Mercatus Site Feed en Health Care Bootcamp: Understanding the U.S. Health Care System <h5> Events </h5> <p>The Affordable Care Act fundamentally changed the landscape of the U.S. health care system. With more than five years since the law’s passage, questions remain about how to fix a system that remains broken despite recent reform efforts. Did the Affordable Care Act adequately reform a failing health system, or did that prescription only treat the symptoms of a much larger illness?</p> <p>The Mercatus Center at George Mason University invites you to join Brian Blase, Senior Research Fellow at the Mercatus Center, and panelist Megan McArdle for an update on the current situation followed by more detailed discussions on reforms to Medicaid and how to promote innovation in health technologies.<br /> <br /></p> <p><b>Program Agenda</b></p> <p>8:45 am – 9:20 am<br /> <b>Registration</b> (coffee and light breakfast served)</p> <p>9:20 am – 9:30 am<br /> <b>Introduction and Welcome</b><br /> Karen Czarnecki, Senior Director for Outreach, Mercatus Center</p> <p>9:30 am – 10: 30 am<br /> <b>Keynote Panel</b><br /> Moderator: Brian Blase, Senior Research Fellow, Mercatus Center<br /> Megan McArdle, Columnist, Bloomberg View</p> <p>10:30 am – 10:40 am<br /> Transition to breakout sessions</p> <p>10:40 am – 11:50 am <br /> <b>Breakout Sessions</b><br /> 1. Opportunities for Innovation in Health Care<br /> 2. An Overview of Medicaid and Ideas for Reform</p> <p>11:50 am – 12:00 pm<br /> <b>Closing Remarks</b></p> <p>Space is limited. Please register online for this event.</p> <p>This event is free and open to all congressional and federal agency staff. Lunch will be provided. Due to space constraints, this event is not open to interns.&nbsp;<b><i>Questions? Please contact Jennifer Campbell at </i></b><a href=""><b><i></i></b></a><b><i>.</i></b></p> Mon, 08 Feb 2016 16:47:27 -0500 ACA's Very Disappointing 2016 Enrollment Period <h5> Expert Commentary </h5> <p class="p1"><span class="s1">With the <a href=""><span class="s2">results</span></a> now in from the Affordable Care Act’s (ACA) third open enrollment period, it’s getting increasingly difficult to sugarcoat the extremely low numbers of enrollees relative to original projections. The 12.7 million people who signed up for an exchange plan amounts to just&nbsp;half as many enrollees as was projected&nbsp;by government and private sector research organizations when the ACA passed.&nbsp;The Rand Corporation <a href=""><span class="s2">predicted</span></a> 27 million, the Centers for Medicare and Medicaid Services <a href=""><span class="s2">predicted</span></a> 24.8 million, the Urban Institute <a href=""><span class="s2">predicted</span></a> 23.1 million, and the Congressional Budget Office <a href=""><span class="s2">predicted</span></a> 21 million.</span></p> <p class="p1"><span class="s1">At the end of open enrollment last year, the Obama administration <a href=""><span class="s2">announced</span></a> 11.7 million sign-ups. However, one month later, there were <a href=""><span class="s2">only</span></a> 10.2 million people with effectuated exchange coverage. Assuming a similar trend this year, even accounting for the administration beginning to purge some people who have already failed to pay premiums, means that there are likely at most 12 million people currently&nbsp;enrolled in an exchange plan.</span></p> <p class="p1"><span class="s1">Over the past two years, overall exchange enrollment declined by about 2% per month as people who drop exchange plans during the year exceed those who sign up during special enrollment periods. A similar trend this year would result in&nbsp;about 10 million exchange enrollees at the end of December. This translates into roughly 11 million exchange enrollees on average during 2016—54% fewer enrollees than the consensus of experts in 2010.</span></p> <p class="p1"><span class="s1"><b>Young, Healthy People in the Middle Class Are Shunning Exchange Plans</b></span></p> <p class="p1"><span class="s1">As I discussed&nbsp;in a November <a href=""><span class="s2">study</span></a> for the Mercatus Center, low overall exchange enrollment is only part of the explanation for why the ACA is failing to deliver what was promised. Enrollment of younger, relatively healthy people with a middle class income is particularly low and has left <a href=""><span class="s2">risk</span></a> pools filled with older and poorer people with more expensive health conditions.</span></p> <p class="p1"><span class="s1">The design of the ACA’s financial support is likely the reason that the only people buying exchange plans in large numbers are those whose incomes fall below 200% of the <a href=""><span class="s2">federal poverty level</span></a> (FPL)—an amount equal to roughly $23,760 for a single person and $48,600 for a family of four. People earning below that level qualify for tax credits that significantly reduce their premiums and subsidies that substantially lower deductibles and other types of cost-sharing.</span></p> <p class="p1"><span class="s1">For people above 200% of the FPL, exchange plans generally contain too little benefit to be worth the cost. For example, a family of four in Roanoke, VA headed by a 40-year old couple with $60,000 in income faced a $5,080 annual premium, after applying about a $5,000 tax credit they qualified for, and a $5,000 deductible for the second-lowest cost silver plan available on the exchange. Each additional dollar of income earned by the family reduces the tax credit by about 14 cents.&nbsp;If this family earned income above $97,200, they would not qualify for any tax credit.</span></p> <p class="p1"><span class="s1">A recent <a href=""><span class="s2">study</span></a> from three Wharton economists at the <a href=""><span class="s2">University of Pennsylvania</span></a> found that “[t]he minority of high risks among the middle class uninsured may gain [from the ACA], but most uninsured will lose and, according to our estimates, will prefer to remain uninsured at the current penalty levels for violating the individual mandate.” According to their estimates, the ACA made a typical person without insurance who earns about $40,000 worse off by around $2,000 to $3,000.</span></p> <p class="p1"><span class="s1">The following table shows the projected enrollment distribution by income <a href=""><span class="s2">produced</span></a> by the Urban Institute just one year&nbsp;ago compared to the actual enrollment distribution reported by the administration for 2015 and 2016. As the table shows, Urban expected 36% of enrollees to be below 200% of the FPL and 25% of enrollees to be above 400% of the FPL. It turns out that in both <a href=""><span class="s2">2015</span></a> and <a href=""><span class="s2">2016</span></a> a far higher percentage of enrollees are below 200% of the FPL and very few people with income above 400% of the FPL enrolled in an exchange plan.</span></p> <p class="p3"><img height="240" width="585" src=" Shot 2016-02-08 at 1.48.32 PM.png" /></p><p class="p3"><span class="s1"><span style="font-size: 12px;">The Congressional Budget Office also projected too many higher-income enrollees. </span><a style="font-size: 12px;" href=""><span class="s2">Last March</span></a><span style="font-size: 12px;">, CBO projected that 6 million of the 21 million projected exchange enrollees would have income too high to qualify for tax credits. It now appears CBO’s estimate of unsubsidized enrollees from last year was too high by at least a factor of four.</span></span></p> <p class="p1"><span class="s1">In addition to enrollees being poorer than expected, they are also older than insurers anticipated. During the 2014 open enrollment period, insurers <a href=""><span class="s2">reported</span></a> that they expected only 18% of enrollees to be over the age of 55. In 2015, about 26% of enrollees were over the age of 55 and the early data for 2016 indicates that 28% of enrollees are over the age of 55. Older people tend to have more expensive health conditions than younger people and the ACA prohibited insurers from properly pricing for that difference. This means insurers had to enroll enough young enrollees to cross-subsidize artificially low premiums for older enrollees—but this has not happened.</span></p> <p class="p1"><span class="s1"><b>Large Insurer Losses and Growing Need to Replace the Law</b></span></p> <p class="p1"><span class="s1">The best evidence of poor risk pools are the large aggregate losses suffered by insurers selling exchange plans. This has led several insurers to <a href=""><span class="s2">collapse</span></a>, and others, including large ones like United and <a href=""><span class="s2">Cigna,</span></a> to question whether they will continue offering exchange plans. It has also <a href=""><span class="s2">led</span></a> to insurers like Anthem, Aetna, Cigna, and United—apparently burned by the administration’s allowance of people to enroll during special enrollment periods without proper verification in 2014 and 2015—to stop paying commissions to brokers who enroll people outside of the open enrollment period.</span></p> <p class="p1"><span class="s1">In sum, the ACA is not doing nearly as well as was predicted six years ago. As documented in a Mercatus <a href=""><span class="s2">study</span></a> released this week, the ACA has almost certainly caused overall health care costs to increase even as exchange enrollment this year will likely amount to&nbsp;less than half of initial expectations. The main coverage gains have occurred through Medicaid, a program that economists at MIT, Harvard, and Dartmouth recently <a href=""><span class="s2">found</span></a> delivers enrollees with only 20 to 40 cents of value for each dollar of government spending. It is becoming increasingly clear that the next Congress and administration may have no other choice but to significantly repair, if not replace, this law.</span></p> Mon, 08 Feb 2016 13:50:16 -0500 Look before You Leap: A Key Principle of Regulation <h5> Expert Commentary </h5> <p class="p1"><span class="s1">“Look before your leap” is such an ancient adage that you might think it would be second nature to those wise souls who write the laws and regulations we live under. Not quite. More than 100 years since the federal government wrote its first regulation, Congress is finally considering legislation telling regulatory agencies that they have to understand what causes a problem before writing a regulation to solve it.&nbsp;</span></p> <p class="p1"><span class="s1">The House and Senate have both considered legislation that would require regulatory agencies to publish an analysis of the nature and significance of the problem they are trying to solve before proposing rules with significant economic impacts. The Early Participation in Regulations Act, sponsored by Sens. Lankford (R-Okla.), Heitkamp (D-N.D.) and Ayotte (R-N.H.), would implement this requirement. It is also contained in the Regulatory Accountability Act, which passed the House and was reported by the Senate Committee on Homeland Security and Governmental Affairs last fall. For those who think regulations should provide effective solutions to problems that actually exist, such reforms are long overdue.&nbsp;</span></p> <p class="p2"><span class="s1">In September, for example, the Food and Drug Administration adopted a regulation requiring that companies that produce or handle animal food must have procedures in place to ensure that animal food is as safe as human food. Most of the available evidence, however, shows that the main contamination problem is with pet food, not all animal feed. The FDA imposed a regulation that is much broader and more costly than necessary to protect people and pets from impurities in pet food.&nbsp;</span></p> <p class="p1"><span class="s1">Why does this happen? For more than three decades, executive orders have required executive branch regulatory agencies to assess the nature and cause of the problem they are trying to solve. But this analysis does not have to be published until the agency proposes a regulation in the Federal Register for public comment.&nbsp;</span></p> <p class="p1"><span class="s1">The dirty little secret is that agencies often already decide what regulation they want to write before they ask their analysts to assess the problem. Interviews with agency economists reveal that they are often pressured to produce an analysis that supports the regulation, instead of performing analysis to help figure out whether or how to regulate. One of my colleagues at the Mercatus Center, Dr. Richard Williams, spent 27 years at the FDA. <a href=""><span class="s2">He recounts</span></a> that when he estimated that the costs a regulation the agency wanted to impose exceeded benefits by a factor of 10, he was told on a Friday that if he could not “find” more benefits over the weekend, he did not need to bother coming back to work on Monday. &nbsp;</span></p> <p class="p1"><span class="s1">Sometimes there’s virtually no assessment of the problem at all. <a href=""><span class="s2">The Regulatory Report Card project</span></a> at the Mercatus Center at George Mason University evaluated the quality of economic analysis accompanying 130 major regulations proposed between 2008 and 2013. Half of these regulations were accompanied by no significant evidence demonstrating the existence, size, or cause of the problem.