Mercatus Site Feed en Federal Subsidies to the States Remain High <h5> Publication </h5> <p class="p1">State governors and legislators often complain about the federal government’s heavy-handed presence in state and local affairs. Republican state policymakers have been particularly vocal in arguing that Washington should mind its own business and leave each state to its own devices.</p> <p class="p1">While state policymakers don’t appreciate federal policymakers telling them what to do, they are highly dependent on federal tax dollars. As the first chart below shows, 30 percent of the total amount spent by state governments in fiscal year 2014 came from federal sources. That figure is down from the federal “stimulus” high of 35 percent in fiscal 2010, but remains above levels seen in the previous decade.</p> <p class="p2"><a href=""><img height="398" width="585" src="" /></a></p> <p class="p1">The federal government was originally given responsibility for a small, defined list of responsibilities that were national in scope (e.g., providing for the national defense) in the Constitution. The Tenth Amendment made it clear that everything else was supposed to be “reserved to the States respectively, or to the people.” But as the second chart illustrates, the notion that the federal government and the states would have divided spheres of responsibility (i.e., “federalism”) was eviscerated in the 20th century.</p> <p class="p2"><a href=""> <img src="" width="585" height="393" /></a></p> <p class="p1">Separated into health and non-health subsidies, the chart shows the dramatic growth in federal subsidies to the states (adjusted for inflation) since 1940. Non-health subsidies have receded a bit in recent years following the conclusion of federal stimulus funding. However, health subsidies continue to reach new highs thanks in part to the expansion of Medicaid under Obamacare. As a whole, federal subsidies to the states will reach a combined $628 billion in fiscal 2015, which is more than the Department of Defense will likely spend this year.</p> <p class="p1">In spite of their complaints about federal overreach, state policymakers are addicted to handouts from Washington because it allows them to spend “free” money instead of asking their constituents to come up with funds via higher taxes. Unfortunately, federal money is not “free,” and the consequence of the federal government’s funding what are properly state and local responsibilities is excessive growth of government at all levels.</p> Mon, 20 Apr 2015 18:15:12 -0400 More Data Collection Won't Stop Future Financial Crises <h5> Expert Commentary </h5> <p class="p1"><a href="">National Security Agency data collection</a> has received considerable attention of late, and some have <a href="">likened</a> the Consumer Financial Protection Bureau’s data collection efforts – like collecting information on 991 million credit card accounts – to those of the NSA. While its director, Richard Cordray, has&nbsp;<a href="">denied</a>&nbsp;the comparison, this data collection seems excessive and won’t stop future crises.</p> <p class="p1">Having people in government collect information about your credit records and income seems as valid a cause for concern as having people collect information about your telephone calls. (If that doesn’t trouble you, consider the rise in federal government <a href="">cybersecurity breaches</a> documented by my colleagues, Andrea Castillo and Eli Dourado.)</p> <p class="p1">Maybe the staff at the&nbsp;Consumer Financial Protection Bureau&nbsp;don’t have to collect so much consumer finance data. My colleague, Thomas Stratmann, a professor of economics at George Mason University, observed that the bureau could conduct <a href="">thorough analysis with much smaller samples</a>. He found that instead of collecting information on nearly one billion credit card accounts, a sample of about 1 percent of all U.S. credit card accounts would work just as well.</p><p class="p1"><a href="">Continue reading</a></p> Mon, 20 Apr 2015 16:51:04 -0400 Credit Is a Powerful Tool for American Families <h5> Expert Commentary </h5> <p class="p1">Americans have an ambivalent relationship with non-mortgage consumer credit: We all use it, yet we feel as if there is something&nbsp;slightly wrong about it. Should we?</p> <p class="p1">Consumer credit is often thought to be just a way to live beyond one’s means and to shift consumption – to spend today instead&nbsp;of saving for tomorrow. But the assumption that families use credit profligately is misleading. To understand how consumers&nbsp;use credit – and why it is a boon to American families and the economy – it is useful to understand how businesses use credit.</p> <p class="p1">Businesses use it for two basic reasons: to invest in capital goods and to smooth income and expenses. Capital goods generate&nbsp;a stream of benefits over time – for example, a construction company could employ workers with shovels to dig foundations&nbsp;for buildings or buy a backhoe to do the same work and finance it out of the crew’s increased productivity.</p> <p class="p1">Similarly, businesses&nbsp;can use credit to deal with short-term fluctuations in revenue and expenses – a retailer might finance its operations on credit&nbsp;during lean times and then pay it back when profits return and more inventory is needed.</p> <p class="p1">But what is often not appreciated is that households overwhelmingly use credit for the same purposes. Much of our use of consumer&nbsp;credit is for investment purposes, such as to buy a home or to use student loans to increase our human capital and earn a&nbsp;higher-paying job.</p> <p class="p1">But most of our big-ticket expenditures have this same characteristic: cars, refrigerators, televisions and other household&nbsp;durables. Consider, for example, the humble washing machine. Its value is the time and money it saves from not having to schlep&nbsp;to the laundromat every weekend with a pocket full of quarters. Refrigerators save us time-consuming trips to the grocery&nbsp;store or eating out; cars expand our job options. In short, the bulk of non-mortgage consumer credit is used to buy consumer&nbsp;durables that generate a stream of benefits over time.</p><p class="p1"><a href="">Continue reading</a></p> Mon, 20 Apr 2015 10:24:40 -0400 Economic Freedom in the World: Where Does America Stand? ( <h5> Events </h5> <p>The tepid, abnormally slow recovery of the U.S. economy after the 2008 recession has generated numerous debates about which government policy or market practice is a culprit or champion.&nbsp; While vigorous, such deliberations have made little progress in changing the status quo.&nbsp; Moving from debate to meaningful action requires a cogent understanding of the underlying causes of our economic malaise and using that knowledge to identify changes that can generate the robust recovery and prosperity that has been uniquely American.&nbsp; The collected essays in <i>What America’s Decline in Economic Freedom Means for Entrepreneurship and Prosperity </i>offers the first cohesive analytic resource on the causes of the dismal economic recovery and what can be done to unlock our nation’s prosperity potential.</p> <p>The Fraser Institute and the Mercatus Center at George Mason University invite you to a panel discussion where we will review the findings of these essays, authored by Liya Palagashvili, Russell Sobel, Robert Lawson, Roger Meiners, Andrew Morriss and Wayne Crews, and edited by Don Boudreaux, which identify entrepreneurship as the principal element for a prosperous economy, and the degree of economic freedom as the element that determines the quantity and quality of entrepreneurship a nation can generate.&nbsp;</p> <p>Since 2000, when the United States was one of the world leaders in economic freedom, its ranking has declined over the past decade as the growth in regulation and other government interventions weakened the rule of law that sustains economic freedom. Learn how this chain of causation works and how reform can restore the elements that propel prosperity.</p> <p>Questions? Please contact Bethany Stalter at <a href=""></a> or (703) 993-4889.<i></i></p> Thu, 16 Apr 2015 16:41:41 -0400 Occupational Licensing Gone Wild? Why Licensing Is Not Always the Answer <h5> Publication </h5> <p class="p1">Chairman Buck, Representative Breaux, and distinguished members of the committee: thank you for inviting me to testify on the subject of occupational licensing and certifications in the state of Indiana.