their money on a two-bedroom flat. The statistics would show a net increase in inequality, even though most would agree that by any reasonable reckoning the two are in fact more equal now in terms of what they can consume and how similar their consumption patterns would be. Of course, this is fantasy, but the general trend in material progress is well captured by this hypothetical. Technology has turned many luxuries into commodities and made it much harder for the rich to distinguish what they consume from the cheaper but functionally similar products used by the average person.

It is in this sense that no matter the measured gap in inequality, real welfare inequality is much less than earlier in our history. That the poor and the rich are not living so differently is perhaps more readily seen in the convergence in mortality rates between the rich and the poor and the fact that the largest parts of the remaining differences are heavily driven by behavior (smoking, obesity, accidents) and from having intact families — and not by lack of access to basic health care. The fact that it is hard to do these comparisons does not change the fact that it is these differences in outcomes, given similar behavior and family, that should be the ideal measures of changing health inequality.

“It is in this sense that no matter the measured gap in inequality, real welfare inequality is much less than earlier in our history.”

Thus in the long run, technology tends to favor the poor. Contrary to common wisdom, current research suggests that the 19th century saw a decrease in inequality when measured in consumption terms. Before industrialization, the rich had silks, where the poor might not have had underwear at all. Cheap cotton and then wool and then synthetics made it possible for all to have more than ample clothing. Today, companies such as Uniqlo have gotten rich off their ability to mimic more expensive fashions at more modest prices. Though differences persist, they are smaller or more subtle than before. In fact, the rise in average wages hurt the rich in one very noticeable way: As the rich tended to consume labor in the form of household workers or personal services, the rise in incomes disproportionately increased the cost of goods that the rich tended to buy (otherwise known as the “servant problem.”)

So much for overstated inequality

But now here comes the bad news. There are important dimensions on which inequality persists and worse yet, will loom larger in the coming years, even if technological progress rebounds to increase prosperity for all. In fact, the more we are able to overcome the plagues of hunger and want, the more likely the inequalities that remain will sting and be sources of conflict.

It is not a surprise that when people worry about the cost of living, the item that looms large in comparisons is housing. But is housing just about housing? A four-bedroom McMansion that might cost $1 to $4 million to purchase in a highly desirable area might only cost $200,000 or $300,000 to build in a remote rural area. In that case, are we really complaining about inequality of housing or of where the house is located?

And this constitutes the nub of the problem. People live to be nearer to work and to people like themselves, to find safe neighborhoods, and to ensure quality schools for their children. But all of these things depend heavily on what other people are doing, not on absolute income per se. Moreover, other factors such as desirable views of the lake or mountains or proximity to the nicest clubs and theaters downtown are inherently limited, “positional” goods that are not easy to replicate even with the best technology. To oversimplify, if there is one area in the city that everyone agrees is the “best” location to live in, then by definition, no amount of economic growth will make it possible for all to live in that location. Economist Fred Hirsch made this argument back in 1978 with his book “The Social Limits to Growth.” Inequality, and therefore the social value of positional goods, has been growing ever since.

Similarly, technology may lift the educational value of almost all universities, but so long as there is a benefit to going to the top 20 universities, no matter how those are defined, then by construction, there will always only be 20 top schools — and that is independent of wealth or demand (though they can weakly accommodate this through growth, while in the process diluting their desirability as selective institutions).

These are called positional goods in the sense that their value depends greatly on their relative status. Some goods, such as housing, could be a combination of material aspects (construction, amenities) and positional goods (location). Others might be mostly positional, as is the case with top universities. Technology cannot do anything to produce such goods, or at any rate produce them in ways that would easily match overall growth.

While it is imaginable that highly desirable new cities will emerge in the future, their desirability in the overall pecking order will likely either constrain demand or else displace a “cooler” city in attracting the wealthiest inhabitants and most skilled workers. In fact, economic growth makes this problem even worse. To the extent that technology and growth alleviate those inequalities that are purely material (e.g. access to initially rare drugs or expensive new electronics), the remaining inequalities will by definition be those that are more intractable. For example, if powerful people’s capacity to obtain more goods and services than us comes not from their wealth but from their political influence, social position, fame, beauty or charm, then it becomes much harder for the rest of us to attain equality. Just think of clubs with “face control” or restaurants that seat customers at desirable tables on the basis of their fame or attractiveness. If you can’t pay for better service and must rely on the discretion or whims of the staff, then the inequalities that persist will most likely be insurmountable for most people. A world that eliminated disparities in wealth but still maintained vast disparities in power or influence would effectively replicate those aristocracies liberal nations sought to overturn.

