Mercatus Site Feed http://mercatus.org/feeds/home/%22http%3A en Brexit http://mercatus.org/features/brexit contact@mercatus.org (Mercatus.org) <h5> Feature </h5> <p><span style="font-family: Helvetica, Arial, sans-serif; font-size: 12px; font-style: normal; font-weight: normal; background-color: #ffffff;">Mercatus Center scholars weigh in on the United Kingdom's historic vote to leave the European Union, examining the impetus behind the vote and the potential future repercussions.</span></p> http://mercatus.org/features/brexit Fri, 24 Jun 2016 14:54:45 -0400 Mercatus Center Scholars Weigh in on Brexit http://mercatus.org/expert_commentary/brexit <h5> Expert Commentary </h5> <p>Mercatus Center scholars weigh in on the United Kingdom's historic vote to leave the European Union, examining the impetus behind the vote and the potential future repercussions.</p><p class="p1"><b><span style="font-family: Helvetica, Arial, sans-serif; font-size: 12px; font-style: normal; font-weight: normal; background-color: #ffffff;">Richard Williams appeared on </span><span class="s1" style="font-size: 12px; background-color: white;">the <a href="http://mercatus.org/podcast/2016/06/24/richard-williams-john-gambling-radio-show-new-york">John Gambling Radio Show (New York)</a> to&nbsp;</span><span style="font-family: Helvetica, Arial, sans-serif; font-size: 12px; font-style: normal; background-color: #ffffff;">discuss the Brexit vote's relationship to EU regulations.</span></b></p><p class="p1"><b><a href="http://mercatus.org/daniel-griswold">Daniel Griswold</a> appeared on the <a href="http://mercatus.org/podcast/2016/06/24/daniel-griswold-wvlk-radio-kentucky">Kruser and Krew radio show on WVLK Radio (Kentucky)</a> to discuss the historic Brexit vote.</b></p><p class="p1"><b style="font-family: inherit; font-style: inherit; background-color: white;"><span class="s1"><a href="http://mercatus.pr-optout.com/Tracking.aspx?Data=HHL%3d8344%3d9-%3eLCE59.61%3a%26SDG%3c90%3a.&amp;RE=MC&amp;RI=4406508&amp;Preview=False&amp;DistributionActionID=30924&amp;Action=Follow+Link">David Beckworth</a></span><span class="s2"> has this to say about&nbsp;Brexit causing the biggest global monetary shock since 2008&nbsp;at his <a href="http://mercatus.pr-optout.com/Tracking.aspx?Data=HHL%3d8344%3d9-%3eLCE59.61%3a%26SDG%3c90%3a.&amp;RE=MC&amp;RI=4406508&amp;Preview=False&amp;DistributionActionID=30923&amp;Action=Follow+Link"><span class="s1">blog</span></a>:&nbsp;</span></b></p> <blockquote><p class="p1"><span class="s1">Brexit is the biggest global monetary shock since 2008. This could be the tipping point that turns the existing global slowdown of 2016 into a global recession. Here is why.</span></p><p class="p1"><span class="s1">First, Brexit is adding further strength to an already overvalued dollar.&nbsp;The trade weighted dollar&nbsp;had appreciated roughly 25 percent between mid-2015 and early-2016. That is a very sharp increase in so short a time. It has come down some, but not much as seen in the figure below (red line):</span></p><p class="p1"><span class="s1"><img src="http://mercatus.org/sites/default/files/fred.JPG" width="575" height="265" /></span></p><p class="p1"><span class="s1"><a href="http://macromarketmusings.blogspot.com/2016/06/brexit-biggest-global-monetary-shock.html">Continue reading</a></span></p></blockquote><p class="p1"><span class="s1"><b><a href="http://mercatus.org/scott-sumner">Scott Sumner</a>&nbsp;discusses how the Brexit is not about Britain at the Library of Economics and Liberty's <i>Econlog:</i></b></span></p><blockquote><p class="p1"><span class="s1">I'm seeing a lot of confusion about the implications of Brexit. Here are two common misconceptions:</span></p><p class="p1"><span class="s1">1. Some people see it as a real shock, whereas it's primarily a monetary shock.</span></p><p class="p1"><span class="s1">2. Some see it affecting Britain's economy by disrupting trade, whereas it actually hurts the eurozone more, by depressing expected NGDP growth. The real effects are often overstated; Norway and Switzerland do fine outside the EU.</span></p><p class="p1"><span class="s1">In some respects, this is quite similar to the British decision to leave the gold standard in September 1931. That decision also hurt the continent of Europe more than Britain (indeed in that case it actually helped Britain.)</span></p><p class="p1"><span class="s1"><a href="http://econlog.econlib.org/archives/2016/06/brexit_is_not_a.html">Continue reading</a></span></p></blockquote><p style="font-weight: normal; font-style: normal; font-size: 12px; font-family: Helvetica, Arial, sans-serif;" class="p1"><b style="font-family: inherit; font-style: inherit; background-color: white;"><a style="font-size: 12px;" href="http://mercatus.org/richard-williams">Richard Williams</a><span style="font-size: 12px;">, in&nbsp;</span><a style="font-size: 12px;" href="http://mercatus.org/expert_commentary/overregulated-britain">his piece for US News &amp; World Reports</a><span style="font-size: 12px;">, discusses overregulation as motive for the Brexit:</span></b></p><blockquote style="font-size: 12px; font-family: Helvetica, Arial, sans-serif;"><p style="font-size: 12px;" class="p1"><span class="s1" style="font-size: 12px;">Is the "Brexit" – the possible departure of the U.K. from the European Union – a major sign of a populist revolt against bureaucracy? It&nbsp;<a style="font-size: 12px;" href="http://globalriskinsights.com/2016/03/brexit-better-britain/"><span class="s2" style="font-size: 12px;">would seem so</span></a>, and the warnings of potential consequences seem dire.</span></p><p style="font-size: 12px;" class="p1"><span class="s1" style="font-size: 12px;">Some argue that if the United Kingdom leaves the EU, then there will be a bureaucratic regulation-fest to make sure that no area currently regulated goes&nbsp;<a style="font-size: 12px;" href="http://www.independent.co.uk/news/uk/politics/eu-referendum-brexit-would-prompt-regulationfest-of-replacing-brussels-bureaucracy-leading-lawyers-a6927746.html"><span class="s2" style="font-size: 12px;">unregulated</span></a>. But that would be nothing new for those long suffering under the weight of British regulations as ably chronicled in the humorous yet depressing book, "<a style="font-size: 12px;" href="https://www.amazon.com/How-Label-Goat-Regulations-Strangling/dp/1905641567/ref=sr_1_2?ie=UTF8&amp;qid=1466257182&amp;sr=8-2&amp;keywords=how+to+label+a+goat"><span class="s2" style="font-size: 12px;">How to Label a Goat: The Silly Rules and Regulations That Are Strangling Britain</span></a>."</span></p><p style="font-size: 12px;" class="p1"><span class="s1" style="font-size: 12px;">Many argue that Britain would be fiscally at risk, yet a&nbsp;<a style="font-size: 12px;" href="http://mercatus.org/publication/cumulative-cost-regulations"><span class="s2" style="font-size: 12px;">recent paper</span></a>&nbsp;from the Mercatus Center at George Mason University shows that, if we had frozen regulations in the United States at the 1980 level, each person in the nation would be $13,000 richer today. The British government believes that the cost of just the top 100 EU regulations is about $<a style="font-size: 12px;" href="http://openeurope.org.uk/today/blog/whats-best-way-cutting-33-3bn-burden-eu-red-tape/"><span class="s2" style="font-size: 12px;">47 billion</span></a>. If Britain were to leave, someone would actually have to ensure that there wouldn't be a free-for-all for those who favor regulating everything imaginable.</span></p><p style="font-size: 12px;" class="p2"><span class="s1" style="font-size: 12px;"><a style="font-size: 12px;" href="http://www.usnews.com/opinion/articles/2016-06-20/expect-more-brexit-style-sentiments-if-regulations-arent-reformed">Continue reading</a></span></p></blockquote><p style="font-weight: normal; font-style: normal; font-size: 12px; font-family: Helvetica, Arial, sans-serif; background-color: #ffffff;" class="p1"><b>And in&nbsp;<a style="font-size: 12px;" href="http://reason.com/archives/2016/06/22/the-brexit-vote-is-a-referendum-on-the-e">his piece for Reason Magazine</a>, he writes:</b></p><blockquote style="font-size: 12px; font-family: Helvetica, Arial, sans-serif;"><p style="font-size: 12px;" class="p1"><span class="s1" style="font-size: 12px;">How many people does it take to change a lightbulb in England? Depends on what the European Union (EU) says.</span></p><p style="font-size: 12px;" class="p1"><span class="s1" style="font-size: 12px;">A priest in Suffolk, England used to hire a man to climb a ladder to change his lightbulbs. That was fine until the European Union Working at Heights Directive banned this activity so that now the priest must spend&nbsp;1,700 pounds (about $2,000).</span></p><p style="font-size: 12px;" class="p1"><span class="s1" style="font-size: 12px;">In the next seven years, they added an additional 12,000 regulations (about 1,700 per year). The vast majority of them (only about 1 in 200) have no analysis of the likely impacts. This is problematic as the costs of EU regulations are estimated to be above&nbsp;<a style="font-size: 12px;" href="http://openeuropeblog.blogspot.com/2009/04/how-many-of-our-laws-are-made-in.html"><span class="s2" style="font-size: 12px;">70 percent</span></a>&nbsp;of the costs of all regulation.&nbsp;</span></p><p style="font-weight: normal; font-style: normal; font-size: 12px; font-family: Helvetica, Arial, sans-serif; background-color: #ffffff;" class="p1"><a style="font-size: 12px;" href="http://mercatus.org/expert_commentary/brexit-vote-referendum-european-union-s-thousands-stifling-regulations">Continue reading</a></p></blockquote><p style="font-weight: normal; font-style: normal; font-size: 12px; font-family: Helvetica, Arial, sans-serif;"><span class="s1" style="font-size: 12px; background-color: white;"><a style="font-size: 12px;" href="http://mercatus.org/expert_commentary/mercatus-center-launch-program-american-economy-and-globalization"><b>Dan T. Griswold</b></a></span><span class="s2" style="font-size: 12px; background-color: white;"><b>, Director of the Program on the American Economy &amp; Globalization, had this to say on leaving a free-trade zone:&nbsp;</b></span></p><blockquote style="font-size: 12px; font-family: Helvetica, Arial, sans-serif;"><p style="font-size: 12px;" class="p1"><span class="s2" style="font-size: 12px;">Both sides are exaggerating the consequences of Britain's vote on Thursday whether to stay in the EU. And both sides have good and not-so-good arguments to back their case. All things considered, there is probably more risk for Britain in leaving the huge free-trade area on its doorstep than in remaining and working for reform within the EU.</span></p></blockquote> http://mercatus.org/expert_commentary/brexit Fri, 24 Jun 2016 16:32:24 -0400 Ryan Is Right to Tackle Federal Regulations, but We Must Look at State and Local, Too http://mercatus.org/expert_commentary/ryan-right-tackle-federal-regulations-we-must-look-state-and-local-too <h5> Expert Commentary </h5> <p class="p1"><span class="s1">Earlier this month, Speaker <a href="http://thehill.com/people/paul-ryan"><span class="s2">Paul Ryan</span></a> (R-Wis.) and House Republicans announced a <a href="http://www.speaker.gov/press-release/a-better-way"><span class="s2">series of policy proposals</span></a> to create "a confident America, where everyone has the chance to go out and succeed no matter where they start in life." The goals of this initiative, "<a href="http://abetterway.speaker.gov/"><span class="s2">A Better Way</span></a>," are certainly admirable. A major focus of the proposals released so far concern removing barriers to opportunity and upward mobility through reforming federal regulations and increasing congressional oversight of federal agencies. However, while this a good place to start, the barriers that exist at a federal level are only a small piece of the puzzle.</span></p> <p class="p2"><span class="s1">In fact, the most pervasive barriers to opportunity are not a product of federal regulations or agencies. Instead, state and local governments are responsible for most of what stands in the way of individuals finding meaningful work in today's economy. This, like the issues that Ryan has highlighted so far, is something that Congress has the power to combat in a significant way.</span></p> <p class="p1"><span class="s1">Disregarding the role of state and local governments will leave much of the problem unchanged. Only when Washington takes fundamental reform at a state-level seriously will everyone have a genuine chance to go out and succeed in the manner that Ryan has suggested.</span></p> <p class="p1"><span class="s1">Take, for example, occupational licensing and other regulatory barriers — such as <a href="http://mercatus.org/site-search?search=%2522certificate%2520of%2520need%2522"><span class="s2">certificate-of-need laws</span></a> — that obstruct competition and impede the entry to markets. Almost exclusively carried out at a state and local level, these barriers act to protect those already in an industry from increased competition. Often, they are enforced long after their initial justifications have evaporated (if they ever really existed in the first place). All of this is done at the expense of the opportunity for those seeking to practice their chosen profession. As a <a href="http://ij.org/wp-content/uploads/2015/04/licensetowork1.pdf"><span class="s2">recent report</span></a> from the Institute for Justice finds, these burdens fall particularly on minorities, those of lesser means and those with less education.</span></p> <p class="p1"><span class="s1">As if it wasn't bad enough that the growth in occupational licensing has gone unchecked for nearly five decades — approximately 5 percent of the workforce needed a license to work in 1950, while more than 25 percent requires a license today — Congress is directly responsible for some other state-level barriers that act to compound these problems. It was Congress that initially <a href="http://mercatus.org/publication/40-years-certificate-need-laws-across-america"><span class="s2">required states to pass certificate-of-need laws in the mid-1970s</span></a>, which require doctors and other providers to <a href="http://www.usatoday.com/story/opinion/2014/10/14/health-care-certificate-of-need-cartel-innovation-column/17272613/"><span class="s2">receive permission</span></a> from the state before they may open, expand or invest in their practice. Although Congress no longer requires states to enforce these laws (and hasn't since the mid-1980s), nearly two-thirds of states continue to use these laws to limit both the opportunities for those seeking to work in healthcare and increase the costs for those seeking care.</span></p> <p class="p1"><span class="s1">Breaking down these barriers would go a long way toward helping those in poverty and creating opportunities for those looking for work. In fact, by focusing on these impediments to competition, a twofold benefit could be achieved: opportunity becomes realized easier and life becomes more affordable.</span></p> <p class="p1"><span class="s1">But what can Congress do about state-level barriers? The principles of federalism certainly require a lighter touch when it comes to federal influence over state and local governments. However, this does not mean that Congress is powerless. Reinvigorating federal competition policy via the Federal Trade Commission (FTC) could go a long way toward fighting anticompetitive state-level policies, which has been a focus of the FTC's advocacy and litigation for decades. Moreover, while the most recent installment of the policy proposals discusses exercising the power of purse over state agencies, the same could be said for using federal funds to influence pro-competitive reforms at a state level. After all, in the case of certificate-of-need laws, this was how Congress got states to pass them in the first place.