Mercatus Site Feed en A Scholar's Scholar Retires <h5> Expert Commentary </h5> <p class="p1">My dear friends Bob and Elizabeth Higgs will soon move from Louisiana to a remote corner of Mexico. Bob says that visits north of the border will be few. The Higgses plan to retire away from it all with a completeness that few of us dare to attempt.</p> <p class="p2">Bob is one of our greatest living scholars. Specializing in economic history, Bob's first major work is his 1976 book, “Competition and Coercion.” In it, Bob documents the many ways that economic competition — including people's ability to move from place to place — enabled blacks to improve their economic situation after the Civil War. These improvements came despite the bigotry that then reigned in the South — and despite the activities of government.</p> <p class="p2">As summarized by the late Nobel laureate economist Robert Fogel in his review of Bob's book, “Those who seized control of the state machinery not only disenfranchised the blacks, but used their political power to transfer income from blacks to whites, to restrict blacks' access to such public institutions as schools and hospitals, to restrict the occupational mobility of blacks, and to bar them from certain occupations ... . While such coercion restricted the rate of black economic progress, it did not prevent it. Higgs concludes that the forces of competition proved strong enough to check the forces of coercion and made possible a fairly rapid rate of economic improvement.”</p> <p class="p2">Competition in the market is the best friend that disfavored people can have. Not so the state.</p> <p class="p2">Bob's most famous book is his 1987 study, “Crisis and Leviathan.” With a mastery of historical details, Bob explained that government's growth is fueled in part by crises — whether real, exaggerated or illusory. The other part of the fuel for government's growth is an ideology that demands government intervention during troubling times. As people's trust in markets and voluntary action weakens and as their faith in government strengthens, politicians grab more power. And when the country escapes each crisis, politicians seize credit for the salvation even when, as during the Great Depression, politicians' actions actually worsened the situation.</p> <p class="p2">Another of Bob's key contributions is his identification of the role of “regime uncertainty.” Regime uncertainty exists when investors worry that, as Bob describes it, “private property rights in their capital and the income it yields will be attenuated further by government action.”</p> <p class="p2">Bob first used regime uncertainty to explain the length of the Great Depression. In the early 1930s, President Herbert Hoover — responding to the slowing economy following the stock-market crash — launched the government into unprecedented heights of activity. FDR followed with even more interventions. These interventions frightened entrepreneurs and investors. And the fright was made worse by the intellectual climate that then regarded socialism as being inevitable. The insecurity that these developments injected into the U.S. economy kept it greatly depressed for more than a decade. Not until the less radical Truman replaced the increasingly radical Roosevelt and the less interventionist Republicans took Congress in 1946 from the Democrats did the economic climate once again encourage enough entrepreneurial activity to promote growth.</p> <p class="p2">No summary can capture the depth, breadth and wisdom of Bob's work. But I hope that I've at least sparked interest in some readers to encourage them to read Bob's contributions directly.</p> Wed, 29 Jul 2015 10:28:00 -0400 The International Corporate Tax Grab <h5> Expert Commentary </h5> <p style="text-align: left;" class="p1">If Greece's ongoing fiscal quagmire demonstrates anything, it's that Europe's largest welfare states live in denial. Even as the bills from decades of profligate spending came due, Greeks took to the streets, not to demand a new path but to insist on continuing the status quo. Even their European creditors, in calling for tax hikes instead of strictly pro-growth reforms, would perpetuate the tax-and-spend cycle. It thus comes as no surprise that these same nations are leading the charge through the Organisation for Economic Co-operation and Development to raise corporate tax rates globally.</p> <p style="text-align: left;" class="p1">This isn't the first effort by the OECD to undermine tax competition and coerce low-tax nations to change their tax policies for the benefit of irresponsible high-tax nations. Since 1998, acting on behalf of European high-tax nations, the OECD has sought to prop up bad tax policy and create an international tax cartel, largely with an indirect form of tax harmonization made possible by destroying financial privacy laws.</p> <p style="text-align: left;" class="p1">Now the OECD is targeting multinationals and has launched a new scheme to boost tax burdens on business. The underlying assumption behind the base erosion and profit shifting, or BEPS, project is that governments aren't seizing enough revenue from multinational companies. The OECD makes the case, as it did with individuals, that it is illegitimate for businesses to legally shift economic activity to jurisdictions that have more favorable tax laws.</p> <p style="text-align: left;" class="p1">Its solution is to force those companies that wisely structured their operations to benefit from low-tax jurisdictions to declare more income in high-tax nations. In other words, they want to harmonize rules and ensure that corporations pay the same regardless of where they choose to locate their business activities.</p> <p style="text-align: left;" class="p1">The expected outcome of BEPS is a higher overall tax burden on economic producers. The OECD insists the project is necessary because nations aren't collecting what they need under the current competitive system, yet its own reports acknowledge that corporate tax collection hasn't declined as a percentage of its members' gross domestic products over the long run.</p> <p style="text-align: left;" class="p1">Besides, corporate taxes rank among the most destructive to economic growth, making the OECD's efforts largely self-defeating.</p> <p>Removing the ability of companies to mitigate the damage of ill-conceived taxes will only enhance their destructive power. Far from filling government coffers in order to continue funding massive redistributive welfare regimes, BEPS will strangle global economic output and erode tax bases even further.</p><p>Reducing the size of bloated governments would be a better idea, but as with both Greece and its creditors, the obvious eludes the OECD.</p><p style="text-align: left;" class="p1">Sadly, the OECD is also rolling out information collection systems that could make the National Security Agency blush. So-called country-by-country reporting will require companies to hand over far more information than they currently release, including proprietary data related to their competitive positions. As any current or former federal employee can attest, there's almost no chance this information can be kept confidential and out of the hands of competitors or hackers.</p> <p style="text-align: left;" class="p1">It's also hard to take seriously OECD claims that reported information will be used only to observe trends and assess where there is the greatest risk of tax evasion. The far likelier outcome is that it provides a blueprint for squeezing more tax dollars from corporations, particularly U.S.-owned businesses that reinvest offshore to avoid the excessive 35 percent tax rate they would face if they brought earnings back to the United States.</p> <p style="text-align: left;" class="p1">Corporations provide an easy political target for tax-hungry politicians, but the burden of corporate taxes falls on ordinary citizens. Employees, shareholders and investors will bear the brunt of the OECD's corporate tax grab, all because European politicians refuse to accept responsibility for building bigger governments than their economies can sustain.</p> Wed, 29 Jul 2015 10:21:49 -0400 The Looming Economic Nightmare for the Tri-State Area <h5> Expert Commentary </h5> <p class="p1">If there’s a lesson to draw from the financial disasters in Greece, Puerto Rico and Chicago, it’s this: When governments take on too much debt and continually defer their bills, it eventually spells trouble — for both taxpayers and those who rely on government pensions or services.</p> <p class="p1">It takes a long time, a lot of bad choices, and an economic shock or two to put a government on the brink.</p> <p class="p1">Will the tri-state area soon face the same painful choices as Chicago Mayor Rahm Emanuel — trying to decide whether to staff schools or fund pensions?</p> <p class="p1">It’s a question that led me to compile new state fiscal health rankings, using the most recent 50-state set of audited financial reports (from the 2013 fiscal year) and check their vital signs.</p> <p class="p1">Do states have enough cash to cover an emergency? Can they meet their annual budget? Do they have more liabilities or assets? What are the biggest risks?</p> <p class="p1">Three of the bottom five states in our union include New York, Connecticut and New Jersey.</p> <p class="p1">All experienced the same lingering post-recession stress: little cash to cover short-term liabilities and revenues that barely match expenses.</p> <p class="p1">And all three have large, ongoing expenses for public employees’ health care or other post-employment benefits (OPEB) and a tendency to use debt financing.</p> <p class="p1">New York ranks 46th, due to a weak cash position and a small deficit in FY 2013.</p> <p class="p1">The long-run measures show the state uses debt to finance everything from OPEB to local highways and bridges, mass transit and CUNY and SUNY expenses.</p> <p class="p1">Issuing debt isn’t unusual, nor does it spell imminent disaster, but it does add up.</p> <p class="p1">New York had $90 billion in long-term liabilities in FY 2013. That’s 63 percent of its total assets — among the highest in the nation. Its second-biggest liability is $15 billion for pay-as-you go health-care benefits for public-sector workers.</p> <p class="p1">Unfunded benefits can put stress on a state’s finances, especially during recessions.</p> <p class="p1">Connecticut is next at 47th.</p> <p class="p1">It has more long-term obligations than it does resources. Adding to its deficit is a reliance on bonds, including debt issued to cover pension contributions and pay for OPEB benefits and compensated absences for employees.</p> <p class="p1">New Jersey finishes at 49th, ahead of Illinois.</p> <p class="p1">The Garden State’s cash position was better than New York’s, but its budgetary position was slightly worse, with revenues falling short of expenses, necessitating a $5 billion transfer to cover the gap.</p> <p class="p1">Long-term obligations like the ongoing cost for pensions and OPEB are again the driver and are among the biggest liabilities on New Jersey’s balance sheet.</p> <p class="p1">Looking at a few self-reported numbers from one fiscal year only says so much.</p> <p class="p1">They’re blunt, basic, and point to broad areas where states face challenges. Like going to the doctor for the first time, the patient’s weight, blood pressure and temperature provide a benchmark, not a full diagnosis.</p> <p class="p1">But the news here is sobering.</p> <p class="p1">It may come as a surprise, but these rankings don’t assign blame to current governors, legislators or political parties.</p> <p class="p1">States’ economies, tax systems, and past fiscal decisions — some stretching back to the booming stock market days of the ’80s and ’90s, when pensions and benefit plans looked over-funded on paper — have placed policymakers in tough situations. Often, their choice is between a rock and a hard place.</p> <p class="p1">Public employees rightly expect to receive the benefits they’ve earned, and politicians must now figure out how to honor those promises while still funding ongoing services.</p> <p class="p1">There is also a lesson from the tri-state area for the top three states: Alaska, North Dakota and South Dakota. Windfall revenues and a hot economy can lead to short-term spending sprees and generous promises, which can blind policymakers to debts and lull legislatures into believing that the long-term never really arrives.</p> <p class="p1">But, as the tri-state area’s governors can tell them, it does.