Some writers — such the economist Robert Frank — have used the positional goods race to argue for higher taxation of consumption; the idea would be to discourage destructive positional competition, which he likens to an arms race. But all this will do is reduce competition in dollar terms. Competition will shift to other dimensions (such as the aforementioned political power, persuasive ability or physical attractiveness) that are even less fungible and often more inegalitarian than income.

“Our fixation on income inequality (which I am certain will not disappear under any feasible policies) will obscure the fact that trying to tax away or regulate those inequalities will give more play to inequalities that are even less tractable, like social or political connections.”

Communist nations such as the Soviet Union were not more equal than Western nations, they had simply suppressed income disparities. Moreover, the assumption that positional competition is inherently wasteful is unfounded. The need of many to one-up their neighbors has often led to productive innovation. Without early adopters who first fought to get Blackberries, and then iPhones, would the mobile market be as well developed? And status-seeking has allowed for socially valuable charitable giving on the part of plutocrats who might otherwise focus exclusively on enriching their descendants.

Our fixation on income inequality (which I am certain will not disappear under any feasible policies) will obscure the fact that trying to tax away or regulate those inequalities will give more play to inequalities that are even less tractable, like social or political connections.

Zoning restrictions and rent control, for example, have not made Manhattan’s housing affordable. If anything, rent control has led to the spectacle of wealthy or influential people occupying luxury accommodations at bargain basement prices. (In the 1980s, because of rent control, New York City Mayor Ed Koch was famously paying about $475 for an apartment worth $1,200 a month.) When transparent market pricing is not allowed to hold sway in a market with high demand, other forms of influence – as well as money – will play a much larger role in distributing desirable resources.

Consider just one example from France: the Socialist leader and former managing director of the International Monetary Fund Dominique Strauss-Kahn did not receive an unusually high salary but had benefits which included the right to fly first class on Air France at any time, including the right to arrive at the last minute and be guaranteed a seat even if the plane was full. No billionaire has those rights, which cannot simply be purchased.

Schooling is especially positional – and especially resistant to solutions like Frank’s consumption tax (although that policy might be good for other reasons). That’s because school is a mix of absolute learning and of access to good or elite students. Consider that the number of Ivy League schools won’t increase as population increases. So while the median state school is vastly better than it used to be and the gap in what you can study has shrunk between the average and the elite schools, the social benefits of going to the top few universities have grown to the point where admission committees wield extraordinary influence and can make arbitrary decisions as to which sets of characteristics give kids a leg up. Large donations help, but so does coming from a well-connected political family or being a Hollywood celebrity. If taxing wealth made it harder to buy one’s way into these schools (e.g. by restricting donations), it would substantially increase the arbitrary power of admissions committees, which would promote different types of inequality. It would make competition from the use of family connections, for example, even more significant.

Examples in Greg Clark’s recent book “The Son Also Rises” also show that efforts to tackle income inequality do little to eradicate other, more persistent inequalities like the social mobility gap. Despite progressive taxation, egalitarian Sweden seems to have about the same degree of long-term social mobility as the United States. And the presence of elite families in China’s top universities seems no different than elsewhere despite the Cultural Revolution and half a century of Communism.

Indeed, focusing on wealth inequality can obscure situations in which social inequality is being improved by allowing larger income inequality. Just consider a CEO of a protected industry that is not threatened by takeovers or foreign competition. That CEO can enjoy many untaxed perks, and therefore, will need a lower salary, all else equal, than someone in a more open, transparent market where the most desirable managers are still paid more than ordinary workers. Traditionally, their compensation partly came in the form of various perks, as well as social prestige and influence. But the fewer the perks, the fairer the rules, and the greater the competition for those slots, the higher the salaries one would have to pay to those who really are on top.

Indeed, to the extent that the U.S. and a few other countries have been moving to more transparent compensation, greater taxation of perks, less deference from subordinates, and greater rights of shareholders, we should expect that the measured compensation of CEOs and managers will only increase, holding all else constant.

It is likely, for example, that if countries such as Japan were to play by the more open competitive rules of the U.S. economy, with greater restrictions on perks, less acceptance of collusive arrangements, and were more subject to foreign competition and threats of takeovers at home, we would shortly see that leading firms would end up having to pay even more for the CEOs or managers that firms wanted to retain, aside from the vexed question of whether these managers “deserved” their high pay. Paying them more would certainly increase measured income inequality while possibly reducing true inequality both within and across firms. Even in the U.S., how many top managers would accept lower salaries if women and foreigners were not allowed to compete for their positions, office perks were untaxed, and hostile takeovers were illegal?

Humans care about goods and humans care about relative status and that means that no matter how much progress we make in providing for all, we will undoubtedly see even more vicious conflicts about positional inequality in the years ahead, even if they are couched in such terms as “good schools” or “affordable housing.”

