Mercatus Site Feed en Remembering Doug North <h5> Expert Commentary </h5> <p class="p1">Douglass Cecil North passed away at the age of 95 on Nov. 23, 2015 at his home in Michigan.&nbsp; Joint recipient of the 1993 Alfred Nobel Memorial Prize in Economics, he will be remembered for his path breaking contributions to the field of economic history and his central role in creating the New Institutional Economics.&nbsp; He spent most of his academic career at two institutions — the University of Washington in Seattle, and Washington University in St. Louis.&nbsp; For much of the last two decades, he also maintained an association with the Hoover Institution at Stanford University.</p> <p class="p1">Doug will be remembered for many things and others can go through his list of honors, awards, and accomplishments.&nbsp; But for me, two things will always stand out — his devotion to his students and his personal role in my life as mentor, colleague, and friend.</p> <p class="p1">On the first point, one could note the large number of great scholars who emerged under his supervision in both Seattle and St. Louis or those who were simply inspired by his teaching to pursue careers in academia.&nbsp; But perhaps it is sufficient to observe that when the Jonathan Hughes Memorial Prize in teaching was instituted by the Economic History Society, North was the first recipient and an overwhelming favorite — not least of which because Jon Hughes had been one of Douglass’s first graduate students.&nbsp; On the day North received the Nobel prize, he cut off his interviewers to teach his regular courses, and reporters got a first-hand look at North the teacher.</p> <p class="p1">In my own life, North played an outsized role.&nbsp; He hired me at Washington University in St. Louis straight out of Northwestern where I’d completed a Ph.D. under Joel Mokyr.&nbsp; I remember the day he came to NU to speak.&nbsp; The room was packed with students and faculty.&nbsp; I tried asking a couple of questions, but of course, the faculty got the bulk of his attention.&nbsp; But he came up to me later and asked me what had troubled me about his talk.&nbsp; He then asked me to write a detailed letter of critique that he could read back in St. Louis, which I promptly sent off to him the following week.&nbsp; A short while later he called me up to interview for a position in the Economics Department.&nbsp; I spent 22 stimulating and wonderful years in St. Louis and I was there to observe the birth of the New Institutional Economics as a full-blown movement and not just a set of ideas.&nbsp; Political economy, economic history, and institutional discussion flourished at St. Louis in those days.</p> <p class="p1">At various times in the 1980s up through the mid-nineties we had Barry Weingast, Ken Shepsle, Lee and Alexandra Benham, James Alt, Randy Calvert, Gary Miller, Bob Parks, and Art Denzau as regular participants at the political economy workshop and at the informal Friday lunches that Doug organized.&nbsp; Jean Ensminger from Anthropology and I from Economics were the juniors in the group and we were later joined by Jack Knight, Norman Schofield and Itai Sened in Political Science, and John Drobak from the Law School.&nbsp; For a few years we also benefited from the participation of Gary Cox and Matt McCubbins when they were at the business school.&nbsp; Many of the leading young historians of the day, including Avner Greif and Jean Laurent Rosenthal, first spoke at Wash U. at these informal Friday lunches.&nbsp; Most of the other great scholars and leaders in political economy – from Mancur Olson and Ronald Coase to Yoram Barzel, Gary Becker, Robert Fogel, Oliver Williamson, and Elinor Ostrom were regular speakers at our Thursday Political Economy seminars.&nbsp; And of course, St. Louis hosted the first conference of the newly formed International Society for the New Institutional Economics with Coase serving as its honorary first president and North succeeding Coase.</p> <p class="p1">I well remember the pattern of the informal Friday lunches before they became a formal seminar workshop with many invited speakers.&nbsp;&nbsp; A group of us would walk over to a restaurant on Delmar while Doug talked about the ideas he was working on — having first given us a draft to look over.&nbsp; At the restaurant, the group would tear into his ideas and argue and scream at each other for a good 45 minutes or so.&nbsp; Then we would begin our walk back while Doug would try to finish up his defense before we made it back to the department.&nbsp; The thing is, no one ever seemed to like the first drafts of Doug’s work, but Doug patiently took copious notes.&nbsp; And each time, the drafts got better and better, till they became the full-fledged work that was to establish his fame and reputation.</p> <p class="p1">He was a marvelous colleague and mentor.&nbsp; When I was struggling with the writing of my book, Doug egged me on by having me give him a chapter every two weeks to read, discuss, and to take apart.&nbsp; His door was always open to students and faculty and he relished chatting with one and all about anything and everything.&nbsp; I have never met anyone as welcoming of criticism and as generous with his time and attention as Doug.&nbsp; When we were both at Hoover one year, a family emergency required my flying to the Far East late at night and Douglass insisted on driving me to the San Francisco airport from Palo Alto.</p> <p class="p1">I well remember that I when I was finally promoted with tenure at Washington U, Doug came up to me and handed me a bottle of wine saying:&nbsp; “This is almost ready to drink and it’s my last bottle.&nbsp; Take good care of it.” It was a bottle of the 1970 Mouton Rothschild.&nbsp; When it was time for me to leave St. Louis for good, he repeated the gesture, this time with a bottle of Chateau d’Yquem.</p> <p class="p1">I have met so many people who can recount an endless number of similar stories that I suspect the laws of physics were allowed to bend around Doug.</p> <p class="p1">When I moved to Fairfax one of the hardest things for me was losing regular contact with Doug, but fortunately we stayed in touch almost to the end.&nbsp; When I saw him a few months ago, he was clearly suffering and weak, but he still played the genial host and was eager to discuss ideas.&nbsp; In particular he was always quick to boast about the latest and greatest work he was doing.&nbsp; He never tired of discussing economics and he never lost his love for research, discussion, and ideas.</p> <p class="p1">As a scholar, he was one of the giants.&nbsp; But he was also a Prince among men.&nbsp; Even at 95, he was too young when he passed away.</p> Mon, 30 Nov 2015 10:57:23 -0500 The Monetary Mechanism of Stateless Somalia <h5> Publication </h5> <p><span style="font-family: 'Helvetica Neue', Arial, Helvetica, sans-serif; font-size: 13px; font-style: normal; line-height: normal; font-weight: normal; color: #333333;">A peculiar monetary institution emerged during the period of interregnum in Somalia from January 1991 to August 2012. Without a functioning government to restrict the supply of notes in circulation, Somalis found it profitable to contract with foreign printers and import forgeries. The exchange value of the largest denomination Somali shillings note fell from US $0.30 in 1991 to US $0.03 in 2008. However, the purchasing power eventually stabilized at the cost of producing additional notes.</span></p><p><span style="font-family: 'Helvetica Neue', Arial, Helvetica, sans-serif; font-size: 13px; font-style: normal; line-height: normal; font-weight: normal; color: #333333;">Find the article <a href="">here</a>.</span></p> Mon, 30 Nov 2015 10:03:01 -0500 Nobelist Douglass North Taught Us Institutions Matter Most <h5> Expert Commentary </h5> <p class="p1"><a href="">Douglass C. North</a> passed away on Nov. 23, 2015, at the age of 95. A <a href="">recipient</a> of the Nobel Memorial Prize in Economics, he was one of the most cited and influential scholars of his generation—not just in economics, but also in law, political science, history, and development. Though he started as a conscientious objector and even a Marxist before World War 2, North's views constantly evolved and in the end, he did more than anyone to restore to the study of economics the importance of good institutions as the basis for the success of modern market capitalism.</p> <p class="p1">Today, the idea that good formal and informal institutions (laws, norms, and their enforcement characteristics)—the rules of the game as he called them—are a crucial determinant of economic success or failure is almost a trite truism accepted by academics, NGOs, and most governments from Mumbai to Moscow, and from Berkeley to Beijing. So it is difficult to recall a time half a century ago, when most leading economists and bureaucrats could say or suggest that all that mattered for development were new technologies, capital transfer, and good Keynesian management of employment and aggregate demand. Leading surveys of growth in the 1950s were written as if the only differences between the economies of the United States, France, Sweden, and the Soviet Union were due to unemployment, technology transfer, capital accumulation, and demand management.