</span></p> <p class="p1"><span class="s1">Besides, expanding these efforts in this way may actually bridge partisan divides. The proposals have been <a href="http://www.usatoday.com/story/news/politics/2016/06/07/paul-ryan-starts-unveiling-plan-better-gop/85535902/"><span class="s2">criticized by Democrats</span></a> as failing to tackle the real issues at hand, but it does not have to be a partisan effort. Reforming barriers to work and opportunity is an issue that the <a href="https://www.whitehouse.gov/the-press-office/2016/06/17/fact-sheet-new-steps-reduce-unnecessary-occupation-licenses-are-limiting"><span class="s2">Obama administration has taken up</span></a> over the past year. In the White House's most recent <a href="https://www.whitehouse.gov/sites/default/files/docs/licensing_report_final_nonembargo.pdf"><span class="s2">report on occupational licensing</span></a>, in which the administration explains the damaging effects of occupational licensing, it concludes that "[t]he stakes involved are high, and to help our economy grow to its full potential we need to create a 21st century regulatory system — one that protects public health and welfare while promoting economic growth, innovation, competition, and job creation." This statement could have very easily been included in any of the policy reports released so far by Ryan.</span></p> <p class="p1"><span class="s1">There seems to be little disagreement that our current regulatory approach is standing in the way. And the push for reform should be a bipartisan effort. However, the focus should be on not only returning balance and accountability between the separate branches of the federal government. It should also ensure that every level of government is held accountable. Working toward that end is a good first step toward finding a better way.</span></p> http://mercatus.org/expert_commentary/ryan-right-tackle-federal-regulations-we-must-look-state-and-local-too Fri, 24 Jun 2016 13:22:30 -0400 The Evolving Role of the USDA in the Food and Agricultural Economy http://mercatus.org/publication/evolving-role-usda-food-and-agricultural-economy <h5> Publication </h5> <p class="p1">Since its inception more than a century and a half ago, the US Department of Agriculture (USDA) has experienced enormous growth in both size and complexity—as has the industry it seeks to serve. Today the USDA is among the largest federal employers and its 2014 budget exceeded $160 billion. Its spectrum of activities span from the protection of rural farm interests to urban food assistance. Consequently, the department is the target of a wide range of interest groups besides farmers, including food assistance advocates and advocacy groups interested in issues such as obesity, animal welfare, food safety, the environment, and more. The disparate agendas of these groups make it difficult for Congress to assemble a unified policy package each time USDA’s programs are due for reauthorization. The latest reauthorization, the Agricultural Act of 2014, was signed into law two years late in February 2015.</p> <p class="p1">In a new study for the Mercatus Center at George Mason University, economist Jayson L. Lusk documents the changes in American agriculture since the USDA’s inception and the expansion of the department’s mission. Much of the USDA’s regulation is outdated, wasteful, and conflicting.</p> <p class="p3">CHANGING INDUSTRY, CHANGING DEPARTMENT</p> <p class="p4">American Farming Has Changed Drastically since 1862</p> <ul class="ul1"> <li class="li5">In 1900, 40 percent of Americans worked on farms. Today, a mere 1 percent do.</li> <li class="li5">Despite massive growth in output, agriculture accounts for less than 1 percent of US GDP today.</li> <li class="li5">Whereas farm households previously earned less than the average US household, today they earn over $20,000 more than the average household and have nearly triple the average household’s net worth.</li> <li class="li5">Farm households today are more financially diversified than in the past and depend on agriculture for less than a quarter of their income.</li> </ul> <p class="p4">The USDA’s Responsibilities Have Also Changed Drastically since 1862</p> <ul class="ul1"> <li class="li5">When the USDA was established in 1862, its stated mission was to collect foreign seeds and distribute them to farmers.</li> <li class="li5">In 1906, Congress passed laws requiring the inspection of meat, poultry, and eggs, and the USDA was tasked with enforcing food safety.</li> <li class="li5">During the Great Depression, the USDA mandated price floors and bought surplus crops. This unintentionally encouraged overproduction, lowering food prices, and the USDA quickly exhausted its $500 million budget.</li> <li class="li5">As part of the New Deal, farmers were given subsidies for not planting crops.</li> <li class="li5">Under Lyndon B. Johnson’s administration, the USDA began to oversee food stamp and commodity distribution programs, and a large increase in spending ensued.</li> </ul> <p class="p4">The USDA’s Outdated Farm Policies Continue to Affect Production</p> <p class="p1">In the United States fewer, larger farms now produce more with less labor than in the past, and farmers are in better financial standing relative to other workers, but USDA farm policy continues to subsidize farmers—often via programs tied to Depression-era polices. For example, it was only in 2015 that the Supreme Court struck down an order from the 1940s regarding raisin marketing, which Justice Elena Kagan described as “the world’s most outdated law.”</p> <p class="p3">THE USDA TODAY</p> <p class="p1">Much of current USDA spending goes toward farm subsidies and food assistance programs such as the Supplemental Nutrition Assistance Program (SNAP).</p> <p class="p1">Farm subsidies can have unintended effects:</p> <ul class="ul1"> <li class="li5">Offering an agricultural subsidy creates an incentive to produce more. In the case of farming, much of the benefit from subsidies is captured by landowners or holders of seed patents rather than by small farmers. The overall result is an inefficient use of resources.</li> <li class="li5">Research suggests that subsidies actually harm some farmers and consumers. By encouraging the production of commodity crops, subsidies reduce fruit and vegetable production, leading to higher prices for consumers.</li> </ul> <p class="p1">Early food assistance programs were designed to alleviate farm surpluses, but there is little evidence that child nutrition, school lunch, or food stamp programs actually increase farm prices:</p> <ul class="ul1"> <li class="li5">It is estimated that for every dollar spent on SNAP, farmers benefit by less than one cent.</li> <li class="li5">However, research suggests that SNAP spending does reduce food insecurity.</li></ul> <p class="p3">ECONOMIC CONSIDERATIONS</p> <p class="p1">Much of the USDA’s activity is justified by the claim that it corrects market failures and ensures that markets remain competitive and do not create unnecessary costs. In fact, most USDA activities have little to do with addressing “unfair” competition. In cases where unfair competition does exist, there are already a variety of federal laws under which victims can sue for redress.</p> <ul class="ul1"> <li class="li5"><i>USDA farm policies sometimes reduce competition in the market.</i> A number of USDA actions, such as marketing orders (regulations), actually seek to promote market power and reduce competition. Some marketing orders allow commodity organizations (essentially trade associations) to control supply, which raises prices and harms consumers. Also, agricultural cooperatives are exempt from antitrust law, even though they coordinate business activities in a way that can reduce competition.</li> <li class="li5"><i>As public choice theory predicts, farm policy is influenced by political interests.</i> The costs of agricultural subsidies are diffused and go unnoticed by taxpayers, but the payouts are concentrated on a smaller, better-organized group of farmers who can lobby for redistributive policies. Research has found that legislators who receive donations from pro-farm groups tend to vote in favor of such redistributive policies.</li> </ul> <p class="p2"><span style="font-size: 12px; background-color: white;">CONCLUSION</span></p> <p class="p1">The size, budget, and responsibilities of the USDA have grown tremendously since its inception. The department today takes on an array of varied and often conflicting tasks. Research suggests that much of the agricultural regulatory apparatus has become outdated as the industry has evolved radically over time. This situation presents opportunities to reform the USDA in order to meet today’s challenges.</p> http://mercatus.org/publication/evolving-role-usda-food-and-agricultural-economy Fri, 24 Jun 2016 10:56:15 -0400 The Brexit Vote is a Referendum on the European Union’s Thousands of Stifling Regulations http://mercatus.org/expert_commentary/brexit-vote-referendum-european-union-s-thousands-stifling-regulations <h5> Expert Commentary </h5> <p class="p1"><span class="s1">How many people does it take to change a lightbulb in England? Depends on what the European Union (EU) says.</span></p> <p class="p3"><span class="s1">A priest in Suffolk, England used to hire a man to climb a ladder to change his lightbulbs. That was fine until the European Union Working at Heights Directive banned this activity so that now the priest must spend</span><span style="font-size: 12px; background-color: white;">1,700 pounds (about $2,000)</span><span style="font-size: 12px; background-color: white;">.</span></p><p class="p3"><span style="font-size: 12px; background-color: white;"> In the next seven years, they added an additional 12,000 regulations (about 1,700 per year). The vast majority of them (only about 1 in 200) have no analysis of the likely impacts. This is problematic as the costs of EU regulations are estimated to be above </span><a style="font-size: 12px; background-color: white;" href="http://openeuropeblog.blogspot.com/2009/04/how-many-of-our-laws-are-made-in.html"><span class="s2">70 percent</span></a><span style="font-size: 12px; background-color: white;"> of the costs of all regulation.&nbsp;</span></p> <p class="p3"><span class="s1">But relative to the pace of regulations put out by the U.S. federal government, the EU could be viewed as highly restrained. In 2015 alone,&nbsp; the United States put out <a href="http://thehill.com/regulation/administration/264456-2015-was-record-year-for-federal-regulation-group-says"><span class="s2">3,378</span></a></span><span class="s2"> </span><span class="s1">rules (with another 2,234 under consideration).</span></p> <p class="p3"><span class="s1">How do we end up with so many regulations, including the ones that may cause a church to close down?</span></p> <p class="p3"><span class="s1">The standard answer in economics is "concentrated benefits and dispersed costs." What that means is that there are always groups—whether they are industry groups or activists groups—who gain a lot from an individual regulation, meaning they get the concentrated benefits. But the people who bear the costs—consumers, small business owners, and workers—generally pay small costs for each individual rule. As the rules add up, so do the costs. The issue is that while ordinary people bear these costs, the incentive for any individual to object to a single regulation is fairly small.&nbsp;</span></p> <p class="p3"><span class="s1">The United States has its own share of stupid rules like specifying the number of <a href="http://www.accessdata.fda.gov/scripts/cdrh/cfdocs/cfcfr/CFRSearch.cfm?fr=145.135"><span class="s2">cherries</span></a> that must be in fruit cocktail or the <a href="http://www.accessdata.fda.gov/scripts/cdrh/cfdocs/cfcfr/CFRSearch.cfm?fr=145.180"><span class="s2">11 different allowed ways</span></a> to pack pineapple in a can. And we don't do a very good job at looking at the impact of our rules either, for big or small. Between 2004 and 2013 only 116 out of the 37,000 regulations had estimates of benefits and costs. How about impacts on small businesses? The EPA recently certified that a gigantic rule expanding their jurisdiction over waters in the United States (WOTUS) <a href="https://www.sba.gov/sites/default/files/Final_WOTUS%20Comment%20Letter.pdf"><span class="s2">did not significantly impac</span></a>t small businesses. Farmers appear to <a href="http://ditchtherule.fb.org/"><span class="s2">disagree</span></a> strongly.</span></p> <p class="p3"><span class="s1">It's easy to understand the sentiment behind a "Brexit" when the EU required farmers in the U.K. to buy <a href="http://robinphillips.blogspot.com/2007/05/review-of-how-to-label-goat.html"><span class="s2">£5,000</span></a> machines to label every egg as to when it was laid and the identity of the chicken. (Who knew they all had names?) But go or stay, the problem of regulation will remain in the U.K., just as it will in the United States. However, if the U.K. decides to leave the EU, there are some reforms they could undertake to begin to get control over the regulatory state.</span></p> <p class="p3"><span class="s1">First, set up the system to ensure legislators know what problem they are addressing. Make sure alternative ways to solve the problem are considered and that the benefits of the chosen solution exceeds the costs. This is known as a regulatory impact analysis. Make this a legal mandate, meaning that if an agency doesn't do it, anybody can go to court to stop the rule.</span></p> <p class="p3"><span class="s1">Second, don't pass legislation that gives agencies the authority to pass rules into infinity and with deference on their interpretations from the courts.</span></p> <p class="p3"><span class="s1">Third, sunset the legislation, provide for retrospective review and give the agencies a social budget cost to implement the legislation.</span></p> <p class="p3"><span class="s1">Finally, make agencies accountable to legislators. For really big rules, with a high economic impact, they should have legislative approval.</span></p> <p class="p3"><span class="s1">There are many, many bills before the U.S. Congress right now trying to implement some of these recommendations, but they are stalled. One reason they are stalled goes back to why we get so many of these rules in the first place: concentrated benefits and dispersed people bearing the costs in terms of lost businesses, lower wages and higher prices. If the U.K. does leave the EU, it should take this opportunity for a regulatory reset.</span></p> http://mercatus.org/expert_commentary/brexit-vote-referendum-european-union-s-thousands-stifling-regulations Thu, 23 Jun 2016 11:37:43 -0400 House Republicans Propose Real, Though Incomplete, Medicaid Reform http://mercatus.org/expert_commentary/house-republicans-propose-real-though-incomplete-medicaid-reform <h5> Expert Commentary </h5> <p class="p1"><span class="s1">Medicaid, the joint federal-state program that finances health care and long-term care expenses for disabled and low income individuals, needs fundamental reform. Medicaid <a href="http://www.nber.org/papers/w21308"><span class="s2">provides</span></a> far too many enrollees with relatively little value, <a href="http://www.nationalreview.com/article/313120/medicaid-americas-worst-health-care-program-avik-roy"><span class="s2">produces</span></a> relatively poor outcomes, and <a href="http://www.nber.org/papers/w12858"><span class="s2">crowds out</span></a> private sector coverage.</span></p> <p class="p1"><span class="s1">Many of the program’s problems emanate from the open-ended federal reimbursement of state Medicaid expenditures. Last year, the federal government paid 63% of state Medicaid bills. The current financing structure discourages both states and the federal government from caring much about the value the program delivers and allows interest groups to argue that states should increase Medicaid for the economic stimulus it generates, ignoring that Medicaid spending must be financed by higher federal taxes.</span></p> <p class="p1"><span class="s1">The open-ended federal reimbursement is causing Medicaid to crowd out state priorities such as education, infrastructure, and adequate funding of public sector pensions. The figure below shows how Medicaid has risen as a percentage of state spending over time and how other categories of state spending have declined.