Mercatus Site Feed http://mercatus.org/feeds/home/publication/why-inflation-matters en The Future of Capitalism: A Conversation Between Tyler Cowen and Luigi Zingales http://mercatus.org/events/future-capitalism-conversation-between-tyler-cowen-and-luigi-zingales contact@mercatus.org (Mercatus.org) <h5> Events </h5> <p style="font-style: normal; font-size: 12px; font-family: Helvetica, Arial, sans-serif;"><span style="font-style: normal; font-size: 12px; font-family: Helvetica, Arial, sans-serif;">This event is part of the Mercatus Center’s </span><i>Conversations with Tyler</i><span style="font-style: normal; font-size: 12px; font-family: Helvetica, Arial, sans-serif;">&nbsp;event series.</span></p><p style="font-style: normal; font-size: 12px; font-family: Helvetica, Arial, sans-serif;"><b>PARTICIPANTS:</b><br /><span style="font-size: 12px;"><a href="http://mercatus.org/tyler-cowen" style="font-size: 12px; color: #666699;">Tyler Cowen</a>, Holbert L. Harris Chair of Economics, George Mason University<br />Luigi Zingales, Robert C. McCormack Distinguished Service Professor of Entrepreneurship and Finance, University of Chicago Booth School of Business</span></p><p style="font-style: normal; font-size: 12px; font-family: Helvetica, Arial, sans-serif;"><span style="font-size: 12px;"></span><b><span style="font-size: 12px; text-decoration: underline;">**Select VIP Seating Available for Media**</span></b></p><p style="font-style: normal; font-size: 12px; font-family: Helvetica, Arial, sans-serif;">Contact Bob Ewing, director of media relations, Mercatus Center<br /><span style="font-size: 12px;">&nbsp;703.993.4960 (office), 202.494.2567 (mobile),&nbsp;</span><a href="mailto:bewing@mercatus.gmu.edu" style="font-size: 12px; color: #666699;">bewing@mercatus.gmu.edu</a></p><p>Is American capitalism in crisis?</p> <p>Luigi Zingales, one of the world’s foremost thinkers on financial development and capitalism, will join Tyler Cowen for a conversation about the policies that will shape capitalism moving into the future.</p> <p>Zingales’ work sprang from personal experience. He came to the United States from Italy with the great American Dream in mind—if you work hard, you will be successful and build a better life. But his experience led him to ask many questions about the American system of capitalism. With more businesses seeking government handouts than ever before, and capitalism coming into question since the financial crisis, his work has brought to light a shift in what we have come to know as American capitalism.</p> <p>In 2003, Zingales authored the book, <i>Saving Capitalism from the Capitalists</i>, and in 2012, he followed up with <i>A Capitalism for the People</i>—a book that <i>Forbes</i> called “unquestionably insightful and thought-provoking” and the <i>Financial Times </i>noted as a “stimulating” work. Cowen, too, acclaimed Zingales’ <i>A Capitalism for the People </i>as one of the most important books for a “popular audience of non-economists.”</p> <p>Is the free market the best way to improve general welfare? What role should politics play in a free market system? And is there hope for the future? Join us for what will certainly be a personal conversation as two economists discuss these issues and more.</p><p style="font-style: normal; font-size: 12px; font-family: Helvetica, Arial, sans-serif;"><span style="font-style: normal; font-size: 12px; font-family: Helvetica, Arial, sans-serif;">If you have any questions about this event, please contact Bethany Stalter at&nbsp;</span><a href="mailto:bstalter@mercatus.gmu.edu" style="font-style: normal; font-size: 12px; font-family: Helvetica, Arial, sans-serif; color: #666699;">bstalter@mercatus.gmu.edu</a><span style="font-style: normal; font-size: 12px; font-family: Helvetica, Arial, sans-serif;">&nbsp;or (703) 993-4889.</span></p><p style="font-style: normal; font-size: 12px; font-family: Helvetica, Arial, sans-serif;"><b>About the&nbsp;<i>Conversations with Tyler</i>&nbsp;Event Series</b><br />The Mercatus Center's&nbsp;<i>Conversations with Tyler</i>&nbsp;series brings world-class thought leaders to the Arlington campus of George Mason University to discuss how ideas, cutting-edge research, and applied economics can bring solutions to society’s most pressing problems.</p> http://mercatus.org/events/future-capitalism-conversation-between-tyler-cowen-and-luigi-zingales Wed, 27 May 2015 00:39:45 -0400 The Future of Globalization: A Conversation Between Tyler Cowen and Dani Rodrik http://mercatus.org/events/future-globalization-conversation-between-tyler-cowen-and-dani-rodrik contact@mercatus.org (Mercatus.org) <h5> Events </h5> <p style="font-style: normal; font-size: 12px; font-family: Helvetica, Arial, sans-serif;"><span style="font-style: normal; font-size: 12px; font-family: Helvetica, Arial, sans-serif;">This event is part of the Mercatus Center’s </span><i>Conversations with Tyler</i><span style="font-style: normal; font-size: 12px; font-family: Helvetica, Arial, sans-serif;">&nbsp;event series.</span></p><p style="font-style: normal; font-size: 12px; font-family: Helvetica, Arial, sans-serif;"><b>PARTICIPANTS:</b><br /><span style="font-size: 12px;"><a style="font-size: 12px; color: #666699;" href="http://mercatus.org/tyler-cowen">Tyler Cowen</a>, Holbert L. Harris Chair of Economics, George Mason University<br /><a href="https://www.sss.ias.edu/faculty/rodrik">Dani Rodrik</a>, Albert O. Hirschman Professor of Economics, Institute for Advanced Study</span></p><p style="font-style: normal; font-size: 12px; font-family: Helvetica, Arial, sans-serif;"><b><span style="font-size: 12px; text-decoration: underline;">**Select VIP Seating Available for Media**</span></b><br />Contact Bob Ewing, director of media relations, Mercatus Center<br /><span style="font-size: 12px;">&nbsp;703.993.4960 (office), 202.494.2567 (mobile),&nbsp;</span><a style="font-size: 12px; color: #666699;" href="mailto:bewing@mercatus.gmu.edu">bewing@mercatus.gmu.edu</a></p><p>Does globalization—the worldwide movement toward economic, financial, trade, and communications integration—lead to a more prosperous or a more divided and unequal world?</p> <p>Dani Rodrik and Tyler Cowen are among today’s most influential voices on international economics and economic development. Join these thought leaders for a conversation about the future of globalization and whether it will be more harmful or beneficial to the economic growth of developing countries.</p> <p>As globalization has accelerated, some countries have thrived while others have continued to struggle. While globalization has brought more job opportunities in some parts of the world, it has also brought job displacement in others. While access to important medicines has increased, the spread of communicable diseases has also increased. And while the globalization of the Internet has helped bring people out of poverty, some contend that the Internet has led to an increase in cultural conformity.</p> <p>Is globalization responsible for international inequality and cultural conflict? Or is globalization responsible for greater economic prosperity around the globe? What better contributes to the general welfare: trade restrictions or free trade? Can politics be an efficient way to maximize the general welfare?</p><p>Rodrik’s and Cowen’s conversation on this topic is sure to be one of the most important and illuminating in recent years.&nbsp;</p><p style="font-style: normal; font-size: 12px; font-family: Helvetica, Arial, sans-serif;"><span style="font-family: Helvetica, Arial, sans-serif; font-size: 12px; font-style: normal;">If you have any questions about this event, please contact Bethany Stalter at&nbsp;</span><a style="font-style: normal; font-size: 12px; font-family: Helvetica, Arial, sans-serif; color: #666699;" href="mailto:bstalter@mercatus.gmu.edu">bstalter@mercatus.gmu.edu</a><span style="font-family: Helvetica, Arial, sans-serif; font-size: 12px; font-style: normal;">&nbsp;or (703) 993-4889.</span></p><p style="font-style: normal; font-size: 12px; font-family: Helvetica, Arial, sans-serif;"><b>About the&nbsp;<i>Conversations with Tyler</i>&nbsp;Event Series</b><br />The Mercatus Center's&nbsp;<i>Conversations with Tyler</i>&nbsp;series brings world-class thought leaders to the Arlington campus of George Mason University to discuss how ideas, cutting-edge research, and applied economics can bring solutions to society’s most pressing problems.</p> http://mercatus.org/events/future-globalization-conversation-between-tyler-cowen-and-dani-rodrik Wed, 27 May 2015 00:28:50 -0400 The Sharing Economy: Issues Facing Platforms, Participants, and Regulators http://mercatus.org/publication/sharing-economy-issues-facing-platforms-participants-and-regulators <h5> Publication </h5> <p class="p1"><b>I. INTRODUCTION</b></p> <p class="p2">The Mercatus Center at George Mason University is dedicated to advancing knowledge about the impact of regulation on society. As part of its mission, the Mercatus Center conducts careful and independent analyses employing contemporary economic scholarship to assess rulemaking proposals from the perspective of the public interest. Thus, this comment before the Federal Trade Commission (FTC) does not represent the views of any particular affected party or special interest group. Rather, it is designed to assist the commission as it weighs the costs and benefits of regulation that affects the sharing economy. Our comments to the commission are derived from recent Mercatus Center working papers on these issues.<sup>2</sup>&nbsp;</p> <p class="p1"><b>II. THE IMPACT OF THE SHARING ECONOMY&nbsp;</b></p> <p class="p2">In its workshop announcement, the commission asks, <b>“How have sharing economy platforms affected competition, innovation, consumer choice, and platform participants in the sectors in which they operate? How might they in the future?”&nbsp;</b></p> <p class="p2">To understand the impact that the sharing economy has had on competition, innovation, and consumer choice, it is important to define the sharing economy. In its broadest sense, we argue that the sharing economy is any marketplace that uses the Internet to bring together distributed networks of individuals to share or exchange otherwise underutilized assets.<sup>3</sup> Thus, it encompasses all manner of goods and services shared or exchanged for both monetary and nonmonetary benefit. The sectors in which the sharing economy has seen substantial growth—and has created the most disruption—include transportation, hospitality, dining, goods, finance, and personal services.&nbsp;</p> <p class="p2">We have identified five ways the sharing economy is creating value for both consumers and producers:&nbsp;</p> <ol class="ol1"> <li class="li4">By giving people an opportunity to use other people’s cars, kitchens, apartments, and other property, it allows underutilized assets or “dead capital” to be put to more productive use.<sup>4 </sup></li> <li class="li4">By bringing together multiple buyers and sellers, it makes both the supply and demand sides of its markets more competitive and allows greater specialization. </li> <li class="li4">By lowering the cost of finding willing traders, haggling over terms, and monitoring performance, it cuts transaction costs and expands the scope of trade.<sup>5 </sup></li> <li class="li4">By aggregating the reviews of past consumers and producers and putting them at the fingertips of new market participants, it can significantly diminish the problem of asymmetric information between producers and consumers.<sup>6&nbsp;</sup></li><li class="li4"><span style="font-size: 11.9999990463257px;">By offering an end run around regulators who are captured by existing producers, it allows suppliers to create value for customers long underserved by those incumbents that have become inefficient and unresponsive because of their regulatory protections.&nbsp;</span></li></ol> <p class="p2">These factors can improve consumer welfare by offering new innovations, more choices, more service differentiation, better prices, and higher-quality services. In short, as the commission’s workshop notice puts it, “The development of the sharing economy can stimulate economic growth by encouraging entrepreneurship and promoting more productive and efficient use of assets.” Irrespective of <i>how </i>the sharing economy creates value, the revealed preferences of both consumers and producers suggest that it <i>does </i>create a substantial amount of economic value. As the commission notes, “Sharing economy transactions have increased rapidly in recent years, reaching an estimated value of $26 billion globally in 2013, and some estimates predict that the sharing economy will generate as much as $110 billion annually in the near future.”&nbsp;</p> <p class="p2">Much of this value flows to individuals who would otherwise be unable to compete in these markets. For those entering the sharing economy as producers, these new platforms create opportunities to generate income from sources that were historically available only to a select few. In the recent past, only those with access to the capital necessary to build hotels could offer rooms as short-term rentals. But firms such as Airbnb and HomeAway allow individuals to penetrate markets traditionally dominated by large incumbents such as Hilton Worldwide and Marriott International. In 2014, for example, guest stays through Airbnb totaled nearly 22 percent more than Hilton Worldwide.<sup>7</sup> And recent projections estimate that the sharing economy has the potential to increase over twentyfold in terms of revenue by 2025.<sup>8</sup>&nbsp;</p> <p class="p2">As we have noted in our previous research, the increased competition from the continued growth of the sharing economy will have direct, positive effects on consumer welfare.<sup>9</sup> First, and most obviously, these firms give consumers access to a broader range of goods and services. The ease of entry and innovation in the online world mean that new entrants in the sharing economy can provide better options and address consumer needs in ways that more traditional business models cannot. According to surveys, consumers currently take advantage of sharing economy services primarily because they offer better prices, a sense of community, greater convenience, and higher quality.<sup>10</sup> In terms of greater convenience and quality, comparisons of Yelp ratings in almost any major city where ride-sharing firms operate demonstrate overwhelming consumer satisfaction.<sup>11</sup> Moreover, a recent survey of US adults familiar with the sharing economy found that 86 percent agree it makes life more affordable, and 83 percent agree that it makes it more convenient and efficient.<sup>12</sup>&nbsp;</p> <p class="p2">The sharing economy, through its use of the Internet and information technology, also offers consumers more information about products and services, and it empowers consumers to act on that information. Many economists have worried about the existence of information asymmetries between producers and consumers, and they have argued that this asymmetry justifies many consumer protection regulations. However, the Internet largely solves this problem by providing consumers with robust search and monitoring tools so that they may find more and better choices.<sup>13</sup> These tools lower the transaction costs of searching for willing trade partners, haggling with them over terms, and monitoring them for compliance. We will discuss these tools, especially reputational mechanisms, in more detail in section VI.</p><p class="p2"><a href="http://mercatus.org/sites/default/files/Koopman-Sharing-Economy-FTC-filing.pdf">Continue reading</a></p> http://mercatus.org/publication/sharing-economy-issues-facing-platforms-participants-and-regulators Tue, 26 May 2015 12:17:55 -0400 The Rise of Executive Federalism http://mercatus.org/expert_commentary/rise-executive-federalism <h5> Expert Commentary </h5> <p class="p1">Consider, if you will, the administration's controversial initiatives on immigration, marijuana legalization, the No Child Left Behind Act (NCLB) and Common Core academic standards, climate change and "clean power," and the implementation of Medicaid expansion and the Affordable Care Act (ACA): What do they all have in common?