</p><p class="p1"><a href="">Continue reading</a></p> Sun, 29 Nov 2015 09:54:59 -0500 Don't Blame Food Companies for Your High-Calorie Thanksgiving <h5> Expert Commentary </h5> <p class="p1">As Thanksgiving draws near, once again everyone's attention turns to festive holiday treats and the explosive number of calories contained therein. The usual <a href="">incriminations</a> of Big Food and its role in ballooning waistlines typically follow. Health advocates <a href="">blame</a> food companies for putting profits above consumers' well-being and for selling consumers cheap junk food loaded with fat and sugar but containing few nutrients. Consequently, they <a href="">call</a> for food regulations and taxes on junk food to counter the food industry's harmful effects. Yet health advocates are unlikely to achieve the outcomes they seek because they mistake the nature of the problem.</p> <p class="p1">To understand just how unusual the criticism of food companies is, it may be helpful to examine how food companies are judged compared to virtually any other industry. Imagine that you are buying an economy class airline ticket and at the end of the transaction, the airline asks you if you'd like to upgrade to business class for just a tiny fraction of your ticket's price. Now imagine that the airline offered this option to every single customer, not just a lucky few. Having been packed like a sardine into ever-fuller planes with ever-tighter seats, I'd guess this airline would be quite popular with its customers. If anyone criticized airline companies for giving their passengers more legroom, people would dismiss it as absurd.</p><p class="p1"><a href="">Continue reading</a></p> Tue, 24 Nov 2015 10:53:25 -0500 Modernizing Freight Rail Regulation: Recommendations from the TRB Study <h5> Publication </h5> <p><iframe src="//" width="510" height="420" frameborder="0" marginwidth="0" marginheight="0" scrolling="no" style="border: 1px solid #CCC; border-width: 1px; margin-bottom: 5px; max-width: 100%;"> </iframe></p> <div style="margin-bottom: 5px;"><strong> <a href="//" title="Modernizing Freight Rail Regulation: Recommendations from the TRB Study" target="_blank">Modernizing Freight Rail Regulation: Recommendations from the TRB Study</a> </strong> from <strong><a href="//" target="_blank">Mercatus</a></strong></div> <p class="p1">In June 2015, the National Academy of Sciences’ Transportation Research Board issued a report with recommendations to update and modernize economic regulation of rail freight transportation. Jerry Ellig served as a member of the committee that prepared the report. This presentation, given to the National Industrial Transportation League’s Railroad Transportation Committee in November 2015, &nbsp;summarizes the report’s main recommendations. For a short narrative that explains the recommendations, see Dr. Ellig’s commentary in <a href="">Real Clear Policy</a>.</p> Tue, 24 Nov 2015 10:11:45 -0500 An ACA Provision You've Never Heard of Could End up Being Very Costly <h5> Expert Commentary </h5> <p class="p1">One of the most consequential provisions of the Affordable Care Act (ACA) is also one of its most obscure.</p> <p class="p1">The “productivity adjustment factor,” inserted by the ACA into the Medicare program, is a massive spending cut, one of the largest in the program’s history. It was included to make room in the federal budget for the ACA’s expensive new health insurance subsidies. &nbsp;If Congress follows past practice, the ACA’s higher spending will be with us long after savings from the productivity adjustment factor have been reduced or eliminated altogether.</p> <p class="p1">The productivity adjustment factor is one of four ACA “indexing” provisions we examined <a href="">in a new research paper published by the Mercatus Center at George Mason University</a>. Indexing refers to adjustments that are made to keep tax and program benefit parameters consistent with policy preferences over time. &nbsp;The most familiar indexing provision in federal law is the Social Security cost-of-living adjustment, or COLA, which prevents purchasing-power erosion of Social Security checks due to inflation.</p> <p class="p1">In Medicare, the federal government makes a COLA-like adjustment to the payments made to hospitals and other facilities. The cost of running a hospital is measured by examining a “market basket” of goods and services typically purchased by inpatient facilities. The prices of items in the basket are tracked, creating an index used to maintain the inflation-adjusted value of Medicare’s payments for seniors’ hospital stays.</p> <p class="p1">Since 1983, when Congress established this prospective payment system for hospitals, Capitol Hill has frequently made ad hoc adjustments to the increase that otherwise would have applied to hospital payments. &nbsp;For instance, in 1990, as part of a large budget-cutting effort, Congress reduced the market basket increase for fiscal year 1991 by 2.0 percentage points for hospitals located in urban areas and 0.7 percentage points for facilities located in rural communities.</p> <p class="p1">The new ACA productivity adjustment factor is different from previous adjustments because it isn’t ad hoc (the formula for making the cut is written into the law) and it isn’t temporary (it will occur automatically every year). Under this provision, the annual updates to hospital and other facility payments will be reduced by a measure of economy-wide productivity increases -- thus it’s a productivity adjustment factor. The government actuaries who produce Medicare cost projections estimate that this factor will reduce the market basket index by, on average, 1.1 percentage points annually, dropping the average increase from 3.5 percent to 2.4 percent.</p> <p class="p1">The budgetary savings from this cut in payments are substantial -- at least on paper. The Congressional Budget Office has estimated it would reduce Medicare spending by $196 billion over 10 years -- making it the largest single spending reduction included in the ACA.</p> <p class="p1">But it is over the long run that the purported cost reductions are truly staggering because the annual cut compounds each year. Medicare’s actuaries have compared these cuts to a scenario in which hospital and other facility payment updates more closely track historical rates. That comparison shows the productivity adjustment factor reduces Medicare spending by about $4.0 trillion over seventy-five years, measured in present value terms.</p> <p class="p1">The actuaries are skeptical that the full cuts from the productivity adjustment factor can be sustained. They estimate that by 2040, half of all hospitals, 70 percent of skilled nursing facilities, and 90 percent of home health agencies would be losing money each year because of the deep cuts in their Medicare reimbursement rates. &nbsp;This would leave Medicare beneficiaries facing substantial barriers to accessing needed care. As the actuaries put it, “in practice, providers could not sustain continuing negative margins and, absent legislative changes, may have to withdraw from providing services to Medicare beneficiaries” or take actions to shift the cost of Medicare patients to other payers.</p> <p class="p1">It’s ironic that Congress enacted the productivity adjustment factor in 2010 because, even then, it was clear that a similar effort to cut Medicare payments to physicians was not working. The so-called “sustainable growth rate,” or SGR, was enacted in 1997 and imposed a cap on total physician fees that was indexed to GDP growth. As health expenses outpaced economic growth, the gap between the amount of spending allowed by the cap and what was necessary to take care of patients grew wider every year. With formula-driven cuts exceeding 20 percent, the SGR became impractical to enforce. It was abandoned altogether earlier this year.</p> <p class="p1">Formulaic cuts are attractive to legislators because they create the illusion of improved solvency in Medicare. The productivity adjustment factor is a blunt instrument that simply lowers what Medicare will pay for services, by trillions of dollars. But if the solution were that easy, it would have been done long ago. The truth is that Medicare is only valuable to the program’s beneficiaries if hospitals and physicians are willing to take Medicare patients. &nbsp;There’s nothing to stop providers of medical care from catering to patients covered by private insurance and avoiding those on Medicare and Medicaid when the government payments fall too low.</p> <p class="p1">The ACA’s defenders say the law will reduce future federal budget deficits. But that will only be true if Congress sticks with the productivity adjustment factor even when beneficiaries complain of restricted access to care. Based on prior history, that’s an unlikely scenario, to say the least.</p> Sun, 29 Nov 2015 17:48:39 -0500 A Common-Sense Solution to the Uber vs. Taxi Wars <h5> Expert Commentary </h5> <p class="p1">Since <a href="">Uber</a>'s launch in San Francisco five years ago, government officials have wrestled with how to address this new type of transportation service. Meanwhile, taxi drivers have cried foul over the unequal regulatory environment. They face a mountain of rules, ranging from sensible to comical and even bizarre, while ride-share upstarts Uber and Lyft operate outside most taxi laws. Policymakers across the nation could learn from their peers in Florida, who may have found a way to level the playing field and still make way for innovation.