&nbsp;</span></p> <p class="p1"><span class="s1">And these were important regulations. All had benefits, costs, or other economic effects exceeding $100 million annually.&nbsp;</span></p> <p class="p1"><span class="s1">A rational regulatory system would require agencies to understand the nature and significance of the problem they’re addressing before they decide what regulations to write. One way to encourage agencies to do so is to require them to publish their analysis of the problem for public comment before they publish a proposed regulation. Pre-proposal publication of the analysis would also give the public a chance to offer suggestions for improvement of the analysis before the agency publishes a regulatory proposal it feels it must defend.&nbsp;</span></p> <p class="p1"><span class="s1">In other words, regulators should look before they leap.</span></p> Mon, 08 Feb 2016 13:51:02 -0500 Conversations with Tyler: A Conversation with Kareem Abdul-Jabbar <h5> Video </h5> <p>Kareem Abdul-Jabbar joins Tyler Cowen for a conversation on segregation, Islam, Harlem vs. LA, Earl Manigault, jazz, fighting Bruce Lee, Kareem’s conservatism, dancing with Thelonious Monk, and why no one today can shoot a skyhook.</p><p><iframe width="580" height="326" src="" frameborder="0"></iframe></p><p>&nbsp;</p> Fri, 05 Feb 2016 15:28:21 -0500 Veronique de Rugy Testifies on Federal Spending and the Debt Limit <h5> Video </h5> <p><iframe frameborder="0" height="360" width="640" src=""></iframe><a href="">Click here</a> to read the full testimony.</p> Fri, 05 Feb 2016 15:16:16 -0500 The Food and Drug Administration Needs to Change After 110 Years <h5> Expert Commentary </h5> <p><span style="font-size: 12px;">A </span><a href="" style="font-size: 12px;"><span class="s2">supercentenarian</span></a><span style="font-size: 12px;"> is a person who has lived passed their 110th birthday. We celebrate that for people, but it's not clear that we should celebrate it for a federal agency like the Food and Drug Administration , which turns 110 this year.&nbsp;</span></p> <p class="p1"><span class="s1">It's certainly time to re-evaluate precisely what such an agency ought to be doing, not to mention what it should not be doing. Two things that federal agencies like the FDA should avoid in particular are scandals and poor outcomes.</span></p> <p class="p1"><span class="s1">Typically the <a href=""><span class="s2">scandals</span></a> are what dominate the news, but what may be most damaging to the country are the poor outcomes from these agencies. Some, such as the chronically <a href=""><span class="s2">poor care</span></a> at veteran's hospitals, are easy to see and document. These sorts of highly visible scandals and outcomes outrage the public and Congress – and action usually follows – but there's no parallel outrage for poor outcomes that are widely distributed and difficult to attribute.</span></p><p class="p1"><a href="">Continue reading</a></p> Fri, 05 Feb 2016 11:12:59 -0500 ACA: 2016 and 2017 <h5> Expert Commentary </h5> <p class="p1"><span class="s1">There is no debating that the ACA contains benefits and costs and that the law continues to sharply divide the country. Its supporters say that it is working, while its opponents argue otherwise and continue pressing to undo the law. In January, Congress sent a bill to the president's desk that would have repealed large swaths of the law, including most of its taxes and much of its spending; as expected, the president vetoed the bill. Let's take a closer look at how ACA is working so far.</span></p> <p class="p1"><span class="s1"><b>ACAs Impact on Coverage</b></span></p><p class="p1"><span class="s1"><i> The numbers have increased</i>: ACA supporters primarily and repeatedly cite the decrease in the number of people without health insurance. The Obama administration estimates that 12.6 million people gained insurance coverage from 2010 to 2014. However, several million people became uninsured during the financial crash of 2008-2009. Part of the post-2010 increase simply reflects a return to pre-recession coverage levels as the economy has slowly improved. Using a 2008 starting point reveals that the number of uninsured fell by only 6.7 million people through 2014.</span></p> <p class="p1"><span class="s1"><i>Most of the increase is Medicaid</i>: The net gains in health insurance have come mainly through Medicaid and not private insurance, since the number of people covered by employer-sponsored insurance has somewhat declined. Medicaid is a program for lower-income people and is plagued with problems, including poor access to care for enrollees. A recent study found that enrollees receive only 20 to 40 cents of benefit for each dollar that Medicaid spends on their behalf.</span></p> <p class="p1"><span class="s1"><i>Exchanges are doing poorly</i>: Overall enrollments on the ACA exchanges are far lower than the government had previously forecast. The only people signing up in large numbers are those who receive large subsidies to reduce their premiums and deductibles.</span></p> <p class="p1"><span class="s1">Importantly, increasing the number of people with insurance cards does not guarantee that those people gain anything in terms of health, as numerous studies have indicated a loose connection between health insurance and health.</span></p> <p class="p1"><span class="s1"><b>ACA's Impact on Insurance and Premiums</b></span></p><p class="p1"><span class="s1"><i> Premiums soar</i>: President Obama told Americans that ACA would reduce family premiums by $2,500. However, since ACA was signed into law, family premiums for employer plans have soared — increasing by more than $4,000 since 2009.</span></p> <p class="p1"><span class="s1"><i>Young and healthy decline to subsidize old and sick</i>: ACA requires that health insurers offer a standardized health insurance product to all applicants, and that they charge the same premiums regardless of health status. Insurers are also prohibited from charging near-retirees more than three times the amount charged to twenty-somethings. As a result, ACA increased individual-market premiums, with younger and healthier people bearing the largest increases.</span></p> <p class="p1"><span class="s1">In 2014 and 2015, insurers selling exchange plans lost money as the plans attracted older and sicker enrollees than expected. In 2016, most exchange-plan premiums are increasing by double-digits. UnitedHealth, the largest insurer in the country, has announced that it may stop offering exchange plans altogether after 2016 because of market instability.</span></p> <p class="p1"><span class="s1"><i>Plans are becoming stingier</i>: Premiums would be even higher, but insurers designed exchange plans with very narrow provider networks and high deductibles and cost-sharing amounts. Many are discovering that their treatments are “covered” under their plans, but not actually paid for by their plans.</span></p> <p class="p1"><span class="s1"><b>ACA's Impact on Businesses and Workers</b></span></p><p class="p1"><span class="s1"><i> Employer mandate arrives in full force</i>: After two years of delay, the employer mandate takes full effect in 2016. The employer mandate requires that employers with at least 50 full-time workers offer acceptable coverage to their workers or pay tax penalties. These penalties can equal $2,000 per worker or $3,000 per worker receiving insurance subsidies on the exchanges. The mandate incentivizes employers to trim hours below 30 per week so workers are not considered full-time and reduce full-time workers (plus full-time equivalents) below 50.</span></p> <p class="p1"><span class="s1"><i>Paperwork will become heavy</i>: The IRS has created seven new forms for ACA. In particular, complying with the employer mandate will be a major paperwork burden for businesses. Businesses will have to report on their health-insurance offering as well as the monthly take-up rate for their workforce.</span></p> <p class="p1"><span class="s1"><i>SHOP exchanges are mostly failing</i>: The Small Business Health Option Program exchanges were designed to provide small businesses the ability to offer their workers more health-insurance options and lower overall premiums. Thus far, the SHOP exchanges have been a failure, enrolling only a small fraction of the number of people projected.</span></p> <p class="p1"><span class="s1"><i>Co-ops have failed</i>: All of the co-ops — state-based insurers established by the law through large federal startup loans — are underwater. More than half have already closed.</span></p> <p class="p1"><span class="s1"><i>Fewer jobs</i>: The Congressional Budget Office estimates that ACA will reduce the amount of full-time work in the economy by about 2 million jobs, decreasing American economic output by about half of 1 percent. This is largely the result of lower-wage workers' working less because additional work would reduce or eliminate subsidies.</span></p> <p class="p1"><span class="s1"><b>Moving Forward</b></span></p><p class="p1"><span class="s1"><i> Insurance-company subsidies were reduced and are ending</i>: ACA contained two back-end subsidy programs to assist insurers offering ACA plans. The first, called reinsurance, pays the majority of the costs of insurers' most expensive enrollees. The second, called risk corridors, collects money from insurers with profits and pays insurers with losses. Congressional action required the risk-corridor program to be budget-neutral so taxpayers would not be on the hook for insurers' losses. That made a big impact, since a lot more insurers lost money than made money on ACA plans in 2014 and 2015. Insurers were upset by this action and are lobbying for taxpayers to finance the risk-corridor deficit. Both reinsurance and risk corridors end after 2016, so ACA plan premiums in 2017 will have to rise, perhaps substantially, to account for the loss of these back-end subsidies.</span></p> <p class="p1"><span class="s1"><i>Individual mandate tops off</i>: ACA supporters hope that the increase in the individual-mandate penalty, which will now equal the greater of $695 per person or 2.5 percent of household income above the tax filing threshold, will incentivize more young and healthy people to purchase coverage and stabilize the risk pools. To date, the individual mandate has not been nearly as effective as many experts had predicted it would be.</span><span style="font-size: 12px;">&nbsp;</span></p> <p class="p1"><span class="s1"><i>Cadillac tax faces an uncertain future</i>: The Cadillac tax was primarily placed in the law as a way to deal with the tax exclusion for employer-provided insurance, which means that employer plans' premiums are not subject to federal income or payroll taxes. Economists generally agree that the tax exclusion causes numerous problems and contributes to the high cost of American health care. The Cadillac tax was slated to begin in 2018 and was a 40 percent excise tax on plans valued at more than $10,200 for single coverage and $27,500 for family coverage. After aggressive lobbying by business and labor groups, Congress delayed the Cadillac tax until 2020. Among people who believe the exclusion needs to be capped or limited, the Cadillac-tax delay raises concern that will ever happen.</span></p> <p class="p1"><span class="s1"><b>Summary</b></span></p><p class="p1"><span class="s1"> Six years after enactment, ACA remains a law very much in turmoil. The law has decreased the number of people without health insurance, and its regulations and subsidies have benefited some lower-income people and many with preexisting health conditions. Many more, however, find they have less freedom and that their coverage is deteriorating: higher premiums, fewer providers, higher out-of-pocket costs. Beyond the widely reported website problems, many of the law's fundamental institutions — individual exchanges, SHOP exchanges, co-ops, mandates — are failing to perform as expected.</span></p> <p class="p1"><span class="s1">The law will certainly be one factor in this year's elections. Obviously, its long-term future depends heavily upon who is elected president. But perhaps more important is whether public pressure from higher premiums, higher taxes, and reduced choices will boil over and force Washington to revisit the law regardless of who is elected president.