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$11 Billion In Missing ACA Subsidies From Mass Tax Noncompliance

Brian Blase — Thu, 22 Sep 2016 10:33:56 -0400

Expert Commentary

Complications arising from the Affordable Care Act (ACA) premium tax credits (PTCs) are causing millions of people to effectively break the law. People who benefit from advance premium tax credits (APTCs) must file tax returns and include a form to reconcile the advanced amount to the actual end-of-year entitled amount. The failure of so many people to fulfill this new legal requirement has led the government to spend more than it should have as APTCs tend to be higher than legally entitled amounts.

The big news is that tax filers, as of April 28, 2016, reported $15.8 billion in total APTC payments. According to data released by HHS, I estimate the amount of APTCs paid in 2015 equaled $26.7 billion—nearly $11 billion more than the amount reported by tax filers. It appears that about 3 million households that received an APTC in 2015 had not filed the required paperwork with the Internal Revenue Service (IRS) by the end of April 2016.

Subsidy Reconciliation Problems and Tax Noncompliance

The ACA authorized PTCs for people who purchase an insurance plan through an exchange and who meet certain characteristics. The PTC reduces out-of-pocket premiums, and the credit amount is dependent on several factors, one of which is household income. The size of the credit decreases as income increases, with $1,000 of additional income reducing the size of the credit by approximately $150.

In 2014, 97% of people who received a PTC had them advanced to the insurance company providing their coverage. The advanced amount is mainly based on the person’s estimated income and family size for that year. In order to reconcile the amount received by the insurer on their behalf with the amount they were legally entitled to receive, people must file Form 8962 when they file their regular Form 1040 tax return.

Only 8% of people with an APTC received the correct amount in 2014. Slightly more than half of people underestimated their income and had to pay money back to the IRS because their APTC was too high. The average amount these people had to pay back was $860. The remaining 41% who claimed an APTC overestimated their income and received an average additional refund of $640.

As of October 31, 2015, more than 1.4 million households had not correctly reconciled their 2014 APTC. About two-thirds submitted a return but did not include Form 8962. The remaining one-third did not file any return.

In total, $11.3 billion of the $15.5 billion total APTC amount in 2014 was successfully reconciled as of the end of October 2015. The IRS has not updated Congress on how much of the $4.2 billion remainder has since been reconciled. Preliminary 2015 tax year data from the Office of the Taxpayer Advocate indicates that ACA-caused tax noncompliance grew substantially from 2014 to 2015.

As of April 28, 2016, 4.5 million tax filers who submitted a 2015 tax return received an ATPC in 2015. The Department of Health and Human Services reported that nearly 8.7 million people were receiving an APTC at the end of the first quarter of 2015. This translates into about 7.2 million households receiving an APTC at the time. Since additional people signed up during the year through special enrollment periods, it is likely that the total number of households receiving an APTC at some point during 2015 exceeded 7.5 million.

This means about 3 million households failed to reconcile their 2015 APTC as of April 28, 2016. Because of the complexity of the ACA, many people were probably unaware they have to file a Form 8962. While some undoubtedly requested an extension and filed late, the discrepancy is very large. As noted earlier, nearly a third of 2014 households that received an APTC in 2014 had not properly reconciled the APTC by the end of October 2015.

Similar to 2014, people tended to receive too much ATPC in 2015. A simple calculation from the 2015 data shows that the average APTC was about $525 greater than the amount to which people were entitled.

It is worth noting that in July 2015, the IRS Commissioner updated Congress on the APTC reconciliation process for the 2014 tax filing season. Although we are nearing the end of September 2016, the IRS has failed to provide Congress with an update on the reconciliation process for the 2015 tax filing season.

The bureaucracy also appears to be failing at its legal requirement to cut off individuals’ 2016 APTC if they did not file a 2014 return. The Government Accountability Office found that four-out-of-four fictitious applicants who failed to file a tax return in 2014 were approved for an APTC again in 2016.

Conclusion

The phase-out of the ACA tax credits has widely been criticized for discouraging work and lowering economic output. In addition to those serious problems, administering the APTC has produced a major tax compliance problem as billions of 2014 and 2015 APTC payments are unaccounted for. Although the desire to provide lower-income people with larger subsidies is understandable, the ACA’s complicated subsidy structure has turned millions of people into inadvertent lawbreakers and has led to the misspending of a substantial amount of taxpayer dollars.

The Risks of Ignorance in Chemical and Radiation Regulation

James Broughel, Dima Yazji Shamoun — Thu, 22 Sep 2016 10:20:07 -0400

Expert Commentary

The Nuclear Regulatory Commission sought comments last June on whether it should switch its default “dose-response model” for ionizing radiation from a linear no threshold model to a hormesis model. This highly technical debate may sound like it has nothing to do with the average American, but the Nuclear Regulatory Commission’s (NRC) decision on the matter could set the stage for a dramatic shift in the way health and environmental standards are set in the United States, with implications for everyone.

Regulators use dose-response models to explain how human health responds to exposure to environmental stressors like chemicals or radiation. These models are typically used to fill gaps where data is limited or non-existent. For example, analysts might have evidence about health effects in rodents that were exposed to very high doses of a chemical, but if they want to know what happens to humans at much lower exposure levels, there might not be much available information, for both practical and ethical reasons.

The linear no threshold (LNT) model has a tendency to overestimate risk because it assumes there’s no safe dose — or “threshold” — for an environmental stressor. (We discuss the LNT model in our new Mercatus Center research, “Regulating Under Uncertainty: Use of the Linear No Threshold Model in Chemical and Radiation Exposure.”) The response (cancer, in most cases) is assumed to be proportional to the dose at any level, even when exposure is just a single molecule. LNT is popular with regulators in part because of its conservative nature. When setting standards, the logic goes, better to be safe than sorry. That is, it’s better to assume that there is no threshold and be wrong than to assume a safe dose exists when one does not.

But does the use of the LNT model really produce the “conservative” results its proponents claim? There are very good reasons to doubt it.

The first is that there are no absolute choices; there are only tradeoffs. Regulations that address risk induce behavioral responses among the regulated. These responses carry risks of their own. For example, if a chemical is banned by a regulator, companies usually substitute another chemical in place of the banned one. Both the banned chemical and the substitute carry risks, but if risks are exaggerated by an unknown amount, then we remain ignorant of the safer option. And because LNT detects — by design — low-dose health risks in any substance where there is evidence of toxicity at high doses, businesses are led to use newer, not-yet-assessed chemicals.

Economic costs borne from complying with regulations also produce “risk tradeoffs.” Since compliance costs are ultimately passed on to individuals, lost income from regulations means less money to spend addressing risks privately. When their incomes fall, people forgo buying things such as home security systems, gym memberships, healthier food, new smoke detectors, or safer vehicles. And when regulators inflate publicly addressed risks but leave private risks unanalyzed, it becomes impossible to weigh the pros and cons of public versus private risk mitigation.

But the most compelling reason to doubt that LNT is a “conservative” standard is simply that it’s likely to be wrong in so many cases. The assumption that “any exposure” causes harm is contradicted not only by common sense, but by a growing body of research. In the decades since LNT was first adopted by regulatory agencies, more and more evidence supporting a threshold — or even a “hormetic” — model of dose response has been found.

Hormesis occurs when low doses of exposure actually cause beneficial health outcomes, and, coincidentally, the scientific evidence for hormesis appears strongest in the area where the LNT was first adopted before its use spread to other areas: radiation. For example, low-doses of radiation exposure have been shown to have protective effects against kidney damage in diabetic patients, and low doses of X-rays have been associated with an anti-inflammatory response to treat pneumonia. There is now evidence of hormesis in hundreds of experiments, but the LNT rules out — by assumption — the possibility of these kinds of beneficial health responses.

Unfortunately, the way regulators typically respond to these problems is simply by ignoring them. Hence a better moniker for the use of the LNT model might be “Ignorance Is Bliss.” So long as regulators ignore the inconvenient truths posed by the possibilities of hormesis and risk tradeoffs, they can continue going to work every day maintaining the belief they are protecting public health. But the uncertainty in their risk assessments is so great that, in fact, regulators often have no idea whether they’re improving public health or doing just the opposite.

A reconsideration of the LNT is long overdue. At the very least, risk analysts should characterize uncertainty using multiple-dose response models — including a threshold model or a hormetic model — when no model has the overwhelming support of the scientific evidence. And analyzing risk tradeoffs should be a routine part of rulemaking.

The NRC should be commended for acknowledging the doubts about the LNT. When the time comes for the agency’s decision, let’s hope they choose knowledge over ignorance.

Anatomy of a Multi-Government Shakedown

Veronique de Rugy — Thu, 22 Sep 2016 10:10:54 -0400

Expert Commentary

I'm slow to defend corporations these days because so many of them have built their business models around government-granted privileges and are free markets' worst enemies. However, for all the perks they get from governments, they also fall victim to their own government. And sometimes the shakedown is done by multiple governing authorities.

A few weeks ago, the European Union's antitrust regulator demanded that Ireland get back $14.5 billion in taxes from Apple Inc. At the heart of the issue are legal tax arrangements between Ireland and Apple passed in 1991 and 2007, which allow the company to pay an annual tax rate of roughly 1 percent on its European profits channeled to Ireland.

