Mercatus Site Feed en Blahous, Fichtner on Medicare and Social Security Trustees Report <h5> Expert Commentary </h5> <p class="p1">The Medicare and Social Security annual report, released yesterday, shows that the insolvency date for the Social Security Disability Insurance (DI) trust fund remains unchanged at 2016. While the fundamental outlook&nbsp;remains materially unchanged for both the Social Security Old Age and Survivors Insurance (OASI) trust fund and the combined (OASDI) trust funds, another year has been lost to inaction.&nbsp;</p> <p class="p1">Mercatus Center senior research fellow&nbsp;<a href="">Charles Blahous</a>, along with fellow&nbsp;public trustee for Medicare and Social Security Robert Reischauer, warn&nbsp;not to mistake minor improvements in the projected solvency of either program for "financial viability."&nbsp;They note in the "<a href="">Message from the Public Trustees</a>":</p> <blockquote><p class="p2"><i>To ensure that [Medicare and Social Security] function adequately, policy makers will need to consult other information in [the trustees] reports beyond the mere projected duration of trust fund adequacy.</i></p></blockquote> <p class="p1">For Social Security, they caution policy makers on the hazards of further postponing "unavoidable corrective actions"&nbsp;and note that the program's current shortfall projection is much larger than that solved<i>—</i>with so much difficulty<i>—</i>by the 1983 reforms:</p> <blockquote><p class="p2"><i>...[W]hen the trust funds faced a threat of depletion in the early 1980s it was still fully possible, though difficult to be sure, to close the financing gap.</i></p><p class="p2"><i>Continued inaction…to the point where the combined trust funds near depletion would—unlike the situation in 1983—likely preclude any plausible opportunity to maintain Social Security’s historical financing structure.</i></p><p class="p2"><i>The imminent depletion of Social Security's Disability Insurance [DI] Trust Fund reserves is but the first financing crisis arising from&nbsp;program cost growth trends that have been evident for the past few decades.</i></p><p class="p2"><i>While legislative action is not yet necessary to prevent imminent reductions in Old-Age and Survivors Insurance&nbsp;[OASI] benefits…prompt action is needed to prevent Social Security’s aggregate financial shortfall from growing to an intractable size.</i></p></blockquote><p class="p1">Please click&nbsp;<a href="">here</a>&nbsp;to view the full letter, as well as the full summary of the 2015 Annual Reports of the Social Security and Medicare Boards of Trustees.</p> <p class="p1">Mercatus Center senior research fellow&nbsp;<a href="">Jason Fichtner</a>, former deputy commissioner and chief economist of the Social Security Administration, said the following in response to the report:</p> <blockquote><p class="p2"><i>I fear the slight improvement in the insolvency date for Social Security’s combined trust fund will give law makers and the public a false sense that the program’s financial problems are anything less than urgent—that reform can continue to be put off. Such a misunderstanding would lead to grave consequences for beneficiaries of both the disability and retirement programs.</i></p><p class="p2"><i>The delay in&nbsp;dealing with the needed structural and financial problems of the DI trust fund should be a wake up call for those concerned with the OASI retirement trust fund—delaying meaningful reforms only limits the options available.</i></p></blockquote> Mon, 27 Jul 2015 10:35:48 -0400 The Export-Import Bank’s Small Business Program Supports Big Companies <h5> Publication </h5> <p class="p1">Among its four principal financial products, the Export-Import Bank has provided “working capital” loans and loan guarantees that assure repayment to private lenders in the event a borrower defaults. According to bank officials, this form of subsidized financing “primarily” benefits small business. In a July 16 letter to Sen. Marco Rubio and others, Ex-Im president Fred Hochberg characterized the bank’s working capital financing as “issued to mostly small businesses.”</p> <p class="p1">But as is the case with a great many claims from Ex-Im officials, the data tell a different story.</p> <p class="p2"><a href=""><img src="" width="585" height="425" /></a></p> <p class="p1">According to the Ex-Im Bank’s definition, a small businesses can have as many as 1,500 employees and up to $21.5 million in revenue. However, the data show that as much as 40 percent of the bank’s working capital loans and loan guarantees in a single year has benefitted large corporations with impressive market capitalization, as the chart above illustrates. (The data were derived from the Ex-Im Bank’s annual reports, and do not include the “supply chain finance program.”) This finding documents yet again that bank officials vastly overstate Ex-Im assistance to small business.</p> <p class="p1">Between 2007 and 2014, large corporations—rather than small businesses—collected between 19.6 and 40.1 percent of the Ex-Im Bank’s working capital loans and guarantees. These included two transactions totaling $711.5 million for Boeing Co. (the Bank’s No. 1 beneficiary, with a market cap of $108.8 billion) and three transactions totaling $850 million for Ford Motor Co. (with a market cap of $58.5 billion). So it’s a real stretch to claim a program “primarily” benefits small business when major companies consistently collect a third or more of the benefits.</p> <p class="p1">Lenders offer lower rates when loans and loan guarantees are backed by US taxpayers—up to 90 percent of principal and interest are backed by taxpayers in the case of working capital guarantees. That gives beneficiaries of the Ex-Im program a significant competitive advantage over firms that don’t have access to these cheaper loans. Other Ex-Im programs primarily finance foreign companies and countries. But the working capital program largely finances US firms, which means their domestic counterparts are put at an increased disadvantage.</p> <p class="p1">The lapse of the Ex-Im charter on June 30 means that the bank is prohibited from awarding any new loans or loan guarantees. But the bank’s proponents—principally big corporate interests—remain committed to winning reauthorization. In hopes of doing so, they will continue to claim that small business is the bank’s “core mission.” Don’t believe it. The truth is that a substantial share of the Ex-Im Bank’s benefits go to large, politically favored corporations.</p> Fri, 24 Jul 2015 11:58:49 -0400 How to Bring Market Discipline Back to Banking <h5> Expert Commentary </h5> <p class="p1">Customers judge their banks by the quality and variety of services they provide —&nbsp;not by size. Legislators, on the other hand, frequently mistake banks' size as the most important indicator of their stability. In fact, bank stability depends not on size but on the riskiness of a bank's assets, as well as which of the bank's sources of funding bear that risk. Market discipline provides one way to control these risks.</p> <p class="p1">Asset risks and funding risks are inherently bound up with one another. Yale University professor Gary Gorton discusses how risky secrets lurking on the asset side of banks historically triggered bank runs once they became public knowledge in his book <a href=";lang=en&amp;"><i>Misunderstanding Financial Crises</i></a>. In the U.S., deposit insurance became the solution to that problem.</p> <p class="p1">But bank stability can also be maintained if banks fund a significant amount of their investments with long-term bonds and equity such as common stock. Since long-term bonds are liabilities, while equity measures the bank's net worth of total assets minus total liabilities, long-term bonds and equity would serve as the bank's capital, as Professors Anat Admati and Martin Hellwig made clear in their book <a href=""><i>The Bankers' New Clothes</i></a>. Unlike depositors, bond and equity investors are primed to take on the downside risk of a bank's assets.</p> <p class="p1">Former finance professor and Goldman Sachs partner Fischer Black <a href="">suggested</a> 40 years ago that banks should fund at least half of their investments with long-term bonds and/or equity, with the remaining funding coming from deposits. Such a rule would mean that for every dollar a bank raises from depositors, it must find bond and equity investors willing to fund at least another dollar. This puts bank risks back into investors' hands.</p> <p class="p1">The market discipline in Black's proposal arises from his recommendation that we measure a bank's equity at market value, rather than book value computed by the bank's accountants. Using market value of equity instills market discipline because it can fluctuate quite a bit, in accordance with equity investors' perceptions of the risk lurking on bank balance sheets. Unpleasant surprises mean the stock price and market value of the bank's equity fall as investors sell. This market discipline puts the corporate finance side of the bank in conflict with the bank's asset managers and loan officers, who now have to check their own risk-taking so the bank does not have to find new investors.</p> <p class="p1">Finally, since a firm's risk of default rises with its debt-equity ratio, banks that rely more on equity would be safer —&nbsp;especially since the slightest hint of those secrets will cause equity investors to sell their assets. In Black's world, size depends on the collective decisions of the bond and equity investors, as well as depositors. If anything, a bigger bank means a better bank, just as a rise in Apple's market share for phones and computers indicates that customers think Apple sells a superior product.