</p> Wed, 29 Jul 2015 10:08:32 -0400 What's the Future of Finance, Innovation and Growth? <h5> Expert Commentary </h5> <p class="p1">Several years ago, Stanford University Prof. Ulrike Malmendier and Stefan Nagel, now at the University of Michigan, <a href="">shed light</a> on how extreme events, like a stock market crash, can affect the way people invest. Those who experienced low returns on their investments around a crash were less willing to take on risk in their financial decisions. It's no surprise that financial market experiences in turn could influence policy views around the world, too.</p> <p class="p1">After the recent crisis, economists have been debating the appropriate role of finance in an economy. Some think finance overall serves a useful <a href="">function</a>, while others <a href="">question</a> whether finance benefits society at all, or whether the financial sector is too large.</p><p class="p1"><a href="">Continue reading</a></p> Wed, 29 Jul 2015 09:27:46 -0400 Mid-Session Budget Review: More Revenue, More Spending <h5> Publication </h5> <p class="p1">The Office of Management and Budget recently released the Obama administration’s fiscal year (FY) 2016 mid-session budget review (MSR). The MSR is an annual update of the president’s initial budget proposal that incorporates subsequent changes in policy and the underlying economic assumptions used in forecasting the budget’s future path. <a href="">I reviewed the president’s budget proposal</a> when it was released in February and the updated figures show that the story remains the same: the White House envisions more tax revenues and higher levels of spending.</p> <p class="p1">The following chart shows projected revenues and spending under the president’s proposal according to the new figures provided by the MSR. The first graph displays the data in dollar amounts while the second shows revenues and spending as a share of the economy (GDP).</p><p class="p1"><a href=""><img height="837" width="585" src="" /></a></p> <p class="p2"><span style="font-size: 12px;">The top graph shows that revenues would climb from $3.6 trillion in FY 2016 to $5.4 trillion in FY 2025. Spending would jump from $4 trillion in FY 2016 to $6.1 trillion in FY 2025. Over that 10-year span, the federal government would take in $44 trillion in revenue and spend a combined $50 trillion. The resulting annual deficits would add $6 trillion to the federal debt held by the public, contributing to a total debt of over $20 trillion in FY 2025.</span></p> <p class="p1">The bottom graph shows that revenues and spending as a percentage of GDP would also increase. After spiking from 17.5 percent in FY 2014 to 19.2 percent in FY 2016, revenues would remain at an elevated level and gradually reach 19.7 percent in FY 2025. Spending as a percentage of GDP would see similar growth after going from 20.3 percent in FY 2014 to 21.5 percent in FY 2016. In FY 2025, spending would reach 22.4 percent of GDP. Federal debt held by the public would stay relatively flat as a percentage of GDP, but at 75 percent that’s not cause for celebration. Indeed, the Congressional Budget Office’s most recent <a href="">long-term budget forecast</a> shows that this already dangerous level of debt will eventually reach destructive levels in the absence of substantial spending reforms.</p> <p class="p1">By pursuing an agenda that essentially ignores the government’s long-term budget problems and instead encourages further expansion, the president is doing a disservice to the interests of future Americans, who would&nbsp; bear the brunt of the economic fallout under the current fiscal trajectory. While it is expected that the Republican-controlled Congress is unlikely to go along with the president’s tax-and-spend agenda, unfortunately, the <a href="">GOP has yet to demonstrate</a> that it’s truly serious about addressing the federal government’s bleak budget picture either.</p> Wed, 29 Jul 2015 09:38:27 -0400 Should the US Export-Import Bank Be Reauthorized? <h5> Publication </h5> <p class="p1">The US Export-Import Bank (Ex-Im Bank) is a government credit agency that provides tax- payer-backed financing to private exporting businesses. An increasing body of evidence shows that the Ex-Im Bank provides subsidized financing to big businesses at the expense of smaller businesses and taxpayers while doing little to promote exports, create jobs, or improve competitiveness of US firms. Removing this source of government-granted privilege can only help US exporters.&nbsp;</p> <p class="p2"><b>BACKGROUND ON THE EX-IM BANK&nbsp;</b></p> <p class="p3">The Ex-Im Bank was initially created in 1934 to finance trade with the Soviet Union and was established as an independent government agency in 1945. Executive Order 6581 gave it the power to “aid in financing and facilitate exports of goods and services, imports, and the exchange of commodities and services” between the United States and foreign countries to create jobs in the United States.&nbsp;</p> <p class="p3">The Ex-Im Bank has four main tools to achieve these goals: loan guarantees, working capital guarantees, direct loans, and export-credit insurance. Recent funding for the bank has increased from $12.37 billion in 2007 to $27.2 billion in 2013. A better way to understand these numbers is to look at the amount of exposure the bank has—that is, the financial risk the bank takes on, for which taxpayers are ultimately responsible. During the same period, the total exposure for the bank increased from $57.42 billion to $113.83 billion.&nbsp;</p> <p class="p3">In September 2013, after extensive debate over reauthorization of the bank, Congress extended the bank’s ability to operate until June 30, 2015. That authorization has ended, and Congress once again must consider the facts surrounding the Export-Import Bank’s reauthorization.&nbsp;</p> <p class="p2"><b>POLICY ANALYSIS OF THE EX-IM BANK&nbsp;</b></p> <p class="p3">The Ex-Im Bank is a Depression-era relic that no longer serves the purpose for which it was intended. The bank subsidizes the exports of a handful of large US firms while exposing tax- payers, borrowers, and consumers to risk. The Ex-Im Bank undermines the legitimacy of both the government and markets as it doles out favors to the politically connected while providing little support to small businesses. It fails to promote exports or level the playing field for US businesses. Eliminating the Ex-Im Bank will not result in job losses. Furthermore, far from being as asset to the Department of the Treasury, it suffers from a lack of transparency and exposes taxpayers to considerable risk.&nbsp;</p> <p class="p5"><b>1. The Ex-Im Bank Is an Example of Government-Created Privilege&nbsp;<br /></b><br /><span style="font-size: 12px;">The Export-Import Bank is a source of destructive government-granted privilege, which is strikingly visible as politically connected businesses lobby for and collect subsidies. The unseen harms, however, are just as important.&nbsp;</span></p> <ul class="ul1"> <li class="li6">Among the top 10 domestic beneficiaries of the Ex-Im Bank is Boeing, which at a 40 percent share of total loan authorizations dwarfs the 25 percent share for all small businesses combined that received Ex-Im Bank loans in 2014. On the foreign side, things aren’t much different—the subsidized financing largely benefits very large companies that either collect massive subsidies as state-controlled entities or that could easily access private financing, such as Mexico’s Pemex, Ireland’s Ryanair, and Emirates airline. In a lawsuit, Delta Air Lines has alleged a loss of 7,500 American jobs stemming from the Ex-Im Bank’s activities. </li> <li class="li6">American businesses without political connections are put at a competitive disadvantage by their own government because they compete against both domestic and foreign businesses with access to subsidized loans. </li> <li><span style="font-size: 12px;">The Ex-Im Bank also gives lenders an incentive to shift resources away from unsubsidized projects and toward subsidized ones—regardless of the merits of each project.&nbsp;</span></li></ul><p><span style="font-size: 12px;"><b> 2. The Ex-Im Bank Does Not Promote Exports or Level the Playing Field for US Businesses <br /></b></span><br style="font-family: inherit; font-style: inherit; font-weight: inherit;" /><span style="font-size: 12px;"> The Ex-Im Bank is supposed to address market imperfections, based on the assumption that high-value projects might not find funding. In the marketplace, however, high-risk projects with a low likelihood of repayment won’t find financing. When the government supports such projects for politically well-connected businesses, taxpayers ultimately bear the risk of failure and nonpayment. High-risk projects, however, only make up 10.9 percent of the Ex-Im Bank’s portfolio. Economic theory and evidence show that these projects are not successful and benefit only a handful of special interests rather than all US exports:</span></p><ul class="ul1"> </ul> <ul class="ul1"> <li class="li6"><i>&nbsp;</i><i>The bank fails to change the trade balance. </i><i>According to the Government Accountability Office (GAO)</i><i>, export promotion programs like Ex-Im Bank subsidies “cannot produce a substantial change in the U.S. trade balance, because a country’s trade balance is largely determined by the underlying competitiveness of U.S. industry and by the macroeconomic policies of the United States and its trading partners.” <br /> </i></li> <li class="li6"><i></i><i>The vast majority of exports are unaffected by the Ex-Im Bank. </i><i>Less than one-third of the estimated export value of the bank’s portfolio </i><i>is intended to counteract competitive disadvantages created by foreign governments. </i><i>The Ex-Im Bank assists less than 2 percent of total exports</i><i>. This means that </i><i>more than 98 </i><i><br /> </i><i>percent of US exports occur without government financing through the bank</i><i>, demonstrating that the bank is not critical to helping US exports thrive globally. <br /> </i></li> <li class="li6"><i></i><i>Benefits are conferred on only a few states, but all taxpayers bear the risk. </i><i>The vast majority of benefits conferred by the Ex-Im Bank are concentrated in a handful of states</i><i>—the top three being Washington state, Texas, and California. Washington state received 43.6 percent of total disbursements from 2007 to 2014, primarily because Boeing—the single largest beneficiary of Ex-Im Bank financing—builds its airplanes there. Forty-two states received less than 2 percent of disbursements and 35 states received less than 1 percent. Should the Ex-Im Bank portfolio fall into insolvency again, </i><i>as it did in 1987</i><i>, taxpayers in all these states share equal responsibility for bailing out the bank.&nbsp;</i></li> </ul><p><i style="font-family: inherit; font-weight: inherit;"><b>3. The Ex-Im Bank Is Unlikely to Affect Net Job Creation&nbsp;<br /></b><br /></i><span style="font-size: 12px;">While the Ex-Im Bank’s supporters point to numbers showing that new jobs have been created through federal spending, funding for one industry or firm may take away more jobs from other industries and firms, resulting in a net job loss. At best, the bank redistributes employment away from smaller unsubsidized firms toward larger subsidized firms.&nbsp;</span></p><ul class="ul1"> </ul> <ul class="ul1"> <li class="li6"><i></i><i>Many industries lose jobs. The Ex-Im Bank claims that its subsidies supported approximately 164,000 jobs in 2014. </i><i>But this figure does not account for<br /> the unseen costs of the bank</i><i>, which include displaced employment among unsubsidized firms that compete with Ex-Im Bank–subsidized firms and firms that purchase products that are made more expensive by those subsidies. Each year, </i><i>Ex-Im Bank subsidies impose net costs of about $3 billion on 189 US industries</i><i>. This means slimmer profit margins, lower growth, and dampened employment across firms that have to compete against firms receiving Ex-Im Bank subsidies. <br /> </i></li> <li class="li6"><i></i><i>Large businesses will not experience job losses in the absence of the bank. Jobs will not be lost if the Ex-Im Bank ceases to extend new loans. The large corporations <br /> </i>that are major recipients of subsidized financing from the Ex-Im Bank, including Boeing, Caterpillar, and General Electric, have millions of dollars—years worth— of backorders that will keep workers employed.