According to the European commission, if a country doesn't tax a company as much as the bureaucrats in Brussels want it to be taxed, somehow that's equivalent to giving the company a subsidy or a handout. So even though Apple followed the rules in Ireland and what it did is legal in both Ireland and the United States, the EU retroactively changed the rules and is now demanding lavish sums of cash from the company.

Forget about the Irish government's right to set its own taxes; when the EU wants your cash, tax sovereignty goes out the window. As you can imagine, the Irish government isn't pleased. It said it would appeal the decision in order "to defend the integrity" of its tax system.

Good luck with that, says Dan Mitchell of the Cato Institute. An appeal requires that Ireland persuade one group of European officials to overturn the decision of another. He explains, "Given the long-standing hostility in Brussels to Ireland's tax system, that's an uphill climb — particularly since European bureaucrats have set themselves up to be judge, jury and executioner on these issues." Also, considering the amount at stake through this Apple tax grab and the tax grab looming over other American multinational corporations, the EU is unlikely to change its mind.

Now enter the United States. U.S. Treasury Secretary Jack Lew complained in The Wall Street Journal about the EU's behavior — calling the move "unfair" and "contrary to well established legal principles" and noting that the move "threatens to undermine the overall business climate in Europe." True. But don't be fooled; the only reason Lew has opposed this EU move is that he would rather be the one grabbing that money.

Under the current punishing system, U.S. companies doing business abroad and repatriating their foreign earnings home get tax credits for the taxes paid to other governments before being hammered with a ridiculously high 35 percent tax rate. The more taxes companies pay offshore the less is left for Uncle Sam to grab. So if the tax payments to the EU qualify as a tax credit, that's potentially $14.5 billion less tax revenue in the U.S. tax chest.

The EU shakedown of Apple will soon become the EU shakedown of Amazon.com, McDonald's and many other U.S. companies, so the U.S. Treasury proceeded to put in place its own shakedown mechanism. It's issuing new rules to restrict how corporations can use tax credits on their foreign tax payments to reduce their U.S. tax bills. The explicit goal of these rules is to avoid suffering a huge tax loss as a consequence of U.S. multinationals having to pay billions of dollars in taxes to the EU version of the Soprano family.

In other words, no matter how you look at it, U.S. corporations are in for a large shakedown from the EU and from the United States. It's sad, considering that the best solution to this mess would be for the United States to reform its corporate income tax by lowering its rate and moving to a territorial tax system. Such reform would guarantee that U.S. firms operating abroad would not park so much money abroad and subject themselves to arbitrary tax changes by foreign governments. It would also increase U.S. competitiveness and trigger economic growth. But if you think that scenario will happen soon, don't hold your breath.

Craft Breweries Need Help, Not Handouts

Christopher Koopman, Thomas Savidge — Thu, 22 Sep 2016 09:59:35 -0400

Expert Commentary

In a development that has become as commonplace as the hoppy IPAs that symbolize the United States’ craft beer renaissance, state and local governments are rushing to “help” breweries. Port City Brewing in Alexandria is just the latest example of what’s happening across the country. Thanks in part to $500,000 in public grants from the Virginia Department of Agriculture and the city government, Port City announced that it will expand its operations and nearly triple its brewing capacity.

The knee-jerk reaction for beer lovers would be to rejoice. After all, this means more beer. People looking for a way to boost the local economy might find cause for celebration. This means more jobs. And local politicians certainly love this, too. Piggybacking off of craft beer’s popularity might increase their popularity (read: re-electability) as well.

While these sentiments are certainly understandable, they neglect to consider how policymakers can actually lend a hand to the industry. Craft breweries do not need subsidies, but they do need help.

In fact, giving money to brewers simply masks the biggest problem facing the industry’s continued growth: Craft brewers face an outdated, counterproductive and oftentimes redundant regulatory mess. In Virginia, for example, starting a craft brewery requires 20 regulatory steps at the local, state and federal levels. This is as many bureaucratic steps as starting a small business in China or Venezuela.

This is not to say that there is no role for regulation, especially when a real public-safety concern is in play. But most of these regulations date to the end of Prohibition, fail to account for changes in the market over the last eight decades and have become poorly disguised gifts to established breweries and wholesalers.

At the federal level, aspiring craft brewers currently must wait more than 160 days to get approval from the Alcohol and Tobacco Tax and Trade Bureau. This includes background checks, field investigations, equipment and premises examination and a legal analysis of proposed operations. Then it’s another 24 days for the TTB to approve the label you put on the bottle. The TTB may also need to approve your formula (depending on your ingredients and brewing methods), which requiresmore waiting. In all, just at the federal level, a brewer must wait nearly six months for the necessary approval.

An aspiring brewer’s work is not done, however, as he or she must also obtain permission at the state level. In Virginia, the problem is not how long it will take to get approval but whether approval will be given at all. The state can deny a license if the applicant is “physically unable to carry on the business” (couldn’t this person hire some help?). Or if the applicant is not a “person of good moral character and repute” (who makes this subjective judgment?). Or even if the applicant is “unable to speak, understand, read and write the English language in a reasonably satisfactory manner” (so much for inclusiveness).

If you become a craft brewer today, don’t plan on selling your first bottle of beer until this time next year. That is, if you’re able to make it through the process at all.

Policymakers have correctly recognized that this process creates problems for craft brewers. Focusing on subsidizing some brewers, however, rather than reforming the entire process for all brewers, does more harm than good. It gives the appearance that policymakers are taking active steps to support an industry when the truth is that it’s only supporting certain members of the industry: those lucky (or shrewd) enough the win subsidies.

You could help this entire industry without spending a dime. Instead of getting financially involved, get out of the way.

A Quiet Revolution in Health Care in a Digital Era

Robert Graboyes — Wed, 21 Sep 2016 09:55:55 -0400

Expert Commentary

A quiet digital revolution is fundamentally altering how health care is delivered and what we even mean by health care. Already, patients take their own electrocardiograms with smartphones, schoolchildren 3D-print prosthetic hands, and mental health patients use artificial intelligence to self-manage care. Over a four-month period, Senior Research Fellow Robert Graboyes will produce weekly columns describing remarkable innovations and innovators and explore the public policy obstacles that block their way.

The whole American political spectrum shares two goals: lower health care spending and better health care delivery. Unfortunately, most political groupings believe success will emerge from a top-down reconfiguration of insurance. Almost certainly, though, better, cheaper care will come not from a relentless focus on insurance, but from fragmentary, bottom-up innovation already underway.

The Left seeks nationalization and centralization — a single-payer system where a wise federal government funds and allocates care. The Affordable Care Act (ACA) approximates this ideal by subsidizing and enlarging the pre-existing menagerie of public, private, individual and group plans. The Right’s hope is federalism and privatization — shifting power from Washington to states and private entities. Each vision has dozens of variations.

Before the ACA, America had a certain number of doctors, nurses, hospital beds, laboratories and machines. Providers had recipes for combining these resources into care and prioritizing who gets it. Resources were heavily used. Recipes changed slowly. The ACA promised millions of people greater access to care, but did relatively little to change resources or recipes. It mostly created winners and losers in terms of cost, care and health. If the ACA gave you an extra hour of physician time, someone else likely lost an hour. If you paid less, someone else paid more. The same would be true of the Left’s nationalization and centralization or the Right’s federalism and privatization.

Each scheme boils down to: “We have a magic knife. Use it to divvy up a pie, and you’ll get more slices, bigger slices, tastier slices, and cheaper slices.”

Insurance matters, but it’s no magic knife. In fairness, no one imagines bliss coming solely from shifting care and costs from patient to patient. Each looks also to less waste, fraud and abuse and to more technological innovation.

Waste, fraud and abuse are certainly real. Doctors order unnecessary tests. Medicare is rife with fraud. Single-payer advocates see the cure in government bargaining power. ACA supporters pin hopes on Accountable Care Organizations. Conservatives look to competition among states, insurers and providers.

Waste-cutting has limits. A common guesstimate is that 30 percent of health spending is waste, but I’d guess that’s an overestimate. Much waste is apparent only in hindsight, and “buy more winning lottery tickets and fewer losing ones” is a futile strategy. No reform will stop all foreseeable waste.

Suppose 30 percent of health care spending is waste, half is foreseeable, and half of that is preventable. Then the best reforms would cut costs by only 7.5 percent. Spending would drop only to 2015 levels — not exactly “the good old days.” Once you achieve this 7.5 percent reduction, the waste-fraud-abuse strategy has maxed out as a cost-cutting tool. Plus, nothing in this cost-cutting effort improves the care we receive.

Reformers also look to technological innovation. The ACA created a Medicare/Medicaid innovation center. President Obama initiated a “moonshot” to cure cancer. Congress considers a “Twenty-First Century Cures Act” to bolster federal research funding.

While these efforts are commendable, they’re geared toward high-cost, large-institution advances, not the disruptive innovation that made information technology vastly more powerful and massively cheaper inside one generation. In IT, planet-changing innovations came from small start-ups; most vanished and a few, like Google, grew large.

The IT comparison isn’t arbitrary. In this century, much of what keeps us healthy will spring from the digital realm: Big Data, wearable telemetry, artificial intelligence, 3D printing, nanotechnology, telemedicine. The cost and speed of DNA sequencing are progressing more rapidly than IT’s Moore’s Law. Much medical diagnosis and decision-making will soon be better managed by machines than by physicians, leaving doctors free to focus on endeavors where human judgment is indispensable.