</p> <p class="p1">But that's not the world we live in today. In this world, our <a href="">tax laws favor debt over equity</a>. Banks are backed by mispriced and even under-funded deposit insurance. U.S. banks measure capital at book value rather than market value. While bank capital requirements increased in the post-Basel Accord era, the guidelines specify so-called risk buckets, which assign <a href="">different capital charges</a> by asset type in an ad hoc manner, effectively lowering capital requirements.</p> <p class="p1">For example, the <a href="">Recourse Rule</a>, finalized on Nov. 29, 2001, lowered commercial bank capital charges from the standard 8% to 1.6% for holdings of highly-rated structured product tranches originated by investment banks. That rule change helps us to understand why some larger banks increased their holdings of the very products that went bust in 2007-09. While Basel III calls for increasing capital requirements, risk buckets still exist today and work against market discipline.</p> <p class="p1">All told, our current legal and regulatory framework invites bank failure even five years after the passage of Dodd-Frank. Legislation focused on size does not address the problem, since it does nothing to reestablish the market discipline missing in the United States since before the Great Depression. Measuring equity at market value would restore that much-needed discipline.</p> Fri, 24 Jul 2015 14:21:32 -0400 Scott Sumner Discusses the Greek Financial Crisis on GVH Live <h5> Video </h5> <iframe width="560" height="315" src="" frameborder="0" allowfullscreen></iframe> <p class="p1"><span class="s1">Earlier in July, Eurozone finance ministers agreed in principle to bailout Greece after the country implemented new economic reforms and help it recover from its massive financial crisis.&nbsp;</span></p> <p class="p2"><span style="font-size: 12px;">While the unemployment rate overall has hovered around 25% in Greece, Millennials have been hit hardest where one in two are unemployed.&nbsp;</span></p> <p class="p2"><span style="font-size: 12px;">Why should millennials care about what's going on in Greece? Scott Sumner, Director of the Program on Monetary Policy at the Mercatus Center at George Mason University, believes that Greece is just an extreme example of what happened here in the United States.</span></p><div class="field field-type-text field-field-embed-code"> <div class="field-label">Embed Code:&nbsp;</div> <div class="field-items"> <div class="field-item odd"> &lt;iframe width=&quot;560&quot; height=&quot;315&quot; src=&quot;; frameborder=&quot;0&quot; allowfullscreen&gt;&lt;/iframe&gt; </div> </div> </div> Thu, 23 Jul 2015 11:37:16 -0400 Michigan's Fiscal Health Is Not Strong <h5> Expert Commentary </h5> <p class="p1">Michigan has struggled to emerge from the Great Recession, just like so much of the rest of the nation — and it still has a great deal of work to do. The latest evidence is a new report published by the Mercatus Center at George Mason University, which shows the state’s “fiscal health” ranking is slipping.</p> <p class="p1">Until recently, assessing the fiscal health of states was difficult because of the lack of standardized data. Now, however, all states prepare audited Comprehensive Annual Financial Reports, which can be compared across states. Using this data, my Mercatus Center colleague Eileen Norcross calculated the fiscal health rankings for all 50 states. This report, “<a href="">Ranking the States by Fiscal Condition</a>,” puts Michigan in 34th place, based on its solvency in five categories.</p> <p class="p1">This project takes the extensive data in these reports, as well as little-known data like trust fund solvency measures that are often overlooked by state regulators and watchdog groups, and puts them into context so that anyone can see a snapshot of how his or her state is doing. For Michigan, the snapshot is not very flattering.</p> <p class="p1">Michigan scores better than average in only one category. We rank 22nd in budget solvency, which measures whether a state can cover its fiscal year spending out of current revenues. Fortunately, Michigan is meeting its current year fiscal commitments better than most states.</p> <p class="p1">Unfortunately, Michigan ranks lower in the categories that measure its fiscal condition in the long run. In particular, our low overall ranking is due to poor rankings in two categories: trust fund solvency and service-level solvency.</p> <p class="p1">Michigan’s lowest ranking is for trust fund solvency, which measures the size of pension liabilities and state debt as compared to state income. The biggest problem is our unfunded pension liabilities. Michigan’s audited financial statement finds that future pension liabilities are 63 percent funded, but that funding ratio is based on discounting future liabilities with unrealistic future pension fund returns.</p> <p class="p1">Norcross’ report recalculates the actual market value of these liabilities using a more appropriate risk-adjusted discount rate, revealing that Michigan’s pensions are only 32 percent funded, well below the average for other states. This severe underfunding should be especially troubling for a state with recent experience with underfunded pensions in Detroit and with General Motors.</p> <p class="p1">Michigan’s other poor ranking is for service-level solvency, or “fiscal slack.” This measures the state’s ability to raise taxes if spending commitments demand more revenues. In other words, it measures the state’s ability to increase taxes without harming the economy. The report ranks Michigan 33rd in service-level solvency, indicating that we are in a worse position than most states, due to a high ratio of current taxes to personal income.</p> <p class="p1">These fiscal rankings are based on the most recent data available (from the 2013 fiscal year), and build upon the methodology in an earlier Mercatus Center report in which Michigan fared somewhat better, with an overall ranking of 30th in the nation. So Michigan’s fiscal condition is deteriorating relative to other states.</p> <p class="p1">The report finds that nearly all states have unfunded pension liabilities that are large relative to state personal income, indicating we all need to take a closer look at unfunded pensions. Another financial crisis could mean serious trouble for states that are fiscally stable in other areas.</p> <p class="p1">Michigan policymakers are debating many important fiscal matters, including road funding and tax reform. While these issues are important, the message from Michigan’s relatively poor fiscal ranking is that we must take better stock of our long-term fiscal health before making future public policy decisions.</p> Thu, 23 Jul 2015 10:15:48 -0400 'Health-Health' Analysis in Policy Decisions <h5> Expert Commentary </h5> <p class="p1">Some recent regulatory milestones have been crossed. First, we've reached the five-year anniversary of Dodd-Frank. <a href=""><b>I recently published some charts</b></a> showing that Dodd-Frank may be the biggest law ever, if the size is measured by how much new regulatory text it spawns. No one disputes this fact: Dodd-Frank created a massive surge in regulations, and it did so in a relatively short time span.</p> <p class="p2">Second, less than a month ago, the <a href=""><b>Supreme Court ruled in <i>Michigan v. EPA</i></b></a> that the Environmental Protection Agency (EPA) — and perhaps implicitly, all regulatory agencies — must consider economic costs prior to deciding whether to promulgate a regulation. Some <a href=""><b>regulatory economists</b></a> marked this moment as the triumph of cost-benefit analysis as a method to inform and improve regulation.</p> <p class="p1">It will be interesting to see which independent agencies, like the Securities and Exchange Commission (SEC), Futures Trading Commission and the Consumer Financial Protection Bureau will begin performing some degree of analysis prior to making a rule. Currently, the independent agencies are not — and cannot be — obligated by the president to perform such a cost-benefit analysis. Statutory language, created by Congress, does require that the SEC perform some degree of analysis, but that is of a different variety from the type that every president since Reagan has required of regulatory agencies.</p> <p class="p1">Cost-benefit analyses of regulations implicitly recognize that regulations can create both winners and losers. In fact, sometimes they're the same person: An individual may be both positively and negatively affected by the same rule. If a regulation will, for example, deliver some sort of health benefit — say, reduction of asthma rates induced by ambient pollutants — while simultaneously increasing the prices of energy, those higher energy prices might negatively affect the same people who are receiving the benefits. And if you take this analysis to its logical conclusion, those higher energy prices will offset, at least to some degree, the positive health benefits created by the regulation.</p> <p class="p1">To be clear: I don't mean that the higher energy prices will make consumers worse off in some abstract way. I mean, very specifically, that the higher energy prices could have a negative effect on health, and that that at least could partially offset the positive health benefits. After all, if some essential goods and services cost more, budget-constrained consumers will necessarily have less to spend on all other goods — some of which are goods that improve health, such as gym memberships (when they're used) and new automobile tires when old treads are worn thin.