&nbsp;</li> </ul> <p class="p5"><b>4. The Ex-Im Bank Does Not Support Small Businesses&nbsp;<br /></b><br /><span style="font-size: 12px;">Proponents claim that the Ex-Im Bank supports small businesses and jobs by leveling the play- ing field, but the vast majority of US small businesses—over 99.9 percent—receive no benefits from the Ex-Im Bank. These small businesses are placed at a competitive disadvantage against large, subsidized competitors that are the primary beneficiaries of the Ex-Im Bank’s financing. Most of the Ex-Im Bank’s funding goes to large corporations such as Boeing. In fact, large corporations received roughly 75 percent of the bank’s total assistance in 2013.&nbsp;</span></p> <ul class="ul1"> <li class="li6"><i></i><i>Large businesses benefit the most. The Ex-Im Bank’s </i><i>top 10 overseas buyers are large corporations </i><i>(including Pemex, Ryanair, and Emirates airline) that primarily purchase exports from multinational conglomerates, challenging the narrative that the bank helps small businesses or even domestic businesses. <br /> </i></li> <li class="li6"><i></i><i>Small, minority-owned, and women-owned businesses are left out. Between fiscal year (FY) 2007 and FY 2014, </i><i>only 23 percent of the bank’s financing benefited small businesses</i><i>, and minority-owned and women-owned small businesses received less than 2 percent of the bank’s total funding. When compared to the exporting economy as a whole for minority and women-owned businesses, </i><i>the bank funds only 1 to 2 percent </i><i>of such business. </i><i><br /></i></li></ul><p><span style="font-size: 12px;"><b>5. The Ex-Im Bank’s Improper Accounting Practices Could Cost Taxpayers Billions of Dollars <br /></b></span><span style="font-family: inherit; font-weight: inherit;"><br /> Supporters of the bank claim that it saves taxpayer money and wisely invests taxpayer dollars. However, the bank uses improper accounting practices and miscalculates its budget savings. The Ex-Im Bank has a history of poor financial management—its accounting and risk assessment practices, which it uses to calculate cost projections, have been consistently criticized by </span><span style="font-family: inherit; font-weight: inherit;">the GAO </span><span style="font-family: inherit; font-weight: inherit;">and its own inspector general for methodological weaknesses:&nbsp;</span></p><ul class="ul1"> </ul> <ul class="ul1"> <li class="li6"><i></i><i>Ex-Im Bank accounting incorrectly shows savings. While the bank claims that $14 billion will be saved over the next decade, </i><i>a federal accounting report </i><i>finds that Ex-Im programs will actually cost taxpayers $2 billion. <br /> </i></li> <li class="li6"><i></i><i>Financial safeguards fail to meet standards. Numerous audits from the </i><i>bank’s internal inspector general </i><i>also show that that the bank’s risk analyses, default assumptions, internal reporting procedures, and financial reporting are inadequate to safely steward taxpayer funds and responsibly manage its vast portfolio.&nbsp;</i></li><li class="li6"><i style="font-family: inherit; font-weight: inherit;">Ex-Im Bank has a history of mismanagement. </i><span style="font-size: 12px;">The Ex-Im Bank has a history of poor financial management. In 1987, it requested a $3 billion federal bailout, following seven years of losses of hundreds of millions of dollars.&nbsp;</span></li></ul> <p class="p2"><b>CONCLUSION&nbsp;</b></p> <p class="p3">The Ex-Im Bank fails to promote exports, create jobs, or support small businesses. Rather, the&nbsp;<span style="font-size: 12px;">Ex-Im Bank privileges subsidized firms over their unsubsidized competitors, draws capital away from other unsubsidized borrowers, and puts taxpayer money at risk, all while making US businesses less dynamic and less efficient. There is a difference between favoring some businesses and being in favor of a free market: the Ex-Im Bank does not support a free market economy. If a government agency fails to meet its own stated objectives and leaves taxpayers on the hook to pay subsidies to large, well-financed, multinational corporations, it should no longer exist.&nbsp;</span></p> Wed, 29 Jul 2015 10:04:19 -0400 First Principles of Congressional Budgeting <h5> Publication </h5> <p class="p1">Chairman Price, Ranking Member Van Hollen, and members of the committee: Thank you for inviting me here to discuss the need for a fundamental overhaul of the federal budget process. I applaud you for directing the House Budget Committee’s attention to this pivotal issue.&nbsp;</p> <p class="p1">My three-part message today is this. First, Congress should treat the budget process as a means, not an end, and enact reforms accordingly. Second, given the fiscal challenges facing the country, now is not the time for minor tweaking. Instead, now is the time to think big and craft a process that drives legislators to produce credible and sustainable fiscal policy by constraining federal spending both today and tomorrow. Third, any reform should include effective enforcement mechanisms, preferably constitutional in nature, to prevent the new process from suffering the same fate as the current one.</p> <p class="p1"><b>THE CURRENT BUDGET PROCESS IS A BROKEN TOOL</b></p> <p class="p1">I begin with a basic question: why should we care about failures in the budget process? Simple: The budget process is a tool, and if it does not work properly, it will hinder Congress’s ability to make progress on key fiscal issues. Yet, as Congress undertakes reform and identifies areas in need of change, it will be tempting to focus only on the mechanics of the process—for instance, whether Congress passes a budget resolution or completes all appropriations bills on time. This narrow approach to reform would be a mistake.</p> <p class="p1">Don’t misunderstand: the mechanics of the process <i>are</i> important, and the gears are creaky, at best. It is true—this year Congress, led by this committee, passed a joint budget resolution for the first time since 2009. But given progress to date, Congress will almost certainly fail to pass all appropriations bills by the statutory October 1<sup> </sup>deadline. Meanwhile, congressional budget rules are routinely gamed, ignored, or changed, which is not surprising given the lack of strong enforcement mechanisms. The process is also incomplete, as the major threat to the federal government’s fiscal future—entitlement spending—falls largely outside current procedures.</p> <p class="p1">That said, we should be concerned about process not for process’s sake, but rather because of our perilous fiscal situation. In the 40 years since the Congressional Budget and Impoundment Control Act was put into place, the federal government has run a unified budget deficit about 90 percent of the time, with the deficit exceeding 3 percent of GDP (the standard for EU countries) about half of the time. During the same time period, the national debt as a share of GDP has roughly tripled.</p> <p class="p1">Remarkably, the worst is yet to come. The Congressional Budget Office (CBO) estimates in its 2015 long-term budget outlook, using very realistic assumptions about the course of future policy, that the debt held by the public will increase to 175 percent of GDP by 2040.</p> <p class="p1"><b>THINKING BIG: PROCESS REFORM SHOULD PROMOTE CREDIBLE AND SUSTAINABLE FISCAL POLICY</b></p> <p class="p1">Given that the status quo is not sustainable, where do we go from here? A reformed budget process that is followed to the letter but fails to control spending in the near term—or that leads to small deficits today while allowing programs like Medicare to ratchet up the federal government’s long-term liabilities in relatively hidden ways—is no reform at all. To be effective, therefore, the process must place binding short-run and long-run constraints on spending, and in doing so, force lawmakers to make hard choices.&nbsp;</p> <p class="p1">In the short run, limits should be placed on deficits over a multiyear period while permitting some deficit spending in any given fiscal year to account for economic fluctuations. Switzerland and Germany are two countries that have adopted this “smoothing” approach.&nbsp;</p> <p class="p1">To address long-run fiscal concerns, budgets must account for long-term liabilities from programs like Medicare and Social Security. Congressional reelection motivations make it too tempting for lawmakers to leave difficult decisions about programs like these for tomorrow. Waiting until there is the “political will” to act, however, typically means waiting until a crisis occurs. To prevent such delays, budgets should adhere to targets regarding long-term liabilities at various points over the course of several decades, rather than simply looking 5 or 10 years into the future, as is current practice.</p> <p class="p1">These periodic targets would ensure any hard choices are made in a timely fashion and any significant changes to entitlement programs are implemented gradually to minimize transition costs. In addition, imposing this long-run perspective on budgeting for new policies would help make transparent instances when such programs or regulations create long-term liabilities that are obscured from view today.</p> <p class="p1">To implement rules focused on the long run necessitates the calculation of estimates that are, by their very nature, uncertain. Still, it is better to produce educated estimates than to ignore the problem. Nobody should reason, “I am not sure how long I will live, so there is no point in planning for retirement.” Yet, that is exactly how the federal government prepares its budgets.</p> <p class="p1"><b>THE BIGGEST CHALLENGE FOR REFORM SUCCESS: EFFECTIVE ENFORCEMENT MECHANISMS</b></p> <p class="p1">Having laid out the direction in which reform should head, I now want to discuss the biggest challenge Congress will face moving forward: making the changes stick. The true measure of success will come when difficult decisions must be made. Will policymakers actually use the process, or will they cast it aside in the interest of political expediency?&nbsp;</p> <p class="p1">History suggests that political expediency will win, and for good reason. Article I, section 5 of the Constitution reads in part, “each House may determine the rules of its proceedings.” This single line gives lawmakers great leeway and has helped create the problem Congress faces today: a budget process that is largely ignored.</p> <p class="p1">The most effective way to ensure durability is a constitutional amendment placing external, enforceable limits on Congress’s ability to tax and spend. A constitutional amendment would counteract the temptation to circumvent rules, and it would also provide a foundation on which the new budget process could be built. In the absence of a constitutional amendment, enforcement options will be much more limited, and success will depend heavily on leadership within the executive and legislative branches.</p> <p class="p1"><b>THE PATH FORWARD: MANY QUESTIONS REMAIN</b></p> <p class="p1">There is, of course, much more to consider if Congress is serious about reform. Should the congressional committee structure be changed? Should reconciliation be eliminated? How can direct spending programs like Medicare be brought into the budget process in a serious way? Can voters be educated so that electoral incentives encourage fiscal responsibility? How exactly should the country’s liabilities be estimated?</p> <p class="p1">Legislators must also pay careful attention to rule design. Appendix 1 of this testimony lists ten principles in this regard, including the importance of writing precise rules to prevent legislators from exploiting loopholes and gimmicks to get around the process.</p> <p class="p1"><b>CONCLUSION</b></p> <p class="p1">In closing, the congressional budget process is in dire need of replacement. Alice Rivlin, former director of both CBO and the Office of Management and Budget, has written, “Process can either hamper decision-making or facilitate it, but only at the margins.” I have a great deal of respect for Dr. Rivlin, and many in the policy community share her views about the limits of process reform. However, “marginal” improvements just won’t do if Congress is serious about tackling the country’s fiscal challenges. As they say, “Go big or go home.”</p> <p class="p1">Thank you again for inviting me to testify today. I welcome your questions.</p><h2><b>Ten Principles of Budget Rule Design<br /><br /></b></h2><ol class="ol1"> <li class="li1"><b>Use budget rules to change the terms of the debate.