</span></p> Fri, 05 Feb 2016 15:00:08 -0500 Responses to Questions for the Record of Jerry Ellig on Moving to a Stronger Economy Through Regulatory Budgeting <h5> Publication </h5> <p class="p1"><span style="font-size: 12px;">February 3, 2016<br /></span><span style="font-size: 12px;"><br />Senator Michael B. Enzi<br /></span><span style="font-size: 12px;">Chairman<br /></span><span style="font-size: 12px;">Committee on the Budget<br /></span><span style="font-size: 12px;">United States Senate<br /></span><span style="font-size: 12px;">Washington, DC 20510<br /></span><span style="font-size: 12px;"><br />Dear Chairman Enzi:</span></p> <p class="p2"><span style="font-size: 12px;">Thank you for the opportunity to testify at the Senate Budget Committee’s December 9, 2015, hearing on the regulatory budget. Below are my responses to the four questions for the record:</span></p> <p class="p3"><b>Chairman Enzi Question 1:</b></p> <p class="p3"><span> </span><i>As you know OMB provides Congress annually with a report of The Costs and Benefits of Federal Regulations as required by the Regulatory Right to Know Act. Over the years that report has varied in its timeliness and quality. You have also seen various agency budgets showing the dollars spent on writing and enforcing regulations as well as studies on the cost of compliance with regulation in the private sector.</i><i style="font-family: inherit; font-weight: inherit;">&nbsp;</i></p> <p class="p3"><i><span> </span>How then would you recommend that Congress establish an initial regulatory baseline for a regulatory budget?</i></p> <p class="p3"><span> </span><b>Answer:</b> The initial baseline should be an estimate of the actual costs of existing regulations. To be useful in congressional decision-making about individual agencies, authorizing statutes, and appropriations, the baseline needs to identify the costs of individual regulations, regulatory programs, or authorizing statutes.</p> <p class="p3"><span> </span>Figures in the annual OMB report to Congress are inadequate for this task. The annual OMB report is a compendium of agencies’ prospective estimates of the costs of regulation, not a retrospective assessment of actual costs. The report covers only the small minority of federal regulations classified as “major,” includes only the regulations issued during the previous 10 years, and is based on agency regulatory impact analyses that are often seriously incomplete.<span style="font-size: 12px;">&nbsp;</span></p> <p class="p3"><span> </span>Figures from studies on the aggregate cost of regulation are also inadequate for this task. Such studies may be helpful in identifying some cumulative costs of regulation, but they do not attribute costs to individual regulations, regulatory programs, or authorizing statutes.</p> <p class="p3"><span> </span>As my Mercatus Center colleagues Jason Fichtner and Patrick McLaughlin noted in a study published in 2015, measuring regulatory costs is more difficult than counting federal outlays. Congress could consider using a proxy for total regulatory costs, such as paperwork costs or net costs to regulated entities, as has been done in other countries. As I noted in my oral response to a question during the hearing, a disadvantage of this approach is that it ignores significant social opportunity costs created by regulation, such as the increase in waiting time for passengers and increased highway deaths attributable to airport security regulation. <span class="s1">Correct estimation of the social cost of a regulation can require assessments of cause-and-effect relationships and monetary valuation challenges that are every bit as difficult as those involved in estimating benefits.&nbsp;</span></p> <p class="p3"><span> </span>Given the difficulties, it may be most practicable for Congress to take an incremental approach, selecting certain agencies or regulatory programs for a pilot study to explore different ways of establishing a baseline. Since the GPRA Modernization Act requires the federal government to identify the programs, tax expenditures, and regulations that contribute toward its high-priority goals, another option would be to conduct a pilot study using the regulations that agencies say are intended to advance high-priority goals. The pilot study should include provisions to disclose the methodology to the public and seek comment from experts to fine-tune a method that could be used across the federal government.</p> <p class="p3"><b>Chairman Enzi Question 2:</b></p> <p class="p3"><span> </span><i>You have worked on two projects, the Performance Report Scorecard and the Regulatory Report Scorecard that have underscored the need for Congress to use and incentivize high-quality analysis. That involves knowing how to obtain, understand and analyze the information needed in decision making. Over the past three decades, legislation has been proposed to establish a separate Congressional Office of Regulatory Analysis.</i></p> <p class="p3"><i><span> </span>Do you support the establishment of such an office?</i></p> <p class="p3"><b><span> </span>Answer: </b>Establishment of a Congressional Office of Regulatory Analysis—either as a separate entity or as a division of the Congressional Budget Office or Government Accountability Office—could provide Congress with the systematic assessment of the effects of regulation that Congress currently lacks.</p> <p class="p3"><span> </span>Under the Government Performance and Results Act, the executive branch has a monopoly on the production of information about the performance of federal programs. Under Executive Order 12866, which governs regulatory analysis and review by the Office of Information and Regulatory Affairs, the executive branch has a monopoly on the production of information about the prospective and retrospective results of regulations. Mercatus Center research projects have found that GPRA and the executive orders on regulatory analysis have improved decision-makers’ knowledge about the results of programs and regulations. But as I noted in my testimony, we have also found that such analysis is often seriously incomplete.</p> <p class="p3"><span> </span>In the Budget Act of 1974, Congress created the Congressional Budget Office because lawmakers recognized that they needed an objective source of spending and revenue estimates independent of the executive branch. In contrast, Congress has no independent source of information on the effects of regulations. The current system provides Congress with a flood of information but little structured means to produce high-quality analysis of the problems that regulatory legislation seeks to solve and the benefits and costs of alternative solutions. For this reason, Congress needs to develop a system for obtaining impartial legislative impact analysis when it authorizes new regulation or reauthorizes existing regulation.</p> <p class="p3"><b>Ranking Member Sanders:</b></p> <p class="p3"><span> </span><i>Much of today’s hearing concerned the costs of regulation. However, as we’ve seen in recent years, there are massive costs associated with deregulation. The Wall Street crash in 2008 was precipitated by the deregulation of the financial sector. The costs associated with the Great Recession that resulted were massive, and we’re still paying the price with high unemployment and a huge deficit. Similarly, the Deepwater Horizon oil spill in 2010 – in which an explosion killed 11 people and almost 5 million barrels of oil spilled over an area estimated to be as large as 68,000 square miles – was also caused, in part, by what the Houston Chronicle called “a lax regulatory climate.”</i></p> <p class="p3"><i><span> </span>With these facts in mind, how would a regulatory budget account for the unforeseen economic and environmental costs of deregulation?</i></p> <p class="p3"><b><span> </span>Answer: </b>Like a family budget or the federal budget, a regulatory budget is a plan for the allocation of resources. The purpose of a budget is to place an overall limit on spending, based on the family’s or the government’s projected income, then divide that spending among competing priorities based on the expected benefits. No one would seriously suggest that the federal government operate without a budget; that would mean individual agencies could spend federal money as they parochially see fit, with no consideration of the government’s ability to pay or the implications such spending could have on other programs.&nbsp;</p> <p class="p3"><span> </span>Unfortunately, the current regulatory system creates an analogous dysfunctional situation. Regulatory agencies can direct individuals, businesses, and state, local, and tribal governments to sacrifice money, time, privacy, and other values with no consideration of the total cost to society of all regulations, as long as the regulation is intended to accomplish the agency’s goals.&nbsp;</p> <p class="p3"><span> </span>As with a family budget or the federal budget, cost is not the only factor relevant to resource allocation decisions in a regulatory budget. When dividing the total of regulatory costs among competing priorities, Congress should take account of the benefits expected from various regulations and regulatory programs. The expected benefit of regulations intended to prevent a financial crisis is the social cost of the crisis multiplied by the reduction in risk (of a crisis) created by the regulations. Similarly, the expected benefit of regulations intended to prevent oil spills is the social cost of the spill multiplied by the reduction in risk (of spills) created by the regulations. Given the high costs of financial crises and oil spills, regulations that significantly reduce the risk of their occurrence would likely be high priorities to retain. Regulations that are <i>intended</i> to reduce the risk but <i>in reality create little or no reduction in risk</i> should not be high priorities.&nbsp;</p> <p class="p3"><span> </span>Extensive research by my colleagues at the Mercatus Center has documented the phenomenon of regulatory accumulation: the tendency of the federal government to continually add new regulations without reexamining existing regulations to see if they are actually accomplishing their intended goals at a reasonable cost. By constraining the total social cost of regulation, a regulatory budget creates incentives for agencies and Congress to examine the actual results of regulations, eliminate the nonfunctional regulations, and retain the regulations that solve real problems at a reasonable cost.</p> <p class="p3"><b>Senator Whitehouse:</b>&nbsp;</p> <p class="p3"><span> </span><i>Does the Mercatus Center accept donations from donors with financial interests in regulated pollutants, regulated chemicals, regulated financial products, and/or regulated consumer products? Please describe any such entities, and the amount of the support of each to the Mercatus Center.</i></p> <p class="p3"><span> </span><b>Answer:</b> To preserve the academic freedom of our researchers, the Mercatus Center has an explicit policy regarding independence of research (<a href=""></a>). Accordingly, I am not involved in requesting or accepting donations.</p> <p class="p3"><span> </span>Thank you again for the opportunity to testify. These answers are being provided in a good faith effort to answer your questions. I nevertheless reserve the right to supplement these answers with any information that should be brought to my attention subsequent to this submission.</p> <p class="p3">Please let me know if I can be of further assistance to the committee on this or other topics related to federal regulatory process reform.</p> <p class="p3">Sincerely,<br /><span style="font-size: 12px;"><br /><br /><br />Jerry Ellig<br /></span><span style="font-size: 12px;">Senior Research Fellow</span></p> Fri, 05 Feb 2016 17:15:28 -0500 The Proper Role of the FDA in the Medical Ecosystem <h5> Expert Commentary </h5> <p class="p1"><span class="s1">When I received my driver’s license my father said to me, “Congratulations, son—now you really learn how to drive.” Driver education courses only ensured that I knew how to operate the vehicle safely and appropriately to get from point A to point B. I had eight fender-benders in my first decade behind the wheel, and I haven’t had one accident for the last decade. My father was right. I learned how to operate a car very well—after I had my license for a while.</span></p> <p class="p1"><span class="s1">If the Department of Motor Vehicles approved driver’s licenses like the Food and Drug Administration approved new drugs and devices, driving tests would go on for months and cost a tremendous amount of money. I would have been tested on driving to points B to Z and countless other scenarios. If the DMV started doing this, Americans would surely say the DMV had lost its way.</span></p> <p class="p1"><span class="s1">Well, the FDA has lost its way and as President Obama’s nominee for commissioner of the FDA—Dr. Robert Califf—moves through the nomination process, the agency’s proper role in the medical ecosystem should be scrutinized.