</p> <p class="p1">First, they are <i>federalism</i> initiatives that affect states in very significant ways (for their ostensible benefit, or to their demonstrable detriment). Second, Congress has nothing to do with any of this beyond writing checks and issuing press releases. Third, the programs operate at the absolute outer bounds of statutory law, and sometimes outside those bounds.</p> <p class="p1">To an extent, that reflects the present administration's latitudinarian approach to the law. But there's a larger, structural point: Our federalism is practically guaranteed to produce chaotic government. Generalized appeals to the rule of law cannot alone fix that problem. We have to make our federalism less "cooperative."</p> <p class="p1">With very few exceptions (such as tax collection, Social Security, and Medicare), virtually all federal domestic programs are administered by state and local governments, often under one of over 1,100 federal funding statutes (such as Medicaid or NCLB). Since its inception under the New Deal, this "cooperative" federalism has proven stupendously successful in doing what it was supposed to do: expand government at all levels. However, its stability rested on peculiar conditions: private and public affluence, tolerably homogeneous states, and a functioning Congress. Those conditions have all ceased to operate to some extent. This predicament explains the rise of an <i>executive </i>and often extra-legal federalism — a federalism that is run through waivers, edicts, and transfers payments that are barely distinguishable from bribes.</p> <p class="p1"><b>The End of Affluence</b><br /> The point of jointly funded federal conditional spending programs (such as Medicaid) is to increase the demand for government, by lowering the perceived tax price of public programs both at the federal and the state level. The programs are <i>built</i> to demand ever-increasing cash infusions. When that can no longer be done or be taken for granted, the federal-state bargain comes apart. And so it has.</p> <p class="p1">The ACA promised states a <i>100 percent</i> reimbursement for expanding Medicaid. Two dozen states litigated <i>against</i> that largess, and to this day some 20 states refuse to take the money. While ideological resistance to "Obamacare" has contributed to this unprecedented display of resistance, it is also the case that states no longer trust the federal government's promises, for the excellent reason that Medicaid's expansion at the federal level is purely debt-financed. Besides, Medicaid is ruinous to state finances with or without its expansion under the ACA. It is now the single largest state expenditure, eclipsing even spending on education, and it is projected to double again within a decade or so. That will not happen, because it cannot happen.</p> <p class="p1">All the while, the states' costs of matching federal transfers with their own revenue dollars keep rising, chiefly because budget cuts would entail a loss of federal transfers. Unable to raise those revenues, states have responded by racking up debt in off-budget places — foremost, pension and other post-employment benefit accounts. Those debts exceed $5 trillion. They will not be paid, because they cannot be paid. That problem cannot be solved through yet more generous federal transfers. In short, the "cooperative" fiscal game is just about up.</p> <p class="p1"><b>(Un)willing&nbsp;States</b><br /> Cooperative federalism requires willing states — not a few willing states, but well-nigh all of them. Without that, national objectives would go unmet. Thus, federal-state bargains are structured to produce uniform cooperation through some combination of carrots and sticks, coupled with an assurance of state "flexibility" — that is to say, statutorily guaranteed authority to shirk. But that does not work under conditions of severe state heterogeneity. In fact, ideological divisions among states have become sufficiently severe to make large numbers of states defect from existing arrangements and resist any effort to extend them. The ACA is the most obvious example, but there are others — foremost, energy-producing states' resolute resistance to the administration's climate-change programs. And increasingly, the dissident states are acting and litigating as a bloc and a coalition. There again goes "cooperative" federalism.</p> <p class="p1"><b>Congress</b><br /> "Cooperative" federalism is supposed to come from Congress and federal statutes. However, practically <i>nothing</i> comes from Congress these days. The legislature is notoriously divided. It lacks the financial resources to rope recalcitrant states in new federalism bargains (witness the ACA), and it cannot even revisit the bargains embedded in old statutes (such as education programs or the Clean Air Act). Thus, to make federal programs "work" under current conditions, agencies rewrite statutes, issue expansive waivers, and negotiate deals with individual states on a one-off basis. That is how the ACA is being "administered." That is how Secretary of Health and Human Services Sylvia Burwell is trying to expand Medicaid. That is how No Child Left Behind is run. And that is how Environmental Protection Agency is trying to impose its Clean Power Plan: "stakeholder meetings" and assurances of regulatory forbearance for cooperating states; unveiled threats against holdout states. This brand of federalism knows neither statutory compliance nor even administrative regularity. It is <i>executive</i> federalism.</p> <p class="p1">The rise of executive federalism is propelled by very potent forces, and it is robust to partisan politics. Expansive administrative waivers, for example, were pioneered by the Reagan administration (under what was then Aid to Families with Dependent Children); the practice has since spread under Democratic and Republican administrations alike. For now, complaints over lawless executive behavior are the stuff of conservative agitation. However, a Republican president would be under enormous pressure to improvise federalism solutions under unworkable, obsolete, and profligate statutes. The fronts might change quite quickly, even as executive federalism continues its ascent. Further along that path lies the fate of Argentina, which practices an advanced form of executive federalism: corrupt, ruinous, unstable.</p> <p class="p1">What can be done about it? A crucial first step is to stop fighting yesterday's federalism battles over "states' rights" or "block grants" — the latter a convenient and supposedly conservative prescription that is in reality a debt-financed, full-scale waiver policy that allows the executive to exercise yet greater authority and states to spend yet more money they haven't raised. Instead, the time has come to fight today's federalism battles over executive federalism and to prepare for tomorrow's — for example, the sure-to-come question of federal bailouts for major cities and entire states. Could the Federal Reserve recapitalize the state of Illinois? A TARP for states: Would that be constitutional? If so, who would enforce the repayment obligations or promises of fiscal discipline, and how?</p> <p class="p1">Obviously (to my mind), we should resist such novel forms of federal-state "cooperation." We have to make our federalism less ruinous and more lawful. And to that end, we have to make it less cooperative, one program at a time.</p> http://mercatus.org/expert_commentary/rise-executive-federalism Tue, 26 May 2015 10:04:06 -0400 Certificate-of-Need Laws: Implications for Kentucky http://mercatus.org/publication/certificate-need-laws-implications-kentucky <h5> Publication </h5> <p class="p1">Thirty-six states and the District of Columbia currently limit entry or expansion of health care facilities through certificate-of-need (CON) programs. These programs prohibit health care providers from entering new markets or making changes to their existing capacity without first gaining the approval of state regulators. Since 1972, Kentucky has been among the states that restrict the supply of health care in this way, with 18 devices and services—including acute hospital beds, magnetic resonance imaging (MRI) and positron emission tomography (PET) scanners—requiring a certificate of need from the state before the device may be purchased or the service offered.</p> <p class="p1">CON restrictions are in addition to the standard licensing and training requirements for medical professionals, but are neither designed nor intended to ensure public health or ensure that medical professionals have the necessary qualifications to do their jobs. Instead, CON laws are specifically designed to limit the supply of health care and are traditionally justified with the claim that they reduce and control health care costs. The theory is that by restricting market entry and expansion, states will reduce overinvestment in facilities and equipment. In addition, many states—including Kentucky—justify CON programs as a way to cross-subsidize health care for the poor. Under these “charity care” requirements providers that receive a certificate of need are typically required to increase the amount of care they provide to the poor. These programs intend to create <i>quid pro quo</i> arrangements: state governments restrict competition, increasing the cost of health care for some, and in return medical providers use these contrived profits to increase the care they provide to the poor.</p> <p class="p2">However, these claimed benefits have failed to materialize as intended. Recent research by Thomas Stratmann and Jacob Russ demonstrates that there is no relationship between CON programs and increased access to health care for the poor. There are, however, serious consequences for continuing to enforce CON regulations. In particular, for Kentucky these programs could mean approximately 5,782 fewer hospital beds, between 9 and 18 fewer hospitals offering MRI services, and between 22 and 31 fewer hospitals offering computed tomography (CT) scans. For those seeking quality health care throughout Kentucky, this means less competition and fewer choices, without increased access to care for the poor.</p> <p class="p1"><b>The Rise of CON Programs</b></p> <p class="p1">CON programs were first adopted by New York in 1964 as a way to strengthen regional health planning programs. Over the following 10 years, 23 other states adopted CON programs. Many of these programs were initiated as “Section 1122” programs, which were federally funded programs providing Medicare and Medicaid reimbursement for certain approved capital expenditures. Kentucky enacted its first CON program in 1972, two years before the passage of the National Health Planning and Resources Development Act of 1974, which made certain federal funds contingent on the enactment of CON programs, and provided a strong incentive for the remaining states to implement CON programs. In the seven years following this mandate, nearly every state without a CON program took steps to adopt certificate-of-need statutes. By 1982 every state except Louisiana had some form of a CON program.</p> <p class="p1">In 1987, the federal government repealed its CON program mandate when the ineffectiveness of CON regulations as a cost-control measure became clear. Twelve states rapidly followed suit and repealed their certificate-of-need laws in the 1980s. By 2000, Indiana, North Dakota, and Pennsylvania had also repealed their CON programs. Since 2000, Wisconsin has been the only state to repeal its program.</p> <p class="p4">Kentucky remains among the 36 states, along with the District of Columbia, that continue to limit entry and expansion within their respective health care markets through certificates of need. On average, states with CON programs regulate 14 different services, devices, and procedures. Kentucky’s CON program currently regulates 18 different services, devices, and procedures, which is more than the national average. As figure 1 shows, Kentucky’s certificate-of-need program ranks the 16th most restrictive in the United States.</p> <p class="p5"><a href="http://mercatus.org/sites/default/files/Elbarasse-Certificate-of-Need-KY-MOP-chart.png"><img src="http://mercatus.org/sites/default/files/Elbarasse-Certificate-of-Need-KY-MOP-chart.png" width="585" height="420" /></a></p> <p class="p6">Note: Fourteen states either have no certificate-of-need laws or they are not in effect. In addition, Arizona is typically not counted as a certificate-of-need state, though it is included in this chart because it is the only state to regulate ground ambulance services.</p> <p class="p1"><b>Do CON Programs Control Costs and Increase the Poor’s Access to Care?</b></p> <p class="p1">Many early studies of CON programs found that these programs fail to reduce investment by hospitals. These early studies also found that the programs fail to control costs. Such findings contributed to the federal repeal of CON requirements. More recently, research into the effectiveness of remaining CON programs as a cost-control measure has been mixed. While some studies find that CON regulations may have some limited cost-control effect, others find that strict CON programs may in fact increase costs by 5 percent. The latter finding is not surprising, given that CON programs restrict competition and reduce the available supply of regulated services.</p> <p class="p1">While there is little evidence to support the claim that certificates of need are an effective cost-control measure, many states continue to justify these programs using the rationale that they increase the provision of health care for the poor. To achieve this, 14 states make some requirement for charity care within their respective CON programs. This is what economists refer to as a “cross subsidy.”</p> <p class="p1">The theory behind cross-subsidization through these programs is straightforward. By limiting the number of providers that can enter a particular practice and by limiting the expansion of incumbent providers, CON regulations effectively give a limited monopoly privilege to providers that receive approval in the form of a certificate of need. Approved providers are therefore able to charge higher prices than would be possible under truly competitive conditions. As a result, it is hoped that providers will use their enhanced profits to cover the losses from providing otherwise unprofitable, uncompensated care to the poor. Those who can pay are supposed to be charged higher prices to subsidize those who cannot.</p> <p class="p1">In reality, however, this cross-subsidization is not occurring. While early studies found some evidence of cross-subsidization among hospitals and nursing homes, the more recent academic literature does not show evidence of this cross-subsidy taking place. The most comprehensive empirical study to date, conducted by Thomas Stratmann and Jacob Russ, finds no relationship between certificates of need and the level of charity care.</p> <p class="p1"><b>The Lasting Effects of Kentucky’s CON Program</b></p> <p class="p1">While certificates of need neither control costs nor increase charity care, they continue to have lasting effects on the provision of health care services both in Kentucky and in the other states that continue to enforce them. However, these effects have largely come in the form of decreased availability of services and lower hospital capacity.</p> <p class="p1">In particular, Stratmann and Russ present several striking findings regarding the provision of health care in states implementing CON programs. First, CON programs are correlated with fewer hospital beds. Throughout the United States there are approximately 362 beds per 100,000 persons. However, in states such as Kentucky that regulate acute hospital beds through their CON programs, Stratmann and Russ find 131 fewer beds per 100,000 persons. In the case of Kentucky, with its population of approximately 4.4 million, this could mean about 5,782 fewer hospital beds throughout the state as a result of its CON program.