</b> Budget battles will be fought differently if fiscal responsibility is a requirement, not an option. </li> <li class="li1"><b>Apply rules permanently and to the entire federal budget. </b>Temporary rules or rules exempting certain programs won’t help in the long run. </li> <li class="li1"><b>Focus on spending. </b>Washington cannot address the looming budget crisis without gaining control of the unsustainable spending growth that drives it. </li> <li class="li1"><b>Build flexibility into rules by “smoothing.”</b> Tie budget rule targets or limits to a multiyear period or long-term economic performance to accommodate economic downturns or other transitory events. </li> <li class="li1"><b>Build flexibility into rules by incorporating limited, carefully constructed emergency provisions.</b> Account for major disruptions like war. </li> <li class="li1"><b>Be precise to prevent loopholes and gimmicks.</b> History proves that if there is a way around a rule, a legislator will find it. </li> <li class="li1"><b>Pay careful attention to “starting points.”</b> Consider cutting inflated spending levels (e.g., from stimulus) prior to pegging permissible increases to the current budget. </li> <li class="li1"><b>Fight against faux fiscal discipline and resist the temptation to compromise on rule design.</b> You are better off with no rule than a badly designed one. </li> <li class="li1"><b>Use a commission as a supplement to, not a replacement for, a budget rule.</b> Commissions are great for specifics, but they can’t produce change without some other external pressure.&nbsp;</li><li class="li1"><span style="font-family: inherit; font-style: inherit;"><b>Incorporate well-designed rules into the US Constitution.</b> </span><span style="font-size: 12px;">While there are pros and cons to constitutional rules, without this external enforcement, budget rules will always be vulnerable to legislators’ propensity to break them.&nbsp;</span></li></ol> Tue, 28 Jul 2015 10:49:59 -0400 How Advances in Technology Keep Reducing Interventionist Policy Rationales <h5> Publication </h5> <p class="p1">Advances in technology enhance the ability of entrepreneurs and markets to solve problems successfully and efficiently. For example, technology can help define property rights, reduce information disparities, eliminate monopolies, provide collective goods, and handle externalities. Technology that empowers people reduces the justification for costly regulations, government interference, and politically motivated spending.</p> <p class="p1">A new paper published by the Mercatus Center at George Mason University explores several concrete examples of how technology is helping to reduce market deficiencies, dealing a blow to demands for government regulation. The political pressure to increase regulations in fields as diverse as environmental policy and consumer protection ignores the evidence that advancing technology is providing customers and entrepreneurs with the knowledge and tools to solve problems without government intervention.</p> <p class="p1">To read the paper in its entirety and learn more about its authors, Fred E. Foldvary and Eric J. Hammer, please see “<a href="">How Advances in Technology Keep Reducing Interventionist Policy Rationales</a>.”</p> <p class="p3"><b>SUMMARY</b></p> <p class="p1">Proponents of government intervention into markets often cite four classic efficiency problems as warranting regulation to “fix” an asserted market failure: collective goods, asymmetric information, externalities, and monopoly. The theory suggests that because markets fail to fix these problems, government is in the best position to monitor markets for trouble and then regulate it away.</p> <p class="p1">This paper explores each of these perceived market failures by looking at examples of current government regulations and the technological advances that have made these regulations obsolete. These innovations have either corrected a problem better than the government could have or shifted the search for a solution from regulation to defining property rights. Governments have trouble adapting to rapidly advancing technology. Regulation often clings to the past while markets push toward a more efficient future. Regulation can also hamper technological progress by skewing and reducing incentives for businesses to adopt new technologies.</p> <p class="p3"><b>KEY EXAMPLES OF TECHNOLOGICAL ADVANCES</b></p> <p class="p1">Many economic problems that once were difficult for businesses and consumers to solve can now be handled more effectively because of better technology.</p> <p class="p4"><b>Traffic Congestion</b></p> <p class="p1">The notion that the government must provide and monitor all traffic services as a collective good funded by taxes is being rendered obsolete by technology. Private roads, bridges, and parking lots have long existed, as have private solutions to congestion, such as parking meters and tolls. However, paying with quarters was slow and inefficient. Now, with electronic payment systems, drivers can travel toll roads without delays and pay for parking without hoarding change. Private roads and parking lots become more effective as technology allows businesses to charge and consumers to pay with less hassle.</p> <p class="p1">The South Norfolk Jordan Bridge in South Hampton Roads, Virginia, was rebuilt by a private consortium. The new bridge opened in 2012 and is notable for the method by which it collects tolls while allowing a continuous flow of traffic. The bridge has no toll booths, so motorists crossing the bridge have their license plates photographed. Most pay for the crossing through E-ZPass, and those without E-ZPass are sent a bill in the mail.</p> <p class="p4"><b>Consumer Product Information</b></p> <p class="p1">The Internet enables consumers to access massive amounts of information about companies and products, reducing the need for costly government-provided consumer protection. Product quality and user experiences are routinely rated on retailers’ sites such as or, and descriptions, evaluations, and recommendations of products and companies are also provided by subscription services such as Consumer Reports and Angie’s List. Consumers can receive information about products and services with the click of a button, so businesses have a strong incentive to ensure their reputations remain high and customers are satisfied. The need for the government to provide this information is decreasing rapidly.</p> <p class="p4"><b>Wildlife Preservation and Environmental Externalities</b></p> <p class="p1">Wildlife preservation has become more effective as the technology involved in tagging animals has advanced, allowing fish farms to protect their property and still provide fish for dinner. This advance means defining and defending property rights is no longer a function that only the government can or should perform. For example, transponder branding involves implanting a small device under the fish’s skin, much as pet owners inject their animals with a chip in case they become lost. Using this technology, aquaculturists can track their own fish and harvest them at optimal times, or allow third-party fishermen to capture the fish for a bounty. To avoid depleting the stock, fishermen can also be prohibited from catching unowned fish. In this way, fishermen can avoid many of the socially destructive externalities inherent in an open commons.</p> <p class="p1">Another way technology is helping avoid environmental externalities is by making information on good and bad behavior much more accessible. Just as restaurants fear bad online reviews, polluters can be shamed, boycotted, and otherwise avoided for their behaviors. The University of Massachusetts Amherst’s Political Economy Research Institute, for instance, compiles a Greenhouse 100 Polluters Index listing the organizations producing the most pollution in the United States.</p> <p class="p4"><b>Monopolies</b></p> <p class="p1">Monopolies are sometimes considered a market failure because a single firm without competition can charge higher prices relative to a competitive industry, and such firms are often slow to innovate when they are in a favorable position and protected by government. Yet in many markets formerly characterized by few suppliers, advancing technology has lowered barriers to entry, reducing firms’ power to set their own prices independent of the market.</p> <p class="p1">This change is in large part due to cheaper computing ability and easier access to products and information via the Internet. Technological progress requires dominant firms to innovate lest they fall behind. Companies that once dominated their industries, such as IBM and AOL, have lost their prime position within the last decade to new firms such as Microsoft, Google, and Facebook, or to firms such as Apple that reinvented themselves with creative technological and marketing leaps.</p> <p class="p1">Electricity generation and distribution is often considered a natural monopoly, but it exists as such largely due to government policies. Technological advances have reduced the cost of generating electricity, making on-site generation more affordable and large-scale distribution less important. Government regulation and subsidization of electricity has also limited markets’ ability to determine an efficient balance of conventional and alternative energy sources. Ultimately, the public bears the cost of an inefficient electricity-generating sector.</p> <p class="p3"><b>CONCLUSION</b></p> <p class="p1">If consumers and private enterprise have a greater ability to protect themselves from harm by their own efforts, they have less need of government regulations that raise prices and restrict consumer choice. Better technology enables private enterprise to become more competitive and productive while simultaneously providing consumers with more information than they ever had in the past.</p> Tue, 28 Jul 2015 09:37:18 -0400 Blahous, Fichtner on Medicare and Social Security Trustees Report <h5> Expert Commentary </h5> <p class="p1">The Medicare and Social Security annual report, released yesterday, shows that the insolvency date for the Social Security Disability Insurance (DI) trust fund remains unchanged at 2016. While the fundamental outlook&nbsp;remains materially unchanged for both the Social Security Old Age and Survivors Insurance (OASI) trust fund and the combined (OASDI) trust funds, another year has been lost to inaction.&nbsp;</p> <p class="p1">Mercatus Center senior research fellow&nbsp;<a href="">Charles Blahous</a>, along with fellow&nbsp;public trustee for Medicare and Social Security Robert Reischauer, warn&nbsp;not to mistake minor improvements in the projected solvency of either program for "financial viability."&nbsp;They note in the "<a href="">Message from the Public Trustees</a>":</p> <blockquote><p class="p2"><i>To ensure that [Medicare and Social Security] function adequately, policy makers will need to consult other information in [the trustees] reports beyond the mere projected duration of trust fund adequacy.</i></p></blockquote> <p class="p1">For Social Security, they caution policy makers on the hazards of further postponing "unavoidable corrective actions"&nbsp;and note that the program's current shortfall projection is much larger than that solved<i>—</i>with so much difficulty<i>—</i>by the 1983 reforms:</p> <blockquote><p class="p2"><i>...[W]hen the trust funds faced a threat of depletion in the early 1980s it was still fully possible, though difficult to be sure, to close the financing gap.</i></p><p class="p2"><i>Continued inaction…to the point where the combined trust funds near depletion would—unlike the situation in 1983—likely preclude any plausible opportunity to maintain Social Security’s historical financing structure.</i></p><p class="p2"><i>The imminent depletion of Social Security's Disability Insurance [DI] Trust Fund reserves is but the first financing crisis arising from&nbsp;program cost growth trends that have been evident for the past few decades.</i></p><p class="p2"><i>While legislative action is not yet necessary to prevent imminent reductions in Old-Age and Survivors Insurance&nbsp;[OASI] benefits…prompt action is needed to prevent Social Security’s aggregate financial shortfall from growing to an intractable size.</i></p></blockquote><p class="p1">Please click&nbsp;<a href="">here</a>&nbsp;to view the full letter, as well as the full summary of the 2015 Annual Reports of the Social Security and Medicare Boards of Trustees.