Mercatus Site Feed http://mercatus.org/feeds/home en Singapore's Lee Kuan Yew Showed Good Governance Is Good Business http://mercatus.org/expert_commentary/singapores-lee-kuan-yew-showed-good-governance-good-business <h5> Expert Commentary </h5> <p class="p1">A “<a href="https://www.whitehouse.gov/the-press-office/2015/03/22/statement-president-death-lee-kuan-yew">true giant of history who will be remembered for generations to come</a>” has passed away. This portrayal of Singapore's founding father by President Barack Obama came shortly after <a href="http://www.reuters.com/article/2015/03/23/us-singapore-leekuanyew-idUSKBN0MI08Y20150323">Lee Kuan Yew died</a> last week at the age of 91. As the world looks back on Lee's legacy, we should pay special attention to his contributions on responsible and effective governance over a three-decade reign as the city-state's prime minister.</p> <p class="p1">In the post-financial crisis world, when many in the West are dissatisfied with their governments – a&nbsp;<a href="http://www.people-press.org/2014/11/13/public-trust-in-government/">Pew Research Center poll</a> conducted in February 2014 shows 75 percent of Americans mistrust the government at least some of the time, for example – Lee’s bold political experimentation in aligning governors’ incentives with the welfare of the governed deserves recognition.</p><p class="p1"><a href="http://www.usnews.com/opinion/economic-intelligence/2015/03/30/singapores-lee-kuan-yew-showed-good-governance-is-good-business">Continue reading</a></p> http://mercatus.org/expert_commentary/singapores-lee-kuan-yew-showed-good-governance-good-business Tue, 31 Mar 2015 10:28:13 -0400 Certificate-of-Need Laws: Implications for Georgia http://mercatus.org/publication/certificate-need-laws-implications-georgia <h5> Publication </h5> <p class="p1">Thirty-six states and the District of Columbia currently limit entry or expansion of health care facilities through certificate-of-need (CON) programs. These programs prohibit health care providers from entering new markets or making changes to their existing capacity without first gaining the approval of state regulators. Since 1979, Georgia has been among the states that restrict the supply of health care in this way, with 17 devices and services—including acute hospital beds, positron emission tomography (PET) scanners, and open heart surgery—requiring a certificate of need from the state before the device may be purchased or the service offered.</p> <p class="p1">CON restrictions are in addition to the standard licensing and training requirements for medical professionals, but are neither designed nor intended to ensure public health or ensure that medical professionals have the necessary qualifications to do their jobs. Instead, CON laws are specifically designed to limit the supply of health care and are traditionally justified with the claim that they reduce and control health care costs. The theory is that by restricting market entry and expansion, states will reduce overinvestment in facilities and equipment. In addition, many states—including Georgia—justify CON programs as a way to cross-subsidize health care for the poor. Under these “charity care” requirements providers that receive a certificate of need are typically required to increase the amount of care they provide to the poor. These programs intend to create <i>quid pro quo</i> arrangements: state governments restrict competition, increasing the cost of health care for some, and in return medical providers use these contrived profits to increase the care they provide to the poor.</p> <p class="p2">However, these claimed benefits have failed to materialize as intended. Recent research by Thomas Stratmann and Jacob Russ demonstrates that there is no relationship between CON programs and increased access to health care for the poor. There are, however, serious consequences for continuing to enforce CON regulations. In particular, for Georgia these programs could mean approximately 13,227 fewer hospital beds, between 20 and 40 fewer hospitals offering magnetic resonance imaging (MRI) services, and between 50 and 71 fewer hospitals offering computed tomography (CT) scans. For those seeking quality health care throughout Georgia, this means less competition and fewer choices, without increased access to care for the poor.</p> <p class="p1"><b>The Rise of CON Programs<br /></b>CON programs were first adopted by New York in 1964 as a way to strengthen regional health planning programs. Over the following 10 years, 23 other states adopted CON programs. Many of these programs were initiated as “Section 1122” programs, which were federally funded programs providing Medicare and Medicaid reimbursement for certain approved capital expenditures. The passage of the National Health Planning and Resources Development Act of 1974, which made certain federal funds contingent on the enactment of CON programs, provided a strong incentive for the remaining states to implement CON programs. In the seven years following this mandate, nearly every state without a CON program took steps to adopt certificate-of-need statutes. Georgia enacted its first CON program in 1979. By 1982 every state except Louisiana had some form of a CON program.