While Americans squabble over insurance, a digital revolution quietly disrupts fundamental notions of health care itself. Imagine a world where schoolchildren produce low-cost prosthetic hands; heart patients use smartphones to perform electrocardiograms on themselves; patients shop the globe for surgical hospitals; cloud computing helps patients manage mental health issues; individual doctors manage thousands of prescriptions a day; and streaming video liberates doctors from computers.

This world already exists, barely perceived by the political community — or the medical community. The key to nurturing it is to remove the obstacles that lie in its path.

Curbing the Surge in Year-End Federal Government Spending: Reforming “Use It or Lose It” Rules—2016 Update

Jason J. Fichtner, Adam Michel — Thu, 22 Sep 2016 09:30:27 -0400

Publication

At the end of every fiscal year, US government agencies spend large sums of their budgets in a potentially wasteful manner. These year-end spending surges are described by the “use it or lose it” phenomenon, which is driven by a fear that leftover resources will prompt future budget cuts. Every year the media documents examples of wasteful year-end spending, but there has been little empirical research on the phenomenon.

An updated study published by the Mercatus Center at George Mason University examines exist- ing literature on the prevalence, consequences, wastefulness, and causes of year-end spending surges. The study provides comprehensive reports of executive department year-end contract expenditure patterns, and it concludes with policy recommendations for curbing year-end spending surges.

KEY POINTS

Data from the past 13 years (FY 2003–2015) show that a remarkably large percentage of executive branch contract spending occurred in the last month of the fiscal year. Over this time period, 16.3 percent of expenditures occurred during September, the last month of the fiscal year—close to twice what would be expected if spending were split evenly over the year’s 12 months.
Existing literature on year-end spending suggests that federal contract expenditures in the last week of the fiscal year tend to be wasteful, funding projects that are of substantially lower quality, as well as more risky non-competitive and one-bid contracts.
A potential remedy for wasteful year-end spending is to allow agencies limited rollover (also known as carry-over) authority for funds not spent by the end of the fiscal year. To maximize success in reducing waste, rollover accounts should be segregated by agency subcomponent. Separate accounts increase the incentive to save because only the agency subcomponents that achieve cost savings will be able to deploy those savings in subsequent fiscal years.

POLICY RECOMMENDATION

To test the merits of rollover authority, the federal government should begin with a pilot exercise. Departments or agencies that wish to participate should be given the authority to roll over up to 5 percent of their contract budget authority into the next fiscal year. Congress should direct the Government Accountability Office to oversee, audit, and evaluate the program.

Value Is Hard to Find in a Fossilised Public Sector

Omar Ahmad Al-Ubaydli — Tue, 20 Sep 2016 17:56:05 -0400

Expert Commentary

Public sectors are important employers in all economies, typically accounting for about 20 per cent of total jobs. Compensation in government organisations is structured quite differently to what is found in the private sector: it is usually higher, when one takes into account the education and experience of workers; pay scales are very rigid; and, there is almost a complete absence of performance-related pay.

These are part of the reason that UAE nationals, and GCC citizens more generally, prefer working in the public sector, and why a majority end up working there: in 2009, 86 per cent of employed Kuwaitis and 88 per cent of employed Qataris were in their respective public sectors. Understanding what accounts for the differences in compensation structures is important as the GCC countries look to restructure their economies towards the private sector.

In the GCC and beyond, the private-public discrepancy in compensation structure is underlain by two primary differences between the sectors.

First, governmental organisations are non-profits, pursuing alternative goals that are typically difficult to measure. One of the virtues of targeting profit is that it is easily quantifiable, making it easier for the organisation’s principals to hold the management accountable. By looking at the bottom line, private shareholders can quite easily identify poor performance by the chief executive, at which point they can justifiably fire him, or her.

In contrast, in the public sector, goals are somewhat nebulous (serving the public). For example, how are we to measure the performance of Saudi Arabia’s police force, especially if we wish to take into account the resources consumed? What about Oman’s judiciary?

This creates a serious risk of cronyism in hiring: in the private sector, nepotistic hires can hurt profits quite transparently, diminishing the likelihood that they occur in the first place. But when measuring the organisation’s success is itself elusive, top managers instantly acquire significant discretion in hiring decisions, which can be deployed in a corrupt fashion by the unscrupulous.

This is why civil services inside and outside the GCC have such rigid hiring and promotion structures, and why so many approvals are required for even trivial human resources decisions. No system is flawless and eventually bureaucrats work out a way of paying themselves more than the market values them, which is why public-sector pay tends to exceed what is available in the private sector. For example, during the period 2000-2010, Bahrainis working in the public sector earned about 55 per cent more than those in the private sector.

The difficulty of measuring performance in the public sector also explains the rarity of performance pay. This is especially true when organisations have multiple goals that differ in their measurability; for example, an immigration officer has to process visitors’ paperwork (easy to measure) and prevent those who pose a security threat from entering (difficult to measure). If management naively pay a bonus based on the number of visitors processed, then that gives an incentive to ignore security considerations in the pursuit of the highest bonus possible.

In fact, after securing its independence from the United Kingdom in the late 18th century, the US government used to give its employees performance-related pay, inadvertently creating a horde of overzealous bureaucrats who abused their power at the public’s expense. This led to public demands for less strongly incentivised civil servants.

The second key difference between the public and private sectors is the lack of competition faced by government organisations. When dealing with companies, consumers can eliminate bad services – a bad restaurant will quickly lose customers and go out of business. This channel is typically absent in the public sector because the service is either an antecedent of competitive markets, such as law enforcement, or it transcends them, such as national defence.

Sometimes, the government provides a service that can actually be delivered competitively, such as public transport, and in those cases, the enforced absence of competition usually leads to terrible service and glacial rates of innovation. In the GCC, privatisation of telecommunications has led to dramatic improvements in service quality.

Generally speaking, the lack of competition means that government organisations have to work extra hard at measuring the quality of their output, which means lots of tiresome audits and KPI briefings. This reinforces the rarity of performance-related pay and is another reason that human resources departments can get away with compensating the organisation’s employees at an above-market rate.

Generations of GCC citizens have become used to the public sector’s structure, which poses a challenge for policymakers seeking to strengthen private-sector employment. Educational institutions and civil society organisations need to help nationals change some of their labour market preconceptions. Gulf citizens need to realise that performance trumps seniority in pay and promotions and that Byzantine oversight systems by human resources departments are typically inferior to the discipline that markets offer.

Crucially, GCC citizens need to modify their educational investments. Previously, commercially worthless academic qualifications were pursued to secure promotions in credentialistic public sector organisations. Now, Gulf nationals need to consider how a degree will help them deliver a service that a private organisation is willing to purchase.

In March last year, the UAE Minister of Finance declared that the Government had no plans to give pay rises to public-sector workers. For many, the immediate reaction was a mixture of disappointment and indignation. For the UAE to fulfil its potential, its citizens need to get to the stage where they wonder how on earth the public sector salaries got that high in the first place.

Why Government Doubles Down on Policy Mistakes

Charles Blahous — Tue, 20 Sep 2016 17:51:16 -0400

Expert Commentary

Frustrated voters often wonder why, after electing well-intended lawmakers to office, so many subsequent government economic policies prove damaging. Part of the answer lies in the nearly irresistible public policy dynamic of “doubling down” on mistakes. Lawmakers, press and the public need to understand the strength of this phenomenon and guard against it when adopting policy positions.

In simplified form, the dynamic runs as follows:

1) Government, in response to a perceived need, takes action to meet that need in a manner that distorts economic behavior and produces predictable adverse effects.

2) The public consequently experiences problems and expresses concern.

3) The problems themselves become justification for additional government actions that worsen the distortions and the resultant problems.

4) As problems worsen, the public more urgently demands corrective actions.

5) Steps #3 and #4 are repeated ad infinitum.

We have seen and continue to see this dynamic operate in many areas of economic policy. To cite but a few:

Worker Health Benefits: With the best of intentions the federal government has long exempted worker compensation in the form of health benefits from income taxation. There is wide consensus among economists that the results of this policy have beenhighly deleterious. As I have written previously, this tax exclusion “depresses wages, itdrives up health spending, it’s regressive, and it makes it harder for people with enduring health conditions to change jobs or enter the individual insurance market.” Lawmakers have reacted not by scaling back the flawed policy that fuels these problems, but rather by trying to shield Americans from the resulting health care cost increases. This has been done through the enactment of additional health programs and policies that further distort health markets and which themselves drive personal and government health spending still higher.

Federal Health Programs: The federal government has enacted programs such asMedicare and Medicaid to protect vulnerable seniors and poor Americans from ruinous health care costs. The positive benefits of these programs co-exist with well-documented adverse effects. For example, it is firmly established that creating these programs pushed up national health spending, driving health costs higher for Americans as a whole. Consumer displeasure over these health cost increases subsequently became a rationale for still more government health spending, rather than reducing government’s contribution to the problem. Examples of this doubling down include the health exchange subsidies established under the Affordable Care Act (ACA), as well as its further expansion of Medicaid. As the problem of high health care costs remains, proposals have proliferated to expand government’s role still further; for example, some have proposed making Medicare available to the entire US population. Though intended to provide relief, such legislation inevitably adds to national health spending growth.