</p> <p class="p1">Mercatus Center senior research fellow&nbsp;<a href="">Jason Fichtner</a>, former deputy commissioner and chief economist of the Social Security Administration, said the following in response to the report:</p> <blockquote><p class="p2"><i>I fear the slight improvement in the insolvency date for Social Security’s combined trust fund will give law makers and the public a false sense that the program’s financial problems are anything less than urgent—that reform can continue to be put off. Such a misunderstanding would lead to grave consequences for beneficiaries of both the disability and retirement programs.</i></p><p class="p2"><i>The delay in&nbsp;dealing with the needed structural and financial problems of the DI trust fund should be a wake up call for those concerned with the OASI retirement trust fund—delaying meaningful reforms only limits the options available.</i></p></blockquote> Mon, 27 Jul 2015 10:35:48 -0400 The Export-Import Bank’s Small Business Program Supports Big Companies <h5> Publication </h5> <p class="p1">Among its four principal financial products, the Export-Import Bank has provided “working capital” loans and loan guarantees that assure repayment to private lenders in the event a borrower defaults. According to bank officials, this form of subsidized financing “primarily” benefits small business. In a July 16 letter to Sen. Marco Rubio and others, Ex-Im president Fred Hochberg characterized the bank’s working capital financing as “issued to mostly small businesses.”</p> <p class="p1">But as is the case with a great many claims from Ex-Im officials, the data tell a different story.</p> <p class="p2"><a href=""><img src="" width="585" height="425" /></a></p> <p class="p1">According to the Ex-Im Bank’s definition, a small businesses can have as many as 1,500 employees and up to $21.5 million in revenue. However, the data show that as much as 40 percent of the bank’s working capital loans and loan guarantees in a single year has benefitted large corporations with impressive market capitalization, as the chart above illustrates. (The data were derived from the Ex-Im Bank’s annual reports, and do not include the “supply chain finance program.”) This finding documents yet again that bank officials vastly overstate Ex-Im assistance to small business.</p> <p class="p1">Between 2007 and 2014, large corporations—rather than small businesses—collected between 19.6 and 40.1 percent of the Ex-Im Bank’s working capital loans and guarantees. These included two transactions totaling $711.5 million for Boeing Co. (the Bank’s No. 1 beneficiary, with a market cap of $108.8 billion) and three transactions totaling $850 million for Ford Motor Co. (with a market cap of $58.5 billion). So it’s a real stretch to claim a program “primarily” benefits small business when major companies consistently collect a third or more of the benefits.</p> <p class="p1">Lenders offer lower rates when loans and loan guarantees are backed by US taxpayers—up to 90 percent of principal and interest are backed by taxpayers in the case of working capital guarantees. That gives beneficiaries of the Ex-Im program a significant competitive advantage over firms that don’t have access to these cheaper loans. Other Ex-Im programs primarily finance foreign companies and countries. But the working capital program largely finances US firms, which means their domestic counterparts are put at an increased disadvantage.</p> <p class="p1">The lapse of the Ex-Im charter on June 30 means that the bank is prohibited from awarding any new loans or loan guarantees. But the bank’s proponents—principally big corporate interests—remain committed to winning reauthorization. In hopes of doing so, they will continue to claim that small business is the bank’s “core mission.” Don’t believe it. The truth is that a substantial share of the Ex-Im Bank’s benefits go to large, politically favored corporations.</p> Fri, 24 Jul 2015 11:58:49 -0400 How to Bring Market Discipline Back to Banking <h5> Expert Commentary </h5> <p class="p1">Customers judge their banks by the quality and variety of services they provide —&nbsp;not by size. Legislators, on the other hand, frequently mistake banks' size as the most important indicator of their stability. In fact, bank stability depends not on size but on the riskiness of a bank's assets, as well as which of the bank's sources of funding bear that risk. Market discipline provides one way to control these risks.</p> <p class="p1">Asset risks and funding risks are inherently bound up with one another. Yale University professor Gary Gorton discusses how risky secrets lurking on the asset side of banks historically triggered bank runs once they became public knowledge in his book <a href=";lang=en&amp;"><i>Misunderstanding Financial Crises</i></a>. In the U.S., deposit insurance became the solution to that problem.</p> <p class="p1">But bank stability can also be maintained if banks fund a significant amount of their investments with long-term bonds and equity such as common stock. Since long-term bonds are liabilities, while equity measures the bank's net worth of total assets minus total liabilities, long-term bonds and equity would serve as the bank's capital, as Professors Anat Admati and Martin Hellwig made clear in their book <a href=""><i>The Bankers' New Clothes</i></a>. Unlike depositors, bond and equity investors are primed to take on the downside risk of a bank's assets.</p> <p class="p1">Former finance professor and Goldman Sachs partner Fischer Black <a href="">suggested</a> 40 years ago that banks should fund at least half of their investments with long-term bonds and/or equity, with the remaining funding coming from deposits. Such a rule would mean that for every dollar a bank raises from depositors, it must find bond and equity investors willing to fund at least another dollar. This puts bank risks back into investors' hands.</p> <p class="p1">The market discipline in Black's proposal arises from his recommendation that we measure a bank's equity at market value, rather than book value computed by the bank's accountants. Using market value of equity instills market discipline because it can fluctuate quite a bit, in accordance with equity investors' perceptions of the risk lurking on bank balance sheets. Unpleasant surprises mean the stock price and market value of the bank's equity fall as investors sell. This market discipline puts the corporate finance side of the bank in conflict with the bank's asset managers and loan officers, who now have to check their own risk-taking so the bank does not have to find new investors.</p> <p class="p1">Finally, since a firm's risk of default rises with its debt-equity ratio, banks that rely more on equity would be safer —&nbsp;especially since the slightest hint of those secrets will cause equity investors to sell their assets. In Black's world, size depends on the collective decisions of the bond and equity investors, as well as depositors. If anything, a bigger bank means a better bank, just as a rise in Apple's market share for phones and computers indicates that customers think Apple sells a superior product.</p> <p class="p1">But that's not the world we live in today. In this world, our <a href="">tax laws favor debt over equity</a>. Banks are backed by mispriced and even under-funded deposit insurance. U.S. banks measure capital at book value rather than market value. While bank capital requirements increased in the post-Basel Accord era, the guidelines specify so-called risk buckets, which assign <a href="">different capital charges</a> by asset type in an ad hoc manner, effectively lowering capital requirements.</p> <p class="p1">For example, the <a href="">Recourse Rule</a>, finalized on Nov. 29, 2001, lowered commercial bank capital charges from the standard 8% to 1.6% for holdings of highly-rated structured product tranches originated by investment banks. That rule change helps us to understand why some larger banks increased their holdings of the very products that went bust in 2007-09. While Basel III calls for increasing capital requirements, risk buckets still exist today and work against market discipline.</p> <p class="p1">All told, our current legal and regulatory framework invites bank failure even five years after the passage of Dodd-Frank. Legislation focused on size does not address the problem, since it does nothing to reestablish the market discipline missing in the United States since before the Great Depression. Measuring equity at market value would restore that much-needed discipline.</p> Fri, 24 Jul 2015 14:21:32 -0400 Scott Sumner Discusses the Greek Financial Crisis on GVH Live <h5> Video </h5> <iframe width="560" height="315" src="" frameborder="0" allowfullscreen></iframe> <p class="p1"><span class="s1">Earlier in July, Eurozone finance ministers agreed in principle to bailout Greece after the country implemented new economic reforms and help it recover from its massive financial crisis.&nbsp;</span></p> <p class="p2"><span style="font-size: 12px;">While the unemployment rate overall has hovered around 25% in Greece, Millennials have been hit hardest where one in two are unemployed.&nbsp;</span></p> <p class="p2"><span style="font-size: 12px;">Why should millennials care about what's going on in Greece? Scott Sumner, Director of the Program on Monetary Policy at the Mercatus Center at George Mason University, believes that Greece is just an extreme example of what happened here in the United States.</span></p><div class="field field-type-text field-field-embed-code"> <div class="field-label">Embed Code:&nbsp;</div> <div class="field-items"> <div class="field-item odd"> &lt;iframe width=&quot;560&quot; height=&quot;315&quot; src=&quot;; frameborder=&quot;0&quot; allowfullscreen&gt;&lt;/iframe&gt; </div> </div> </div> Thu, 23 Jul 2015 11:37:16 -0400 Michigan's Fiscal Health Is Not Strong <h5> Expert Commentary </h5> <p class="p1">Michigan has struggled to emerge from the Great Recession, just like so much of the rest of the nation — and it still has a great deal of work to do. The latest evidence is a new report published by the Mercatus Center at George Mason University, which shows the state’s “fiscal health” ranking is slipping.</p> <p class="p1">Until recently, assessing the fiscal health of states was difficult because of the lack of standardized data. Now, however, all states prepare audited Comprehensive Annual Financial Reports, which can be compared across states. Using this data, my Mercatus Center colleague Eileen Norcross calculated the fiscal health rankings for all 50 states. This report, “<a href="">Ranking the States by Fiscal Condition</a>,” puts Michigan in 34th place, based on its solvency in five categories.</p> <p class="p1">This project takes the extensive data in these reports, as well as little-known data like trust fund solvency measures that are often overlooked by state regulators and watchdog groups, and puts them into context so that anyone can see a snapshot of how his or her state is doing. For Michigan, the snapshot is not very flattering.</p> <p class="p1">Michigan scores better than average in only one category. We rank 22nd in budget solvency, which measures whether a state can cover its fiscal year spending out of current revenues. Fortunately, Michigan is meeting its current year fiscal commitments better than most states.</p> <p class="p1">Unfortunately, Michigan ranks lower in the categories that measure its fiscal condition in the long run. In particular, our low overall ranking is due to poor rankings in two categories: trust fund solvency and service-level solvency.</p> <p class="p1">Michigan’s lowest ranking is for trust fund solvency, which measures the size of pension liabilities and state debt as compared to state income. The biggest problem is our unfunded pension liabilities. Michigan’s audited financial statement finds that future pension liabilities are 63 percent funded, but that funding ratio is based on discounting future liabilities with unrealistic future pension fund returns.</p> <p class="p1">Norcross’ report recalculates the actual market value of these liabilities using a more appropriate risk-adjusted discount rate, revealing that Michigan’s pensions are only 32 percent funded, well below the average for other states. This severe underfunding should be especially troubling for a state with recent experience with underfunded pensions in Detroit and with General Motors.