</p> <p class="p1">In 1987, the federal government repealed its CON program mandate when the ineffectiveness of CON regulations as a cost-control measure became clear. Twelve states rapidly followed suit and repealed their certificate-of-need laws in the 1980s. By 2000, Indiana, North Dakota, and Pennsylvania had also repealed their CON programs. Since 2000, Wisconsin has been the only state to repeal its program.</p> <p class="p4">Georgia remains among the 36 states, along with the District of Columbia, that continue to limit entry and expansion within their respective health care markets through certificates of need. On average, states with CON programs regulate 14 different services, devices, and procedures. Georgia’s CON program currently regulates 17 different services, devices, and procedures, which is more than the national average. As figure 1 shows, Georgia’s certificate-of-need program ranks the 18th most restrictive in the United States.</p> <p class="p5"><a href="http://mercatus.org/sites/default/files/Koopman-Certificate-of-NeedGA-MOP-3.jpg"><img src="http://mercatus.org/sites/default/files/Koopman-Certificate-of-NeedGA-MOP-3.jpg" width="585" height="426" /></a></p> <p class="p3"><b>Do CON Programs Control Costs and Increase the Poor’s Access to Care?<br /></b>Many early studies of CON programs found that these programs fail to reduce investment by hospitals. These early studies also found that the programs fail to control costs. Such findings contributed to the federal repeal of CON requirements. More recently, research into the effectiveness of remaining CON programs as a cost-control measure has been mixed. While some studies find that CON regulations may have some limited cost-control effect, others find that strict CON programs may in fact increase costs by 5 percent. The latter finding is not surprising, given that CON programs restrict competition and reduce the available supply of regulated services.</p> <p class="p1">While there is little evidence to support the claim that certificates of need are an effective cost-control measure, many states continue to justify these programs using the rationale that they increase the provision of health care for the poor. To achieve this, 14 states—including Georgia—make some requirement for charity care within their respective CON programs. This is what economists refer to as a “cross subsidy.”</p> <p class="p1">The theory behind cross-subsidization through these programs is straightforward. By limiting the number of providers that can enter a particular practice and by limiting the expansion of incumbent providers, CON regulations effectively give a limited monopoly privilege to providers that receive approval in the form of a certificate of need. Approved providers are therefore able to charge higher prices than would be possible under truly competitive conditions. As a result, it is hoped that providers will use their enhanced profits to cover the losses from providing otherwise unprofitable, uncompensated care to the poor. Those who can pay are supposed to be charged higher prices to subsidize those who cannot.</p> <p class="p1">In reality, however, this cross-subsidization is not occurring. While early studies found some evidence of cross-subsidization among hospitals and nursing homes, the more recent academic literature does not show evidence of this cross-subsidy taking place. The most comprehensive empirical study to date, conducted by Thomas Stratmann and Jacob Russ, finds no relationship between certificates of need and the level of charity care.</p> <p class="p1"><b>The Lasting Effects of Georgia’s CON Program<br /></b>While certificates of need neither control costs nor increase charity care, they continue to have lasting effects on the provision of health care services both in Georgia and in the other states that continue to enforce them. However, these effects have largely come in the form of decreased availability of services and lower hospital capacity.</p> <p class="p1">In particular, Stratmann and Russ present several striking findings regarding the provision of health care in states implementing CON programs. First, CON programs are correlated with fewer hospital beds. Throughout the United States there are approximately 362 beds per 100,000 persons. However, in states such as Georgia that regulate acute hospital beds through their CON programs, Stratmann and Russ find 131 fewer beds per 100,000 persons. In the case of Georgia, with its population of approximately 10.01 million, this could mean about 13,228 fewer hospital beds throughout the state as a result of its CON program.</p> <p class="p1">Moreover, several basic health care services that are used for a variety of purposes are limited because of Georgia’s CON program. Across the United States, an average of six hospitals per 500,000 persons offer MRI services. In states such as Georgia that restrict hospitals’ capital expenditures (above a certain threshold) on MRI machines and other equipment, the number of hospitals that offer MRIs is reduced by between one and two per 500,000 persons. This could mean between 20 and 40 fewer hospitals offering MRI services throughout Georgia. The state’s CON program also affects the availability of CT services. While an average of nine hospitals per 500,000 persons offer CT scans, CON regulations are associated with a 37 percent decrease in these services. For Georgia, this could mean between 50 and 71 fewer hospitals offering CT scans.