</span></p><p class="p1"><span class="s1"> Congress intended the FDA to license drugs for approval, and then let the medical ecosystem prescribe the drugs in real world circumstances—guided by FDA’s licensing instructions, of course—to arrive at the most appropriate uses for individual patients.</span></p> <p class="p1"><span class="s1">The FDA’s role is clearly defined in the Federal Food Drug and Cosmetic Act (FD&amp;C): “to promote health by promptly and efficiently reviewing clinical research and taking appropriate action on the marketing of regulated products in a timely fashion.” This includes “ensuring that… drugs are safe and effective … [and] there is reasonable assurance of the safety and effectiveness of devices.”</span></p> <p class="p1"><span class="s1">The two most important parts of the FDA’s mission are to judge new products on the basis of safety and effectiveness, and to do so quickly. The median time of approval of novel drugs is 304 days. Considering that 10 months is the target review period for all new drug applications, the FDA is late half the time.</span></p> <p class="p1"><span class="s1">The reason that the FDA is incorrigibly late, and the reason that many companies don’t even try to develop drugs for many diseases that affect millions of Americans, is because the FDA has lost sight of its proper role. The FDA is supposed to be the gatekeeper of medicines that become available to the medical marketplace of physicians, patients, hospitals, payers, and medical community. Congress intended for the FDA to approve only those drugs that could be labeled for safe use and demonstrated the clinical effects claimed by drug developers.</span></p> <p class="p1"><span class="s1">Instead, the FDA is imposing its own standard for what constitutes a good drug. Rather than licensing products for use by doctors, the FDA is trying to dictate the practice of medicine. Rather than entering products that are safe and effective into the medical marketplace for the physicians to use and determine which are best for individual patients, the FDA is endeavoring to tell doctors and patients, upon approval, which drugs are best and how they are to be used. This is not how the system was set-up, nor is it possible.</span></p> <p class="p1"><span class="s1">In my recent research paper for the Mercatus Center on “On the Proper Role of the FDA,” we make the case for the FDA to return to its proper role: arbiters of safety and effectiveness, period. The FDA must be stopped from insisting on long-term outcomes that require humongous clinical trials, which are exceedingly difficult, time consuming, and costly to demonstrate, especially before approval. If the FDA were returned to its proper role, new drugs would be approved quickly, true personalized medicine would be facilitated, and both drug development costs and prices would be reduced.</span></p> <p class="p1"><span class="s1">You and your doctor need to decide which therapies are best for you and which are most beneficial, not the FDA. The only way that can happen is if the agency assumes its proper role in the medical ecosystem.</span></p> Fri, 05 Feb 2016 15:34:19 -0500 $19 Trillion and Counting <h5> Expert Commentary </h5> <p class="p1"><span class="s1">The statutory limit on how much debt the federal government can accumulate is back in the news, but this time it's not because Washington is close to breaching it. That's not a present concern thanks to the year-end bipartisan spending spree that included a suspension of the debt limit until March 2017. The news is that a report from the House Financial Services Committee found that the Obama administration's Treasury Department has been repeatedly misleading the American public on the matter.</span></p> <p class="p1"><span class="s1">Treasury has routinely rejected the idea that once the government reaches the debt limit, federal spending could be prioritized to avoid a default. During a previous debate over the debt limit in 2011, my colleague Jason Fichtner and I wrote a paper explaining that even if Treasury is unable to issue more debt, it can still avoid a default and thus give policymakers more time to implement reforms that would put the government on a more sustainable fiscal path.</span></p> <p class="p1"><span class="s1">Contrary to Treasury's claims, we argued that it has several financial management options to continue paying the government's primary obligations. Specifically, Treasury could use incoming tax receipts to cover high priority claims including the interest on existing debt, the principal on that debt, Social Security benefits and more. Government assets could also be liquidated to pay bills.</span></p> <p class="p1"><span class="s1">Treasury claimed that such options were neither acceptable nor feasible, and thus the only choice was for Congress to promptly agree to increase the debt limit. Then-Treasury Secretary Timothy Geithner claimed that prioritizing was out of the question and that failing to pay any of the government's bills would be the equivalent of defaulting on the debt. The same thing happened again during the administration's 2013 showdown with Congress over lifting the debt limit. This time it was Geithner's replacement, Jacob Lew, claiming that prioritization was not an option.</span></p> <p class="p1"><span class="s1">We now know that the administration's claims were untrue.</span></p> <p class="p2"><span class="s1">As it turns out, documents subpoenaed by the House Financial Services Committee reveal that during the 2013 debt ceiling debate the Obama administration knew it was actually capable of prioritizing payments. Indeed, the Federal Reserve Bank of New York was conducting "tabletop exercises" in preparation for what the administration was publicly stating couldn't be done. The documents show that while Treasury was helping the administration scare the public, its behind-the-scenes actions proved otherwise.</span></p> <p class="p1"><span class="s1">While Treasury and the administration's deceptive behavior is disturbing, it's good news for the next battle over lifting the debt limit early next year. I have repeatedly made it clear in the past that I believe defaulting on the debt is not an acceptable option. However, continuing to raise the debt limit without making any substantive changes to the unsustainable financial path we are on is just as irresponsible. Under the watch of both Republicans and Democrats, the debt limit has been raised 20 times since 1993. The result is that the federal debt has ballooned from less than $5 trillion in 1993 to $19 trillion and counting today.</span></p> <p class="p1"><span class="s1">Deficits are also going back up thanks to a bipartisan inability to get spending under control. According to the Congressional Budget Office's latest projections, cumulative annual budget deficits will add another $9.4 trillion in debt to the federal government's mountain of red ink. That figure is $1.5 trillion higher than the CBO projected less than six months ago.</span></p> <p class="p1"><span class="s1">Will Rogers once said, "If you find yourself in a hole, stop digging." Policymakers need to stop digging and instead implement institutional reforms that constrain government spending, which is the underlying cause of the mounting debt. Indeed, that should be a precondition to raising the debt limit next year. And this time we will know that Treasury has the means to give Congress the time to finally get it done.</span></p> Fri, 05 Feb 2016 14:39:08 -0500 Federal Spending in Perspective: The Powerball Jackpot <h5> Publication </h5> <p>The recent record $1.6 billion Powerball lottery jackpot captured the nation’s attention. The sum is so immense, it’s hard for most of us to wrap our minds around. Another immense sum that’s hard for Americans to wrap their minds around is the amount of hardworking taxpayers’ money that the federal government spends on an annual and daily basis. In fiscal year 2015, the federal government spent $3,700 billion (or $3.7 trillion), which is more than $10 billion per day.</p> <p>This week’s chart shows that although the Powerball jackpot was massive, it was considerably smaller than how much the federal government spent per day, on average, last year. Indeed, the federal government spent almost half a billion dollars per hour. That means that it would have taken Uncle Sam only 3.8 hours to spend the entire jackpot!</p> <p><img height="351" width="585" src="" /></p> <p>It’s worth noting that the federal government was also a winner. Assuming the three jackpot winners took the lump sum payout, the federal government will end up collecting around $400 million in taxes on it. Again, that is a massive sum, but it’s only equal to about one hour of federal spending.</p> Thu, 04 Feb 2016 13:53:27 -0500 Are Congress and the Fed Repeating the Mistakes of the Depression? <h5> Expert Commentary </h5> <p class="p1">See if this sounds familiar. The economy is in a deep slump. The Fed cuts interest rates close to zero and then tries quantitative easing (QE). A banking crisis begins in the United States and then spreads to Europe, where even sovereign debt is no longer safe. Individual countries are locked into a single monetary regime and unable to stimulate their economies.</p> <p class="p1">Am I my describing the Great Recession? Yes, but I’m also describing the Great Depression of the early 1930s. Now let’s push the comparison a bit further.</p> <p class="p1">At the time, the Depression was widely viewed as representing the failure of unbridled capitalism. Monetary policy was assumed to be expansionary but ineffective. So far I'm still describing both the 1930s and recent history.</p> <p class="p1">Today, however, the Great Depression is seen very differently, thanks to the path-breaking research of Milton Friedman and Anna Schwartz. Even former Fed Chair Ben Bernanke admits that the Federal Reserve caused the Great Depression, with a highly contractionary monetary policy. But how could this be, given that the Fed cut interest rates close to zero and also did substantial QE during the 1930s?</p> <p class="p1">Bernanke provides an answer in an academic paper in which he points out that neither interest rates nor money creation are good indicators of the actual stance of monetary policy. Instead, Bernanke argues that you need to look at nominal GDP growth and inflation, both of which fell sharply during the early 1930s and more modestly in the 2008-09 period.</p> <p class="p1">During much of my academic career I studied the role of the gold standard in the Great Depression, and recently published <a href=";utm_medium=marketing&amp;utm_campaign=PMP">a book on my findings</a>. During the banking crisis of 2008 and the associated recession, I couldn't help but notice a number of parallels with the much deeper slump of the 1930s. One, which I've already alluded to, was the widespread misdiagnosis of the stance of monetary policy. Just as in the 1930s, most people — even most economists — initially assumed that the stance of monetary policy was highly expansionary in the period after 2008. As in the 1930s, people focused too much on the inputs into monetary policy, such as interest rates and QE, and not enough on the output, inflation and nominal GDP growth.</p> <p class="p1">But the parallels don't stop there. Perhaps the most striking similarity is between the Eurozone and the interwar gold standard. In both cases, individual countries had little or no control over monetary policy. And in both cases, the crisis was misdiagnosed. It was assumed that the financial crisis was causing a recession, whereas the reverse was more nearly true. The deep slump worsened the fiscal situation of countries in two ways: making the budget deficit larger and also reducing national income available to pay off sovereign debt.</p> <p class="p1">The U.S. economy finally began to recover after Franklin Roosevelt began devaluing the dollar in April 1933. Initially the recovery was quite rapid, with industrial production rising by 57 percent between March and July 1933. But then FDR issued an executive order that effectively pushed hourly wages up by roughly 20 percent in just two months. Industrial output leveled off until May 1935, when the Supreme Court declared the wage and price-fixing program to be unconstitutional.</p> <p class="p1">The wage shock of July 1933 would be just the first of five such shocks. In all five cases, growth in industrial production slowed sharply after wages were artificially increased by government policy changes, slowing the recovery. The economy remained deeply depressed as late as the spring of 1940 — seven years after FDR took office.</p> <p class="p1">There are many lessons from the Depression for today’s economy.