</p> <p class="p1">Moreover, several basic health care services that are used for a variety of purposes are limited because of Kentucky’s CON program. Across the United States, an average of six hospitals per 500,000 persons offer MRI services. In states such as Kentucky that restrict hospitals’ capital expenditures (above a certain threshold) on MRI machines and other equipment, the number of hospitals that offer MRIs is reduced by between one and two per 500,000 persons. This could mean between 9 and 18 fewer hospitals offering MRI services throughout Kentucky. The state’s CON program also affects the availability of CT services. While an average of nine hospitals per 500,000 persons offer CT scans, CON regulations are associated with a 37 percent decrease in these services. For Kentucky, this could mean between 22 and 31 fewer hospitals offering CT scans.</p> <p class="p1"><b>Conclusion</b></p> <p class="p1">While CON programs were intended to limit the supply of health care services within a state, proponents claim that the limits were necessary to either control costs or increase the amount of charity care being provided. However, 40 years of evidence demonstrate that these programs do not achieve their intended outcomes, but rather decrease the supply and availability of health care services by limiting entry and competition. For policymakers in Kentucky, this situation presents an opportunity to reverse course and open the market for greater entry, more competition, and ultimately more options for those seeking care.</p> http://mercatus.org/publication/certificate-need-laws-implications-kentucky Tue, 26 May 2015 15:04:31 -0400 The Tip of the Regulatory Iceberg http://mercatus.org/expert_commentary/tip-regulatory-iceberg <h5> Expert Commentary </h5> <p class="p1">In 2014, the government issued 2,400 new regulations, including 27 major rules that may cost $80 billion or more annually. They range from forcing restaurants to list the number of calories in food — even though past experiments have revealed that such measures fail to change consumers' behavior — to reducing consumer choices and increasing energy prices by imposing tighter energy efficiency mandates on the plugs that we use to charge cellphones, laptops and even electric toothbrushes.</p> <p class="p1">These figures can be found in a new paper by Heritage Foundation scholars Diane Katz and James L. Gattuso, in which they tally the number and cost of government regulations over the past six years of President Barack Obama's administration — and show that Washington's control over the economy and Americans' lives is intensifying. According to their count, during the first six years of the Obama administration, the number of new major rules reached 184, but another 126 are in the pipeline. That's more than twice the number imposed by President George W. Bush, who wasn't shy about regulating the economy.</p> <p class="p1">Katz and Gattuso explain, "The cost of just these 184 rules is estimated by regulators to be nearly $80 billion annually." But this is only the tip of the iceberg. Official regulatory costs are vastly underestimated, among other things, because of the large number of rules for which costs have not been fully quantified.</p> <p class="p1">More importantly, it doesn't appropriately account for the businesses, innovations and economic growth that will never exist because of the incessant accumulation of regulations. Take the bureaucrats at the Federal Aviation Administration, who have effectively banned the use of commercial unmanned aerial vehicles, commonly referred to as drones. This and the myriad other questionable drone regulations proposed by the FAA have been widely criticized as arbitrary and nontransparent.</p> <p class="p2">Another example was the FAA's proposal to require drone pilots to obtain the same license as old-school airplane pilots. Thank goodness it appears that the FAA is walking away from this bad idea. But the bottom line is that the FAA has demonstrated its penchant for imposing destructive constraints on this new technology.</p> <p class="p1">Meanwhile, a more hands-off approach to regulating drones in other countries has led to new, exciting commercial uses for drones all over the world. For instance, a startup called Matternet uses drones to deliver critical supplies in places where roads can keep people isolated for months at a time. The potential is huge, considering that over 1 billion people live in such places. Germany's DHL already uses drones to deliver medicine to the small city of Juist on a small island in the North Sea. And a few weeks ago, we saw how the charity GlobalMedic was using drones to help aid relief operations in Nepal after the country was ravaged by earthquakes.</p> <p class="p1">Yet the FAA continues its destructive approach with new proposed rules to further constrain drones that are less than 55 pounds. The rules would, among other things, prohibit them from conducting deliveries and prohibit operation outside the hours of official sunrise and sunset.</p> <p class="p1">In other words, forget about sending medication or food to people in areas where ground travel is not possible, and forget about the 30-minute delivery service Amazon Prime Air — in the United States, that is.</p> <p class="p1">But that's a drop in the bucket compared with dozens of other costly rules, including 13 regulations of the financial system that saw the light of day in 2014. According to Katz and Gattuso, eight of those were the product of Dodd-Frank, an act that was supposed to reduce the risk of a major bank failure but is actually a regulatory burden that cripples small banks while further protecting even larger institutions. In other words, Katz and Gattuso conclude, the need for reform of the regulatory system has never been greater.</p> http://mercatus.org/expert_commentary/tip-regulatory-iceberg Thu, 21 May 2015 11:40:08 -0400 Export Jobs Won’t Disappear Absent Ex-Im Bank http://mercatus.org/publication/export-jobs-won-t-disappear-absent-ex-im-bank <h5> Publication </h5> <p><span style="font-size: 12px;">The charter of the US Export-Import Bank is set to expire on June 30 unless it is reauthorized by Congress. Scare tactics aside, the end of Ex-Im would not mean the loss of thousands of American jobs.</span></p><p><span style="font-size: 12px;">Economists have long understood that subsidies doled out by government credit agencies such as the Ex-Im Bank are not merely unnecessary: they can actually harm the economy. In their quest to keep the subsidies flowing, proponents of the bank are claiming that failure to reauthorize its charter would lead to massive job losses. This blatant fearmongering has succeeded in causing concern among some lawmakers. House Speaker John Boehner only made matters worse on April 30, when he asserted that “there are thousands of jobs on the line that would disappear pretty quickly if the Ex-Im Bank were to disappear.”</span></p><p><span style="font-size: 12px;">First, and fundamentally, export subsidies do not “create” or “support” jobs—they redistribute them from unsubsidized firms to subsidized ones. Second, the job numbers touted by Ex-Im Bank officials are dubious at best and have been roundly criticized as misleading by the Government Accountability Office, among others.</span></p><p><span style="font-size: 12px;">But, just as important, the biggest beneficiaries of the Ex-Im Bank know full well that their employees and those of their suppliers are perfectly safe in the event the charter is not reauthorized. That’s because Boeing, Caterpillar, General Electric, and the like all have billions of dollars of backorders that will keep their workers busy for years to come.<br /></span><br /><span style="font-size: 12px;">This week’s charts use data from the Ex-Im Bank to display the top 10 beneficiaries for all Ex-Im Bank transactions between 2007 and 2014 and the backlog information from the companies’ annual reports. As the data show, the Ex-Im Bank lives up to its nickname of “Boeing’s Bank.” The aviation giant is the biggest beneficiary by far: the bank has provided $66.7 billion in subsidized financing to foreign purchasers of Boeing planes. General Electric also ranks among the biggest beneficiaries, with $8.3 billion in export assistance, and Bechtel Corp. benefitted from $5.2 billion in support. The $2.2 billion in Ex-Im Bank financing that has benefitted Caterpillar was boosted by the $2.7 billion loan guarantee to its subsidiary, Solar Turbine Inc. (also on the top 10 list).</span></p><p><a href="http://mercatus.org/sites/default/files/Cumulative-Exim-Chart-1.png"><img src="http://mercatus.org/sites/default/files/Cumulative-Exim-Chart-1.png" width="585" height="722" /></a></p><p><a href="http://mercatus.org/sites/default/files/Exim-Cumulative-Backlog-Charts-Full.png" style="font-size: 13.5135135650635px;"><i>Click here to download full chart&nbsp;</i></a></p><p><span style="font-size: 12px;">The data also show the companies’ backlogs, as reported in their latest annual reports. Boeing Co. posted a “record” backlog of $441 billion (in 2013); General Electric Co. recorded a backlog of $261 billion (in 2014); Caterpillar Inc.’s backlog is $16.5 million (in the first quarter of 2015); and Bechtel Corp. posted a “strong” backlog of $70.5 billion (in 2014).</span></p><p><a href="http://mercatus.org/sites/default/files/Vero-Backlogs-Exim-chart-2_0.png"><img height="387" width="585" src="http://mercatus.org/sites/default/files/Vero-Backlogs-Exim-chart-2_0.png" /></a></p><p><a style="font-size: 11.9999990463257px;" href="http://mercatus.org/sites/default/files/Exim-Cumulative-Backlog-Charts-Full.png"><i>Click here to download full chart&nbsp;</i></a></p><p><span style="font-size: 12px;">The expiration of the Ex-Im Bank charter will have no effect—none—on the financing of deals that already have been approved. The bank will simply be unable to extend new loans, which would be a win for taxpayers who are ultimately on the hook for a total of $140 billion if bank reserves fail to cover defaults.</span></p><p><span style="font-size: 12px;">Absent subsidies from the Ex-Im Bank, these corporations have production backlogs that will take years to fulfill—some with Ex-Im Bank financing in place and others without. This means that shutting down the Ex-Im Bank will not result in job losses—except, perhaps, among the ranks of lobbyists who are trying to scare members of Congress into maintaining this fount of corporate welfare.</span></p> http://mercatus.org/publication/export-jobs-won-t-disappear-absent-ex-im-bank Tue, 26 May 2015 17:52:09 -0400 How the Internet, the Sharing Economy, and Reputational Feedback Mechanisms Solve the “Lemons Problem” http://mercatus.org/publication/how-internet-sharing-economy-and-reputational-feedback-mechanisms-solve-lemons-problem <h5> Publication </h5> <p class="p1">Government regulation is often explained as consumer protection in cases involving asymmetric information: situations when sellers know more about their product than potential buyers do. Proponents of consumer protection regulations argue that if buyers know sellers can withhold key information about a product, meaning buyers are unable to distinguish between good and bad purchases ahead of time, lower-quality products will dominate the market because consumers will be less willing to make purchases. The fear is that without regulations buyers and sellers will not make beneficial exchanges.&nbsp;</p> <p class="p1">A new study conducted for the Mercatus Center at George Mason University shows that reputational feedback mechanisms—buyers’ and sellers’ abilities to rate one another and share information about their interactions—can help correct these information deficiencies better than traditional regulatory approaches. The Internet and the expansion of the “sharing economy” have provided a solution to the information deficiency problem where regulations have been ineffective. The continued use of outdated regulatory approaches may in fact prove detrimental to consumers.&nbsp;</p> <p class="p2">To read the study in its entirety and learn more about its authors, scholars Adam Thierer, Christopher Koopman, Anne Hobson, and Chris Kuiper, see “<a href="http://mercatus.org/sites/default/files/Thierer-Lemons-Problem.pdf">How the Internet, the Sharing Economy, and Reputational Feedback Mechanisms Solve the ‘Lemons Problem</a>.’”&nbsp;</p> <p class="p1"><b>THE LEMONS PROBLEM&nbsp;</b></p> <p class="p1">George A. Akerlof, winner of the Nobel Prize for his contributions to the economics of information, argued in a 1970 paper that information asymmetries between producers and consumers can lead to the “lemons problem,” in which lower-quality products crowd out higher-quality products because of uncertainty among consumers.&nbsp;</p> <p class="p1">For example, in the used car market, used cars tend to command a low market price because potential buyers are unable to tell whether a used car is good or bad.&nbsp;</p> <ul class="ul1"> <li class="li3">Since buyers are unable to differentiate higher-quality cars (plums) from lower-quality cars (lemons), they are unwilling to pay above the average value. As a result, higher-valued used cars exit the market, the average price declines, and buyers’ willingness to pay decreases as well. </li> <li><span style="font-size: 12px;">Eventually, as the process continues, only a few lemons remain on the market.&nbsp;</span></li></ul><p><span style="font-size: 12px;"><b>CAN GOVERNMENT REGULATION SOLVE THE LEMONS PROBLEM?&nbsp;<br /></b></span><br /><span style="font-size: 12px;">While he admitted that private solutions may emerge to solve information deficiencies, Akerlof argued that government regulation was still necessary. This argument, however, ignores two key facts:</span></p> <ul class="ul1"> <li class="li3"><i></i><i>Regulations can harm consumers. </i>Regulatory measures such as food labels or product safety warnings may seem like fail-safe mechanisms to correct information-based uncertainty. Regulations, however, are not as effective as market solutions, and may harm consumers instead of helping them. Regulators can be influenced by regulated industries, erecting bar- riers to keep out new competition, stifling innovation, and imposing higher prices and reduced quality on consumers. By making it more difficult to do business, regulations can have the unintended consequence of entrenching already-established businesses while closing the market to entrepreneurs with innovative ideas. </li> <li class="li3"><i></i><i>Private institutions can use trust and reputation to help consumers. </i>Akerlof is correct that human nature can produce suboptimal behavior in the absence of effective and efficient mechanisms to induce cooperation among buyers and sellers. But his model fails to account for the use of mechanisms such as trust and reputation, as well as social norms, to boost information-sharing. Centuries of history demonstrate that trust and reputation have been crucial to productive exchanges between consumers and producers.&nbsp;</li></ul><p><span style="font-size: 12px;"><b> KEY FINDINGS: INTERNET AND INFORMATION SYSTEMS SOLVE THE LEMONS PROBLEM&nbsp;<br /><br /></b></span><span style="font-size: 12px;">Modern reputational feedback mechanisms are becoming more sophisticated and, in the process, are offering consumers a louder voice in transactions and improving trust between strangers. These reputational tools can help create more effective, and largely self-regulating, markets that provide more information to more individuals at a lower cost than ever before. The Internet has opened the door to developing and dispersing better information by a variety of methods:</span></p><ul class="ul1"> <li class="li3"><i></i><i>Professional online reviews and ratings. </i>With the advent of the Internet, professional product and service reviews, ratings, and awards, such as those provided by <i>Consumer Reports</i>, shifted to publication online. Specialty product review sites, such as <i>CNET</i>, which reviews technology products, also arose to take advantage of widespread information access via the Internet. </li> <li class="li3"><i></i><i>Average consumer ratings and reviews of businesses. </i>Consumers began to use the Internet for their own reviewing and rating. For example, the significant use of Amazon’s customer feedback and rating system eventually evolved into separate service review platforms such as Yelp, which allow customers to review and rate local businesses.