</p> <p class="p1"><b>Conclusion<br /></b>While CON programs were intended to limit the supply of health care services within a state, proponents claim that the limits were necessary to either control costs or increase the amount of charity care being provided. However, 40 years of evidence demonstrate that these programs do not achieve their intended outcomes, but rather decrease the supply and availability of health care services by limiting entry and competition. For policymakers in Georgia, this situation presents an opportunity to reverse course and open the market for greater entry, more competition, and ultimately more options for those seeking care.</p> http://mercatus.org/publication/certificate-need-laws-implications-georgia Tue, 31 Mar 2015 09:15:51 -0400 Auto Franchise Laws Restrict Consumer Choice and Increase Prices http://mercatus.org/publication/auto-franchise-laws-restrict-consumer-choice-and-increase-prices <h5> Publication </h5> <p class="p1">Arizona, Michigan, New Jersey, and Texas recently received the 2014 Luddite Award from the <a href="http://www2.itif.org/2015-luddite-awards.pdf">Information Technology and Innovation Foundation</a> for preventing automaker Tesla from selling cars directly to consumers. These states’ efforts to ban direct sales are reminiscent of the Luddites, nineteenth-century English workers employed in the textile industry who both rejected technological development and actively worked to prevent its use through its destruction. State legislatures, rather than destroying physical plant and equipment like the Luddites, actively impede alternative distribution models, reducing consumer choice.</p> <p class="p1">Auto franchise laws often include three major restrictions: mandatory dealership licensing requirements, onerous terms for terminating dealerships, and the creation of exclusive territories for incumbent dealers. Each rule carries a potential cost for consumers.</p> <p class="p1">The coverage of these laws has expanded significantly during the past 30 years.</p><p class="p1"><img height="379" width="585" src="http://mercatus.org/sites/default/files/Auto-Restrictions-Ellig_0.gif" /></p> <p class="p2"><span style="font-size: 12px;">In 1979, fewer than half of all the states in the US regulated all three aspects of auto franchising. By 2014, Maryland was the lone holdout, regulating only two of the three aspects. The increase in prevalence prompts an important question: has the act of purchasing an automobile become so risky for consumers that it warrants this near universal framework of regulations?</span></p> <p class="p1">Since state laws require manufacturers to sell new vehicles through franchised dealers, manufacturers cannot sell directly to the public. This requirement prevents new manufacturers, such as Tesla, from establishing factory-owned dealerships. Tesla believes its direct sales model could improve the dealership experience for consumers interested in purchasing an electric vehicle, but laws in most states prevent it from finding out.</p> <p class="p1">Dealer termination laws typically require auto manufacturers to prove that a dealership has engaged in behavior that meets the “for cause” criteria for termination. Increasing the efficiency of a manufacturer’s distribution network is typically not regarded as a legitimate cause. Struggling dealerships benefit from this rule but likely at the expense of car-buying Americans, who face higher prices as the rule prevents increasing efficiency in dealer networks.</p> <p class="p1">Exclusive territories help insulate dealers from competition. Manufacturers sometimes find it worthwhile to voluntarily offer exclusive territories to encourage dealers to invest in promoting the product. But mandatory exclusive territories can increase consumer costs. Without the threat that the manufacturer might open other competing franchises, existing dealers have the opportunity to charge consumers higher prices or may lose sales for the manufacturer through poor dealer performance.</p> <p class="p1">We do not claim to know the best way of organizing auto distribution. But mandatory auto franchise laws prevent manufacturers—and consumers—from finding that out.</p> http://mercatus.org/publication/auto-franchise-laws-restrict-consumer-choice-and-increase-prices Mon, 30 Mar 2015 11:26:05 -0400 Capital/Capitol: Finance and Economic Opportunity http://mercatus.org/expert_commentary/capitalcapitol-finance-and-economic-opportunity <h5> Expert Commentary </h5> <p class="p1">William Lewis, Founding Director of the McKinsey Global Institute, makes a clear case for what academic research has long suggested—that is, “<a href="http://press.uchicago.edu/ucp/books/book/chicago/P/bo3623392.html">the power of productivity</a>” to expand economic opportunity.