</p> <p class="p1">These are examples of risk tradeoffs. Risk tradeoffs occur when policy interventions — in particular, health, environmental, safety and security regulations — which are intended to address risk in one area increase a risk elsewhere. One important form of risk tradeoff is the health-health tradeoff, which derives from the health-wealth relationship. A former Office of Information and Regulatory Affairs administrator <a href=""><b>aptly defined this tradeoff nearly two decades ago</b></a>, writing that health-health tradeoffs occur when "the diminution of one health risk simultaneously increases another health risk."</p> <p class="p1">Life expectancy and wealth are positively correlated. Several studies have demonstrated that the correlation is not mere happenstance; wealth is a causal determinant of health (although it is probably also true that health is a determinant of wealth — the causality goes in both directions). A relevant corollary to the "wealthier is healthier" paradigm is the "richer is safer" paradigm. Wealthier societies can invest in more medical research, systems designed to improve societal resilience to health-threatening emergencies such as natural disasters, and develop an infrastructure that permits individuals to choose to use their disposable income on health-improving or risk-reducing goods. The flip side of that coin is that reductions in disposable income induced by government interventions can lead to reductions in expenditures that reduce health and safety risks.</p> <p class="p1">This is a potentially useful insight that can inform policy decisions of all stripes, but especially those designed to address issues such as health, safety, and the environment. In fact, there is already a name and precedent for this type of analysis: health-health analysis. In the early 1990s, the Office of Management and Budget considered the application of health-health analysis in estimating the effects of some proposed environmental and safety regulations. Around the time, scholars pointed out that, although these regulations are intended to improve health or reduce risk, the resulting costs to employers from complying may be passed on to workers in the form of layoffs, reduced working hours or lower wages. If low income is detrimental to one's health, then the beneficial health effects of environmental regulation may be offset.</p> <p class="p1">To what degree are they offset? That is a question that could be answered with analysis — specifically, with health-health analysis. A health-health analysis would ask the question: What sort of health benefits are created by this regulation, and to what degree are they offset by the reductions in health-related expenditures that lower incomes imply?</p> <p class="p1">Regardless of specific numbers, the consideration of this sort of tradeoff — the tradeoff between regulatory costs and individuals' health — makes clear that some regulations (and the acts of Congress that induce their creation) may induce more health loss than health gains. They may not be common, but we won't really know until we start methodically considering how losses in income caused by regulatory compliance can affect the health of individuals.</p> <p class="p1">Perhaps this sort of analysis could be considered as part of the cost-benefit analyses that agencies should engage in prior to regulating. Or, even better, perhaps this tradeoff could be considered in Congress, before the creation of massive laws such as Dodd-Frank. All of those Dodd-Frank-induced regulations created costs, and the "richer is safer" paradigm indicates that those costs can have real, negative effects on health. Are they at least outweighed by the regulations' benefits?</p> Thu, 23 Jul 2015 09:57:15 -0400 Optimizing Human Health Through Linear Dose–Response Models <h5> Publication </h5> <p>This paper proposes that generic cancer risk assessments be based on the integration of the Linear Non-Threshold (LNT) and hormetic dose–responses since optimal hormetic beneficial responses are estimated to occur at the dose associated with a 10−4 risk level based on the use of a LNT model as applied to animal cancer studies. The adoption of the 10−4 risk estimate provides a theoretical and practical integration of two competing risk assessment models whose predictions cannot be validated in human population studies or with standard chronic animal bioassay data. This model-integration reveals both substantial protection of the population from cancer effects (i.e. functional utility of the LNT model) while offering the possibility of significant reductions in cancer incidence should the hormetic dose–response model predictions be correct. The dose yielding the 10−4 cancer risk therefore yields the optimized toxicologically based “regulatory sweet spot”.</p><p><a href="">Continue reading</a></p> Thu, 23 Jul 2015 09:45:04 -0400 Jason Fichtner Discussing Tax Reform on C-Span <h5> Video </h5> <p><a href=""><img height="301" width="585" src="" /></a></p> Wed, 22 Jul 2015 11:53:32 -0400 Breaking Down the Barriers: Three Ways State and Local Governments Can Improve the Lives of the Poor <h5> Publication </h5> <p class="p1">Economists are familiar with the regressive effects of government policies such as occupational licensing, minimum wage, zoning laws, and taxes, but policymakers often ignore these issues when debating inequality and poverty. Policymakers who see redistribution as a path to upward mobility should be looking more at existing government regulation and taxation and how they make upward mobility more difficult by erecting barriers between the poor and economic success.</p> <p class="p1">In a new study for the Mercatus Center at George Mason University, economist Steven Horwitz examines several government policies and concludes that regulations and taxes prevent upward mobility by burdening the poor more heavily than those who are better off. Many of these regulations and taxes are products of the private interests of current producers who stand to benefit from government encroachment into business.</p> <p class="p2">To read the study in its entirety and learn more about its author, see “<a href="">Breaking Down the Barriers: Three Ways State and Local Governments Can Improve the Lives of the Poor.</a>”</p> <p class="p4"><b>KEY FINDINGS</b></p> <p class="p1">One reason that people seeking upward mobility are prevented from advancing is the fact that starting a new business or entering a new occupation is often unnecessarily expensive and complicated by government regulations. These regulations may exist primarily to protect the people who are already in the market from new competition, rather than because of any real danger to consumers. There are a number of ways in which state and local regulation and taxation make it harder for lower-income households to achieve upward mobility.</p> <p class="p5"><b>Occupational Licensing</b></p> <p class="p1">Occupational licensure laws disproportionately burden the poor by requiring them to spend significant resources just to enter a market. These laws require prospective professionals to pass tests and spend hundreds of dollars on classes and fees, and subject them to oversight from boards and regulators largely composed of those who already compete in the market.</p> <p class="p1">Many of these regulations are also unnecessary because the jobs in question do not present any real risks to the public. Consumers can use services such as Yelp to research products or providers online before making a purchase. Instead of protecting consumers, these regulations often serve to protect those already in an industry by limiting competition. This, in turn, reduces upward mobility for the poor and raises prices for consumers.</p> <p class="p1">Uber’s experience provides a case study of many of these issues. Uber is a ride-sharing service that provides new employment opportunities for those in need as well as cheaper transportation for those of modest means. Yet Uber also eats into the profits of taxi companies, at least part of which are a result of taxi companies’ politically privileged position in the market. Unsurprisingly, traditional taxi companies are protesting the service, claiming it is illegal and dangerous because it is not subject to the same regulations as taxis.&nbsp;</p> <p class="p5"><b>Zoning and Other Small Business Regulations</b></p> <p class="p1">Zoning laws are intended to limit situations where certain types of business activities interfere with residential living. However, similarly to occupational licensure laws, zoning laws are often used by those with access to political power to reduce competition from rivals who are able to provide services at a lower cost.</p> <p class="p1">In Chicago, for example, all businesses must have a basic business license that costs $250 for two years, and violating this law can cost hundreds of dollars per day. Those attempting to renovate a building or operate a business out of their home must complete an application process controlled by the Department of Zoning. Even getting permission to change a sign may require dozens of forms.</p> <p class="p1">These types of laws deny people the opportunity to provide for their families through their hard work and personal skills. Repealing regulations that restrict business opportunities would enrich poor people and give them control over their own lives, reducing dependency on government.</p> <p class="p5"><b>Regressive Taxation</b></p> <p class="p1">Government policies can also raise the cost of living in ways that disproportionately affect lower-income households. Regulations that raise prices by imposing taxes on the sale of certain products are one type of policy that can have such regressive effects. If the goods and services being taxed are consumed disproportionately by low-income households, the resulting higher prices increase such households’ cost of living disproportionately and are thus considered regressive.</p> <p class="p1">“Sin” taxes—taxes that are intended to change behavior of consumers—are one prominent category of taxes with a disproportionate effect on the poor.