</p> <p class="p1">Last month, Broward County commissioners voted to reduce excessive taxi and ride-sharing regulations, creating a single set of simple rules that apply equally to all transportation services. Days later, Collier County joined the cities of Sarasota and Gainesville in completely deregulating vehicle-for-hire services, putting taxis and ride-share companies on equal footing. Now others — including Miami-Dade County, Portland, Ore., and Cambridge, Mass. — are considering similar changes.</p> <p class="p1">What kinds of laws do traditional taxi drivers face? Here are some examples:</p> <p class="p1">Most cities set a dress code for drivers; many explicitly prohibit bathing suits. Los Angeles keeps it classy by specifying black dress pants, black dress shoes and socks, and a white dress shirt. Female drivers have the option of wearing a black skirt.</p> <p class="p1">In Miami, it's illegal to operate a taxi without hubcaps, but again, Los Angeles does this one better by requiring that all the hubcaps match. Los Angeles also stipulates the proper lettering for signs in the taxicab. Apparently someone on L.A.'s Board of Taxicab Commissioners has a problem with serif fonts.</p> <p class="p1">Some cities appear to regard taxi drivers as not-so-distant cousins of Neanderthals, restricting a driver to only the words "taxi" or "cab," or if they are feeling particularly verbose, "taxicab," when soliciting a passenger. But monosyllabic solicitation must also be civilized: The L.A. taxi code prohibits using a "loud or boisterous tone of voice."</p> <p class="p1">Cities even micromanage taxi paint jobs. Washington's City Council decided in 2012 that the cabs weren't colorful enough and put the Taxicab Commission in charge of coming up with a unified paint scheme. However, the paint schemes submitted were so stunningly terrible — one looked like the Brazilian flag — that council members immediately considered revising the legislation to require a new design. The final result probably won't please University of Michigan fans, though; scarlet and gray are Buckeye colors. Less amusing, taxi owners will have to pay about $500 a vehicle to comply with the law.</p> <p class="p1">We've singled out some of the more arcane regulations. Most rules, however, are unnecessary in a world in which cellphone apps offer both drivers and riders instant feedback on the other's behavior and reputation. The only valid reason to regulate the transportation service industry is to ensure public safety. But burdensome regulations do more harm than good by creating barriers to entry, which reduce competition.</p> <p class="p1">For example, a seemingly innocuous rule such as the one mandating unified paint schemes makes it difficult for taxi companies to compete via product differentiation. This prevents riders from easily distinguishing taxis with a reputation for safety and high quality from riskier, low-quality fleets. Companies, in turn, have little incentive to hire better drivers or use cabs with better safety features.</p> <p class="p1">Other common taxi regulations are more obviously anticompetitive. Many cities limit the total number of taxi licenses available, and some even mandate a minimum number of cabs per company, crowding out newcomers. Still others impose steep licensing fees, outlaw price competition or require an additional license to pick up airport passengers.</p> <p class="p1">Economists have long argued that stiff competition is often far better than detailed regulations when it comes to fostering safety and quality. Recent research by the Mercatus Center at George Mason University illustrates how new communication technologies used by Uber and Lyft, which allow drivers and riders to rate each other, can fill the information gap between rider and driver.</p> <p class="p1">It's likely that the simple-yet-powerful discipline instilled by genuine competition and easily accessible customer reviews would outmatch even New York's 350-page taxi manual.</p> <p class="p1">In many municipalities, the taxi lobby has convinced policymakers that there are only two solutions: Either level the playing field by forcing ride-sharing firms to obey excessive taxi regulations, or ban ride-sharing completely. Leaders in Florida have shown that there's another option: Embrace progress by removing needless rules for all transportation service companies.</p> Fri, 20 Nov 2015 11:12:25 -0500 New Research: Affordable Care Act Not Working as Intended <h5> Expert Commentary </h5> <p class="p1">When the Affordable Care Act or “Obamacare” passed five years ago, government prognosticators and private research organizations projected between 21 and 27 million exchange enrollees in 2016. But last month, the Obama administration <a href="">announced </a>that it reduced that target to just 10 million enrollees.</p> <p class="p1">In 2010, the Urban Institute, a left-of-center think tank, projected that almost as many people with income above four times the poverty level ($47,080 for a single person and $97,000 for a family-of-four in 2015) would enroll in exchange plans as people with income less than half these amounts. Urban’s projections, which were fairly representative of other groups, are in hindsight wildly optimistic. <a href="">It turns out</a> that more than 25 times as many people with income below twice the poverty level purchased an exchange plan as people with incomes above four times the poverty level.</p> <p class="p1">In a new <a href="">research study</a> published by the <a href="">Mercatus Center</a> at George Mason University, I explore why ACA enrollment projections were so wrong. Here are the most likely explanations:</p> <p class="p1">First, for most uninsured people, the costs of enrolling in ACA plans exceed the benefits. For example, a recent economics <a href="">study</a> found that a typical single person making $40,000 is generally $1,500 to $3,500 better off by remaining uninsured as opposed to purchasing an exchange plan.</p> <p class="p1">Second, exchange plan deductibles are very high. In 2015, deductibles <a href="">averaged</a> about $3,000 for single coverage and $6,000 for family coverage for the most common type of plan. Tellingly, the only people who enrolled in exchange plans in large numbers—those below twice the poverty level—are the only ones who qualify for large subsidies to reduce these deductibles.</p> <p class="p1">Third, exchange plans <a href="">contain</a> fewer doctors and hospitals than expected.</p> <p class="p1">Fourth, the individual mandate isn’t motivating as many people to enroll as anticipated. The economic modelers <a href="">believed</a> that the mandate would create a “new social norm to have health coverage [that] can lead to behavioral responses much stronger than the nominal amount of the penalty would suggest.” However, few people who paid the mandate penalty in 2014 actually <a href="">signed up</a> for exchange plans in 2015 during a six-week special enrollment period created just for them. Moreover, hardship exemptions that relieve people who had any difficulty paying premiums from having to pay the penalty have weakened the mandate’s effectiveness.</p> <p class="p1">Fifth, the ACA requires insurers to offer coverage to all applicants at standard rates regardless of health condition. Large net attrition in exchange enrollment in both 2014 and 2015 suggests that many people may be dropping coverage after treatment.</p> <p class="p1">In addition to lower-than-expected enrollment, insurers are losing more money than anticipated. Just last year, the Congressional Budget Office <a href="">released</a> projections that insurers would make profits on exchange plans.</p> <p class="p1">Using <a href="">data</a> released by the administration, however, I <a href="">estimate</a> that insurers lost about 12 percent of ACA plan premiums in 2014. Insurers lost this much despite a huge government subsidy to cover most of the cost of their expensive enrollees. This subsidy delivered $8 billion to insurers in 2014, but it’s scheduled to end after the 2016 plan year. Starting in 2017, premiums will for the first time reflect the true cost of enrollees unless the administration devises a creative way to further subsidize insurers beyond what the law seemingly allows.</p> <p class="p1">In sum, double-digit premium increases in 2016 are a product of disappointing enrollment and insurers’ realization that a larger proportion of their enrollees are sicker and older than they expected. As premiums <a href="">increase</a>, deductibles are <a href="">rising</a> and provider networks are actually <a href="">shrinking</a>. These changes make ACA plans even less desirable to people who aren’t already sick or don’t qualify for large subsidies.</p> <p class="p1">The magnitude of the errors of initial predictions about the ACA’s effect is cause to re-examine our assumptions about health care markets. The failure of exchange plans to attract people who don’t receive giant subsidies should cause policymakers to revisit the law and allow people to purchase insurance products that they actually want.