</span></p> <p class="p1"><img height="390" width="575" alt="Percentage of Key Categories of State Expenditures, Including Federal Funds" src="http://mercatus.org/sites/default/files/blasemedicaid.jpg" /></p> <p class="p1"><span class="s1">The open-ended federal Medicaid reimbursement has also produced&nbsp;an explosion of federal spending. Between 1990 and 2015, federal Medicaid spending increased from $77 billion (in 2015 dollars) to $350 billion, and program enrollment more than tripled during this period.</span></p> <p class="p1"><span class="s1">For a myriad of reasons, it’s hard to significantly change government programs, even ones that provide a small benefit relative to their cost. Yesterday, the House Republicans’ health care task force released a <a href="http://abetterway.speaker.gov/_assets/pdf/ABetterWay-HealthCare-PolicyPaper.pdf"><span class="s2">blueprint</span></a> for health care reform, which includes Medicaid reform. Fortunately, the Medicaid portion of the blueprint recognizes that the federal government should no longer provide an open-ended reimbursement of state Medicaid spending—the single most important policy change needed for the program.</span></p> <p class="p1"><span class="s1">The task force proposal allows states the choice of a block grant or a per capita allotment and changes federal rules to allow states greater freedom to reform their programs. While more meat needs to be put on the bones of the proposal, the Medicaid component of the health care blueprint shows signs that serious legislation could emerge that would be a vast improvement from the status quo.</span></p> <p class="p1"><span class="s1"><b>The House Republicans’ Medicaid Financing Proposal</b></span></p> <p class="p1"><span class="s1">The Medicaid proposal contained in the task force plan has two central elements: 1) replacing the open-ended federal financing structure with, at states’ option, a per capita allotment or a block grant, and 2) increasing the ability of states to reform their programs and transition people off Medicaid by reducing federal rules and streamlining bureaucracy.</span></p> <p class="p1"><span class="s1">Starting in 2019, the task force plan allows states to receive federal Medicaid funding through block grants, or through per capita allotments, which were proposed in 1995 by then-president Bill Clinton. If states elect the per capita allotment option they will receive an allotment for each enrollee in the four major enrollment groups—seniors, the blind and disabled, children, and non-disabled, working-age adults—with varying allotment amounts for each group.</span></p> <p class="p1"><span class="s1">The proposal indicates that the per capita amounts would be based on the 2016 federal share of expenditures for each category of enrollees, adjusted for inflation. The proposal also indicates that the inflation rate would be less than under current law, but that rate is not specified.</span></p> <p class="p1"><span class="s1">Under the block grant option—the longstanding Republican Medicaid reform position—“funding would be determined using a base year in a manner that would assume states transition individuals currently enrolled in Obamacare’s Medicaid expansion into other sources of coverage.” The proposal further indicates that “states would receive maximum flexibility for the management of eligibility and benefits for non-disabled, non-elderly adults and children” if they select a block grant.</span></p> <p class="p1"><span class="s1">Any Medicaid reform proposal must also specify what will be done with the population made eligible for Medicaid by the ACA. Under the proposal, states that have not yet expanded Medicaid would be prohibited from doing so. This effectively means that the plan would eliminate the enhanced match—the federal government reimburses the ACA expansion population of generally non-disabled, working-age adults at a rate of 100% from 2014 to 2016 and never below 90% thereafter—for states that have not yet expanded. People in those states who would have been covered under the terms of the ACA Medicaid expansion would instead qualify for a tax credit—a core component of the House Republicans’ task force plan—to assist in the purchase of a private insurance plan.</span></p><p class="p1"><span class="s1"></span><span style="font-size: 12px; background-color: white;">The task force plan also allows states that have expanded Medicaid to reduce income eligibility thresholds below the 138 percent of federal poverty level threshold in the ACA or to phase out the expansion by freezing enrollment. People who are no longer eligible for Medicaid in those states, would be eligible for a tax credit to purchase a private plan. The task force also proposes to slowly phase down the enhanced reimbursement rate for the ACA expansion population until it reaches the normal state reimbursement rate in the hopes of “transitioning many of the able-bodied adults from Medicaid into commercial coverage.”</span></p> <p class="p1"><span class="s1">In addition to changing Medicaid’s financing structure, the task force blueprint outlines several ideas for how Republicans would significantly loosen the federal rules governing state programs. I will discuss this aspect of the proposal in a subsequent piece, but, if adopted, these policies would reduce federal rules and bureaucracy and allow states much greater discretion over eligibility requirements as well as plan design, particularly for non-disabled adults.</span></p> <p class="p1"><span class="s1"><b>Evaluating the Medicaid Financing Proposal</b></span></p> <p class="p1"><span class="s1">The three key questions to ask of any Medicaid financing proposal that ends the open-ended federal reimbursement are: 1) what is the level of federal commitment? 2) how are the funds divided among the states? and 3) how are state incentives affected? These questions touch on deep divisions and profoundly affect both states and interest groups. The first question is crucial given that the large and growing federal budget deficits are primarily driven by unsustainable federal commitments through Social Security, Medicare, Medicaid, and the ACA, but I will focus on the last two questions.</span></p> <p class="p1"><span class="s1">For all enrollees except the ACA expansion population, states’ federal Medicaid reimbursement rate is inversely related to states’ per capita income. The idea was to provide greater federal support for poorer states. However, the reality is more complicated as some states, <a href="https://oversight.house.gov/wp-content/uploads/2013/03/Bipartisan-Medicaid-Oversight-Report-Final.pdf"><span class="s2">exemplified by New York</span></a>, have developed sophisticated financing gimmicks to leverage federal funds without actual state contributions. Unfortunately, federal funding is increasingly a function of the creativity of state financing gimmicks.</span></p> <p class="p1"><span class="s1">In addition to different state approaches to financing gimmicks, some states spend a lot more on Medicaid per enrollee than other states. For example, New York <a href="http://kff.org/medicaid/state-indicator/medicaid-spending-per-full-benefit-enrollee/"><span class="s2">spends</span></a> more than three times as much per disabled Medicaid enrollee as Alabama. Although Alabama is a much poorer state, it receives $10,000 less than New York in federal funding per disabled Medicaid enrollee. Grandfathering in existing spending levels, which the task force plan appears to do, should be reconsidered since doing so seems to unjustly award states with high existing spending like New York and punish states with lower existing spending like Alabama.</span></p> <p class="p1"><span class="s1">Moving forward, it is also important to understand the different effects on state incentives produced by block grants and per capita caps. One concern, with per capita allotments is the incentive created for states when they receive additional funding for each program enrollee. This will undoubtedly cause some states, aided by interest groups in those states, to seek to enroll as many people, particularly relatively healthy people, into their programs as possible.</span></p> <p class="p1"><span class="s1">The ability of states to do this for the blind and disabled population is not concerning since those enrollees generally have already gone through a screening process to gain eligibility for a disability program—Supplemental Security Income. Moreover, the phase down in the elevated match for the expansion population does diminish the incentive for states to enroll non-disabled, working-age adults into Medicaid. Moving forward, the task force may consider how to blend per capita caps with block grants to best achieve Medicaid financing reform.</span></p> <p class="p1"><span class="s1">With respect to the ACA Medicaid expansion, the task force approach moves in the right direction. Given the evidence that Medicaid is such a poor program for non-disabled adults in particular, allowing states to move as many non-disabled adults off of Medicaid is sensible. Thus, the decision of the task force to ratchet down the elevated match rate for the expansion population is important. While reducing the elevated rate eliminates the bias against the traditional Medicaid enrollment groups, it will also provide states with an incentive to transition non-disabled, working-age adults off of Medicaid. Of course, it is important to consider the costs of this approach, meaning the task force needs to specify the size of the tax credit.</span></p> <p class="p1"><span class="s1"><b>Conclusion</b></span></p> <p class="p1"><span class="s1">Sensible Medicaid reform must accomplish two aims: reduce the unsustainable trajectory of federal and state Medicaid spending, and produce better outcomes for people most in need of public assistance. The House task force proposal would take steps to accomplish both aims. While much more work needs to be done, this is generally a good start.</span></p> http://mercatus.org/expert_commentary/house-republicans-propose-real-though-incomplete-medicaid-reform Thu, 23 Jun 2016 09:47:02 -0400 Fichtner, Warshawsky on Social Security Trustees Report http://mercatus.org/expert_commentary/fichtner-warshawsky-social-security-trustees-report <h5> Expert Commentary </h5> <p class="p1"><span class="s1">The Social Security annual report, released today, shows that while the projected&nbsp;insolvency date for the combined Old Age, Survivor, and Disability Insurance (OASDI) trust funds remains unchanged at 2034, another year has been lost to inaction. The Obama administration trustees have called for legislators to address the shortfall "as soon as possible."</span></p> <p class="p1"><span class="s1">Mercatus Center senior research fellow <a href="http://mercatus.pr-optout.com/Tracking.aspx?Data=HHL%3d8342%3a3-%3eLCE59.61%3a%26SDG%3c90%3a.&amp;RE=MC&amp;RI=4340977&amp;Preview=False&amp;DistributionActionID=30868&amp;Action=Follow+Link"><span class="s2">Mark Warshawsky</span></a>, a member of the Social Security Advisory Board from 2006 through 2012, said the following in response to the report:</span></p> <blockquote><p class="p1"><span class="s1">The insolvency date for the overall program has not changed from last year, that is, it is now one year closer. &nbsp;With every year that passes, without fundamental reform, we are losing opportunities to responsibly put the program on a sound financial footing and for it to reflect the profound economic changes that have taken place since the program was last reformed in 1983.</span></p><p class="p1"><span class="s1">The unfunded obligation of the program, whether calculated over 75 years or over an even longer horizon, increased more this year than was expected.&nbsp;This is due to a realistic lowering by the Trustees of the future interest rate assumed. Further changes to reflect the best informed views on current and projected economic and demographic conditions, including for future mortality trends—in particular to better consider recommendations by the 2015 technical panel of external experts—no doubt are waiting on the participation of Public Trustees, whose positions are currently vacant. &nbsp;</span></p><p class="p1"><span class="s1">It is unrealistic to simultaneously "ensure solvency for future generations of Americans" while at the same time to "expand and finance improved Social Security benefits" as the Administration is recommending. <i>&nbsp;</i></span></p></blockquote> <p class="p1"><span class="s1">Mercatus Center senior research fellow&nbsp;<a href="http://mercatus.pr-optout.com/Tracking.aspx?Data=HHL%3d8342%3a3-%3eLCE59.61%3a%26SDG%3c90%3a.&amp;RE=MC&amp;RI=4340977&amp;Preview=False&amp;DistributionActionID=30867&amp;Action=Follow+Link"><span class="s2">Jason Fichtner</span></a>, former deputy commissioner and chief economist of the Social Security Administration, notes:</span></p> <blockquote><p class="p1"><span class="s1">I fear the lack of change in the depletion date for Social Security’s combined trust funds will give lawmakers and the public a false sense that the program’s financial problems are less than urgent—that reform can continue to be put off. Such a misunderstanding would lead to grave consequences for beneficiaries of both the disability and retirement programs.</span></p><p class="p1"><span class="s1">Although this report suffered from the lack of oversight by public trustees, it is notable that the administration trustees see the looming problem essentially unchanged.</span></p><p class="p1"><span class="s1">The recent last-minute patch of the financial problems of the DI trust fund should be a wake-up call for those concerned with the OASI retirement trust fund—delaying meaningful reforms only limits the options available.</span></p></blockquote> <p class="p1"><span class="s1">To schedule an interview, please contact:&nbsp;Camille Walsh at (504) 338-8785 or <a href="mailto:cwalsh@mercatus.gmu.edu"><span class="s2">cwalsh@mercatus.gmu.edu</span></a>.</span></p> http://mercatus.org/expert_commentary/fichtner-warshawsky-social-security-trustees-report Wed, 22 Jun 2016 21:51:13 -0400 Los Angeles' New Manufacturing Hub Won't Generate Innovation http://mercatus.org/expert_commentary/los-angeles-new-manufacturing-hub-wont-generate-innovation <h5> Expert Commentary </h5> <p class="p1"><span class="s1">The <a href="https://www.whitehouse.gov/blog/2016/06/20/strengthening-and-celebrating-americas-capacity-innovation"><span class="s2">White House blog announced</span></a> that Barack Obama is engaging in several innovation-themed events during the week of June 20</span><span class="s3"><sup>th</sup></span><span class="s1">. One is the formal announcement of the winner of the ninth&nbsp;<a href="https://www.manufacturing.gov/nnmi-institutes/"><span class="s2">manufacturing hub competition</span></a>: Smart Manufacturing Leadership Coalition in Los Angeles. The coalition will get $70 million of taxpayer money, and <a href="https://www.americamakes.us/membership/why-america-makes"><span class="s2">based on the work of similar winners</span></a> it will be used to create a manufacturing organization that functions as a combination advocacy and networking group and research center that funds projects and engages in workforce education and training.</span></p> <p class="p1"><span class="s1">This sounds like a typical application of government largess aimed at helping the economy grow, but it’s doubtful that it will have much of an effect. Of course <i>something</i> will come out of it – after all they have $70 million to spend – but the impact is unlikely to meaningfully alter California’s or even L.A.’s economy. This is because most government officials are largely unaware of what spawns innovation, and as a result they do the wrong things.</span></p> <p class="p1"><span class="s1">The mindset of many government officials is stuck in the mid-20</span><span class="s3"><sup>th</sup></span><span class="s1">century, a time when most economists believed that physical investment in equipment and factories was the key to economic growth and prosperity. There was some acknowledgement that investing in research and development (R&amp;D) was necessary as well, but it was taken for granted that any useful new ideas would be costlessly integrated into the economy.