</p> <ul class="ul1"> <li class="li6">Sin taxes are often imposed on alcohol and tobacco, but recent proposals to tax sugary drinks or fatty foods would also fall under this category.</li> <li class="li6">While the intent of the taxes is to discourage people from consuming the taxed goods, economic evidence suggests that these taxes do not have much of an effect on behavior. Because the poor also tend to spend a larger share of their disposable income on these goods than do the rich, sin taxes have a disproportionate effect on the spending power of poor households.</li></ul> <p class="p4"><b>CONCLUSION</b></p> <p class="p1">Many discussions of poverty and inequality are bogged down in debates about tax rates and government spending, trapped under the assumption that the cause of some people’s poverty is other people’s wealth. One key factor preventing upward mobility is state and local regulations that make it more expensive and time-consuming for the poor to open new businesses or enter a new profession. By eliminating burdensome business regulations such as occupational licensing and zoning restrictions and by refraining from imposing sin taxes, policymakers can let the poor help themselves move up and out of poverty.</p> Fri, 24 Jul 2015 11:06:57 -0400 Critiques of the Social Security Trustees Report <h5> Expert Commentary </h5> <p class="p1">As we await the release of the Social Security trustees report for 2015, it is worthwhile to consider an alternative viewpoint, from the Congressional Budget Office, about the future finances of Social Security programs. Also, we summarize a recent prominent critique by professors Konstantin Kashin, Gary King, and Samir Soneji of the financial projection methods and assumptions of the trustees and the chief actuary. As a point of reference for this discussion, we’ll first review some basic results from last year’s trustees report.&nbsp;</p> <p class="p1">Each year the trustees of the Social Security and Medicare trust funds report on the financial status of the two programs. In 2014 the trustees report projected that the combined trust funds for the old age, survivors (OASI), and disability insurance (DI) programs (collectively OASDI) would be exhausted of reserves in 2033. At that point, continuing tax revenue would be sufficient to pay 77 percent of scheduled benefits, declining to 72 percent in 2088. The DI trust fund, however, was expected to run out much sooner, by 2016. When that occurs, the government must by law reduce disability payouts to 81 percent of scheduled benefits. Because the primary source of revenue for Social Security is the payroll tax, the programs’ revenues and costs are traditionally expressed as percentages of taxable payroll — that is, the amount of worker earnings taxed to support the programs. The 75-year actuarial balance measure, which compares revenue with cost over an extended period, is also expressed as a percentage of taxable payroll. The balance (actually a deficit) represents the average amount of program changes needed (from benefit cuts, tax increases, or both) throughout the 75-year valuation period to achieve a zero balance on average. For OASI, the 75-year actuarial deficit was estimated in 2014 to be 2.55 percent of taxable payroll; for DI it was 0.33 percent; and for the entire program (OASDI) it was 2.88 percent.<sup>1&nbsp;</sup></p> <p class="p2">&nbsp;<b style="font-family: inherit; font-style: inherit;">Comparison With CBO Projections&nbsp;</b></p> <p class="p3">The Congressional Budget Office does an annual independent projection of Social Security finances, and its 2014 projections were bleaker than those of the trustees of the Social Security and Medicare trust funds. The CBO projected that, under current law, the DI trust fund would be exhausted in fiscal 2017 and the OASI trust fund would be exhausted in 2032. If future legislation shifted resources from the OASI trust fund to the DI trust fund, the combined OASDI trust funds would be exhausted in 2030. According to the CBO, the projected 75-year imbalance increased from 3.36 percent in 2013 to 3.97 percent of taxable payroll in 2014. When mea- sured as a share of taxable payroll, the CBO’s estimates of long-term tax revenues are about the same as those produced in 2013, but the projections of long-term outlays are slightly higher than in 2013. Specifically, the 75-year cost rate — a measure of outlays — is 0.6 percentage points higher. Out- lays are a larger share of taxable payroll, primarily because of lower projected interest rates; the result- ing lower discount rate increases the present value of larger amounts late in the projected stream of spending. That change accounts for about half of the 0.6 percentage point increase in the 75-year cost rate. Changes to the CBO’s 10-year baseline projections account for another 0.2 percentage points, and updated data and other estimating changes account for the remaining 0.1 percentage point. While there are many reasons that the CBO’s projections are more dire than those of the trustees, an important part of the difference is the CBO’s assumption that the significant decline in mortality experienced over past decades will continue at the same rate. Also, the CBO anticipates lower overall interest rates and somewhat higher rates of disability in the future than do the trustees.&nbsp;</p> <p class="p3">The June 2015 CBO projection presents an even worse situation for Social Security as its main scenario.<sup>2</sup> The combined trust fund exhaustion date is a year earlier — in 2029. The 75-year financial shortfall is now projected to be 4.4 percent of taxable payroll. The outlook worsened because expectations of future interest rate levels fell, and the application of a new method lowered future payroll tax revenues.&nbsp;</p> <p class="p3"><b>A Recent Academic Critique&nbsp;</b></p> <p class="p3">Recently, political scientists Kashin, King, and Soneji published two articles questioning important aspects of the projections and assumptions in the Social Security trustees reports, particularly during the post-2000 period since Steve Goss became chief actuary.<sup>3</sup> They correctly note that there has never been a systematic and comprehensive evaluation of the accuracy of the trustees’ projections. By contrast, in most private and public pension plans, a periodic analysis of actuarial gains and losses (that is, the actual financial results of the pension plan com- pared with the prior projections) attributed by source (that is, by individual assumption, such as interest rates) is typically conducted to gauge the reasonableness and accuracy of individual assumptions. The Social Security Administration (SSA) does not do this. Kashin, King, and Soneji con- ducted major elements of this empirical analysis for the period since 1980. They conclude that the SSA’s forecasting errors were approximately unbiased until 2000 but then became systematically biased afterward, and increasingly so over time. They show that most of the forecasting errors suggest that the Social Security Trust Funds are in better shape than the true outcomes have revealed them to be in. They add that the report’s uncertainty intervals are increasingly inaccurate.</p><p class="p3"><a href="">Continue reading</a></p> Mon, 20 Jul 2015 16:32:12 -0400 How to Fix Roads and Bridges without Increasing the Fuel Tax: Reform Federal Highway Policy and Use the Savings for Roads <h5> Publication </h5> <p class="p1">As gas prices have fallen throughout the country, in some states dipping below $2 per gallon, proposals to raise the tax on gasoline have become more politically palatable. Members of Congress from both sides of the aisle have proposed raising the tax to increase funding for America’s aging infrastructure. Before resorting to raising the tax burden on the American public, Congress should explore ways it can free up more money for highway projects by reducing the regulatory burden on federally funded highway projects.</p> <p class="p1">America’s roadways are primarily funded through the federal fuel tax, which, since 1993, has been set at 18.4 cents per gallon for gasoline and 24.4 cents per gallon for diesel fuel. Federal fuel tax dollars go into the Highway Trust Fund for the construction and maintenance of America’s highways. The Highway Trust Fund was created as a pay-as-you-go fund in 1956, meaning that Congress could not spend more than it collected in revenue from user fees. This is no longer the case, as Congress has recently used revenue from the general fund to avoid running a deficit in the trust fund. In 2014 the trust fund nearly dried up before Congress passed an $11 billion stopgap measure. Since 2008 policymakers have diverted an estimated $70 billion in general funds to the Highway Trust Fund.</p> <p class="p1">Before resorting to an increase in the federal gas tax, policymakers should first review the regulations for federal transportation projects. They should pare back requirements that raise the cost of building and maintaining roads while offering questionable benefits. Regulations like the Davis-Bacon Act of 1931 (Davis-Bacon) increase the cost of labor for federal infrastructure projects. Environmental regulations such as the National Environmental Policy Act of 1969 (NEPA) create complicated requirements that result in delays that drive up the costs of federal infrastructure projects. Besides causing delays, regulations force the government to hire additional federal employees to make sure that requirements are met. Key regulations that apply to federal transportation projects or affect the allocation of funds by the Federal Highway Administration (FHWA), including their estimated costs, are described below, along with alternatives for reducing the regulatory burden on highway projects.