</p> Thu, 19 Nov 2015 12:07:15 -0500 A Downgraded ACA Baseline <h5> Expert Commentary </h5> <p class="p1">In a new <a href="">study</a> published today by the Mercatus Center at George Mason University, I assess key predictions made by both government and nonprofit research organizations about the Affordable Care Act’s (ACA) impact. The misestimates include: overestimating total exchange enrollment, overestimating enrollment of higher income people who do not qualify for subsidies to reduce premiums, projecting too many healthy enrollees relative to less healthy enrollees, and underestimating premium increases. This post focuses on the Congressional Budget Office’s (CBO) estimates. As CBO accounts for the first two years of the ACA’s implementation, its 2016 revised baseline will almost certainly&nbsp;show a lower overall budgetary cost for the law’s subsidies even as the average subsidy amount increases to account for a more adverse risk pool than expected.</p> <p class="p1"><b>CBO Overestimated Total Exchange Enrollment</b></p> <p class="p1">Right before the ACA passed Congress, <a href="">CBO projected</a> the law would have an average annual exchange enrollment of 8 million people in 2014, 13 million people in 2015, and 21 million people in 2016.</p> <p class="p1">It turns out these estimates were significantly&nbsp;too high in both 2014 and 2015 as only about 5.5 million people enrolled in 2014 and only about 9.5 million people enrolled in 2015. If the Obama administration’s recent <a href="">projection</a> of 2016 enrollment turns out to be correct, then CBO’s 2010 estimate of 2016 enrollment will be too high by about 50%.</p> <p class="p3"><b>CBO Overestimated Unsubsidized Enrollment</b></p> <p class="p1">In March 2015, <a href="">CBO released</a> downgraded expectations of exchange enrollment. In that update, CBO projected 11 million exchange enrollees with 3 million of them earning too much income to qualify for a premium subsidy.</p> <p class="p1">It turns out that CBO’s projection of 8 million subsidized enrollees was fairly accurate but its projection of unsubsidized enrollees was about double actual enrollment.</p> <p class="p1"><b>Enrollees More Expensive Than CBO Projected</b></p> <p class="p1">Under the risk corridor program, the government collects money from insurers with excess profits on ACA plans – exchange plans and ACA-compliant plans not sold through exchanges – and pays money to insurers with excess losses on these plans. In a <a href="">February 2014 estimate</a>, CBO projected that the government would receive an $8 billion windfall from the risk corridor program because of&nbsp;sizeable overall insurer profits. After the administration announced its intent to implement the program in a budget neutral manner, <a href="">CBO projected</a> that for the 2014 plan year profitable insurers would pay $1 billion for excess gains and unprofitable insurers would collect $1 billion for excess losses.</p> <p class="p1">It turns out that CBO significantly overestimated insurer profitability and thus expected generally healthier ACA plan enrollees than enrolled. Insurers with excess profits owed about $360 million and insurers with large losses requested about $2.9 billion. Using this data, I <a href="">estimate</a> that insurers’ losses on ACA plans in 2014, even with an $8 billion subsidy to cover the majority of the costs of their high expense enrollees, equaled about 12% of premiums. Standard and Poor’s<a href=";SctArtId=352088&amp;from=CM&amp;nsl_code=LIME&amp;sourceObjectId=9401106&amp;sourceRevId=5&amp;fee_ind=N&amp;exp_date=20251105-19%3A10%3A01">projects</a> that risk corridors will also run a significant deficit for the 2015 plan year.</p> <p class="p1"><b>CBO Underestimated Premium Increases</b></p> <p class="p1">In March 2015, <a href="">CBO projected</a> private health insurance spending per enrollee would grow by an average of 4.3% per year over the 2014-2018 period and that exchange plan premium increases would “generally reflect the underlying trend in spending by private health insurers.”</p> <p class="p1">It turns out that premiums will rise by double-digits next year. The weighted average <a href="">increase</a> is about 12%, with the average lowest cost silver and bronze plans <a href="">increasing</a> by 13% and 16%, respectively.</p> <p class="p1"><b>Anticipating Changes to CBO’s Revised ACA Baseline</b></p> <p class="p1">A large amount of uncertainty surrounds ACA projections given the magnitude of the changes made by the law. Although several of CBO’s projections have turned out to be well off the mark, it is worth noting that their projections tended to be better than those made by the <a href="">Centers for Medicare and Medicaid Services</a>, <a href="">The RAND Corporation</a>, and the&nbsp;<a href="">Urban Institute</a>.</p> <p class="p1">In its next ACA baseline, CBO will have to account for lower enrollment, particularly of people without subsidies, than it expected. Its new projections will also have to account for worse ACA plan risk pools and higher premium increases. These adjustments will cause other estimates to change, including the overall subsidy cost, the number of people with employer-sponsored insurance (ESI), and the amounts of revenue generated from the individual and employer mandates.</p><p class="p1"><a href="">Continue reading</a></p> Fri, 20 Nov 2015 11:27:18 -0500 The Unintended Consequences of CFPB Debt Reform <h5> Expert Commentary </h5> <p class="p1">While we can be confident that new regulations for the debt collection industry are <a href=""><b>on the way</b></a>, it's not yet clear whether those regulations will help or harm consumers. The result is largely dependent upon the Consumer Financial Protection Bureau (CFPB), which has the opportunity to either help facilitate open, constructive communication between consumers and debt collection firms, or to saddle the industry and consumers with hasty regulations that result in unintended consequences.</p> <p class="p1">The CFPB so far appears to be pursuing debt collection regulatory reform through the normal regulatory process, receiving more than 20,000 public comments in the wake of their proposal last year, and is surveying consumers about their experiences with debt collection. In addition to those laudable efforts, policymakers would do well to consider the lessons that can be learned from studying the <a href=""><b>historical legal and economic framework</b></a> of consumer debt collection regulation.</p> <p class="p1">As the CFPB contemplates new rules, it should remember that that consumer debt collection has been heavily regulated for decades at both the state and federal level. While the debt collection process is certainly not a pleasant experience, the worst practices of the industry's past have generally been outlawed. Because of that, the CFPB should prioritize <a href=""><b>comprehensive regulatory impact analysis</b></a> to determine whether the costs of additional regulatory burdens imposed on the industry will outweigh the limited marginal benefits.</p> <p class="p1">Fair and effective protections against fraudulent and abusive practices by debt collectors can help consumers by making them more willing to borrow without fear of harsh collection practices. To be willing to make a loan, however, lenders must be able to price the risk of the loan accurately (through the interest rate on the loan and other terms) or reduce their risk of loss (such as by lending less to riskier borrowers). Poorly designed or overzealous regulation of collection practices can result in higher interest rates or a reduction of access to credit for consumers. Those consumers who are deemed to be the riskiest borrowers (often lower-income consumers) will be the first to be denied credit, or will be priced out of their first-choice credit options. Since those consumers will still have a need for credit, that means forcing them to use less-preferred and more expensive options like payday lending or auto-title loans.</p> <p class="p1">Moreover, even those in the collection process can be harmed by poorly designed regulation, particularly those that limit communications between creditors and debtors, by leading to more lawsuits against consumers. Changing technology has created a number of ways in which consumer debt collectors might communicate more efficiently and proactively with those facing unpaid debts, which can lead to voluntary dispute resolutions.</p> <p class="p1">Lawsuits are expensive and unpleasant, for both consumers and firms, but if the less costly methods of achieving a debt resolution are removed or further limited via new regulations, we should expect firms to turn to courts more quickly in the debt collection process. Consumers may not even know that it would have been possible to achieve a resolution out of court if firms are barred from communicating with them.</p> <p class="p1">This is certainly not to say that the CFPB can or should do nothing.</p> <p class="p1">Today's debt collection rules were designed in an era when most communications were through landline phones and snail mail. Modernizing the rules governing consumer debt collection to enable firms to work constructively with consumers, such as allowing more flexibility to contact consumers by email and cell phone, while still protecting consumers' privacy could substantially improve the circumstances of consumers currently going through a debt collection process and those in need of access to reliable credit in the future.</p> <p class="p1">The CFPB should go about doing so carefully, however. There are decades of empirical research on the economic trade-offs involved in these regulatory decisions, and what initially looks like a well-meaning rule to protect consumers can quickly turn into a host of unintended consequences that hurt the most vulnerable.