</span></p> <p class="p1"><span class="s1">With this worldview, giving $70 million dollars to a manufacturing coalition in L.A. seems like a good idea: The coalition will wisely allocate the funds to the “right” researchers and firms working on the “right” projects, those projects will scale and be implemented, the firms will grow and the local economy will benefit.</span></p> <p class="p1"><span class="s1">But real economic growth is not that easy. <a href="http://www.sup.org/books/title/?id=20320"><span class="s2">Sixty years of largely unsuccessful foreign aid</span></a> has taught us that the rules and institutions – both formal and informal – that govern the economy can nurture or obstruct the benefits of new ideas and investment. Many policy makers and government officials accept this reality when it comes to countries, but far fewer recognize that it’s just as true at the local level.</span></p> <p class="p1"><span class="s1">The <a href="http://www.scpr.org/news/2016/06/21/61821/why-la-will-be-home-to-a-new-smart-manufacturing-i/"><span class="s2">Smart Manufacturing Leadership Coalition</span></a> will be primarily investing its resources in firms in the Greater Los Angeles area, an area that by its actions has revealed itself to be hostile towards innovation. For example, the Los Angeles planning commission<a href="http://watchdog.org/268429/los-angeles-officials-regulate-airbnb/"><span class="s2">wants to restrict the use of Airbnb</span></a> by charging homeowners a “hotel tax” and limiting the types of units that can be rented along with the number of days they can be rented.</span></p> <p class="p1"><span class="s1">In fact, Los Angeles’ local government incessantly interferes with the economy. L.A. officials <a href="http://www.foxla.com/entertainment/features/158592806-story"><span class="s2">have increased the minimum wage</span></a> to $15 per hour, <a href="http://www.latimes.com/local/california/la-me-food-study-20150319-story.html"><span class="s2">banned fast food restaurants</span></a> in South L.A., and often<a href="http://www.latimes.com/local/california/la-me-0819-lopez-pizza-20150818-column.html"><span class="s2">drown entrepreneurs in a sea of red tape</span></a>. These actions increase the cost of doing business and create an economic environment full of uncertainty, since one never knows what city officials will do next.</span></p> <p class="p1"><span class="s1">Moreover, California’s state government is also antagonistic towards innovation and entrepreneurship. <a href="http://freedominthe50states.org/"><span class="s2">California is ranked 49</span><span class="s4"><sup>th</sup></span></a>in the Mercatus Center’s Freedom in the 50 states index, which ranks states on measures of economic and personal freedom. It also has one of the worst tax climates in the country: The <a href="http://taxfoundation.org/article/2016-state-business-tax-climate-index"><span class="s2">tax foundation ranks it 48</span><span class="s4"><sup>th</sup></span></a> in its business climate tax index.</span></p> <p class="p3"><span style="font-size: 12px; background-color: white;">California also followed Los Angeles’ lead by increasing the state minimum wage to $15 per hour, </span><a style="font-size: 12px; background-color: white;" href="http://neighborhoodeffects.mercatus.org/2016/03/30/a-15-minimum-wage-will-excessively-harm-californias-poorest-counties/"><span class="s5">which will disproportionally harm the state’s poorer, rural counties</span></a><span style="font-size: 12px; background-color: white;">, and environmental regulations </span><a style="font-size: 12px; background-color: white;" href="http://www.rsc.org/chemistryworld/2016/06/california-prop-65-controversy-harmful-chemicals"><span class="s5">such as Proposition 65</span></a><span style="font-size: 12px; background-color: white;"> have become a source of countless frivolous lawsuits that increase the cost of doing business in the state.</span></p> <p class="p4"><span class="s1">As the <span class="s5"><a href="https://www.whitehouse.gov/blog/2016/06/20/strengthening-and-celebrating-americas-capacity-innovation">White House blog says</a>,</span> “America’s capacity for creativity and invention is a major reason why our economy is the strongest and most durable in the world.” This is <a href="http://www.usnews.com/opinion/articles/2016-05-23/free-speech-is-good-for-the-economy"><span class="s5">an accurate statement</span></a>, but America’s economic success isn’t due to top-down investment in politically favored industries and firms. Instead, America’s ability to innovate is driven by risk-taking entrepreneurs who use their talent and ideas to provide us with new things that improve our lives.</span></p> <p class="p4"><span class="s1">We don’t need to take money out of private hands, funnel it through the inefficient government apparatus and then return it to firms in the form of government grants and subsidies in order to have an innovative economy. What we need are local governments that provide basic goods and services such as infrastructure, a police force and a court system and then get out of the way.</span></p> <p class="p4"><span class="s1">The <a href="http://www.britannica.com/biography/Alcaeus"><span class="s5">Greek poet Alcaeus</span></a> wrote “Not houses finely roofed, or stones of walls well built, nor canals nor dockyards makes the city, but men able to use their opportunity.” The idea that innovative people drive local economies has been echoed by modern urban economists <a href="http://www.city-journal.org/html/new-urban-opportunity-agenda-14111.html"><span class="s5">such as Harvard’s Ed Glaeser</span></a> who has written that “Private entrepreneurs, not public officials, power urban economies.”</span></p> <p class="p4"><span class="s1">To create real economic growth, public policy needs to allow for risky experimentation. There is evidence that urban areas that have an accepting attitude about risk <a href="http://link.springer.com/article/10.1007/s00168-015-0734-5"><span class="s5">are more innovative</span></a>. Cities that want to gain a real competitive edge don’t need a government funded “manufacturing innovation institute.” They need risk-loving individuals who increase a city’s chances of innovating.</span></p> <p class="p4"><span class="s1">One way for a city to attract risk-loving entrepreneurs and foster innovation is to implement a policy of permissionless innovation. <a href="http://mercatus.org/publication/permissionless-innovation-continuing-case-comprehensive-technological-freedom"><span class="s5">In his book</span></a>, researcher Adam Thierer writes that permissionless innovation “is the notion that experimentation with new technologies and business models should generally be permitted by default.” This is an alternative to current city regulatory regimes, such as the one in L.A., that rely on the precautionary principle.</span></p> <p class="p5"><span style="font-size: 12px; background-color: white;">The precautionary principle is based on the idea that because some new products, services, or technologies may cause harm, the creators of these new things need to demonstrate that they are safe before they can be brought to the market. Local regulations that follow the precautionary principle include occupational licensing, business licensing, liquor licensing, and many zoning laws, all of which require entrepreneurs to get government permission before engaging in new endeavors.</span></p> <p class="p4"><span class="s1">Technological innovation is increasing at a faster pace than ever before, but local regulations force innovative entrepreneurs to fit their new products and services into a regulatory system designed for a slower-paced industrial economy rather than our modern, faster-paced service and technology economy.</span></p> <p class="p4"><span class="s1">No amount of federal or state money can overcome a regulatory regime based on the precautionary principle that stifles innovation by limiting the trial-and-error process. Instituting a climate of permissionless innovation is a better, cheaper and conspicuous way for a city to show that it’s truly interested in fostering real innovation.</span></p> <p class="p4"><span class="s1">Novel products and services will always have kinks that need to be worked out, but as Thierer notes, “trying to preemptively plan for every hypothetical worst case scenario means that many of the best-case scenarios will never come about.”</span></p> http://mercatus.org/expert_commentary/los-angeles-new-manufacturing-hub-wont-generate-innovation Wed, 22 Jun 2016 17:34:54 -0400 Unplanned Order http://mercatus.org/expert_commentary/unplanned-order <h5> Expert Commentary </h5> <p class="p1"><span class="s1">One of history's most profound discoveries is that complex, beautiful and immensely useful arrangements often emerge without anyone designing them.</span></p> <p class="p1"><span class="s1">Charles Darwin, of course, famously explained how complex life forms emerge over many generations through trial and error. Each of these life forms is well suited to survive in its environment. Yet no one designed these life forms.</span></p> <p class="p1"><span class="s1">Indeed, the complexity of the natural world is so impressive that many people of faith resist Darwin's theory. They find it difficult to believe that the amazing and magnificent order of the natural world could be the result of anything but the conscious design of a creator.</span></p> <p class="p1"><span class="s1">I don't wish to debate theology or biology. Instead, I want to discuss another complex, beautiful and immensely useful arrangement: the modern economy.</span></p> <p class="p1"><span class="s1">No one designed, or could possibly have designed, this economy. It's true that governments enforce many of the rules that put boundaries on economic activities. But the complexity, size and flexibility of the global market are too vast for it to have been designed by any human mind or any congress of human minds.</span></p> <p class="p1"><span class="s1">Pick up an ordinary pencil. What you hold is the result of the ideas and efforts of literally hundreds of millions of people. The seemingly simple pencil in your hand exists only because some people know how to explore for iron ore while other people know how to transform that ore into steel. Still other people know how to mold that steel into blades for chain saws — chain saws whose motors are built by different people. And then other people use those chain saws to fell trees.</span></p> <p class="p1"><span class="s1">Another few people pilot the boats and drive the trucks to transport the logs to the lumber factory. The sheets of lumber are then somehow made into pencil shafts. Each of these pencil shafts encases a cylinder of “lead” (a mixture of graphite and clay) that enables pencils to do their jobs. Yet producing the “lead” itself demands the efforts of countless other workers — as does the pencil's eraser, as does the aluminum ferrule that keeps the eraser attached to the pencil.</span></p> <p class="p1"><span class="s1">The pencil you hold is the result of the knowledge and efforts of literally hundreds of millions of people, nearly all of whom are strangers to you. Even more remarkable is the fact that only a tiny fraction of the people whose efforts were necessary to put that pencil into your hand had any idea that their efforts would help to produce pencils.</span></p> <p class="p1"><span class="s1">No one designed the economic processes that result in pencils. No one could possibly do so. Yet these processes obviously exist. They exist because they emerged, unplanned, over the years from economic competition guided by market prices.</span></p> <p class="p1"><span class="s1">Long before Darwin explained how order emerges unplanned in the natural world, Adam Smith — a Scottish moral philosopher whose work gave birth to the science of economics — explained how individuals in a society with private property but without any guidance from government act in ways that unintentionally create an economy that is stupendously productive.</span></p> http://mercatus.org/expert_commentary/unplanned-order Wed, 22 Jun 2016 17:24:03 -0400 Reduce the Hurdles to Private Investment in Infrastructure http://mercatus.org/expert_commentary/reduce-hurdles-private-investment-infrastructure <h5> Expert Commentary </h5> <p class="p1"><span class="s1">The Congressional Budget Office has a new report looking at the return of federal investment in transportation and research. The bottom line is that the return is not so much as the private-sector investment. So rather than invest more money in federal investments, let's get rid of all the federal policies that get in the way of the private sector's doing the investing.</span></p> <p class="p1"><span class="s1">First, let's look at the CBO report. Salim Furth of The Heritage Foundation explained in an email to me how this CBO report deserves much credit for "diligently following Congress' new requirement that CBO include macroeconomic feedback effects in its evaluations of major fiscal policy changes." He continued: "This dynamic approach is a lot more work than the alternative, and Director Keith Hall is quietly making CBO more transparent. He's more open to criticism, but that's a benefit in the long run, since it will compel CBO to constantly improve its modeling."</span></p> <p class="p1"><span class="s1">"CBO is very honest about its limitations," Furth added. He noted, for instance, that it admits we know very little about the economic impact of investment in education and research because we lack sufficient empirical evidence. The report also acknowledges major uncertainty in macroeconomic valuation, which leads to a wide range of estimates — sometimes negative, sometimes positive — about the impact of deficit-funded federal investment on the incomes of Americans.</span></p> <p class="p1"><span class="s1">Then there are the things that the CBO says we know. Based on existing literature, the CBO estimates that a 1 percent increase in "public physical capital" — such as highways or airports — leads to 0.06 percent economic growth. It also estimates that though there are positive effects of federal investment on transportation spending, there are also negative ones, mostly because of the 33 cents in private investment decline for every deficit-funded federal dollar spent. For this reason — and for better or worse — the CBO also uses the transportation estimate for federal investment in education and research.</span></p> <p class="p1"><span class="s1">When reading these numbers, I am reminded of a joke about economic estimates by my former colleague Russ Roberts — a fellow at the Hoover Institution. It goes like this: "How do you know macroeconomists have a sense of humor? They use decimal points."</span></p> <p class="p2"><span style="font-size: 12px; background-color: white;">Leaving aside the question of how reliable these estimates really are, the CBO tells us that "productive federal investment has an average annual rate of return of about 5 percent, or half of the agency's estimate of the average rate of return on private investment." In other words, private-sector investments generate more return than those made by the government.</span></p> <p class="p1"><span class="s1">Though directionally correct, this finding is only a modest bow toward reality. There is a large body of research showing how federal investment in transportation is often misallocated because of political pressure, is used inefficiently because the supply and demand are not guided by market prices, and suffers from costly systemic overruns. These problems, in addition to the fact that federal investments often give priority to union labor and follow inefficient requirements, mean that federal investments often have a negative return, not just a lower return.