Mercatus Site Feed http://mercatus.org/feeds/home/veronique-de-rugy en Does Pennsylvania’s Redevelopment Assistance Capital Program Develop Its Economy? http://mercatus.org/publication/does-pennsylvania-s-redevelopment-assistance-capital-program-develop-its-economy <h5> Publication </h5> <p class="p1">Several states administer grant programs that provide funding to businesses that relocate to the state or expand existing operations. The Redevelopment Assistance Capital Program (RACP) in Pennsylvania is a grant program administered by the commonwealth’s Office of the Budget for the acquisition and construction of regional economic, cultural, civic, recreational,&nbsp;and historical improvement projects. The program was started in 1986 with the goal of creating new economic opportunities and jobs in Pennsylvania by investing in a wide variety of projects classified as economic development. Funding for the RACP increased nine times from 1986 through 2010, and by 2010 the borrowing authority for the program had reached $4.05 billion, up from $400 million at its start. In 2013, Act 77 reduced the borrowing authority of the program to $3.45 billion. Since 1986 the program has awarded more than $5 billion in grants that have been used to fund more than 2,200 projects. Some of the projects approved in 2014 include the relining of a US Steel Corporation blast furnace, construction of a 120-room upscale hotel in Pittsburgh, and construction and installation of a rooftop solar array for an Urban Outfitters distribution center. The grants for these three projects totaled $11 million. Table A1 in the appendix provides a sample of approved projects, their descriptions, and the grant amounts.</p> <p class="p2">RACP grants are funded by tax-exempt government bonds. The bonds are sold to raise revenue, which is then used to award grants to the successful applicants. RACP projects must have a total cost of at least $1 million and at least 50 percent of the project cost must be provided by non-state entities. The grants are used to reimburse the costs of winning projects; they are not provided up front.</p> <p class="p2">The RACP is administered similarly to a revolving line of credit. This means that as debt is retired, new debt can be issued to fund additional projects, so long as the amount of outstanding debt does not exceed $1.2 billion. A recent redesign of the RACP established semiannual funding rounds, with awards generally made in April and October of each year.</p> <p class="p2">In this study, I examine the distribution of RACP grants and their effect on subsequent employment growth. Over the life of the program, nearly half the grant dollars have been awarded to businesses in two counties—Philadelphia and Allegheny (where Pittsburgh is the county seat). I also find that grants awarded in 2010 did have a small, positive effect on county employment growth from 2010 to 2013. However, this result should be interpreted with caution since it does not represent net jobs created across the state. In fact, the economic theory and evidence in this study demonstrate that targeted development grants tend to reallocate economic activity from one place to another and across time rather than create long-term economic growth.</p> <p class="p1"><b>Where Do RACP Grants Go?</b></p> <p class="p1">The RACP has awarded more than $5 billion in grants since 1986. A substantial amount of that money was awarded in 2010, as shown in figure 1. Owing to the revolving nature of the debt used to fund the grants, the award amounts fluctuate. For example, the high award amount in 2010 resulted in low award amounts in 2011 and 2012.</p> <p class="p3"><a href="http://mercatus.org/sites/default/files/Millsap-PA-RACP-figure-1.png"><img src="http://mercatus.org/sites/default/files/Millsap-PA-RACP-figure-1.png" width="585" height="451" /></a></p> <p class="p2">The grants are awarded to the projects that score the highest according to a publicly available scoring system. The maximum amount of points is 100. Points can be earned for job creation and retention (40 points), community impact (20 points), development of strategic clusters (5 points), financial impact (25 points), and the start date of construction (i.e., shovel-readiness, 10 points). The scoring process was designed to be objective and apolitical, but instead, the unintended result is that a large portion of the grants have been awarded to businesses in a small subset of counties. As shown in figure 2, over the history of the RACP, the bulk of the dollars awarded and projects funded have been in two counties: Allegheny and Philadelphia. Allegheny County has received $1.01 billion for 351 projects, while Philadelphia has received $1.7 billion for 506 projects.</p><p class="p2"><a href="http://mercatus.org/sites/default/files/Millsap-PA-RACP-figure-2.png"><img height="448" width="585" src="http://mercatus.org/sites/default/files/Millsap-PA-RACP-figure-2.png" /></a></p> <p class="p2">Nearly 40 percent of the projects funded and almost 50 percent of the dollars awarded and actual payments have gone to businesses in those two counties. Philadelphia County and Allegheny County contain the cities of Philadelphia and Pittsburgh, respectively, which are the two largest cities in Pennsylvania. However, although these cities are the largest, Philadelphia and Allegheny County combined never made up more than 26 percent of the Pennsylvania population from 1980 to 2014. Both the dollars awarded and projects funded in these two counties far exceed their share of the population, meaning they are getting a disproportionate amount of the RACP awards.</p> <p class="p2">The RACP’s funding criteria take direct politics out of the process by using a publicly available, objective scoring methodology. But determining what criteria to include in the scoring methodology itself was a political process, and the result is a set of criteria that implicitly favor businesses in large cities. The scoring methodology includes “prioritizing projects that will have the greatest financial impact on Pennsylvania’s economy” such as “large, regional, economic development projects that are transformative in nature.” Projects that are “transformative in nature” are more likely to be located in densely populated areas where the infrastructure is already in place and there are more people to impact. Transformative projects rarely take place in sparsely populated areas that are hard to access. The methodology also focuses on “strategically important industry clusters.” Again, industry clusters are often located in densely populated cities owing to knowledge spillovers and agglomeration economies. Older industries, such as steel production, coal mining, and shipping, also clustered together to be around rivers or waterways and natural resource inputs. Cities such as Philadelphia and Pittsburgh grew up around these industries.</p> <p class="p2">In addition to being one of the most densely populated counties in Pennsylvania, Allegheny County is also one of the wealthiest. In 1979, before RACP began, Allegheny had the fifth highest per capita income out of the 67 counties in Pennsylvania. In 1989, three years after the program began, Allegheny was ranked seventh, and in 2010 Allegheny was ranked sixth. Philadelphia was ranked 39th, 25th, and 45th respectively in each of those years, which still places Philadelphia firmly in the middle of the rankings. Figure 3 depicts the relationship between per capita funding and per capita income by county more broadly using only 2010 data.</p> <p class="p3"><a href="http://mercatus.org/sites/default/files/Millsap-PA-RACP-figure-3.png"><img src="http://mercatus.org/sites/default/files/Millsap-PA-RACP-figure-3.png" width="585" height="475" /></a></p> <p class="p1">On the horizontal axis is the natural log of the county’s per capita income and on the vertical axis is the natural log of the county’s per capita release amount.</p> <p class="p2">If poorer counties, as measured by per capita income, received more grant money per capita, then the graph would depict a negative relationship between the two variables. As the graph shows, there is a slight negative relationship between the two variables, but the relationship is weak. It does not appear that RACP funding is primarily going to the poorest counties.</p> <p class="p1"><b>Does the RACP Create Jobs?&nbsp;</b></p> <p class="p1">One of the stated goals of the RACP is to generate employment in the counties that receive the grants. As mentioned earlier, 40 percent of the possible points that are used to determine the grant winners are based on job creation and retention. If the RACP generates employment, one would expect larger employment growth in the counties that receive higher levels of RACP funding, all else equal. Figure 4 is a scatter plot with the natural log of 2010 per capita RACP funding on the horizontal axis and private, nonfarm employment growth from 2010 to 2013 on the vertical axis. There is a slight positive relationship between per capita funding and subsequent job growth at the county level.</p> <p class="p4"><a href="http://mercatus.org/sites/default/files/Millsap-PA-RACP-figure-4.png"><img height="470" width="585" src="http://mercatus.org/sites/default/files/Millsap-PA-RACP-figure-4.png" /></a></p> <p class="p2">Many other factors that can affect job growth at the county level are not accounted for in the scatter plot. In order to control for some of these additional factors, a multivariable regression was estimated that used county employment growth from 2010 to 2013 as the dependent variable. The 2010–2013 period was chosen since it followed the year of the largest authorization of funds in the RACP’s history, as shown in figure 1. The key independent variable is the natural log of the RACP per capita release amount. The release amount is the amount of funds authorized to be reimbursed. If the RACP positively impacts job growth one would expect to find an effect in the years following such a large authorization of grant dollars. Summary statistics for the variables are in table A1 and the regression results are in table A2 in the appendix.</p> <p class="p2">RACP funding per capita in 2010 did have a small but statistically significant effect on subsequent county employment growth when past employment growth and other factors are held constant. The analysis shows that a one standard deviation increase in the natural log of RACP funding per capita in 2010 resulted in a 1.1 percentage point increase in county employment growth from 2010 to 2013. The following is a numeric example to illustrate the effect such an increase would have on the level of employment in a county.</p> <p class="p2">Washington County received the median level of RACP per capita funding in 2010, which was equal to $47. Increasing this to $134 per capita (a one standard deviation increase) would have increased Washington County’s growth from 9 percent to 10.2 percent. This additional growth would have resulted in 640 additional jobs at a cost of $18.25 million, which equates to a per-job cost of $28,522.</p> <p class="p2">It should be emphasized that the positive effect found here is not surprising, and it does not show that the grant led to a net increase in Pennsylvania’s economic growth. Creating jobs via a grant process that gives certain businesses money to expand is a trivial achievement. To put the Washington County example in a more appropriate context, it is important to remember that the result involves an all-else-equal injection of RACP funds. It is possible for Washington County to receive more funds holding everything else within the county constant, but it is not possible for <i>Pennsylvania</i> to supply more funds holding everything else within the state constant. In order for Pennsylvania to supply more RACP grants to Washington County, it would need to either redistribute them from another county or sell bonds to raise additional funds and then give those funds to Washington County. Redistributing grants involves decreasing RACP grants in one county, which would lead to a decrease in employment in that county, all else equal. Selling bonds imposes a higher future tax burden on the residents of Pennsylvania, which will lead to a decrease in economic activity at some point in the future, all else equal. Both of these funding methods involve a <i>redistrubtion</i> of economic activity, either spatially or intertemporally, that is not accounted for in the preceding empirical analysis and similar studies. A complete analysis would include the tax burden that is imposed on both current and future residents of Pennsylvania in order to fund the additional RACP grants and all the revlevant opportunity costs. Such a counterfactual analysis is beyond the scope of this study; thus the empirical result here only represents the upper-bound of gross jobs created in a county if it received additonal grants, not net jobs created in Pennsylvania. The economic theory behind the opportunity costs that are inherent in programs like RACP will be developed more in the next two sections.</p> <p class="p1"><b>Business Grants Interfere with Competition and Innovation</b></p> <p class="p1">The RACP grants subsidize the production of private goods, such as the relining of a blast furnace mentioned in the introduction. Private goods are goods that are both rivalrous and excludable, and as such their production is best left to the market. If private investors, who are subject to the economic signals of profit and loss, are unwilling to invest the amount necessary to successfully complete a project, then it is probably not a worthwhile venture because this implies that the expected marginal cost exceeds the expected marginal revenue.</p> <p class="p2">A common argument by supporters of business grants is that companies will underinvest in innovation due to spillovers. In other words, since some of the benefits of innovation accrue to other businesses that don’t innovate but instead imitate, businesses will produce less innovation than is socially desirable in order to limit their competitors’ opportunities to imitate. On its face this argument appears to have merit but it contains several important flaws.</p> <p class="p2">First, even if some of the benefits of innovation accrue to other firms (i.e., there is a positive externality), the presence of a positive externality by itself is not a legitimate reason to subsidize an activity indefinitely or by whatever amount political leaders settle on via the legislative process. For example, RACP funding is currently set at $125 million per year, but this amount was not the result of a rigorous analysis designed to accurately estimate an efficient subsidy. A subsidy that is too large can be just as economically inefficient as no subsidy at all.