Education: The cost of higher education has become an increasingly salient policy/political issue. In an effort to broaden access to education, government hassubsidized its cost with a heavy emphasis on grants and loans to students and their families. It is now fairly well understood that these subsidies have had the predictable effect of increasing tuition costs. Students and their families regularly complain about having to choose between footing a massive education bill, or taking out student loans that create crushing levels of indebtedness. Many politicians have reacted to these trends not by reconsidering the policies that give rise to them, but by proposing dramatic further expansions of government education subsidies.

Social Security: Social Security collects payroll taxes from workers and provides monetary benefits to retirees, surviving family members and the disabled. It operates as an income transfer program rather than by building retirement savings. Because of this, whenever its benefits and tax burdens are expanded, Americans’ abilities and incentives to save for retirement are reduced. This phenomenon is most pronounced with low-income, liquidity-constrained workers who, after program expansions in the 1970s, were promised Social Security benefits equaling a very high percentage of their earnings, while at the same time were left with very little surplus earnings to put aside while working. There is general agreement among economists both that Social Security depresses other saving and that savings rates among Americans of modest incomes are undesirably low. Paradoxically, however, many advocates cite these low savings rates as a reason to further expand Social Security.

As these and countless other examples reveal, whenever government policies create or exacerbate adverse economic effects, the political focus often turns to relieving the consequent hardship rather than addressing its policy causes. The resulting relief is often short-lived because the remedial legislation has usually failed to correct the underlying problem and often has made it worse.

The ACA threatens to repeatedly be such a case. It is complex legislation with far-reaching consequences both positive and negative, offering many opportunities to double down on its more problematic policy choices. Lawmakers should resist trying to repair its problematic provisions by expanding them. Here are two examples of where the temptation is likely to be faced:

1) Fixing the ACA’s work disincentives. Experts ranging from economistCasey Mulligan to those at the Congressional Budget Office have substantiated that the ACA is driving many workers out of the work force at a time when we can least afford it. A primary culprit is the design of its health exchange subsidies, which are skewed so heavily toward the lowest-income individuals that anything they earn subjects them to a substantial loss of federal support. To see the double down instinct at work, read for example columnist Catherine Rampell, who acknowledges the work incentive problem under current federal laws, but then argues the answer lies in expanding the ACA’s various subsidies (which are themselves ample work disincentives, and expansion of which would worsen the ACA’s troubled finances.)

2) Fixing the ACA’s effects on health insurance premiums. The ACA effectuated many requirements that are causing health insurance premiums to rise. Combined with this problem are many horizontal inequities arising from the law’s complexities. For example, individuals with identical incomes receive different levels of support depending on whether they get insurance through exchanges or through their employer. As I noted in 2012, this creates enormous temptation for the federal government to provide relief from premium increases by expanding subsidies to those buying insurance outside the ACA’s exchanges. Doubling down in this manner would considerably worsen the ACA’s rising price tag.

With the ACA specifically and with economic policy in general, it is vitally important that lawmakers understand the doubling-down trap and use their awareness to avoid it. If an economic distortion is created or exacerbated by government policy, the best first response is to look squarely at the policy that has caused the problem, and consider whether it needs to be tweaked, redesigned, scaled back or even eliminated. When instead we focus only on alleviating the hardship caused by flawed government policies, too often we perpetuate those very policy flaws while allowing the hardship to re-emerge again and again.

I Don't Need This Job

Robert Graboyes — Tue, 20 Sep 2016 17:45:38 -0400

Expert Commentary

Long ago and far away, there crossed my ears the wisest words I've ever heard from any politician. They comprise a mantra, capable of bringing serenity to public officials and balance to public policy. Rare in practice, often obvious in hindsight, the words were: "I don't need this job."

In the late 1960s, as a youthful hanger-on in Virginia politics, I developed a decades-long friendship with a state senator and future federal judge, James Harry Michael Jr. In early 1978, during my fleeting time as a newspaper reporter, we spoke most days as I covered his legislative activities.

It helps to picture the man. Michael was an archetypal Virginia gentleman. Though he lost his one attempt at statewide office, people always said, "He looks like a governor." Lean and immaculately dressed, gleaming silver hair swept back from his falconine face. As often as not, his lips were clenched FDR-style around a cigarette holder.

People Aren't Thinking Straight About Bayer and Monsanto

Tyler Cowen — Wed, 21 Sep 2016 11:31:35 -0400

Expert Commentary

Bayer’s proposed purchase of Monsanto, the biggest deal of the year so far, has led to a heated public debate over economic concentration. Unfortunately, both sides are failing to identify the key issues behind the potential transaction.

The good news is that the deal announced on Sept. 14 would not increase market concentration by much. Bayer is primarily a pharmaceutical and health care company whereas Monsanto deals in crop chemicals and seeds.

Since Bayer does make biotech products and agricultural chemicals, there is overlap in the markets for cottonseed and canola seeds. But what’s the actual problem from possibly limiting competition in those markets? There are many substitutes for cotton fabrics and canola oil (how many of us could pass a blind taste test for canola versus vegetable oil?).

Critics who dislike Monsanto for its leading role in developing genetically modified organisms and agricultural chemicals shouldn’t also be citing monopoly concerns as a reason to oppose the merger -- that combination of views doesn’t make sense. Let’s say for instance that the deal raised the price of GMOs due to monopoly power. Farmers would respond by using those seeds less, and presumably that should be welcome news to GMO opponents.

It appears that some of the opposition to the deal can be traced to a dislike of the companies involved, especially Monsanto. If that becomes a consideration for U.S. and European Union regulators, it will amount to a worrisome politicization of antitrust policy. Keep in mind that the proposed acquisition needs approval in about 30 different political jurisdictions, hardly a recipe for flexible adjustment to changing marketplace conditions. The shares of Monsanto have been trading well below the offer price, a sign that investors don’t expect the proposal to survive.

Social media has given many companies popular reputations that make it harder to evaluate antitrust deals on an appropriately technocratic basis. That makes it more likely that popular companies will receive favorable treatment from governments while unpopular ones face higher hurdles. Especially in Europe, which has far more anti-GMO sentiment than the U.S., Monsanto is often vilified. Yet running antitrust law by democratic opinion is hardly a good idea, given the complexity of the economic issues involved and the paucity of information before most voters. A significant portion of the electorate, for instance, fails to accept that GMOs have been adjudicated as safe by a wide variety of established experts.

There is a silver lining to this whole mess, however, namely that it may not matter much if the deal falls apart.

What does Bayer hope to get for its $66 billion, $128-a-share offer? The company has argued that it will be able to eliminate some duplicated jobs and expenses, negotiate better deals with suppliers and invest more funds in research and development. Maybe, but the broader reality is less cheery. There is a well-known academic literature, dating to the early 1990s, showing that acquiring firms usually decline in value after tender offers, especially after the biggest deals. Mergers do not seem to make companies more valuable or efficient.

Why then do so many mergers and acquisitions happen? Well, some of them do pay off (Google buying YouTube), but also many managers engage in empire-building by increasing the size of their companies, even at the expense of the shareholders. Another possibility is what economists call “winner’s curse,” namely that the winner of an auction or contest or bidding war tends to be the person or institution most optimistic, and in fact overly optimistic, about the value at stake. Consistent with this view, Bayer’s shares are down since the merger became a media rumor on May 11.

Not Exactly Merger Mania

Bayer's daily closing stock price

The whole Bayer-Monsanto case is a classic example of how a vociferous public debate can disguise or even reverse the true issues at stake. If Bayer fails to close the deal for Monsanto, Bayer shareholders may be the biggest winners. The biggest losers from a failed deal may be its opponents, who will spend the rest of their lives in a world where misguided judgments of corporate popularity have increasing sway over laws and regulations.

That wouldn’t be good for anybody. However the deal turns out, it’s hard to see in the process of considering it a society that is making decisions rationally.

People Aren't Thinking Straight About Bayer and Monsanto

Tyler Cowen — Wed, 21 Sep 2016 11:32:38 -0400

Expert Commentary

There is a silver lining to this whole mess, however, namely that it may not matter much if the deal falls apart.

Not Exactly Merger Mania

Bayer's daily closing stock price

That wouldn’t be good for anybody. However the deal turns out, it’s hard to see in the process of considering it a society that is making decisions rationally.

Don't Believe the Good Economic News About Brexit

Tyler Cowen — Wed, 21 Sep 2016 11:34:11 -0400

Expert Commentary

With the arrival of positive manufacturing and services reports from the U.K., it seems that the British economy is doing fine. There's dwindling talk of a recession caused by the vote the leave the European Union, and British politicians are wondering if a “hard Brexit” option –rapid withdrawal from Europe without a new trade agreement – might be feasible.

The answer is no. Such views rest upon bad economic reasoning and the cost of Brexit remains high, albeit mostly invisible for the time being.

Nations can pay an economic price in many ways, whether or not it takes the form of an actual recession. The term “recession” is an artifact of macroeconomists, and formally a recession is a sequence of two or more quarters with shrinking gross national product. Most of the losses from Brexit will be felt more slowly, though they probably will be worse than a mere recession.

What is unusual about the Brexit scenario is how suddenly it came along. The night before the June 23 vote, prediction markets strongly favored Remain, so the impact of Leave showed up quickly in asset prices, most of all in the form of a currency decline. That moved most of the pain away from a daily to-and-fro debate over economic conditions, and toward a rapidly-arrived understanding of what a new long run would look like.