</p> <p class="p1">Conservatives need to be more aware of the cost of large shortfalls in nominal GDP. When monetary policy allows NGDP to fall well below trend, unemployment increases and financial crises develop or intensify. But instead of blaming the Fed, most people blame capitalism, and we end up with counterproductive statist policies.</p> <p class="p1">Liberals need to be more cautious in advocating large increases in the minimum wage. It’s true that some studies suggest that small increases have little effect. But the minimum wage was already increased by roughly 40 percent right as we were sliding into the Great Recession. If it were to be doubled to $15, as some progressives now advocate, the cost in jobs could be quite significant.</p> Mon, 08 Feb 2016 11:33:16 -0500 Dodd-Frank and the Federal Reserve’s Regulations <h5> Publication </h5> <p>The Dodd-Frank Wall Street Reform and Consumer Protection Act has been generally associated with <a href="">an explosion in federal financial regulatory restrictions</a>. <a href="">RegData</a> permits us to specifically examine which agencies produced regulatory restrictions associated with the law. Dodd-Frank was associated with a substantial increase in the Federal Reserve’s role as a regulator, as its number of regulations jumped 32 percent in the 4 years since the passage of the legislation.</p> <p>The chart below tracks total cumulative restrictions from the Federal Reserve from 1990 to 2014.&nbsp;</p><p><img height="452" width="585" src="" /></p><p><span style="font-size: 12px;">The dotted line in the chart marks the passage of Dodd-Frank in 2010. The accumulation of regulatory restrictions accelerated between 2009 and 2010, almost entirely from restrictions associated with the Credit Card Accountability Responsibility and Disclosure Act of 2009. There was, however, an even more noteworthy increase in total regulatory restrictions between 2010 and 2014, as the Federal Reserve added 3,186 new regulatory restrictions in response to Dodd-Frank. The Federal Reserve’s regulatory restrictions grew as much over the four years after Dodd-Frank was enacted as they did during the decade and a half prior to the law’s creation.</span></p> <p>The chart below plots the annual growth of the Federal Reserve’s new and cumulative regulatory restrictions that are associated with Dodd-Frank.&nbsp;</p> <p><img height="452" width="585" src="" /></p> <p>The Federal Reserve’s increased pace of rulemaking since 2011 is striking. From 2013 to 2014 alone, regulatory restrictions imposed by the Federal Reserve associated with Dodd-Frank grew by nearly 70 percent. As our colleagues have <a href="">noted in the past</a>, Dodd-Frank substantially increased the Federal Reserve’s regulatory authority, a claim clearly supported by the data. This surge in regulatory activity at the Federal Reserve now means that nearly one-quarter of all regulatory restrictions imposed by the Federal Reserve are associated with Dodd-Frank. Importantly, of the 132 rulemaking requirements for all bank regulators (including the Federal Reserve), the law firm <a href="">Davis Polk reports</a> that only 83 were finalized as of September 30, 2015—meaning the total effect of Dodd-Frank on the Federal Reserve is not yet reflected in the data.</p> <p>These charts understate the level of regulatory growth for financial firms and consumers, because they only reflect the growth in a single agency. They do not include, for instance, growing regulatory burdens for mortgages and other consumer debt products once regulated by the Federal Reserve, but now <a href="">under the purview</a> of the Consumer Financial Protection Bureau.</p> <p>The expansion in the Federal Reserve’s regulatory role should raise concern about its rulemaking processes, including the use of regulatory analysis. While the Federal Reserve’s internal rulemaking policy calls for regulatory analysis to carefully consider, among other things, the “economic implications” of rules, it has <a href="">not always adhered</a> to that policy.&nbsp;</p> <p>Moreover, the Federal Reserve enjoys a significant amount of independence as the arbiter of monetary policy. In view of the significant increase in regulatory activity post-Dodd-Frank, however, it is worth questioning whether the institutional protections from congressional oversight designed to keep monetary policy independent also prevent appropriate <i>regulatory</i> oversight of the Federal Reserve’s rulemaking activities.</p><p>&nbsp;</p> Thu, 04 Feb 2016 13:32:53 -0500 Economist William Beach Joins Mercatus Center, Returns to George Mason University <h5> Expert Commentary </h5> <p class="p1"><b>Arlington, Va.</b>—The Mercatus Center at George Mason University is excited to announce the addition of William Beach as Vice President for Policy Research. Dr. Beach brings decades of economic and leadership experience with his prior roles as Chief Economist for the Senate Budget Committee, a senior economist in the corporate headquarters of Sprint United, and Director of the Heritage Foundation’s Center for Data Analysis. &nbsp;He also served previously as President of the Institute for Humane Studies at George Mason University. &nbsp;</p> <p class="p1">Regarding his new position, Dr. Beach said the following:</p> <p class="p1">I’m delighted to return to George Mason University, and look forward to helping Mercatus grow its research portfolio’s depth and impact. &nbsp;Mercatus has an established reputation for publishing cutting-edge research that academics as well as policy makers and the media turn to for answers to many of today’s most pressing problems.&nbsp;</p> <p class="p1">“We are thrilled to have Bill Beach join the Mercatus team,” said Tyler Cowen, faculty director of the Mercatus Center. &nbsp;“Dr. Beach has built an outstanding reputation as an economist as well as a research and analysis expert. &nbsp;His contributions to Mercatus will prove invaluable to our growth.” &nbsp;</p> <p class="p1">Dr. Beach previously served as the Chief Economist for the Senate Budget Committee, Republican Staff. Prior to that, he was the Lazof Family Fellow in Economics at the Heritage Foundation and Director of the Foundation’s Center for Data Analysis (CDA).&nbsp;</p> <p class="p1">From 1988 to 1991, Dr. Beach served as a senior economist in the corporate headquarters of Sprint United, Inc. &nbsp;Following Sprint, Beach moved to George Mason University, where he was the President of the Institute for Humane Studies. A graduate of Washburn University in Topeka, Kansas, Dr. Beach also holds a master’s degree in history and economics from the University of Missouri-Columbia and a Ph.D. in Economics from Buckingham University in Great Britain.</p> Wed, 03 Feb 2016 16:22:08 -0500 David Beckworth Discusses the Federal Reserve’s December Rate Hike on Bloomberg TV <h5> Video </h5> <iframe src="" width="500" height="375" frameborder="0" webkitallowfullscreen mozallowfullscreen allowfullscreen></iframe> <p><span style="color: #212121; font-family: Calibri, sans-serif; font-size: 14.6667px; font-style: normal; font-weight: normal; line-height: normal;">David Beckworth discusses the implications of the Federal Reserve’s recent decisions on Bloomberg TV</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 src=&quot;; width=&quot;500&quot; height=&quot;375&quot; frameborder=&quot;0&quot; webkitallowfullscreen mozallowfullscreen allowfullscreen&gt;&lt;/iframe&gt; </div> </div> </div> Tue, 02 Feb 2016 17:43:42 -0500 Neighborly Solutions to a Blizzard of Problems <h5> Expert Commentary </h5> <p class="p1"><b>&nbsp;</b><span style="font-size: 12px;">When&nbsp;a major winter storm pummeled the East Coast, it left 12 to 36 inches of snow across the region as well as coastal flooding and, tragically a number of weather-related fatalities in its wake. School districts, governments and businesses were closed as people across the region dug out after the storm. While we may expect government to lead the recovery effort, our neighbors play a key role in helping our communities return to normalcy.</span></p> <p class="p2"><span class="s1">Consider the following examples:</span></p> <p class="p2"><span class="s1">On the Saturday evening of the blizzard, a couple went for a walk around their neighborhood just as the snow stopped falling. As they tromped through the snow, sometimes as high as their knees and hips, they encountered another couple walking their dog and a few people assessing the state of their buried cars. Then, farther down the barely plowed street, they noticed a car with its four-way emergency flashers on and the engine revving as tires dug into the snow. The couple felt obliged to help and went back to their apartment to grab a shovel. Within a few minutes, the car and its passengers were on their way.</span></p> <p class="p2"><span class="s1">Similarly, on Sunday, a gentleman in his late 40s&nbsp;walked around his neighborhood looking for people who might need help. He shoveled snow from the sidewalk of one neighbor who went inside to take a break after clearing a path to her car, and then he moved on to the driveway of another neighbor who wasn’t able to go outside because of&nbsp;poor health.</span></p> <p class="p2"><span class="s1">These stories aren’t unique. During the blizzard and in the subsequent days, countless people&nbsp;had a&nbsp;similar story of helping or being helped by their neighbors: such as the woman who finishes clearing her driveway and then shovels her neighbor’s driveway so that he doesn’t risk hurting his knee again, the boy who checks in on his elderly neighbor to make sure her heat is working and that she has enough food and medicine to last through the storm and the neighbors who dig out the fire hydrants on their street.</span></p> <p class="p2"><span class="s1">In these situations, we often expect government to protect property, clear roads, get public transit running and assist in medical emergencies. And we should celebrate the police, fireman and emergency responders who come to work and save lives. However, we shouldn’t forget that some storms are so large that they’re likely to overwhelm even the best-prepared and most-efficient governments.</span></p> <p class="p2"><span class="s1">In circumstances such as&nbsp;the recent blizzard, community members must rely on one another during and after the storm. If communities are to quickly return to normalcy, our neighbors, who take on the roles of commercial and social entrepreneurs, must be given room to act, too.</span></p> <p class="p2"><span class="s1">This is true after every major storm or natural disaster, including Hurricanes Katrina and Sandy. In New Orleans, commercial entrepreneurs reopened grocery stores, gas stations and furniture stores to provide the goods needed for rebuilding. And in New York, churches and synagogues provided food, clothing and medical services to their neighbors. Although the story of recovery from Winter Storm Jonas is still being written, it shouldn’t surprise us that entrepreneurs play a major role.</span></p> <p class="p2"><span class="s1">News reports have already focused on the grocery store and gas station owners who kept their stores open as long as possible so people could stock up on supplies as well as the social entrepreneurs who kept homeless shelters open and assisted the most vulnerable members of their communities. These stories, like the ones mentioned earlier, are about neighbors helping neighbors obtain the resources and tackle the activities needed to dig out after the storm and return to their daily lives.</span></p> <p class="p2"><span class="s1">We should embrace the key role that our neighbors play during and after disasters. Returning to normalcy means working together to clear the snow, supporting the business owners who remain open to sell supplies and embracing the importance of local entrepreneurs.</span></p> Tue, 02 Feb 2016 20:18:56 -0500 Wireless Spectrum in 2016: A Policy Update <h5> Events </h5> <p>With nearly a trillion dollars at stake and draft legislation in development, now is the time for policymakers to free spectrum for innovative 21<sup>st</sup> century use. In order for 21<sup>st</sup> century technologies like the sharing economy and the Internet of Things to reach their full potential, and drive economic opportunity, more spectrum must be made available. Federal spectrum reallocation is a win-win-win scenario for the economy, social well-being, and the government.</p> <p>The Mercatus Center at George Mason University invites you to join <a href="">Brent Skorup</a>, Research Fellow in the Technology Policy Program, for a Capitol Hill Campus discussion of federal wireless spectrum and how it can be used more efficiently.</p> <p>This program will explain:</p> <ul><li>What wireless spectrum is and its basic technical aspects;</li><li>Competition and consumer benefits that arise from freeing up more spectrum; </li><li>The tremendous budgetary value of assigned spectrum underutilized by federal agencies; and</li><li>Strategies for reallocating government-held spectrum for private use.