</p> <p class="p2">Second, innovations that are patentable largely avoid the problem of underinvesting due to information spillovers. Patents grant firms temporary monopolies over their innovations—thus removing the threat of imitation—and these monopolies allow firms to earn economic profits during the length of the patent. When the patent system is functioning properly, the ability to earn economic profits provides an incentive to innovate, making local-level subsidies unnecessary.</p> <p class="p2">Third, the allure of business grants encourages what economist William Baumol called unproductive entrepreneurship. Instead of spending time and energy inventing new products or improving production processes, entrepreneurs are incentivized to expend resources pursuing government grants. Since the grant is simply a transfer of resources from one group to another—in this case from taxpayers to the winning businesses—the resources spent on acquiring the grant do not create any new output, and from the whole of Pennsylvania’s perspective, they are wasted. Over time innovation will decline as once-productive entrepreneurs increasingly turn their attention toward winning the next grant rather than providing value to consumers.</p> <p class="p2">And finally, in a competitive economy a firm that chooses not to innovate is soon overrun by its competition. Economic models commonly assume away this discrete aspect of competition. Instead the models assume that if a firm innovates, another will imitate it almost immediately. The imitating firm eats into the innovators’ profits while bearing none of the costs of innovation. Thus it is in a firm’s best interest to innovate less than it would if imitation were preventable. This argument, however, ignores a more important way that innovation impacts firms—many innovations are so disruptive that they completely extinguish firms that fail to evolve. Potential entrants and existing entrepreneurs are always looking for profit opportunities, and if firms are lackadaisical other firms that offer superior products will quickly replace them.</p> <p class="p2">Firms can afford to underinvest in innovation so long as they are being protected from competition by regulations and policies that benefit established firms, and this type of protection can only be provided by the very government that some call on to subsidize innovation. To the extent that innovation subsidies are economically efficient, they are a second-best solution necessitated by a government that restricts, rather than encourages, competition.</p> <p class="p1"><b>The Seen and the Unseen Effects of Business Grants</b></p> <p class="p1">Government grants to private businesses distort the allocation of scarce resources. Businesses that receive the grants use the money to improve or expand their operations, a process that requires the use of resources such as capital and labor. The capital and labor used by the subsidized business are no longer available to be used by other unsubsidized businesses. Thus the grant results in an allocation of resources that is likely different than what would have prevailed in a free market.</p> <p class="p2">Government grants to private businesses also interfere with the entrepreneurial process and distort market competition. The grant-receiving businesses are given a state-induced advantage over their competitors. In fact, because the grant money is ultimately funded by taxes, workers and owners of competing firms are forced to subsidize their competitors by providing the revenue that funds the grants. And while the grant-induced expansion of a business may result in new jobs and tax revenue for local governments, what is not seen is the loss of jobs that result from the taxes placed on the unsubsidized businesses. French economist Frédéric Bastiat referred to this as “what is seen and what is not seen.” It is easy to see that the business that receives the grant grows and adds jobs, but it is difficult to see the job losses that occur throughout the commonwealth as a result of the taxes levied to fund the grant. Because the grant provides a competitive edge to the subsidized company, that company may be able to outcompete its rivals and force them to scale back their operations or even shut down. The loss of economic activity that results from such a scenario is rarely attributed to government grants, but the redistribution of resources caused by the grants is the ultimate cause of the distorted market competition that preceded the outcome.</p> <p class="p2">This type of grant—which takes money from taxpayers throughout the commonwealth and gives it to local businesses—also encourages government inefficiency and waste, since local policymakers do not bear the full cost of their policy decisions. For example, all else equal, higher taxes and more regulation increase the cost of doing business. But because the businesses in Philadelphia and Allegheny counties receive such a large portion of RACP funds, any relative increase in the cost of doing business in those counties will be partially offset by the grants. This allows the local governments in those counties to impose higher taxes and more regulation than they might otherwise choose if they had to compete fairly with the rest of Pennsylvania’s counties to attract businesses.</p> <p class="p1"><b>RACP-Specific Considerations</b></p> <p class="p1">The RACP was recently redesigned as it had “strayed considerably from its intended purpose of encouraging and assisting in regional economic development projects.” However, the following analysis of the funding criteria reveals that the grants are still largely about creating jobs and generating tax revenue. The current RACP funding criteria place too much emphasis on the results of economic development rather than the causes.&nbsp;</p> <p class="p2">For example, a total of 28 points can be earned for creating and retaining specified amounts of both direct and indirect jobs. An additional nine points are awarded if the wage base of the jobs is 2.51 or more times higher than the per capita income of the county where the business is located. Estimating jobs created or retained, especially indirect jobs, is more art than science. Awarding up to 37 points based on these metrics provides an incentive for grant applicants to err on the high side of any estimation and ignore any indirect “unseen” costs, such as job losses that occur at other competing firms. Also, different industries have different average salaries. Industries that use a relatively large amount of high-skill labor—such as health care, finance, and insurance—are going to have a higher wage base than industries that use more low-skill labor, such as accommodation and food services. Thus the process inherently favors firms in industries that use high-skill, high-wage labor. Even in the same industry, high-skill, high-wage firms are favored over lower-wage firms. For example, a hotel that caters to wealthy customers will pay higher wages (on average) than a hotel that serves the middle class. Businesses that disproportionately serve high-wealth consumers have an advantage in the RACP funding process.</p> <p class="p2">Three more of the possible points are directly related to the costs of the project. If the project requires 101 or more construction jobs to complete, an applicant is awarded three points. The wages paid to construction workers are a cost of a project, not a benefit. More construction workers make a project more expensive for taxpayers, but in the RACP program this gets an applicant more points and thus a better chance of having its project approved.&nbsp;</p> <p class="p2">Finally, by focusing on strategic clusters and industries, which can earn up to five points, Pennsylvania’s political leaders are putting the economy at risk of becoming dependent on a relatively small amount of industries—similar to the way Michigan became largely dependent on the automobile industry. Firms in some industries may end up clustering in Pennsylvania because of a comparative advantage or agglomeration economies, but this is a natural occurrence that does not require subsidies. Attempting to artificially create clusters or sustain them is ill-advised, since political leaders lack the relevant knowledge necessary to select the appropriate industries. Even if they somehow manage to select the appropriate industries, the subsidies dampen the profit and loss signal that indicates when agglomeration is no longer economically efficient.</p> <p class="p1"><b>Conclusion</b></p> <p class="p1">The Redevelopment Capital Assistance Program provides grants to private businesses throughout Pennsylvania. However, in its current form it disproportionally benefits businesses in two urban counties—Philadelphia and Allegheny. An empirical analysis that examines the program’s largest award year suggests that the program generates only a small amount of gross employment in the recipient counties, while economic theory and additional evidence suggest that the program generates negligible net employment in Pennsylvania.</p> <p class="p2">The RACP distorts market competition by giving some businesses a state-funded competitive advantage over their rivals. RACP grants are not free money, and can only be increased in one area by either decreasing them in another or by increasing the tax burden on the residents of Pennsylvania. In the long run this favoritism harms innovation, business diversity, and economic growth as scarce resources are diverted to industry sectors and firms based on their ability to win grants rather than their ability to provide value to consumers. Businesses that provide value to consumers will grow and naturally create both direct and indirect jobs over time. Creating a business environment that allows entrepreneurs to thrive is the best thing Pennsylvania can do for its economy.</p> http://mercatus.org/publication/does-pennsylvania-s-redevelopment-assistance-capital-program-develop-its-economy Thu, 03 Sep 2015 10:04:22 -0400 Are the Costs of Government on “Autopilot”? http://mercatus.org/publication/are-government-costs-autopilot <h5> Publication </h5> <p class="p1">Taxes and the costs of complying with regulation are two of the larger and more noticeable ways that private individuals pay for government services. Yet it may surprise most people to learn that a significant portion of the federal government’s expenditures and indirect costs to the US economy occur each year on “autopilot” without any action by the current Congress.&nbsp;<span style="font-size: 12px;">These autopilot costs are the result of past legislation, interest payments, and rules created by government agencies, all of which bypass the annual appropriations process that exists to ensure the accountability of our elected officials.</span></p> <p class="p1">Some federal government costs <i>are</i> included in the <a href="https://www.whitehouse.gov/sites/default/files/omb/budget/fy2016/assets/budget.pdf">yearly budget</a>. For example, discretionary expenditures—those appropriated by annual congressional vote—are budgeted at $1.15 trillion for fiscal year (FY) 2015. According to a <a href="http://regulatorystudies.columbian.gwu.edu/sites/regulatorystudies.columbian.gwu.edu/files/downloads/2016_Regulators_Budget.pdf">yearly report</a> by Susan Dudley of George Washington University and Melinda Warren of Washington University in St. Louis, MO, $62 billion of that $1.15 trillion will flow to regulatory agencies. While $62 billion is a substantial figure, it is relatively small in terms of overall government spending. The sum of regulatory costs to the economy, however, extends far beyond the salaries and spending at the agencies themselves.</p> <p class="p1">The remaining costs of regulations are much more difficult to calculate than those plainly stated in the federal budget. These are the costs of complying with regulations that are borne by consumers and producers, and those costs are, in turn, paid for through higher prices, lower wages, and reduced innovation. An oft-cited <a href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2502883">report</a> by Clyde Wayne Crews Jr. of the Competitive Enterprise Institute estimates that these costs will be approximately $1.88 trillion in 2015.</p> <p class="p1">Other organizations such as the National Association of Manufacturers (NAM) and the Office of Management and Budget (OMB) offer estimates that help highlight the wide range and uncertainty in this calculation. NAM estimates these costs were <a href="http://www.nam.org/Data-and-Reports/Reports/Cost-of-Federal-Regulations/The-Cost-of-Federal-Regulation/">$2.03 trillion in 2012</a>, while OMB calculates that the range of annual costs from 2001 to 2013 was from <a href="https://www.whitehouse.gov/sites/default/files/omb/inforeg/2014_cb/2014-cost-benefit-report.pdf">$74.3 to $110.5 billion</a> (all amounts adjusted to 2015 dollars by the authors). However, the OMB estimation only includes the costs of 116 of the 569 economically significant regulations (those with an impact of $100 million in at least one year) and none of the 36,453 regulations that do not qualify as economically significant during this period. The authors acknowledge that, because of this exclusion, “the total benefits and costs of all Federal rules now in effect are likely to be significantly larger than the sum of the benefits and costs reported.” Yet even the lower-range value from the OMB, when compared to Dudley and Warren’s figure, shows that the annual appropriations by Congress only reflect 45 percent, or $62 billion, of the total costs of regulations, $136.3 billion. The higher-range estimates from Crews and NAM indicate that this figure may be as low as 3 percent.</p> <p class="p1">To get a full picture of the costs of government, we must also take into account the expenditures that <i>are</i> a part of the budget but <i>are not</i> appropriated each year by congressional votes. The three major entitlement programs—Social Security, Medicare, and Medicaid—are estimated<b> </b>at $1.75 trillion for the year. These programs, along with another $628 billion in other mandatory spending and $229 billion in net interest, account for the remainder of the autopilot costs. Combining the estimates of regulatory costs and the numbers from the federal budget, we can produce estimations of the total cost of the federal government in 2015.