&nbsp;</p> <p class="p1">I am an associate professor of economics in the department of business administration at Saint Francis University. I wrote my doctoral dissertation on the effects of occupational licensing and have also published several papers on the subject. Most of my comments below are based on a recent study I co-authored for the Mercatus Center at George Mason University titled “Bringing the Effects of Occupational Licensing into Focus: Optician Licensing in the United States” (attached). As the state discusses voluntary certification and creation of a registry I hope my comments may help provide context for policy relating to various licensed and certified occupations in the state of Indiana.&nbsp;</p> <p class="p1">Occupational licensing has significantly expanded in both breadth and scope the last several decades, resulting in higher costs of entry for many occupations and also higher prices for consumers. In this testimony, I will focus on the following points:&nbsp;</p> <ol class="ol1"> <li class="li2">Occupational licensing imposes substantial costs, while its benefits are unclear. </li> <li class="li2">A careful examination of the data shows that occupational licensing of barbers and opticians increases the earnings of the professionals without any measurable benefit to consumers. </li> <li class="li2">Occupational licensing is not always the optimal policy choice for regulation of a profession, from the standpoint of consumer protection. Certification might offer a lower cost and more effective regulatory alternative. </li> </ol> <p class="p3"><b>THE SCOPE OF OCCUPATIONAL LICENSING LAWS&nbsp;</b></p> <p class="p1">As of 2006, 29 percent of the workforce in the United States is subject to occupational licensing laws.<sup>1</sup> At least 800 occupations in the United States are subject to occupational licensing in at least one state.<sup>2</sup> The intention of these laws is to signal to consumers that individuals who are licensed meet minimum quality standards. While the intention is honorable, it is not clear that the imposed standards change the quality of service. What is clear is that occupational licensing imposes costs.&nbsp;</p> <p class="p1">Minimum quality standards set by licensing statutes can quickly become the maximum quality standards, as a decline in competition will lead to less incentive to improve and innovate.<sup>3</sup> Licensing imposes standards that are passed on to all customers, despite clear differences in how each customer values the quality of service.<sup>4</sup> It would appear that licensing may not necessarily be in the best interest of consumers for all occupations.&nbsp;</p> <p class="p3"><b>INDIANA’S LICENSING OF LOW-INCOME PROFESSIONS&nbsp;</b></p> <p class="p1">I have reviewed the Indiana Professional Licensing Agency’s report entitled “Establishing a Process for Self-Certification Registration” and largely agree with the economic testimony provided in the report. My contribution to the discussion is a focus on the economic effects of occupational licensing of low-income occupations.&nbsp;</p> <p class="p1">Occupational licensing laws often vary tremendously from state to state with no clear reason. Here I will focus on laws related to two professions: barbers and opticians. Our purpose here is not to identify occupations that would be candidates for deregulation—this is also not the purpose of the proposed Registry of Certified Professions. Instead, our purpose here is to identify the costs of occupational licensing as an institution and make the case that it might not always represent the ideal method of establishing <i>new regulation </i>for a profession from the standpoint of consumers.&nbsp;</p> <p class="p1"><i>Barbers. </i>Aspiring barbers in Colorado, Massachusetts, Missouri, New York, Vermont, and Washington can become licensed with 1,000 hours of training. In Iowa and Nebraska, more than double the number of hours (2,100) is required. Research suggests that tougher barber licensing provisions are associated with higher barber pay (an 11–22 percent premium).<sup>5</sup> For several years, Alabama was the lone state to not license barbers.<sup>6</sup> A recent law, effective in September 2013, reinstituted barber licensing. Curiously, the number of training hours required to be a barber (1,000) is one-third the number of hours required to be a cosmetologist (3,000). The sole difference between cosmetology and barbering as defined by Alabama statutes is that cosmetologists are allowed to perform manicures and pedicures and barbers are not. This strange discrepancy is a microcosm of the arbitrary nature of occupational licensing laws.&nbsp;</p> <p class="p1"><i>Opticians</i>. Unlike barbers, opticians are not licensed in all states. Opticians are able to dispense eyeglasses and contact lenses, but they do not have the authority to diagnose and treat eye diseases or perform eye examinations as ophthalmologists can. For reasons that we can only speculate, there has been little momentum to expand regulation of the profession. Opticians are licensed in 21 states, and as with the other two professions, the requirements to obtain a license vary extensively across states. Opticians in California can obtain licensure without completing any educational requirements, but in bordering Nevada, opticians must complete 1,128 days of education.&nbsp;</p> <p class="p1">In a recent study published by the Mercatus Center at George Mason University, my co-author and I estimated the effect that licensing has had on the earnings of opticians and the quality of service delivered to consumers.<sup>7</sup> We found that in states with licensing statutes, opticians earn from 0.3 to 0.5 percent more per year the statute is in place. We also found that opticians earn approximately 3 percent more per each additional licensing exam and for every additional 100 hours of education required.&nbsp;</p> <p class="p1">Quality of a service is a difficult metric to study, but using vision insurance premiums and optician malpractice insurance rates as a proxy we found there to be little evidence of an increase in quality. If licensure was associated with a higher quality of care from licensed opticians, this would allow them to charge higher prices and result in higher vision insurance premiums. We found the opposite: premiums were $14.16 in licensed states compared to $14.34 in unlicensed states. To supplement this finding we analyzed malpractice insurance rates. If optician licensing was increasing the quality of service, we hypothesized that state malpractice insurance premiums in unlicensed states should have been higher than in licensed states to compensate insurers for additional risk. We found that malpractice rates were exactly the same across both licensed and unlicensed states (except for the Commonwealth of Virginia, which was $25 higher and the only exception).&nbsp;</p> <p class="p1">Our inability to observe differences in the quality of optician services provided to consumers between licensed and unlicensed states also manifests itself in the Texas certification program. Texas does not require opticians to be licensed, but rather gives opticians the option of obtaining certification from the Texas Opticians Registry. After examining the public records of the Texas Opticians Registry, we discovered that only 2.8 percent of opticians in Texas are certified. This low participation rate implies that consumers do not see a difference in quality between the certified and the uncertified opticians: most opticians in Texas choose to not obtain certification and the vision services market appears to function normally.&nbsp;</p> <p class="p3"><b>CONCLUSION&nbsp;</b></p> <p class="p1">In our examination of occupational licensing of two low-income occupations, licensing increases the earnings of professionals without providing a measurable benefit to consumers. For many occupations not currently regulated in states, occupational licensing may not serve as an ideal means of protecting consumers. For newly regulated occupations, certification may serve as a lower cost option for providing consumers the necessary protection from incompetent or unscrupulous professionals.&nbsp;</p> Thu, 16 Apr 2015 16:29:04 -0400 State Government Becoming Increasingly Affordable <h5> Expert Commentary </h5> <p class="p1">Fiscal horror stories from populous states like Illinois, California and New Jersey are becoming all too common these days, but Florida’s finances have yet to make the front pages of the national news. In an era when state governments are growing, and many strain to merely pay for past commitments, Florida has stood out for its fiscal responsibility.</p> <p class="p1">In a comprehensive new study published by the Mercatus Center at George Mason University, I document just how remarkable this is. The Sunshine State certainly has policy areas of concern — including homeowners insurance, land use regulation, pension accounting and rising health care costs. But for two decades, we’ve had a balanced budget without raising taxes, and have in many cases cut them.