Start with the decline in the British pound. Against the euro, the currency of the U.K.’s main trading partner, the pound has dropped about 9 percent since right before the vote. I will suggest based on my own rough and conservative calculation that an actual Brexit, if it happens (the messy process will take years and could be abandoned or reversed), would would push sterling down a little more, resulting in a total drop of around 10 percent.

There Goes the Currency

Cost of 1 British pound in Euro

That means British assets are worth less by global standards. Let’s continue with the rough calculations. Net household wealth has been estimated at about 9 trillion pounds, and if we add in U.K. government holdings of land and other assets, let’s say this is about 12 trillion pounds.

How much has the value of that wealth gone down? It’s not right to say “10 percent,” because for purely domestic activities the lower value of the pound doesn’t matter much. If you want to buy a used copy of Dickens and go for a walk in the Lake District, that’s no more expensive than before.

Nonetheless imports are almost 30 percent of British GDP, which you can take as one possible measure of what eventually might be spent on the outputs of foreign nations. So plausibly, in the long run that 30 percent becomes 10 percent more expensive because of the weaker British currency. Thirty percent of 12 trillion is 3.6 trillion, and the 10-percent value decline from that figure is 360 billion pounds, or about 5,625 pounds per capita. a pretty steep price for the Brexit vote.

To put that 360 billion pounds in context, that is about 19 percent of 2015 British GDP, much costlier than a typical recession. The bigger loss, however, is less psychologically painful because it is spread out over many years, basically the rate at which the British will spend down their wealth. And if you view the country as a wealth-generating mechanism for the future, in fact the actual costs will be higher because hitherto-unproduced wealth will be worth less too, although those costs are more distant yet.

This isn’t any kind of formal international trade model, with a full set of measurements and moving variables. It's just a simple way of showing that the costs of Brexit can be high without a recession. It is quite possible and indeed likely that various adjustments, including a move away from foreign imports, would lower these costs. On the other side of the ledger, Brexit could help create a negative political and economic momentum that is not captured here either. Nonetheless this is a gross approximation of the first-order hit to British wealth.

In the meantime, don’t be too cheered by the positive reports. For instance, under all plausible economic projections for Brexit, including the most pessimistic, exports should jump in the short run. British production capacity is still in place, and the cheaper British pound will spur more orders from abroad. The real questions about cost are how exports will fare once (if?) Brexit actually occurs and tariffs go up, and also how imports will become more expensive over time.

The notion of a recession is actually a narrow way of thinking about economic cost, and it focuses attention too much on short-run, highly visible, and painful burdens. I worry that the spreading out of Brexit costs over time will lead the British people to feel invulnerable, to demand too much from their politicians, and to limit their ties with the EU too much and too quickly.

Let's Think Again About Dodd-Frank

Tyler Cowen — Wed, 21 Sep 2016 11:09:13 -0400

Expert Commentary

Six years after the U.S. Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act in response to the 2008 financial crisis, it is not obvious that it made the U.S. economy safer and sounder.

Take the slow recovery in the real estate market. Some of the weak housing demand is due to high student debt and slow rates of household formation, but tighter regulations on mortgage lending also have held it back.

Evidence of this comes in a recent paper by Francesco D’Acunto and Alberto G. Rossi at the University of Maryland Business School, who show that the lending regulations of Dodd-Frank redistributed credit away from the middle class toward wealthier Americans. After adjusting for economic conditions, mortgage credit to the middle class went down by 15 percent. It went up 21 percent for wealthy households. Mortgage credit also has been tight for poorer borrowers, in part through the deliberate intent of the law. It seems we shot ourselves in the foot by slowing down an already lagging economic recovery.

Looking at a broad swath of history, I see three major forces that can make financial systems safer: people being scared by recent events, solid economic growth and reduced debt in comparison to the value of equity. The financial crisis gave us the first on that list as perhaps its main “gift” (for now), but Dodd-Frank may have worsened economic growth problems.

On the plus side, we might like to think that Dodd-Frank improved the debt-equity balance by pushing banks to raise more capital. But that, too, now stands in doubt.

Last week Natasha Sarin and Lawrence H. Summers of Harvard University released a paper questioning whether Dodd-Frank has made big U.S. banks safer at all. The authors look at a variety of measures, including options prices, the ratio of market prices to book values, bank share volatility relative to overall market volatility, credit-default swap spreads and the value of preferred equity shares for banks. In every metric, it seems that the big banks are at least as risky as they were before the crisis, in part because they have lower capital values.

A critic might charge that pre-crisis price mismeasurements underestimated the risk to banks at that time, and in this sense the new realization of higher measured risks is more an acknowledgement of sad reality than a critique of Dodd-Frank. Still, when examined from other angles, the numbers on current bank safety are not reassuring. For instance, Sarin and Summers found that the prices of options implied that for major banks, the chance of a 50-percent price decline over the course of a year is 4.6 percent. Since that is almost a 1-in-20 chance, might the next crisis actually not be so far away?"

Furthermore, insurance against defaults has gotten more expensive as measured by credit-default swap spreads for the big banks. They’re now about three times higher than before the financial crisis. Does that indicate greater bank risk or a stronger belief that if there were another crash a government bailout might not come? We don’t know, but neither is reassuring. A no-bailout rule might work if banks respond by upping their capital values, but Sarin and Summers show that is exactly what has not happened.

Have Regulations Made Banks Safer?

Ratio of market value of equity to total assets at "Big 6" U.S. banks

It’s a common economic prescription that regulation should insist that banks carry high levels of capital to withstand losses in bad times. But although Dodd-Frank raised statutory capital requirements, it may have drained banks of some of their true economic capital by regulating and sometimes prohibiting valuable banking activities. The ratio of market price to book value has declined for the biggest banks, and that is one sign of falling values for true economic capital, even though banks have met the letter of law by increasing capital as the regulations specified. Sarin and Summers note that measures of bank capital, as defined by regulators rather than the market, have little predictive power for bank failures.

The core problem is this: The franchise value of banks fell after the crisis, which pushed banks closer to insolvency. As recovery proceeded, however, Dodd-Frank pushed down the value of banks once again. If your reaction to this problem is, “Regulation needs to be tougher yet,” that’s going to worsen the dilemma by bringing banks that much closer to insolvency. Maybe it was factors separate from Dodd-Frank, such as lower interest rates, that have had the biggest role in reducing the value of banks. Still, that means regulation isn’t addressing the most significant threats to bank solvency.

On top of all that, non-bank financial institutions like hedge funds, insurance companies and investment banks now have a much larger role in originating mortgages. They’re not covered by Dodd-Frank at all. So it’s not tougher regulation alone that we need, but smarter regulation.

Yet nobody really knows what a smarter version of Dodd-Frank should look like. The bill covers so many complex issues that an improvement just isn’t going to be that simple, and yes, something did need to be done after 2008. Sarin and Summers, among many others, are not looking to roll back bank regulation. Still, the weight of evidence is indicating that this one needs to be rethought.

More Competitive Tax Rates Could Curb Corporate Inversions

Veronique de Rugy — Tue, 20 Sep 2016 12:12:12 -0400

Publication

America’s corporate income tax rate is the highest of all developed nations—almost 15 percent higher than the average, as the chart below shows.

Technological advances have enabled a rapid increase in the volume of transactions crossing national borders. The increase in globalization and a dramatic decrease in the cost of moving capital have made it difficult for national governments to sustain tax rates at 1970s levels.

The ensuing tax competition between countries led to a reduction in tax rates on capital. Corporate tax rates have dropped dramatically in developed countries, from an average of around 48 percent in 1980 to 25 percent today.

In the United States, however, the tax rate has barely changed since the 1986 tax reform. At the time, the United States lowered its rate to 39 percent—below the then developed-country average of 44 percent. Since then, other OECD countries have cut their corporate tax rates aggressively, while US tax rates have stayed stubbornly flat. In fact, 31 nations have cut their rates since 2000.

Consequently, US companies have increasingly looked ease their tax burdens with corporate inversions. In such a practice, an American company acquires a foreign company and then relocates its legal headquarters out of the United States for tax purposes, in an effort to remain competitive globally.

Thankfully, there is now bipartisan support for reforming the corporate income tax. Addressing the underlying causes of inversions by reforming this tax system would not only stop inversions, it would also trim the burden on corporations, which would in turn help American companies compete better at home and abroad.

ACA Medicaid Expansion: A Lot Of Spending Of Little Value

Brian Blase — Tue, 20 Sep 2016 11:46:20 -0400

Expert Commentary

In new research published by the Mercatus Center, I analyze the causes and impact of the much higher-than-expected enrollment and spending associated with the Affordable Care Act (ACA) Medicaid expansion. Though unpredicted by Washington experts, the results were predictable. The federal government’s 100% financing of state spending on expansion enrollees has led states to boost enrollment and create high payment rates. (See this 2-minute Mercatus video for additional information on this significant development.)

In states that have expanded, enrollment and per enrollee spending are nearly 50% higher than predicted. While interest groups within the states—particularly hospitals and insurers—benefit from the higher spending being charged to federal taxpayers, substantial evidence suggests much of this new spending is wasted or provides little value for its intended recipients.