</p> <p class="p1">Michigan’s other poor ranking is for service-level solvency, or “fiscal slack.” This measures the state’s ability to raise taxes if spending commitments demand more revenues. In other words, it measures the state’s ability to increase taxes without harming the economy. The report ranks Michigan 33rd in service-level solvency, indicating that we are in a worse position than most states, due to a high ratio of current taxes to personal income.</p> <p class="p1">These fiscal rankings are based on the most recent data available (from the 2013 fiscal year), and build upon the methodology in an earlier Mercatus Center report in which Michigan fared somewhat better, with an overall ranking of 30th in the nation. So Michigan’s fiscal condition is deteriorating relative to other states.</p> <p class="p1">The report finds that nearly all states have unfunded pension liabilities that are large relative to state personal income, indicating we all need to take a closer look at unfunded pensions. Another financial crisis could mean serious trouble for states that are fiscally stable in other areas.</p> <p class="p1">Michigan policymakers are debating many important fiscal matters, including road funding and tax reform. While these issues are important, the message from Michigan’s relatively poor fiscal ranking is that we must take better stock of our long-term fiscal health before making future public policy decisions.</p> Thu, 23 Jul 2015 10:15:48 -0400 'Health-Health' Analysis in Policy Decisions <h5> Expert Commentary </h5> <p class="p1">Some recent regulatory milestones have been crossed. First, we've reached the five-year anniversary of Dodd-Frank. <a href=""><b>I recently published some charts</b></a> showing that Dodd-Frank may be the biggest law ever, if the size is measured by how much new regulatory text it spawns. No one disputes this fact: Dodd-Frank created a massive surge in regulations, and it did so in a relatively short time span.</p> <p class="p2">Second, less than a month ago, the <a href=""><b>Supreme Court ruled in <i>Michigan v. EPA</i></b></a> that the Environmental Protection Agency (EPA) — and perhaps implicitly, all regulatory agencies — must consider economic costs prior to deciding whether to promulgate a regulation. Some <a href=""><b>regulatory economists</b></a> marked this moment as the triumph of cost-benefit analysis as a method to inform and improve regulation.</p> <p class="p1">It will be interesting to see which independent agencies, like the Securities and Exchange Commission (SEC), Futures Trading Commission and the Consumer Financial Protection Bureau will begin performing some degree of analysis prior to making a rule. Currently, the independent agencies are not — and cannot be — obligated by the president to perform such a cost-benefit analysis. Statutory language, created by Congress, does require that the SEC perform some degree of analysis, but that is of a different variety from the type that every president since Reagan has required of regulatory agencies.</p> <p class="p1">Cost-benefit analyses of regulations implicitly recognize that regulations can create both winners and losers. In fact, sometimes they're the same person: An individual may be both positively and negatively affected by the same rule. If a regulation will, for example, deliver some sort of health benefit — say, reduction of asthma rates induced by ambient pollutants — while simultaneously increasing the prices of energy, those higher energy prices might negatively affect the same people who are receiving the benefits. And if you take this analysis to its logical conclusion, those higher energy prices will offset, at least to some degree, the positive health benefits created by the regulation.</p> <p class="p1">To be clear: I don't mean that the higher energy prices will make consumers worse off in some abstract way. I mean, very specifically, that the higher energy prices could have a negative effect on health, and that that at least could partially offset the positive health benefits. After all, if some essential goods and services cost more, budget-constrained consumers will necessarily have less to spend on all other goods — some of which are goods that improve health, such as gym memberships (when they're used) and new automobile tires when old treads are worn thin.</p> <p class="p1">These are examples of risk tradeoffs. Risk tradeoffs occur when policy interventions — in particular, health, environmental, safety and security regulations — which are intended to address risk in one area increase a risk elsewhere. One important form of risk tradeoff is the health-health tradeoff, which derives from the health-wealth relationship. A former Office of Information and Regulatory Affairs administrator <a href=""><b>aptly defined this tradeoff nearly two decades ago</b></a>, writing that health-health tradeoffs occur when "the diminution of one health risk simultaneously increases another health risk."</p> <p class="p1">Life expectancy and wealth are positively correlated. Several studies have demonstrated that the correlation is not mere happenstance; wealth is a causal determinant of health (although it is probably also true that health is a determinant of wealth — the causality goes in both directions). A relevant corollary to the "wealthier is healthier" paradigm is the "richer is safer" paradigm. Wealthier societies can invest in more medical research, systems designed to improve societal resilience to health-threatening emergencies such as natural disasters, and develop an infrastructure that permits individuals to choose to use their disposable income on health-improving or risk-reducing goods. The flip side of that coin is that reductions in disposable income induced by government interventions can lead to reductions in expenditures that reduce health and safety risks.</p> <p class="p1">This is a potentially useful insight that can inform policy decisions of all stripes, but especially those designed to address issues such as health, safety, and the environment. In fact, there is already a name and precedent for this type of analysis: health-health analysis. In the early 1990s, the Office of Management and Budget considered the application of health-health analysis in estimating the effects of some proposed environmental and safety regulations. Around the time, scholars pointed out that, although these regulations are intended to improve health or reduce risk, the resulting costs to employers from complying may be passed on to workers in the form of layoffs, reduced working hours or lower wages. If low income is detrimental to one's health, then the beneficial health effects of environmental regulation may be offset.</p> <p class="p1">To what degree are they offset? That is a question that could be answered with analysis — specifically, with health-health analysis. A health-health analysis would ask the question: What sort of health benefits are created by this regulation, and to what degree are they offset by the reductions in health-related expenditures that lower incomes imply?</p> <p class="p1">Regardless of specific numbers, the consideration of this sort of tradeoff — the tradeoff between regulatory costs and individuals' health — makes clear that some regulations (and the acts of Congress that induce their creation) may induce more health loss than health gains. They may not be common, but we won't really know until we start methodically considering how losses in income caused by regulatory compliance can affect the health of individuals.</p> <p class="p1">Perhaps this sort of analysis could be considered as part of the cost-benefit analyses that agencies should engage in prior to regulating. Or, even better, perhaps this tradeoff could be considered in Congress, before the creation of massive laws such as Dodd-Frank. All of those Dodd-Frank-induced regulations created costs, and the "richer is safer" paradigm indicates that those costs can have real, negative effects on health. Are they at least outweighed by the regulations' benefits?</p> Wed, 29 Jul 2015 10:52:25 -0400 Optimizing Human Health Through Linear Dose–Response Models <h5> Publication </h5> <p>This paper proposes that generic cancer risk assessments be based on the integration of the Linear Non-Threshold (LNT) and hormetic dose–responses since optimal hormetic beneficial responses are estimated to occur at the dose associated with a 10−4 risk level based on the use of a LNT model as applied to animal cancer studies. The adoption of the 10−4 risk estimate provides a theoretical and practical integration of two competing risk assessment models whose predictions cannot be validated in human population studies or with standard chronic animal bioassay data. This model-integration reveals both substantial protection of the population from cancer effects (i.e. functional utility of the LNT model) while offering the possibility of significant reductions in cancer incidence should the hormetic dose–response model predictions be correct. The dose yielding the 10−4 cancer risk therefore yields the optimized toxicologically based “regulatory sweet spot”.</p><p><a href="">Continue reading</a></p> Thu, 23 Jul 2015 09:45:04 -0400 Jason Fichtner Discussing Tax Reform on C-Span <h5> Video </h5> <p><a href=""><img height="301" width="585" src="" /></a></p> Wed, 22 Jul 2015 11:53:32 -0400 Breaking Down the Barriers: Three Ways State and Local Governments Can Improve the Lives of the Poor <h5> Publication </h5> <p class="p1">Economists are familiar with the regressive effects of government policies such as occupational licensing, minimum wage, zoning laws, and taxes, but policymakers often ignore these issues when debating inequality and poverty. Policymakers who see redistribution as a path to upward mobility should be looking more at existing government regulation and taxation and how they make upward mobility more difficult by erecting barriers between the poor and economic success.</p> <p class="p1">In a new study for the Mercatus Center at George Mason University, economist Steven Horwitz examines several government policies and concludes that regulations and taxes prevent upward mobility by burdening the poor more heavily than those who are better off. Many of these regulations and taxes are products of the private interests of current producers who stand to benefit from government encroachment into business.</p> <p class="p2">To read the study in its entirety and learn more about its author, see “<a href="">Breaking Down the Barriers: Three Ways State and Local Governments Can Improve the Lives of the Poor.</a>”</p> <p class="p4"><b>KEY FINDINGS</b></p> <p class="p1">One reason that people seeking upward mobility are prevented from advancing is the fact that starting a new business or entering a new occupation is often unnecessarily expensive and complicated by government regulations. These regulations may exist primarily to protect the people who are already in the market from new competition, rather than because of any real danger to consumers. There are a number of ways in which state and local regulation and taxation make it harder for lower-income households to achieve upward mobility.</p> <p class="p5"><b>Occupational Licensing</b></p> <p class="p1">Occupational licensure laws disproportionately burden the poor by requiring them to spend significant resources just to enter a market. These laws require prospective professionals to pass tests and spend hundreds of dollars on classes and fees, and subject them to oversight from boards and regulators largely composed of those who already compete in the market.</p> <p class="p1">Many of these regulations are also unnecessary because the jobs in question do not present any real risks to the public. Consumers can use services such as Yelp to research products or providers online before making a purchase. Instead of protecting consumers, these regulations often serve to protect those already in an industry by limiting competition. This, in turn, reduces upward mobility for the poor and raises prices for consumers.</p> <p class="p1">Uber’s experience provides a case study of many of these issues. Uber is a ride-sharing service that provides new employment opportunities for those in need as well as cheaper transportation for those of modest means. Yet Uber also eats into the profits of taxi companies, at least part of which are a result of taxi companies’ politically privileged position in the market. Unsurprisingly, traditional taxi companies are protesting the service, claiming it is illegal and dangerous because it is not subject to the same regulations as taxis.