</p> Wed, 18 Nov 2015 15:40:22 -0500 Budget Deal Is Business-as-Usual in Washington <h5> Publication </h5> <p>The Bipartisan Budget Act of 2015, freshly signed into law by President Obama, suspends the $18.1 trillion federal debt ceiling until March 2017. It also busts the 2011 Budget Control Act—<a href="">which I previously discussed</a>—for the second time. It does so by raising the caps on discretionary funding by $50 billion for fiscal year (FY) 2016 and $30 billion for FY 2017.</p> <p>The deal’s defenders claim that it is fiscally responsible because the additional funding is paid for with a combination of revenue increases and funding reductions elsewhere. To be able to make this claim, however, the deal’s authors turned to a well-worn budget trick: the Congressional Budget Office’s (CBO) scoring of the legislation. The CBO score attempts to measure the fiscal effects of a particular piece of legislation over a 10-year period by estimating the changes in revenues and spending versus a baseline projection. In the case of the budget agreement, the CBO’s score shows that over the next decade the increased spending would be completely offset.</p> <p>But the devil is in the details.</p> <p>This week’s chart shows the CBO’s score of the budget deal broken down annually from FY 2016 to FY 2025. The red bars show the funding increases. The bars in two shades of blue show the offsetting combination of funding decreases elsewhere and revenue increases.</p><p><a href=""><img height="398" width="585" src="" /></a></p><p><span style="font-size: 12px;">While the funding increases occur up front, the offsets would largely occur in the future. Indeed, roughly half of the “savings” wouldn’t occur until the final year, FY 2025. That begs an obvious question: If Congress can’t muster the fortitude to abide by spending constraints now, why should it be expected to abide by them in the future? As noted, this is the second time Congress has failed to uphold the cap limits since they were enacted in 2011. And even though the ink has barely dried on the president’s signature, </span><a style="font-size: 12px;" href="">policymakers are already promising the farm lobby</a><span style="font-size: 12px;"> that they will scrap the $3 billion in savings from cuts to the federal crop insurance program.</span></p> <p>Unfortunately, the gimmickry doesn’t end there. As the <a href="">Center for a Responsible Federal Budget details</a> on its website, only half of the deal is “truly paid for” thanks to double-counted savings, “<a href="">pension smoothing</a>,” ignoring additional interest costs, and additional funding for the Overseas Contingency Operations account that the <a href="">deal’s authors made sure didn’t make it into the final score</a>.&nbsp;</p> <p>I had <a href="">previously warned</a> that with the Republicans wanting more military funding and the Democrats wanting more nondefense funding, the likely outcome would be a deal that increased both. Unfortunately, with this deal that has proven to be the case. Such business-as-usual budgeting is just more evidence that policymakers remain incapable of getting the federal government’s finances on <a href="">sustainable footing</a>. &nbsp;&nbsp;</p> Wed, 18 Nov 2015 15:38:44 -0500 Rent Control Policies Are Ineffective, Unjust <h5> Expert Commentary </h5> <p class="p1">Officials and activists in cities around the United States are lamenting the lack of affordable housing in their communities. Even the federal government is getting involved, as the Secretary of Housing and Urban Development Julian Castro was recently in Minneapolis to discuss <a href="">the issue.</a></p> <p class="p1">Most Americans know about the sky-high housing prices in places like San Francisco and New York. But fewer are aware that a similar outcry over housing prices exists in places such as <a href="">Houston</a>, <a href="">Denver</a>,&nbsp;<a href="">Minneapolis-St. Paul</a>, <a href="">Seattle</a> and <a href="">Wilmington, N.C</a>., areas not typically known for their high housing prices. Thankfully, these cities have yet to copy New York and San Francisco's biggest affordable-housing blunder — rent control. Yet, despite the repeated failure of rent control to restrain housing prices in New York or the Bay Area, it remains a popular policy proposal among affordable-housing advocates. This is unfortunate since rent control is not only an ineffective policy; it is also an unjust one.</p> <p class="p1">Rent control's inability to restrain housing prices is not surprising given that it doesn't address the ultimate problem, <a href="">which is a lack of housing</a>. Instead, it further reduces the quantity of available housing by diminishing the profit incentive to build more. Developers who know that the city won't allow them to increase rents as demand rises will be hesitant to build rental housing and more likely to build commercial buildings or single family homes that aren't subject to rent control — if they even build at all.</p> <p class="p1">Alternative solutions proposed in many cities — such as <a href="">inclusionary zoning</a>, which requires builders to include a specified number of affordable units in any development, or direct subsidies to developers in the form of <a href="">government owned land</a> or <a href="">tax credits</a> — have the appealing characteristic of actually attempting to address the core problem of too little housing, which is an improvement over rent control.</p> <p class="p1">Unfortunately, new research by my colleagues at the Mercatus Center shows that these other methods <a href="">often fail to increase the supply of housing as well</a>. The authors specify some policies that government could implement to encourage more housing — such as tax transfers to residents to encourage them to allow more building — and governments should try these rather than continuing the failed policies that have been in place for years.</p> <p class="p1">In addition to the perverse economic incentives created by rent control, there is also a legal and moral issue. As New York University law professor Richard Epstein has repeatedly pointed out, <a href="">rent control conflicts with the "takings clause" of the 5th Amendment</a>. This clause guarantees that Americans receive just compensation if their property is taken by the government. Rent control is in effect a taking of property, even though the government never actually takes possession of the housing units subjected to it.</p> <p class="p1">To see how this works, suppose you owned an apartment building in Seattle with five units that could each be rented for $1,000 per month. Now suppose that Seattle's city council implemented rent control — <a href="">which it's pursuing</a> — in order to provide more affordable housing, and under the new law you could charge only $800 per month. Your monthly revenue would decline from $5,000 per month to $4,000, which is the economic equivalent of Seattle simply taking possession of one of your units. In effect, rent control allows a government to take one of your apartments without compensation.</p> <p class="p1">Unfortunately, the courts have yet to officially recognize this obvious fact. In the court case of <a href=""><i>Guggenheim v. City of Goleta</i></a>, which concerned rent control in a California trailer park, the court stated that municipalities cannot be forced by the courts <a href="">to implement sound economic policies</a>, even if economics 101 shows that the policy is equivalent to a taking. Thus the regulation of property without compensation remains permissible in the U.S. even if it has the same economic effect as an actual taking of property.</p> <p class="p1">Many people are justifiably upset when a government abuses the power of eminent domain <a href="">to seize a small business</a> for private redevelopment, but they regrettably fail to see the economic similarity when a government imposes rent control on property owners. In both cases the economic livelihood of the property owner has been damaged, but in the rent control case the owner is also denied compensation. Rent control is not only a bad economic policy that doesn't achieve its goal of restraining housing prices. It is also an unjust policy that causes real economic harm to property owners.</p> Tue, 17 Nov 2015 12:21:14 -0500 The Injustice of Eminent Domain <h5> Expert Commentary </h5> <p class="p1">The District of Columbia <a href="">recently filed suit in D.C. Superior Court to use eminent domain to take control of a piece of land the city needs to placate D.C. United</a>, the District's major league soccer team. Without the land, D.C. United may leave for Virginia. This is just another <a href="">in a growing list </a>of local governments using the policy of eminent domain to enrich other private citizens, rather than for essential public uses. It's a policy only big business or a government bureaucrat could love.</p> <p class="p1"><a href="">Eminent domain</a> allows governments to acquire private property from unwilling sellers for public use. In many cases, however, "public use" has been ignored or twisted beyond recognition, as local governments use it to <a href="">take people's homes</a> and businesses for different private uses, as long as these provide more of a "public benefit." The subtle switch from use to benefit spells trouble for many.</p> <p class="p1">Now <a href="">a carpet store in Glendale, Colorado, can be seized</a> and handed over to a developer so that an entertainment complex can be constructed, as this provides jobs and a bigger tax base for the city. As for the proprietor's livelihood, who cares?