&nbsp;</p> <p class="p1">Then we can separate the costs that are appropriated by Congress as part of the annual budget process from those that are not to see how much is on autopilot. The appropriated costs are the discretionary expenditures, including budgets for regulatory agencies. Those remaining—non-budgeted costs of regulation, Social Security, Medicare, and Medicaid, other mandatory programs, and net interest—give us the total “autopilot” costs. Using the Crews estimate, the data reveal that the current Congress is voting on just 20 percent of the amount that we pay for their services, leaving 80 percent—an astounding $4.5 trillion—as autopilot costs in 2015. But even using the lower-bound estimate of $74.3 billion for the non-budgeted costs of regulation would only decrease the autopilot costs to 70 percent of the total.</p> <p class="p2"><a href="http://mercatus.org/sites/default/files/federal-govt-costs-chart-1_0.png"><img src="http://mercatus.org/sites/default/files/federal-govt-costs-chart-1_0.png" width="585" height="457" /></a></p><p class="p2"><span style="font-size: 12px;">This recurring process is not inescapable. Our Mercatus Center colleagues Jason Fichtner and Patrick McLaughlin have proposed a method of more accurately estimating costs and including them in the annual budget process called </span><a href="http://www.economics21.org/commentary/mercatus-legislative-impact-analysis-budget-06-09-2015" style="font-size: 12px;">legislative impact accounting</a><span style="font-size: 12px;">. This method would:</span></p> <p class="p3" style="padding-left: 30px;">incorporate economic analyses of legislation and regulation into the budget process in two ways: First, when new legislation is proposed, an independent office—perhaps the Congressional Budget Office—would produce an estimate of the economic costs the legislation would create. Importantly, a legislative impact assessment would attempt to consider economic costs of proposed legislation, not just budgetary outlays. . . . Second, legislative impact accounting would require retrospective analyses of the economic effects of legislation, starting five years after the legislation passed. The idea is to learn what the real effects have been, and to then update the original estimates produced in the first stage. This would effectively create a much-needed feedback loop that communicates information about the economic effects of legislation back to Congress.</p> <p class="p1">Such a process would help inform Congress and the public about the hidden costs that accompany legislation and regulation, and it would help incorporate this information into the annual appropriations process.</p> <p class="p1">Indeed, any effort to account for these autopilot costs would help promote transparency and accountability within the federal government.</p> http://mercatus.org/publication/are-government-costs-autopilot Thu, 03 Sep 2015 11:32:19 -0400 Addressing the Social Security Disability Insurance Dis-Trust Fund http://mercatus.org/expert_commentary/addressing-social-security-disability-insurance-dis-trust-fund <h5> Expert Commentary </h5> <p class="p1">Have you ever wondered why your television screen is often filled with advertisements from law firms touting their ability to land money for the disabled? It's because helping people obtain federal Social Security disability benefits has become a lucrative industry in the past decade. But it would be a mistake to only blame the legal profession. After all, lawyers are only taking advantage of a program that frequently encourages people with dubious disability claims to seek benefits, especially when the economy is down.</p> <p class="p1">According to the Social Security trustees report released at the end of July, the disability insurance trust fund will run out of money by the end of 2016. Without reforms, millions of Americans will receive an automatic 19 percent reduction in their Social Security Disability Insurance benefits.</p> <p class="p1">That the program is short on cash is not surprising, considering the tremendous increase in benefits and recipients. According to the Social Security Administration, 2.6 million Americans were collecting SSDI in 1970. In 2014, that number reached 10.9 million. Today the program pays about $142 billion. Adjusted for inflation, that's double what the program cost in 1998.</p> <p class="p1">The statistics show large increases in applications for disability benefits when the economy is struggling and unemployment is rising but fewer applications when the situation is reversed. Given that people obviously don't become more or less disabled depending on how the economy is performing, it means that people are using the program as a form of unemployment insurance.</p> <p class="p1">How did we get here? When SSDI was implemented in the late 1950s, it was intended to provide benefits to those who were too disabled to work but weren't yet eligible for Social Security benefits. However, eligibility standard changes implemented in 1984 shifted screening rules from a list of specific impairments to a process that put more weight on an applicant's reported pain or discomfort, even in the absence of a clear medical diagnosis.</p> <p class="p4">This results in more workers being awarded benefits based on ailments that aren't easily diagnosed and depend on patient self-reporting, such as back pain.</p> <p class="p1">Adding to the problem is that if people are initially denied benefits, they can appeal to an administrative law judge, or ALJ. In theory, these judges impartially balance the claims of applicants against the interests of us taxpayers. Unfortunately, many judges don't. In May, my colleague Mark Warshawsky and George Mason University economics student Ross Marchand noted, "In 2008 judges on average approved about 70 percent of claims before them, according to the Social Security Administration."</p> <p class="p1">They added, "Nine percent of judges approved more than 90 percent of benefit requests that landed on their desks." As their data show, those judges who are generous with benefits are also consistently generous over time. This shouldn't be the case, of course, because judges are randomly assigned cases. This is problematic for taxpayers. In their upcoming Mercatus Center study, Warshawsky and Marchand estimate that over the past decade, decisions from these overly generous judges will cost taxpayers $72 billion.</p> <p class="p1">As the authors note, ALJs have greater incentives to award benefits than to deny them, because approving people involves less paperwork than denying them. Considering the payoffs for applicants (the average SSDI benefit amount is $1,165 per month but can reach $2,663), as well as the lack of incentives to stop appealing when denied and the incentives for lawyers to push their clients through the appeal process, judges — especially the generous ones — are faced with huge caseloads.</p> <p class="p1">The system is in dire need of reform. On the ALJ front, Warshawsky and Marchand recommend reducing the judges' workload to 500 cases per year and ending lifetime tenure by reducing it to 15 years because the generous judges are the long-serving ones.</p> <p class="p1">But lawmakers could also scale back eligibility rules so that benefits only go to those who can prove their inability to work. That might just make the TV ads stop and make the SSDI program solvent again.</p> http://mercatus.org/expert_commentary/addressing-social-security-disability-insurance-dis-trust-fund Wed, 02 Sep 2015 15:10:43 -0400 Social Security Disability Insurance Program Is Financially Unsustainable http://mercatus.org/publication/social-security-disability-insurance-program-financially-unsustainable-ssdi <h5> Publication </h5> <p class="p1">The 2015 annual report from the Social Security Board of Trustees shows that the program’s disability component is in immediate trouble. Data from the latest report show that the disability fund will be depleted as soon as next year and unable to pay full benefits to beneficiaries.&nbsp;</p> <p class="p1">This week’s first chart uses that data to show total income, expenditures, and assets in the Social Security Disability Insurance (DI) trust fund going back to 1980. The chart shows that the trust fund has been operating under deficits since 2009, as shown by the decline in the trust fund (green bars) and ever-growing gap between the payments (red line) and receipts (blue line).&nbsp;</p> <p class="p1"><a href="http://mercatus.org/sites/default/files/C1-disability-insurance-trust-fund-vero.png"><img src="http://mercatus.org/sites/default/files/C1-disability-insurance-trust-fund-vero.png" width="585" height="398" /></a></p> <p class="p1">Those deficits have been financed by redeeming nonmarketable government securities that were accumulated over the years when the program was bringing in more revenue than was being paid out. The government spent the surpluses on other government programs and credited the fund with the securities. But because the securities are nonmarketable, the government had to use general federal revenues to “redeem” them once the DI fund started to run deficits in order to cover the difference. With the illusion of the DI trust fund about to disappear, policymakers have no choice but to finally confront the financial imbalance that actually began years ago.&nbsp;</p> <p class="p1">That means confronting the growth in disability benefits, which have exploded over the past decade. The second chart shows the dramatic inflation-adjusted rise in benefits since the program’s inception, which have doubled in real terms (from $70 billion to about $142 billion) between 1998 and 2014.&nbsp;</p> <p class="p1"><a href="http://mercatus.org/sites/default/files/C2-ssdi-benefit-payments-vero.png"><img src="http://mercatus.org/sites/default/files/C2-ssdi-benefit-payments-vero.png" width="585" height="398" /></a></p> <p class="p1">It will be tempting for policymakers to avoid the politically difficult decision to rein in benefits by a temporary fix, like raising payroll taxes or shifting “assets” from the regular Social Security trust fund to the DI component. These short-term fixes would worsen the Social Security system’s long-term structural imbalance, while inflicting damage on the US economy.&nbsp;</p> http://mercatus.org/publication/social-security-disability-insurance-program-financially-unsustainable-ssdi Wed, 02 Sep 2015 10:55:34 -0400 Six Mistakes Paul Krugman Makes about Medicare's Finances http://mercatus.org/expert_commentary/six-mistakes-paul-krugman-makes-about-medicares-finances <h5> Expert Commentary </h5> <p class="p1">My usual custom when writing about Medicare and Social Security finances is to simply present the relevant data instead of discussing others’ commentaries about the programs. After this year’s Medicare trustees’ report was released, however, a subsequent <a href="http://krugman.blogs.nytimes.com/2015/07/26/the-disappearing-entitlements-crisis/?smid=fb-share&amp;_r=3">Paul Krugman</a> column prompted a number of questions from his readers, suggesting it would be helpful to address Dr. Krugman’s specific assertions.&nbsp;</p> <p class="p1">The essence of Dr. Krugman’s column was to cite the latest Medicare report as evidence that “there never was an entitlements crisis.” Dr. Krugman’s view of the Medicare financing outlook differs with the trustees’ perspective as reflected in our <a href="http://www.socialsecurity.gov/OACT/TRSUM/index.html">joint message</a>, which states, “Medicare still faces a substantial financial shortfall that will need to be addressed with further legislation.” The difference between these two perspectives derives in part from problems of incomplete information and analysis.</p> <p class="p1"><i>Problem #1: Conflating expectations with reality. </i>Dr. Krugman’s piece points to long-term Medicare cost projections that now look less daunting than they did in 2009, and asserts that the entitlement cost problem is therefore “disappearing.” That characterization, however, is incorrect. Comparing to prior projections is in this context a distraction, irrelevant to whether Medicare is now on a stable financial course (it is not).&nbsp;</p> <p class="p1">The mistake is one of so-called “<a href="http://www.economics21.org/commentary/federal-fiscal-predicament-what-seems-better-actually-worse">anchoring</a>,” a behavioral economics concept referring to the powerful cognitive illusion whereby our perception of events is distorted by previous expectations. Whether things are actually getting better or getting worse is not a function of the trend of expectations but of real-world data evolving in time. Medicare cost burdens are mounting, not easing, as the accompanying graph shows. Total program costs have been rising faster than our economic output, and are currently projected to continue to do so. As many readers will intuit, it is highly problematic for any major spending program to grow significantly faster than the economy that must support it, as this can only lead to continually rising tax burdens, escalating debt, and/or crowding out other priorities.</p><p class="p1"><a href="http://www.economics21.org/commentary/six-mistakes-paul-krugman-makes-about-medicares-finances">Continue reading</a></p> http://mercatus.org/expert_commentary/six-mistakes-paul-krugman-makes-about-medicares-finances Tue, 01 Sep 2015 11:26:20 -0400 Sunset Clauses Lead to Political Power Plays, but Some Good Government http://mercatus.org/expert_commentary/sunset-clauses-lead-political-power-plays-some-good-government <h5> Expert Commentary </h5> <p class="p1">Almost everyone, regardless of political persuasion, can point to some aspect of government that has outlived its usefulness or is a waste of time and money. Getting rid of the "waste, fraud and abuse" is a constant campaign theme. Such claims imply there must be plentiful opportunities to bring efficiencies to government and that a process such as the sunset review process, designed to rid government of bloat and inefficiency, would be well used. Pioneered in the mid-1970s, the sunset clause is, indeed, at least one good government tool.