</span></p> <p class="p1"><span class="s1">One important policy implication of the CBO's finding (that the returns from private investments tend to be higher than for government investments) is that to boost economic growth, policymakers should reduce hurdles to private investment in infrastructure — for example, airports. Policymakers should cut marginal tax rates and allow for capital expensing to increase returns for infrastructure investment. They should end federal subsidies to state governments for infrastructure to spur state privatization. They should cut federal regulations that raise costs for building state infrastructure, such as the Davis-Bacon labor rules, and they should cut regulations that restrict state privatization.</span></p> <p class="p1"><span class="s1">And, as the Cato Institute's Chris Edwards notes, they should repeal the tax exemption on municipal bond interest, which stacks the deck against private investment. At the same time, state and local policymakers should cut property taxes on machinery and equipment, which are a major deterrent for businesses to build new factories in many states.</span></p> http://mercatus.org/expert_commentary/reduce-hurdles-private-investment-infrastructure Wed, 22 Jun 2016 17:16:34 -0400 Overregulated Britain http://mercatus.org/expert_commentary/overregulated-britain <h5> Expert Commentary </h5> <p class="p1"><span class="s1">Is the "Brexit" – the possible departure of the U.K. from the European Union – a major sign of a populist revolt against bureaucracy? It <a href="http://globalriskinsights.com/2016/03/brexit-better-britain/"><span class="s2">would seem so</span></a>, and the warnings of potential consequences seem dire.</span></p> <p class="p1"><span class="s1">Some argue that if the United Kingdom leaves the EU, then there will be a bureaucratic regulation-fest to make sure that no area currently regulated goes <a href="http://www.independent.co.uk/news/uk/politics/eu-referendum-brexit-would-prompt-regulationfest-of-replacing-brussels-bureaucracy-leading-lawyers-a6927746.html"><span class="s2">unregulated</span></a>. But that would be nothing new for those long suffering under the weight of British regulations as ably chronicled in the humorous yet depressing book, "<a href="https://www.amazon.com/How-Label-Goat-Regulations-Strangling/dp/1905641567/ref=sr_1_2?ie=UTF8&amp;qid=1466257182&amp;sr=8-2&amp;keywords=how+to+label+a+goat"><span class="s2">How to Label a Goat: The Silly Rules and Regulations That Are Strangling Britain</span></a>."</span></p> <p class="p1"><span class="s1">Many argue that Britain would be fiscally at risk, yet a <a href="http://mercatus.org/publication/cumulative-cost-regulations"><span class="s2">recent paper</span></a> from the Mercatus Center at George Mason University shows that, if we had frozen regulations in the United States at the 1980 level, each person in the nation would be $13,000 richer today. The British government believes that the cost of just the top 100 EU regulations is about $<a href="http://openeurope.org.uk/today/blog/whats-best-way-cutting-33-3bn-burden-eu-red-tape/"><span class="s2">47 billion</span></a>. If Britain were to leave, someone would actually have to ensure that there wouldn't be a free-for-all for those who favor regulating everything imaginable.</span></p><p class="p1"><span class="s1"><a href="http://www.usnews.com/opinion/articles/2016-06-20/expect-more-brexit-style-sentiments-if-regulations-arent-reformed">Continue reading</a></span></p> http://mercatus.org/expert_commentary/overregulated-britain Wed, 22 Jun 2016 12:01:52 -0400 The Three I's of Regulatory Reform http://mercatus.org/expert_commentary/three-regulatory-reform <h5> Expert Commentary </h5> <p class="p1"><span class="s1">House Speaker Paul Ryan recently unveiled an ambitious regulatory reform agenda. It’s chock full of ideas, but at its core, they stem from one simple question: What regulatory process would deliver the most effective regulations at a reasonable cost?</span></p> <p class="p1"><span class="s1">While most regulatory experts—and some politicians—can point to a regulation that seems ineffective, silly, or even harmful, this plan goes deeper by addressing the underlying problem: the process itself. By articulating a positive vision for the regulatory process, Speaker Ryan’s agenda clearly stands apart from mere election-year rhetoric.</span></p> <p class="p1"><span class="s1">The envisioned regulatory process is simple: First, prior to regulating, investigate whether a regulation would actually address an otherwise intractable problem. Second, consider various approaches to solving that problem, including market-based alternatives. A failure to consider a wide range of options is equivalent to buying the first house a realtor shows you. Third, go back and review regulations to see if they have worked as intended, and modify or eliminate those that are obsolete or ineffective.</span></p> <p class="p1"><span class="s1">As in any process involving people, the creation of laws and regulations is subject to human error. Technology companies, for example, perpetually correct bugs and flaws, as evidenced by the updates to your phone’s or computer’s operating system. But those companies don’t just correct errors discovered after products are released. They also re-examine the product creation process itself and seek ways to reduce the error rate.</span></p> <p class="p1"><span class="s1">Speaker Ryan’s agenda follows a similar logic. Regulations are legal products jointly created by Congress—because all regulatory authority stems from Congressional mandates—and regulatory agencies. If we want to reduce the error rate, we need a process that assures quality and usefulness, both during the creation phase and after their effects have been observed.</span></p> <p class="p1"><span class="s1">How do we get there? Regulatory process reform begins with the three I’s: Information, Incentives, and Implementation. To improve any process, you need to know how well the current one is working. Which products perform best? Which products were ineffective? What features of the current process are linked to the best performers and the worst performers? Speaker Ryan’s agenda highlights some ways in which information about regulations’ performance could be improved.</span></p> <p class="p1"><span class="s1">One suggestion would require agencies to publicly disclose any scientific and technical information used to support regulatory decisions. Another involves shifting some duties for estimating the costs of regulations away from the agencies issuing the rules themselves to an independent body.</span></p> <p class="p1"><span class="s1">Of course, the existence of better information doesn’t guarantee its usage. For that, you need incentives. To that end, Ryan’s agenda suggests exploring the notion of a budget for regulations.</span></p> <p class="p1"><span class="s1">Many versions of regulatory budgets have been suggested, with the earliest versions attributed to Robert Crandall of the Brookings Institution and former Senator Lloyd Bentsen (D-Texas) in the 1970s. Speaker Ryan’s agenda mentions several versions, but the most developed would work like a spending budget, where “Congress would allocate to each regulatory agency a limit on the amount of regulatory costs that could be imposed each fiscal year. Once the budget limit is reached, the agency could not issue any more regulations” unless granted additional authority by Congress—or, in some variations, if the agency earned credits for the cost of regulations that it repealed. This works just like a household budget—by setting limits, you create incentives to only spend when necessary and to prioritize those activities that would be highest value. It also incentivizes you to gain some extra spending power by eliminating unnecessary spending.</span></p> <p class="p1"><span class="s1">Then there’s the hard part: Implementation. Improving information quality won’t guarantee an improvement in product quality, at least not without addressing the incentives of regulators. At the same time, it would be difficult to address the incentives of regulators without improving the information available to them and Congress. The delivery of better regulatory results will require the implementation of reforms to every step of the regulatory process.</span></p> <p class="p1"><span class="s1">There’s no silver bullet—nor does the Speaker’s report suggest one. Instead, the agenda highlights many of the points in the process where reform can begin.</span></p> http://mercatus.org/expert_commentary/three-regulatory-reform Wed, 22 Jun 2016 11:49:29 -0400 Net Neutrality Is Government Censorship http://mercatus.org/expert_commentary/net-neutrality-government-censorship <h5> Expert Commentary </h5> <p class="p1"><span class="s1">Few expected it. Last week the D.C. Circuit Court of Appeals, in a 2–1 decision, completely upheld the Federal Communications Commission’s 2015 order regulating the Internet under Title II of the 1934 Communications Act, an order commonly called “net neutrality.” Most analysts predicted that the FCC would at most get a partial win, but legal challenges asserting that the order violated administrative law, the Communications Act, and the First Amendment failed to convince two of the three judges that deference was unwarranted. The decision ratifies the FCC’s decades-long transformation from economic regulator to social regulator and, if not reversed, will do lasting damage to U.S. technology and to free speech.</span><span style="font-size: 12px; background-color: white;">&nbsp;</span></p> <p class="p1"><span class="s1">Readers with passing knowledge of net neutrality may have heard that it means that Internet service providers must treat all Internet traffic the same. This notion of equal treatment, repeated in the first line of the court opinion, has unknown origins, makes no appearance in the rules, and is widely derided by network engineers as a fantasy. Many services transmitted on broadband lines would break with “equal” treatment.</span></p> <p class="p1"><span class="s1">As you might gather from the FCC’s two prior failed attempts at regulating the Internet and from the length of the final order, net neutrality is far more than a traffic-management requirement. In the words of Tim Wu, the law professor who coined the term, the Internet rules are about giving the agency the ability to shape “media policy, social policy, oversight of the political process, [and] issues of free speech.</span><span style="font-size: 12px; background-color: white;">&nbsp;</span></p> <p class="p1"><span class="s1">The court decision is a godsend for the New Deal agency that was created to oversee the telegraph industry, AT&amp;T’s long-distance monopoly, and broadcast radio. The upheld rules give the FCC sweeping new authority to regulate Internet and Web companies.</span></p> <p class="p1"><span class="s1">Title II regulations, created to police the Ma Bell monopoly, transform the Internet from a virtually unregulated, private system of networks into a quasi-public utility subject to conflicting common-carrier precedents, bureaucratic designs, and interminable waiver proceedings.</span></p> <p class="p1"><span class="s1">Many rules and regulations kick in, including a selective ban on blocking Internet content and oversight of the competitive Internet interconnection market, but the so-called general-conduct standard swallows them all. This amorphous rule allows the FCC to prevent any practice by an Internet access provider that the FCC believes will “unreasonably disadvantage” an Internet user, application, or content provider. The FCC and net-neutrality advocates correctly recognize that if the agency can monitor and control the distributors of speech, they can shape culture and politics.</span></p> <p class="p1"><span class="s1">For students of the FCC and media, this looks familiar. The FCC is reluctant to engage in obvious censorship — Janet Jackson’s wardrobe malfunction notwithstanding — so, like censors throughout history, interest groups use the agency’s licensing and regulatory powers to control the distributors</span></p> <p class="p1"><span class="s1">The most prominent example of abuse of regulations came in the 1960s, when the Democratic National Committee and its affiliates used the FCC’s Fairness Doctrine to drive conservatives out of TV and radio for a generation. But in recent years, broadcast media and print newspapers are losing influence to the Internet, television, and streaming video, and the new media had the potential to escape regulators’ scrutiny.</span></p> <p class="p1"><span class="s1">The competitive technology marketplace should be a cause for celebration for a communications and media regulator. Instead, a well-functioning market needed a manufactured crisis — in this case, illusory “neutrality violations” — for the agency to reassert power. Title II brings new media firmly inside the regulatory tent.&nbsp;</span></p> <p class="p2"><span style="font-size: 12px; background-color: white;">Until this expansion of power, the FCC — like other common-carrier regulators, including the Civil Aeronautics Board and the Interstate Commerce Commission — faced the real prospect of slowly winding down, as the AT&amp;T monopoly fell apart and mass media virtually exploded with the Web and new technology. Laissez-faire in communications and media — which gained steam in the Carter and Reagan administrations — led to the deregulatory 1996 amendments to the Communications Act. Until the early 1990s, regulators treated television and telephone as natural monopolies, and most consumers faced high prices and no choice for cable TV and local phone service.</span></p> <p class="p1"><span class="s1">The 1996 law broke down regulatory silos in communications, and the competitive upheaval since then is one of the great untold stories of deregulatory success. Local phone companies have lost more than 100 million subscribers since 2000 as consumers switch to cellular carriers or to phone service from their cable company. Cable-TV providers, likewise, have faced punishing satellite and phone-company competitors, and cable’s share of the subscription-TV market has fallen from 94 percent in 1996 to 53 percent today.</span></p> <p class="p1"><span class="s1">It’s important to understand how broadband Internet works. While it appears to function simply, in reality it is a complex network growing more differentiated every year. Broadband Internet access is a single pipe that can transmit a host of services and applications, including Facebook access, e-mail, phone, teleconferencing, gaming, streaming television, data backup, and more. But broadband is shared by many users, and providers can’t offer the full multitude of services to all customers at acceptable quality and prices at all times. So tradeoffs are made. Some are obvious, like giving an Internet-protocol phone call precedence over another user’s monthly operating-system update. Others are complex tradeoffs related to interconnection price, content costs, the protocols the applications use, predicted consumer demands, and available capacity.</span></p> <p class="p1"><span class="s1">Title II rules make the FCC the ultimate arbiter of which tradeoffs and business models are acceptable. Call it innovation by regulatory waiver. So when providers are unsure about whether a new technology or business model “unreasonably” harms some Internet constituency, they can submit those prospective plans to the Commission and pray for an affirmative (and timely) advisory opinion. These advisory opinions border on Kafkaesque. The FCC can decline the request for an opinion, can permit the innovation, or can require more information from the submitting party. These opaque determinations cannot be appealed, and affirmative decisions can be reversed at the agency’s whim.