</p> <p class="p1">For Lewis and others, broad productivity gains are key to increasing wealth, reducing poverty, and mitigating threats to global stability. Households are thus keenly interested in increasing the pace and broadening the scope of productivity gains.</p> <p class="p1">Policies that encourage competition in financial services, though frequently overlooked in this context, play an important role in facilitating these ambitions. But if our <i>political capitol</i> doesn’t promote competitive markets, our <i>financial capital</i> cannot power the productivity that has helped generations of Americans enjoy substantial increases in living standards.</p> <p class="p1">We look forward to offering through this newsletter periodic briefings on the state of financial governance in the US and what it means for our economic wellbeing and policy opportunities to do better.</p> <p class="p4"><b>Federal Reserve: What's More Worrisome, Deflation or Asset Bubbles?<br /></b><span style="font-size: 12px;">The most frequent question in financial news may be, “when will the Fed increase rates?” While the Federal Open Markets Committee (FOMC) has offered guidance, opinions vary from a hawkish camp that advocates increasing rates sooner and a dovish camp that appears more patient. The latest employment report, which saw a relatively strong increase in earnings, may have lessened concerns in the FOMC about tightening monetary policy too soon.</span><sup style="font-family: inherit; font-style: inherit; font-weight: inherit;">1</sup><span style="font-size: 12px;"> These concerns have not disappeared, however, especially amongst FOMC members who see deflation as a persistent threat.</span></p> <p class="p1">Working against that view is the fact that strong economic performance has accompanied numerous periods of deflation over the past 150 years.<sup>2</sup>In this light, a less-frequently asked question may deserve more attention—that is, when and how will the Fed start reversing its unprecedented accumulation of mortgage, Treasury, and other securities?</p> <p class="p1">So far, the FOMC does not appear to have firmly settled on a strategy. And given the difficulty of identifying any associated distortions to market prices, timing may be less dependent on data than it is on theory. Fed Chair Yellen’s testimonies, scheduled for February 24<sup>th</sup> before the Senate Banking Committee and February 25<sup>th</sup> before the House Financial Services Committee, may begin to offer some answers.</p> <p class="p4"><b>Dodd-Frank Updates<br /></b><span style="font-size: 12px;">The Consumer Financial Protection Bureau (CFPB) has been particularly busy during the first two months of 2015. On January 15</span><sup style="font-family: inherit; font-style: inherit; font-weight: inherit;">th</sup><span style="font-size: 12px;">, the Bureau</span><a style="font-size: 12px;" href="http://www.consumerfinance.gov/students/request-for-information-regarding-an-initiative-on-safe-student-banking/">announced</a><span style="font-size: 12px;"> that it was seeking comment on its “Safe Student Account Scorecard,” a metric meant to rank the safety of consumer financial products offered to college students. Two weeks later, on January 29</span><sup style="font-family: inherit; font-style: inherit; font-weight: inherit;">th</sup><span style="font-size: 12px;">, the CFPB </span><a style="font-size: 12px;" href="http://files.consumerfinance.gov/f/201501_cfpb_amendments-relating-to-small-creditors-and-rural-or-underserved-areas.pdf">proposed</a><span style="font-size: 12px;"> a number of measures aimed at reducing the regulatory burden felt by small, rural banks.</span></p> <p class="p1">The comment period for each ends in March, which could leave little time for industry, consumer advocates, researchers, and Congress to weigh in on the proposed changes.</p> <p class="p1">Meanwhile, the Bureau remains committed to their “<a href="http://www.consumerfinance.gov/owning-a-home">Owning a Home</a>” online toolset. Designed to encourage potential homebuyers to shop around for better mortgage rates, the project (particularly the “Rate Checker”) has been <a href="http://www.housingwire.com/articles/32601-mba-stevens-cfpb-rate-checker-needs-to-be-taken-down">criticized</a> by the mortgage banking industry for leaving out key information and potentially misleading consumers.</p> <p class="p4"><b>Financial Stability Oversight Council<br /></b><span style="font-size: 12px;">MetLife </span><a style="font-size: 12px;" href="http://thehill.com/blogs/pundits-blog/finance/229701-metlife-goes-to-court">has emerged</a><span style="font-size: 12px;"> as the first firm willing to formally challenge its designation by the Financial Stability Oversight Council (FSOC) as “systemically important.” At the very least, this sets the stage for courts to weigh the procedural and constitutional concerns of designated entities against the wide latitude granted to regulators in the Dodd-Frank Act.</span></p> <p class="p1">More broadly, it opens the door for policymakers to discuss whether or not it makes sense to think of large insurers as systemically risky in the first place. If a key requirement for assessing systemic risk is the presence of liabilities that are ‘run-prone,’ for instance, then insurers may be a poor fit for FSOC designation.