</p> <p class="p1">Florida’s state government appropriations as a percentage of Gross State Product (GSP) peaked in the 1994-95 budget at 11.86 percent. In the two decades since, this number has steadily declined to 10.38 percent in 2000, 9.89 percent in 2007, and 9.26 percent in 2014.</p> <p class="p1">State government employment shows a similar trend, peaking at 1.25 percent of the state’s population in 1995, and declining to 0.95 percent by 2012, the lowest percentage in the nation. In his latest budget, Gov. Scott has proposed cutting more than 1,000 state jobs — most, but not all, of which are vacant today. This move has spurred controversy, but critics and advocates agree that Florida's state government has taken a fiscally conservative turn over the last few decades.</p> <p class="p1">While other states (and the federal government) grappled with ways to raise taxes and maintain spending growth, Florida chose to live within its means, holding the line on taxes and reducing spending to match the decline in revenues.</p> <p class="p1">Our well-deserved reputation as a small-government state leads some to argue that we lose out on government services, so not everyone is happy about this. But while we are spending less on state government, are we really getting less?</p> <p class="p1">As a Floridian with three children who graduated from Florida high schools, and two who attend our state universities, I have been satisfied with the quality of their education. I sometimes get tied up in traffic, but don’t find our congestion (or other public services) worse than big-spending states like California, New York or Illinois.</p> <p class="p1">Regardless, Florida’s government seems to be giving its citizens a good deal. Spending less for what you get is desirable. Critics can argue that we should spend more, and in specific cases, they may have an argument. But we should be grateful that our leaders have resisted the spending temptations that are so harmful in other states.</p> Thu, 16 Apr 2015 12:36:42 -0400 U.S. Regulations and Taxes Stifling Entrepreneurs <h5> Expert Commentary </h5> <p class="p1">The current state of entrepreneurship is receiving considerable attention as debate simmers around questions of business dynamism in the United States. According to a <a href="">Gallup article</a>, the U.S. has dropped to 12th among developed nations in terms of business startups. Economists also recently <a href="">found</a> evidence for this downward trend in business activity and attribute it to diminished incentives for entrepreneurs to start new firms.</p> <p class="p1">This raises some questions: What exactly are the factors leading to the decline in business activity in the United States? And what can be done to revive the American entrepreneurial environment?</p> <p class="p1">Economists identify the costs imposed on entrepreneurs by the regulatory environment as one of the most important influences on business dynamism. Where regulations make it difficult to start and operate businesses, entrepreneurs have a difficult time bringing new ideas and innovations to fruition. Promising entrepreneurs who face burdensome regulations might opt out of doing business or decide to take their ideas to countries with more favorable business climates.</p> <p class="p1"><a href="">Continue reading</a></p> Thu, 16 Apr 2015 11:00:27 -0400 The Key to Reviving the U.S. Economy: New Book Explains the Importance of Economic Freedom and Entrepreneurship for U.S. Economic Growth <h5> Expert Commentary </h5> <p class="p1">Why did the U.S. economy recover so slowly from the 2008 recession?&nbsp; What lessons have economists learned that can encourage economic growth in the future?&nbsp;</p> <p class="p1">A new book jointly published today by the&nbsp;Fraser Institute of Canada in conjunction&nbsp;with the Mercatus Center at George Mason University offers the answers.</p> <p class="p1">“The United States was once considered the land of opportunity, where entrepreneurs such as Henry Ford, Ray Kroc and Steve Jobs improved standards of living by providing new products and services at prices people were willing and able to pay,” said Donald J. Boudreaux, senior fellow at both the Fraser Institute and the Mercatus Center, and editor of <i>What America’s Decline in Economic Freedom Means for Entrepreneurship and Prosperity.</i></p> <p class="p3"><b>*Read the </b><a href=""><b>U.S. News&nbsp;&amp;&nbsp;World Report</b></a><b> column*</b></p> <p class="p1">Comprised of five essays by U.S. economists, the book connects the dots between entrepreneurship, economic freedom, and economic growth, detailing their interrelated roles in America’s sluggish economic recovery:</p> <p class="p1"><b>Liya Palagashvili of New York University and George Mason University</b> begins by detailing how&nbsp;entrepreneurship is central for both economic growth and long-term prosperity.</p> <p class="p1"><b>Russell Sobel of The&nbsp;Citadel&nbsp;</b>builds on Palagashvili’s chapter, providing further details on the relationship between entrepreneurship, high levels of economic freedom, and growth. As Sobel explains: “More economic freedom results in higher prosperity precisely because it results in higher levels of entrepreneurial activity.”</p> <p class="p1"><b>Robert Lawson of Southern Methodist University</b> examines the current situation in the United States.&nbsp; According to the Fraser Institute’s annual <a href=""><i>Economic Freedom of the World Index </i></a>(co-written by Lawson), economic freedom in the U.S. has dramatically fallen from its global rank of second in 2000 to 14<sup>th</sup> today.</p> <p class="p1">Lawson writes: “To a large degree, the United States has experienced a significant move away from rule of law and toward a highly regulated, politicized, and heavily policed state.”</p> <p class="p1"><b>Robert Meiners of the University of Texas at Arlington and Andrew P. Morris, Dean of Texas A&amp;M University School of Law&nbsp;</b>examine the role&nbsp;of the U.S. legal system and how special interests corrupt the legal and economic framework.&nbsp; They also explain the impact of regulation and the economy.</p> <p class="p1"><b>Clyde Wayne Crews, Jr. of the Competitive Enterprise Institute </b>captures the extent to which U.S. regulation has reached prodigious levels, writing: “Such examples scale down to the Consumer Product Safety Commission’s proposed window blinds regulation to FDA’s regulation of a serving size of breath mints.”</p> <p class="p1"><b>Donald Boudreaux of the Fraser Institute and Mercatus Center at George Mason University</b> concludes by noting that although American entrepreneurship is in decline, it is possible to reverse the trend:</p> <p class="p1">“For generations, American entrepreneurs and small business owners have played a vital role in our economy. But today that role is being diminished. The results can be seen in the lagging economic recovery since 2008.</p> <p class="p1">“The warning signs are all about us but it’s not too late to reverse course. Start with a simpler, understandable tax code, fewer regulations, greater enforceability of contracts – in short, put an end to government stifling of entrepreneurs and small businesses.”</p> <p class="p1">The Fraser Institute is an independent Canadian public policy research and educational organization.&nbsp;The Mercatus Center at George Mason University is the world’s leading university source for market-oriented ideas–&nbsp;bridging the gap between academic ideas and real-world&nbsp;problems.</p> Thu, 16 Apr 2015 11:02:54 -0400 Evaluating the Ex-Im Bank Based on the Facts <h5> Events </h5> <p>As the deadline for reauthorization of the Export-Import Bank of the United States draws near, Congress is faced with a choice of whether to keep the Bank or allow its charter to expire. Policymakers are carefully reconsidering the assumptions, mission, and activities of the federal government’s official export credit corporation in order to &nbsp;make an informed, fact based decision.<o:p></o:p></p> <p>The Mercatus Center at George Mason University invites you to join Dr. Veronique de Rugy, senior research fellow for the Mercatus Center, for an examination of the justifications supporting continued authorization of the Bank and the economic realities of those claims.<o:p></o:p></p> <p>Space is limited. Please register online for this event.<o:p></o:p></p> <p>This event is free and open to all congressional and federal agency staff. This event is not open to the general public. Lunch will be provided. Due to space constraints, please no interns.&nbsp;<i>Questions? Please contact Caitlyn Van Orden </i>at<i> </i><a href=""><i></i></a>.