</span><span style="font-size: 12px; background-color: white;">&nbsp;</span></p> <p class="p1"><span class="s1">If history is any guide, these Title II rules and obligations will drive out smaller ISPs that can’t afford to hire lawyers and lobbyists to interpret the neologisms and incantations that will pour forth from the FCC. The larger carriers, with hallways of attorneys watching the agency’s every move, will muddle through the complexity as they grow more sclerotic, and they may even grow a little larger and more profitable as weaker rivals throw in the towel. Internet and technology companies, used to Silicon Valley’s “move fast and break things” culture, will increasingly need to lawyer up and ask permission before experimenting with new technology that touches on data transmission.&nbsp;</span><span style="font-size: 12px; background-color: white;">&nbsp;</span></p> <p class="p1"><span class="s1">Some Internet providers may initially fight or test the legal boundaries, but the FCC has ways of breaking defiant firms. The most alarming is that the agency is increasingly using license and transaction approvals to coerce various policies — like net-neutrality compliance, increasing the number of, say, public-affairs, Spanish-language, and children’s TV shows, and abandonment of editorial control of TV and radio channels — that it cannot, or will refuse to, enact via formal regulation. In the long run, Internet and technology companies, now FCC supplicants, will have to divert funds from new services and network design to fending off regulatory intrusions and negotiating with the Internet’s new zoning board.</span></p> http://mercatus.org/expert_commentary/net-neutrality-government-censorship Wed, 22 Jun 2016 13:07:20 -0400 The Political Economy of Medicaid Expansion: Federalism, Interest Groups, and the ACA http://mercatus.org/publication/political-economy-medicaid-expansion-federalism-interest-groups-and-aca <h5> Publication </h5> <p class="p1">Medicaid is a joint federal and state program designed to benefit low-income families and those who have difficulty paying for health care. Various factors have contributed to the Medicaid program’s significant growth, from $5.3 billion in 1970 to $449 billion in 2013, leading to concern for cost containment.</p> <p class="p1">A new study for the Mercatus Center at George Mason University examines the various factors contributing to Medicaid program growth as well as the earlier academic literature about Medicaid growth. It then looks at whether these factors correlate with the expansion of Medicaid by the states under the Patient Protection and Affordable Care Act (ACA).</p> <p class="p1"><span class="s1">Most of Medicaid growth is not due to an increase in the medical needs of poor Americans, but rather to the extension of program coverage to other groups. This interest group benefit also benefits state lawmakers, and the costs are passed on to taxpayers around the nation. This situation exists largely because of the incentives caused by the structure of grants and by interest group behavior. Moving away from an open-ended matching grant structure and toward a more conditional block grant structure could greatly reduce costs for taxpayers and Medicaid beneficiaries alike.</span></p> <p class="p1"><b style="font-family: inherit; font-style: inherit; background-color: white;">HIGHLIGHTS</b></p> <p class="p1"><span class="s1">The primary factors that have potential to contribute to Medicaid program growth include Medicaid need, Medicaid grant structure, the behavioral effects of grants, and the political economy of grants.</span></p> <ul class="ul1"> <li class="li4">A review of the academic literature demonstrates that political economy factors such as interest group behavior and the incentive effects of grant structure have had the largest impact on Medicaid growth.</li> <li class="li4">Medicaid need, or the group of factors relating to the number Americans meriting assistance (the poor, children in poverty, and others unable to afford adequate care), is not as large a contributing factor to Medicaid cost growth as might be expected.</li> </ul> <p class="p1">Correlating the main cost drivers of Medicaid expansion with the states’ decisions to expand Medicaid under the ACA shows mixed results:</p> <ul class="ul1"> <li class="li4">States that have not expanded Medicaid have higher estimated costs and slightly higher matching rates, on average. In other words, states that have not expanded have seen a larger growth in Medicaid expenditures and higher enrollment. Higher matching rates mean that states use more of their own dollars for their Medicaid services.</li> <li class="li4">States that have not expanded Medicaid also display similar political leanings, as reflected by the partisanship of each state or by citizens’ voting patterns during presidential elections. Differing preferences about the size and scope of government likely drive this trend.</li> <li class="li4">How much Medicaid costs states does not correlate with interest group behavior in the expected manner. Estimates show that states that have not expanded Medicaid also have more hospitals, nursing homes, and physicians; these are all signs of potential interest groups invested in Medicaid growth.</li> </ul> <p class="p5"><span class="s4"><b><i>The Political Economy of Medicaid</i></b></span></p> <p class="p1">Representative democracy is undermined when public policies reflect specific interest groups’ ability to organize themselves rather than the underlying preferences of citizens in society. The academic literature on Medicaid demonstrates strong evidence that political economy factors drive state Medicaid spending:</p> <ul class="ul1"> <li class="li4"><i>Interest groups.</i> The senior citizen lobby and nursing homes stand out as interest groups that disproportionately affect the growth of Medicaid spending. The poor and children in poverty are at a disadvantage relative to these groups.</li> <li class="li4"><i>Political ideology.</i> The political party controlling a state legislature can shape a Medicaid program to fit its partisan goals, particularly in the case of discretionary spending. Citizen preferences play a much smaller role.</li> <li class="li4"><i>Information problems.</i> Intergovernmental grants act as a source of information asymmetries between government officials and citizens, making it difficult for politicians to act in the best interest of citizens.</li> </ul> <p class="p5"><span class="s4"><b><i>The Impact of Matching Grant Structure</i></b></span></p> <p class="p1">Medicaid allows federal money to flow to the states in the form of a matching grant. Once a state opts in, it is required to contribute a given amount of funding to the program for each dollar received from the federal government. Historically, the federal government has provided close to 60 percent of the funding for Medicaid. The matching-grant structure creates incentives that contribute to Medicaid spending growth in the states:</p> <ul class="ul1"> <li class="li4"><i>Matching grants make Medicaid program activities cheaper.</i> States receive between $1 and $3 from the federal government for each dollar they spend on Medicaid. This essentially lowers the price of Medicaid program activities in the eyes of state policymakers. States taking advantage of matching grants will spend more than states covering the full cost of additional spending.</li> <li class="li4"><i>Medicaid grants are open-ended.</i> Because matching grants are open-ended, states using Medicaid dollars gain a systematic advantage over states that fund their own programs.</li> <li class="li4"><i>Medicaid funding rules allow states to use funding tricks.</i> States can use funding tricks to increase the number of federal dollars they receive. For example, they can count dollars from outside the state appropriations toward the state match. States have used the funds generated from untraditional revenue sources, such as special taxes imposed on hospital facilities, to count as money that they are required to put toward Medicaid.</li> </ul> <p class="p5"><span class="s4"><b><i>The Behavioral Effects of Matching Grants</i></b></span></p> <p class="p1">Grant dollars have the tendency to “stick where they hit,” meaning government money usually stays in the hands of government officials, even when the original intention was to eventually benefit citizens. This situation is largely driven by the overly complicated nature of calculating federal matching grants. It can confuse taxpayers and cause them to misperceive the true cost of government programs, which in turn can facilitate more spending growth.</p> <ul class="ul1"> <li class="li4">Empirical studies demonstrate that a grant from the federal government can cause state spending to rise by between 30 percent and 70 percent of the grant amount—a much larger increase than economic theory would predict.</li> <li class="li4">Matching grant dollars not only have the tendency to stick where they hit today, they also have the potential to persist, sometimes even after the initial grant disappears.</li> <li class="li4">By contrast, a block grant, in which the amount of the grant is independent of the exact actions taken by the recipient, would improve the incentives of state policymakers. Medicaid spending would be smaller under block grants than under matching grants receiving the same amount of federal funding.</li> </ul> <p class="p2"><span style="font-size: 12px; background-color: white;"><b>CONCLUSION</b></span></p> <p class="p1">Political economy factors explain the differences in Medicaid spending across states, even though empirical measures of interest group dynamics do not correlate closely with the ACA expansion of Medicaid. This is especially clear considering how almost two-thirds of Medicaid dollars go to the elderly and disabled, when Medicaid is commonly described as providing health insurance for the poor and for children. Many of these factors remain outside the control of politicians.</p> <p class="p1">The most policy-relevant determinants of program growth are the matching rates and the open-ended nature of Medicaid grants to states. Matching grants are inefficient and remove spending responsibility from state policymakers by sharing state costs with the federal government. Policymakers interested in slowing Medicaid’s growth should consider conditional block grants as an alternative form of intergovernmental grants.</p> http://mercatus.org/publication/political-economy-medicaid-expansion-federalism-interest-groups-and-aca Wed, 22 Jun 2016 11:30:41 -0400 The Biggest Movers in State Fiscal Health http://mercatus.org/expert_commentary/biggest-movers-state-fiscal-health <h5> Expert Commentary </h5> <p class="p1"><span class="s1">If you follow municipal finance, you are no doubt aware of the fiscal struggles of Illinois, New Jersey, Connecticut, and, of course, Puerto Rico. But many of the structural problems that plague these states occur across the map. Other states that usually go unnoticed in this context — such as Delaware or Iowa — are experiencing similar declines in their fiscal health.</span></p> <p class="p1"><span class="s1">In a new <a href="http://mercatus.org/statefiscalrankings"><span class="s2">study</span></a>, the Mercatus Center at George Mason University </span><span class="s3">ranks the states and Puerto Rico by fiscal condition</span><span class="s1">. Unsurprisingly, the states that make the news with <a href="http://www.forbes.com/sites/adammillsap/2016/06/01/public-pensions-are-states-biggest-problem/#f51f5730ba1e"><span class="s4">fiscal calamities</span></a> do poorly. But there are also a few states in the middle of the ranking that have fallen with respect to last year’s edition. These warrant a closer look.</span></p> <p class="p1"><span class="s1">Between the <a href="http://mercatus.org/statefiscalrankings-2015-edition"><span class="s4">2015</span></a> and <a href="http://mercatus.org/statefiscalrankings"><span class="s4">2016</span></a> studies, twenty-two states improved their fiscal standing, twenty-two worsened, and six stayed the same.</span></p> <p class="p1"><span class="s1">However, since the Mercatus fiscal ranking measures how states perform in relation to one another, an upward change in the ranking does not always signify a real improvement in a state’s financial position. Since larger changes are more apt to capture significant differences in the underlying financial metrics of the states—rather than merely relative differences in position — we’ve highlight those states that moved by five positions or more.</span></p> <p class="p1"><span class="s1">Only Delaware, Iowa, and North Carolina changed positions to such an extent. Delaware and Iowa dropped in the overall fiscal ranking by eight and seven spots, respectively, while North Carolina moved up six.</span></p> <p class="p1"><span class="s1">Delaware, which fell from thirtieth to thirty-eighth, declined largely due to a worsening of their cash and budget solvencies — two short-term measurements of fiscal health that make up part of the overall ranking. Delaware’s cash on hand is declining, it’s spending more money than it’s bringing in, and it’s running an operating deficit. These are all signs of short-term stress, which raise the question of whether the state is prepared for any downturn that might occur in the near future.</span></p> <p class="p1"><span class="s1">Similarly, Iowa, which fell from eighteenth to twenty-fifth, saw drops in cash on hand and assets and a worsening deficit, leading to large drops in cash and budget solvencies. But unlike Delaware, Iowa owes some of this drop to changes in how it reports its finances. A restatement of their assets and liabilities made their previous numbers look worse as well. Still, even without the reporting change, Iowa’s rank would have dropped a few positions.&nbsp;</span></p> <p class="p1"><span class="s1">Iowa’s reporting change highlights another important issue that the Mercatus study brings to the forefront: transparency. Sound financial statements, backed by accurate actuarial reporting, are essential if policymakers, journalists, and residents are to be able to monitor states’ fiscal conditions.</span></p> <p class="p1"><span class="s1">On a more positive note, North Carolina improved in almost all financial areas, and climbed from twenty-seventh to twenty-first. The state experienced increasing cash balances, a growing surplus, and shrinking liabilities.</span></p> <p class="p1"><span class="s1">North Carolina implemented <a href="http://mercatus.org/publication/case-studies-political-economy-state-tax-reform"><span class="s5">sweeping reforms</span></a> to its tax system in 2013, with the goal of reducing the tax burden on working families by broadening the tax base and lowering rates. It’s too soon to know what the effects of all these reforms will be, but North Carolina’s improved fiscal health might well be an early, positive indicator.</span></p> <p class="p1"><span class="s1">Reforming the revenue side of the ledger is just one way that states can improve their ranking and overall fiscal health. It’s also important to reduce spending, which should be done in tandem with any tax reform.</span></p> <p class="p1"><span class="s1">Although moving in different directions in the rankings, Delaware, Iowa, and North Carolina all face growing pension debts. Each of their pension obligations, valued on a risk-free basis, grew by at least 7 percent. Their performances follow the national trend: total pension debt at the national level grew by about 11 percent over the same period.</span></p> <p class="p1"><span class="s1">These trends highlight the difference between relative and absolute<i> </i>changes in fiscal condition. A state may improve relative to others — as was the case for North Carolina — while its absolute performance in some areas remains weak. Even though North Carolina’s pension debt grew by about 10 percent, the state still moved up one spot in the trust fund ranking, which includes pension debt as a component. This is because the pension debt grew at a slower rate in North Carolina than in other states.</span></p> <p class="p1"><span class="s1">This is why it’s important for state officials to focus on improving their state’s finances, rather than their state’s ranking.