&nbsp;</li> <li><i style="font-family: inherit; font-weight: inherit;">Two-way or interactive review and rating. </i><span style="font-size: 12px;">When two parties that don’t know each other inter- act, such as when an individual sells an item on eBay, a two-way review system is very useful. Both buyers and sellers can leave feedback after every transaction, meaning each gradually develops a feedback profile—a reputational score—based on comments and ratings.&nbsp;</span></li></ul> <p class="p1">The sharing economy, which includes any marketplace that uses the Internet to bring people together to share or exchange otherwise underutilized assets, has taken these reputational feed- back mechanisms to a new level. Sharing economy platforms rely primarily on two types of online reputational feedback mechanisms:&nbsp;</p> <ul class="ul1"> <li class="li3"><i></i><i>Centralized mechanisms. </i>Centralized mechanisms build trust in a third-party platform but not necessarily between the two transacting parties. Examples of such platforms include eBay, which offers a money-back guarantee and a payment clearing system to facilitate transactions, and Airbnb—a website that allows people to rent short-term lodging from private individuals—which tracks all elements of every transaction to develop a trust score for each reservation, flagging suspicious transactions for further review by the company. </li> <li class="li3"><i></i><i>Peer-to-peer mechanisms. </i>Even though a third-party platform may exist, peer-to-peer mechanisms build trust between the two transacting parties directly. In addition to ratings and reviews, technological developments such as blogs, social networking, smartphones, and mobile apps, including geolocation, have made it even easier for all people to have a voice in e-commerce. As a result, companies have become more responsive to consumer demand, establishing their own presence on social media and quickly responding to com- plaints. There are many examples of peer-to-peer interactions in the sharing economy today, where buyers and sellers can rate and review each other and share that information with other parties.&nbsp;</li></ul><p><span style="font-size: 12px;"><b> CONCLUSION <br /></b></span><br style="font-family: inherit; font-style: inherit; font-weight: inherit;" /><span style="font-size: 12px;"> Reputational feedback mechanisms are crucial to the success of the sharing economy. When consumers are empowered to rate providers, they get more and better-quality services than regulation ever offered them. Policymakers should reevaluate traditional regulations aimed at addressing information deficiencies, as the sharing economy has done what regulation could not: improve consumer welfare while encouraging innovation and economic growth.&nbsp;</span></p><ul class="ul1"> </ul> http://mercatus.org/publication/how-internet-sharing-economy-and-reputational-feedback-mechanisms-solve-lemons-problem Tue, 26 May 2015 16:41:20 -0400 Federalism and the Constitution: Competition versus Cartels http://mercatus.org/publication/federalism-and-constitution-competition-versus-cartels <h5> Publication </h5> <p class="p1"><i>This book is available for purchase at <a href="http://www.amazon.com/Federalism-Constitution-Competition-versus-Cartels/dp/1942951078/">Amazon.com</a> and <a href="https://www.createspace.com/5512602">CreateSpace.com</a>.</i></p><p class="p1"><span style="font-size: 11.9999990463257px;">Federalism questions are at the heart of today’s intensely controversial policy debates. From education to disaster relief to health care and insurance, federal arrangements are failing, and the federal structure itself has reemerged as a subject of public debate. Bloated bureaucracies defy reform and governments pursue ever-deeper debt. These debilities loom especially large in times of economic stress and widespread public disaffection.</span></p> <p class="p2">This essay examines the sources and the scope of federalism’s failures. It provides a trenchant, constitutionally grounded analysis with profound implications for a range of current policy debates. Federalism’s restoration requires not merely rebalancing the federal-state relationship through decentralization. Rather, we must restore the structure of federalism to <i>competitive</i> federalism—which encourages states to compete to enhance freedom and economic growth—in response to the rise of <i>cartel</i> federalism, which squashes competition between the states and makes states dependent on the federal government.</p><p class="p1"><b>About the Author</b></p> <p class="p1">Michael S. Greve is a professor of law at George Mason University. Previously, he served as John G. Searle Scholar at the American Enterprise Institute, where he specialized in constitutional law, courts, and business regulation. Before joining AEI, Greve was founder and co-director of the Center for Individual Rights, a public interest law firm specializing in constitutional litigation.</p> <p class="p1">Greve has served as an adjunct or visiting professor at a number of universities, including Cornell, Johns Hopkins University, and Boston College. He was awarded a PhD and an MA in government by Cornell University. Greve also earned a diploma from the University of Hamburg in Germany.</p> <p class="p1">A prolific writer, Greve is the author of numerous scholarly articles and nine books, including <i>The Upside-Down Constitution</i> (Harvard University Press, 2012), <i>Real Federalism: Why It Matters, How It Could Happen </i>(AEI, 2000), and <i>The Demise of Environmentalism in American Law</i> (AEI, 1996). He blogs at libertylawsite.org.</p> http://mercatus.org/publication/federalism-and-constitution-competition-versus-cartels Tue, 26 May 2015 16:06:16 -0400 The Time Has Come for the End of the Ex-Im Bank http://mercatus.org/expert_commentary/time-has-come-end-ex-im-bank <h5> Expert Commentary </h5> <p class="p1">Have you noticed that everyone in the top tier ofRepublican presidential candidates — Ted Cruz,Marco Rubio, Rand Paul, Scott Walker and Jeb Bush— has gone on record against a small New Deal-era crony agency called the Export-Import Bank of the United States?</p> <p class="p1">In fact, Rubio recently came out with all guns blazing against the bank, arguing that it picks winners and losers and shouldn’t be reauthorized once its charter expires June 30. Maybe their commitment to end Ex-Im cronyism and corruption will rub off on their colleagues.</p> <p class="p1">There are several reasons one might want to let the bank expire. First, the Ex-Im Bank exemplifies the kind of government program that benefits well-connected companies by harming unseen victims. Over 60 percent of its activities benefit 10 large and politically connected companies — including Boeing, General Electric and Caterpillar.</p> <p class="p1">Ex-Im credit subsidies have the economic effect of redistributing jobs and prosperity away from the 98 percent of unsubsidized firms, employers and workers and toward large corporations that do not lack for financing opportunities. This means that the bank does not actually increase the net dollar amount of exports.</p> <p class="p1">Ex-Im also imposes damage on 189 American industries by directly subsidizing foreign competition. Consider the list of Ex-Im’s top 10 foreign beneficiaries. We find several rich, state-owned airlines. Emirates, the top airline recipient of Ex-Im largesse, is a state-owned company that uses Ex-Im savings to compete with unsubsidized U.S. airlines. Examples of Ex-Im transactions such as these contributed to an estimated loss of 7,500 U.S. airline jobs.</p> <p class="p1">But it gets worse. The top beneficiary of Ex-Im abroad is Pemex, a Mexican government-owned oil and gas company with a market capitalization of $490 million. Even as the Obama administration does everything it can to penalize U.S. energy companies, Ex-Im extended $7 billion in cheap credit over seven years to the conglomerate. In addition, Pemex has admitted to serious corruption issues, including a contracting process co-opted for the benefit of organized crime.</p> <p class="p1">Questionable Ex-Im deals are quite common. For instance, a Wall Street Journal article recently highlighted two deals totaling over $1 billion for the benefit of the state-owned Russian bank Vnesheconombank. VEB maintains a close business relationship with a major Russian arms dealer responsible for more than 80 percent of Russia’s weapon exports, including shipments to Bashar Assad’s regime in Syria. Because money is fungible, lowering VEB’s financing costs to buy Boeing planes can easily facilitate sales of more weapons to hostile regimes.</p> <p class="p1">Russian companies can no longer receive new Ex-Im subsidies, though taxpayers are still on the hook for $1.5 billion in pre-existing Russian loans. But in order to know whether the bank is actually complying with such country limitations, we need to be able to check its data.</p> <p class="p1">Good luck with that. One-third of Ex-Im foreign transactions are labeled “unknown” in the dataset. This makes it impossible to know whether Ex-Im loans are going to companies in restricted countries committing human rights abuses, such as North Korea and Iran.</p> <p class="p1">It’s hard to trust Ex-Im’s data. The bank has a history of intentionally mislabeling data to artificially increase “small business” numbers. Last year, the bank pulled down the public dataset that I and other watchdogs used to analyze its transactions. The new dataset, posted months later, was scrubbed of critical fields at Chairman Fred Hochberg’s direction. Now we cannot even tell whether companies such as VEB are purchasing bank-financed Boeing jets.</p> <p class="p1">Ex-Im cronyism is unjust and inefficient. But rampant Ex-Im Bank corruption and secrecy are absolutely unacceptable. It remains to be seen whether Republicans in the House of Representatives will use their largest majority since 1928 to stop the bank once and for all as their presidential candidates would like.</p> http://mercatus.org/expert_commentary/time-has-come-end-ex-im-bank Wed, 20 May 2015 09:56:56 -0400 Five Years Later, Dodd-Frank Is Looking Pretty Haggard http://mercatus.org/expert_commentary/five-years-later-dodd-frank-looking-pretty-haggard <h5> Expert Commentary </h5> <p class="p1">Dodd-Frank is rounding the bend to its five-year mark. Its vocal cheering section does not seem to notice that it's looking a bit haggard. One area in which its weakness is evident is over-the-counter derivatives reform, which accounts for approximately 20 percent of Dodd-Frank's pages and much of its rhetoric. Dodd-Frank relies on central counterparty clearinghouses to bring order to over-the-counter derivatives-financial contracts that help companies manage their risks. Although Title VIII of the Act gives a nod to clearinghouses as a potential <i>source</i> of new risk, that concern gets lost in all the cheering for clearing.</p> <p class="p1">Before the crisis, large financial firms entered into many derivatives transactions directly with one another and with their customers. These contracts bound firms into long-term relationships, which meant that a failure by one large firm would directly affect all the firms with which it had relationships.</p> <p class="p1">By contrast, other types of derivatives trade on exchanges and are centrally cleared; once a transaction is executed, each original party to the trade replaces the contract with its original counterparty with a new contract with the clearinghouse. As many others have explained, the clearinghouse becomes the buyer to the seller and the seller to the buyer.</p> <p class="p1">Dodd-Frank's drafters decided to impose this central counterparty clearinghouse model on the over-the-counter derivatives markets. Under Dodd-Frank, standardized derivatives contracts must be centrally cleared. The rationale is that moving as many derivatives transactions into clearinghouses as possible makes it easier for financial firms and their regulators to comprehend and manage risk.</p> <p class="p1">That hardly sounds radical when one considers that clearinghouses have been around for centuries with a relatively-although certainly not completely-unsullied record. Moreover, the United States is not alone in moving to mandatory clearing. And, because of certain efficiencies that clearinghouses can offer, the industry was working voluntarily before the crisis to move more standardized derivatives into clearinghouses. What harm could there be in a little regulatory shove?</p> <p class="p1">Regulatory mandates like this look better on paper than they do in practice. Now that the plans sketched out on Dodd-Frank's pages are coming to life, lots of people are getting scared. Big financial firms are trying to understand their risk exposures to clearinghouses. They are demanding that clearinghouses be clear about how they plan to handle member defaults and ready to pony up their own money in the event of a default. A banking industry association warned the Financial Stability Oversight Council earlier this year that, if clearinghouses don't whip their risk management programs into shape, they "could become a source of contagion to their clearing members and customers during periods of market stress."</p> <p class="p1">Regulators are worried, too. The Office of Financial Research issued two papers this month on central clearing and discussed central clearinghouses in its last <a href="http://financialresearch.gov/annual-reports/files/office-of-financial-research-annual-report-2014.pdf"><b>annual report</b></a>. The report argued that the "new central clearing system concentrates risks in a small number of large central counterparties, transforming the network to a hub-and-spoke system that can better manage a larger number of dealer failures but is highly vulnerable to the failure of a [clearinghouse] that can transmit risk to all members." The report warned specifically of the trouble that could follow a "joint default" of a clearinghouse "and one or more clearing members." The director of the Office of Financial Research echoed these concerns in a recent <a href="http://www.reuters.com/article/2015/05/15/us-regulation-summit-berner-idUSKBN0O024O20150515"><b>Reuters Financial Regulation Summit</b></a>.</p> <p class="p1">At a hearing last week, Commodity Futures Trading Commission Chairman Timothy Massad similarly <a href="http://www.cftc.gov/PressRoom/SpeechesTestimony/opamassad-22#1"><b>pointed out</b></a> that "a small number of clearinghouses are becoming increasingly important single points of risk in the global financial system." His colleague Commissioner Mark Wetjen brought that concern home in a recent <a href="http://www.cftc.gov/PressRoom/SpeechesTestimony/opawetjen-11"><b>speech</b></a> highlighting a December 2013 scare at a South Korean clearinghouse when one of its members defaulted. Building on that speech's cautionary tone, Commissioner Wetjen held a clearing roundtable last week.</p> <p class="p1">Clearinghouses protect themselves in a number of ways: First, they establish membership standards to keep weak firms out. Second, members contribute to a guaranty fund, which can be tapped if the clearinghouse gets into trouble. Third, members pay initial margin at the beginning of a trade and variation margin through the life of the derivatives contract to reflect changes in the markets. Clearinghouses set these margin payments at a level to ensure that the member will be able to meet its responsibilities to the clearinghouse and limits the types of collateral members can provide. Fourth, clearinghouses only accept contracts they can understand and manage. They try to avoid taking on complex or illiquid contracts. Finally, clearinghouses establish committees to manage risk and plan for defaults.