</p><p class="p1"><a href="">Continue reading</a></p> Fri, 20 Nov 2015 11:11:47 -0500 The Doomed Crusade Against Daily Fantasy Sports <h5> Expert Commentary </h5> <p class="p1">Last week, New York State attorney general Eric Schneiderman issued cease-and-desist letters to DraftKings and FanDuel, the two largest daily-fantasy-sports (DFS) companies, claiming that the games they offer constitute illegal gambling under New York law. The companies have&nbsp;responded&nbsp;with legal action of their own, putting the decision in the hands of the New York court system.&nbsp;</p> <p class="p1">While this is just the latest in a series of confrontations playing out across the country over the status of daily fantasy sports, it is perhaps the highest-profile one. It also raises important questions about how the law is applied to innovative products and firms, such as DraftKings and FanDuel, as well as who is in the best position to protect consumers.&nbsp;</p> <p class="p1">In fantasy sports, participants choose their own “teams” composed of real-life athletes in a particular sport, then get points for the statistical accomplishments (yardage gained, rebounds, goals scored, stolen bases, etc.) that their players achieve in real-life games. Traditional fantasy sports operate with users competing against a set group of fellow users,&nbsp;drafting teams for a competition&nbsp;that lasts an&nbsp;entire season.&nbsp;But in recent years, online daily fantasy-sports competitions have been launched, with each day or week being a separate contest, generally against dozens or even thousands of anonymous other competitors.&nbsp;</p> <p class="p1">In his letter, Schneiderman declares these latter products to be “games of chance” rather than “games of skill,” and he uses this distinction as the basis for his actions.&nbsp;The same distinction was used by the Nevada Gaming Control Board to file a cease-and-desist order against DFS operators last month. But what exactly is the standard being used, and how does this apply to new, innovative products such as DFS games?&nbsp;</p> <p class="p1">While Congress explicitly removed fantasy sports games from its online-gambling laws, state laws remain much more ambiguous when it comes to what constitutes gambling. Games deemed “of skill” are considered legal, while those “of chance” are considered gambling, which is then either heavily regulated or prohibited, depending on the state.&nbsp;</p> <p class="p1">In Schneiderman’s view, traditional, season-long fantasy sports are games of skill while daily games are ones of chance. Yet every game involves some combination of skill and luck. One recent survey found that success in season-long fantasy sports game is 55 to 65 percent skill, with the remainder being luck.&nbsp;</p> <p class="p1">The problem with using this skill-versus-luck test is that it has never been fully defined. The line between skill and luck is an ambiguous standard that leaves much room for subjective, arbitrary decisions. This has resulted in varying interpretations across states. A handful of states already ban season-long fantasy sports under the skill-versus-luck test, and others have already done the same for daily fantasy games.&nbsp;</p> <p class="p1">Beyond the implications for season-long and DFS games, this logic could be applied to ban a number of commonplace games. For example, statistical analysis has shown that skill does not overtake luck in determining NHL standings until the season is nearly complete. If someone saw fit, he could argue that hockey is game of chance rather than one of skill. Will the Sabres, Rangers, and Islanders be receiving cease-and-desist letters?&nbsp;</p> <p class="p1">When it comes to consumer protection, these latest developments in states like New York and Nevada call into question who is in the best position to protect those who seek to play fantasy sports. Schneiderman’s cease-and-desist letter is based on a rather low opinion of those who play fantasy sports, claiming that DraftKings and FanDuel are merely attempting to “fleece sports fans across the country” by promoting their games as “a path to easy riches.” But if the goal is truly “consumer protection,” is outright prohibition the best route?&nbsp;</p> <p class="p1">As we’ve argued before, if regulators are seriously interested in protecting consumers, the best thing they can do at this point is allow competition to play out. Players who feel that DraftKings and FanDuel no longer provide what they are seeking will likely move to other platforms, and this is an opportunity for entrepreneurs to create products that are more responsive to consumer demands, which might include more equitable prize distributions or more transparent protocols for lineup submissions (to avoid various types of cheating). For the time being, however, it seems players are satisfied with their experiences even in the face of the recent order from the attorney general. FanDuel CEO Nigel Eccles recently stated that the company hasn’t seen an unusual number of withdrawals since the letter was released. The vast majority of people who go to casinos or play the lottery do not believe it’s a prudent financial investment or a sound retirement plan. They simply enjoy the excitement of the game.&nbsp;</p> <p class="p1">What’s apparent in reading Schneiderman’s letter is that he thinks daily fantasy sports are being marketed as a sort of investment. Yet daily fantasy lineups are not a hedge fund, not a mutual fund, not a bond or security. They are games. DFS is, plain and simple, an entertainment product that people play for fun.&nbsp;</p> <p class="p1">It’s worth noting that the vast majority of people who go to casinos or play the lottery do not do so because they believe it’s a prudent financial investment or a sound retirement plan. They do so because they simply enjoy the excitement of the game. But this consideration is often disregarded when regulators attempt to calculate “consumer welfare” in this context. No one criticizes the money being spent on products such as Netflix ($5.5 billion in 2014) or video games ($24 billion in 2015), which are entertainment products that have zero expected monetary return as a scam. Yet when it comes to the entertainment products offered by DraftKings and FanDuel, the analysis takes on a wholly different form.&nbsp;</p> <p class="p1">But DraftKings and FanDuel, as well their users, are not standing idly by while regulators increase restrictions. In fact, the industry is having what may be considered its “Uber moment.” Indeed, DraftKings seems to have taken a page directly from Uber’s playbook by using its app to ask users to make their voices heard. It seems to be working.&nbsp;</p> <p class="p1">Much of this could be moot before long. Some experts believe that all forms of gambling (games of skill and games of luck) will be legal nationwide in the next four to five years. While Schneiderman’s crusade against DFS could end up alongside New York City’s pinball ban as a temporary blip in the history of gambling, it should still be worrisome to New Yorkers that bureaucrats have decided once again that they know better than their constituents how their money and time ought to be spent.&nbsp;</p> <p class="p1">For now, the outcome rests in the hands of the New York courts. Perhaps it is fitting that the resolution should come from there, a slightly different game that is nonetheless still a blend of both skill and luck.&nbsp;</p> Mon, 16 Nov 2015 13:30:28 -0500 The Government Is Rushing out an Ill-Conceived Plan to Regulate Consumer Drones <h5> Expert Commentary </h5> <p class="p1">Officials at the Federal Aviation Administration estimate that <a href=""><b>up to a million drones will be sold this holiday season</b></a>, and it's making them very nervous. Let's face it: Some of these drone recipients — possibly even a few Vox readers — are likely to do something stupid with their new toys in the next few months.</p> <p class="p1">In the past, noncommercial drone users have <a href=""><b>occasionally behaved foolishly</b></a> and <a href=""><b>endangered others</b></a>, but this hasn't been a big deal because there just aren't that many in the skies. If holiday drone sales don't disappoint, that will change.</p> <p class="p1">So the FAA has convened a task force to explore new drone registration requirements that could for the first time implicate hobbyists who were previously exempt from regulation. Ordinary consumers who buy or receive drones might need to fill out DMV-style paperwork to operate within the law.</p><p class="p1"><a href="">Continue reading</a></p> Fri, 13 Nov 2015 10:48:21 -0500 A DMV for Drones? Inside the FAA’s Clumsy Push to Regulate Flying Computers <h5> Expert Commentary </h5> <p class="p1">At long last, commercial drone technology has developed to the point where businesses and consumers alike can take them to the skies for fun and profit. The benefits of mass drone flight are projected to be enormous, with applications ranging from <a href="">instant package delivery</a>&nbsp;to&nbsp;<a href="">manufacturing</a>&nbsp;to&nbsp;<a href="">lifestyle video-blogging</a>. But a series of poor proposals from the Federal Aviation Administration (FAA) threatens to ground major parts of this hot industry just as it <a href="">starts to take flight</a>.