</p> <p class="p1"><b>REGULATION OF HOW STATES SPEND HIGHWAY MONEY</b></p> <p class="p1">The FHWA allocates its share of the Highway Trust Fund to 12 different program categories. Figure 1 shows the major program categories. Detailed regulations affect how money from each program category can be spent.</p><p class="p1"><a href=""><img height="667" width="585" src="" /></a></p> <p class="p3">The FHWA has developed a set of procedures that must be used on every highway project it funds. According to one estimate, complying with federal rules raises overhead costs to approximately 25 percent of project costs, while overhead costs represent only about 5 percent of project costs for locally funded roads that do not have to comply with federal rules. These costs could be reduced considerably if the federal government gave each state a grant and allowed that state to decide how to spend the money, subject to an audit process to ensure that certain minimum standards are met, such as making sure the money is spent on highways.</p> <p class="p5">Another regulation that raises highway costs is the Buy America program. This program requires that iron, steel, and manufactured products used for highways must be made in the United States unless using domestically produced materials would raise costs by more than 25 percent. Although many highway materials, such as concrete and asphalt, are not internationally traded, eliminating this requirement can still reduce some costs, particularly for bridges, which use a considerable amount of steel.</p> <p class="p1"><b>ENVIRONMENTAL REGULATIONS</b></p> <p class="p5">Federal transportation projects must comply with 65 different environmental regulations.<b> </b>These regulations are intended to reduce the impact of federal transportation projects on environmental quality, human health, historical and archeological sites, land and water use, noise, and air quality. Each regulation increases the cost of the US highway system by requiring agencies to check off the required boxes before they can move forward with a highway construction project.</p> <p class="p5">Compliance with NEPA regulations is complicated and involves a detailed documentation procedure. If planners do not know whether a project will have significant environmental effects, an environmental assessment (EA) must be prepared. If the EA finds that a project will have a significant effect on the environment, the Federal Highway Administration must create an environmental impact statement to document the expected effects and any reasonable alternative actions.</p> <p class="p5">Because they have to meet so many different requirements, many created by NEPA, major highway construction projects take as long as 10 to 15 years to complete. For example, California’s Transportation Corridor Agencies have spent the last 15 years attempting to comply with the federal environmental review process for a toll road under construction. Since NEPA became law, the average time required to complete an environmental impact statement for a federal infrastructure project has increased from two years to more than eight years.&nbsp;</p> <p class="p5">The Obama administration recognized the burdensome nature of the NEPA process when it exempted 179,000 stimulus projects from environmental review. The goal, according to secretary of energy Steven Chu, was to “get the money out and spent as quickly as possible.” While the NEPA process likely offers some benefits, these recent exemptions have not led to an environmental catastrophe and strongly suggest that federal projects can be completed in a timelier manner if some regulatory burdens are reduced.</p> <p class="p5">Since NEPA was passed, numerous environmental regulations have been passed at the federal, state, and local level, making the NEPA process redundant for many projects. Diane Katz and Craig Manson lay out several recommendations for reforming NEPA. The first is to narrow NEPA reviews to focus on issues not covered by other environmental regulations. Katz and Manson also recommend mandating time limits for agency decisions about changes that may be required in a project and limiting the number of alternatives studied. In addition, they recommend permitting agencies to incorporate existing analyses as functional equivalents rather than beginning anew when case facts are similar between projects. The authors also recommend establishing a lead agency to limit jurisdictional overlap. These reforms provide practical suggestions for streamlining the NEPA process so that taxpayer dollars can be spent more efficiently on federal highway projects.</p> <p class="p5"><b>THE HIGHWAY SAFETY IMPROVEMENT PROGRAM</b></p> <p class="p5">An additional category of regulation attempts to ensure that America’s roadways are safe for the public. The Highway Safety Improvement Program (HSIP) was expanded in 2012 as part of the Moving Ahead for Progress in the 21st Century Act. The HSIP’s goal is to provide funds to help state and local governments achieve a significant reduction in traffic fatalities and serious injuries on all public roads.</p> <p class="p5">It is not clear why the federal government needs to provide grants to the states for safety improvements to occur, since each state has an incentive to make its roads safer. By accepting these grants, states must agree to follow spending priorities set in Washington. If states spend their own money, each state could use its own criteria to decide how to improve safety instead of adhering to the HSIP’s rules, which require setting aside money for programs that are often not states’ top safety priorities.</p> <p class="p5">The Railway-Highway crossings program illustrates the impact of federal priorities on HSIP spending. The safety improvement program requires that states prioritize spending to enhance safety at railway-highway grade crossings, with $220 million set aside each year for that purpose. Without special permission from the secretary of the Department of Transportation, states cannot use that money for other purposes, even if that money could make stronger safety gains if applied to another area. Even if HSIP grants increase the total spending on safety programs, they likely lead to greater funding for lower-priority projects while higher-priority safety improvements are not funded.</p> <p class="p1"><b>DAVIS-BACON ACT AND THE COST OF LABOR</b></p> <p class="p1">The Davis-Bacon Act of 1931 set a price floor for the wages of workers on most federally funded construction projects based on the “prevailing wages” of workers in that area. In practice, this means paying higher union wages, since the level of prevailing wages is often determined based on union wage data. James Sherk found that Davis-Bacon regulations increase the cost of federally funded construction projects by 9.9 percent. Although some would argue that this represents a benefit for local workers who are employed by federal projects, in reality Davis-Bacon leads to higher costs that must be borne by US taxpayers. Federal regulations like Davis-Bacon also distort the market for labor in areas where federal projects are located. Because these kinds of regulation make labor more expensive, contractors may respond by using more capital and less labor. As a result, it might be more difficult for construction workers to find jobs. In this case Davis-Bacon would actually be hurting the very people it was intended to help.</p> <p class="p1">The Congressional Budget Office estimates that repealing Davis-Bacon would save $13 billion in discretionary spending from 2015 through 2023. This suggests that annual savings to the FHWA could be more than $700 million per year.</p> <p class="p1"><b>HOW MUCH COULD BE SAVED BY ELIMINATING CERTAIN FEDERAL REGULATIONS?</b></p> <p class="p5">Gabriel Roth presents estimates of the costs of federal regulations from several experts who have been involved in managing or overseeing highway construction or maintenance projects. Ralph Stanley, the entrepreneur who conceived and launched the Dulles Greenway, a privately constructed toll road in Northern Virginia, estimates that federal regulations increase project costs by 20 percent. Reducing these regulatory costs could save more than $8 billion per year. Roth mentions two other estimates—one that federal funding raises administrative and research costs by about 10 percent of construction costs, the other that federal regulations increase costs by 30 percent.</p> <p class="p5">In addition to 20 percent savings in the cost of administering highway projects, reducing or eliminating programs that spend trust fund money for purposes other than highway construction and maintenance could save additional costs. Up to $2.4 billion could be saved by reducing or eliminating federal spending on the HSIP. Even if the federal government gives states smaller grants but allows states more discretion to choose the most important safety improvements, the savings can be substantial while potentially improving highway safety.&nbsp;</p> <p class="p5"><b>CONCLUSIONS</b></p> <p class="p5">Recent large transfers from the general fund to the Highway Trust Fund mean that revenues from the federal fuel tax have been paying a declining share of highway costs. This is part of the impetus behind calls for an increase in the fuel tax. But the federal government could eliminate a substantial portion of the shortfall in the Highway Trust Fund through a few reforms. If the FHWA reformed highway policy by giving grants directly to the states, eliminating Davis-Bacon, and reducing programs that require trust fund money to be allocated for purposes other than highway construction or maintenance, total savings could be as much as $10 billion or more. The government could also simplify the NEPA process, eliminate other costly regulations, and devolve safety regulation to the states. If these measures are not sufficient to eliminate the deficit, other revenue sources, such as congestion tolls, or having states pay for more costs, might also be considered before resorting to an increase in the federal fuel tax.