</li></ul> <p>Space is limited. Please register online for this event.</p> <p>This event is free and open to all congressional and federal agency staff. Lunch will be provided. Due to space constraints, this event is not open to interns. <b><i>Questions? Please contact Jennifer Campbell at <a href=""></a>.</i></b></p> Tue, 02 Feb 2016 17:09:10 -0500 ACA Will Drive Health Care Costs Up <h5> Expert Commentary </h5> <p class="p1"><span class="s1">Today the <a href=""><span class="s2">Mercatus Center</span></a> unveiled a <a href=""><span class="s2">study</span></a> by Bradley Herring (Johns Hopkins University) and Erin Trish (University of Southern California) finding that the much-discussed health spending slowdown that continued in 2010-13 “can likely be explained by longstanding patterns” over more than two decades, rather than suggesting a recent policy correction. Projecting these factors forward and incorporating the effects of the Affordable Care Act’s health insurance coverage expansion provisions, Herring-Trish predict the expansion will produce a “likely increase in health care spending.”</span></p> <p class="p1"><span class="s1">Though not surprising in light of longstanding appreciation of insurance’s effects on health service utilization, the latter finding is nevertheless profoundly concerning given that <a href=""><span class="s2">pre-ACA health spending growth trends</span></a> were already <a href=""><span class="s2">widely held</span></a> to be <a href=""><span class="s2">untenable</span></a>. These Herring-Trish findings were first made public last December in <a href=""><span class="s2">Inquiry: the Journal of Health Care Organization</span></a>, Provision and Financing and warrant the attention of policymakers, for the simple reason that they show core ACA provisions as worsening some of the most severe problems in health care policy.</span></p> <p class="p1"><span class="s1">The run-up to the ACA’s passage featured widespread recognition that <a href=""><span class="s2">excess health cost growth</span></a> was a substantial problem afflicting entities ranging from the federal government to health insurers to individual Americans. Sometimes the argument was taken too far, as in CBO’s erroneous 2008 <a href=""><span class="s2">depiction</span></a>of health cost inflation being the dominant driver of federal budget deficits. But experts on all sides agreed that national health spending was growing faster than our economy’s ability to support it, and that this was a significant public policy problem requiring correction.</span></p> <p class="p1"><span class="s1">Experts have also long understood that insurance coverage tends to fuel additional health service utilization, driving up spending. This has long been evident from <a href=""><span class="s2">academic studies</span></a> and has been incorporated into <a href=""><span class="s2">many models</span></a> for projecting health spending. The Medicare trustees’ projections reflect this understanding of insurance effects; essentially, the more that insurance coverage <a href=""><span class="s2">reduces out-of-pocket costs</span></a>, the more health spending there will be (all other things being equal). This is good when it means more people can afford health services they need; it’s bad when it prompts the purchase of services people don’t need and wouldn’t choose to buy unless so incented. Good or bad, it’s a reality; more insurance generally means more spending.</span></p> <p class="p1"><span class="s1">Public understanding of this phenomenon became somewhat confused when the ACA was debated. Two objectives of the ACA were too often conflated:&nbsp;</span></p> <p class="p1"><span class="s1">1) <a href=""><span class="s2">expanding the pool of insured</span></a> so that sick people could have their health care costs subsidized by healthy people, and&nbsp;</span></p> <p class="p2"><span class="s3">2) <a href=""><span class="s2">bending the health cost curve down</span></a>.&nbsp;</span></p> <p class="p1"><span class="s1">Pursuing the first objective is unhelpful to the second objective. Granted, requiring healthy individuals to carry insurance (and imposing community rating, as the ACA does) can reduce costs facing those with expensive health conditions. This is because the healthy then contribute more money to insurance plans than they take from them, permitting others to pay for less than they receive. However, expanding coverage does not drive total costs down but rather up. This is because all the costs of caring for the sick are still there, while all insured persons have greater incentive to utilize more health services than they would if uninsured.&nbsp;</span></p> <p class="p1"><span class="s1">Given how the ACA’s advocates touted the law as “<a href=""><span class="s2">bending the health care cost curve [down]</span></a>, and reducing the deficit” while occasionally in the same sentence crediting it with expanding coverage to “more than 94 percent of Americans,” many Americans could be forgiven for not understanding those two goals were in conflict.&nbsp;</span></p> <p class="p1"><span class="s1">National health expenditure growth began to slow significantly <a href=""><span class="s2">prior to the ACA’s passage</span></a> in 2010 (see Figure 1). The slowdown continued after the ACA was passed but before many of its provisions took full effect, tempting <a href=""><span class="s2">some advocates</span></a> to credit the ACA somewhat <a href=""><span class="s2">groundlessly</span></a> for successful cost containment.&nbsp;</span></p> <p class="p3"><img height="338" width="450" src="" /></p> <p class="p1"><span class="s1">Herring-Trish show that the vast majority of the recent slowdown can be explained by “long-standing patterns” involving trends in real income, physicians per capita, the percent of the population living in nonmetropolitan areas, the numbers of those living in poverty, and other factors. If these trend lines are traced back to 2000, <a href=""><span class="s2">Herring-Trish</span></a> find that they account for over 70% of the recent cost slowdown. If they are traced back to 1991, they account for virtually all of it (98%). By itself, the Great Recession’s effect of reducing average real incomes accounted for more than two-fifths of the deceleration in health spending.</span></p> <p class="p1"><span class="s1">Moreover, not only has the ACA not contributed meaningfully to the recent cost slowdown, but it will likely put upward pressure on health spending going forward. <a href=""><span class="s2">Herring-Trish</span></a> find that the law’s Medicaid expansion will by itself increase total national health spending roughly 1% by 2019. A 1% increase may sound small, but remember we already spend over <a href=""><span class="s2">$3 trillion</span></a> a year on health care, and faced unsustainable cost growth trends before the ACA’s coverage expansion added to them.</span></p> <p class="p1"><span class="s1">In fairness it should be acknowledged there are other provisions of the ACA that its <a href=""><span class="s2">advocates</span></a> hoped would counteract the coverage expansion’s effect of adding to total health costs. However, many of those measures, from the Cadillac plan tax to the Independent Payment Advisory Board (IPAB), have not produced their desired savings because they have not taken effect and it’s uncertain that they ever will. Our best information remains that the ACA, by expanding Medicaid as well as other subsidized insurance, didn’t merely shift more of the burden of funding existing health care costs to taxpayers– it actually increased those costs. Sooner or later, lawmakers will need to fix that problem.</span></p> Wed, 03 Feb 2016 09:53:53 -0500 Fundamental Spending Reform: The Solution to the Debt Ceiling Debate <h5> Publication </h5> <p>Chairman Duffy, Ranking Member Green, and members of the subcommittee: Thank you for the opportunity to testify today.</p> <p>After offering a brief look at how we arrived at our current state, I would like to make the following points:</p> <ol> <li>High and increasing debt has adverse consequences for our economy.</li> <li>There are a number of institutional reforms that can be implemented to check the spending that drives this growth in debt.</li> <li>Entitlement reform is essential, as rapidly burgeoning growth in entitlements is driving the growth in spending.</li> <li>The latest increase in the debt ceiling gives us some time to reach an agreement that reflects real reform, and there are sufficient assets available that default is not a concern.</li></ol><p><b>1. THE INCREASING FEDERAL DEBT</b></p> <p>The origins of the federal government’s statutory debt limit can be traced back to 1917, when the country borrowed money to finance World War I. Limitations on federal borrowing were intended to control congressional spending by limiting the amount of debt that the federal government could accumulate. Policymakers have routinely pushed the debt limit ever higher ever since. Indeed, the limit has been increased almost 20 times since 1993, and the federal debt has ballooned from less than $5 trillion to $19 trillion. That figure continues to rise, thanks to the Bipartisan Budget Act of 2015, which passed in October and suspended the debt limit until March 16, 2017.</p> <p>It is ironic that the suspension of the debt limit was part of a deal to increase spending above the Budget Control Act of 2011’s intended spending caps (for the second time). Despite the popular perception of Republicans and Democrats caught in gridlock, the truth is that after the political dust settles, the end result is always the same: a bipartisan agreement on more spending and more debt.</p> <p>This needs to change. According to the most recent 10-year fiscal forecast from the Congressional Budget Office (CBO), “federal outlays remain near 21 percent of GDP for the next few years—higher than their average of 20.2 percent over the past 50 years . . . [and] if current laws generally remained the same, growth in outlays would outstrip growth in the economy, and outlays would rise to 23 percent of GDP by 2026.”</p> <p>CBO projections also show that federal debt held by the public will reach 76 percent of GDP by the end of 2016—a full two percentage points higher than 2014. It is also expected to grow from $14 trillion this year to $24 trillion by 2026.&nbsp;</p> <p>That’s probably an underestimate since it is a projection based on the assumption that policymakers will keep their promises to cut spending and raise taxes. Based on Congress’s termination of the sequester years ahead of schedule and its historical propensity to spend more and more each year, such an assumption is unlikely to come true. The projections also assume that the economy will grow at current projected rates and without any recessions. This, too, is unlikely, since the country tends to go into recession every five to six years.</p> <p>Deficits are also going to go up to $544 billion from last year’s $439 billion. Over the coming decade, the size of the federal deficit will double to reach an annual gap of almost 5 percent of GDP. CBO predicts that deficits will total $9.4 trillion. That’s up $1.5 trillion from its August report. It also notes that under the alternative scenario budget projection, spending will increase to 21.9 percent of GDP in 2020, to 25.8 percent in 2030, and to 30.4 percent in 2040.</p> <p>The expansion of mandatory programs—such as Medicare, Medicaid, Affordable Care Act subsidies, and Social Security—is the driving force behind this spending growth and our exploding debt. These entitlements will trigger even higher levels of debt in the years outside the 10-year budget window.&nbsp;</p> <p>Unfortunately, as the debt grows, the interest payments on that debt will grow as well. If the United States does not change course, interest on the debt will end up as one of its biggest budget items. Our unfunded liabilities keep going up, too. The net present value of the promises made to the American people for which the United States does not have the money to pay is roughly $75.5 trillion, according to the Treasury Department.</p> <p>High debt levels are problematic. As CBO explained a few years ago:</p> <p>Such high and rising debt later in the coming decade would have serious negative consequences: When interest rates return to higher (more typical) levels, federal spending on interest payments would increase substantially. Moreover, because federal borrowing reduces national saving, over time the capital stock would be smaller and total wages would be lower than they would be if the debt was reduced. In addition, lawmakers&nbsp;would have less flexibility than they would have if debt levels were lower to use tax and spending policy to respond to unexpected challenges. Finally, a large debt increases the risk of a fiscal crisis, during which investors would lose so much confidence in the government’s ability to manage its budget that the government would be unable to borrow at affordable rates.