</p> <p class="p1">Sunset clauses are provisions written into the law, most often laws establishing regulatory agencies, which end the agency's existence, unless the legislature acts to extend its life. The sunset review process requires that the agency defend its existence and justify its continuation. We examined the sunset clause and its use and found that it was not just about good governance but also a political power play.</p><p class="p1"><a href="http://www.usnews.com/opinion/economic-intelligence/2015/09/01/sunset-clauses-leads-to-political-power-plays-but-some-good-government">Continue reading</a></p> http://mercatus.org/expert_commentary/sunset-clauses-lead-political-power-plays-some-good-government Wed, 02 Sep 2015 14:24:04 -0400 What Will It Take to Solve Puerto Rico's Debt Crisis? http://mercatus.org/expert_commentary/what-will-it-take-solve-puerto-ricos-debt-crisis <h5> Expert Commentary </h5> <p class="p1">How serious was the default by Puerto Rico on its bond obligation? As a member of parliament and associate minister of finance during the recovery in New Zealand during the mid-1980s when the commonwealth almost went bankrupt, I have firsthand knowledge of how difficult recovery is — but I also know that it is possible.</p> <p class="p1">I can tell the people of Puerto Rico that the recovery will be painful. Individuals may find that borrowing is more difficult and expensive. The government may want to tax its citizens more heavily. And the commonwealth’s creditors may be compelled to renegotiate their debt holdings. This is very serious, indeed.</p> <p class="p1">Puerto Ricans may find that many of the government-paid benefits will need to be reduced significantly. In the case of New Zealand, this reduction in benefits was as much as 30 percent. The civil service was reduced by 66 percent. The Puerto Rican government will need to be reduced in size by as much as 40 percent. But the quicker the adjustments are made, the quicker people and the economy can get back on a path to growth. Even then, vigilance will be required to keep fiscal distress from creeping back again — and keep the political class from revisiting its big spending tendencies.</p> <p class="p1">So, is this all just a financial hiccup that will quickly go away or could it cripple the island for a generation? To answer that question, one would benefit from a frame of reference that compares factual financial information about Puerto Rico with other commonwealths within the United States — some of which are quite troubled, and many of which could learn from Puerto Rico’s mistakes.</p> <p class="p1">Fortunately my colleagues at the <a href="http://mercatus.org/">Mercatus Center</a> at George Mason University recently released <a href="http://mercatus.org/statefiscalrankings">a study on the solvency of all 50 states</a> that provides the most comprehensive ranking of state fiscal health to date, using states’ own audited annual financial reports. This study ranks the states from the most fiscally solvent to those at the highest risk. Given Puerto Rico’s financial straits, the same scholars have now applied these standards to the island — and in all but one category Puerto Rico is worse than all 50 states. This information shows that Puerto Rico’s financial problems are not easily solved nor can they be quickly repaired.</p> <p class="p1">A <a href="http://mercatus.org/statefiscalrankings/puertorico">closer look at its financial statements</a> accounts for Puerto Rico’s dire situation: Both Puerto Rico’s budget solvency and long-run solvency are roughly twice as poor as that of New Jersey, which finishes 49th on each, according to the study’s metrics. The commonwealth has only 50 percent of the cash needed to cover short-term bills, its long-term liabilities are about five times larger than the average state’s and its obligations to public employees are large and almost entirely unfunded. Overall, Puerto Rico’s fiscal performance is far worse than that of the most fiscally distressed states of Illinois and New Jersey.</p> <p class="p1">How did Puerto Rico get into so much trouble without anyone noticing? This evolving financial position has been apparent in the island’s financial accounts for at least the last 20 years, but one after another, politicians refused to acknowledge that the island was heading for bankruptcy unless they made some tough decisions immediately. For the politicians, the next election was more important than financial solvency.</p> <p class="p1">To be fair, we should not heap all the blame on the politicians. The bond-issuing agencies also deserve a share of blame — after all, they let tax-free earnings on the island’s bonds seduce them into lending when the financial fundamentals said the risk was too high. Irresponsible lenders made money available to irresponsible politicians who spent the island into bankruptcy — so we shouldn’t be unduly sympathetic to the bond holders who were the architects of their own misery.</p> <p class="p1">What of the consequences? The saddest immediate consequence is that some talented people with readily marketable skills will leave the island and leave an economy bordering on — if not fully collapsing into — recession for a considerable time. Companies will also join the exodus in search of more attractive environments.</p> <p class="p1">What’s the solution? A bailout is unlikely — and as Greece found out, to qualify for a bailout you have to surrender a lot of sovereignty. The best solutions will be home-grown and leave the decision-making authority in Puerto Rico.</p> <p class="p1">Some have called for the creation of a financial control board like that used by the District of Columbia when it almost went bankrupt in the late 1990s. Using this model, the island’s governor and legislature would have to vest authority in a board of qualified citizens to do what’s necessary to reestablish the commonwealth’s creditworthiness. The role of the governor and legislature would become more ceremonial in nature until the emergency subsides.</p> <p class="p1">What could the board do? First, it should seek some accommodation from the island’s creditors. Next, immediately liquidate as much cash as possible for the repayment of debt. This might entail privatizing a large portion of the island’s assets like government-owned utilities, ports, airports, enterprises, land, etc. The commonwealth desperately needs capital to pay down debt, not be held captive by enterprises that are frequently more of a liability to the government than a revenue producer.</p> <p class="p1">Having stabilized the island’s finances, the board should then turn its attention to dramatically improving the island’s competitiveness to attract investment capital and move the economy back into a growth phase. In the end, emerging from this crisis will depend on creating a vibrant, growing economy.</p> <p class="p1">For any naysayers, recall the experiences of island nations that have done this: Singapore, which turns 50 years old this month, was once one of the poorest places on earth. Today, it’s one of the few places where there is virtually no poverty. Up until the late 1980s, Ireland was one of the poorest countries in Europe, and by the time of the Great Recession it came roaring back with the second highest per capita income. And through dramatic reform and market-driven policies, my native New Zealand paid down most of its debt and is currently running fiscal surpluses.</p> <p class="p1">Recovery is possible, but if the leaders of Puerto Rico think it can be achieved without hardship and tough decisions, they should recuse themselves immediately because they will not be part of the solution.</p> http://mercatus.org/expert_commentary/what-will-it-take-solve-puerto-ricos-debt-crisis Wed, 02 Sep 2015 17:06:41 -0400 FSMA: No Safety, No Modernization http://mercatus.org/expert_commentary/fsma-no-safety-no-modernization <h5> Expert Commentary </h5> <p class="p1">In the midst of food prices that are already on the rise, the U.S. Food and Drug Administration’s <a href="https://www.govtrack.us/congress/bills/111/s510/text">Food Safety Modernization Act</a> (FSMA) will vastly increase costs, but it’s not likely to change food safety nor will it modernize our approach to food safety. In a <a href="http://mercatus.org/publication/regulations-implementing-food-safety-modernization-act">new research paper</a>, I examine four of the biggest of the new regulations (ultimately, there may be as many as 50) and find no evidence that they will have much effect on the safety of manufactured food, produce, imported food or animal food. And, despite the name of the law, the approach taken with all of these rules is not modern. Instead, it is trying to tell manufacturers how to produce food and inspect producers for compliance — an approach that dates back to the 1870s in the United States. In the modern information age, there is a much <a href="http://mercatus.org/publication/food-safety-21st-century">better way</a>.</p> <p class="p1">There are <a href="http://mercatus.org/sites/default/files/Ellig_10RegPrinciples_v1.pdf">two essential items</a> that should be present for a regulation to have an impact: First, there must be a problem to solve, and second, there must be some measure of effectiveness at solving that problem. Ideally, there is not an excessive cost attached to the solution. By FDA’s own analysis, each of the four regulations examined in my recent study fail in one of the two categories.</p> <p class="p1">An example of the first issue — failure to identify a large, ongoing problem to be solved — is best illustrated by a proposed rule on “<a href="http://www.fda.gov/Food/GuidanceRegulation/FSMA/ucm378628.htm">intentional adulteration</a>.” Put simply, this is a rule to prevent terrorists from poisoning food. FDA admits there has been no intentional adulteration and that it has no idea what food companies have been doing since 9/11 to protect their plants. In other words, they have absolutely no idea whether there is a problem to fix with this large and expensive solution.</p> <p class="p1">There is also scant evidence to suggest a large, systemic problem with packaged food; nevertheless, FDA does have a large and expensive rule. Using elements of a <a href="http://mercatus.org/publication/regulatory-cost-calculator">regulatory cost calculator</a>, the solution to this nonexistent problem will cost $18 billion, according to industry estimates. While there have been a few highly publicized outbreaks traced back to packaged food, <a href="https://www.federalregister.gov/articles/2014/09/29/2014-22446/current-good-manufacturing-practice-and-hazard-analysis-and-risk-based-preventive-controls-for-human">FDA notes</a> that most food safety problems occur in restaurants, other retail establishments or homes.1 These problems are not covered by the current rule.</p> <p class="p1">Then there is the second problem, when there is no effective solution presented. This is surely the case with FDA’s rule for fresh produce. Fresh produce from farms certainly can cause foodborne disease, but FDA has focused on forcing Hazard Analysis Critical Control Points (HACCP), created for manufactured food, to fit produce. Unfortunately, this method has been tried by FDA before for products that do not have a control step between harvest and mouth, e.g., raw shellfish, without success. If there is no control point, HACCP is useless.</p> <p class="p1">In some cases, Congress allowed discretion to reduce the scope of these rules, but FDA has chosen not to exercise discretion, proposing the biggest possible rules. For animal foods, FDA has evidence that contact with pet foods cause illness in humans, but no evidence that the same is true for farm animal food. Nevertheless, they proposed regulating both pet and farm animal feed with the same controls. For fresh produce, they have evidence associated with outbreaks for some fruits and vegetables, but note that others have no such associated outbreaks. Incredibly, they have adopted a philosophy that, because something <i>could</i> happen with the produce that has never been associated with an outbreak, they should be covered. It doesn’t take much of an imagination to expand that philosophy to justifying the regulation of everything on the planet.</p> <p class="p1">The biggest problem, however, comes with the entire approach, command-and-control regulation and inspection. It’s old, it’s outdated, and it’s not likely to work. FDA will never have the knowledge to tell every type of domestic and foreign producer, warehouse, transporter and retailer what the best way is to keep their products safe. Nor will they ever have enough inspectors to cover them all in a timely fashion, even though they will continue to press American taxpayers for more resources.</p> <p class="p1">What they do have is a new information age where — if/when producers make mistakes — those mistakes can often be traced back to the producers, and that information is immediately spread to millions of consumers. That creates an incentive for producers to mitigate lawsuits, recalls and diminished sales. FDA can help to determine what caused the problem, allowing everyone who might experience a similar problem to change their own practices or contracts with suppliers.</p> <p class="p1">In other words, we now have better trace-back, problem identification and communication abilities to create <i>incentives</i>. With those incentives will come both more due diligence and creation of more technologies, such as pasteurization, which historically have made the biggest difference in food safety. Those incentives are much more powerful than the old regulatory approaches and, if embraced, we may finally start to make a dent in the millions of food safety cases that plague Americans annually.</p> http://mercatus.org/expert_commentary/fsma-no-safety-no-modernization Mon, 31 Aug 2015 12:02:15 -0400 The Economic Situation, September 2015 http://mercatus.org/publication/economic-situation-september-2015 <h5> Publication </h5> <p class="p1">June’s Economic Situation began with Dorothy, Tin Man, Scarecrow, and Lion searching for the Yellow Brick Road and wondering if it had disappeared. Since then, there’s been a whole lot of shaking going on. In this report, I first take a look back to June and come forward. Then, in the section to follow, I will deal with China, devaluation, and financial market reactions. After that, I cover some specialized topics. Let’s hit the road!