</p> Tue, 21 Jul 2015 11:00:10 -0400 Expensive Licensing Can Drive Away Entrepreneurs <h5> Expert Commentary </h5> <p class="p1">As of July 1, Virginia now licenses ridesharing companies — such as Uber and Lyft  —  as “transportation network companies.” This is part of the legislation signed into law this past February, which allows these companies to operate throughout the commonwealth.</p> <p class="p1">Among other requirements, this new law also requires ridesharing companies to pay an initial licensing fee of $100,000 and another $60,000 each year to renew their license.</p> <p class="p1">While both Uber and Lyft celebrated this as a step forward for ridesharing in Virginia, the legislation could ultimately serve to hinder continued competition and innovation in on-demand transportation beyond these large, established companies.</p> <p class="p1">In fact, the Transportation Network Company (TNC) designation — and the costly licensing requirements that go along with it  —  are an instant win for the Uber and Lyft.</p> <p class="p1">Organizing and running a successful start-up is expensive and complicated enough, and there are plenty of expenses that a new ridesharing firm would have to incur to build, test and ultimately deploy its app for popular use. These types of natural barriers to entry are inherent in any enterprise.</p> <p class="p1">***</p> <p class="p1"><b>The TNC law</b>, however, creates artificial barriers to entry by requiring additional costs that are not related to running a ridesharing company, but are simply necessary to purchase permission from the commonwealth for the privilege of operating within its borders.</p> <p class="p1">And while $100,000 might seem relatively insignificant when viewed in the context of billion-dollar companies like Uber and Lyft, the fee may ultimately make it too costly for smaller companies to enter the market and compete with the established players.</p> <p class="p1">Imagine, for example, a young entrepreneur who thinks she might have the next great ridesharing app. If she simply wants to test the app in and around Arlington or Richmond, she would first need to pay $100,000 to make sure she is operating legally. This is in addition to all the costs associated with building her app, as well as all of the other costs necessary to comply with the rest of the law.</p> <p class="p1">Under the new law now in effect, she will likely have to raise hundreds of thousands of dollars to release her app and figure out whether it is even ready for popular use. It is entirely likely that she will simply decide not to pursue her idea. At the very least, she would likely choose not to pursue it in Virginia.</p> <p class="p1">***</p> <p class="p1"><b>Outside of Virginia,</b> this issue is still far from settled, and many cities and states are still deciding how they will treat ridesharing firms. It should be an opportunity to re-evaluate their entire regulatory approach in light of how the market has changed.</p> <p class="p1">Virginia’s efforts to do so are laudable, but they fall flat. And policymakers in other jurisdiction should look elsewhere for examples of how to get it right.</p> <p class="p1">If every state were to adopt Virginia’s approach, a single ridesharing start-up could be faced with $5 million worth of costs to simply get the licenses necessary to deploy their app across the country.</p> <p class="p1">Uber and Lyft may celebrate Virginia’s TNC law, but not because it serves consumers’ needs. Instead, it will likely put the brakes on continued competition in Virginia’s ridesharing market.</p> Wed, 22 Jul 2015 14:58:19 -0400 Keeping Rail Deregulation on Track <h5> Expert Commentary </h5> <p class="p1">Thirty-five years ago, President Jimmy Carter signed the Staggers Rail Act, which largely deregulated freight railroads. Deregulation reduced rail rates for most shippers, restored railroads to profitability, and eliminated the risk that taxpayers would be on the hook for future railroad bailouts. But unfortunately, several contentious issues perpetually threaten to prompt ill-considered legislation or renewed regulation. A recent <a href=""><b>report</b></a> from a Transportation Research Board committee, on which I served, proposes targeted solutions to these problems.</p> <p class="p1">Railroad deregulation was a response to a well-known crisis. By the late 1970s, one-fifth of the nation's track was operated by bankrupt railroads. One-third of the largest railroads were losing money. The federal government spent $7 billion to bail out several Northeastern railroads and combine them to form Conrail. Railroads faced a sea of red ink in spite of the fact that rail rates were rising faster than inflation. The industry's woes even pervaded popular culture as well-known singers like <a href=""><b>Jimmy Buffet</b></a> and <a href=""><b>Arlo Guthrie</b></a> crooned matter-of-factly about dying railroads.</p> <p class="p1">Bipartisan majorities in Congress chose deregulation to prevent future bailouts. Deregulation generated large productivity increases that allowed railroads to reduce rates substantially for most shippers — and freight railroads became profitable, eliminating the danger that they would require ongoing taxpayer subsidies. Their improved ability to attract capital allowed railroads to invest in maintaining and upgrading the rail system, improving service and safety.</p> <p class="p1">In 2012, Congress appropriated funds for the Transportation Research Board (part of the National Academy of Sciences) to convene the committee I served on. The report addresses the topics that have created the most acrimonious debate since deregulation, including: maximum rate protections, mandated switching, shipper service complaints, railroad merger approvals, and annual calculations of railroad "revenue adequacy."</p> <p class="p1"><i>Maximum rate protections</i>. The Staggers Act eliminated rate regulation for the majority of rail shipments. But shippers who lack good transportation alternatives to a single railroad can have their rates reviewed by the Surface Transportation Board. Because railroads incur very high fixed costs to build and maintain the network, they will inevitably have to charge different shippers different markups beyond the marginal cost of serving each shipper. Rate regulation is supposed to ensure that these markups are not "too high" — clearly a distributional issue that requires policymakers to make subjective value judgments.</p> <p class="p1">To determine whether a rate is eligible for review, and then to judge whether it is reasonable, regulators compare the rate to a "cost" figure that pretends many costs of providing the rail network can be allocated to individual shippers or shipments, even though those costs are not caused by an individual shipper or shipment. These cost figures are inherently arbitrary.</p> <p class="p1">For example, the regulators' "cost" calculations imply that railroads lose money on about 20 percent of traffic because it is priced below the cost of providing the service. Railroads have been accused of a lot of evil things since deregulation, but intentionally losing money is not one of them! The nonsensical numbers clearly suggest that the system overestimates the cost of many shipments.</p> <p class="p1">The report recommends that regulators use the rates charged for similar shipments in markets where the railroad faces competition as a benchmark for determining whether a rate is eligible for challenge, instead of comparing rates to arbitrary and misleading cost figures. Rate challenges would go to an arbitrator instead of regulatory hearings. This change would provide a transparent mechanism for determining whether a rate can be challenged, and it would get regulators out of the business of conducting individual rate cases.</p> <p class="p1"><i>Mandated switching.</i> Shipper groups want regulators to increase their competitive options by ordering a railroad to physically transfer cars to a nearby competing railroad when the shipper is served by only one railroad, so the customer can access the other railroad's network and prices despite not being located close enough to contract with that railroad for the entire length of the shipment. Regulators have usually declined. The report recommends that shippers should be allowed to propose switching as a remedy in arbitration.</p> <p class="p1">This proposal could allow some increase in the use of mandatory switching, but only in individual cases where a clear problem has been demonstrated to exist — a shipper is "captive" to one railroad and the rate has been judged unreasonable.</p> <p class="p1"><i>Shipper service complaints</i>. Shipper complaints about the responsiveness and timeliness of rail service ebb and flow. Unfortunately, the evidence about alleged service problems is anecdotal, because regulators do not collect shipment-level data on the timeliness of service, like the on-time data collected for airline flights.</p> <p class="p1">The report recommends that regulators should collect these data to help determine whether there is a significant problem. It also recommends a top-to-bottom review of all rail industry data collection to eliminate data reporting requirements that no longer serve a useful purpose.</p> <p class="p1"><i>Railroad merger approvals.</i> The Surface Transportation Board reviews proposed railroad mergers under a vague "public interest" standard that lets regulators consider virtually any factors they believe might be relevant. The report recommends that merger-review authority should be transferred to the Department of Justice's Antitrust Division, which reviews mergers in other transportation industries solely for their effects on competition.