&nbsp;</p> <p class="p5"><b>Zoning and Other Small Business Regulations</b></p> <p class="p1">Zoning laws are intended to limit situations where certain types of business activities interfere with residential living. However, similarly to occupational licensure laws, zoning laws are often used by those with access to political power to reduce competition from rivals who are able to provide services at a lower cost.</p> <p class="p1">In Chicago, for example, all businesses must have a basic business license that costs $250 for two years, and violating this law can cost hundreds of dollars per day. Those attempting to renovate a building or operate a business out of their home must complete an application process controlled by the Department of Zoning. Even getting permission to change a sign may require dozens of forms.</p> <p class="p1">These types of laws deny people the opportunity to provide for their families through their hard work and personal skills. Repealing regulations that restrict business opportunities would enrich poor people and give them control over their own lives, reducing dependency on government.</p> <p class="p5"><b>Regressive Taxation</b></p> <p class="p1">Government policies can also raise the cost of living in ways that disproportionately affect lower-income households. Regulations that raise prices by imposing taxes on the sale of certain products are one type of policy that can have such regressive effects. If the goods and services being taxed are consumed disproportionately by low-income households, the resulting higher prices increase such households’ cost of living disproportionately and are thus considered regressive.</p> <p class="p1">“Sin” taxes—taxes that are intended to change behavior of consumers—are one prominent category of taxes with a disproportionate effect on the poor.</p> <ul class="ul1"> <li class="li6">Sin taxes are often imposed on alcohol and tobacco, but recent proposals to tax sugary drinks or fatty foods would also fall under this category.</li> <li class="li6">While the intent of the taxes is to discourage people from consuming the taxed goods, economic evidence suggests that these taxes do not have much of an effect on behavior. Because the poor also tend to spend a larger share of their disposable income on these goods than do the rich, sin taxes have a disproportionate effect on the spending power of poor households.</li></ul> <p class="p4"><b>CONCLUSION</b></p> <p class="p1">Many discussions of poverty and inequality are bogged down in debates about tax rates and government spending, trapped under the assumption that the cause of some people’s poverty is other people’s wealth. One key factor preventing upward mobility is state and local regulations that make it more expensive and time-consuming for the poor to open new businesses or enter a new profession. By eliminating burdensome business regulations such as occupational licensing and zoning restrictions and by refraining from imposing sin taxes, policymakers can let the poor help themselves move up and out of poverty.</p> Tue, 28 Jul 2015 09:30:50 -0400 Critiques of the Social Security Trustees Report <h5> Expert Commentary </h5> <p class="p1">As we await the release of the Social Security trustees report for 2015, it is worthwhile to consider an alternative viewpoint, from the Congressional Budget Office, about the future finances of Social Security programs. Also, we summarize a recent prominent critique by professors Konstantin Kashin, Gary King, and Samir Soneji of the financial projection methods and assumptions of the trustees and the chief actuary. As a point of reference for this discussion, we’ll first review some basic results from last year’s trustees report.&nbsp;</p> <p class="p1">Each year the trustees of the Social Security and Medicare trust funds report on the financial status of the two programs. In 2014 the trustees report projected that the combined trust funds for the old age, survivors (OASI), and disability insurance (DI) programs (collectively OASDI) would be exhausted of reserves in 2033. At that point, continuing tax revenue would be sufficient to pay 77 percent of scheduled benefits, declining to 72 percent in 2088. The DI trust fund, however, was expected to run out much sooner, by 2016. When that occurs, the government must by law reduce disability payouts to 81 percent of scheduled benefits. Because the primary source of revenue for Social Security is the payroll tax, the programs’ revenues and costs are traditionally expressed as percentages of taxable payroll — that is, the amount of worker earnings taxed to support the programs. The 75-year actuarial balance measure, which compares revenue with cost over an extended period, is also expressed as a percentage of taxable payroll. The balance (actually a deficit) represents the average amount of program changes needed (from benefit cuts, tax increases, or both) throughout the 75-year valuation period to achieve a zero balance on average. For OASI, the 75-year actuarial deficit was estimated in 2014 to be 2.55 percent of taxable payroll; for DI it was 0.33 percent; and for the entire program (OASDI) it was 2.88 percent.<sup>1&nbsp;</sup></p> <p class="p2">&nbsp;<b style="font-family: inherit; font-style: inherit;">Comparison With CBO Projections&nbsp;</b></p> <p class="p3">The Congressional Budget Office does an annual independent projection of Social Security finances, and its 2014 projections were bleaker than those of the trustees of the Social Security and Medicare trust funds. The CBO projected that, under current law, the DI trust fund would be exhausted in fiscal 2017 and the OASI trust fund would be exhausted in 2032. If future legislation shifted resources from the OASI trust fund to the DI trust fund, the combined OASDI trust funds would be exhausted in 2030. According to the CBO, the projected 75-year imbalance increased from 3.36 percent in 2013 to 3.97 percent of taxable payroll in 2014. When mea- sured as a share of taxable payroll, the CBO’s estimates of long-term tax revenues are about the same as those produced in 2013, but the projections of long-term outlays are slightly higher than in 2013. Specifically, the 75-year cost rate — a measure of outlays — is 0.6 percentage points higher. Out- lays are a larger share of taxable payroll, primarily because of lower projected interest rates; the result- ing lower discount rate increases the present value of larger amounts late in the projected stream of spending. That change accounts for about half of the 0.6 percentage point increase in the 75-year cost rate. Changes to the CBO’s 10-year baseline projections account for another 0.2 percentage points, and updated data and other estimating changes account for the remaining 0.1 percentage point. While there are many reasons that the CBO’s projections are more dire than those of the trustees, an important part of the difference is the CBO’s assumption that the significant decline in mortality experienced over past decades will continue at the same rate. Also, the CBO anticipates lower overall interest rates and somewhat higher rates of disability in the future than do the trustees.&nbsp;</p> <p class="p3">The June 2015 CBO projection presents an even worse situation for Social Security as its main scenario.<sup>2</sup> The combined trust fund exhaustion date is a year earlier — in 2029. The 75-year financial shortfall is now projected to be 4.4 percent of taxable payroll. The outlook worsened because expectations of future interest rate levels fell, and the application of a new method lowered future payroll tax revenues.&nbsp;</p> <p class="p3"><b>A Recent Academic Critique&nbsp;</b></p> <p class="p3">Recently, political scientists Kashin, King, and Soneji published two articles questioning important aspects of the projections and assumptions in the Social Security trustees reports, particularly during the post-2000 period since Steve Goss became chief actuary.<sup>3</sup> They correctly note that there has never been a systematic and comprehensive evaluation of the accuracy of the trustees’ projections. By contrast, in most private and public pension plans, a periodic analysis of actuarial gains and losses (that is, the actual financial results of the pension plan com- pared with the prior projections) attributed by source (that is, by individual assumption, such as interest rates) is typically conducted to gauge the reasonableness and accuracy of individual assumptions. The Social Security Administration (SSA) does not do this. Kashin, King, and Soneji con- ducted major elements of this empirical analysis for the period since 1980. They conclude that the SSA’s forecasting errors were approximately unbiased until 2000 but then became systematically biased afterward, and increasingly so over time. They show that most of the forecasting errors suggest that the Social Security Trust Funds are in better shape than the true outcomes have revealed them to be in. They add that the report’s uncertainty intervals are increasingly inaccurate.</p><p class="p3"><a href="">Continue reading</a></p> Mon, 20 Jul 2015 16:32:12 -0400 How to Fix Roads and Bridges without Increasing the Fuel Tax: Reform Federal Highway Policy and Use the Savings for Roads <h5> Publication </h5> <p class="p1">As gas prices have fallen throughout the country, in some states dipping below $2 per gallon, proposals to raise the tax on gasoline have become more politically palatable. Members of Congress from both sides of the aisle have proposed raising the tax to increase funding for America’s aging infrastructure. Before resorting to raising the tax burden on the American public, Congress should explore ways it can free up more money for highway projects by reducing the regulatory burden on federally funded highway projects.</p> <p class="p1">America’s roadways are primarily funded through the federal fuel tax, which, since 1993, has been set at 18.4 cents per gallon for gasoline and 24.4 cents per gallon for diesel fuel. Federal fuel tax dollars go into the Highway Trust Fund for the construction and maintenance of America’s highways. The Highway Trust Fund was created as a pay-as-you-go fund in 1956, meaning that Congress could not spend more than it collected in revenue from user fees. This is no longer the case, as Congress has recently used revenue from the general fund to avoid running a deficit in the trust fund. In 2014 the trust fund nearly dried up before Congress passed an $11 billion stopgap measure. Since 2008 policymakers have diverted an estimated $70 billion in general funds to the Highway Trust Fund.</p> <p class="p1">Before resorting to an increase in the federal gas tax, policymakers should first review the regulations for federal transportation projects. They should pare back requirements that raise the cost of building and maintaining roads while offering questionable benefits. Regulations like the Davis-Bacon Act of 1931 (Davis-Bacon) increase the cost of labor for federal infrastructure projects. Environmental regulations such as the National Environmental Policy Act of 1969 (NEPA) create complicated requirements that result in delays that drive up the costs of federal infrastructure projects. Besides causing delays, regulations force the government to hire additional federal employees to make sure that requirements are met. Key regulations that apply to federal transportation projects or affect the allocation of funds by the Federal Highway Administration (FHWA), including their estimated costs, are described below, along with alternatives for reducing the regulatory burden on highway projects.</p> <p class="p1"><b>REGULATION OF HOW STATES SPEND HIGHWAY MONEY</b></p> <p class="p1">The FHWA allocates its share of the Highway Trust Fund to 12 different program categories. Figure 1 shows the major program categories. Detailed regulations affect how money from each program category can be spent.</p><p class="p1"><a href=""><img height="667" width="585" src="" /></a></p> <p class="p3">The FHWA has developed a set of procedures that must be used on every highway project it funds. According to one estimate, complying with federal rules raises overhead costs to approximately 25 percent of project costs, while overhead costs represent only about 5 percent of project costs for locally funded roads that do not have to comply with federal rules. These costs could be reduced considerably if the federal government gave each state a grant and allowed that state to decide how to spend the money, subject to an audit process to ensure that certain minimum standards are met, such as making sure the money is spent on highways.