</p> <p class="p1">Getting all of these aspects of risk management right is difficult. The regulatory interest in central clearing completely alters the dynamics. Regulators are conflicted. They are likely to view all risk management measures skeptically. They may assume a decision not to clear a contract is a way to avoid the clearing mandate.</p> <p class="p1">Once a clearing mandate is in place, regulators need to make sure that firms have easy access to clearinghouses and don't have to pony up too much in guaranty fund contributions or margin. The Justice Department's antitrust lawyers even <a href="http://www.justice.gov/atr/public/comments/265618.htm"><b>weighed in</b></a> to warn the Commodity Futures Trading Commission that existing clearing members might restrict "access to new clearing members in an effort to insulate themselves from competition in making markets" all in the name of sound risk management. Such regulatory conflicts could inhibit legitimate risk management efforts.</p> <p class="p1">Central clearing has a valuable place in the derivatives markets, but regulatory attempts to force it come at a cost. These clearinghouses will not only be big and important, but will be managed with one eye toward placating pro-clearing regulators and another toward managing risk. As former Fed Chairman Ben Bernanke <a href="http://www.federalreserve.gov/newsevents/speech/bernanke20110404a.htm"><b>cautioned</b></a> four years ago, although clearinghouses "generally performed well in the highly stressed financial environment of the recent crisis ... we should not take for granted that we will be as lucky in the future." Dodd-Frank's clearing mandate and other regulatory inducements to clear might bring that lucky streak to an abrupt and painful end.</p> http://mercatus.org/expert_commentary/five-years-later-dodd-frank-looking-pretty-haggard Wed, 20 May 2015 09:50:24 -0400 In Memoriam: Dr. John Templeton http://mercatus.org/expert_commentary/memoriam-dr-john-templeton <h5> Expert Commentary </h5> <p>The Mercatus Center at George Mason University notes with great sadness <a href="https://www.templeton.org/sites/default/files/obituary_dr._jack_templeton.pdf">the passing of John M. (“Jack”) Templeton, Jr</a>., M.D., the president and chairman of the John Templeton Foundation.<span style="font-size: 12px;">&nbsp;</span></p><p>“Dr. Templeton’s philanthropy has had world-changing effects on our understanding of the role that formal and informal institutions play in society,” said Mercatus Center Senior Vice President and Chief Operating Officer Daniel Rothschild. “His generosity will continue to pay dividends at Mercatus and elsewhere for generations to come.”</p><p>Dr. Templeton’s interest in this area led him to approve two multi-year, multi-million dollar investments in the Mercatus Center from the John Templeton Foundation. The Templeton research grant for Mercatus Center’s F. A. Hayek Program is fueling interdisciplinary scholarship on the causes of economic progress and the institutional arrangements that support free and prosperous societies. The Templeton Foundation’s support is also helping expand the Mercatus Center’s “Counting the Cost” Healthcare Project, which is working to understand the economic implications of the Affordable Care Act and examining ways to secure better health for the American people.</p><p>“The compassion and purpose that marked Dr. Templeton’s career in medicine drove him to consider how to best increase prosperity and freedom for all people,” said Peter Boettke, Mercatus Center Vice President and Director of the Hayek Program. “He advanced research in this area significantly, and we are so honored and tremendously grateful to carry on his legacy through our work at Mercatus that is generously supported by the John Templeton Foundation.”</p><p>All of us at the Mercatus Center at George Mason University join together to extend our sincere condolences to Dr. Templeton’s family. He will be greatly missed.</p><p><i>Photo courtesy of the John Templeton Foundation</i></p> http://mercatus.org/expert_commentary/memoriam-dr-john-templeton Wed, 20 May 2015 09:50:32 -0400 Federal Funding Received by Amtrak http://mercatus.org/publication/federal-funding-received-amtrak <h5> Publication </h5> <p class="p1">The cause of last week’s tragic crash of Amtrak train 188 in Philadelphia remains unknown. Some policymakers and pundits immediately pinned the blame on a lack of federal funding for the government-owned and -managed passenger rail operator. This week’s chart shows the annual amount of federal operating and capital funding that Amtrak has received since it was created by the Rail Passenger Service Act of 1970, including a generous allocation in 2009, as part of the American Recovery and Reinvestment Act (ARRA).</p> <p class="p1"><a href="http://mercatus.org/sites/default/files/C2-amtrak-subsidies_0.png"><img src="http://mercatus.org/sites/default/files/C2-amtrak-subsidies_0.png" width="585" height="398" /></a></p> <p class="p1">Amtrak has received almost $44 billion—almost $70 billion in inflation-adjusted 2015 dollars—from federal taxpayers since its creation. That amount is considerable, since Amtrak was intended to subsist on its own profits. However, Amtrak has lost money every year of its existence despite repeated claims from government officials through the years that profitability was on the horizon.&nbsp;</p> <p class="p1">A fundamental problem remains: because Amtrak is managed by the government, operational decisions are often made on the basis of political concerns rather than sound economic and financial reasoning. For example, all of Amtrak’s long-distance routes lose money and make little economic sense, but they continue to exist because a national network of rail lines engenders more political support.</p> <p class="p1">Even in the northeast corridor, where the population density might be sufficient to operate a profitable rail line, government management has led to financial mismanagement. A 2014 <a href="https://amtrakoig.gov/sites/default/files/reports/management_challenges_final_report_september_2014.pdf">report</a> on Amtrak’s management challenges produced by the Amtrak inspector general’s office makes that clear:</p> <blockquote><p class="p2">The company has not consistently used sound business practices in each phase of the capital planning process, including developing sound project proposals with performance measures, learning from the execution and outcome of projects, and controlling unauthorized expenditures.</p></blockquote> <p class="p1">Although technology apparently exists that would help prevent crashes such as the most recent tragedy, Amtrak and its bosses in Washington have repeatedly chosen to allocate money elsewhere. That includes $8 billion in the 2009 ARRA “stimulus” package for a dubious system of high-speed rail. It’s worth noting that the “stimulus” package also included an additional $1.3 billion in capital grants to Amtrak, which is reflected in the chart.&nbsp; While we do not know as yet what specifically caused the crash of Amtrak 188, it is not clear that giving Amtrak more taxpayer dollars would have prevented it.</p> http://mercatus.org/publication/federal-funding-received-amtrak Wed, 20 May 2015 08:38:12 -0400 Electronic Distribution of Prescribing Information for Human Prescription Drugs, Including Biological Products http://mercatus.org/publication/electronic-distribution-prescribing-information-human-prescription-drugs-including <h5> Publication </h5> <p class="p1">The proposed rule titled “Electronic Distribution of Prescribing Information for Human Prescription Drugs, Including Biological Products” would require that prescribing information intended for medical professionals no longer be distributed in paper form. Instead, this information would be disseminated electronically, except in limited circumstances. Prescribing information is intended to help health care professionals make more informed decisions concerning prescriptions and thereby improve the safety of their patients. Prescribing information distributed in paper form may not be current because it may have been printed before more recent labeling changes. The Food and Drug Administration (FDA) argues that requiring electronic dissemination of prescribing information will allow for real-time updates and improve the safety and effectiveness of prescription medications. In addition, the FDA argues that the electronic distribution of prescribing information will lead to substantial cost savings in the form of reduced printing costs.</p> <p class="p2">The FDA’s claim that access to up-to-date information on prescription drugs can help both physicians and pharmacists avoid dangerous prescribing errors is not contested here. However, this comment argues that the agency fails to adequately make the case that the proposed regulation is needed and that it best accomplishes the goals of improved patient health and lower costs of distributing prescribing information. This argument is founded on three observations.</p> <p class="p2">First, in order to present the case in favor of the proposed regulation, the agency must establish that there exists a systemic failure owing to either market imperfections or ineffective past policies or regulations. The analysis presented in the proposed regulatory impact analysis (PRIA) falls far short of doing so. Beyond discussing printing costs, the PRIA includes no assessment of the status quo. Specifically, it makes no attempt to determine the extent to which the risk to patient health is increased owing to the potentially outdated prescribing information inserts. Given that “most physicians do not use the paper form of the prescribing information but instead use compendiums containing information supplied by third parties,” the risks may be negligible, particularly if the information provided by third parties is up to date. Unfortunately, the PRIA makes no attempt to assess current risk exposure. Instead it assumes the risk to patient health to be substantial, and uses this assumption as justification for regulatory action.</p> <p class="p2">Second, the FDA’s assessment of the net benefits of the proposed regulation is incomplete. The FDA makes no attempt to measure the benefits of the proposed regulation beyond the potential savings related to reduced paperwork costs if prescribing information were no longer required in paper form. It is unclear how many prescribing errors could be prevented by the electronic distribution of prescribing information on a centralized FDA webpage.</p> <p class="p2">Third, the PRIA does not consider any substantial alternatives to the proposed regulatory action. The one alternative presented is to effectively eliminate the six-months-after-publication-of-final-rule effective date in the proposed rule, delaying the implementation of the rule until two years after the publication of the final rule. If the agency had assessed the net benefits of approaches other than the proposed command-and-control option, the public could have more confidence in the proposed regulation’s merits. For example, if the adoption of the proposed regulation does not lead to reduced health risks relative to the status quo—in which health professionals rely on third-party compendiums, including many electronic ones—then the appropriate action may be to eliminate the existing paper-form requirement and not dictate any specific centralized repository of prescribing information.</p> <p class="p2">Given the potential impact a prescribing error can have on a patient’s health, this issue deserves a more thoughtful and rigorous analysis than has thus far been offered. Before the FDA takes any regulatory action, it must make a convincing argument establishing the existence of a systemic problem, one that causes patients to face an avoidable risk from prescribing errors. If a systemic problem does exist, then the FDA must present a more comprehensive assessment of the net benefits of the proposed regulation relative to the status quo and then compare and contrast the merits of the proposed regulation with those of other reasonable alternatives. Only after addressing these concerns is it possible to make an educated decision regarding the appropriateness of the proposed rule.</p> <p class="p1"><b>FAILURE TO ESTABLISH REGULATORY NEED</b></p> <p class="p1">In order to establish the need for regulatory action, a regulator must identify a systemic failure. The FDA attempts to apply a public goods argument to support regulatory action: “A single electronic labeling repository for prescribing information accessible to all users is a public good.” Standard economics textbooks define public goods as goods which are both nonrival in consumption—meaning that multiple users can consume the same unit of production without reducing the benefits enjoyed by other users—and nonexcludable—meaning that once the good is provided, it is prohibitively costly to prevent nonpaying consumers from obtaining the good. While a repository of prescribing information is nonrival in consumption, it does not meet the conditions of nonexcludability. Indeed, prescribing information is already provided by private, for-profit organizations to those who pay a subscription fee. Prescribing information is excludable and is therefore a mixed good.</p> <p class="p2">Because prescribing information is a mixed good, economic theory cannot predict whether it would be more efficiently provided privately or publicly. Answering this question demands a comprehensive analysis to determine how an information repository is best produced. Instead, the FDA simply assumes that there is a market failure requiring regulatory action, though its justification for the proposed rule ironically highlights the failure of regulatory action to evolve seamlessly with technology. On the other hand, entrepreneurs have thrived, creating third-party compendia of prescribing information in more accessible formats than the government-provided information. Significant numbers of third-party compendia even offer applications for mobile devices.</p> <p class="p2">The fact that the FDA-mandated paper-form prescribing information may be out of date is not sufficient to warrant new regulation that prohibits issuing the information in paper form. Given that pharmacies reported that they rely on corporately curated prescribing information and manufacturer websites while physicians and nurses generally rely on third-party compendia, the relevant questions are whether the privately provided sources of prescribing information are out of date and how frequently prescribing errors occur owing to out-of-date prescribing information. The FDA should assess the degree to which commonly referenced third-party sources of prescribing information are out of date and the frequency of resulting prescribing errors. While determining the causes of prescribing errors may not be feasible, it is certainly possible to assess the degree to which third-party sources are out of date. One method is to track new boxed warnings and contraindications and determine the average number of days before the information on the most common third-party sources is updated. Another method is to select a number of medications and determine what percentage of common third-party sources are out of date in ways that are likely to lead to prescribing errors.</p> <p class="p2">The FDA admits the difficulty of determining “how often health care professionals rely on the prescribing information as well as different information sources.” Yet the FDA refers to results of an industry survey that suggest such information has already been collected. The FDA reports that “pharmacists refer to product labeling less than 1 percent of the time when filling prescriptions.” Given the FDA’s assessment that physicians and nurses rely on third-party compendia and pharmacists rely almost exclusively on third-party sources of prescribing information, the fact that current FDA-mandated paper-form prescribing information is out-of-date may be irrelevant. The relevant questions are the following: (1) How often is the third-party prescribing information out-of-date? (2) What percentage of the out-of-date information is relevant to boxed warnings and contraindications? and (3) What are the primary sources for the information collected by the third-party sources?