</p> <p class="p1"><i>Railroad revenue adequacy.</i> The Surface Transportation Board annually calculates whether individual major railroads are earning revenues adequate to let them attract capital to maintain and improve the rail network. This calculation was important information to have when railroads were going bankrupt and the government wanted to see if deregulation would improve their financial health. Now, the annual calculation has turned into a highly contentious event, because regulators hinted in the past that they might regulate rates more strictly once railroads became "revenue adequate."</p> <p class="p1">The report recommends that this annual ritual should be eliminated, thus eliminating the danger that it could be used as a vehicle to impose public-utility style rate of return regulation on railroads. Instead, the Department of Transportation should undertake a broader assessment of the industry's financial health over a number of years.</p> <p class="p1">Most of these proposals would require legislative changes, and most would require some new (one-time) regulatory proceedings. All of them would help preserve the benefits of railroad deregulation by laying to rest the persistent problems that threaten to derail it.</p> Mon, 20 Jul 2015 10:30:44 -0400 The Dodd-Frank Wall Street Reform and Consumer Protection Act May Be the Biggest Law Ever <h5> Publication </h5> <p class="p1">On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law as a response to the financial crisis of 2007–08. The statute, which itself was 848 pages long, directed dozens of regulatory agencies to revise or create new regulations addressing the financial system in the United States. Those agencies responded with hundreds of new rules that will govern financial markets, on a scale that vastly exceeds any previous regulation of financial markets, and dwarfs the regulations that accompanied all other legislation enacted during the Obama administration.</p> <p class="p1">RegData, an online interactive tool, allows us to quantify the regulatory surge of Dodd-Frank in context. By analyzing the text of regulations and counting the words and phrases that signify a mandatory or prohibited activity—such as <i>shall</i>, <i>must</i>, <i>may not</i>, <i>prohibited,</i> and <i>required</i>—RegData gives a more meaningful measure of regulation than simply counting the number of new rules created or the number of pages added to the <i>Federal Register</i>. Because agencies must cite their legal authority for each regulation, RegData can match the restriction count found in regulations produced by regulatory agencies to the parts of the US Code that house the codified text from the Dodd-Frank Act.</p> <p class="p1">The first chart below shows the number of new restrictions for all laws passed during the Obama administration through 2014.</p> <p class="p2"><a href=""><img height="398" width="585" src="" /></a></p> <p class="p1">Dodd-Frank, highlighted, stands out sharply from the crowd. It is associated with more than five times as many new restrictions as any other law passed since January 2009, for a total of nearly 28,000 new restrictions. In fact, it is associated with more new restrictions than all other laws passed during the Obama administration put together, as shown in the second chart below.</p> <p class="p2"><a href=""><img src="" width="585" height="397" /></a></p> <p class="p1">Dodd-Frank not only looms large in its effect on the pace of rulemaking when compared to other recent laws, but it also stands out from historical financial regulation. The third chart shows the number of restrictions in Title 12 of the <i>Code of Federal Regulation</i>, which is titled Banks and Banking.</p> <p class="p2"><a href=""><img height="395" width="585" src="" /></a></p> <p class="p1">The passage of Dodd-Frank is marked with a dotted line. The number of regulatory restrictions in Title 12 had generally trended up since 1975 with occasional peaks and valleys, including a slight decrease in the mid-to-late 1990s. The increase in restrictions following the passage of Dodd-Frank, however, dwarfs all increases seen in previous periods. More regulatory restrictions were added to Title 12 from 2010 to 2014 than the entire title contained in 1980.</p> <p class="p1">The extraordinary output of regulation set in motion by Dodd-Frank should, five years after its enactment, give us pause. Such a large and sudden addition of regulation of the financial sector has doubtless increased the complexity of financial regulation, and it is remarkable that such vast changes were accomplished in a relatively short timeframe, for better or worse. Whether this increased government involvement in the financial sector will prevent future crises or exacerbate them remains to be seen.</p> Mon, 27 Jul 2015 09:50:45 -0400 The Sharing Economy: Policies Perspectives in the New Economy | Capitol Hill Campus <h5> Video </h5> <iframe width="560" height="315" src="" frameborder="0" allowfullscreen></iframe> <p>Christopher Koopman examines the economics and policy issues surrounding the sharing economy.</p><div class="field field-type-text field-field-embed-code"> <div class="field-label">Embed Code:&nbsp;</div> <div class="field-items"> <div class="field-item odd"> &lt;iframe width=&quot;560&quot; height=&quot;315&quot; src=&quot;; frameborder=&quot;0&quot; allowfullscreen&gt;&lt;/iframe&gt; </div> </div> </div> Thu, 16 Jul 2015 17:07:14 -0400 Two Models of Federalism Highlight Growing Divide Among States <h5> Publication </h5> <p class="p1">Increasingly, states are deeply divided on central questions of national politics and policy. The divide is often viewed as a lamentable and perhaps dangerous form of political “polarization.” But those fears are exaggerated. In fact, the divide between and among the states offers an opportunity to reform federalism on a constitutional basis.</p><p class="p1"><a href=""><img src="" width="585" height="443" /></a></p> <p class="p1">Our constitutional order forces states to compete for a mobile citizenry’s talents, assets, and affections. Exploitative state policies will <a href="">induce citizens and business to move to a more hospitable state</a>, whereas a sensible mix of policies, coupled with other state attractions, will attract citizens and their business. In this fashion, federalism disciplines state politicians. However, many of them will seek to evade that discipline. Just as firms in competitive markets often seek to restrict competition, states will attempt to form anti-competitive cartels, with the help and under the umbrella of the federal government. Federal minimum regulatory standards (for example, for wages and labor conditions) are one anticompetitive strategy. Federal fiscal transfers for programs that states would otherwise have to fund from own-source revenues (such as Medicaid) are another. Such “cooperative” cartel arrangements, of course, have become pervasive. Federal minimum standards cover a vast swath of productive activity, and federal transfer payments exceed $600 billion per year.</p> <p class="p1">Only one set of conditions can arrest cartel federalism’s march and check the state demand for federal intervention: concerted opposition by a bloc of pro-competitive states that have nothing to gain, and everything to lose, from federally sponsored cartelization. Happily, those conditions increasingly characterize the state of our federalism.</p> <p class="p1">The map below shows the states’ positions—competition versus cartel—in three highly salient policy dimensions:&nbsp;</p> <ul class="ul1"> <li class="li1"><i>Labor Regulation.</i> Competitive states have <a href="">right-to-work laws</a>; cartel states do not. (Right-to-work laws are a very good proxy for states’ overall business regulation.)</li> <li class="li1"><i>Affordable Care Act</i>. The ACA’s expansion of Medicaid and its health care exchanges embody a comprehensive cartel regime, financed through federal transfer payments and subsidies. Competitive states opposed the ACA in <a href=""><i>NFIB v. Sebelius</i></a> (2012); cartel states supported the act.</li> <li class="li1"><i>Climate Change</i>. “Green” policies entail high-cost production. States that are committed to such policies put themselves at a competitive disadvantage. Thus, their strategy is to raise their competitive (and, typically, energy-producing) rivals’ costs through federal climate change regulation. Competitive states opposed such regulation in <a href=""><i>Massachusetts v. EPA</i></a> (2007), <a href=""><i>Utility Air Regulatory Group v. EPA</i></a><i> </i>(2014), or both; cartel states supported federal regulation<i>.</i></li> </ul> <p class="p1">States supporting the competitive position in two or three criteria are shown in light and dark aqua, respectively. States supporting the cartel position are shown in orange.</p> <p class="p1">The competitive state bloc includes Alabama, Florida, Georgia, Idaho, Indiana, Kansas, Louisiana, Michigan, Nebraska, North Dakota, South Carolina, South Dakota, Texas, Utah, and Wyoming. Unsurprisingly, these are the <a href="">fastest-growing, most dynamic states</a> in the union. The cartel bloc includes California, Connecticut, Delaware, Illinois, Maryland, Massachusetts, New Mexico, New York, Oregon, and Vermont. These are consistently ranked among the least competitive among the 50 states.</p> <p class="p1">The contest between the two blocs, between competition and cartel, will increasingly shape the contours of our national politics and our economic future. To the extent that the pro-competitive states recognize their common interest and manage to act as a cohesive bloc in Congress and in the regulatory process, it may yet be possible to reestablish a more competitive, constitutional federalism.