An important 2015 study showed that Medicaid expansion enrollees obtain low value through the program. Moreover, an increasing amount of spending on the program is lost to waste, fraud, and abuse. The Wall Street Journal highlighted a new government report showing that improper Medicaid spending exploded between 2013 and 2016. Improper payments amounted to about $67 billion in 2016, a $41 billion increase from the estimated $26 billion in 2013. The large increase in improper Medicaid payments has occurred while the ACA Medicaid expansion took effect, suggesting that the expansion is the main cause of the stunning rise. (Interestingly, the Department of Health and Human Services has pulled the report from the Internet.)

Perverse Incentives Produce Lots of Waste

Under the ACA, the federal government reimburses 100% of state spending on expansion enrollees—non-disabled, working-age adults with income between the state’s previous eligibility thresholds and 138% of the federal poverty level ($16,394 in 2016). After this year, the federal share gradually phases down until 2020 when it reaches 90%, where it is scheduled to remain.

Common sense suggests that a jurisdiction is more likely to increase spending on an area when the costs can largely be passed to other jurisdictions. This type of financing structure also lessens a jurisdiction’s incentive to ensure that the spending provides high value with low amounts of waste.

ACA Medicaid Explosion

Medicaid, already on an unsustainable cost-growth trajectory before the ACA, has experienced unprecedented enrollment and spending growth since 2013. Medicaid spending in 2015 was nearly $100 billion above the 2013 amount.

Medicaid expansion enrollment and spending is higher than projected even though not as many states as expected have adopted the expansion. My research shows the difference in the Congressional Budget Office’s (CBO) Medicaid expansion enrollment and spending projections over time. The first figure shows CBO’s most recent estimate of expansion enrollment along with CBO’s estimates from 2010, 2014, and 2015.

Enrollment is much higher than CBO expected when the ACA passed in 2010, and it is also significantly higher, particularly in 2017 and beyond, than estimated in both CBO’s 2014 and 2015 reports. Essentially, this means that far more people—roughly 50% more—have enrolled and are projected to enroll in Medicaid in the states that expanded than was expected by CBO previously.

In addition to higher-than-expected enrollment, spending per newly eligible Medicaid enrollee is much greater than expected. As I wrote in July when the Obama administration released the 2015 Medicaid actuarial report, government spending on newly eligible enrollees equaled about $6,366 in 2015—an amount 49% higher than its projection of $4,281 from just one year earlier.

Both higher-than-expected enrollment and spending per enrollee has resulted in the Medicaid expansion being much more costly than projected. For example, in April 2014, CBO projected that the Medicaid expansion would cost $42 billion in 2015. The actual cost was $68 billion, about 62% higher.

The second figure shows CBO’s projections of federal spending on the Medicaid expansion and how CBO’s most recent projection of the cost are substantially above previous expectations.

Using CBO’s current projections of state adoption of the expansion for its previous estimates shows that federal Medicaid spending between 2016 and 2024 is $232 billion in excess of its April 2014 estimates.

Both figures adjust CBO’s previous year estimates for its current assumptions about state adoption of the expansion. CBO now expects states to adopt the expansion at a slower rate than it has previously projected. In 2010, before the Supreme Court made Medicaid expansion optional for states, CBO expected all states would adopt the expansion. This adjustment allows for a better comparison of enrollment and spending because it holds constant CBO’s assumptions about the percentage of the newly eligible Medicaid population residing in expansionary states.

Too Little Value from Medicaid Expansion

Prior to the ACA, when states shouldered their traditional share of Medicaid spending (an average of 43%), only Vermont and the District of Columbia concluded that the tradeoffs—higher state taxes and reduced spending elsewhere—justified expanding Medicaid to the ACA expansion population. It turns out that states that did not expand Medicaid prior to the ACA almost certainly made a wise cost-benefit calculation.

A 2015 study from economists at Harvard, MIT, and Dartmouth, assessing an earlier Medicaid expansion in Oregon to a similar population to the ACA expansion, found that “[a]cross a variety of alternative specifications … Medicaid’s value to recipients is lower than the government’s costs of the program, and usually substantially below.” They estimated that the “welfare benefit to recipients from Medicaid per dollar of government spending range from about $0.2 to $0.4.” Oregon Medicaid expansion enrollees did not have significant improvements in blood pressure, cholesterol, or blood sugar relative to people who did not enroll in Medicaid.

Reform Medicaid, Stop Viewing Program as Economic Stimulus

In order to increase the value that enrollees receive from Medicaid and lessen the amount lost to waste, fraud, and abuse, it is necessary to change the central incentives underlying the federal-state partnership. In particular, the incentives of the ACA’s elevated reimbursement rate lead policymakers to view Medicaid as an engine for economic stimulus instead of as a welfare program. For example, according to the White House:

“By expanding Medicaid, States can pull billions in additional Federal funding into their economies every year, with no State contribution over the next three years and only a modest one thereafter for coverage of newly eligible people.”

A study by Deloitte Consulting and the University of Louisville projects that the ACA’s Medicaid expansion will add 40,000 jobs and $30 billion to Kentucky’s economy through 2021. The problem with this and similar studies is that they assess the decision of a state in isolation without factoring in other states’ decisions regarding expansion. For example, Kentucky is worse off when other states expand, because her citizens pay federal taxes to finance health benefits that accrue only to individuals in those other states.

Economist Robert Book points out that the American economy is worse from the ACA expansion “because taxation itself has a negative effect on economic activity, over and above the amount of tax collected.” Book estimates a reduction of $174 billion in economic activity over a 10-year period if all states expand Medicaid. He also estimated a total job loss of more than 200,000 positions from 2014 to 2017 if all states expanded Medicaid.

Sensible Medicaid reform has two central goals: reduce the unsustainable trajectory of spending and produce better outcomes for people most in need. The ACA Medicaid expansion significantly adds to the unsustainable spending trajectory of the program, likely fails to produce health outcomes or value to recipients worth the corresponding cost, and creates a large federal government bias toward nondisabled, working-age adults at the expense of traditional Medicaid enrollees. Moving Medicaid back in the right direction requires ending the ACA’s elevated federal reimbursement rate that has given rise to these problems.

Regulation under Uncertainty: Use of the Linear No-Threshold Model in Chemical and Radiation Exposure

Dima Yazji Shamoun, Edward J. Calabrese, Richard Williams, James Broughel — Wed, 21 Sep 2016 08:54:16 -0400

Publication

The catastrophic consequences of events such as the Hiroshima and Nagasaki bombings have made the harmful health effects of exposure to high doses of radiation abundantly clear. But what about exposure to low doses of radiation—for example, radiation from X-rays and CT scans? For decades, government regulators have used a risk assessment model known as the linear no-threshold (LNT) model to inform their rulemaking. This model presumes that low-dose exposure to chemicals and radiation is always harmful. In fact, according to the model, there is no threshold to toxicity—exposure to even a single molecule results in proportional and irreversible harm. This implies that setting regulatory standards to ever lower exposure levels will always appear desirable, especially when cost considerations are ignored.

Relying on updated research and incorporating lessons from economic theory, a new study for the Mercatus Center at George Mason University explains why using the LNT model as the default risk assessment model is inadequate at best and harmful to public health at worst. Regulatory agencies should consider alternative risk assessment models when investigating the risks and benefits of low-level exposure to chemicals and radiation.

BACKGROUND

The National Academy of Sciences endorsed the use of the LNT model for radiation 60 years ago. In the decades that followed, the model came to be adopted as the default risk assessment model by regulatory agencies in the United States and throughout the world. Although LNT was initially applied to radiation, it came to be used for hundreds of chemicals and pollutants as well. Today, the LNT model underlies much of the healthcare and environmental regulation that exists in the United States as agencies drive exposure to lower and lower levels.

METHODOLOGY

Several decades of risk research provide a basis for evaluating the LNT model’s validity. Evidence comes from the areas of DNA repair, preconditioning, and adaptive responses in biology:

LNT validation. It takes thousands of subjects to identify small responses and infrequent events that result from low-dose exposure to stressors. Therefore, the LNT model typically relies on studies in which a population was exposed to high doses of a toxic substance.
Hormesis. Another model, known as hormesis, has shown that while high doses of a substance such as radiation or a carcinogen may be harmful, low doses of the same substance can actually be beneficial, even decreasing the risk that a subject will develop cancer.
DNA repair, preconditioning, and adaptive responses in biology. When the LNT model was adopted for radiation, many scientists believed that a single change to DNA could cause cancer and irreversible damage. We now know that DNA mutation only happens when a large number of molecules are affected. Furthermore, several types of cells can repair mutated DNA. Organisms have even been found to adapt to low doses of environmental “stressors” like pollutants and chemicals. For instance, low doses of X-rays have been shown to initiate an anti-inflammatory response and treat pneumonia, and low-dose radiation has been found to induce a protective effect against kidney damage in diabetic patients.

KEY FINDINGS

The LNT model should not be the default model used for characterizing public health risks. Following the recommendations of the National Research Council, regulators should select the model that is best supported by the scientific evidence given the type of risk evaluated. In cases where the evidence is inconclusive, multiple models, including a threshold or a hormetic model, should be harmonized through a model uncertainty framework and incorporated into decision-making.
The LNT model causes regulators to continually overestimate risk (although by varying degrees), which upsets the careful balancing required when risk managers consider countervailing risks. Though the LNT model is supposed to be a “better safe than sorry” approach, policy decisions based on overestimating one risk could lead to worse public health outcomes owing to risk-risk and health-health tradeoffs. Overestimation of risk could also encourage regulators to set tolerance levels below any optimal hormetic level of exposure with respect to public health.