</p> <p class="p2">If third-party information is rarely out of date or rarely concerns boxed warnings and contraindications, then prescribing errors may not be a systemic problem and there may be no need for additional command-and-control action. If third-party sources are out of date in ways that are likely to lead to prescribing errors, then policymakers must understand <i>why </i>this occurs in order to prescribe an adequate solution.</p> <p class="p1"><b>FAILURE TO PROPERLY ASSESS BENEFITS</b></p> <p class="p1">Physicians’ and pharmacists’ access to updated information on prescription drugs can surely assist in minimizing the occurrence of prescribing errors and, in the process, lead to improved patient care. Unfortunately, the FDA does not assess the potential benefits the proposed regulation might have for patient health.</p> <p class="p2">Such an assessment should include two steps. First, it should calculate the potential number of prescribing errors caused by out-of-date prescribing information. The baseline could be an estimate of the total number of prescribing errors during a typical year as an upper limit to the number of errors that could be prevented. Estimates of medical errors because of out-of-date package inserts indicate that they are quite rare, accounting for only 0.3 percent of all medication errors. Currently, the PRIA includes no such assessment of the potential size of the problem.</p> <p class="p2">Second, the assessment should calculate the number of prescribing errors that could be eliminated by means of a centralized repository. If third-party sources of prescribing information are rarely out of date in ways that are likely to lead to prescribing errors, then there may be little benefit to be gained from a centralized repository provided by the FDA. If third-party boxed warnings and contraindications information is out of date, then further analysis is required. First, what percentage of physicians and pharmacists will choose to directly access the repository, and in what percentage of decisions? Second, will the repository improve the speed at which third-party sources of prescribing information update their systems? Given the third-party development of accessible and easily searchable mobile applications, it may be reasonable to conclude that few health care professionals will directly access the FDA repository. If that is the case, it is vital for regulators to determine how the repository would affect the information provided by third parties in order to ascertain its impact on the number of prescribing errors. To do so, the FDA will need to involve the third-party information providers in the regulatory impact analysis process.</p> <p class="p2">Even ignoring the role of third-party compendia, the FDA-claimed benefits of the electronic repository are very likely exaggerated. In a 2013 report, the Government Accountability Office (GAO) states that relying on electronic labeling as a complete substitute for paper labeling “could adversely impact public health by limiting the availability of drug labeling for some physicians, pharmacists, and patients by requiring them to access drug labeling through a medium with which they might be uncomfortable, they might find inconvenient, or that might be unavailable.” The GAO mentions Internet availability in rural areas and during power outages as particularly concerning to stakeholders. For instance, in a 2012 report the Federal Communications Commission notes that roughly 14 million Americans lack adequate broadband capabilities. Further, stakeholders reported to the GAO that many pharmacies, “in order to protect their systems from potential threats like computer viruses, do not have Internet access.” Indeed, 27 percent of pharmacists surveyed by NERA Economic Consulting report that they either do not have Internet access or cannot browse the Internet and 82 percent of those with access report having experienced a loss of Internet connectivity during business hours. Internet connectivity issues have the potential, at least in certain regions and during power outages, to erode if not entirely dissipate the advantages a centralized electronic repository has over paper-form information. Accordingly, only 25 percent of surveyed pharmacists agree that electronic labeling would provide more accurate information than the status quo.</p> <p class="p2">Lastly, the net benefits of the proposed and alternative solutions must be evaluated with the understanding that medicine is constantly evolving toward ever more individualized care based on genetic markers. As indicated by Peter Huber, such advancements have important implications for the usefulness of the FDA-mandated labeling:</p> <blockquote><p class="p1">But the FDA-approved label is history, or soon will be. That scrap of paper is Washington’s attempt to tell you and your doctor whether your body is bioequivalent to other bodies in which the drug has performed well in the past. Except in the simplest cases, paper can’t convey even a tiny fraction of the information that we should be using to fit drugs to patients. The accurate fitting will emerge from pattern-matching search engines powered by constantly growing databases. They will contain far more information than is currently collected in FDA-scripted clinical trials.</p></blockquote> <p class="p1">If the proposed regulation were an advancement toward the development and distribution of more patient-centered prescribing information, then it would be a step in the right direction—toward improving patient health. Unfortunately, the proposed regulation may stifle innovation involving patient-centered prescribing information, since individualized information would not be offered on the repository without another rulemaking authorizing such information.</p> <p class="p2">Given the competition for subscribers in the market for third-party compendia, the incentives to develop patient-centered prescribing information may still exist. However, the proposed centralized repository would, at best, lag behind competing third-party compendia in providing individualized information, making it of diminished value relative to the third-party compendia. As such, it is unlikely that individualized information can adequately be offered in a centralized repository. If it cannot, then any FDA repository—whether it be in paper or electronic form—will soon become obsolete, as prescribers and pharmacists access the information distributed via third-party compendia instead. If this is the case, the long-run benefits of a centralized repository are highly limited.</p> <p class="p1"><b>NO CONSIDERATION OF ALTERNATIVES</b></p> <p class="p1">The proposed rule has been deemed to be “an economically significant regulatory action under Executive Order 12866.” As such, the regulatory analysis must follow the guidelines set forth in that executive order. These guidelines state that “each agency shall identify and assess available alternatives to direct regulation, including providing economic incentives to encourage the desired behavior, such as user fees or marketable permits, or providing information upon which choices can be made by the public.” Unfortunately, the PRIA fails to consider any alternatives other than an 18-month difference in the regulation’s effective date.</p> <p class="p2">To assure the public of the merits of the proposed regulation, the FDA needs to explore other alternatives. In this case, the FDA has ignored at least one alternative that is very likely better than the proposed regulation: simply removing the paper requirement. Manufacturers and repackagers would still be required to disseminate minimum standard content of prescribing information. The requirement could be to include the information in the packaging or to refer the user to an online resource that, similarly to the requirement in the proposed regulation, must be updated within a specified amount of time after FDA label approval. This would give manufacturers and repackagers the flexibility to determine the lowest-cost means of providing assessable information that third-party sources can reference without involving the extra administrative step of interacting with an FDA office.</p> <p class="p2">The analysis included in the PRIA presents a stronger argument for the above-described alternative than for the proposed regulation. Both alternatives would reduce the cost of printing the currently mandated paper-form prescribing information. The FDA-proposed regulation is only preferable if it can be shown to lead to quicker updates to prescribing information provided by third parties at a reasonable cost. The FDA does not provide such evidence. Since the FDA demonstrates only that the proposed regulation would reduce printing costs—an effect that would also follow the removal of the current in-print requirement—the less restrictive alternative that would allow third-party firms the greatest degree of flexibility to adjust to medical and technological advancements may be preferable.</p> <p class="p1"><b>CONCLUSIONS</b></p> <p class="p1">For the reasons discussed above, the argument in favor of implementing the “Electronic Distribution of Prescribing Information for Human Prescription Drugs, Including Biological Products” is flawed and incomplete. The FDA does not demonstrate that the regulation solves a significant problem, and it fails to estimate the benefits of the regulation for patient health. Ultimately, a more complete analysis of both the costs and, particularly, the benefits of the proposed regulation and of reasonable alternatives is needed before the FDA can claim that this particular regulation is in the best interests of the public.</p> http://mercatus.org/publication/electronic-distribution-prescribing-information-human-prescription-drugs-including Tue, 19 May 2015 10:14:25 -0400 Opportunity and Mobility in the Sharing Economy http://mercatus.org/expert_commentary/opportunity-and-mobility-sharing-economy-airbnb-lyft-uber <h5> Expert Commentary </h5> <p class="p1">Much of the news surrounding the rapid growth of the sharing economy seems to focus exclusively on the headline-grabbing, billion-dollar valuations that companies like <a href="http://www.wsj.com/articles/ubers-new-funding-values-it-at-over-41-billion-1417715938">Uber</a> and <a href="http://www.bloomberg.com/news/articles/2015-03-01/airbnb-said-to-be-raising-funding-at-20-billion-valuation">Airbnb</a> received. More recently, the ride-sharing app and Uber-competitor <a href="http://nypost.com/2015/03/12/lyft-value-soars-to-2-5-billion/">Lyft</a> was valued at $2.5 billion. These stories <a href="http://www.theguardian.com/commentisfree/2014/may/27/airbnb-uber-taxes-regulation">fuel</a> a rather popular narrative that the sharing economy is a thinly veiled attempt to profit by cheating the system, circumventing taxes, evading safety regulations, and flouting labor laws.</p> <p class="p1">Yes, these new firms are challenging the traditional approaches taken by both incumbents and regulators. Focusing exclusively on this part of the story, however, actually misses the true value of these new, innovative services. And for the <a href="http://www.slideshare.net/jeremiah_owyang/sharingnewbuying?redirected_from=save_on_embed">80 million Americans</a> who transact through the sharing economy, it represents so much more.</p> <p class="p1">In fact, a recent survey of consumers across the America found that <a href="http://www.pwc.com/us/en/industry/entertainment-media/publications/consumer-intelligence-series/assets/pwc-cis-sharing-economy.pdf">86 percent of adults</a> believe the sharing economy makes life more affordable. This is true for individuals on both sides of the transaction: producers and consumers. For consumers, the sharing economy provides access to goods and services that have been too expensive for many in the past.</p> <p class="p1">For those looking to produce within the sharing economy, opportunities are now available that simply didn’t exist a decade ago. A young, cash-strapped couple may not have seen their spare bedroom as way to afford their apartment until the&nbsp;<a href="https://www.airbnb.com/">Airbnb</a> platform provided them with a way to rent it out to vacationers. A single mother working toward her degree who wants to supplement her income, but is unable to commit to a second job, may not have viewed her extra hour between classes as a profit opportunity until&nbsp;<a href="https://www.instacart.com/">Instacart</a>&nbsp;and <a href="https://www.taskrabbit.com/">TaskRabbit</a>&nbsp;allowed her to put that time to use shopping for others. A retiree with a garage full of power tools may not have viewed it as a way to supplement his pension checks until&nbsp;<a href="https://www.1000tools.com/">1000 Tools</a>&nbsp;connected him with people in his area wanting to rent his tools.</p> <p class="p1">Averaging <a href="http://www.pwc.com/us/en/industry/entertainment-media/publications/consumer-intelligence-series/assets/pwc-cis-sharing-economy.pdf">425,000 guests per night</a>, and more than 155 million guest stays in 2014, a firm like Airbnb is creating real value for individuals to generate income in ways otherwise unavailable a decade ago. But this isn’t limited to those directly engaged in these services. An entire ecosystem is emerging around the growth of these firms.</p> <p class="p1">As author <a href="http://www.nytimes.com/2013/07/21/opinion/sunday/friedman-welcome-to-the-sharing-economy.html?pagewanted=all&amp;_r=0">Thomas Friedman</a> explains it, Airbnb isn’t simply creating opportunities for hosts and guests within their platform, but for all types of work surrounding these rentals. People are offering <a href="http://www.handy.com/">home cleaning and repairs</a> between rentals, as well as coordinating <a href="https://www.keycafe.com/">key exchanges</a>. Services such as <a href="https://www.eatfeastly.com/">Feastly</a> will connect guests with local chefs who will cook for them, and <a href="https://www.kitchensurfing.com/washington-dc">Kitchensurfing</a> will bring chefs right into the home they are renting. Guests can also <a href="https://www.vayable.com/">connect with locals</a> who will help them find destinations in the area and even make the necessary reservations.</p> <p class="p1">Some <a href="http://robertreich.org/post/109894095095">criticize</a> this as being a “share-the-scraps economy.” Former Secretary of Labor <a href="http://robertreich.org/post/109894095095">Robert Reich</a> has described the sharing economy as a world where work is unpredictable, workers have no power or legal rights, labor bears all the risks, and people work all hours for almost nothing. His criticisms, however, seem to ignore some basic realities about the way that the sharing economy is evolving in real time.</p> <p class="p1">The sharing economy is a route rather than a destination—creating mobility that its critics fail to recognize. For many, these firms are <a href="http://tweetstorm.io/user/pmarca/578363644846559232">generating streams of income</a> that were historically available only to the wealthy. In the past, rooms were only offered for rent by those wealthy enough to build hotels. Airbnb allows anyone with extra space to penetrate a market traditionally dominated by the likes of Conrad Hilton and a few others. In 2014, private, short-term rentals through Airbnb totaled nearly <a href="http://www.pwc.com/us/en/industry/entertainment-media/publications/consumer-intelligence-series/assets/pwc-cis-sharing-economy.pdf">22 percent more</a> than Hilton Worldwide.</p> <p class="p1">The sharing economy also mobilizes workers in a way traditional business models simply could not. Moving between Uber and Lyft, or from Instacart to TaskRabbit, is much easier than trying to transition from one traditional full-time job to another. And with services such as <a href="http://www.peers.org/about/">Peers.org</a>, workers not only have the freedom but also the information to seek the work that matches their abilities and schedules, as well as the best platforms for them.