</p> <p class="p1">To read more about federalism’s current state and dynamics, see Michael S. Greve, <a href="">“Federalism and the Constitution: Competition versus Cartels”</a> (special study, Mercatus Center at George Mason University, Arlington, VA, 2015). The <a href="">paperback</a> and <a href="">Kindle ebook</a> are available from</p> Mon, 20 Jul 2015 09:55:34 -0400 Veronique de Rugy Discusses the Greek Financial Crisis on Fox Business <h5> Video </h5> <iframe src="" width="500" height="281" frameborder="0" webkitallowfullscreen mozallowfullscreen allowfullscreen></iframe> <p class="p1">Veronique de Rugy explains what’s going on in Greece for Varney &amp; Co. on Fox Business</p><div class="field field-type-text field-field-embed-code"> <div class="field-label">Embed Code:&nbsp;</div> <div class="field-items"> <div class="field-item odd"> &lt;iframe src=&quot;;byline=0&amp;portrait=0&quot; width=&quot;500&quot; height=&quot;281&quot; frameborder=&quot;0&quot; webkitallowfullscreen mozallowfullscreen allowfullscreen&gt;&lt;/iframe&gt; </div> </div> </div> Wed, 15 Jul 2015 17:40:00 -0400 Scott Sumner Discusses the Greek Financial Crisis on Al Jazeera <h5> Video </h5> <iframe src="" width="500" height="375" frameborder="0" webkitallowfullscreen mozallowfullscreen allowfullscreen></iframe> <p><a href="">7 14 15 Scott Sumner Varney Company</a> from <a href="">Media Team</a> on <a href="">Vimeo</a>.</p> <p class="p1">With Greece’s economy defaulting on its debt obligations, Scott Sumner breaks down the situation for Al Jazeera America</p><div class="field field-type-text field-field-embed-code"> <div class="field-label">Embed Code:&nbsp;</div> <div class="field-items"> <div class="field-item odd"> &lt;iframe src=&quot;; width=&quot;500&quot; height=&quot;375&quot; frameborder=&quot;0&quot; webkitallowfullscreen mozallowfullscreen allowfullscreen&gt;&lt;/iframe&gt; &lt;p&gt;&lt;a href=&quot;;&gt;7 14 15 Scott Sumner Varney Company&lt;/a&gt; from &lt;a href=&quot;;&gt;Media Team&lt;/a&gt; on &lt;a href=&quot;;&gt;Vimeo&lt;/a&gt;.&lt;/p&gt; </div> </div> </div> Wed, 15 Jul 2015 17:39:23 -0400 State "Competitors's Veto" Laws and the Right to Earn a Living: Some Paths to Federal Reform <h5> Publication </h5> <p class="p1">The certificate of public convenience and necessity (CPCN) is a type of licensing requirement devised in the nineteenth century that today applies to a wide variety of industries. Unlike other types of licensing laws, CPCN requirements do not impose educational or training criteria on persons seeking to enter an industry. Instead, CPCN laws block any new firms from operating unless they can prove to the licensing agency that new competition is in “the public interest,” or some similar criterion. Although originally devised for the railroad industry,<sup>1</sup> CPCN requirements today regulate taxicabs, limousines, moving companies, ambulances, and even hospitals and nursing schools.<sup>2</sup></p> <p class="p1">When first devised, the economic theory behind these laws was that under certain circumstances economic competition could be “inefficient” or “destructive,” and therefore government should prevent “excess entry” into the market. But CPCN requirements are now employed to restrict entry into ordinary, competitive markets that lack the characteristics of markets theoretically at risk for “excess entry.” Given that CPCN laws do not restrict, or even purport to restrict, dangerous or dishonest business practices—which are addressed by different laws—CPCNs in these ordinary markets cannot be explained as regulation in the public interest. Instead, they are better explained by public choice theory: CPCN laws are tools by which incumbent firms bar competition for self-interested reasons. These laws enrich existing businesses by restricting the supply of services, raising prices for consumers, and—worst of all— depriving would-be entrepreneurs of their constitutional right to earn a living without unreasonable government interference. In the 1980s, the federal government rolled back many CPCN requirements at the national level, with a resulting boost to economic productivity and decrease in prices.<sup>3</sup> Other countries report similar benefits from deregulation.<sup>4</sup> But CPCN laws remain on the books in many states and municipalities and they are rarely called to account for their economic consequences or for their constitutional legitimacy.&nbsp;</p> <p class="p1">Until recently it has been difficult to demonstrate the precise effects of CPCN laws because while they have been the subject of extensive theoretical literature, there has been little empirical research on the effects of these laws in ordinary competitive markets.<sup>5</sup> But in February 2014, the United States District Court for the Eastern District of Kentucky held that the state’s CPCN law for moving companies violated the Fourteenth Amendment because it deprived entrepreneurs of the right to engage in the moving trade without being in any way related to protecting public health, safety, or welfare.<sup>6</sup> The evidence uncovered during that litigation—like evidence revealed in a similar case in Missouri in 2012<sup>7</sup>—shows how CPCN laws actually operate and demonstrates the need for reform that will not only improve living standards by reducing unnecessary barriers to entry, but also better secure the vital constitutional right to economic liberty.&nbsp;</p> <p class="p1">This article begins by discussing the historical and legal framework of that right and the constitutional doctrine that today governs the states’ authority to restrict economic liberty. It then examines the effects of CPCN laws on moving companies in Kentucky and other states, and how deregulation in the 1980s helped curtail similar abuses at the federal level. The article concludes with a brief sketch of possible reforms and potential federalism-based objections to those reforms.&nbsp;</p><p class="p1"><a href="">Continue reading</a></p> Mon, 20 Jul 2015 12:55:46 -0400 Behavioral Public Choice: The Behavioral Paradox of Government Policy <h5> Publication </h5> <p class="p1">What are the economic justifications for government intervention in the economy? In a market economy, prices coordinate the activities of buyers and sellers and convey information about the strength of consumer demand for a good and the costs of supplying it. Because trade is voluntary, buyers and sellers only make exchanges when both parties benefit. Under ideal market conditions, this process leads to an efficient allocation of goods without government intervention.&nbsp;</p> <p class="p1">However, economics has long recognized instances in which markets can fail to lead to an efficient outcome. The long-standing view is that either market power or the nonexistence of markets causes market failures. Market power is present when some individuals or firms are price makers (for example, monopolists) rather than participants in a perfectly competitive environment. Such situations typically lead to the production of a less than efficient quantity of goods. The problem of market power is the purview of industrial organization economics and antitrust policy.<sup>1</sup></p> <p class="p1">The nonexistence of markets, or the failure of a robust market to arise, can occur for a number of reasons, such as asymmetric information (when one party in a transaction has information that is not available to another) and public goods (when a good is nonrival and nonexcludable in consumption and thus likely to be undersupplied by the market). Another cause for the nonexistence of markets is externalities, which occur when transactions impose costs or benefits on a third party that are not considered in the market exchange. A classic example is when a factory produces and sells a good to a consumer to their mutual advantage, but the pollution generated by the production of the good has a negative impact on the health of nearby residents. A market for the clean air in the affected area would not emerge if high transaction costs of organizing the pollution victims prevented the parties from negotiating.<sup>2</sup> The market system will fail to internalize the health costs imposed by the factory’s operations and lead to inefficiently high production and health consequences.&nbsp;</p> <p class="p1">For about a century, economists have argued that policymakers should rely, when possible, on market-based principles in designing regulations to address these market failures. For example, in the pollution cases above, a tax on production equal to the marginal external costs could lead producers to internalize the thirdparty costs stemming from production, which would result in an efficient outcome.<sup>3</sup> Similarly, establishing a property right for the clean air (for example, through a cap-and-trade program) could also cause producers to internalize the third-party costs in their market decisions, again resulting in an efficient outcome.&nbsp;</p> <p class="p2">But in recent years, economics has seen a change from the traditional approach of evaluating market failures and in the justifications for government intervention in the economy, with implications for when and how the government should intervene. Recent research has focused on identifying cognitive limitations and psychological biases that lead people to make choices that cause self-harm, thus suggesting another type of market failure that justifies government intervention.<sup>4</sup> We refer to these phenomena as behavioral failures in that they often involve departures from the individual rationality assumptions incorporated in economists’ models of consumer choice.&nbsp;</p><p class="p2"><a href="">Continue reading</a></p> Wed, 15 Jul 2015 10:56:50 -0400