</p> <p class="p1">Drones, or "unmanned aerial vehicles" (UAVs) as the acronymically-inclined like to call them, are merely computers with wings. They range in size from <a href="">charming toys weighing under a few pounds</a> to crafts that are almost <a href="">large enough for human passengers</a>. They can be controlled by a human operator on the ground, like a model aircraft, or they can be pre-programmed to autonomously zip across the skyline on their own, aided by a series of gyroscopes, aerodynamic blades, transmitters, sensors, and cameras that allow these winged robots to <a href=";Page=1">quickly detect and avoid objects in their flight path</a>.</p> <p class="p1">Drones can act as synthetic extensions of ourselves, allowing us to explore and interact with environments far beyond our normal reach. As mobile computers, they help us to <a href="">better extract useful data from the world around us</a> to improve how we get things done. And as platforms for engagement with a new airspace frontier, they are a critical check on government power and a <a href="">possible tool for resistance</a> to those in oppressive situations. They’re really, really cool, and they’re <a href="">poised to contribute much to both our economy</a> and general standard of living.</p><p class="p1"><a href="">Continue reading</a></p> Fri, 13 Nov 2015 10:38:31 -0500 Modernizing the SSDI Eligibility Criteria: Trends in Demographics and Labor Markets Affecting Workers in the “Grid” <h5> Publication </h5> <p><iframe src="//" width="510" height="420" frameborder="0" marginwidth="0" marginheight="0" scrolling="no" style="border: 1px solid #CCC; border-width: 1px; margin-bottom: 5px; max-width: 100%;"> </iframe></p> <div style="margin-bottom: 5px;"><strong> <a href="//" title="Modernizing the SSDI Eligibility Criteria: Trends in Demographics and Labor Markets Affecting Workers in the “Grid”" target="_blank">Modernizing the SSDI Eligibility Criteria: Trends in Demographics and Labor Markets Affecting Workers in the “Grid”</a> </strong> from <strong><a href="//" target="_blank">Mercatus</a></strong></div> Fri, 20 Nov 2015 10:45:52 -0500 Reputation in the Internet Black Market <h5> Publication </h5> <p><span style="font-family: Arial, Helvetica, sans-serif; font-size: 12px; font-style: normal; line-height: normal; font-weight: normal;">This paper is an analysis of the role reputation plays in the Deep Web using data from the Internet black-market site, The Silk Road. This encrypted online marketplace employed cryptocurrency and functioned over the Tor network. Utilizing a modeling technique, informed by trade auction theory, we investigate the effect of seller reputation. Analysis of the seller's reputation gives us insights into the factors that determine the prices of goods and services in this black marketplace. Data on cannabis listings is parsed from the Silk Road website and covers an 11-month time period, from November 2013 to October 2014. This data demonstrates that reputation acts as a sufficient self-enforcement mechanism to allow transactions. These findings exemplify the robustness of spontaneous order with respect to the Deep Web as an emergent marketplace.</span></p><p><span style="font-family: Arial, Helvetica, sans-serif; font-size: 12px; font-style: normal; line-height: normal; font-weight: normal;">Find the article <a href=";aid=10029604&amp;fileId=S1744137415000454">here</a>.</span></p> Thu, 12 Nov 2015 15:21:55 -0500 Budgeting in Wonderland <h5> Expert Commentary </h5> <p class="p1">One need not be intricately familiar with the tale of "Alice's Adventures in Wonderland" to appreciate that the federal budget process has similarly become an alternate reality replete with sketchy characters, peril and the absurd. In the latest trip down the Beltway rabbit hole, a Republican-led Congress relied on Democratic votes to produce a two-year budget agreement that removed the limit on Uncle Sam's credit card and increased spending now in exchange for offsetting spending cuts and revenue increases that will mostly occur 10 years from now. Well, that's if future Congresses stick to the offsets.</p> <p class="p1">No, seriously.</p> <p class="p1">Let's start with the federal debt, which had been stuck at $18.1 trillion since March, thanks to the Treasury Department's seemingly magical ability to keep it from breaching the government's statutory limit on debt even though spending continued to outpace revenues all the while. Under the deal, the debt limit is suspended until March 2017, which means policymakers won't have to sully themselves working on the debt problem any time soon.</p> <p class="p1">Regardless of the efficacy of the debt limit, one would think that chipping away at that $18.1 trillion of debt (equal to approximately $56,000 for every man, woman and child in the United States) would be the priority on Capitol Hill. But if Capitol Hill has a priority, it is to find a way to gather the votes to go deeper into debt — and to do so by spending even more of other people's money.</p> <p class="p1">It was that bipartisan desire to increase the flow of money coming out of the federal spending spigot that led to a budgetary framework that is as disingenuous as the grin on the Cheshire-Cat's face. The deal busted limits on federal spending (for the second time) that policymakers had reluctantly put in place just four short years earlier.</p> <p class="p1">Although imperfect in design, the budget caps and their enforcement mechanism, sequestration, had actually imposed a modest degree of spending restraint. But like the debt limit, it appears that the limits on federal spending exist to be broken.</p> <p class="p1">Capitulating to the White House's desire to jack up spending and, consequentially, the federal debt, the Republican leadership resorted to the time-honored trick of using the Congressional Budget Office's 10-year "score" of the legislation to make the claim that the additional spending is "paid for."</p> <p class="p1">Except that it's not.</p> <p class="p1">I won't go into the weeds of how CBO scoring works. Non-budget wonks need only know that according to the score, of the $80 billion-plus in additional funding provided for the next two fiscal years, roughly half of it is to be "paid for" in 2025. If you're asking yourself what's to stop future Congresses from ignoring the pay-fors, move to the front of the class. Indeed, before the budget deal had even been signed into law, Republican leaders were already promising the members of Congress who represent agricultural interests that $3 billion in offsetting cuts to the federal crop insurance program will quickly be nixed.</p> <p class="p1">Adding insult to injury, a review of the deal by the Committee for a Responsible Federal Budget found that the actual spending increase will be $154 billion and that only approximately half of that amount will be "legitimately" paid for. That's because the deal's authors employed a number of budget gimmicks that would be embarrassing to anyone who has any shame. But this is Congress we're talking about.</p> <p class="p1">If only it were all just a bad dream.</p> Fri, 13 Nov 2015 12:27:31 -0500 The Evolution of Federal Budget Rules and the Effects on Fiscal Policy: How Informal Norms Have Trumped Formal Constraints <h5> Publication </h5> <p class="p1">Most discussion of federal government deficits and debt focuses on recent decades and formal budget rules, such as the debt ceiling, sequestration, and balanced budget amendments. However, the underlying deficit problem goes back much further and is driven in part by changes to <i>informal</i> rules.</p> <p class="p1">A new study published by the Mercatus Center at George Mason University argues that, beginning late in the 19th century, the informal rules that govern fiscal policy began to reward policymakers for increasing spending—even for increasing it beyond the capacity of federal revenues, and therefore at the cost of chronic deficits. Despite numerous legislative attempts to constrain spending over the past 40 years, these informal rules have trumped formal constraints, and the deficit problem has marched steadily on.</p> <p class="p1">With this evolution of federal budget rules in mind, today’s reform discussions must address the deeper problem of informal rules driving systematic deficits and unsustainable debt. Otherwise, formal restraints will not work.</p> <p class="p1">Below is a summary of this analysis. To read the entire study and learn more about its authors, Peter T. Calcagno and Edward J. López, please see “<a href="">The Evolution of Federal Budget Rules and the Effects on Fiscal Policy: How Informal Norms Have Trumped Formal Constraints</a>.”</p> <p class="p3">TODAY’S FISCAL CHALLENGES</p> <p class="p1">The federal government is suffering from an unsustainable fiscal condition. Under conservative assumptions, the Congressional Budget Office projects that, after temporary, near-term declines, federal budget deficits will increase to 150 percent of their current magnitude by 2023. Federal debt held by the public will exceed $18 trillion within that same decade, according to the Congressional Budget Office’s estimates, and the outlook is even worse if assumed budget disciplines are relaxed.</p> <ul class="ul1"> <li class="li4">Overspending is driving the long-term fiscal problem more than inadequate taxation. Federal revenues and spending both averaged about 3 percent of GDP from 1792 to 1929. But from 1930 to 2013, average expenditures jumped to 18.5 percent while average revenues increased only to 16 percent. More recent decades show a worsening of the imbalance. Since 1952, for example, federal spending has settled into an average of about 19 percent of GDP, while tax revenue has stayed at 16 percent. The obvious result of this imbalance is chronic deficits.