</p> <p class="p1">This freedom and flexibility gives workers leverage they don’t have elsewhere. For many of these new firms, their value is based on the size of their networks. Ride-sharing firms like Uber and Lyft, for example, are only as valuable as the number of passengers and drivers they connect. Not only are the firms competing for customers, but for drivers as well. In fact, Lyft, with its $2.5 billion&shy; valuation, is planning for a <a href="http://fusion.net/story/104768/leaked-lyft-document-confirms-competing-with-uber-is-hell/">$30 million loss</a> in 2015 due to both promotions and also guarantees regarding driver compensation. This is paying dividends for those looking to turn their cars into streams of income.</p> <p class="p1">From this perspective, when the sharing economy is allowed to grow, the story isn’t “<a href="http://fox2now.com/2015/04/22/missouri-house-endorses-statewide-regulations-for-uber-lyft/">big business taking advantage of local government</a>.” Nor is it a story of billion-dollar startups <a href="http://host.madison.com/wsj/news/local/state-senate-approves-statewide-regulations-for-uber-lyft/article_b64cbf67-fab4-5ff9-b6d7-5458ceb3a797.html">undermining local business</a> (although hotels and taxis are certainly feeling the pressure). The growth of the sharing economy is a story of real opportunity being created for real people: the young, cash-strapped couple, the single mother, and the retirees taking what they have and putting it to work for them. It is a story economic empowerment today, occurring in ways unavailable and unimaginable in yesterday’s economy. It’s Horatio Alger, reborn.</p> http://mercatus.org/expert_commentary/opportunity-and-mobility-sharing-economy-airbnb-lyft-uber Tue, 19 May 2015 10:02:38 -0400 How the Affordable Care Act Empowers HHS to Cartelize the Health Care Industry http://mercatus.org/publication/how-affordable-care-act-empowers-hhs-cartelize-health-care-industry <h5> Publication </h5> <p class="p1">The Patient Protection and Affordable Care Act (ACA) has brought enormous change to the health care industry. It reinvents one-sixth of the US economy through its bundle of new regulations, fees, grants, and other incentives. The affected parties, including consumers, hospitals, insurers, and pharmaceutical companies, have all positioned themselves to meet what will be a significant change in the mode of health care delivery.</p> <p class="p2">At the heart of this new direction is a reorientation of the health care sector guided and designed by the administration of President Barack Obama and the Department of Health and Human Services (HHS). The media has focused more on the bureaucratic pitfalls coinciding with the launch of the department’s health care exchange website (<a href="http://www.healthcare.gov" title="www.healthcare.gov">www.healthcare.gov</a>) and less on the monumental changes occurring in the industries most directly affected: hospitals, pharmaceutical companies, and insurers. These industries are undergoing major transformations in how they provide services as a result of HHS guidelines.</p> <p class="p2">Although disillusionment with the existing health care system in the United States is widespread, the ACA addresses this issue using top-down, heavy-handed bureaucratic solutions. Essentially, it has enabled HHS to organize the industry as it sees fit. Whether this approach will change the industry for the better is an open question; whether it will largely replace consumer preferences with bureaucratic ones is not. Unfortunately, consumer preferences are host to a number of problems that could easily move health outcomes in a negative direction.</p> <p class="p2">I use Yandle’s classic Bootleggers and Baptists theory (Yandle 1983; Smith and Yandle 2014) to explain the ongoing dynamic within the health care industry. HHS has increasingly coordinated both Bootleggers (economic interests) and Baptists (moral interests). Although the ultimate effect of this change is uncertain, distinct patterns can be discerned using contemporary and historical analysis of trends in the affected industry. In particular, I show how the ACA largely empowers HHS as a vehicle for centralized coordination of the health care industry.</p> <p class="p2">This paper outlines the machinations of HHS in bringing together the major health care industries and consumer groups to coordinate national health care. I use the coordinated Bootlegger and Baptist model as a framework to show how these efforts by HHS largely serve to cartelize the health care industry in a way that places the preferences of government bureaucrats and interests of Bootleggers and Baptists above those of the public.</p> <p class="p1"><b>Bootleggers, Baptists, and Televangelists</b></p> <p class="p1">Yandle (1983) first introduced the concept of Bootleggers and Baptists to describe how economic and moral interests team up to generate favorable political outcomes. In his original work, he highlights how regulation so often seems to benefit the producers it is supposed to constrain. As he explains, this outcome is a natural result of an environment where public choice considerations dominate public interest concerns. His theory provides a supplement to public choice analysis by exposing how moral interests so often enable the very Bootlegger special interests they are often trying to hinder.</p> <p class="p2">The decades-long fight waged by health proponents against Big Tobacco is an example. Although efforts to reduce the number of smoking-related illnesses have been partially successful, many of these activities have done more to serve the tobacco companies than the consumers. One of the more memorable examples occurred in 1960 when health advocates successfully lobbied to ban certain forms of advertising, which resulted in a reduction in operating costs (and accompanying higher profits) for larger firms and proved a significant obstacle for new entrants, thus benefiting Big Tobacco (see Kluger 1996; Smith and Yandle 2014, 91–92).</p> <p class="p2">Bootlegger special-interest groups are often successful because they have a much greater economic stake in the trajectory of legislation and so bring much to bear in guiding policy outcomes. Building on the classic public choice works of Olson (1965), Stigler (1971), and Becker (1983, 1985), the argument rests on the assumption that special-interest groups will seek to further their interests through political channels by being both better informed and better motivated to affect political outcomes in a direction they find favorable. Baptist groups may attempt to oppose Bootlegger efforts, but more often they settle for outcomes that appear to be in the public interest but, in actuality, fund Bootlegger profits.</p> <p class="p2">Of course, not all Bootlegger efforts are successful. (An example of how the insurance industry failed to block a financially painful provision in the ACA is shown later.) Two factors weigh against Bootlegger efforts. First, the more Bootleggers can hide behind Baptist support, the better are their chances of success. By extension, the less Baptist support available, the greater the chances are that Bootleggers will fail to acquire legislative benefits or, in some cases, attract rent-extracting penalties. This points to the second factor—government is not simply a neutral broker. In many cases, government is more interested in taking gains away from economic interests to support its pet projects. The seminal work of Fred McChesney (1987, 1997) illustrates this propensity for rent extraction. I illustrate this propensity in this paper using recent efforts of HHS to encourage funding enrollment in the new health care exchanges under the group Enroll America. Indeed, the line between rent extraction and rent-seeking is often a thin one.</p><p class="p2"><a href="http://mercatus.org/sites/default/files/Smith-Cartelizing-HealthCare.pdf">Continue reading</a></p> http://mercatus.org/publication/how-affordable-care-act-empowers-hhs-cartelize-health-care-industry Mon, 25 May 2015 00:26:06 -0400 Certificate-of-Need Laws: Implications for Michigan http://mercatus.org/publication/certificate-need-laws-implications-michigan <h5> Publication </h5> <p class="p1">Thirty-six states and the District of Columbia currently limit entry or expansion of health care facilities through certificate-of-need (CON) programs. These programs prohibit health care providers from entering new markets or making changes to their existing capacity without first gaining the approval of state regulators. Since 1972, Michigan has been among the states that restrict the supply of health care in this way, with 18 devices and services—including acute hospital beds, magnetic resonance imaging (MRI) and positron emission tomography (PET) scanners—requiring a certificate of need from the state before the device may be purchased or the service offered.</p> <p class="p1">CON restrictions are in addition to the standard licensing and training requirements for medical professionals, but are neither designed nor intended to ensure public health or ensure that medical professionals have the necessary qualifications to do their jobs. Instead, CON laws are specifically designed to limit the supply of health care and are traditionally justified with the claim that they reduce and control health care costs. The theory is that by restricting market entry and expansion, states will reduce overinvestment in facilities and equipment. In addition, many states—including Michigan—justify CON programs as a way to cross-subsidize health care for the poor. Under these “charity care” requirements providers that receive a certificate of need are typically required to increase the amount of care they provide to the poor. These programs intend to create <i>quid pro quo</i> arrangements: state governments restrict competition, increasing the cost of health care for some, and in return medical providers use these contrived profits to increase the care they provide to the poor.</p> <p class="p2">However, these claimed benefits have failed to materialize as intended. Recent research by Thomas Stratmann and Jacob Russ demonstrates that there is no relationship between CON programs and increased access to health care for the poor. There are, however, serious consequences for continuing to enforce CON regulations. In particular, for Michigan these programs could mean approximately 12,982 fewer hospital beds, between 20 and 40 fewer hospitals offering MRI services, and between 68 and 85 fewer hospitals offering computed tomography (CT) scans. For those seeking quality health care throughout Michigan, this means less competition and fewer choices, without increased access to care for the poor.</p> <p class="p1"><b>The Rise of CON Programs</b></p> <p class="p1">CON programs were first adopted by New York in 1964 as a way to strengthen regional health planning programs. Over the following 10 years, 23 other states adopted CON programs. Many of these programs were initiated as “Section 1122” programs, which were federally funded programs providing Medicare and Medicaid reimbursement for certain approved capital expenditures. Michigan enacted its first CON program in 1972, two years before the passage of the National Health Planning and Resources Development Act of 1974, which made certain federal funds contingent on the enactment of CON programs, and provided a strong incentive for the remaining states to implement CON programs. In the seven years following this mandate, nearly every state without a CON program took steps to adopt certificate-of-need statutes. By 1982 every state except Louisiana had some form of a CON program.</p> <p class="p1">In 1987, the federal government repealed its CON program mandate when the ineffectiveness of CON regulations as a cost-control measure became clear. Twelve states rapidly followed suit and repealed their certificate-of-need laws in the 1980s. By 2000, Indiana, North Dakota, and Pennsylvania had also repealed their CON programs. Since 2000, Wisconsin has been the only state to repeal its program.</p> <p class="p4">Michigan remains among the 36 states, along with the District of Columbia, that continue to limit entry and expansion within their respective health care markets through certificates of need. On average, states with CON programs regulate 14 different services, devices, and procedures. Michigan’s CON program currently regulates 18 different services, devices, and procedures, which is more than the national average. As figure 1 shows, Michigan’s certificate-of-need program ranks the 15th most restrictive in the United States.</p> <p class="p5"><a href="http://mercatus.org/sites/default/files/Elbarasse-Certificate-of-Need-MI-MOP-chart.png"><img src="http://mercatus.org/sites/default/files/Elbarasse-Certificate-of-Need-MI-MOP-chart.png" width="585" height="424" /></a></p> <p class="p6">Note: Fourteen states either have no certificate-of-need laws or they are not in effect. In addition, Arizona is typically not counted as a certificate-of-need state, though it is included in this chart because it is the only state to regulate ground ambulance services.</p> <p class="p1"><b>Do CON Programs Control Costs and Increase the Poor’s Access to Care?</b></p> <p class="p1">Many early studies of CON programs found that these programs fail to reduce investment by hospitals. These early studies also found that the programs fail to control costs. Such findings contributed to the federal repeal of CON requirements. More recently, research into the effectiveness of remaining CON programs as a cost-control measure has been mixed. While some studies find that CON regulations may have some limited cost-control effect, others find that strict CON programs may in fact increase costs by 5 percent. The latter finding is not surprising, given that CON programs restrict competition and reduce the available supply of regulated services.</p> <p class="p1">While there is little evidence to support the claim that certificates of need are an effective cost-control measure, many states continue to justify these programs using the rationale that they increase the provision of health care for the poor. To achieve this, 14 states make some requirement for charity care within their respective CON programs. This is what economists refer to as a “cross subsidy.”</p> <p class="p1">The theory behind cross-subsidization through these programs is straightforward. By limiting the number of providers that can enter a particular practice and by limiting the expansion of incumbent providers, CON regulations effectively give a limited monopoly privilege to providers that receive approval in the form of a certificate of need. Approved providers are therefore able to charge higher prices than would be possible under truly competitive conditions. As a result, it is hoped that providers will use their enhanced profits to cover the losses from providing otherwise unprofitable, uncompensated care to the poor. Those who can pay are supposed to be charged higher prices to subsidize those who cannot.</p> <p class="p1">In reality, however, this cross-subsidization is not occurring. While early studies found some evidence of cross-subsidization among hospitals and nursing homes, the more recent academic literature does not show evidence of this cross-subsidy taking place. The most comprehensive empirical study to date, conducted by Thomas Stratmann and Jacob Russ, finds no relationship between certificates of need and the level of charity care.</p> <p class="p1"><b>The Lasting Effects of Michigan’s CON Program</b></p> <p class="p1">While certificates of need neither control costs nor increase charity care, they continue to have lasting effects on the provision of health care services both in Michigan and in the other states that continue to enforce them. However, these effects have largely come in the form of decreased availability of services and lower hospital capacity.</p> <p class="p1">In particular, Stratmann and Russ present several striking findings regarding the provision of health care in states implementing CON programs. First, CON programs are correlated with fewer hospital beds. Throughout the United States there are approximately 362 beds per 100,000 persons. However, in states such as Michigan that regulate acute hospital beds through their CON programs, Stratmann and Russ find 131 fewer beds per 100,000 persons. In the case of Michigan, with its population of approximately 9.9 million, this could mean about 12,982 fewer hospital beds throughout the state as a result of its CON program.