<o:p></o:p></p> Thu, 16 Apr 2015 09:30:09 -0400 Illustrating Retirement Income for Defined Contribution Plan Participants: A Critical Analysis of the Department of Labor Proposal <h5> Publication </h5> <p class="p1">Devising the best retirement income strategies is a challenge facing all Americans with individual retirement accounts. The Department of Labor recently proposed that personal retirement accounts include an illustration of the retirement income producible from the assets in the account through an immediate life annuity. This is a step toward helping people who are making decisions about saving for retirement and managing their assets during retirement, but the proposal can and should be improved.&nbsp;</p> <p class="p1">A new study for the Mercatus Center at George Mason University is the first to rigorously assess the details of the proposed regulation using empirical methodology widely accepted in the financial industry and comparing the proposed illustration to the Social Security statement. The regulation would require all defined contribution plans to inform their participants of the life annuity income equivalents of the current and projected balances in their individual accounts. The study examines several changes the Department of Labor can make to improve its proposal.&nbsp;</p> <p class="p2">To read the study in its entirety and learn more about its author, economist Mark J. Warshawsky, please see “<a href="">Illustrating Retirement Income for Defined Contribution Plan Participants: A Critical Analysis of the Department of Labor Proposal</a>.”&nbsp;</p> <p class="p1">SUMMARY&nbsp;</p> <p class="p1">When workers retire, they will have to manage their financial accounts in a responsible manner. Even for those with experience and understanding of personal financial management, it can be a daunting task to ensure that the money saved will be spent wisely and will still be around many years into the future. One way to assist workers who are planning their investment and spending choices is to provide an income illustration based on the funds in their account and projected to be in their account at the time of retirement.&nbsp;</p> <p class="p1">The Social Security Administration already provides such personalized information about the projected annual Social Security retirement benefits that workers can expect to receive if they retire at various claiming ages. This statement, automatically mailed to all covered workers every five years (and now available online), is designed to be used as part of the broader retirement income planning process.&nbsp;</p> <p class="p1">The Department of Labor’s proposed regulation would require defined contribution retirement plans to provide a similar statement, showing workers the income they could claim from their account at certain periods of time. Empirical analysis shows that the proposal could be effective if it incorporates some key improvements. There are several ways in which Department of Labor should make the statement more informative and relevant to workers as they plan their retirement and their retirement income strategies.&nbsp;</p> <p class="p1">KEY RECOMMENDATIONS&nbsp;</p> <p class="p1">The Department of Labor can improve its proposal in several ways:&nbsp;</p> <ul class="ul1"> <li class="li3"><i></i><i>Make the illustrations inflation-indexed. </i>The proposal should reflect an inflation-indexed life annuity rather than a nominal fixed annuity. </li> <li class="li3"><i></i><i>Base the illustrations on annual income. </i>The illustration should be based on annual rather than monthly income, consistent with the way salaries and many financial reports are structured. </li> <li class="li3"><i></i><i>Show a survivor annuity. </i>The proposal should show individual and joint-and-67%-to-survivor life annuity rates at the normal retirement age to all workers, rather than individual and joint-and-50% contingent rates just for married workers. Many insurers offer joint-and-67%- to-survivor life annuities, while joint-and-50% contingent options are not typically offered. </li> <li class="li3"><i></i><i>Use gender-distinct illustrations. </i>The illustrations should be provided on a gender-distinct rather than a gender-neutral basis (unless a gender-neutral annuity is offered within the plan). Few annuities are currently offered on a gender-neutral basis. </li> <li class="li3"><i></i><i>Provide data for several retirement ages. </i>The illustration should show older workers projections for several retirement ages, like the Social Security statement does. </li> <li class="li3"><i></i><i>Provide the illustrations annually. </i>The illustrations need not be provided more frequently than annually, which is the same frequency that the Social Security Administration pro- vides such personalized information to its participants. </li> <li class="li3"><i></i><i>Use the 10-year Treasury rate. </i>The assumed 7 percent investment return for projecting account balances forward is too high; illustrations should use the 10-year Treasury con- stant maturity rate instead. </li> <li class="li3"><i></i><i>Include IRAs. </i>The proposal should include individual retirement accounts. </li> </ul> <p class="p1">CONCLUSION&nbsp;</p> <p class="p1">The Department of Labor is on the right path when it proposes to require the illustration of the expected lifetime income that a 401(k) account can produce when its owner retires. However, its proposal can be improved to produce a more useful illustration for retirement planning and the selection of a retirement income strategy.&nbsp;</p> Thu, 16 Apr 2015 10:32:41 -0400 The Export-Import Bank’s Top Foreign Buyers <h5> Publication </h5> <p class="p1"><b>I</b>n lobbying for reauthorization of the Export-Import Bank of the United States (Ex-Im Bank), advocates emphasize its importance to small businesses and economic growth. As they tell it, taxpayer subsidies to foreign firms for the purchase of American exports grow Main Street businesses and create jobs. But the reality is quite different. A new analysis of government data reveals that Ex-Im Bank’s top 10 overseas buyers<sup>1</sup> are large corporations that primarily purchase exports from multinational conglomerates. Furthermore, the subsidies lavished on these foreign firms actually undercut American companies and workers that must compete without such government assistance.&nbsp;</p> <p class="p1">The numerous problems with Ex-Im Bank have been analyzed in a significant body of research.<sup>2</sup> For instance, previous research has documented that Ex-Im Bank financing principally benefits very large exporters.<sup>3</sup> This new analysis reveals that the primary beneficiaries on the buyer side of the transactions are also very large firms. Among the top 10 buyers, 5 are state-controlled and rake in millions of dollars from their own governments in addition to Ex-Im Bank subsidies. These multiple-subsidy streams offset operating costs, and provide a significant competitive advantage over unsubsidized US firms engaged in similar ventures.&nbsp;</p> <p class="p1">Five of the top 10 buyers are involved in the exploration, development, and production of oil or natural gas. These foreign concerns are collecting subsidies from American taxpayers at the same time that the Obama administration is restricting domestic oil and gas operations.<sup>4</sup> Consequently, the federal government doubly disadvantages US energy firms—through Washington’s excessive regulation and Ex-Im Bank subsidies granted to US firms’ foreign competitors.&nbsp;</p> <p class="p1">The other five top buyers are airlines that collectively have received more than $15 billion in Ex-Im Bank subsidies in the past seven years solely to purchase products from Boeing—the single largest US beneficiary of Ex-Im Bank financing.<sup>5</sup> The bank’s subsidization of foreign airlines has tripled since 2008, significantly increasing competitive pressure on domestic carriers.<sup>6</sup> In reality, Ex-Im Bank subsidies are a form of corporate welfare that is neither necessary nor appropriate.<sup>7</sup> If lawmakers truly want to nurture small businesses and economic growth, they should end the Ex-Im Bank favoritism that undermines domestic companies and focus instead on reducing the tax and regulatory barriers that choke investment, innovation, and job creation.<sup>8</sup>&nbsp;</p> <p class="p3"><b>A DEPRESSION-ERA RELIC&nbsp;</b></p> <p class="p1">The Export-Import Bank was incorporated in 1934 by President Franklin D. Roosevelt to finance trade with the Soviet Union. Congress later constituted the bank as an independent agency under the Export-Import Bank Act of 1945. The most recent authorization of the Ex-Im Bank was set to expire on September 30, 2014, but lawmakers extended the charter until June 30, 2015.