</li> <li class="li4">At the same time, fiscal policymaking has become more complex and fragmented and less predictable. As deficits spiked in the first few years after 2000, for example, fiscal policymakers increasingly relied on emergency and supplemental spending bills that evaded spending limits and the formal budget process, while also enacting temporary tax provisions that raised uncertainty in markets and compromised economic growth.</li> <li class="li4">The growth of mandatory spending on entitlement programs—which run automatically without annual review or appropriation—has exerted even more deficit pressure, as has the burden of debt service. From 1962 to 2014, mandatory spending has increased from 25 percent to 65 percent of the budget, while discretionary spending has correspondingly dropped from 68 to 34 percent. This trend is projected to continue, with mandatory spending expected to exceed three-fourths of the budget by 2020, according to Office of Management and Budget projections.</li></ul> <p class="p3">THE EVOLUTION OF FISCAL POLICY RULES: KEY SHIFTS IN NORMS</p> <p class="p1">Beginning late in the 19th century, the federal government’s fiscal policy has been driven by two gradual changes to informal rules: a shift away from the balanced-budget norm and the emergence of the career politician.</p> <ul class="ul1"> <li class="li4">By the early decades of the 20th century, fiscal policy was drawing away from the balanced-budget norm that had prevailed since America’s founding, and toward using the budget to underwrite a stronger safety net for economic security and to manage macroeconomic performance. As the decades passed, these two sets of expectations exerted pressure for increased federal spending, not only during times of national emergencies, but also under ordinary conditions. This led to the acceptance of increased federal spending even at the cost of deficits, rather than balanced budgets, as the new policy norm.</li> <li class="li4">During this time, norms in the government were shifting as well. The elected class mutated from a high-turnover group of temporary officeholders into a body of career politicians. In addition, the organization of Congress, political parties, and the executive branch led to a diffusion of budget access and authority within government.</li> </ul> <p class="p1">The shift from the old balanced-budget norm to the modern deficit-as-policy norm, coupled with the professionalization of elected office, began to exert enormous pressure on policymakers to increase federal spending. They responded by codifying these new norms into formal law, laying the groundwork for chronic deficits and unsustainable debt.</p> <p class="p3">FROM CODIFYING DEFICITS TO CONSTRAINING OVERSPENDING:&nbsp;</p> <p class="p3">EVOLUTION OF THE FORMAL RULES</p> <p class="p1">Following these two shifts of informal fiscal norms, numerous changes to the formal rules of fiscal policy emerged. The salient theme in the evolution of formal rules has been the struggle to balance the need for fiscal discipline against the demands of a professionalized government expected to use its budget to promote economic security and macroeconomic management.</p> <ul class="ul1"> <li class="li4">At the household level, the single most profound change came with the 1935 Social Security Act. Over time, the act centralized responsibility for public assistance and social insurance programs, and started a permanent demand for increased spending on a comprehensive range of social insurance and public assistance programs.</li> <li class="li4">Other policy initiatives expanded the government’s role in trying to boost economic performance. The Federal Reserve Act of 1913 centralized responsibility for financial stability and the supply of liquidity during financial crises. The 1946 Employment Act set the objectives of stabilizing unemployment, output, and inflation. The Full Employment and Balanced Growth Act of 1978 (commonly known as the Humphrey-Hawkins Act) extended the Federal Reserve’s macroeconomic goals.</li> <li class="li4">In addition, the economics profession began to support the use of budget deficits as a policy tool for achieving macroeconomic stability and avoiding a repeat of the Great Depression. By the mid-20th century, the mainstream positions in academia, the media, and the intelligentsia had accepted the case for countercyclical policy articulated in the 1930s by John Maynard Keynes.</li> <li class="li4">In the early 1970s, following a standoff between Congress and President Nixon, lawmakers tried to coordinate their budget activities with the Congressional Budget and Impoundment Control Act of 1974, which put the final touches on the modern budget process. The Budget Act built on the existing committee structures in the House and Senate, but created the Budget Committees to supervise and coordinate the budget process, and a Congressional Budget Office to provide Congress with its own independent fiscal analysis.</li> <li class="li4">Because the Congressional Budget Act repeatedly failed to control fiscal outcomes, Congress made numerous other attempts to constrain spending. These included the Omnibus Budget Reconciliation Act of 1981—with its explicit goal of reducing spending—the Balanced Budget and Emergency Deficit Control Act of 1985, the Budget Enforcement Act of 1990, and the Omnibus Budget Reconciliation Act of 1993. These attempts to constrain spending added layers of complexity to the fiscal policy process.</li> <li class="li4">Yet despite these efforts, every annual budget since 1974 has experienced a deficit, with the exception of 1998–2001. In sum, by the time Congress was beginning to take serious steps to rein in the budget, the systematic tendencies toward deficit-financed overspending had already been cemented into place.</li></ul> <p class="p3">WHY THE DEFICIT-AS-POLICY NORM TRUMPS FORMAL SPENDING CONSTRAINTS</p> <p class="p1">The diffusion of spending authority among numerous committees of Congress has led to higher transfers, deficits, and debt. This, coupled with other forces, has ingrained the deficit-as-policy norm in federal budgeting.</p> <ul class="ul1"> <li class="li4">Each committee allocates funds for its segment of the budget—e.g., agriculture, defense, commerce—but when the several appropriations are aggregated, the sum is greater than anyone intended and more than available revenues can offset. Thus, the federal government generates deficits as a matter of routine, regardless of whether emergency conditions are at hand.</li> <li class="li4">Meanwhile, safety net programs for the elderly, children, and the unemployed have evolved into permanent entitlements that now absorb two-thirds of federal spending. Relief of economic hardship has motivated historic expansions of unemployment benefits, food assistance, and other safety-net programs.</li> <li class="li4">Economic experts argue that increased deficit spending is needed to promote economic growth and that more spending carries only minor tradeoffs because Treasury yields and debt service levels remain low. This deficit-as-policy norm also has effectively granted any group with a good cause access to the federal budget.</li> <li class="li4">On the financing side, there is intense pressure to avoid the burden of financing additional expenditures. The lack of future taxpayers’ representation in current policy choices creates a bias in favor of financing current spending through future, rather than current, taxes—that is, a bias toward debt-finance. In the era of professional politics, politicians have a career interest in taking credit for the benefits of additional budget outlays. This incentive creates a systematic tendency toward increased spending, both in good times and in bad.</li></ul> <p class="p3">LESSONS FOR REFORM</p> <p class="p1">The deficit-as-policy norm and the professionalization of politics have become ingrained in American politics and will be difficult to reverse. Serious reform discussions must focus on the fundamental, underlying institutional rules of the fiscal game, including and especially the relevant informal rules. Only then will the people with a seat at the table have the incentive to act systematically to promote fiscal discipline.</p> <p class="p1">Formal constraints on spending—such as a balanced budget rule or fixed spending limits—may be helpful, but will not work unless the public begins to change its view that programs such as Social Security and health care are entitlements. This is a huge challenge that requires gradual changes in attitudes, but the reality is that meaningful fiscal reform does not stand a chance without some further evolution of norms beyond deficit-as-policy.</p> <p class="p1">Reform discussions must start by recognizing that current fiscal challenges are rooted in these deep institutional changes. Effective reforms must focus on institutional rules, both formal legislation and informal norms. Most importantly, changes in public attitudes are needed to move the American political culture more toward a balanced-budget norm—recognizing that the abilities of the federal government are limited, as should be its spending authority.</p> Fri, 20 Nov 2015 11:05:00 -0500