</p> <p>These numbers are important to keep in mind when discussing the next debt ceiling deadline. Indeed, when March 2017 comes around we can expect that Washington will once again have the same debate it has had for the last few years about whether or not to raise the debt ceiling and under what circumstances. On one side you will find those who want to raise the limit without questions asked. On the other side, you will find those who will demand reforms in exchange for yet another increase in the debt ceiling.</p> <p>Continuing to pass debt ceiling increases without proper spending reforms would be irresponsible. It is also irresponsible to signal to the international community that the US government could possibly default on its debt obligations while Washington works through whether it will raise the debt limit before or after it formulates a plan to reduce government spending.</p> <p>WHAT’S AT STAKE</p> <p>To be sure, default should not be an option on the table. However, raising the debt ceiling without a commitment to improve our long-term debt problem has adverse consequences. In 2011, the rating agency Fitch warned the US government that while it supported raising the debt ceiling, it also wanted the government to come up with a credible medium-term deficit-reduction plan. Other rating agencies at the time also warned the United States of the negative consequences of not dealing with the country’s long-term debt.&nbsp;</p> <p>If Congress does not address our debt problem before March 2017, the optimal outcome would then be to raise the debt limit while Congress and the president pass a credible plan to reduce near- and long-term spending at the same time.&nbsp;</p> <p>Fortunately, if an agreement to control spending and raise the debt limit is not reached, the United States need not risk defaulting on its debt. The Treasury Department has the legal authority to prioritize interest payments on the debt above all other obligations, whether that means delaying payments to contractors or managing other obligations. But Congress should not be forced to raise the debt ceiling under false pretenses.</p> <p>As was the case in 2011, the United States will have enough expected cash flow (tax revenue) and assets on hand to avoid either of these unattractive options. Managing payments in this manner is by no means optimal, and Treasury officials have indicated that this will be difficult owing to payment automation. That said, it is important to recognize the options that are available to prevent a default. While Washington has difficult choices to make, defaulting on its debt obligations should not be part of the discussion about how to handle the debt limit or reduce long-term government spending.</p> <p><b>2. REAL INSTITUTIONAL REFORM</b></p> <p>The heated rhetoric coming in March 2017 about whether Congress should raise the debt ceiling will obscure the federal government’s real problem: an unprecedented increase in government spending and the future explosion of entitlement spending has created a fiscal imbalance today and for the years to come. No matter what Congress decides to do about the debt ceiling, the United States must implement institutional reforms that constrain government spending and return the country to a sustainable fiscal position.</p> <p>Real institutional reforms, as opposed to onetime cuts, would change the trajectory of fiscal policy and put the United States on a more sustainable path. Such reforms could include:</p> <p>1.&nbsp;<i>A constitutional amendment to limit spending</i>.&nbsp;The inability of lawmakers to constrain their own spending makes spending limits enforced through the US Constitution preferable.</p> <p>2.&nbsp;<i>Meaningful budget reforms that limit lawmakers’ tendency to spend</i>.<b>&nbsp;</b>In the absence of constitutional rules, budget rules should have broad scope, few and high-hurdle escape clauses, and minimal accounting discretion.</p> <p>3.&nbsp;<i>The end of budget gimmicks</i>.<b>&nbsp;</b>Creative bookkeeping is at the center of many countries’ financial troubles. Congress should institute a transparent budget process and end abuse of the emergency spending rule, reliance on overly rosy scenarios, and all other gimmicks.&nbsp;</p> <p>4.&nbsp;<i>A strict cut-as-you-go system</i>.<b>&nbsp;</b>This system should apply to the entire federal budget, not just to a small portion of it. There should be no new spending without offsetting cuts.</p> <p>5.&nbsp;<i>A BRAC-like commission for discretionary spending</i>.<b>&nbsp;</b>Commissions composed of independent experts often tackle intractable political problems successfully.</p> <p><b>3. REAL ENTITLEMENT REFORMS</b></p> <p>As mentioned earlier, the drivers of our future debt are spending on Medicare, Medicaid, Affordable Care Act subsidies, and Social Security. Without reforms today, vast tax increases will be needed to pay for the unfunded promises made to a steadily growing cohort of seniors.</p> <p>While economists disagree when it comes to fiscal policy, a consensus has emerged that spending-based fiscal adjustments are not only more likely to reduce the debt-to-GDP ratio than tax-based ones but are also less likely to trigger a recession. In fact, if accompanied by the right type of policies (especially changes to public employees’ pay and public pension reforms), spending-based adjustments can actually be associated with economic growth.</p> <p>Fortunately, numerous workable solutions are available to lawmakers, including adding a system of personal savings accounts to Social Security, liberalizing medical savings accounts, and making the latter permanent to reduce healthcare costs by increasing competition between providers and making consumers more responsive to tradeoffs.&nbsp;</p> <p>These options are supposed to encourage families to save more and also to use their money more responsibly and in a manner more consistent with their long-term needs. And since taxpayers remain in control of their cash, they can also pass it along if they don't use it all before they die—giving the next generation a head start when it comes to building assets.</p> <p>Better yet, we should free the healthcare supply from the many constraints imposed by federal and state governments and the special interests they serve. The stakes are high: Bringing revolutionary innovation to this industry could mean not just bending the healthcare cost curve but breaking it to bits—making the need for health insurance much less important, if not moot, in many cases.</p> <p><span style="font-size: 12px;"><b>4. REVENUE AND ASSETS AVAILABLE TO FUND OUR COMMITMENT UNTIL AN AGREEMENT IS REACHED</b></span></p> <p>With that in mind, let’s think about what happens in March 2017. At that time, the government will reach the debt ceiling, and the Treasury will no longer be able to issue federal debt. The federal government could reduce spending, increase federal revenues by a corresponding amount to cover the gap, or find other funding mechanisms. This would allow time for Congress and the president to reach an agreement to change the country’s financial path before raising the debt ceiling.</p> <p>At that time, the Treasury Department will have several financial management options to continue paying the government’s obligations. These include (1) prioritizing payments; (2) taking financial steps, including permitting the suspension of investments in, and the redemption of securities held by, certain government trust funds or postponing the sale of nonmarketable debt; (3) liquidating some assets to pay government bills; and (4) using the Social Security Trust Fund to continue paying Social Security benefits.</p> <p>PRIORITIZING PAYMENTS</p> <p>The Secretary of the Treasury has long-standing authority to prioritize payments and does not have to pay bills in the order in which they are received. The US Government Accountability Office found that&nbsp;</p> <p>the Secretary of the Treasury has the authority to determine the order in which obligations are to be paid should the Congress fail to raise the statutory debt ceiling and revenues are inadequate to cover all required payments. There is no statute or other basis for concluding that the Treasury must pay outstanding obligations in the order they are presented for payment. Treasury is free to liquidate obligations in any order it determines will best serve the interests of the United States.</p> <p>According to a report by the Treasury Department’s Inspector General (IG), during the 2011 debt ceiling crisis the Treasury “considered a range of options with respect to how Treasury would operate if the debt ceiling was not raised.” Further, the report notes that Treasury officials told the IG that “organizationally they viewed the option of delaying payments as the least harmful among the options under review” and that “the decision of how Treasury would have operated if the U.S. had exhausted its borrowing authority would have been made by the President in consultation with the Secretary of the Treasury.”</p> <p><span style="font-size: 12px;">TEMPORARY MEASURES</span></p> <p>During the last debt ceiling debate in 2011, my colleague Jason Fichtner and I listed all the assets that Treasury could tap into to avoid a default until an agreement between the president and Congress be reached. We updated this report in 2013. At the time we explained that Treasury was expected to collect $2.6 trillion in revenue. We wrote:</p> <p>That alone would be enough to cover interest on the debt ($218 billion), thereby avoiding any technical default of the US government on its debt obligations to Social Security ($809 billion), Medicare ($581 billion), and Medicaid ($267 billion), and it would leave approximately $725 billion for other priorities.</p> <p>In addition, we noted that the Treasury Department had financial measures at its disposal to fund government operations temporarily without having to issue new debt. To be clear, our list was only meant to present the range of possible options available to Congress. But, as we noted then, those may not be good or desirable options.</p> <p>These assets totaled $1.9 trillion and included $50.2 billion in nonrestricted cash on hand, $121.1 billion in restricted cash and other monetary assets (gold, international monetary assets, foreign currency),&nbsp;and the redemption of existing investments in other trust funds.</p> <p>We also noted that the government could rely on the determination of a “debt issuance suspension period.” This determination would permit the redemption of existing, and the suspension of new, investments of the Civil Service Retirement and Disability Fund (CSRDF). Right now there is $858.7 billion intergovernmental holdings in the CSRDF.</p> <p>In March 2017, the numbers will be different, but the same assets may be used to avoid a default. Relying on any of these sources of funds or increasing the debt ceiling without reducing existing budget commitments illustrates the irresponsible path the country is on and the urgent need for institutional spending reform. Nonetheless, these assets could be used as a temporary measure to allow Congress and the administration to negotiate spending reductions and institutional reforms to the budget process to ensure the nation is put back on a sound fiscal path.&nbsp;</p> <p>Thank you. I am happy to take your questions.</p><p>&nbsp;</p> Thu, 04 Feb 2016 15:48:57 -0500 Is Innovation Over? <h5> Expert Commentary </h5> <p class="p1"><span class="s1">Almost seven years after the Great Recession officially ended, the U.S. economy continues to grow at a&nbsp;<a href=""><span class="s2">sluggish rate</span></a>. Real wages are stagnant. The real median wage earned by men in the United States is lower today than it was in 1969. Median household income, adjusted for inflation, is&nbsp;<a href=""><span class="s2">lower now</span></a>&nbsp;than it was in 1999 and has barely risen in the past several years despite the formal end of the recession in 2009. Meanwhile, the U.S. Federal Reserve Board and the Congressional Budget Office have taken more seriously the idea that U.S. productivity, one of the most important sources of economic growth, may stay low. And such problems are hardly unique to the United States. Indeed, productivity growth has been slow in most of the developed world for some time.</span></p> <p class="p1"><span class="s1">In the medium to long term, even small changes in growth rates have significant consequences for living standards. An economy that grows at one percent doubles its average income approximately every 70 years, whereas an economy that grows at three percent doubles its average income about every 23 years—which, over time, makes a big difference in people’s lives.