<sup>9</sup>&nbsp;</p> <p class="p1">The bank provides loans and loan guarantees as well as capital and credit insurance to “facilitate” US exports. The financing is backed by the “full faith and credit” of the US government, which means taxpayers are on the hook for losses that bank reserves fail to cover. Ex-Im Bank’s current exposure exceeds $140 billion.&nbsp;</p> <p class="p1">President Roosevelt’s executive order authorizing the bank called for “remov[ing] obstacles to the free flow of interstate and foreign commerce” and “promoting the fullest possible utilization of the present productive capaci- ties of industries.”<sup>10</sup> In decades past, political and economic turmoil around the world did present barriers to international trade. But successive rounds of global trade negotiations, starting with the first General Agreement on Tariffs and Trade in 1947, and culminating in the establishment of the World Trade Organization in 1995, have secured massive lowering of such barriers. When Ex-Im Bank was created in 1934, the average tariff on dutiable imports was 46.7 percent. Now, it is below 5 percent.<sup>11&nbsp;</sup></p> <p class="p1">Not surprisingly, international trade has boomed as global trade barriers have shrunk. American businesses have benefitted from this, exporting $2.35 trillion worth of goods and services in 2014, hitting a record high for the fifth consecutive year.<sup>12 </sup>Ex-Im Bank plays a marginal role, assisting in only 2 percent of total US exports. The export picture would look almost the same without Ex-Im Bank because export credit subsidies only rearrange the distribution of exports, rather than raising the net level of exports overall.<sup>13</sup></p><p class="p1"><a href="">Continue reading<sup>&nbsp;</sup></a></p> Mon, 20 Apr 2015 10:10:02 -0400 Can Public Pensions Fulfill Their Promises? An Examination of Pennsylvania’s Two Largest Public Pensions <h5> Publication </h5> <p class="p1">The financial health of state and local pensions has received considerable attention in recent years. One major concern is that public pensions, such as Pennsylvania’s Public School Employees’ Retirement System (PSERS) and State Employees’ Retirement System (SERS), likely will be unable to pay all their promised benefits in the future.</p> <p class="p1">A new study for the Mercatus Center at George Mason University is the first to examine whether public pensions that are funded at various levels will have sufficient assets to pay all promised future benefits. The study also looks at the distribution of the potential accumulation of assets for pensions that do have sufficient assets. Examining PSERS and SERS using financial modeling over a period of years, the study presents two conclusions applicable to all public pensions:</p> <ul class="ul1"> <li class="li2">Due to the volatility of a pension’s investment returns, there is less than a 50–50 chance that a fully funded pension will be able to pay all promised future benefits without additional contributions. Since most public pensions in the United States are funded at a level less than 100 percent, the problem is even more severe.</li> <li class="li2">If pensions make changes to increase the likelihood that all future benefits will be paid, there is an increased likelihood that the pension will accumulate “too many” assets, leading to political demands to distribute those assets through higher benefit payments, exacerbating future funding problems.</li> </ul> <p class="p1">To read the study in its entirety and learn more about its authors, Erick M. Elder and Gary A. Wagner, see “<a href="">Can Public Pensions Fulfill Their Promises? An Examination of Pennsylvania’s Two Largest Public Pensions</a>.”</p> <p class="p4"><b>PSERS AND SERS</b><br />Despite having combined assets of more than $75 billion, Pennsylvania’s two largest public pension plans, PSERS and SERS, may be underfunded by as much as $100 billion. The burden of pension underfunding will require either</p> <ul class="ul1"> <li class="li2">increases in contributions from employers, lowering take-home pay for employees; or</li> <li class="li2">increases in contributions from the Commonwealth of Pennsylvania or municipalities, leading to higher taxes or a reduction in government services.</li> </ul> <p class="p1">Due to the magnitude of unfunded pension liabilities, Pennsylvania has seen its general obligation bond ratings lowered by major credit rating agencies. As a result, Pennsylvania will be required to pay a higher interest rate on newly issued debt, raising the cost of government services and programs, such as building hospitals, new roads, and schools.</p> <p class="p1">The continued underfunding of PSERS and SERS should be a major concern for policymakers in Pennsylvania. The proper analysis of and solution to this problem has implications for all public pensions in the United States.</p> <p class="p4"><b>PENSION FUNDING THEORY</b><br />The funding ratio is a common metric for gauging the financial health of a public pension. Pensions that have funding ratios below 80 percent are generally considered underfunded, while pensions with funding ratios in excess of 100 percent are generally considered overfunded. But investment returns are critical to the true health of the plan, and those returns can be uncertain.</p> <p class="p4"><b>KEY FINDINGS</b><br />Long-term financial modeling based on current funding ratios and an assumed distribution of asset returns leads to several conclusions:</p> <ul class="ul1"> <li class="li2"><i>Funding is sufficient for the next five years.</i> Both PSERS and SERS have a 100 percent probability that the pensions will have sufficient assets to pay benefits without an increase in contributions for the next five years.</li> <li class="li2"><i>Future funding sufficiency is doubtful.</i> After five years, the probability of sufficient funding declines: by 2030, PSERS will have only a 31 percent chance of sufficient funding and SERS will have only a 16 percent chance of sufficient funding. In 50 years, the chances drop to 4 percent (PSERS) and 1.5 percent (SERS).</li> <li class="li2"><i>Even fully funded pensions may have insufficient assets.</i> Due to the nature of investment returns and volatility, a fully funded pension may not have sufficient assets at a certain point in time: there is a 50–50 chance that any pension will have sufficient funding to pay all benefits by the year 2040.</li> <li class="li2"><i>Overfunding pensions may lead to increased benefit payments.</i> Even an overfunded pension, such as one with 20 percent more assets on hand than the expected value of future liabilities, will have less than a certain chance of making all future payments: by 2040, the probability is only 73 percent. However, when a pension is actuarially overfunded, political demands for increasing benefit payments may arise, leading to an even greater chance of funding insufficiency.</li></ul> <p class="p4"><b>IMPACT ON PENSION REFORM AND TAXPAYERS</b><br />Due to the underfunding of these pensions, it is highly likely that some sort of pension reform will occur in the future. Reforms will affect current and future public-sector employees, current and future public-sector retirees, and taxpayers—because additional contributions to public pensions may require higher taxes to pay for them.</p> <p class="p4"><b>CONCLUSION</b><br />PSERS and SERS are severely underfunded based on traditional metrics and can only guarantee to finance promised obligations for the next five years. But even if the pensions were fully funded, they would have only a 50–50 chance of making all payments in the year 2040. However, rather than rush to fully fund the pension, reform-minded policymakers must consider the tradeoff of overfunding the pension. Future financial reports issued by each pension should include calculations indicating the likelihood that the pension will be able to meet its future obligations over different time periods.</p> Tue, 14 Apr 2015 22:47:38 -0400 Public-Sector Pension Reform in Pennsylvania and the Role of Transition Costs <h5> Publication </h5> <p>Chairman Eichelberger, Minority Chair Blake, and distinguished members of the Senate Finance Committee:&nbsp;thank you for inviting me to testify on the subject of transition costs in pension reform in the Commonwealth ofPennsylvania.