</p> <p class="p1">The Yellow Brick Road we hoped for in June, and now, generates at least 3.0 percent GDP growth—far more than the weak 0.6 percent growth recorded for the first quarter of 2015. When I stared at that first quarter number, optimism got the best of me. I realized that continued close-to-zero growth just wasn’t in the cards. In spite of the unusually strong dollar taking the edge off export sales, the cold winter, and the Los Angeles longshoreman’s strike, I was convinced the US economy was going to find its feet again and, yes, stumble toward that elusive yellow road that might take us to Kansas, 3.0 percent GDP growth, or an even better place. (At the time I was staring at the data, the big August financial market decline had not occurred. More on those dark moments a bit later.)</p> <p class="p1">While optimism was reigning supreme, lo and behold, along came the Wicked Witch of the West. The Department of Commerce revised GDP growth in a negative direction for the most recent few years. Yes, things got worse; the path turned out to be weaker than I had thought.&nbsp;</p> <p class="p1">But things changed again. (If this data isn’t cyclical—or should I say cynical?—I don’t know the meaning of the word.) Suddenly, a silver lining showed up in the clouds. The GDP gods provided a stronger estimate for the second quarter of 2015. Right on the heels of that 0.6 percent first quarter growth, the first second-quarter estimate to arrive showed 2.3 percent growth. This was revised up on August 27 to a wonderfully strong positive 3.7 percent.&nbsp;</p> <p class="p1">The results of all this are seen in the accompanying GDP growth chart. The chart shows the most recent 2Q 2015 estimate of 3.7 percent, the 3.14 percent long-term average growth rate, representing the much-longed-for yellow brick road, and a white four-quarter running average. The backward looking four-quarter average is now registering 2.7 percent. However, the Atlanta Federal Reserve Bank’s August 24 estimate for 3Q 2015 GDP is hitting a lowly 1.4 percent. Yes, it’s a bumpy road. We will be lucky to see 2.3 percent GDP growth when 2015 is tallied.</p><p class="p1"><a href="http://mercatus.org/sites/default/files/Economic-Situation-September-2015-v2.pdf" style="font-size: 12px;">Continue reading</a></p> http://mercatus.org/publication/economic-situation-september-2015 Fri, 04 Sep 2015 10:45:42 -0400 The 2015 Social Security and Medicare Trustees' Reports http://mercatus.org/expert_commentary/2015-social-security-and-medicare-trustees-reports <h5> Expert Commentary </h5> <p class="p1">The 2015 annual report released on July 22 from the trustees of the Social Security and Medicare trust funds projects a slight improvement in Social Security’s future finances as compared to last year’s projections. This is primarily a result of methodological changes in earnings, tax, and benefit projections, as well as projected slower growth in employer contributions to health insurance premiums, which would lead to an increase in taxable payroll. The disability segment of the program, which has its own trust fund, is still expected to be insolvent in 2016, as benefit payments and enrollment have grown rapidly, even after adjusting for the anticipated aging of the workforce. Hence, unless there is reform of the program or new financing, the law will require a 19 percent cut in disability benefits.&nbsp;</p> <p class="p1">The 2015 report for Medicare also shows an improvement in the outlook as compared to last year because of a significant change in the methodology, leading to a somewhat slower rate of projected growth in healthcare spending in the out years, even as actual Medicare spending grew noticeably in 2014, particularly for drugs and physicians. Because there was no consumer price inflation in the past year, mainly because of the drop in fuel prices, the trustees forecast that there will be no benefit increase for Social Security recipients in 2016, which means, by law, there will be no increase in either the Social Security taxable wage base (that is, contribution and benefits) or in Medicare Part B premiums for most, but not all, beneficiaries.&nbsp;</p> <p class="p1"><b>Social Security&nbsp;</b></p> <p class="p1">Under current law and absent reform, the Social Security trustees project that the program will suffer cash-flow shortfalls — gaps between payroll and benefit taxes and expenditures — forever. The shortfall was $74 billion in 2014 and is projected to be $84 billion in 2015. Shortfalls will increase rap- idly after 2018 as the pace of baby-boom generation retirements picks up. Note that as recently as 2009, Social Security once represented a positive cash flow to the federal budget, as tax revenue exceeded expenditures. The negative turnaround in program finances hit sooner and deeper than expected.&nbsp;</p> <p class="p1">The ‘‘theoretical combined’’ trust funds for the old age and survivors insurance (OASI) and the disability insurance (DI) programs (collectively OASDI) are projected to be exhausted of reserves in 2034, one year later than projected last year. At that point, continuing tax revenue would be sufficient to pay 79 percent of scheduled benefits, declining to 73 percent in 2089. The DI trust fund, however, is expected to run out much sooner, by the fourth quarter of 2016. When that occurs, the government must by law reduce disability payouts to 81 percent of scheduled benefits.&nbsp;</p> <p class="p1">Because the primary source of revenue for Social Security and, to a lesser extent, Medicare, is the payroll tax, the programs’ revenues and costs are traditionally expressed as percentages of taxable payroll — that is, the amount of worker earnings taxed to support the programs. (Note that taxable payroll is almost 25 percent larger for Medicare than for Social Security because the Medicare pay- roll tax is imposed on all earnings, while Social Security taxes apply only to earnings up to an annual maximum — $118,500 in 2015.) The Social Security annual cost rates are projected to increase from 13.99 percent of taxable payroll in 2014 to 16.71 percent in 2040, decline to 16.54 percent in 2050, and then rise gradually to 18.01 percent in 2090. The Social Security revenue rate — which includes payroll taxes at 12.4 percent level and income taxes on benefits — was 12.8 percent in 2014 and is expected to increase slowly over time, to 13.32 percent in 2090, because the amount of Social Security benefits excluded from income taxation is not indexed for inflation and benefit growth.&nbsp;</p> <p class="p1"><a href="http://mercatus.org/sites/default/files/Trustee-report-2015-Warshawsky.pdf">Continue reading</a></p> http://mercatus.org/expert_commentary/2015-social-security-and-medicare-trustees-reports Mon, 31 Aug 2015 11:07:11 -0400 Certificate of Need Laws No Longer Needed http://mercatus.org/expert_commentary/certificate-need-laws-no-longer-needed <h5> Expert Commentary </h5> <p class="p1">Health care in America isn’t a topic reserved only for the federal government. Debates over its future are playing out in statehouses across the country, including North Carolina’s.</p> <p class="p1">In Raleigh, it centers on decades-old laws requiring qualified doctors and medical providers to secure permission from the state in order to build or expand their own practices, by purchasing certain devices, offering particular services, or opening new facilities.</p> <p class="p1">These are known as “certificate-of-need” or “CON” laws, and North Carolina has the fourth-most restrictive program in the country.</p> <p class="p1">At some point over the past 50 years, every state had CON laws. Their aim was noble: to control costs and better distribute care to hard-to-reach areas and to the needy. But over the past few decades, many of them — and the federal government— realized that they do more harm than good.</p> <p class="p1">CON programs force any medical provider interested in opening or expanding a practice to submit to an onerous, expensive and time-consuming approval process.</p> <p class="p1">It is easier for large, established providers to navigate this process than it is for smaller providers.</p> <p class="p1">CON laws also allow existing facilities to challenge potential competitors in a public hearing that can sometimes resemble full-blown litigation.</p> <p class="p1">More important, what does this mean for those seeking care?</p> <p class="p1">Recently, my colleagues Thomas Stratmann and Jacob Russ created the most comprehensive study yet of CON laws. They found that the real effect of CON laws is simple: They stifle the amount of care available for everyone.</p> <p class="p1">Using these findings, Stratmann and I estimated that North Carolina’s CON program could mean approximately 12,900 fewer hospital beds, 49 fewer hospitals offering MRI services, and 67 fewer hospitals offering CT scans in the state.</p> <p class="p1">Does this necessarily mean that the state needs all those beds? No. What it means is that the supply of health care services is being restricted by outmoded laws.</p> <p class="p1">Most would agree that stifling the supply of health care is probably not a good thing.</p> <p class="p1">And proponents readily admit that these laws do in fact limit the supply of health care.</p> <p class="p1">Yet they argue that these restraints are worth it, and the programs are necessary, to control costs or increase the amount of charity care being provided.</p> <p class="p1">However, 40 years of evidence demonstrate that these programs do not control costs. Moreover, Stratmann and Russ find zero relationship between the presence of CON laws and any increase in charity care.</p> <p class="p1">Our findings shouldn’t be construed as encouragement to build an additional 13,000 hospital beds across North Carolina — unless providers think they need them based on the demand of their patients.</p> <p class="p1">No researcher, myself included, knows exactly how many medical services a state with nearly 10 million people needs.</p> <p class="p1">But neither do state administrators nor the proponents of CON laws. This is especially true now, as the provision of health care has become an increasingly innovative and rapidly evolving space.</p> <p class="p1">As Federal Trade Commissioner Joshua Wright recently noted in his call for a repeal of CON laws, competition in health care means more innovation, higher quality, and lower prices for those seeking care.</p> <p class="p1">Controlling costs and increasing charity care are certainly laudable goals, but they can be achieved through less intrusive and less costly measures.</p> <p class="p1">More than 30 years ago, the federal government realized that restraining competition is a poor way to improve Americans’ health care. Since then, 14 states have also walked away from CON programs.</p> <p class="p1">Next year, New Hampshire will join them when its repeal of CON takes effect in June 2016.</p> <p class="p1">This situation presents a particularly rich opportunity for North Carolina to reverse course on nearly 40 years of regulatory blunder and finally provide more options for those seeking care throughout the state.</p> http://mercatus.org/expert_commentary/certificate-need-laws-no-longer-needed Wed, 02 Sep 2015 09:55:41 -0400 What Can Be Done to Fix N.J., Pa. Budget Woes? http://mercatus.org/expert_commentary/what-can-be-done-fix-nj-pa-budget-woes-0 <h5> Expert Commentary </h5> <p class="p1">It's no secret that New Jersey is in a dangerous fiscal position, due largely to rising pension and health-benefit costs in deeply underfunded plans.</p> <p class="p1">In a new study based on states' audited financial reports, I rank New Jersey 49th out of 50 states for its fiscal health. Recently, I testified before the state Senate in Harrisburg on Pennsylvania's ranking, which is on a similar path at 41st. Fortunately, it may have time to change course by executing some of the same reforms that would help pull New Jersey out of its tailspin.</p> <p class="p4">Most of New Jersey's spending is determined by legislative, constitutional, and federal mandates, leading to a Gordian knot of a budget. Gov. Christie presented a $34 billion balanced budget in June only after reducing the annual pension contribution from $3.1 billion to $1.3 billion and vetoing some streams of education aid. The Legislature proposed to fill the gap with increases in the corporate tax and income tax. Will this be enough, or is New Jersey limping into another fiscal year?</p> <p class="p1">Ask the New Jersey Office of Legislative Services (OLS). It has sobering news to deliver:</p> <p class="p1">If the state fully accounted for what is needed this year to pay for pensions, school funding, transportation, and property tax rebates (that is, all of its statutory obligations), its structural deficit would be $10.2 billion. In other words, if we count up the cost for fully funding this year's bills, New Jersey's deficit is nearly one-third the size of its current budget.</p> <p class="p1">OLS notes that this is an "academic estimate," and one with which "reasonable people can disagree," but it brings home an important lesson: Balancing budgets by downplaying debts and deferring payments isn't the same thing as having healthy finances.</p> <p class="p1">New Jersey is short on cash, struggling to balance its yearly budget, and relying on pay-as-you-go financing to cover mounting Other Post Employment Benefits (OPEB). Public-sector pensions are large and underfunded.</p> <p class="p1">Pennsylvania is under similar short-term strain. At a budgetary impasse, the commonwealth faces a $2.3 billion budget deficit in 2015. Like New Jersey, Pennsylvania's fiscal troubles are largely driven by pension and health-benefit costs for public-sector workers. And with cash reserves insufficient to cover short-term expenses in the event of a recession, Pennsylvania's credit rating has also tumbled.</p> <p class="p1">Gov. Wolf's budget task force also points to the tenuous place the state finds itself with only $231,000 in the rainy-day fund. The legislature proposes structural pension reform and the governor prefers to keep the existing system open and cover the gap with pension obligation bonds. The former will stop pensions from growing, while the latter runs the risk of adding debt to the pension tab.</p> <p class="p1">Both states have shown a tendency to promise everything today while letting the next generation worry about the bill. That explains how we got here - but what can be done to fix it?</p> <p class="p1">There are few basic principles Pennsylvania and New Jersey must follow going forward:</p> <p class="p1">First, don't overlook rainy-day funds. Generally states save too little cash to cushion against recessions. Contributions to the fund should be a priority and should match the revenue loss in an average recession.