</p><p class="p5"><sup>1 Silvia, John E. and Sarah Watt House (2015). Employment: Strong Hiring Continues, Wages Rebound. Wells Fargo Securities, LLC Economics Group.</sup></p><p class="p5"><sup>2 Plosser, Charles (2003). Deflating Deflationary Fears. Shadow Open Market Committee (SOMC) Position Paper, November.</sup></p> http://mercatus.org/expert_commentary/capitalcapitol-finance-and-economic-opportunity Mon, 30 Mar 2015 09:50:45 -0400 Pension Reform Doesn’t Mean Higher Taxes http://mercatus.org/expert_commentary/pension-reform-doesnt-mean-higher-taxes-public-sector-pension <h5> Expert Commentary </h5> <p>The Pennsylvania State House held a hearing on Tuesday about reforms that would shore up the state’s public-employee pension program. The hearing was overdue. Annual required contributions to the state’s defined-benefit plan have soared to more than 20% of employee payroll from only 4% in 2008. Legislators in the state, like many elected officials nationwide, are looking for a way out.</p> <p>State Rep. Warren Kampf has introduced a bill to shift newly hired government employees to defined-contribution pensions similar to a 401(k) plan. Defined-contribution pensions offer cost stability for employers, transparency for taxpayers and portability for public employees.</p> <p>But the public-pension industry—government unions and the various financial and actuarial consultants employed by pension-plan managers—claims that “transition costs” make switching employees to defined-contribution pensions prohibitively expensive. Fear of “transition costs” has helped scuttle past reforms in Pennsylvania, as in other states. But the worry is unfounded.</p> <p>The argument goes as follows: The Governmental Accounting Standards Board’s rules require that a pension plan closed to new hires pay off its unfunded liabilities more aggressively, causing a short-term increase in costs. Thus the California Public Employees’ Retirement System, known as Calpers, claimed in a 2011 report that closing the state’s defined-benefit plans would increase repayment costs by more than $500 million. Similar claims have been made by government analysts in Minnesota, Michigan and Nevada. The National Institute for Retirement Security, the self-styled research and education arm of the pension industry, claims that “accounting rules can require pension costs to accelerate in the wake of a freeze.”</p> <p>But GASB standards don’t have the force of law; nearly 60% of plan sponsors failed to pay GASB’s supposedly required pension contributions last year. That includes Pennsylvania, where the public-school-employees plan last year received only 42% of its actuarially required contribution. GASB standards are for disclosure purposes and not intended to guide funding. New standards issued in 2014, GASB says, “mark a definitive separation of accounting and financial reporting from funding.”</p> <p>In fact, nothing requires a closed pension plan to pay off its unfunded liabilities rapidly, and there’s no reason it should. Unfunded pension liabilities are debts of the government; employee contributions are not used to pay off these debts. Whether new hires are in a defined-contribution pension or the old defined-benefit plan, the size of the unfunded liability and the payer of that liability are the same.</p> <p>More recently, pension-reform opponents have shifted to a different argument: Once a pension plan is closed to new hires, it must shift its investments toward much safer, more-liquid assets that carry lower returns. Actuarial consultants in Pennsylvania have claimed that such investment changes could add billions to the costs of pension reforms.</p> <p>This argument doesn’t hold. It is standard practice for a pension to fund near-term liabilities with bonds and to pay for long-term liabilities mostly with stocks. A plan that is closed to new entrants stops accumulating long-term liabilities. As a result, the stock share of the plan’s portfolio will gradually decline. But that’s because the plan’s liabilities have been reduced. Plans would not be applying a lower investment return to the same liabilities. They would apply a lower investment return to <em>smaller</em> liabilities.</p> <p>Many public pension plans apparently believe that a continuing, government-run pension can ignore market risk, while a plan that is closed to new entrants must be purer than Caesar’s wife. The reality is that all public plans, open and closed, should think more carefully about the risks they are taking. But the difference in investment returns between an open plan and a closed one should be a minor consideration for policy makers considering major pension reforms.</p> <p>Shifting public employees to defined-contribution retirement plans won’t magically make unfunded liabilities go away. Pension liabilities must be paid, regardless of what plan new employees participate in. But defined-contribution plans, which cannot generate unfunded liabilities for the taxpayer, at least put public pensions on a more sustainable track.