</p> <p class="p1">Moreover, several basic health care services that are used for a variety of purposes are limited because of Michigan’s CON program. Across the United States, an average of six hospitals per 500,000 persons offer MRI services. In states such as Michigan that restrict hospitals’ capital expenditures (above a certain threshold) on MRI machines and other equipment, the number of hospitals that offer MRIs is reduced by between one and two per 500,000 persons. This could mean between 20 and 40 fewer hospitals offering MRI services throughout Michigan. The state’s CON program also affects the availability of CT services. While an average of nine hospitals per 500,000 persons offer CT scans, CON regulations are associated with a 37 percent decrease in these services. For Michigan, this could mean between 68 and 85 fewer hospitals offering CT scans.</p> <p class="p1"><b>Conclusion</b></p> <p class="p1">While CON programs were intended to limit the supply of health care services within a state, proponents claim that the limits were necessary to either control costs or increase the amount of charity care being provided. However, 40 years of evidence demonstrate that these programs do not achieve their intended outcomes, but rather decrease the supply and availability of health care services by limiting entry and competition. For policymakers in Michigan, this situation presents an opportunity to reverse course and open the market for greater entry, more competition, and ultimately more options for those seeking care.</p> http://mercatus.org/publication/certificate-need-laws-implications-michigan Wed, 20 May 2015 08:26:44 -0400 How the Affordable Care Act Is Like Prohibition http://mercatus.org/expert_commentary/how-affordable-care-act-prohibition <h5> Expert Commentary </h5> <p class="p1">The Affordable Care Act is now in its fifth year. Many things have changed since March 23, 2010 when it was passed into law. Website rollouts, cost curves and enrollment figures have dominated the new stories. What we speak so little of, however, is how health care has actually been reformed and how this in turn defined what health care reform means to us today.</p> <p class="p1">To do this, we would need to examine the groups responsible for what ultimately became the bill passed into law, which can help us make sense of what we consider health care reform today. Health care reform is the product of "bootlegger" and "baptist" interests coming together to restructure the industry in their favor, all brought together by a "televangelist" administration.</p> <p class="p1">So what in the world does all that mean?</p><p class="p1"><a href="http://www.usnews.com/opinion/economic-intelligence/2015/05/18/how-obamacare-is-like-prohibition">Continue reading</a></p> http://mercatus.org/expert_commentary/how-affordable-care-act-prohibition Wed, 20 May 2015 23:00:39 -0400 Don't Be so Sure the Economy Will Return to Normal http://mercatus.org/expert_commentary/dont-be-so-sure-economy-will-return-normal <h5> Expert Commentary </h5> <p class="p1">It is hard to avoid the feeling that our current economic problems are more than just a cyclical downturn. We know that the economy has gone through some bad times. But what exactly are we experiencing?</p> <p class="p1">One relatively optimistic view is that observed deficiencies — like slow growth in real wages and the overall economy, persistently low interest rates and low levels of labor participation — are merely temporary. In this view, these problems will dwindle after manageable problems like high levels of public or household debt have been reduced.</p> <p class="p1">Another commonly heard view is that we made the mistake of letting the last recession linger too long, allowing some of its features to became entrenched. That analysis suggests that if we correct past policy errors, whatever they may have been, an underlying normality will re-emerge.</p> <p class="p1">There are some nuggets of truth in both of these arguments, but there is a much more disturbing possibility that could turn out to be more accurate: namely, that the recession was a learning experience that we haven’t fully absorbed. From this perspective, the radical and sudden changes of the financial crisis were early indicators of deep fragility and dysfunctionality.</p> <p class="p1">Slowly but surely, we may be responding to these difficult revelations by scaling back our ambitions for the economy — reinforcing negative trends that were already underway. In this troubling view, we have finally begun to discover some unpleasant truths. Borrowing a phrase from the University of Toronto economist Richard Florida, it’s possible that we are experiencing a “Great Reset.”</p> <p class="p1">Let’s consider an analogy to see how this might work in practice.</p> <p class="p1">Well before the recent recession, many colleges and universities realized that they could not afford so many full-time tenured and tenure-track faculty members, and they began to increase their reliance on lower-paid adjuncts. Few institutions fired large numbers of full-timers suddenly, because that could have left them understaffed if trends reversed. Longstanding protections of tenure were also a constraint. Instead, many administrators added modestly to the number of adjunct faculty members, sometimes over decades, relying on retirement and attrition to manage the shift in a relatively smooth manner.</p> <p class="p1">That evolution reflects a more general principle: Institutional rigidities don’t permit adjustments to occur all at once, but by studying continuing changes we may be able to peer around a corner and see where a sector is headed.</p> <p class="p1">Such processes are scary because we may be watching the slow unfolding of a hand that, in its fundamentals, has already been dealt.</p> <p class="p1">There are signs that a comparable story may apply to the American economy more broadly.</p> <p class="p1">In manufacturing, for example, <a href="http://www.nytimes.com/2011/09/13/business/in-detroit-two-wage-levels-are-the-new-way-of-work.html">Ford, Chrysler, General Motors</a>, Caterpillar and Navistar (formerly International Harvester) all pay many of their new workers much less. In some of these two-tier structures, <a href="http://www.thenation.com/article/172684/how-two-tier-union-contracts-became-labors-undoing?page=0,0">the new wage may be as little as half the old one</a>. In addition to this rapid change, the companies also seem to be reducing the ranks of highly paid workers through slow attrition.</p> <p class="p1">Here is another change that might be a broader sign of a pending reset: A heavy burden of adjustment in the overall labor market is being borne by the young. Wages for the typical graduate of a four-year college have dropped <a href="http://www.epi.org/publication/class-of-2014/">more than 7 percent since 2000</a>, and <a href="https://www.stlouisfed.org/publications/regional-economist/january-2015/youth-labor-force?&amp;utm_source=Twitter&amp;utm_medium=SM&amp;utm_campaign=482&amp;utm_term=labor&amp;utm_content=re">the labor force participation rate of the young has been falling</a>. One consequence is that young people <a href="http://www.nytimes.com/2014/06/22/magazine/its-official-the-boomerang-kids-wont-leave.html?hp&amp;_r=0">are living at home longer and receiving more aid from their parents</a>. They also seem to be less interested in buying their own homes.</p> <p class="p1">All of these factors could indicate that our economy is evolving into one that will offer far less favorable long-run wage prospects. Much research has shown that the effects of a recession can be pernicious for decades: Earning a<a href="http://www.columbia.edu/%C2%98vw2112/papers/grad_recession_vonwachter_oreopoulos_heisz_final.pdf"> lower wage in earlier years is predictive of lower wages through the rest of one’s career</a>. While we are seeing economic problems for the relatively young, they will eventually become dominant earners in the economy and the major force behind broader statistics.</p> <p class="p1">In short, are these economic problems transitory, or are we glimpsing the beginnings of a grimmer future?</p> <p class="p1">If a reset is underway, we might have to accept that public policy cannot reverse it easily. Once unsustainable economic structures begin to fail, it takes a significant improvement to make them viable again. Yet because of the difficulty of making major changes under our current political alignment, most new government policies today are no more than changes at the margin. Perhaps the most basic problem is that it is difficult to be sure when a reset is underway, and it is harder yet to raise public alarm about changes that seem to be gradual and slow.</p> <p class="p1">Most of all, it is not always wise to fight a reset.</p> <p class="p1">Early in the previous decade, Germany realized its economic model wasn’t working, and it accepted lower real wages for many workers.</p> <p class="p1">Even though growth in living standards has been slow, the German economy has been flexible and has appeared to be on a sustainable track. Maybe that was the best Germany could do.</p> <p class="p1">France, in contrast, has <a href="http://marginalrevolution.com/marginalrevolution/2014/05/why-has-french-employment-for-some-workers-done-so-well.html">attempted to preserve high real wages and benefits for prime-age workers</a>, in part by buying older workers out of employment and delaying starts for the young. But the country has a higher rate of unemployment and, arguably, may face greater and more sudden adjustments in years to come. <a href="http://www.reuters.com/article/2012/09/01/france-politics-idUSL6E8K10FL20120901">French polls indicate high pessimism about future economic prospects</a>.</p> <p class="p1">The debate over the economy these days isn’t just about income inequality and what should or should not be done about it. Perhaps the most crucial issue is whether economies will return to normal conditions of steady growth, or whether we are witnessing a fundamental transformation, unveiled in bits and pieces. Nominations for the nature of that transformation include a “robot economy,” a new political economy where elites have too much power or, perhaps, a new global economy where the United States no longer holds such a dominant position, to the detriment of American firms and workers.</p> <p class="p1">No one knows whether or how much of a reset may be underway. Yet I can’t help but wonder which features of current data might prove harbingers of larger, more permanent changes to come.</p> http://mercatus.org/expert_commentary/dont-be-so-sure-economy-will-return-normal Mon, 18 May 2015 10:06:13 -0400 Lessons About Government from the NFL http://mercatus.org/expert_commentary/lessons-about-government-nfl <h5> Expert Commentary </h5> <p class="p1">In many ways, the National Football League is like the federal government. First, the NFL only exists because a group of individual entities — the teams — collectively agreed to form and subject themselves to governance by a centralized body, similar to how the states handed over power to Washington centuries ago. Second, the NFL creates and enforces rules about how the game is played, similar to regulations coming out of the federal government. Third, the NFL very seldom admits that any of its policies were wrongheaded and changes them — and when was the last time you heard a politician admit that a policy was a mistake?</p> <p class="p1">Unfortunately, for a governing body like the NFL to admit a policy's failure seems to require undeniable, unforgettable, alarming visual evidence. It's not just the NFL that apparently has to be shocked into change. Federal, state and local governments have a longstanding tradition of ignoring problematic policies right up until the point that innocent and unwilling participants are irrevocably harmed by the policy. And even then, change only seems to come about when that harm can no longer be denied by society at large — like when a video is leaked. What lessons about governance can we draw from events that forced change inside a powerful governing body like the NFL?</p> <p class="p2">Recent events — such as the suspension, sanctions and fines on Tom Brady and the New England Patriots over Deflategate — show that the NFL has apparently stopped its policy of treating star players differently from other players. But if it weren't for shocking examples like the Ray Rice video, the NFL may not have shifted away from its original policy of going light-handed on stars and using mediocre players as disciplinary examples. While in years past, teams might have turned a blind eye to red flags about a player's off-field behavior if that player was talented enough on the field, nowadays even the hint of a history of domestic violence can be enough to cause a consensus first-round talent to not be drafted at all (ask La'el Collins).</p> <p class="p1">On rare occasions, the federal government has similar experiences. Nearly a century ago, the United States embarked on a very poor policy experiment: the prohibition of alcohol. The experiment lasted for 13 years, and it came at a huge social cost. Most people know about the rise of racketeering and bootlegging gangsters such as Al Capone that were facilitated by prohibition, but a lesser-known phenomenon is the large number of people who were physically disabled because they drank poisonous liquor.</p> <p class="p1">Prohibition included exceptions for medicinal alcohols — often called patent medicines, a misnomer because they had no patents and generally performed no actual medical function. One such patent medicine was Jamaican ginger extract, or "jake," which typically contained 70 to 80 percent ethanol. During the Prohibition era, government enforcers required manufacturers of jake to add a higher content of ginger solids in order to render the drink more bitter and difficult to consume. Department of Agriculture inspectors would occasionally test jake shipments by boiling off the liquid and weighing the remaining solid residue. One manufacturer attempted to concoct a version of the liquor that would be relatively more drinkable and still pass this test, but in the process, created a poisonous drink that would later cause partial paralysis to an estimated 30,000 to 50,000 people — the largest mass poisoning in the history of the United States. This didn't have to occur. Jake had been used for "medicinal" purposes for 70 years with no record of poisonings from adulteration. But people respond to incentives, and prohibition-related policies created a perverse set.</p> <p class="p1">The result was the equivalent of a modern-day NFL scandal. Newspapers covered the proliferation of often-permanently disabled workers. More importantly, you couldn't avoid seeing them — they were in your town, they were your neighbors, they were normal people like you. The country was staring at stark and shocking evidence that its policy was harming innocent people, and this helped bring about the rare moment where the government recognizes its policy as a failure.</p> <p class="p1">For the NFL, the turn towards an arguably better policy regarding player conduct was only precipitated by a brutal video of a discrete act of harm. For government policies that slowly hurt Americans, it's harder to see how change can come about until it is too late. Examples of policies that are slow-burning failures abound: the inevitable insolvency of Medicare; the relentless accumulation of regulations and red tape; the war on drugs; cronyism. Unless the government can preemptively correct its course, these policies inevitably will lead to more situations at which correction to the policy can't do much for those who have already been harmed.</p> http://mercatus.org/expert_commentary/lessons-about-government-nfl Mon, 18 May 2015 09:55:00 -0400