<br /><br />As part of my research for the State and Local Policy Project at the Mercatus Center at George Mason University,&nbsp;I have studied the accounting, economic, and fiscal principles at work in public-sector defined benefit plans. I&nbsp;have analyzed the state pension plans of New Jersey, Rhode Island, Delaware, and Alabama. I have also studied&nbsp;and commented on the pension systems of New Hampshire and Montana. On May 1, 2012, I provided testimony to the Pennsylvania House State Government Committee on the funded status and financial health of Pennsylvania’s pension plans.1<br /><br />As state and local governments assess the long-term sustainability of defined benefit plans, a growing number are&nbsp;choosing to close existing defined benefit plans and move either new hires or a portion of all employees to new&nbsp;systems. These systems may be defined contribution plans, as in Oklahoma, Michigan, and Alaska; cash balance&nbsp;plans, a type of defined benefit plan, as in Kansas and Kentucky; or hybrid plans that combine features of defined&nbsp;contribution and defined benefit plans, as in Rhode Island and Utah.<br /><br />These reforms aim to stop the growth of unfunded pension liabilities and establish retirement systems with&nbsp;stronger foundations and sounder funding for retirees. In each of these states, policymakers have projected the growing costs of keeping defined benefit plans open to new employees and found that switching to a new system&nbsp;is the best course for employees, taxpayers, and governments.</p><p>In some cases, proposed pension reforms have stalled over concerns by policymakers that closing defined benefit&nbsp;plans and moving employees to a new system will generate transition costs. These costs, it is argued, add shortterm&nbsp;expenses to already increasing fiscal burdens resulting from underfunded employee pension plans. Transition&nbsp;costs diminish as the closed plan pays out benefits to the remaining retirees.</p><p>Closing a defined benefit plan does not add liabilities to the plan. Rather, it changes how the plan’s liabilities are&nbsp;accounted for and changes the investment strategy for the plan’s assets. It reveals the economic value of the plan&nbsp;and makes the funding of the plan’s benefits more sound. Closing a defined benefit plan doesn’t add new costs; it&nbsp;makes the costs transparent, and it makes it easier to ensure that the benefits for retirees are fully funded.<br /><br />I will now explain what transition costs are and why they should not stand in the way of switching employees&nbsp;from defined benefit to defined contribution or hybrid plans. I will also address how pension plans, particularly&nbsp;closed ones, should invest their assets.<br /><br /><b>WHAT ARE TRANSITION COSTS?</b><br />Two types of transition costs are cited as budgetary barriers to switching public employees from a defined benefit&nbsp;plan to a defined contribution plan: accounting costs and investment costs.<br /><br />Both of these short-term costs, it is argued, rise in a closed defined benefit plan. While they dwindle as the number&nbsp;of retirees in the closed plan approaches zero, governments are hesitant to add costs to already strained budgets.&nbsp;Let me explain some misconceptions about these costs and why these are not a barrier to pension reform.&nbsp;</p><p>Claims of accounting-based transition costs stem from a misreading of Government Accounting Standards Board&nbsp;(GASB) accounting guidance regarding amortization schedules for closed defined benefit plans. Amortization&nbsp;refers to smoothing out debt payments—in the case of pensions—for past years of service. Plans are free to amortize,&nbsp;or structure the payments, of the closed plan’s liability using one of several approaches and can even stick with&nbsp;the existing amortization schedule. Alaska elected to use the existing amortization schedule for its closed plan.</p><p>Investment-based transition costs concern how the closed defined benefit plan should value and invest the plan’s&nbsp;assets. These costs arise from past accounting assumptions that have led plans to be underfunded by relying onunrealistically high-expected returns from riskier assets. Closed plans are required to switch to less risky and&nbsp;more liquid portfolios. This switch improves the closed plan’s funding and reduces the risks associated withunderfunding retiree benefits. When a plan’s assumed rate of return decreases, the present value of the liability&nbsp;increases, though the liability itself is gradually decreasing in the closed plan. Thus, investment-based transitioncosts serve a positive and necessary goal—fully paying out retiree benefits.</p><p>In general, transition costs refer to the employer’s contribution to the pension that funds employee benefits. This&nbsp;contribution has two parts. One is the normal cost, the annual cost for benefits earned by active employees in thecurrent year. The other is the amortization of the unfunded accrued liability (UAL), which covers unfunded benefits&nbsp;from past years. This latter portion is the focus of the accounting-based transition-cost critique.</p><p><a href="">Continue reading</a></p> Wed, 15 Apr 2015 15:36:21 -0400 Regulatory Impact on Economic Growth: Why the “New Normal” Isn’t Normal <h5> Video </h5> <iframe width="560" height="315" src="" frameborder="0" allowfullscreen></iframe> What are the benefits to low and middle income households if we close the current growth gap and how can we get the economy to generate those benefits?<div class="field field-type-text field-field-embed-code"> <div class="field-label">Embed Code:&nbsp;</div> <div class="field-items"> <div class="field-item odd"> &lt;iframe width=&quot;560&quot; height=&quot;315&quot; src=&quot;; frameborder=&quot;0&quot; allowfullscreen&gt;&lt;/iframe&gt; </div> </div> </div> Tue, 14 Apr 2015 13:57:40 -0400 Get Rid of State and Local Tax Deductions <h5> Expert Commentary </h5> <p class="p1"><b>The New York Times Room for Debate&nbsp;posted this question:</b> What are the most useless, unfair or counterproductive personal tax breaks?<br /><br /></p> <p class="p1"><b>Veronique de Rugy provided the following response:<br /></b><span style="font-size: 12px;">Genuine income tax reform would lower tax rates, reduce double taxation of income that is saved and invested, and cut out loopholes that tilt the playing field in favor of politically connected interest groups.</span></p> <p class="p1">In this vein, we should get rid of deductions that let taxpayers write off state and local income taxes. I’m all for people keeping more of their income, but this exemption actually leads to bad policy by state and local government.</p> <p class="p1">This loophole lets politicians raise taxes without upsetting voters as much as they should be, because this additional burden can be deducted from their federal tax bill. But people in responsible low-tax states shouldn't be paying higher taxes to subsidize profligacy in high-tax states like California and Illinois to make up for this federal largesse.</p> <p class="p1">State and local governments are also encouraged to spend more wastefully by the federal income tax exemption on interest received for lending money to those governments through municipal bonds. That deduction should go, too. It encourages state officials to incur more debt and artificially steers private capital toward state and local government at the expense of private investments.</p> <p class="p1">But every penny of revenue raised by reforming state and local tax deductions should be used to lower marginal tax rates, not to finance bigger government.</p> <p class="p1">Of course, while all tax exemptions help crowd out other possible tax reforms, they aren’t equally bad. Tax provisions that merely allow people to avoid being double-taxed — such as those for retirement saving or the tax treatment of capital gains and dividends — mitigate biases embedded in the tax code. They don’t compare to the state and local government deductions — or even health care exclusions — which are mere handouts to special interests. Unfortunately, outfits like the Joint Committee on Taxation or the Congressional Budget office fail to make the distinction, compromising the potential for productive tax reform.</p> Tue, 14 Apr 2015 10:52:41 -0400 Taxing Peter to Improperly Pay Paul (or His Corpse) <h5> Expert Commentary </h5> <p class="p1">Taxes are obviously on everybody's mind this time of year, which makes it the perfect time to ask where — or to whom — all our money is going.</p> <p class="p1">First things first: In 2014, the government collected roughly $3 trillion. It spent $3.5 trillion. In other words, it had to borrow $500 billion to pay for all the spending on top of the taxes collected.</p> <p class="p1">Of the $3.5 trillion, about half went to pay for "entitlement" programs — though we are not actually entitled to all of them. These programs are better-known as Social Security, Medicare, Medicaid and Affordable Care Act subsidies. So right there, you have $1.77 trillion in spending, with $851 billion going toward paying for seniors' retirement benefits.