</p> http://mercatus.org/expert_commentary/pension-reform-doesnt-mean-higher-taxes-public-sector-pension Thu, 26 Mar 2015 11:10:06 -0400 Since Term Limits Took Effect, State Government Has Shrunk http://mercatus.org/expert_commentary/term-limits-took-effect-state-government-has-shrunk-florida <h5> Expert Commentary </h5> <p>When Floridians voted to term-limit Florida's state legislators in 1992, one of the commonly heard objections was that it would shift the power in state government from elected legislators toward legislative staff, lobbyists or both. Those groups would benefit from a growing state government, so one might have predicted that the size of Florida's state government would have increased as a result of term limits. However, my new research shows this isn't the case at all.</p> <p>In fact, by several measures, Florida's state government has actually shrunk since the imposition of term limits.</p> <p>Critics of term limits make several thoughtful arguments. One theory holds that they deprive the Legislature of the benefits of experienced leadership, and that legislators are forced out before they can really learn the ropes. (Interestingly, I haven't heard this argument made about term limits for governor.) One consequence of an inexperienced legislature is that legislators rely more on their staffs, and are more easily swayed by lobbyists. Legislative staffs have more power, and lobbyists have more clout, following this line of reasoning.</p> <p>As government employees, legislative staff tend to favor government spending and government programs, but because staffers work for legislators, they do defer to the preferences of their employers. The turnover in the legislature, with no term limits for staff, could shift the balance of power. Staff members can — and often do — remain in their jobs for decades, even as term limits push their bosses out of office on a regular and predetermined schedule.</p> <p>According to this reasoning, lobbyists, whose job is to ask their government to do (or not do) specific things for them, also fill part of the vacuum created by an inexperienced legislature. While many advocate for government cutbacks, overall, they are viewed as a force for larger government. If lobbyists have more power due to an inexperienced legislature, they should get their way more often, and government should grow.</p> <p>This argument makes sense in theory, but a look at the data tells a story of shrinking, rather than expanding, state government since Florida's term limits took effect.</p> <p>State government appropriations as a percentage of gross state product continually grew through the 1980s and '90s, reaching a peak of 11.86 percent of GSP in the 1994-95 budget, shortly after the passage of term limits. By 2000, state appropriations fell to 10.38 percent of GSP, by 2007 to 9.24 percent, and by 2014 to 9.26 percent of GSP. In an era of government growth, Florida's state budget is 22 percent less, as a share of state income, than it was 20 years ago.</p> <p>State government employment shows a similar trend, peaking at 1.25 percent of the state's population in 1997, and falling to 0.95 percent by 2012. Measuring the size of government by either spending or employment, there has been a remarkable downsizing of Florida's state government since term limits were enacted — even while nationwide, the trend has been toward bigger government.</p> <p>Florida was hit harder than most states after the 2008 downturn because of the bursting housing-market bubble and the state's heavy reliance on tourism. The state's fiscal conservatism and fiscal responsibility were especially evident then, as it maintained a balanced budget and cut expenditures to match the fall in tax revenues while holding the line on taxes. State government appropriations for the 2006-07 fiscal year were $73.9 billion, and fell to $66.2 billion in 2008-09 — a decline of more than 10 percent.</p> <p>These numbers certainly don't prove that Florida's state government has been shrinking because of term limits. But they do provide some evidence against the hypothesis that term limits result in a shift of power toward legislative staff and/or lobbyists. Before the implementation of term limits, the trends in state spending and state government employment were up. Afterward, the trend has been down, consistent with the views of the fiscally responsible Legislature that Floridians have elected.</p> <p>Some Floridians will applaud their state government for its fiscal conservatism; others will criticize it for shortchanging public services. But Floridians have consistently elected fiscally conservative governors and legislators, and an examination of Florida's budget history since term limits were passed makes it difficult to argue that term limits have eroded the Legislature's power.