&nbsp;</span></p> <p class="p1"><span class="s1">Although two years of data is not enough to establish long-term trends, growing pension liabilities and poor fiscal practices, such as <a href="http://www.thefiscaltimes.com/2016/06/01/Your-State-Next-Puerto-Rico"><span class="s4">issuing debt</span></a> to cover spending, will continue to be a problem unless states make substantial shifts towards better financial practices.</span></p> <p class="p1"><span class="s1">As we track the states over time, we’ll learn more about what it means to be on solid fiscal ground. More data will help us discern how much of a state’s improvement is due to better practices, enabling us to draw policy lessons from improving states, which other state officials can implement in order to improve their own finances.</span><span style="font-size: 12px; background-color: white;">&nbsp;</span></p> <p class="p1"><span class="s1">In the meantime, states can look to Iowa and Delaware for lessons on what not to do — and to North Carolina as a model for how to improve finances going forward.</span></p> http://mercatus.org/expert_commentary/biggest-movers-state-fiscal-health Fri, 17 Jun 2016 16:00:19 -0400 FinTech: Balancing Innovation and Consumer Protection http://mercatus.org/events/fintech-balancing-innovation-and-consumer-protection <h5> Events </h5> <p>Financial technology (or ‘FinTech’) is changing the way industry practitioners, consumers, and policymakers think about innovation in the financial sector. Algorithmic underwriting improves credit opportunities for underserved markets, blockchain technology makes financial transactions open and transparent, cryptocurrencies change the way we think about money, and real-time payments systems slash the costs of credit intermediation. FinTech offers an impressive array of opportunities for economic growth.<span style="font-size: 12px; background-color: white;">&nbsp;</span></p> <p>Those opportunities, however, also bring new challenges. Are 20<sup>th</sup> century banking regulations compatible with 21<sup>st</sup> century banking technology? How should policymakers balance the promise of innovation against the potential risks to consumers?</p> <p>Please join panelists <a href="http://mercatus.org/brian-knight">Brian Knight</a>, Senior Research Fellow, Financial Markets Working Group at the Mercatus Center, <a href="http://mercatus.org/andrea-castillo">Andrea Castillo</a>, Program Manager, Technology Policy Program at the Mercatus Center, and Margaret Liu, Senior Vice President, Conference of State Bank Supervisors, for a lunch discussion on:</p> <ul><li>The current state of FinTech;</li><li>The opportunities and challenges FinTech presents;</li><li>The role of policymakers in promoting innovation while protecting consumers; and</li><li>The appropriate level of federal preemption in FinTech regulation.</li></ul> <p><i style="font-family: inherit; font-weight: inherit; background-color: white;">This event is free and open to the general public.&nbsp;This event has been planned in accordance with the widely-attended event exception to congressional gift rules and government ethics memoranda.&nbsp;Lunch will be provided </i><i style="font-family: inherit; font-weight: inherit; background-color: white;">(please let us know of any dietary restrictions). Due to space constraints, this event is not open to interns.</i></p><p><b><i>Questions? Please contact Jen Campbell at </i></b><a href="mailto:jcampbell@mercatus.gmu.edu"><b><i>jcampbell@mercatus.gmu.edu</i></b></a><b><i> or 703-993-4967.</i></b></p> http://mercatus.org/events/fintech-balancing-innovation-and-consumer-protection Fri, 17 Jun 2016 14:13:37 -0400 Consumer Credit Symposium: A Century of Experience with Uniform Small Loan Law http://mercatus.org/events/consumer-credit-symposium-century-experience-uniform-small-loan-law contact@mercatus.org (Mercatus.org) <h5> Events </h5> <p><span style="font-size: 12px; background-color: white;">100 years ago, the Uniform Small Loan Law (USLL) emerged as a collaborative proposal between progressive reformers and capitalists to provide a free market alternative to illegal lenders who flourished at the time. These reformers designed the model law to encourage non-bank lenders to provide credit at profitable rates and thus ensure access to legal credit for borrowers in need. To this day, the USLL’s influence on consumer credit regulation can still be felt in the persistence of 36% interest rate caps. &nbsp;&nbsp;</span></p> <p class="p1"><span style="font-size: 12px; background-color: white;">What lessons have we learned since the passage of the 1916 Uniform Small Loan Law on the effects of consumer credit? How can we reform current policies that are well-intentioned but end up harming many low-income individuals?</span></p> <p class="p1">The Mercatus Center at George Mason University, the Department of Finance and Economics at Mississippi State University, The Jack R. Lee Chair, and the Institute for Market Studies invite you to a symposium to consider the intervening century of experience with traditional installment loans and other non-bank supplied small dollar loan products available today.&nbsp;</p> <p class="p1">Join academics, policymakers, and industry representatives in Starkville, MS to discuss the history of the emergence of the USLL, current regulation of consumer credit, and the role that academic research can play in future consumer credit regulation.&nbsp;</p><p class="p1"><span style="font-weight: normal; font-style: normal; font-size: 12px; font-family: Helvetica, Arial, sans-serif; background-color: white;">Registration: 8:30am - 10:15am<br /></span><span style="font-weight: normal; font-style: normal; font-size: 12px; font-family: Helvetica, Arial, sans-serif; background-color: white;">Symposium: 10:15am - 8:30pm<br /></span><span style="font-weight: normal; font-style: normal; font-size: 12px; font-family: Helvetica, Arial, sans-serif; background-color: white;">Post-dinner Reception: 8:30pm - 11:00pm</span></p> http://mercatus.org/events/consumer-credit-symposium-century-experience-uniform-small-loan-law Mon, 20 Jun 2016 11:22:37 -0400 Job-Killing Red Tape for Thee, Not for Me http://mercatus.org/expert_commentary/job-killing-red-tape-thee-not-me <h5> Expert Commentary </h5> <p class="p1"><span class="s1">If you think that all members of Congress have to comply with all of the laws that we common citizens have to obey, think again. Over the years, Congress has passed thousands of bills and statutes that dictate how we should or shouldn't live our lives, but its members often fail to comply with these rules. In many instances, they actually exempt themselves from those burdensome constraints.</span></p> <p class="p1"><span class="s1">To state an obvious example: Taking other people's money via force and spending it will land everyone but a politician in jail.</span></p> <p class="p1"><span class="s1">Or, remember a few years ago when we found out that members of Congress weren't prohibited from trading stocks using nonpublic information? For most of us, this type of insider trading is a serious crime that carries a high probability of prison time for regular Joes. The outrage over this scandal led to a reform bill (the STOCK Act) to right the injustice. But then Congress eliminated a key reporting requirement for members of Congress, which gutted the law enough to guarantee more corruption going forward.</span></p> <p class="p1"><span class="s1">Just to name another few:</span></p> <p class="p1"><span class="s1">Congress is also exempt from investigatory subpoenas to obtain information for safety and health probes and from prosecution for retaliating against employees who report safety and health hazards. In an age of federal agencies' overreach and bogus prosecutions, I bet private businesses would like to be exempt, too.</span></p> <p class="p1"><span class="s1">Sarbanes-Oxley rules, which can throw chief executives of publicly traded companies in prison for up to 20 years and cost them $5 million in fines if they fail to certify their accounts, don't apply to Congress. The Department of Defense has failed to comply with auditing requirements for several decades without consequences.</span></p> <p class="p1"><span class="s1">In other examples, we see that it takes decades for Congress to subject itself to laws that apply to us. The Fair Labor Standards Act of 1938 established overtime pay, record keeping and youth employment standards, affecting full-time and part-time workers. For all its good intentions, many companies consider this act to be the bane of their existence, the source of a constant stream of regulations and enormous costs with small benefits. Congress, in spite of its large workforce, exempted itself from it.</span></p> <p class="p1"><span class="s1">That lasted until 1995 — almost 60 years later — when the House and Senate finally passed the Congressional Accountability Act, requiring that Congress comply with many of the standards established under the FLS Act. Among other things, the act applied many labor and workplace safety and civil rights statutes to the legislative branch, such as Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act of 1967, the Occupational Safety and Health Act of 1970 and the American with Disabilities Act of 1990.</span></p> <p class="p1"><span class="s1">But don't let this fool you. Just because it's the law doesn't mean that Congress actually complies with it. Consider overtime rules. Again, under the CAA of 1995, Congress has to comply with the rules, but in order to do so, both the House and the Senate must issue a resolution that they will adopt the rules. In 1996, all those procedural boxes were checked, and Congress subjected itself to overtime pay rules. It never complied again.</span></p> <p class="p1"><span class="s1">In August 2004, the Department of Labor issued new and costly overtime pay regulations — which once again changed the standard compensation levels and overtime exemptions for full-time employees, from a weekly salary level of $155 (the threshold varies based on duties) to a new standard of $455. However, Congress has not yet adopted the regulations to replace the 1996 overtime pay standards with the updated ones.</span></p> <p class="p1"><span class="s1">And what do you think is going to happen now that the DOL changed the overtime pay rule to apply to full-time employees making up to $913 a week? Based on their past behaviors, I predict that members of Congress will exempt themselves again, even though many lawmakers forcefully lobbied for the rule to be pushed down the private sector's throat. As Competitive Enterprise Institute's Bill Frezza noted when he heard of the exemption, "job-killing red tape for thee. Exemption for me."</span></p> <p class="p1"><span class="s1">In Federalist No. 57, James Madison wrote that the House of Representatives "can make no law which will not have its full operation on themselves and their friends, as well as on the great mass of the society." How far we have fallen.</span></p> http://mercatus.org/expert_commentary/job-killing-red-tape-thee-not-me Mon, 20 Jun 2016 11:30:57 -0400 Review and Critique of Piketty's Capital in the Twenty-First Century http://mercatus.org/publication/review-and-critique-pikettys-capital-twenty-first-century <h5> Publication </h5> <p class="p1"><span class="s1">Thomas Piketty’s <i>Capital in the Twenty-First Century </i>has ignited a debate over inequality that has significantly impacted public perceptions and policy debates in the United States. Piketty uses hundreds of years of income data to make bold predictions about future income inequality and justify aggressive policy reforms—including a global tax on capital—to tackle the issue. But are Piketty’s conclusions and policy prescriptions really grounded in economic theory and solid empirical results?</span></p><p class="p1"><span class="s1">In a new study from the Mercatus Center at George Mason University, economist Mark J. Warshawsky reviews and critiques Piketty’s analysis and proposals. Warshawsky finds several significant flaws in Piketty’s methodology for estimating future inequality and in his suggested reforms to the tax code. Warshawsky’s review also summarizes the criticism of Piketty’s book by other academics and Piketty’s responses to this criticism.</span></p><p class="p1"><span class="s1"><b>KEY POINTS</b></span></p><p class="p1"><span class="s1">Piketty’s critique of inequality is based on his analysis of capital, but this analysis consists of rough estimations and bold projections that do not withstand scrutiny.</span></p><ul class="ul1"> <li class="li2"><span class="s1">Piketty’s projection of a 670 percent world capital/income ratio in the year 2100 relies on simplistic and unrealistic assumptions regarding savings and growth.</span></li> <li class="li2"><span class="s1">Piketty claims the return on capital is between 4 and 5 percent—an assessment that downplays the significantly lower return on capital in recent years and the effect of inflation on the real return on capital throughout history.</span></li> <li class="li2"><span class="s1">The class divisions that Piketty uses in his analysis are arbitrary and may not accurately represent the same groups over long periods of time, particularly in economies with high levels of mobility or volatility.</span></li> <li class="li2"><span class="s1">In contrast to most scholarly evidence on the subject, Piketty suggests that the elasticity of substitution between capital and labor exceeds one.</span></li> <li class="li2"><span class="s1">Piketty’s research relies heavily on tax data, leading to assumptions about the incomes of nonfilers that likely overstate the growth in inequality.</span></li></ul><p class="p1"><span class="s1">Piketty’s prescriptions for tax policy include increasingly progressive taxation of income and inheritances, as well as a direct global tax on capital.</span></p><ul class="ul1"> <li class="li2"><span class="s1">There are multiple examples of high wealth and inheritance taxes coinciding with increased inequality. This empirical evidence casts doubt on the efficacy of Piketty’s proposals.&nbsp;</span></li> <li class="li2"><span class="s1">Piketty’s demand for financial transparency—even public transparency of certain individuals’ and corporations’ financial records—threatens the privacy rights of everyone.</span></li></ul> http://mercatus.org/publication/review-and-critique-pikettys-capital-twenty-first-century Wed, 22 Jun 2016 11:39:26 -0400 Public Interest Comment on Train Crew Staffing Rule http://mercatus.org/publication/public-interest-comment-train-crew-staffing-rule <h5> Publication </h5> <p class="p1">INTRODUCTION</p> <p class="p1">The Regulatory Studies Program of the Mercatus Center at George Mason University is dedicated to advancing knowledge about the impact of regulation on society. As part of its mission, the program conducts careful and independent analyses that employ contemporary economic scholarship to assess regulations and their effects on the economic opportunities and the social well-being available to all members of American society.</p> <p class="p1">In this comment, I primarily address the efficacy of this proposed rule from an economic point of view. The primary concern is countervailing risk. The Federal Railroad Administration (FRA), by requiring a greater expenditure on additional personnel required by this proposal, may induce some railroads to reallocate scarce resources away from those activities that are historically associated with improved safety—such as track and equipment maintenance or other infrastructure investments. Because investment, and the safety it can create, stems from financial performance, the costs of any new safety rule necessarily create a trade-off. The additional safety that the new rule creates must be weighed versus the losses in safety caused by deterred investment. Two offsetting effects, in particular, warrant consideration: deterred investment in infrastructure, including track and equipment maintenance, and deterred investment in safety-enhancing technology and innovation.