</span></p> <p class="p1"><span class="s1">Some experts, such as the MIT economists Erik Brynjolfsson and Andrew McAfee, think that the current slowdown is a&nbsp;<a href=""><span class="s2">temporary blip</span></a>&nbsp;and that exponential improvements in digital technologies are&nbsp;<a href=""><span class="s2">transforming</span></a>&nbsp;the world’s economies for the better;&nbsp;<a href=""><span class="s2">others</span></a>&nbsp;are more pessimistic. Chief among the doomsayers is Robert Gordon, a professor of economics at Northwestern University. His latest entry into this debate,&nbsp;<a href=""><span class="s2"><i>The Rise and Fall of American Growth</i></span></a>, is likely to be the most interesting and important economics book of the year. It provides a splendid analytic take on the potency of past economic growth, which transformed the world from the end of the nineteenth century onward. Gordon thinks Americans are unlikely to witness comparable advances again and forecasts stagnant productivity for the United States for the foreseeable future.</span></p> <p class="p1"><span class="s1">Yet predicting future productivity rates is always difficult; at any moment, new technologies could transform the U.S. economy, upending old forecasts. Even scholars as accomplished as Gordon have limited foresight.</span></p> <p class="p1"><b>The Golden Age</b></p><p class="p1"><span style="font-size: 12px;">In the first part of his new book, Gordon argues that the period from 1870 to 1970 was a “special century,” when the foundations of the modern world were laid. Electricity, flush toilets, central heating, cars, planes, radio, vaccines, clean water, antibiotics, and much, much more transformed living and working conditions in the United States and much of the West. No other 100-year period in world history has brought comparable progress. A person’s chance of finishing high school soared from six percent in 1900 to almost 70 percent, and many Americans left their farms and moved to increasingly comfortable cities and suburbs. Electric light illuminated dark homes. Running water eliminated water-borne diseases. Modern conveniences allowed most people in the United States to abandon hard physical labor for good.</span></p> <p class="p1"><span class="s1">In highlighting the specialness of these years, Gordon challenges the standard view, held by many economists, that the U.S. economy should grow by around 2.2 percent every year, at least once the ups and downs of the business cycle are taken into account. And Gordon’s history also shows that not all GDP gains are created equal. Some sources of growth, such as antibiotics, vaccines, and clean water, transform society beyond the size of their share of GDP. But others do not, such as many of the luxury goods developed since the 1980s. GDP calculations do not always reflect such differences. Gordon’s analysis here is mostly correct, extremely important, and at times brilliant—the book is worth buying and reading for this part alone.</span></p> <p class="p1"><span class="s1">Gordon goes on to argue that today’s technological advances, impressive as they may be, don’t really compare to the ones that transformed the U.S. economy in his “special century.” Although computers and the Internet have led to some&nbsp;<a href=""><span class="s2">significant breakthroughs</span></a>, such as allowing almost instantaneous communication over great distances, most new technologies today generate only marginal improvements in well-being. The car, for instance, represented a big advance over the horse, but recent automotive improvements have provided diminishing returns. Today’s cars are safer, suffer fewer flat tires, and have better sound systems, but those are marginal, rather than fundamental, changes. That shift—from significant transformations to minor advances—is reflected in today’s lower rates of productivity.</span></p> <p class="p1"><span class="s1">Consider the history of aviation. Gordon notes that a Boeing 707 flight from Los Angeles to New York took 4.8 hours in 1958, which is actually somewhat shorter than the time it takes today. In fact, since the widespread adoption of the Boeing 707, door-to-door air travel times have increased due to the contemporary hassles involved in navigating airports and all their security. Airplanes have become much safer, but the aviation sector has been surprisingly slow to make other major technological changes. Indeed, the DC-3, a highly practical, all-purpose small plane that dates from the 1930s, still remains in use today, even in the United States.</span></p> <p class="p1"><span class="s1">Gordon also explores how pensions and other workplace benefits have eroded since the 1970s. For instance, the percentage of workers on a defined-benefit pension plan fell from 30 percent in 1983 to 15 percent in 2013. Gordon’s treatment of this topic is a useful rebuttal to the common claim that wage stagnation is an illusion because unmeasured benefits on the job have improved so much. The truth is that fewer workers as a percentage of the labor force now receive significant benefits from their employers.</span></p> <p class="p1"><span class="s1"><b>False Prophet?</b></span></p> <p class="p1"><span class="s1">Gordon’s analysis is fascinating, but he isn’t quite able to make his startling revisionist thesis work at book length—especially a book that’s more than 750 pages. He covers a wide range of potentially interesting topics, but few of them receive much depth or cohere into a useful narrative. He discusses the Great Chicago Fire of 1871 and the San Francisco earthquake of 1906; compares automobile and maritime insurance; explains why the Homestead Act of 1862 and similar subsequent legislation passed in the nineteenth and early twentieth centuries that opened up millions of acres of land to settlers at low or no cost were politically controversial; and details the role of Philo Farnsworth of Rigby, Idaho, in developing the television set. These are all perfectly interesting set pieces, but they add little to his argument. The book could have been at least a hundred pages shorter, with no loss and some gain.</span></p> <p class="p1"><span class="s1">But the biggest problem with Gordon’s book is his belief that he can forecast future economic and productivity growth rates: specifically, he predicts that both will remain low in the United States. He cites the mediocre American educational system, rising&nbsp;<a href=""><span class="s2">income inequality</span></a>, government debt, and low levels of&nbsp;<a href=""><span class="s2">population growth</span></a>, among other factors, as unfavorable headwinds that are buffeting the U.S. economy. But although these are very real problems, there are other, more positive factors at play in the U.S. economy that Gordon is too quick to dismiss and that make predicting the future of economic and productivity growth a very difficult business.</span></p> <p class="p1"><span class="s1">Gordon brushes off such complexities and offers a sustained defense of growth forecasts: he assures readers that the French author Jules Verne made some pretty good predictions back in 1863 and that a December 1900 article in&nbsp;<i>Ladies’ Home Journal</i>&nbsp;foresaw some important aspects of the modern world, such as air conditioning and cheap automobiles. But Gordon doesn’t mention his own record as a forecaster, which is decidedly mixed. In 2000, he argued that the productivity innovations of the time didn’t measure up to the gains of the past, and the same year, he published another paper arguing that the productivity benefits of computers were not as high as many people were asserting. So far, so good.</span></p> <p class="p1"><span class="s1">What Gordon neglects to mention, however, is that he is also the author of a 2003&nbsp;<a href=""><span class="s2">Brookings essay</span></a>&nbsp;titled “Exploding Productivity Growth,” in which he optimistically predicted that productivity in the United States would grow by 2.2 to 2.8 percent for the next two decades, most likely averaging 2.5 percent a year; he even suggested that a three percent rate was possible. Yet 2004, just after the essay was published, was toward the tail end of the period of high productivity growth that had started in the 1990s, and since then, this number has tended to be closer to one percent. These days, Gordon is offering forecasts of not much more than one percent for labor productivity growth and below one percent for median income growth; in essence, he is chasing the trends he has observed most recently.</span></p> <p class="p1"><span class="s1">In the preface to his book, Gordon offers a brief history of the evolution of his views on productivity. Yet he does not mention the 2003 essay, nor does he explain why he has changed his mind so dramatically. He also fails to cite other proponents of the stagnation thesis, even though most of their work predates his book. These precursors include the economist Michael Mandel, the Silicon Valley entrepreneur Peter Thiel, and me. Mandel and I are relatively optimistic about the technological future of the United States, but we, along with most informed participants in these debates, are skeptical about our ability to forecast rates of economic and productivity growth many years into the future or, for that matter, even a few years ahead.</span></p> <p class="p1"><span class="s1"><b>A Glass Half Full</b></span></p> <p class="p1"><span class="s1">Ultimately, Gordon’s argument for why productivity won’t grow quickly in the future is simply that he can’t think of what might create those gains. Yet it seems obvious that no single individual, not even the most talented entrepreneur, can predict much of the future in this way.</span></p> <p class="p1"><span class="s1">Consider just a few technological breakthroughs we could witness in the coming years, only a small number of which Gordon even mentions: significant new ways to treat&nbsp;<a href=""><span class="s2">mental health</span></a>, such as better antidepressants; strong and effective but nonaddictive painkillers;&nbsp;<a href=""><span class="s2">artificial intelligence</span></a>&nbsp;and smart software that could&nbsp;<a href=""><span class="s2">eliminate</span></a>&nbsp;many of the most boring, repetitive jobs;&nbsp;<a href=""><span class="s2">genetic engineering</span></a>; and the use of modified smartphones for medical monitoring and diagnosis. I can’t predict when such breakthroughs will actually happen. But it seems there is a good chance we’ll live to see some or maybe all of them materialize, and they could prove to be major advances. And although Gordon focuses on the demographic challenges the United States faces, he never considers that today, thanks to greater political and economic freedom all over the world, more individual geniuses have the potential to contribute to global innovation than ever before.</span></p> <p class="p1"><span class="s1">It’s also worth remembering that many past advances came as complete surprises. Although the advents of automobiles, spaceships, and robots were widely anticipated, few foretold the arrival of x-rays, radio, lasers, superconductors, nuclear energy, quantum mechanics, or transistors. No one knows what the transistor of the future will be, but we should be careful not to infer too much from our own limited imaginations.</span></p> <p class="p1"><span class="s1">Even during Gordon’s special century of 1870–1970, progress was not evenly distributed. There were pauses, such as much of the 1920s and 1930s, between some especially fruitful periods. Some pauses in advancement today should therefore not be alarming. Gordon himself admits that information technology was producing some truly significant advances as recently as the late 1990s and the very early years of this century.</span></p> <p class="p1"><span class="s1">Given that economic growth and technological progress are uneven, there may well be bumps on the road when it comes to using computers to significantly improve human well-being. Surveying the array of human talent in&nbsp;<a href=""><span class="s2">Silicon Valley</span></a>, the advances that have taken place to date, and the possible potential uses for new items such as smartphones, it is difficult to accept Gordon’s assertion that information technology has run its course. It seems much more likely that significant growth still lies ahead.</span></p> <p class="p1"><span class="s1">Gordon’s book serves as a powerful reminder that the U.S. economy really has gone through a protracted slowdown and that this decline has been caused by the stagnation in technological progress. But perhaps the book’s greatest contribution to the debate over the world’s economic future is that it unintentionally demonstrates the weakness of the case for pessimism.</span></p> Tue, 02 Feb 2016 10:16:02 -0500