</p> <p class="p1">Second, both states need to reset their retirement systems. This means moving new workers to defined-contribution systems. And it means discipline in funding existing defined-benefit plans, a promise that the state has made to its workers. Skipping on contributions may buy relief today, but it guarantees greater budgetary pressure tomorrow.</p> <p class="p1">Third, stop using short-term solutions to fix long-term problems. Avoid the temptation to address debt with more debt, the policy equivalent of using one credit card to pay for another. Pension obligation bonds have been used by many states to cover a contribution shortfall, with mixed results. Should pension investments underperform (as they did after 2007), the system has simply added to its pension bills.</p> <p class="p1">In both Pennsylvania and New Jersey, structural deficits can be solved only with structural reforms. Unstoppable spending that overwhelms revenue growth can usually be traced back to promises that were made, or risks that were taken, without fully accounting for the costs. It's going to take a new way of thinking to solve years' worth of problems.</p> http://mercatus.org/expert_commentary/what-can-be-done-fix-nj-pa-budget-woes-0 Mon, 31 Aug 2015 10:17:14 -0400 New York City Supporter and Friend Lunch http://mercatus.org/events/new-york-city-supporter-and-friend-lunch-13 <h5> Events </h5> <p>Will innovators be forced to constantly seek the blessing of public officials before they develop and deploy new devices and service? Successful innovation, which is essential to better health, safety and security, requires freedom to experiment and develop. But there is an array of government rules and processes that increasingly prohibit “permissionless” innovation.</p> <p>Mercatus Center Senior Research Fellow Adam Thierer argues that when policymakers work from a precautionary disposition, the result will be fewer services, lower quality goods, higher prices, diminished economic growth and a decline in overall standard of living. By contrast, “permissionless” innovation has the power to continue to fuel the next great industrial revolution. Please join us for a lunch discussion centered on this important topic.</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 Julie Burden at <a href="mailto:jburden@mercatus.gmu.edu">jburden@mercatus.gmu.edu</a> or (703) 344-3219.</p> http://mercatus.org/events/new-york-city-supporter-and-friend-lunch-13 Thu, 27 Aug 2015 11:48:17 -0400 Walmart, Katrina, and Disaster Response http://mercatus.org/video/walmart-katrina-and-disaster-response <h5> Video </h5> <iframe width="585" height="329" src="https://www.youtube.com/embed/_djmIfcLTBQ?list=PLS8aEHTqDvpJD8uxczhGvY4yZq2Osab-i" frameborder="0" allowfullscreen></iframe> <p>Steven Horwitz explains why private sector firms like Walmart outperformed FEMA in the aftermath of Hurricane Katrina.</p><p>Learn more at:&nbsp;<a href="http://mercatus.org/katrina">mercatus.org/katrina</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;585&quot; height=&quot;329&quot; src=&quot;https://www.youtube.com/embed/_djmIfcLTBQ?list=PLS8aEHTqDvpJD8uxczhGvY4yZq2Osab-i&quot; frameborder=&quot;0&quot; allowfullscreen&gt;&lt;/iframe&gt; </div> </div> </div> http://mercatus.org/video/walmart-katrina-and-disaster-response Fri, 28 Aug 2015 13:11:24 -0400 Learning from Katrina: How Communities Can Flourish in the Wake of Disaster http://mercatus.org/video/learning-katrina-how-communities-can-flourish-wake-disaster <h5> Video </h5> <iframe width="585" height="329" src="https://www.youtube.com/embed/v7a7MC0JGfM?list=PLS8aEHTqDvpJD8uxczhGvY4yZq2Osab-i" frameborder="0" allowfullscreen></iframe> <p>August 29th marks the 10th anniversary of Hurricane Katrina making landfall as a Category 3 hurricane. The failure of the storm surge protections from Florida to Texas, and especially in New Orleans, is considered one of the worst engineering failures by the Army Corps of Engineers in its history. The policy responses from local, state, and national public officials are also considered to have been woefully inadequate. The entire episode represents a classic case study in how government failure can compound the fury of nature through the folly of man. Peter Boettke discusses the lessons we can learn.</p><p>Learn more at: <a href="http://mercatus.org/katrina">mercatus.org/katrina</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;585&quot; height=&quot;329&quot; src=&quot;https://www.youtube.com/embed/v7a7MC0JGfM?list=PLS8aEHTqDvpJD8uxczhGvY4yZq2Osab-i&quot; frameborder=&quot;0&quot; allowfullscreen&gt;&lt;/iframe&gt; </div> </div> </div> http://mercatus.org/video/learning-katrina-how-communities-can-flourish-wake-disaster Fri, 28 Aug 2015 13:10:24 -0400 Basic Economics of the Export-Import Bank of the United States http://mercatus.org/publication/basic-economics-export-import-bank-united-states <h5> Publication </h5> <p class="p1">Authorization for the Export-Import Bank of the United States (Ex-Im Bank) recently lapsed for the first time in more than 80 years, though the bank may be reestablished at any time. The debate continues over whether the United States government should reauthorize funding for the Ex-Im Bank. We hear that “without an Ex-Im Bank .&nbsp;.&nbsp;. there’d be little incentive for American manufacturers to actually make their goods in the United States” and that the Ex-Im Bank is needed to balance the competitive disadvantages created by similar banks of foreign nations. Indeed, the Ex-Im Bank itself holds this view:</p> <blockquote><p class="p2">All major exporting countries, including America’s fiercest competitors in the global marketplace, have their own export credit agencies (ECAs), which support their respective countries’ exports. In fact, nearly 60 countries operate an ECA. Many of the world’s ECAs provide larger levels of financing than Ex-Im Bank, without being subject to the rules and restrictions that Ex-Im Bank follows. For example, China financed more than $100 billion of Chinese exports in 2013, compared to Ex-Im Bank’s support of $37.4 billion worth of US exports last year. Likewise, it is estimated that South Korea, which has an economy that is less than one-tenth the size of the US economy, also finances more than $100 billion per year to support exports from South Korea. In contrast, Ex-Im Bank steps in, only when needed, to help level the playing field against aggressive financing by foreign governments so US companies and workers can compete on the basis of the price and quality of their goods and services.</p></blockquote> <p class="p3">Against that view, we offer a simple, open-economy trade model to demonstrate that there is, in fact, a deadweight loss in the domestic economy when a government offers an export subsidy. In addition to a loss in economic efficiency, the Ex-Im Bank amounts to a special privilege for the connected few—big subsidies to powerful companies. For example, nearly $8 billion of the $12 billion in Ex-Im Bank loan guarantees in 2013 went to support Boeing exports. In fact, of that $12 billion, 97 percent supported the sales of only 10 firms. While Ex-Im Bank programs may indeed benefit select domestic firms, we will demonstrate that the bank’s overall impact on the US economy is negative.</p> <p class="p1"><b>The Ex-Im Bank’s Tools</b></p> <p class="p1">The Ex-Im Bank’s main tools are loan guarantees, working capital guarantees, direct loans, and export-credit insurance. Table 1 reports the 2014 approved totals for each program.</p> <p class="p3">Loan guarantees are the largest portion of the Ex-Im Bank’s financing. These guarantees allow foreign and domestic lenders to finance foreign buyers of US exports at a reduced risk. The bank charges a foreign buyer of US exports a fee based on the loan’s length, size, and risk. The bank then guarantees lenders that it will cover up to 85 percent of the contract value of the loan’s outstanding principal and interest if the foreign buyer of US exports defaults. The bank approved $1.8 billion in loan guarantees in 2014.</p> <p class="p3">The working capital guarantee program guarantees short-term loans made to qualified US exporters to fund everyday operations of a company. These guarantees are made on a one-time basis or as a revolving line of credit. The Ex-Im Bank guarantees to pay up to 90 percent of the outstanding balance of the working capital loan to the lender if the borrower defaults. The bank approved $659 million in working capital guarantees in 2014.</p> <p class="p3">The direct loan program provides loans to foreign buyers of US exports for up to 80 percent of the US contract value. The Ex-Im Bank is responsible for the total value of the loan’s outstanding principal and interest if the foreign borrower defaults. The bank approved $998 million in direct loans in 2014.</p> <p class="p3">Last, the Ex-Im Bank provides loss insurance to US banks and exporters that extend credit directly to foreign buyers. The exporter pays a fee to the Ex-Im Bank that serves as an insurance premium. The Ex-Im Bank approved $1 billion in export-credit insurance in 2014.</p> <p class="p1"><img src="http://mercatus.org/sites/default/files/Beekman-Ex-Im-Bank-Economics-table-1.png" width="585" height="196" /></p> <p class="p3">In 2014, total US exports were $2.26 trillion. In the same year, the estimated export value of Ex-Im Bank activity was $4.48 billion. Ex-Im Bank activity, therefore, amounted to 0.198 percent of total US exports in 2014.</p> <p class="p1"><b>Simple International Trade Models</b></p> <p class="p1">We model the Ex-Im Bank’s actions as a subsidy to US exporting firms. The Ex-Im Bank’s programs provide financial assistance that ordinarily would be unattainable, would have less favorable terms, or at minimum would be more expensive in the open market. As long as the Ex-Im Bank intervenes in markets, crowding out private market participants, we cannot know the true market terms and rates.</p> <p class="p3">To better understand the economics behind the Ex-Im Bank, let’s construct a simplified story for one market, the market for tires. Suppose tires are made in many countries around the globe and the global market for tires is large. We will use a competitive open-economy model to show how a country’s welfare changes when governments subsidize international trade. Assume that our economy—let’s call it Henrystonia—is small relative to the world market and that its domestic decisions have no effect on the international marketplace.</p> <p class="p3">The pleasant nation of Henrystonia has all that a free community would desire, including the right to import or export goods and services. Citizens of Henrystonia are price takers in the world marketplace; domestic consumers and producers are so few in number relative to the world market that they can’t influence the price. Thus, no consumer would pay more than the world price and no producer would accept less than the world price. Consumers and producers base their decisions to exchange in the world marketplace on the world price.</p> <p class="p1"><b>A Small-Economy Model</b></p> <p class="p1">Figure 1 depicts the market for tires in Henrystonia. The curve labeled “domestic demand” represents domestic consumers and the curve labeled “domestic supply” represents domestic producers.</p> <p class="p3">Henrystonia, however, is an open economy that participates in international trade. Domestic producers sell tires at the world price, which is assumed to be $150 per tire. We’ve illustrated this price in figure 1 by inserting the horizontal line labeled “world price” at $150. The world price is the equilibrium price in the international market for tires, made up of an international supply curve and an international demand curve.</p> <p class="p1"><img height="407" width="585" src="http://mercatus.org/sites/default/files/Beekman-Ex-Im-Bank-Economics-figure-1.png" /></p> <p class="p3">Table 2 summarizes Henrystonia’s tire market when the world price is $150 per tire. We make three observations: (1) The world price is higher than the domestic price, so local producers are interested in exchanging 120,000 tires at $150 per tire. (2) Domestic consumers are only interested in buying 80,000 tires at the higher world price. (3) Because of international trade, domestic producers are able to export 40,000 tires outside Henrystonia.</p> <p class="p1"><img src="http://mercatus.org/sites/default/files/Beekman-Ex-Im-Bank-Economics-table-2.png" width="585" height="238" /></p><p class="p1"><b></b><span style="font-size: 12px;">Table 2 reports how economic surplus in the domestic tire market is distributed in Henrystonia, as shown in figure 1. Domestic consumers have a consumer surplus equal to the area A. The producer surplus equals the area B&nbsp;+&nbsp;C&nbsp;+&nbsp;D&nbsp;+&nbsp;E&nbsp;+&nbsp;F. The total economic surplus, which measures how much better off consumers and producers are because they have exchanged tires, is equal to A&nbsp;+&nbsp;B&nbsp;+&nbsp;C&nbsp;+&nbsp;D&nbsp;+&nbsp;E&nbsp;+&nbsp;F.</span></p> <p class="p3">Now, we want to measure this free-market outcome against two alternative cases: (1) all countries except Henrystonia offer their producers a subsidy, and (2) Henrystonia’s government decides to retaliate by offering its producers a subsidy to level the playing field.</p> <p class="p3">Let’s assume that all countries except Henrystonia offer their producers a subsidy for each tire they sell in order to compete with Henrystonia’s producers. The net impact of the foreign subsidy causes the world price to decrease to $125 per tire. We’ve demonstrated this price in figure 1 with the horizontal line labeled “world price with foreign subsidy.”</p> <p class="p3">Table 2 summarizes Henrystonia’s tire market with a world price of $125 per tire. Local producers are interested in exchanging 100,000 tires at $125 per tire. Domestic consumers are interested in buying 100,000 tires at the world price. Because of the lower subsidized world price, domestic producers no longer export tires outside Henrystonia.</p> <p class="p3">Because of the lower world price, domestic consumers have a higher consumer surplus equal to the area A&nbsp;+&nbsp;B&nbsp;+&nbsp;D shown in figure 1. The domestic producer surplus decreases to the area C&nbsp;+&nbsp;E, and the total economic surplus <i>decreases</i> to equal A&nbsp;+&nbsp;B&nbsp;+&nbsp;C&nbsp;+&nbsp;D&nbsp;+&nbsp;E. The net impact of foreign governments’ subsidizing their exports harms Henrystonia—it causes Henrystonia’s total economic surplus to decrease by an amount equal to area F.