CONCLUSION

Advances in the science of risk, along with insights from tradeoff analysis in economics, demonstrate that the linear no-threshold model should be reevaluated as the default model for cancer risk assessment. Rather than intentional overestimation of risk—which may lead to unintended consequences and worse public health outcomes—the weight of the scientific evidence should be the tie-breaker when selecting models to inform policy. When science cannot definitively adjudicate between models, formal model uncertainty analysis becomes indispensable to adequate risk-based regulatory decision-making.

Want Lower Drug Prices? Start by Fixing the FDA

Marc Joffe — Mon, 19 Sep 2016 11:27:08 -0400

Expert Commentary

In the early 1960s, pictures of babies with tragic birth defects, including shortened or missing limbs, caused an international scare. The malformations were quickly linked to the drug thalidomide, an over-the-counter sedative that had recently been developed in Germany and was being used by pregnant women to alleviate morning sickness.

One result of the thalidomide crisis was the passage of a new law, the Kefauver Harris Amendment, that gave the U.S. Food and Drug Administration most of the power it now exerts in regulating drugs.

Today, we face a drug crisis of a much different sort. Recent drug pricing scandals are leading to calls for government action. But the prices causing so much outrage today are often then unintended result of that 1962 law and others that gave the FDA its current power. By limiting the number of drugs and other treatments available, the FDA reduces the options available to patients and gives pharmaceutical firms excessive pricing power.

Some have responded to soaring drug prices by calling for government price controls. That’s a risky option, as we can see in Venezuela, where residents are struggling to find daily necessities because of government price restrictions. In our country, gas lines, common during the 1970s owed their origins to price controls imposed by Richard Nixon. The problem with price controls is that the government entity imposing them lacks the information on supply and demand necessary to set them optimally. Thus, price ceilings will most likely be set either too high to have an impact or so low that they trigger a shortage.

A better alternative is to rely on competition to drive prices down. As many of us learned in our introductory economics classes, price equals the marginal cost of production in a perfectly competitive market. While this may not happen in the real world of imperfect competition, prices well above production costs represent an invitation to new firms to enter the market.

But FDA regulations restrict market entry. Often, the FDA gives only one company the right to produce a generic drug, creating an artificial monopoly not justified by the usual intellectual property arguments. In some cases, under an FDA program launched ten years ago, drugmakers have been granted exclusive rights to market medications that have been commonly used for decades or longer — typically at increased prices.

A drug whose patent has expired has already financially rewarded its inventor. Once patent protection lapses, any company that manufacture the drug safely and inexpensively should be free to do so. Yet in a number of cases, pharmaceutical companies have been able to raise prices on older drugs that no longer enjoy patent protection because of a lack of competition. Before the recent outrage over Mylan’s EpiPen price hike, Turing Pharmaceuticals raised the price of Daraprim, used to treat parasitic infections, from $13.50 to $750 per pill and Valeant Pharmaceuticals jacked up the price of Isuprel, a heart medication, by 525 percent.

The FDA has also imposed an expensive and onerous new drug approval process that is preventing patients from accessing many life-saving and life-enhancing tests and treatments. Among the examples that Richard Williams, Ariel Slonim and I report in a new Mercatus Center study are a treatment for diabetic foot ulcers, cultured stem-cell therapies for orthopedic conditions, genetic tests and anti-aging treatments.

This last category is particularly telling. Because the FDA has not considered aging to be a disease, it is not clear what criteria the agency might apply to anti-aging treatments or whether it would consider them at all. Much the same is the case with treatments that increase our physical capacity: They don’t treat a specific disease, so they lack a clear path to approval.

In other cases, FDA restrictions prevent terminally ill patients from taking new medications that are under review. Since these patients may not survive through the clinical trial period, they should have the opportunity to try new medications before it’s too late. The FDA provides exceptions to some terminal patients under its expanded use program, but qualifying for expanded use involves a lengthy bureaucratic process of its own. A more promising alternative is “right to try” laws enacted at the state level, which allow patients to take investigational new drugs without FDA approval.

The justification for the FDA’s drug approval process is that it protects patients from dangerous or ineffective drugs. But the FDA cannot guarantee safety: Approved drugs used individually or in tandem can have unexpected, and sometimes fatal, side effects. Meanwhile, overly restrictive regulations can kill patients by preventing them from accessing new medications.

Even thalidomide, the widely vilified sedative, ultimately proved to be a useful treatment. In 1964, an Israeli doctor gave thalidomide tablets to a leprosy patient suffering extreme pain. The medication not only allowed the patient to sleep, but reversed his symptoms. Eventually, thalidomide became a common treatment for leprosy and was later found to be effective against AIDS and cancer. None of these indications would have been possible had thalidomide not been approved in Germany (and elsewhere) in what proponents of the Kefauver Harris Amendment regarded as an overly lax regulatory regime.

Congress is considering legislation that would expedite FDA approvals for new drugs. But even if this legislation is enacted, securing new drug approvals will continue to be an expensive and onerous process for pharmaceutical companies, with many choosing not to undertake the effort at all. The result will be continued monopoly pricing of off-patent drugs and delays in the availability of new medical innovations.

Some more fundamental reforms would be more effective. One would be to allow multiple organizations to approve drugs, providing competition to the FDA. A private drug adjudication industry would have to be carefully structured and regulated to ensure that approving organizations do not have perverse incentives. Another option is to rely on the courts: Let pharmaceutical companies sell whichever medications they believe to be safe and effective — with the understanding that patients can win large judgments if the companies fail to produce and market their treatments responsibly.

The American people deserve access to the widest variety of affordable treatments. Rather than demanding that the government do more to achieve this goal, perhaps it is time that we ask one government agency — the FDA — to do less.

The Regulation of Taxi and Limousine Industries in Pennsylvania: Creating a Regime that Encourages Competition, Enables Innovation, and Protects Consumers

Christopher Koopman, Michael Farren, Matthew Mitchell — Mon, 19 Sep 2016 11:01:52 -0400

Publication

The Pennsylvania Public Utility Commission (the Commission) has requested comments pertaining to proposed temporary regulations governing the taxi and limousine industries.

The Project for the Study of American Capitalism at the Mercatus Center at George Mason University is dedicated to advancing knowledge about the effects of government policies that favor particular firms, industries, or occupations. Program scholars conduct careful and independent analyses that employ economic and legal scholarship to assess policy from the perspective of the public interest. Therefore, this commentary does not represent the views of any particular affected party but is designed to assist the Pennsylvania Public Utility Commission as it explores these issues.

To address changes in for-hire transportation, the Commission has been charged with promulgating temporary regulations related to 11 regulatory subject areas, which are outlined below. Before addressing these subject areas, we would like to make a single, overarching point regarding the regulation of taxi and limousine industries in Pennsylvania: Both economic theory and data suggest that competition, rather than regulation, is the most effective means to achieve the twin goals of protecting consumers and ensuring safe and reliable service.

In the attached research on taxi regulations, we provide a policy framework for evaluating why, when, and how to regulate these increasingly innovative and changing industries. It provides more detail—including a case study—on the anticompetitive effects of certain regulation in today’s for-hire transportation market. The research also suggests that taxi regulators should focus on removing barriers to entry, price controls, and mandated business practices.

As the Commission correctly recognizes, for-hire transportation has experienced substantial changes in recent years as technology, customer demand, and expectations have changed. Moreover, the competitive challenges created by ridesharing apps have put pressure on the taxi and limousine industries to adapt to changing market conditions. As a result, how the Commission regulates is more important than perhaps ever before.

We have organized the areas that the Commission has been charged to evaluate into the three broad categories discussed in our paper—barriers to entry, price controls, and mandated business practices (several of these areas can fall into multiple categories)—to offer a framework for understanding the effects of taxi regulations.

Barriers to Entry
1. “vehicles’ age and mileage, including procedures to petition for exceptions to age and mileage standards”
2. “driver requirements, including criminal history background check requirements and driving record requirements”
3. “vehicle requirements, including compliance with environmental, cleanliness, safety and customer service standards, including special safety requirements for children”
4. “requirements for continuous service and exceptions for unexpected demand and personal health and safety”
Price Controls
1. “taxi tariffs, including rate and tariff change procedures for both meters and digital platforms”
2. “limousine tariffs, including rate and tariff change procedures”
3. “procedures for cancellations, no-shows and cleaning fees”
Mandated Business Practices
1. “the use of log sheets and manifests, including the storage of information on digital or other electronic devices”
2. “metering addressing the use of a variety of technologies”
3. “marking of taxis, including advertising”
4. “the operation of lease-to-own taxi and limousine equipment”

As we discuss in our attached paper, there should be no barriers to entry at the firm, vehicle, or driver levels; there should be no price controls; and there should be no exhaustive rules governing business operations or service provision. By limiting competition, these types of regulations have yielded higher prices, lower quality, and antiquated technologies and practices. By removing these barriers, the Commission can arrest the precipitous decline of the taxi and limousine industries in the face of changing technologies and ensure that the industries’ future is characterized by continued competition and innovation.