</p> <p class="p1">Then, the government spent almost $600 billion on defense spending and $513 billion on "income security" programs, such as food stamps and unemployment insurance. Finally, the government pays some $229 billion in interest, which shouldn't surprise us, seeing as it has to borrow so much money each year in addition to our existing debt of more than $18 trillion.</p> <p class="p1">Depending on your political leanings, you may find that we spend too much on welfare or too much on defense. But no matter what your party affiliation is, you may be annoyed to find out that the government makes over $100 billion worth of improper welfare payments annually. Some of that is fraud, but some is caused by clerical errors or the failure to verify whether a recipient is eligible — or sometimes even alive!</p> <p class="p1">Not surprisingly, because of the sheer amount of money the government spends on Medicare and Medicaid, that's also where the most dollars — roughly $65 billion — are improperly paid.</p> <p class="p3">To put that number in perspective, the entire budget of the Department of Homeland Security is $43 billion, and we spend $60 billion on education. It is even more than the entire gross domestic product of the small but rich country Luxemburg.</p> <p class="p1">The irony, however, is that the worst offender is the IRS. That's right, the same agency that collects your hard-earned cash all year long and will go after you with a vengeance if you fail to pay all that you owe is the champion of improper payments.</p> <p class="p1">You see, the IRS oversees a program called the earned income tax credit, designed to offset the regressive effects of the payroll tax for low-income folks by redistributing money to low- and moderate-income working individuals and couples — particularly those with children. Well, every single year, about 24 percent of the money paid goes to people who shouldn't get it. That's roughly $14.5 billion.</p> <p class="p1">A 2013 report on the issue from a Treasury Department inspector general revealed the scale of the problem. According to the data, between 2003 and 2012, the amount of improper payments for the EITC alone was over $100 billion — somewhere between $110.8 billion and $132.6 billion. That's the GDP of Hungary.</p> <p class="p1">But the worst part is that the IRS is doing next to nothing to fix the problem, nor does it seem to be complying with the requirement to provide an annual report to Congress detailing specific information on improper EITC payments.</p> <p class="p1">So the next time you pay your taxes, you might want to consider who is endorsing the check.</p> Wed, 15 Apr 2015 15:07:27 -0400 A Contrarian Take on Congressional Productivity <h5> Expert Commentary </h5> <p>Many people complain that the most recent two Congresses were incredibly unproductive. That's nonsense. To be sure, fewer laws were enacted when compared with what past Congresses did, but think about that for a moment. Most laws are an imposition of more regulations, new restrictions on our freedoms or government-dispensed privileges to a few at the expense of the many. The 580 laws these two Congresses managed to push through are already too much.Congress should actually continue to shrink its lawmaking — and when passing a bill, it should enhance freedom.</p><p>For example, next year, Social Security's disability insurance trust fund will run out of money, triggering a 20 percent cut to benefits. This is a great opportunity for Congress to reform this money pit of a program by aligning eligibility standards to benefit those who are genuinely disabled and poor. Congress could also repeal the Affordable Care Act. President Barack Obama's health care plan appears to be unconstitutional, expensive and driving up the cost of health care, and it requires 18 new taxes with bureaucratic rationing of health. This would be the first step toward freeing the health care market. Congress could then implement health insurance premium support and turn Medicaid into block grants.</p><p>That would introduce more consumer choices and competition among health care suppliers to improve health care prices. However, nothing will radically impact prices as much as the kinds of revolutionary innovation in the health care industry that we've seen in fields such as information technology. To achieve that goal, Congress must first free the health care supply from the many constraints imposed by federal and state governments (in both blue and red states) and the special interests they serve. That means passing legislation to radically reform the Food and Drug Administration and the Medicare reimbursement system.Congress also has an opportunity to end a New Deal-era program called the Export-Import Bank.</p><p>This agency extends cheap loans and loan guarantees to gigantic and often wealthy corporations abroad — for example, the Mexican government's oil and gas company, Pemex, and many of our domestic airline competitors around the globe — so they will buy products from gigantic U.S. corporations. The Ex-Im Bank is the poster child of cronyism and should be terminated. That's an easy task to accomplish because all Congress needs to do is let the bank dissolve in June when its charter expires.</p><p>In order to take a giant step toward ending cronyism, however, my colleague Matt Mitchell suggests passing a constitutional amendment prohibiting all corporate bailouts. He explains, "With the knowledge that they alone bear the costs of their mistakes, firms would be more prudent, and the entire financial system would be more secure."</p><p>Finally, Congress could engage in fundamental tax reform. Moving to a flat tax, one low rate applied across our income, would not just shrink and simplify our taxes. It would also reduce considerably the role and size of the IRS — an agency that can be abusive, serves taxpayers poorly during tax season, oversees a massive amount of improper payments under policies such as the earned income tax credit (under which 25 percent of the payments are improperly made) and unlawfully pays out Affordable Care Act subsidies through the federal exchange.</p><p>There are more reforms worth considering, such as a repeal of the Dodd-Frank Act, which expands banks' safety net and uses the banking system to redistribute wealth. But whatever it does, Congress should pass bills that shrink, rather than expand, the size and scope of government.</p> Mon, 13 Apr 2015 16:09:33 -0400 John Tamny Is Making Economics Popular Again <h5> Expert Commentary </h5> <p class="p1">When The Rolling Stones rerelease their classic 1971 album, "Sticky Fingers," in June, it will present an opportunity to learn a thing or two about rock 'n' roll — and also tax policy.</p> <p class="p1">Indeed, one of the many great stories in a very compelling new book by John Tamny recounts how, in the 1970s, the British government forced the Stones into exile, first to France and then to the United States. In "Popular Economics: What the Rolling Stones, Downton Abbey, and LeBron James Can Teach You About Economics," Tamny recalls how the British government imposed an 83 percent marginal tax rate in the 1970s, which it then hiked to 98 percent for investments and so-called unearned income. That's when the Stones "upped and went to France," according to the group's guitarist Keith Richards.</p> <p class="p1">The book establishes Tamny, the editor of RealClearMarkets and the political economy editor at Forbes, as the modern and American Frederic Bastiat. Each of Tamny's stories teaches an important economic lesson, but he does it in the most entertaining way you will ever read.</p> <p class="p1">For example, while reading about the history of the famous movie "The French Connection," you'll learn about opportunity costs — the economic growth that could have been if it hadn't been for inefficient taxes or regulations.</p> <p class="p1">His account of how the famous Sands Hotel in Las Vegas was replaced by the even more famous Venetian will teach you about the counterintuitive benefits of job destruction. And by the end of the book, Tamny will demystify both inflation and the Super Bowl.</p> <p class="p1">The Stones' story teaches us about incentives: When the government increases the price of labor through high marginal rates, the supply of that particular good will shrink.</p> <p class="p5">Tamny notes, "As it turned out, raising the cost of working for 83 percent meant the Inland Revenue Service collected 83 percent of nothing from the Rolling Stones."</p> <p class="p1">The great work of Nobel Prize-winning economist Edward Prescott has long confirmed that people work more hours when marginal income tax rates are lower, especially when they are just starting out and also when they are nearing retirement. This effect is particularly pronounced in the presence of a generous welfare state that provides benefits for lost revenue.