</p> <p class="p3">The next question to investigate is, Does it make sense for Henrystonia to retaliate—to level the so-called “international playing field”—by subsidizing the production costs of local Henrystonia producers?</p> <p class="p3">Suppose Henrystonia offers a $25 subsidy for each tire produced in Henrystonia. Table 3 summarizes the results. Domestic consumers in Henrystonia do not receive a subsidy and therefore continue to pay $125 per tire. At this price, domestic consumers buy 100,000 tires. Each domestic producer receives $125 per tire from consumers (domestic or foreign) and $25 per tire from the government of Henrystonia. So at the combined price of $150 per tire, local producers are willing to produce 120,000 tires. Because of international trade, domestic producers are now able to export 20,000 tires outside of Henrystonia.</p> <p class="p1"><img height="393" width="585" src="http://mercatus.org/sites/default/files/Beekman-Ex-Im-Bank-Economics-table-3.png" /></p><p class="p1"><b></b><span style="font-size: 12px;">Because the price has not changed for consumers, domestic consumer surplus has not changed—it is equal to the area A&nbsp;+&nbsp;B&nbsp;+&nbsp;D in figure 1. The producer surplus now increases to the area B&nbsp;+&nbsp;C&nbsp;+&nbsp;D&nbsp;+&nbsp;E&nbsp;+&nbsp;F. The net gain of B&nbsp;+&nbsp;D&nbsp;+&nbsp;F is a rent. Producers are willing to exhaust real resources—on political activity and inefficient production decisions—to obtain and maintain this rent. The subsidy’s total cost equals the area B&nbsp;+&nbsp;D&nbsp;+&nbsp;F&nbsp;+&nbsp;G ($25 for each of the 120,000 tires produced in Henrystonia). The total economic surplus is the sum of the consumer surplus and producer surplus minus the subsidy, or A&nbsp;+&nbsp;B&nbsp;+&nbsp;C&nbsp;+&nbsp;D&nbsp;+&nbsp;E&nbsp;−&nbsp;G.</span></p> <p class="p3">The bottom line is that if Henrystonia retaliates by offering its own subsidy to “level the playing field,” Henrystonia is actually made <i>worse off</i> by the value of area G. When a foreign government decides to subsidize the production of its local producers, Henrystonia is better off—in terms of efficiency—by not retaliating. Specifically, if Henrystonia retaliates consumers are indifferent, producers win B&nbsp;+&nbsp;D&nbsp;+&nbsp;F, and taxpayers lose B&nbsp;+&nbsp;D&nbsp;+&nbsp;F&nbsp;+&nbsp;G. Retaliating is inefficient because taxpayers lose more than producers win by area G.</p> <p class="p1"><b>A Large-Economy Model</b></p> <p class="p1">Our small-economy model captures important features of many markets in which the Ex-Im Bank operates. However, a large-economy model is more appropriate for some of the Ex-Im Bank’s most conspicuous operations, such as wide-bodied aircraft financing. The key difference between a large-economy and a small-economy model is that changes to the demand and supply in a large economy affect the world price. Small-economy demand and supply shocks have no effect on the world price.</p> <p class="p3">Consider Boeing, a prominent player in the world market for wide-bodied aircraft. If the Ex-Im Bank offers a subsidy to finance Boeing exports, Boeing will increase the quantity of wide-bodied exports. Because Boeing has such a large share of the world market, when it increases its exports, the world price for wide-bodied aircraft declines.</p> <p class="p3">Figure 2 offers a stylized demonstration of the impact of a $3 million per unit subsidy on wide-bodied aircraft exports out of Henrystonia. The export subsidy causes the world price to decrease from $163 million to $162 million per unit. Domestic producers now receive $165 million per unit. This price equals the new world price plus the $3 million per unit export subsidy. Because producers in Henrystonia will receive $165 million for each exported unit, they require domestic consumers (e.g., Delta) to also pay $165 million per unit. Thus, the net impact of the export subsidy is to increase the price of wide-bodied aircraft in the domestic economy from $163 million to $165 million. At $165 million per unit, domestic producers increase their quantity sold to 129,000 units, domestic consumers decrease their quantity purchased to 68,000 units, and exports increase to 61,000.</p> <p class="p1"><img src="http://mercatus.org/sites/default/files/Beekman-Ex-Im-Bank-Economics-figure-2.png" width="585" height="383" /></p> <p class="p3">Table 4 summarizes Henrystonia’s wide-bodied aircraft market with and without the $3 million subsidy. Because of the higher domestic price, domestic consumers have a lower consumer surplus equal to the area A. Domestic producer surplus increases to area B&nbsp;+&nbsp;C&nbsp;+&nbsp;D&nbsp;+&nbsp;F&nbsp;+&nbsp;G&nbsp;+&nbsp;H&nbsp;+&nbsp;I&nbsp;+&nbsp;L&nbsp;+&nbsp;M&nbsp;+&nbsp;N&nbsp;+&nbsp;O. The cost of the export subsidy equals the area C&nbsp;+&nbsp;D&nbsp;+&nbsp;E&nbsp;+&nbsp;G&nbsp;+&nbsp;H&nbsp;+&nbsp;I&nbsp;+&nbsp;J&nbsp;+&nbsp;K, which equals $3 million for each of the 61,000 exported wide-bodied aircraft. Total economic surplus <i>decreases</i> to equal A&nbsp;+&nbsp;B&nbsp;+&nbsp;F&nbsp;+&nbsp;L&nbsp;+&nbsp;M&nbsp;+&nbsp;N&nbsp;+&nbsp;O&nbsp;−&nbsp;(E&nbsp;+&nbsp;J&nbsp;+&nbsp;K). The export subsidy generates a deadweight loss equal to the area C&nbsp;+&nbsp;E&nbsp;+&nbsp;G&nbsp;+&nbsp;H&nbsp;+&nbsp;I&nbsp;+&nbsp;J&nbsp;+&nbsp;K. The diminution of economic efficiency observed in the large-economy model is greater than what would be observed a small-economy model, <i>ceteris paribus</i>.</p> <p class="p1"><img src="http://mercatus.org/sites/default/files/Beekman-Ex-Im-Bank-Economics-table-4.png" width="585" height="307" /></p> <p class="p1"><b>Unfair Competition</b></p> <p class="p1">Different countries have different regulations, subsidies, and rules of the game. These differences are perceived to make international trade unfair. Thus, particular constituents often ask their governments to intervene with programs such as the Ex-Im Bank’s to make international trade “fairer.”</p> <p class="p1">For example, as we have demonstrated, national governments often intervene and give production subsidies to their domestic businesses. Most economists would regard those subsidies as a bad policy for the foreign government (in terms of the foreign country’s own economic efficiency). Foreign subsidies would also put domestic producers at a disadvantage, but domestic consumers would benefit because the price they pay for goods and services would decrease, compliments of the foreign government. However, if the domestic government does intervene and retaliates to “level the playing field,” there will be a deadweight loss for the overall domestic economy. The gains from a retaliatory subsidy are less than the costs of that subsidy.</p> <p class="p1"><b>Discussion</b></p> <p class="p1">Different groups view the proposal to fund the Ex-Im Bank differently. If we use economic efficiency to judge how the bank helps or harms various groups, we learn from the small-economy example presented earlier that domestic producers benefit from the subsidy, domestic consumers are neutral, and Ex-Im Bank interventions lead to a net reduction of total economic surplus for the domestic economy. Specifically, a broad base of domestic taxpayers (who are both consumers and producers) bears the brunt of the loss in economic surplus (area B&nbsp;+&nbsp;D&nbsp;+&nbsp;F&nbsp;+&nbsp;G), but the subset of US producers that receive Ex-Im Bank assistance are better off to some degree (area B&nbsp;+&nbsp;D&nbsp;+&nbsp;F). Beyond this wealth transfer from the many to the few is a net loss in economic surplus for the US economy (area G). In the large-economy example, the export subsidy creates a deadweight loss (C&nbsp;+&nbsp;E&nbsp;+&nbsp;G&nbsp;+&nbsp;H&nbsp;+&nbsp;I&nbsp;+&nbsp;J&nbsp;+&nbsp;K), domestic producers benefit from the subsidy (B&nbsp;+&nbsp;C&nbsp;+&nbsp;D), and domestic consumers are made worse off (B&nbsp;+&nbsp;C).</p> <p class="p3">A basic question remains: Why do we have an Ex-Im Bank? Many people maintain that government should not intervene in international trade because it negatively affects overall economic efficiency. Thus, there should be no Ex-Im Bank, and its charter should not be reauthorized.</p> <p class="p3">Others argue that government must intervene and the bank’s current authorization should be renewed. There are two common arguments in support of Ex-Im Bank intervention: (1) protection of domestic jobs and (2) unavailability of traditional financing. In the next sections we briefly explore each argument for intervention.</p> <p class="p3">Regardless of the Ex-Im Bank’s effect on economic efficiency, the ultimate decision about whether to intervene is political. Economic analysis, however, can help decision makers better understand the benefits and costs of their political decisions.</p> <p class="p1"><b>Protection of Domestic Jobs</b></p> <p class="p1">Many producer groups are proponents of the Ex-Im Bank because it protects some domestic jobs. Many of these protected jobs may indeed be eliminated without the bank’s subsidies because these goods and services would be produced outside the country at a lower cost. However, the concept of comparative advantage reminds us that even if a country is better at producing everything (that is, it has an absolute advantage), each country is still better off trading. That is, free and open trade creates jobs at the same time that it destroys jobs, and it leads to better and lower-priced goods. Upon removal of a special privilege to one business or industry, other jobs may be created within other, more efficient businesses or industries. The reallocation of resources to more efficient uses can be a painful process, especially in the short run. But the Ex-Im Bank’s subsidies lower total economic efficiency because they retain workers in less-efficient industries—a so-called allocative inefficiency that adds to the deadweight loss demonstrated previously. The overall level of domestic job creation is diminished, not enhanced, as a result of Ex-Im Bank interventions.</p> <p class="p1"><b>Unavailability of Traditional Financing</b></p> <p class="p1">Ex-Im Bank supporters argue that private banks do not offer the services provided by the Ex-Im Bank. Further, proponents point out that the institution returned $1.057 billion to the US Treasury in FY 2013 and approximately $2 billion over the past five years. Proponents say that these returns demonstrate that the bank’s services are needed and that the bank is well managed.</p> <p class="p3">We must ask, though, why private financial institutions cannot provide the loans and loan guarantees rather than a government agency. In our economic analysis, we characterize the financial intervention of the Ex-Im Bank as a government subsidy of the domestic producers. The implication is that those financial products would otherwise not be available to the domestic exporters, or that if they were available, they would be priced higher. In fact, a vast majority of export transactions—99.802 percent in 2014—are financed privately, with the Ex-Im Bank stepping in to support marginal transactions that private commercial banks do not want to fund or do not want to fund on the terms that the Ex-Im Bank is willing to offer.</p> <p class="p3">It appears that the US government is bearing financial risk at below-market prices to promote additional exports. As long as the Ex-Im Bank is able to price these transactions below market rates, the private market will not be competitive in those marginal deals. The Ex-Im Bank is not solving a failure of private markets, but is instead crowding out properly priced and structured private-market transactions. If the bank were to be eliminated, we should not assume that the marginal export transactions would be unable to secure funding. The private market would likely step in for most of those transactions, though perhaps at a higher price or with additional requirements. The transactions that did not receive private funding would be ones that lenders deemed too risky at that price. Economizing on scarce capital, steering it toward the best projects and away from the worst, is a key feature of a well-functioning financial market; it is not a flaw.</p> <p class="p3">Supporters often point to the Ex-Im Bank’s successes in managing its portfolio of transactions. For example, the Ex-Im Bank’s active default rate was 0.175 percent—less than one-fifth of 1 percent—as of September 30, 2014. If the Ex-Im Bank can manage its portfolio of transactions, why couldn’t a private firm do the same, and price the risk competitively at prevailing market prices?</p> <p class="p1"><b>Conclusion</b></p> <p class="p1">The Ex-Im Bank provides financing for US exporters and their foreign buyers. There is an open debate over whether the United States should reauthorize funds to support the Ex-Im Bank. We’ve presented an economic efficiency analysis of Ex-Im Bank activities in a small and large open-economy model. We find that a domestic economy should not offer an export subsidy, whether a foreign government offers its own export subsidy or not. Finally, regardless of the Ex-Im Bank’s impact on economic efficiency, the ultimate decision about whether to intervene is political. Economic analysis can help political decision makers better understand the benefits and costs of their decisions.</p> http://mercatus.org/publication/basic-economics-export-import-bank-united-states Thu, 27 Aug 2015 10:16:52 -0400 JW Verret Analyzes the Chinese Financial Crisis for MSNBC http://mercatus.org/video/jw-verret-analyzes-chinese-financial-crisis-msnbc <h5> Video </h5> <iframe src="https://player.vimeo.com/video/137416285" width="500" height="375" frameborder="0" webkitallowfullscreen mozallowfullscreen allowfullscreen></iframe> <p class="p1"><span class="s1">The Chinese financial market correction has sent ripples through the global economy. JW Verret breaks down the situation on MSNBC.