</p> http://mercatus.org/expert_commentary/term-limits-took-effect-state-government-has-shrunk-florida Wed, 25 Mar 2015 16:45:50 -0400 Consumers Are Much More Powerful than Their Government Protectors http://mercatus.org/expert_commentary/consumers-are-much-more-powerful-their-government-protectors-consumer-financial-protection-bureau <h5> Expert Commentary </h5> <p>Last week, in a <a href="http://www.consumerfinance.gov/blog/your-complaint-is-more-than-data-its-your-story/">blog post</a> titled, "Your complaint is more than data-it's your story," the Consumer Financial Protection Bureau enticed consumers to "share your whole story, everyone will see it." The post came as the Bureau <a href="http://files.consumerfinance.gov/f/201503_cfpb_disclosure-of-consumer-complaint-narrative-data.pdf">pledged</a> to move forward with plans to publish the narratives of consumer complaints about their financial institutions. The Bureau's existing public complaint database includes only standardized data fields-not the consumer's narrative description of the problem. Its decision to publish unverified consumer narratives is not surprising, but publishing these stories is not helpful to consumers.</p> <p>The Bureau takes a number of precautionary steps in connection with the database. First, it verifies that a customer relationship exists, which should eliminate attempts by competitors to sully each other's reputations. Second, it plans to remove personal information from the narratives that consumers submit. Third, the Bureau will not publish 5-digit zip codes for areas with less than 20,000 inhabitants. Fourth, in a departure from its sweeping credit card account data collection program, it allows customers to opt-in; those who would prefer not to share their complaint with the world can keep it private. Finally, if consumers scroll down far enough on the complaint database landing page, they will see a disclaimer that the Bureau has not verified the information.</p> <p>Even with these precautions, the Bureau's public storytelling warehouse poses problems for consumers. Many comment letters - including <a href="http://mercatus.org/publication/disclosure-consumer-complaint-narrative-data">one</a> by the Mercatus Center - point these issues out. Placing complaints on a self-proclaimed "official website of the United States government" invites consumers to assume that the CFPB has culled out the meritless complaints. The Bureau does not throw out baseless complaints, but may reject company responses it deems baseless. In a change from the proposed policy, the Bureau will allow financial companies to choose from among a set of generic responses. The Bureau, however, in its "discretion to assess whether there are good-faith bases" for their selected responses, may decide not to include them in the public database. Companies, picking from stock responses, will be greatly limited in their ability to address issues raised in detailed narratives.</p> <p>In response to concerns about the lopsided complaint-only database, the Bureau is <a href="http://files.consumerfinance.gov/f/201503_cfpb_request-for-information-regarding-the-consumer-complaint-database.pdf">asking</a> for comment on plans to publish positive feedback. The CFPB, for example, might release rankings to highlight companies that are particularly responsive to consumer complaints. Taking such a step seems only to heighten concerns that the database will become a way to force financial companies to resolve meritless complaints. Particularly, because the Bureau suggests that the top-ten list will be accompanied by a bottom-ten list, reputational worries will cause companies to do whatever it takes to make it onto the star complaint resolver list, or at least stay out of the bottom ten. Some customers will receive a windfall. Other customers are likely to bear at least some of the costs of companies' scrambling to stay on the good list.</p> <p>The Bureau suggested another potential way to balance the complaints: a compliment database. The database could be supplemented by an archive of consumers recounting their positive experiences with financial services firms. The imbalance in the existing database is troubling, but creating a separate database for compliments and populating the website with consumers' good stories about financial firms is not the answer. As with the complaint database, consumers will assume that the Bureau has taken steps to verify these consumers' experiences and the featured companies will seem to have the Bureau's special approval. There is a place for consumer feedback databases, but that place is not "an official website of the United States government."</p> <p>In a <a href="http://www.consumerfinance.gov/newsroom/prepared-remarks-of-cfpb-director-richard-cordray-at-the-ruby-hutchinson-memorial-lecture/">speech</a> last week, Bureau Director Richard Cordray explained that "consumers, of course, can speak directly to us, but they also speak more generally by their behavior in the marketplace." He is right; when consumers are permitted to speak with their feet in the marketplace, their voices have much greater impact than the stories they tell the CFPB.</p> http://mercatus.org/expert_commentary/consumers-are-much-more-powerful-their-government-protectors-consumer-financial-protection-bureau Fri, 27 Mar 2015 10:43:11 -0400 Using RegData to Answer Questions About Regulation http://mercatus.org/events/using-regdata-answer-questions-about-regulation <h5> Events </h5> <p>Nearly every congressional staffer deals with regulations in some capacity – to respond to constituent questions, to brief a member before a meeting, or to advise a member before a vote. To help understand which agency regulates which industries, how recent acts of Congress have affected the pace of rulemaking, and other questions about regulation, Patrick A. McLaughlin, Omar Al-Ubaydli, and the Mercatus Center at George Mason University developed RegData, an innovative way of measuring the size and scope of US federal regulations.