</p> <p class="p1">But Tamny's Stones anecdote also teaches us that higher taxes on the rich punish everyone. They decrease the incentive for individuals to become wealthy in the future through entrepreneurship, human capital accumulation and career choices.</p> <p class="p1">Economists at the American Enterprise Institute have studied this indirect effect of higher taxes on the rich and wrote about it in an article published in Tax Notes in November 2012, called "Should the Top Marginal Income Tax Rate Be 73 Percent?" Imagine a high-school student who graduates when the top marginal income tax rate is more than 70 percent. "He may decide not to pursue his dream of becoming a college-educated engineer because the government will take a large share of the returns to his college investment," they wrote. Then everyone would be worse off. He would be, and so would society because we would have one fewer engineer.</p> <p class="p1">As Tamny concludes, "politicians who raise income tax rates on top earners ... are telling the strivers lower down that they will incur a penalty for succeeding."</p> <p class="p1">Only a few writers have the ability to teach economics in a way that doesn't put most of us to sleep. Tamny is one of those, and "Popular Economics" is a book you will find yourself goingback to for years to come.</p> Tue, 14 Apr 2015 13:18:00 -0400 Mr. Will Rogers Goes to Washington <h5> Expert Commentary </h5> <p class="p1">The cowboy philosopher Will Rogers once said, "If you find yourself in a hole, stop digging." Unfortunately, his advice is often ignored in Washington, where the answer to our national debt is more government spending and the policy prescription for a slow economy is to favor special interest groups.</p> <p class="p1">Take one of the latest trends, for example. Faced with the reality that Social Security is insolvent, some politicians are pushing for an increase to benefits rather than reforming it. In fact, according to The Wall Street Journal, "legislation increasing benefits, and boosting payroll taxes to cover the cost, now has 58 co-sponsors in the House."</p> <p class="p1">That's what Rogers would call digging a hole. Even if politicians raise taxes to pay for the new spending, the program is in dire need of reform. The latest Social Security trustees report, released last summer, reiterated the fact that the program is broken.</p> <p class="p1">Since 2010, Social Security has been running a constant cash-flow deficit, meaning that taxes collected for the program aren't enough to cover the benefits paid to retirees. To fill the gap and keep payments to retirees going, the program is drawing from the trust funds (first using the interest paid on the bonds in the fund and then the principal), and then the Treasury Department is borrowing money to pay back the trust funds.</p> <p class="p1">More worrisome is the fact that if nothing were to change, the Social Security retirement trust fund would be exhausted by 2034, one year sooner than projected last year, and the first part of Social Security to hit the wall would be the disability fund in 2016. Check your calendar, folks; that's next year!</p> <p class="p1">Social Security benefits hinge on what's available in the trust funds.</p> <p class="p1">Without a positive balance in the trust funds, the program wouldn't be able to pay full benefits. It would be able to pay only what it collects in taxes, which would require a cut in benefits across the board. That concretely could be a 19 percent cut for beneficiaries on disability starting next year and a 25 percent cut for retirees starting in 2034.</p> <p class="p1">When the report came out, my colleague Jason Fichtner — a former Social Security Administration commissioner — summed up the consequences that kicking the can down the road (i.e., doing nothing) would have. He said: "Misunderstanding the critical state of the program's financial health would lead to grave consequences for beneficiaries of both the disability and retirement programs. We need to act now to reform Social Security. Delaying will only make necessary reforms more severe for those that can least afford it."</p> <p class="p1">But these cuts could occur a bit sooner if some politicians get their preferred solution to the impending emptying of the Social Security disability trust fund: shifting payroll tax funds from the retirement fund to the disability fund. And this is all assuming there aren't any financial crises or major recessions between now and then. Making the retirement program more generous, without big attendant increases to its funding source (the payroll tax), would hasten its bankruptcy substantially, too.</p> <p class="p1">Social Security is in the metaphorical hole. The great news is that lawmakers could stop digging by choosing from many policy options available to them: private accounts, privatization with a safety net for the poor or an eligibility age adjustment. Raising benefits, however, isn't one of them.</p> Mon, 13 Apr 2015 15:51:49 -0400 Permanently High Pentagon Funding Levels Portend Permanent War <h5> Publication </h5> <p class="p1">Proponents of perpetual budget increases for the Department of Defense argue that the Pentagon is being “crippled” by spending caps implemented under the 2011 Budget Control Act. Indeed, congressional Republicans are currently trying to evade those caps by stuffing $96 billion in defense funding for fiscal year 2016 into the Overseas Contingency Operations (OCO) account, which isn’t subject to the caps.</p> <p class="p1">Regardless of how the money is ultimately budgeted, it is important to note that Pentagon’s current total budget is still high relative to post–World War II levels, including the Cold War.&nbsp;</p> <p class="p1">This week’s chart shows total funding for the Department of Defense from fiscal year 1948 to fiscal year 2015 in inflation-adjusted 2015 dollars. Funding for the OCO account, first delineated following the 9/11 terrorist attacks, is separated out.</p> <p class="p2"><a href=""> <img height="408" width="585" src="" /></a></p> <p class="p1">Funding for Department of Defense is scheduled to be a combined $569 billion for fiscal year 2015, which would be down from a peak of $756 billion in fiscal year 2010. That figure is still considerably higher than the post–World War II annual average of $412 billion and is also higher than peak Cold War funding of $551 billion in fiscal year 1985.&nbsp;</p> <p class="p1">Hawkish members of Congress claim that the Department of Defense does not have sufficient funding to meet potential threats to US interests. That gets the problem backward: massive Pentagon budgets lead to US military adventurism, which generate the alleged threats that will then be used to justify further funding increases.</p> <p class="p1">Until the “Global War on Terror,” the Pentagon budgets toward the end of the Cold War in the 1980s were the largest since World War II. In his 2013 book, <a href=""><i>The Great Deformation</i></a>, former Reagan budget director David Stockman argued that those massive Cold War budgets helped set the stage for future military interventions, which in turn led to the wars in the Middle East:</p> <blockquote><p class="p3"><span style="font-size: 12px;">At the heart of the Reagan defense buildup, therefore, was a great double shuffle. The war drums were sounding a strategic nuclear threat that virtually imperiled American civilization. Yet the money was actually being allocated to tanks, amphibious landing craft, close air support helicopters, and a vast conventional armada of ships and planes.</span><span style="font-size: 12px;">&nbsp;</span></p></blockquote> <blockquote><p class="p1">These weapons were of little use in the existing nuclear standoff, but were well suited to imperialistic missions of invasion and occupation. Ironically, therefore, the Reagan defense buildup was justified by an Evil Empire that was rapidly fading but was eventually used to launch elective wars against an Axis of Evil which didn’t even exist.</p></blockquote> <p class="p1">One could argue that history is repeating itself in the push to maintain permanently elevated levels of Pentagon funding. It is not a coincidence that the proponents of continuing to fund the Pentagon at historically high levels also seemingly see a potential role for the US military in every hot spot on the planet. Thus, if these proponents for massive Pentagon budgets get their way, the stage could be set for future military interventions that would be costly in terms of taxpayer dollars and individual liberty.</p> Tue, 14 Apr 2015 09:53:06 -0400