Mercatus Scholar Jerry Brito Reacts to NY Financial Regulator's Draft of 'BitLicense' for Bitcoin Businesses

Jerry Brito — Fri, 18 Jul 2014 09:45:58 -0400

Expert Commentary

The New York Department of Financial Services released a draft proposal today for licensing and regulating virtual currency businesses, like Bitcoin. Mercatus scholar Jerry Brito reacts to their “BitLicense” proposal at The Technology Liberation Front, noting that while New York is on the right track, there is room for improvement.

Read the full post here and find excerpts below:

"The definition of who is engaged in 'virtual currency business activity,' and thus subject to the licensing requirement, is quite broad. It has the potential to swallow up online wallet services, like Blockchain, who are merely providing software to their customers rather than administering custodial accounts."

"In order to grow and reach its full potential, the Bitcoin ecosystem needs regulatory certainty from dozens of states. New York is taking a leading role in developing a regulatory structure and the path it chooses will likely influence other states. This is why we have to make sure that New York gets it right."

If You've Got a Small Business, Odds are the Export-Import Bank Isn't Helping You

Veronique de Rugy — Fri, 18 Jul 2014 13:44:01 -0400

Expert Commentary

Americans now know the Export-Import Bank is a corporatist program built on bad economics.

Its corporate beneficiaries are fighting tooth and nail to protect their subsidies. Do not be fooled by their rhetoric.

Insider lobbying groups like the Chamber of Commerce claim the Ex-Im Bank is about small business and jobs. Without the bank, they threaten, catastrophe will strike average Americans.

This is just fear-mongering. The bank only subsidizes less than 2 percent of exports and jobs and less than 1 percent of small businesses in the U.S. each year. Most of this support directly benefits a handful of well-connected domestic and foreign firms, like Boeing and General Electric.

Unfortunately, Ex-Im supporters know that “promoting small business” is a good way to conceal toxic Ex-Im corporatism.

Take this piece in The Hill by Rep. Charles Boustany Jr., R-La. He argues that the bank primarily helps small businesses to gain customers, create thousands of jobs, and grow exports. These claims are misleading.

First, the Ex-Im Bank's definition of a “small business” isn't exactly “small.” Most government bodies set the threshold at firms with fewer than 500 employees. Ex-Im “small businesses” can be three times that large and earn up to $21 million in annual revenues. This isn't “small” for most Americans.

Even with this expansive definition, it is misleading to imply, as Boustany does, that Ex-Im supports most small business firms and jobs in America. In fact, Ex-Im's effect on U.S. small businesses and jobs is so tiny that you can hardly see it on the chart above.

Data from Census Bureau's Statistics of U.S. Businesses dataset and this Export-Import Bank dataset show that only 0.3 percent of all small business jobs in 2007 (the most recent year for the Census dataset) were supported by the Ex-Im Bank. Assuming that each Ex-Im small business transaction went to a unique small business, only 0.04 percent of all small businesses were supported by Ex-Im that year.

The pattern is similar on the state level. Consider Boustany's home state of Louisiana. Census data show that Louisiana exported $355 billion in goods and services from 2007 to 2014. Ex-Im reports that it supported $1.6 million of Louisiana's exports in that same time, $786 million of which went to small businesses.

This means that only 0.44 percent of Louisiana’s exports were actually supported by the bank — which is lower than the national average of 1.6 percent. Additionally, Ex-Im only supported 0.22 percent in exports for small businesses in Louisiana.

Boustany either doesn’t know the facts or he doesn’t care. Either way: Ex-Im is hardly critical for more than 99 percent of small businesses in the U.S. and his own state. That doesn’t stop Boustany from trying to scare Americans from ending the Export-Import Bank with visions of exports collapsing and economic catastrophe.

The sad part is that the Export-Import Bank actually harms many U.S. small businesses and workers by subsidizing their competitors. Boustany doesn’t explain that when Ex-Im subsidizes one Louisiana firm, it penalizes all other unsubsidized firms and workers. Subsidized firms undoubtedly enjoy that these taxpayer-backed subsidies lower their costs and raise their profits, but they come at the cost of slower wage growth, less hiring, and more layoffs among the other 98 percent of unsubsidized exports. These unsubsidized Americans shouldn’t matter less than the few privileged firms who receive government subsidies.

Boustany is right when he says that “American people are tired of Washington politicians playing political games when American jobs are at stake.” He should look in the mirror. More than 98 percent of jobs and exports in the U.S. bear the unjust costs of Ex-Im privileges for politically connected few.

Members of Congress should represent all of us, not just those of us fortunate to have friends down at the Export-Import Bank.