</p> <p class="p1">Another matter of major concern is the lack of evidence that the proposal would actually make any operations safer. Even if there were no safety trade-offs from deterred investment, the FRA’s basis for this proposal amounts to little more than speculation tied to faulty analysis and delivered with the authoritative voice of a federal agency.</p> <p class="p1">Any credible estimation of the net effect of the proposed rule would need to consider losses to safety caused by an induced diminution of track and equipment maintenance or other safety-enhancing investments. Given the proven record of maintenance and infrastructure investments on safety rates—reviewed in detail below—this proposed rule may not only be ineffective in reducing accident rates, but it may also actually increase the net accident rate. It is primarily because of these unintended consequences that I recommend that the FRA withdraw its proposed rule.</p><p class="p1" style="padding-left: 30px;"><b style="font-family: inherit; font-style: inherit; background-color: white;">1. Summary of the Proposed Rule</b></p> <p class="p1">The FRA proposes, among other things, to require a minimum size of train crew staffs. According to the notice of proposed rulemaking (NPRM), the FRA is “concerned that as railroads implement positive train control (PTC) and other technologies, they may expand use of less than two-person crews on operations without considering safety risks or implementing risk mitigating actions that FRA believes are necessary.” The proposal would require all railroad operations to have a minimum crew of two people unless the operation was granted a specific exception from the FRA.</p><p class="p1" style="padding-left: 30px;"><b style="font-family: inherit; font-style: inherit; background-color: white;">2. Countervailing Risks and the Determinants of Railroad Safety</b></p> <p class="p1">In its 2011 publication entitled <i>Regulatory Impact Analysis: A Primer</i>, the Office of Management and Budget (OMB) explains that OMB <i>Circular A-4</i> directs agencies to identify countervailing risks that a proposed rule would create:</p> <p class="p3">A countervailing risk is an adverse economic, health, safety, or environmental consequence that results from a regulatory action and is not already accounted for in the direct cost of the action (e.g., adverse safety impacts from more stringent fuel-economy standards for light trucks). As with other benefits and costs, an effort should be made to quantify and monetize both ancillary benefits and countervailing risks.</p> <p class="p1">In the case of the railroad industry, the record of safety improvement over the past three decades indicates a need to consider the forces that have driven that improvement prior to any intervention. Furthermore, the FRA should consider whether this proposed rule would undermine those same factors, producing a countervailing risk that could offset or even overwhelm any positive safety effects that the rule creates.&nbsp;</p> <p class="p1">The most prominent feature of the safety record of the modern railroad industry in the United States is the advent of improved safety that began around the time of the Staggers Act of 1980. The Staggers Act removed various economic restrictions placed on railroads by the Interstate Commerce Commission over the preceding decades. Prior to this regulatory reform, economic regulations diminished the financial incentives of railroads to invest in those activities that increase safety. As a recent study notes:</p> <p class="p3">Under normal market circumstances, railroads have relatively strong financial incentives to operate safely. Railroad accidents harm railroads’ own property, employees, shippers’ goods, shipper-owned railcars, and third parties. Firms have a direct incentive to prevent accidents that harm their own property. Railroad employees and labor unions are well-informed about safety hazards and have strong incentives to negotiate contracts that force railroads to internalize the costs that accidents impose on employees (Savage, 1998, pp. 77–90). The Federal Employers Liability Act (FELA) makes railroads financially responsible for injuries to workers and increases workers’ ability to recover damages by removing many defenses that railroads had under common law (Squires, 2000, pp. 106–07).</p> <p class="p1">However, economic regulations created an environment far from “normal market circumstances.” Because these regulations reduced railroads’ profitability, investment was depressed, particularly in maintenance. A portion of railroads in poor financial health engaged in risky bankruptcy behavior—deferring risk-reducing activities, such as track and equipment maintenance, because shareholders could avoid full responsibility for a major accident by declaring bankruptcy.&nbsp;</p> <p class="p1">A primary lesson from the era of economic regulation is that regulations that diminish the financial health of railroads can inadvertently induce greater accident risk. Even when accounting for FRA safety regulations, a recent peer-reviewed study estimated that “approximately 89 % of the reduction in the accident rate from 1978 to 2013 was because of the Staggers Act,” because the act “removed many of the constraints on investment and operations that undermined safety.” Any regulations—even safety regulations—that hinder the investments that have driven the remarkable improvements in railroad safety since the Staggers Act could have the perverse effect of increasing the accident rate.</p> <p class="p1">For some railroads, the proposed rule will likely create a financial constraint on those investments that are empirically associated with safety improvements. For example, investment in track is negatively correlated with the track-related accident rate, although it is worth noting that this relationship does not hold for investment related to compliance with federal track standards.&nbsp;</p> <p class="p1">Firms’ investment decisions are strongly related to their financial performance, as a large body of economics literature indicates. The strength of that relationship alone should serve as a warning that this proposed rule could reduce investment in safety-increasing activities, such as track and equipment maintenance. Although the FRA recognizes that compliance with this proposed rule would be costly to railroads, it does not consider that those costs could induce countervailing risks by constraining how railroads may allocate scarce resources. By potentially inducing one or more railroads to reallocate expenditure from track or other infrastructure investments associated with safety improvement to activities required by this proposal, the FRA will create a countervailing risk that may offset the safety outcomes that are the proposed rule’s ostensible purpose.</p> <p class="p1">The development of new technologies, some of which could increase safety, can also be hindered by regulations. For example, economic regulations of railroads that deterred investment also slowed the development and adoption of new technologies and practices that improve safety, such as car retarders and automated switching. Improved finances can lead to greater investment not only in track and infrastructure but also safety-enhancing new technologies like these—the hindrance of development of these technologies is another countervailing risk that the FRA should consider.</p> <p class="p1">Furthermore, on top of ignoring countervailing risks induced by this proposed rule, the FRA has not presented any substantive evidence that requiring additional crew members would produce safety benefits. Instead, the FRA relies on a deeply flawed analysis and repeated assertions that the proposal will improve safety, as explained in the following section.</p><p class="p1" style="padding-left: 30px;"><b style="font-family: inherit; font-style: inherit; background-color: white;">3. Lack of Evidence and Regulating Based Upon “Belief”</b></p> <p class="p1">Executive Order 12866, issued by President Bill Clinton in 1993, formally adopted and ordered executive branch agencies to adhere to several principles of regulation. One of these principles concerns the use of information, stating: “Each agency shall base its decisions on the best reasonably obtainable scientific, technical, economic, and other information concerning the need for, and consequences of, the intended regulation.” The current administration reaffirmed the principles of Executive Order 12866 in its own Executive Order 13563. Executive Order 13563 also ordered agencies to “use the best available techniques to quantify anticipated present and future benefits and costs as accurately as possible.”&nbsp;</p> <p class="p1">The FRA admits several times that it does not have evidence that one-person crews are inherently less safe than those with two or more crew members. For example, the preamble of the NPRM states that the FRA “does not currently collect sufficient data related to the size of a train crew nor do accident reports investigations generally address the size of a crew in order for [the] FRA or any entity to definitively compare one-person operations to multiple person operations.” Immediately contradicting itself, the preamble then states, “However, [the] FRA has studies showing the benefits of a second crewmember and other information detailing the potential safety benefits of multiple-person crews.” No citation to these “studies showing the benefits of a second crewmember” is offered.</p> <p class="p1">The accompanying regulatory impact analysis (RIA) also claims that “studies show that one-person train operations can increase risks by overloading the sole crew member with tasks.” However, this claim cites only one study: an FRA-sponsored report entitled, “Technology Implications of a Cognitive Task Analysis for Locomotive Engineers” by Emilie Roth and Jordan Multer. That study documents the results of a cognitive task analysis that was performed to examine the cognitive and collaborative demands and activities of locomotive engineers. While the study contains interesting implications regarding the adoption of new train control technologies, such as the positive train control systems recently required by FRA regulations, it does not, by any means, “show that one-person train operations can increase risks” as the RIA claims. In fact, the study relies on interviews with locomotive engineers, conductors, and trainers, combined with direct observations. The interviewed employees work in, and the direct observations occurred in, two environments: passenger railroad operations and freight railroad operations. However, the specific operations that were investigated are drastically different from those where one-person crew operations may exist. Regarding passenger operations, the study notes, “In Amtrak passenger train operations, a crew consists of a minimum of three employees: a locomotive engineer, a conductor, and an assistant conductor. . . . Generally, two individuals, two locomotive engineers or an engineer and a conductor, are required in the cab.” Similarly, for freight operations, the study writes, “two individuals work in the cab; a locomotive engineer who is responsible for running the train, and a conductor who is in charge of the train.” While one-person crew operations certainly exist, they were not the subject of this study. In fact, the study itself states, “Additional analyses would be needed to explicitly address the one-person operation case.”</p> <p class="p1">To the degree that the FRA does rely on empirical analysis to motivate its “belief,” the analysis is deeply flawed. In Section 6.3 of the RIA, the FRA reports some details of its sole attempt at a statistical analysis. This analysis entails the performance of paired t-tests to “determine if known one-person crew short-line railroads had a higher accident rate compared with the overall similar industry.” Non–Class I railroads are grouped into four categories: those with more than 400,000 labor hours, those with less than 400,000 labor hours, all non–Class I railroads, and non–Class I railroads identified by an FRA survey to engage in one-person operations. The t-tests purport to compare the difference in accident rates across the groups, concluding that the “results provide strong evidence that shortline railroads with one-person operations have a statistically overall higher accident/incident rate than similar sized railroads.” The RIA states that the FRA’s tests were performed “under the assumption that groups are not independent as they are all shortlines and share ‘common characteristics’ but are <i>assumed to differ in only one condition (one-person crews)</i>” [emphasis added].</p> <p class="p1">This approach is fatally flawed. First, the assumption that the different groups differ in only one condition—the usage of one-person crews—implies that many other important measurable factors that affect accident rates are identical across the groups. Simple examples of other important factors are the experience of the crews; expenditure on track maintenance; expenditure on equipment maintenance; and weather and geographic conditions. These factors differ tremendously across railroads and across these groups. By failing to recognize and control for this, the FRA’s t-test will attribute differences caused by other factors to the only difference it assumed to exist between the groups—one-person operations. This approach is exacerbated by the failure to consider whether outliers are driving the results. If, for example, a single railroad that engages in one-person operations is largely responsible for the difference in means across the groups, and that same railroad has a higher accident rate because of poor track maintenance, then the FRA’s “statistical analysis” would not only incorrectly attribute the higher accident rate to one-person operations rather than track maintenance, but it would do so for all railroads in the one-person operations group.</p> <p class="p1">In some ways, the FRA is refreshingly forthright about its basis for action being its “belief” that the proposed rule would improve safety despite the lack of evidence. The NPRM and RIA indicated repeatedly that the FRA’s basis for proposing this rule is its “belief” that additional crew members will increase safety. Both the NPRM and the accompanying RIA frequently invoke the FRA’s beliefs as the basis for a decision. The phrase “FRA believes” occurs 40 times in the NPRM’s preamble. The RIA uses the phrase, “FRA believes,” or “FRA further believes” in 27 different instances.<span class="s1"> </span>Regulating based on a belief, rather than evidence, not only risks adverse consequences, but it also violates several Executive Orders, OMB guidelines, and regulatory best practices.</p><p class="p1" style="padding-left: 30px;"><b style="font-family: inherit; font-style: inherit; background-color: white;">4. Concluding remarks and recommendations</b></p> <p class="p1">When the likely safety benefits are empirically demonstrable and the ensuing consequences on investment are relatively muted, the net effect of a new rule could increase safety. However, in the case of this proposed rule, the FRA has given no consideration to some important countervailing risks that the proposed rule would generate: potential effects on investment and the degree to which those effects on investment would impact safety. This shortcoming not only indicates that the FRA is either unaware of or unconcerned with the actual net effect of this rule on safety, but it also demonstrates a substantial deviation from the directions of OMB regarding the assessment of benefits and costs.&nbsp;</p> <p class="p1">Furthermore, the proposal relies primarily on a fatally flawed statistical analysis as the basis for its proposal. The FRA buttresses its case by repeatedly asserting its belief that the proposal will improve safety and that other factors and objections are irrelevant. Good intentions and fervent belief do not create positive results. On the other hand, poorly considered regulations—such as this proposed rule—can create negative outcomes.</p> http://mercatus.org/publication/public-interest-comment-train-crew-staffing-rule Wed, 22 Jun 2016 12:00:20 -0400