In addition, in those instances where the Commission is deciding how and when to regulate, we propose a simple framework for principled regulatory reform:

Start with a blank slate. Regulators should constantly approach their task as if they are starting anew. If you were to design regulations from scratch today, what would they look like?
Define the nature of the problem. Begin by identifying a systemic market failure that the regulation is aiming to address. This step requires a regulator to clearly (1) explain how the normal process of market competition is not working and (2) assess the factual basis for this market failure. Simply wanting to improve a product or service is admirable but falls far short of justifying regulatory intervention that might undermine competition.
Identify alternative solutions. Once a systemic market failure has been identified, a number of alternative approaches to address it should be identified as well. Ultimately, there may be no need for regulatory intervention if other approaches resolve the problem better or more efficiently than regulation would. The list of potential alternatives should include the alternatives of deregulation and of doing nothing, as well as an open-minded assessment of how the current set of public policies might be contributing to the problem.
Define the costs of each solution. Every available option will require trade-offs of some sort. Regulators must define and, if possible, quantify the costs associated with each solution to the problem, including both the monetary and nonmonetary costs. Regulators should also explicitly recognize the potential for unintended consequences. Regulators should also include analysis of the “do nothing” solution.
Define and quantify the expected benefits of the regulation. Once the costs of each alternative are understood, it is necessary to weigh them against the benefits of each approach. Maintaining the profitability or even continued existence of established firms should not be counted as a benefit of regulation since artificial protections of industry come at the expense of consumers and taxpayers.
Measure benefits and costs. Both benefits and costs must be defined and measured in a scientific, technical way. In cases where the benefits and costs cannot be accurately quantified, the subjective nature of these trade-offs should be explicitly acknowledged.

It is important that the Commission—using this framework as a guide—analyze the impact that barriers to entry, price controls, and mandated business practices may have on (1) continued competition within the taxi and limousine industries, (2) these industries’ ability to compete with other for-hire transportation services like Uber and Lyft, and (3) the capacity of these industries to adapt and change to fit consumer preferences and economic realities. If the Commission fails to implement such analysis, it may promulgate regulations that hinder, rather than help, the taxi and limousine industries as well as consumers that have come to rely on these services.

Globalization Goes National

Tyler Cowen — Wed, 21 Sep 2016 11:33:24 -0400

Expert Commentary

Trade agreements are stalled or collapsing. Brexit won. World trade volume is slowing down. Has globalization hit a wall?

Not exactly. Globalization isn’t so much slowing as it is taking new forms. The most potent form of globalization today is occurring inside nations, notably China and India.

Globalization typically is defined as the movement of goods, services, ideas, labor and investment across national borders. But many nations lack integrated economic relations within their borders, and thus they could reap high gains from trade by opening up internally. This is happening, and its logic very much resembles that of globalization.

In China, for instance, there has been a long history of geographical fragmentation. The Chinese economy has had a tendency to cluster around megacities, such as the Beijing-Tianjen-Hebei, Shanghai-Nanjing, or Guangzhou/Shenzhen/Hong Kong clusters. In the past, a Chinese port might have had better trade connections to Korea or California than to many parts of the Chinese interior. But these days the story in China is the rise and extension of national brands. The internet is bringing the whole country’s economy together through Alibaba, WeChat, and other services that ease the online purchase, shipping, and advertising of goods at the national level.

You might decline to call this globalization because economic integration does not fit the formal definition of crossing national borders. But in the recent past, different regions of China were often economically like distinct nations. Domestic integration is lowering costs, smoothing out price differences and allowing differing cultures and linguistic areas to exchange ideas. So these improved internal trade relations have the economic features of globalization, whether or not they merit that exact name.

Many barriers to trade across regions still remain in China. For instance state-owned firms, many controlled by provincial authorities, often favor local contractors. Some of these barriers are legal and regulatory, while others stem from lack of trust, physical distance, regional rivalries and missing social networks across regions. Still, the decline in these obstacles represents one of the world’s most significant and rapid globalizations.

The more economically integrated China becomes, the more it may retreat from some kinds of global trade. If a Chinese customer can buy a smartphone or pharmaceutical from the domestic market, she may stop looking for foreign imports. That will register statistically as a decline in globalization, but actually it is an increase in efficient economic integration. Some parts of the Chinese economy were prematurely hyper-globalized at the same time domestic economic integration lagged, and now that state of affairs is being remedied.

India also is seeing its different states and regions being tied together through migration, trade, and investment. You can see this in the food: tandoori chicken and dosas have become national standards, available throughout the country, and less closely associated with their particular regions of origin. Hindi is becoming more of a national lingua franca, and the internet makes it possible to broadcast the same messages to the entire country at relatively low cost. Many these “globalizing” developments have spread expertise and capital from the more developed southern and western parts of India to the poorer eastern and landlocked regions. Labor, in turn, has migrated from the poorer states to the wealthier cities.

Significant barriers remain; for example, Indian trucks must pass through numerous checkpoints to carry goods around the country. Logistics costs remain high, at about 13 percent of gross domestic product. Fortunately, the recent move to a national goods-and-services tax will lower some of the state-level taxes on internal trade. Keep in mind that India’s most populous states would be among the larger nations in the world. So if Uttar Pradesh (over 200 million people) and Bihar (over 100 million people) have closer economic relations, it is a major advance in trade relations and resembles globalization in its economic consequences.

Indonesia, with a population of over 250 million and thousands of islands, still has a long way to go in terms of economic integration, but there is more internal trade each year. The same is true in the Philippines, Pakistan and much of Africa, among other populous regions.

To be sure, the older cross-border form of globalization is by no means dead. But a lot of today’s globalization-by-any-other-name is, counterintuitively, taking the form of nation-building. And just as we got both good and bad sides of globalization, so will this process of nation-building be a mixed bag. It may, for example, sometimes include too much nationalism. Nonetheless, these stronger and better integrated political units probably will grow in wealth and economic sophistication, and in due time that will give us more globalization yet.

Congress to Embrace Its Favorite Pastime, Kicking the Can

Veronique de Rugy — Fri, 16 Sep 2016 16:43:32 -0400

Expert Commentary

Election cycles can be unfriendly to serious policy debates on critical issues, such as Washington's ongoing addiction to excessive government spending and debt. The circus of this election cycle has been particularly devoid of serious discussion on this paramount problem. We see minimal concern that deficits are growing again, no serious solutions being offered to control the exploding federal debt and a failure to recognize the overdue need to rein in the government's major entitlement programs. Instead, members of Congress from both parties are hoping to avoid yet another last-minute tussle over the annual federal budget process so they can focus on November's high-stakes elections.

With Congress facing an Oct. 1 deadline to avoid a government shutdown, it looks as if a short-term continuing resolution to keep the government funded is likely to happen. Talking on the Senate floor this week, Senate Majority Leader Mitch McConnell announced, "I expect to move forward this week on a continuing resolution through Dec. 9 ... and include funds for Zika control and for our veterans." In other words, McConnell and company want to kick the can past the elections, which, if history is a guide, means the lame-duck Congress coming back in December to finalize a fiscally irresponsible budget deal will make fiscal matters worse, not better.

House Freedom Caucus conservatives oppose a short-term continuing resolution and are demanding the passage of a longer-term CR that would allow the next president and Congress to hash out a final budget agreement. They argue that a lame-duck Congress and president would be likelier to pass a bloated spending bill in December, when a number of policymakers will have less reason to care. One benefit of passing a CR into next year is that it could temper the awful cycle of budgeting by crisis, which has become the norm in recent years. It also would increase the chances of keeping the spending caps put in place in 2011 from being violated, which has happened in previous end-of-the-year rushes from Congress.

It's a sad state of affairs, however, if the most we can get in terms of a debate over spending is how long of a CR Congress should pass. First, a fight over a potential government shutdown in October wouldn't be so disastrous as many claim (and Republican leaders believe). Second, in the grand scheme of our budget problems, the debate over whether a short-term CR would be better than a long-term CR is somewhat meaningless. Neither would address the real budget problems we face, nor would any CR shrink the size and scope of government by actually eliminating programs. Instead, the fight will be over bottom-line numbers, which the average American understands little about anyway. On top of that, the piece of the budget Congress is fighting over (discretionary spending) is a smaller (and declining) share of overall federal spending.

Now, it's true that Republicans have shown a willingness to fight on some issues and stand firmly behind some policy positions, but these fights usually involve side issues, such as cutting off Planned Parenthood funding. Taxpayers shouldn't have to fund Planned Parenthood in particular, but it would be nice for a change to see Republicans make the case that the federal government shouldn't be funding family planning services at all. But just like the Republican-led battle to stop ACORN from receiving federal funds a few years ago, it appears that the GOP's desire to save taxpayers a few bucks has more to do with politics than it does with concerns about government spending.

Sadly, the Republican presidential candidate supports more military spending, busting the budget caps yet again and protecting the lumbering system of federal entitlement programs that threaten the prosperity of America's younger generations. That's unfortunate, but if measured in terms of what Republicans have accomplished in the past 30 years, it isn't much different from the position of the average Republican member of Congress. Granted, the average Republican will now symbolically vote for ending the Affordable Care Act, yet when push comes to shove, Republican members of Congress can't be counted on to support sensible cuts to Medicare or bringing individual choice to Social Security. So whether we get a short-term CR or we get a long-term CR, the message from congressional Republicans and the party's presidential aspirant appears to be that the only thing that matters is winning elections.