</span></p><div class="field field-type-text field-field-embed-code"> <div class="field-label">Embed Code:&nbsp;</div> <div class="field-items"> <div class="field-item odd"> &lt;iframe src=&quot;https://player.vimeo.com/video/137416285&quot; width=&quot;500&quot; height=&quot;375&quot; frameborder=&quot;0&quot; webkitallowfullscreen mozallowfullscreen allowfullscreen&gt;&lt;/iframe&gt; </div> </div> </div> http://mercatus.org/video/jw-verret-analyzes-chinese-financial-crisis-msnbc Thu, 27 Aug 2015 14:36:42 -0400 Sunset Legislation in the States: Balancing the Legislature and the Executive http://mercatus.org/publication/sunset-legislation-states-balancing-legislature-and-executive <h5> Publication </h5> <p class="p1">Sunset review provisions are clauses embedded in legislation, usually at the state level, that allow a piece of legislation or a regulatory board to expire on a certain date unless the legislature takes action to renew the legislation or board. Sunset reviews are often advertised as good government policies, forcing governments to review and reconsider whether agencies and particular laws are still necessary.</p> <p class="p1">A new study for the Mercatus Center at George Mason University shows that the sunset review process can also be seen as an effective bargaining tool for the legislature to minimize the executive branch’s influence on a wide variety of state boards and agencies. It is a way for the legislature to make its veto power credible and to have influence over an agency’s agenda, which is also influenced by special interests and the executive branch.</p> <p class="p1">To read the study in its entirety and learn more about its authors, economists Brian Baugus and Feler Bose, see “<a href="http://mercatus.org/sites/default/files/Baugus-Sunset-Legislation.pdf">Sunset Legislation in the States: Balancing the Legislature and the Executive</a>.”</p> <p class="p3"><b>BACKGROUND ON SUNSET PROVISIONS</b></p> <p class="p1">Sunset reviews come in many varieties and may be used narrowly or broadly, depending on the state. A sunset provision typically includes a requirement that specific legislation or a regulatory board undergo a review, usually conducted by legislative staff or state auditors.</p> <p class="p1">The length of time between enactment/renewal and the next sunset date varies from state to state but typically runs between four and twelve years under current state laws. The process normally involves data collection, interviews with key agency staff and interested parties, financial auditing, and records review. The process results in one of four outcomes: renewal, renewal with changes, consolidation with other entities, or termination of the statute or agency.</p> <p class="p1">Sunset reviews can be broken down into four categories:</p> <ul class="ul1"> <li class="li5"><i>Comprehensive.</i> States require all statutory agencies to undergo sunset review on a preset schedule.</li> <li class="li5"><i>Regulatory.</i> States require licensing and regulatory boards to undergo sunset review.</li> <li class="li5"><i>Selective.</i> States require only selected agencies to undergo a sunset review.</li> <li class="li5"><i>Discretionary.</i> The legislature may choose which agencies and statutes undergo a sunset review.</li></ul> <p class="p3"><b>SUNSET REVIEWS HELP LEGISLATURES EXERCISE CONTROL OVER GOVERNMENT</b></p> <p class="p1">In several states examined in the study, a majority of the statutes and agencies subject to a sunset review over the last few years were allowed to continue, although many were also modified in some way as part of the renewal process.</p> <p class="p1">The study considers several theories about why state legislatures use the sunset review process and what they hope to achieve by it. Ultimately, the process is best understood as an effective bargaining method that allows a legislature to assert itself and increases its ability to influence agencies’ agendas.</p> <ul class="ul1"> <li class="li5"><i>Legislative disadvantages.</i> Legislatures tend to be part-time, which contributes to their distinct information and power disadvantages relative to the executive branch. Moreover, special interest groups with access to the executive branch can alter the role and goals of specific agencies, diverting them from their original missions as intended by the legislature.</li> <li class="li5"><i>Legislative influence.</i> While the desire to implement good government practices may drive sunset legislation to some extent, the legislature has a more self-serving reason for using sunset reviews: increasing its own influence over government. Sunset reviews allow the legislature to guarantee that some of its preferred outcomes are achieved by exercising a credible veto over executive branch execution of the laws the legislature wrote.</li></ul> <p class="p3"><b>CONCLUSION</b></p> <p class="p1">Sunset reviews provide an opportunity for part-time legislatures to have more control over the regulatory functions of the state and guarantee that regulations and enforcement agencies are not unduly influenced by the executive branch or special interests. Sunset reviews also provide the people of the state—through the legislature—with a voice in policies that have been unduly influenced by special interests and the executive branch.</p> http://mercatus.org/publication/sunset-legislation-states-balancing-legislature-and-executive Thu, 27 Aug 2015 12:49:02 -0400 Ex-Im’s Working Capital Programs Benefit Big Businesses and Banks http://mercatus.org/publication/ex-im-s-working-capital-programs-benefit-big-businesses-and-banks <h5> Publication </h5> <p class="p1">Defenders of the US Export-Import Bank (Ex-Im Bank) cite its working capital programs as evidence that the agency plays a critical role in supporting small businesses. As one of four main components of Ex-Im’s export subsidies, the working capital programs represent a relatively small component of the agency’s overall portfolio. The agency as a whole mainly benefits large, politically connected firms, as I have <a href="http://mercatus.org/publication/export-import-still-boeing-s-bank">previously</a> <a href="http://mercatus.org/publication/ex-im-bank-little-value-small-minority-owned-and-women-owned-businesses">demonstrated</a>.&nbsp;</p> <p class="p1">Even though small businesses are the main beneficiaries of the Ex-Im Bank’s working capital programs, big businesses still remain big recipients indirectly and directly. The working capital program transfers the risk of lending from the lenders (often big banks or sometimes Boeing itself) to taxpayers.</p> <p class="p1">The first chart shows the annual authorized amount of working capital loans and guarantees for small business and big business. Also included are figures for the Supply Chain Finance Guarantee Program (SCF), which the Ex-Im Bank counts as benefitting small businesses even though the ultimate beneficiaries are large exporters such as Boeing and Caterpillar.</p> <p class="p1"><a href="http://mercatus.org/sites/default/files/de-Rugy-Ex-Im-Working-Capital-chart-1.png"><img src="http://mercatus.org/sites/default/files/de-Rugy-Ex-Im-Working-Capital-chart-1.png" width="585" height="424" /></a></p> <p class="p1">The bar chart shows breakdowns of the Ex-Im Bank’s annual working capital loans and guarantees from fiscal year (FY) 2007 to FY 2014. The amount authorized between FY 2007 and FY 2014 fluctuated from $1.26 billion in 2007 to $2.39 billion. The funding peaked in 2012 with $3.25 billion authorized that year. The data also show that every single year, large firms benefited from the working capital program directly, and they also benefited indirectly through the SCF program to the tune of $1.28 billion of working capital over the period.</p> <p class="p1">The doughnut chart shows the proportion of total FY 2007 to FY 2014 working capital loans and guarantees. It shows that over the FY 2007 to FY 2014 period, 36 percent of the working capital programs benefitted large firms—29 percent directly and 7 percent through the SCF program.</p> <p class="p1">The second chart shows the annual total amount of working capital loans and working capital guarantees that the Ex-Im Bank authorized from FY 2007 to FY 2014.</p> <p class="p1"><a href="http://mercatus.org/sites/default/files/de-Rugy-Ex-Im-Working-Capital-chart-2.png"><img height="425" width="585" src="http://mercatus.org/sites/default/files/de-Rugy-Ex-Im-Working-Capital-chart-2.png" /></a></p> <p class="p1">The vast majority are guarantees in which the agency reimburses lenders up to 90 percent of the outstanding loan amount in the event of nonpayment. This shifts the risk from lenders—typically massive global financial institutions like PNC Bank, JPMorgan Chase, and Wells Fargo—to the taxpayers.</p> <p class="p1">The third chart shows the top ten beneficiaries of the Ex-Im Bank’s working capital programs from FY 2007 to FY 2014.&nbsp;</p> <p class="p1"><a href="http://mercatus.org/sites/default/files/de-Rugy-Ex-Im-Working-Capital-chart-3.png"><img src="http://mercatus.org/sites/default/files/de-Rugy-Ex-Im-Working-Capital-chart-3.png" width="585" height="425" /></a></p> <p class="p1">The clear winners are large corporations like Ford, Caterpillar, and Boeing. The same names of large politically connected corporations that have shown up in our <a href="http://mercatus.org/sites/default/files/C3-Top-ten-2013-2007-large.jpg">top ten Ex-Im beneficiaries of 2013 and 2007</a> appear in this context as well.</p> <p class="p1">The good news is that this textbook example of cronyism is presently shuttered because Congress failed to reauthorize the Ex-Im Bank by July 1. The bad news is that the big corporate interests who have enjoyed its largesse over the years are committed to bringing the agency back to life. Despite the rhetoric of benefits to small businesses, policymakers would do well to remember the truth: the Ex-Im Bank’s benefits have flown primarily to large politically connected businesses.</p> http://mercatus.org/publication/ex-im-s-working-capital-programs-benefit-big-businesses-and-banks Wed, 26 Aug 2015 12:47:38 -0400 The Food and Drug Administration and the Federal Food, Drug, and Cosmetic Act http://mercatus.org/publication/food-and-drug-administration-and-federal-food-drug-and-cosmetic-act <h5> Publication </h5> <p class="p1">It has become such a cliché that the civics class rendition of how a bill becomes law bears only superficial resemblance to real legislative practice that even <a href="https://www.youtube.com/watch?v=JUDSeb2zHQ0">Saturday Night Live</a> is in on the joke (after you’ve watched that clip, see our <a href="http://mercatus.org/publication/measuring-content-not-just-number-executive-orders-and-proclamations">executive orders chart</a>). The lawmaking process does not end with the president’s signature, contrary to the tidy story presented in civics books. Instead, the passage of the law might well be considered the foundation, not the end of lawmaking.&nbsp;</p> <p class="p1">The Federal Food, Drug, and Cosmetic Act (FDCA) vividly demonstrates the point. The FDCA, which President Franklin Roosevelt signed into law in 1938, revamped the legal authority for the Food and Drug Administration (FDA). In the nearly 80 years since, the FDA has built on the foundation of the FDCA and its amendments a tower of regulations, each of which has the force of law.</p> <p class="p1">With RegData, we can size up this accumulation of regulatory law. RegData counts the number of words and individual regulatory restrictions—words and phrases that identify a specific mandatory or prohibited activity—in each part-level division of the <i>Code of Federal Regulations</i> (CFR). Each CFR part is matched with the agency and department that created it. Agencies must state their statutory authority for each regulation they issue, and so RegData also associates words and restrictions with the acts of Congress that modified that authority. Taken together, these data shine a light on the regulatory growth from laws such as the FDCA.</p> <p class="p1">The FDCA itself was 19 pages long and contained about 11,700 words, as <a href="http://legisworks.org/sal/52/stats/STATUTE-52-Pg1040a.pdf">printed in the United States Statues at Large</a>. In the 2014 edition of the CFR, the regulations associated with the FDCA comprised about 2,180,000 words. About 130,000 new words were added in the previous ten years.</p> <p class="p1">The number of regulatory restrictions associated with the statute has grown over time as well. The following chart gives a timeline of regulatory accumulation associated with the FDCA and its major amendments, from 1980 (the first year RegData can associate restrictions with laws, because RegData relies on digitized text) through 2014:<iframe style="font-size: 12px;" width="585" height="452" src="//www.thinglink.com/card/691155012763516930" type="text/html" frameborder="0" scrolling="no"></iframe></p><p class="p1"><a href="http://mercatus.org/sites/default/files/McLaughlin-FDA-total-restrictions-table.png"><img height="763" width="585" src="http://mercatus.org/sites/default/files/McLaughlin-FDA-total-restrictions-table.png" /></a></p><p class="p1"><a href="http://mercatus.org/sites/default/files/McLaughlin-FDA-total-restrictions-charts.pdf"><i>Download Full Chart</i></a></p><p class="p1"><span style="font-size: 12px;">One notable feature of the graph is the decline in restrictions starting in 1996 through 1999. That period, which included the passage of the FDA Modernization Act of 1997, saw a 12 percent decrease in restrictions. Equally notable, however, is the speed with which that trend was reversed. The restriction count has grown steadily since 2000, and in 2010 it surpassed the previous high.</span></p> <p class="p1">The lesson for lawmakers—and the public—is clear: regulatory legislation is not a single event. New laws tend to empower agencies indefinitely, and courts tend to defer to agencies’ interpretation of regulatory legislation. For nearly 80 years, the FDCA, the original statutory authority, and its amendments have formed the foundation of the tower of regulations built by the FDA, and they are used to add regulations to the top.&nbsp;</p> <p class="p1">Statutory authorizations of regulatory actions, like the FDCA, effectively act as one-way ratchets in the long term—they instigate and support the accumulation of regulations over time. There is no counterbalancing mechanism, such as an agency or commission, charged with reviewing, modifying, or eliminating older regulations that exhibit obsolescence, duplication, or ineffectiveness. Congress would do well to consider not only how a new law is conceived of today, but also what it may become in the years and decades to come.</p> http://mercatus.org/publication/food-and-drug-administration-and-federal-food-drug-and-cosmetic-act Wed, 26 Aug 2015 10:20:31 -0400