</p> <p class="p5">Another regulation that raises highway costs is the Buy America program. This program requires that iron, steel, and manufactured products used for highways must be made in the United States unless using domestically produced materials would raise costs by more than 25 percent. Although many highway materials, such as concrete and asphalt, are not internationally traded, eliminating this requirement can still reduce some costs, particularly for bridges, which use a considerable amount of steel.</p> <p class="p1"><b>ENVIRONMENTAL REGULATIONS</b></p> <p class="p5">Federal transportation projects must comply with 65 different environmental regulations.<b> </b>These regulations are intended to reduce the impact of federal transportation projects on environmental quality, human health, historical and archeological sites, land and water use, noise, and air quality. Each regulation increases the cost of the US highway system by requiring agencies to check off the required boxes before they can move forward with a highway construction project.</p> <p class="p5">Compliance with NEPA regulations is complicated and involves a detailed documentation procedure. If planners do not know whether a project will have significant environmental effects, an environmental assessment (EA) must be prepared. If the EA finds that a project will have a significant effect on the environment, the Federal Highway Administration must create an environmental impact statement to document the expected effects and any reasonable alternative actions.</p> <p class="p5">Because they have to meet so many different requirements, many created by NEPA, major highway construction projects take as long as 10 to 15 years to complete. For example, California’s Transportation Corridor Agencies have spent the last 15 years attempting to comply with the federal environmental review process for a toll road under construction. Since NEPA became law, the average time required to complete an environmental impact statement for a federal infrastructure project has increased from two years to more than eight years.&nbsp;</p> <p class="p5">The Obama administration recognized the burdensome nature of the NEPA process when it exempted 179,000 stimulus projects from environmental review. The goal, according to secretary of energy Steven Chu, was to “get the money out and spent as quickly as possible.” While the NEPA process likely offers some benefits, these recent exemptions have not led to an environmental catastrophe and strongly suggest that federal projects can be completed in a timelier manner if some regulatory burdens are reduced.</p> <p class="p5">Since NEPA was passed, numerous environmental regulations have been passed at the federal, state, and local level, making the NEPA process redundant for many projects. Diane Katz and Craig Manson lay out several recommendations for reforming NEPA. The first is to narrow NEPA reviews to focus on issues not covered by other environmental regulations. Katz and Manson also recommend mandating time limits for agency decisions about changes that may be required in a project and limiting the number of alternatives studied. In addition, they recommend permitting agencies to incorporate existing analyses as functional equivalents rather than beginning anew when case facts are similar between projects. The authors also recommend establishing a lead agency to limit jurisdictional overlap. These reforms provide practical suggestions for streamlining the NEPA process so that taxpayer dollars can be spent more efficiently on federal highway projects.</p> <p class="p5"><b>THE HIGHWAY SAFETY IMPROVEMENT PROGRAM</b></p> <p class="p5">An additional category of regulation attempts to ensure that America’s roadways are safe for the public. The Highway Safety Improvement Program (HSIP) was expanded in 2012 as part of the Moving Ahead for Progress in the 21st Century Act. The HSIP’s goal is to provide funds to help state and local governments achieve a significant reduction in traffic fatalities and serious injuries on all public roads.</p> <p class="p5">It is not clear why the federal government needs to provide grants to the states for safety improvements to occur, since each state has an incentive to make its roads safer. By accepting these grants, states must agree to follow spending priorities set in Washington. If states spend their own money, each state could use its own criteria to decide how to improve safety instead of adhering to the HSIP’s rules, which require setting aside money for programs that are often not states’ top safety priorities.</p> <p class="p5">The Railway-Highway crossings program illustrates the impact of federal priorities on HSIP spending. The safety improvement program requires that states prioritize spending to enhance safety at railway-highway grade crossings, with $220 million set aside each year for that purpose. Without special permission from the secretary of the Department of Transportation, states cannot use that money for other purposes, even if that money could make stronger safety gains if applied to another area. Even if HSIP grants increase the total spending on safety programs, they likely lead to greater funding for lower-priority projects while higher-priority safety improvements are not funded.</p> <p class="p1"><b>DAVIS-BACON ACT AND THE COST OF LABOR</b></p> <p class="p1">The Davis-Bacon Act of 1931 set a price floor for the wages of workers on most federally funded construction projects based on the “prevailing wages” of workers in that area. In practice, this means paying higher union wages, since the level of prevailing wages is often determined based on union wage data. James Sherk found that Davis-Bacon regulations increase the cost of federally funded construction projects by 9.9 percent. Although some would argue that this represents a benefit for local workers who are employed by federal projects, in reality Davis-Bacon leads to higher costs that must be borne by US taxpayers. Federal regulations like Davis-Bacon also distort the market for labor in areas where federal projects are located. Because these kinds of regulation make labor more expensive, contractors may respond by using more capital and less labor. As a result, it might be more difficult for construction workers to find jobs. In this case Davis-Bacon would actually be hurting the very people it was intended to help.</p> <p class="p1">The Congressional Budget Office estimates that repealing Davis-Bacon would save $13 billion in discretionary spending from 2015 through 2023. This suggests that annual savings to the FHWA could be more than $700 million per year.</p> <p class="p1"><b>HOW MUCH COULD BE SAVED BY ELIMINATING CERTAIN FEDERAL REGULATIONS?</b></p> <p class="p5">Gabriel Roth presents estimates of the costs of federal regulations from several experts who have been involved in managing or overseeing highway construction or maintenance projects. Ralph Stanley, the entrepreneur who conceived and launched the Dulles Greenway, a privately constructed toll road in Northern Virginia, estimates that federal regulations increase project costs by 20 percent. Reducing these regulatory costs could save more than $8 billion per year. Roth mentions two other estimates—one that federal funding raises administrative and research costs by about 10 percent of construction costs, the other that federal regulations increase costs by 30 percent.</p> <p class="p5">In addition to 20 percent savings in the cost of administering highway projects, reducing or eliminating programs that spend trust fund money for purposes other than highway construction and maintenance could save additional costs. Up to $2.4 billion could be saved by reducing or eliminating federal spending on the HSIP. Even if the federal government gives states smaller grants but allows states more discretion to choose the most important safety improvements, the savings can be substantial while potentially improving highway safety.&nbsp;</p> <p class="p5"><b>CONCLUSIONS</b></p> <p class="p5">Recent large transfers from the general fund to the Highway Trust Fund mean that revenues from the federal fuel tax have been paying a declining share of highway costs. This is part of the impetus behind calls for an increase in the fuel tax. But the federal government could eliminate a substantial portion of the shortfall in the Highway Trust Fund through a few reforms. If the FHWA reformed highway policy by giving grants directly to the states, eliminating Davis-Bacon, and reducing programs that require trust fund money to be allocated for purposes other than highway construction or maintenance, total savings could be as much as $10 billion or more. The government could also simplify the NEPA process, eliminate other costly regulations, and devolve safety regulation to the states. If these measures are not sufficient to eliminate the deficit, other revenue sources, such as congestion tolls, or having states pay for more costs, might also be considered before resorting to an increase in the federal fuel tax.</p> Tue, 21 Jul 2015 11:00:10 -0400 Expensive Licensing Can Drive Away Entrepreneurs <h5> Expert Commentary </h5> <p class="p1">As of July 1, Virginia now licenses ridesharing companies — such as Uber and Lyft  —  as “transportation network companies.” This is part of the legislation signed into law this past February, which allows these companies to operate throughout the commonwealth.</p> <p class="p1">Among other requirements, this new law also requires ridesharing companies to pay an initial licensing fee of $100,000 and another $60,000 each year to renew their license.</p> <p class="p1">While both Uber and Lyft celebrated this as a step forward for ridesharing in Virginia, the legislation could ultimately serve to hinder continued competition and innovation in on-demand transportation beyond these large, established companies.</p> <p class="p1">In fact, the Transportation Network Company (TNC) designation — and the costly licensing requirements that go along with it  —  are an instant win for the Uber and Lyft.</p> <p class="p1">Organizing and running a successful start-up is expensive and complicated enough, and there are plenty of expenses that a new ridesharing firm would have to incur to build, test and ultimately deploy its app for popular use. These types of natural barriers to entry are inherent in any enterprise.</p> <p class="p1">***</p> <p class="p1"><b>The TNC law</b>, however, creates artificial barriers to entry by requiring additional costs that are not related to running a ridesharing company, but are simply necessary to purchase permission from the commonwealth for the privilege of operating within its borders.</p> <p class="p1">And while $100,000 might seem relatively insignificant when viewed in the context of billion-dollar companies like Uber and Lyft, the fee may ultimately make it too costly for smaller companies to enter the market and compete with the established players.</p> <p class="p1">Imagine, for example, a young entrepreneur who thinks she might have the next great ridesharing app. If she simply wants to test the app in and around Arlington or Richmond, she would first need to pay $100,000 to make sure she is operating legally. This is in addition to all the costs associated with building her app, as well as all of the other costs necessary to comply with the rest of the law.</p> <p class="p1">Under the new law now in effect, she will likely have to raise hundreds of thousands of dollars to release her app and figure out whether it is even ready for popular use. It is entirely likely that she will simply decide not to pursue her idea. At the very least, she would likely choose not to pursue it in Virginia.</p> <p class="p1">***</p> <p class="p1"><b>Outside of Virginia,</b> this issue is still far from settled, and many cities and states are still deciding how they will treat ridesharing firms. It should be an opportunity to re-evaluate their entire regulatory approach in light of how the market has changed.</p> <p class="p1">Virginia’s efforts to do so are laudable, but they fall flat. And policymakers in other jurisdiction should look elsewhere for examples of how to get it right.</p> <p class="p1">If every state were to adopt Virginia’s approach, a single ridesharing start-up could be faced with $5 million worth of costs to simply get the licenses necessary to deploy their app across the country.</p> <p class="p1">Uber and Lyft may celebrate Virginia’s TNC law, but not because it serves consumers’ needs. Instead, it will likely put the brakes on continued competition in Virginia’s ridesharing market.</p> Wed, 22 Jul 2015 14:58:19 -0400