<br /> <br /> Join the Mercatus Center at George Mason University and Dr. Patrick McLaughlin for a tutorial on how to use RegData as a tool for congressional staff work. Learn how RegData can:</p> <ul><li>Identify how regulated &nbsp;the major industries in your state or district are;</li><li>Compare the level of regulatory restrictions across industries and by regulatory agency;</li><li>Research questions like “Was deregulation a cause of the financial crisis?” </li></ul> <p>We hope you will join us for what promises to be a valuable presentation. Space is limited. Please register online for this event.</p> <p>This event is free and open to all congressional and federal agency staff. This event is not open to the general public. Food will be provided. Due to space constraints, please no interns.&nbsp;<em>Questions? Please contact Samantha Hopta at&nbsp;</em><i><a href="mailto:shopta@mercatus.gmu.edu">shopta@mercatus.gmu.edu</a>&nbsp;</i><em>or (703) 993-4967.</em></p> http://mercatus.org/events/using-regdata-answer-questions-about-regulation Tue, 24 Mar 2015 19:41:40 -0400 San Francisco Supporter and Friend Lunch http://mercatus.org/events/san-francisco-supporter-and-friend-lunch-1 <h5> Events </h5> <p style="font-style: normal; font-size: 12px; font-family: Helvetica, Arial, sans-serif;"><span style="font-size: 12px;">For years, policymakers have avoided reforms to fix the troubled finances of our entitlement programs. But now, the deadlines are on top of us. Unless&nbsp;change takes place before 2016, the Social Security Disability Insurance trust fund will run out of money, resulting in benefit cuts—a significant financial shock for those on the disability rolls.</span></p><p style="font-style: normal; font-size: 12px; font-family: Helvetica, Arial, sans-serif;">New research by Mercatus Center Senior Research Fellow Jason Fichtner argues that policymakers should use this opportunity to adopt much-needed reforms of the Disability Insurance program, which could set the tone for future entitlement reforms. Please join us for a lunch discussion centered on reform options for the program&nbsp;and a path forward to make real change.<br /><br />This is not a fundraising event, and there is no charge to join us. We are pleased to have you as our guest to show our thanks and appreciation to our donors. Dress is business casual. Please invite friends or associates who might be interested.<br /><br />To RSVP for this event, please contact Brittany Hemsath at&nbsp;<a href="mailto:bhemsath@mercatus.gmu.edu" style="font-size: 12px; color: #666699;">bhemsath@mercatus.gmu.edu</a>&nbsp;or (703) 993-8297.</p> http://mercatus.org/events/san-francisco-supporter-and-friend-lunch-1 Tue, 24 Mar 2015 19:25:54 -0400 New York City Supporter and Friend Lunch http://mercatus.org/events/new-york-city-supporter-and-friend-lunch-12 <h5> Events </h5> <p><span style="font-size: 12px;">For years, policymakers have avoided reforms to fix the troubled finances of our entitlement programs. But now, the deadlines are on top of us. Unless&nbsp;change takes place before 2016, the Social Security Disability Insurance trust fund will run out of money, resulting in benefit cuts—a significant financial shock for those on the disability rolls.</span></p><p>New research by Mercatus Center Senior Research Fellow Jason Fichtner argues that policymakers should use this opportunity to adopt much-needed reforms of the Disability Insurance program, which could set the tone for future entitlement reforms. Please join us for a lunch discussion centered on reform options for the program&nbsp;and a path forward to make real change.<br /><br />This is not a fundraising event, and there is no charge to join us. We are pleased to have you as our guest to show our thanks and appreciation to our donors. Dress is business casual. Please invite friends or associates who might be interested.<br /><br />To RSVP for this event, please contact Brittany Hemsath at <a href="mailto:bhemsath@mercatus.gmu.edu">bhemsath@mercatus.gmu.edu</a> or (703) 993-8297.</p> http://mercatus.org/events/new-york-city-supporter-and-friend-lunch-12 Tue, 24 Mar 2015 19:23:28 -0400 Behavioral Public Choice: The Behavioral Paradox of Government Policy http://mercatus.org/publication/behavioral-public-choice-behavioral-paradox-government-policy <h5> Publication </h5> <p class="p1">In order to justify new regulations, government agencies often argue that consumers are irrational. Unfortunately, these same regulators fail to recognize that policymakers themselves are subject to behavioral biases and political influences.</p> <p class="p2">A new paper for the Mercatus Center at George Mason University examines several examples in which government actors are subject to behavioral and political biases, leading to inefficient policies.</p> <p class="p2">To learn more about the paper and its authors, W. Kip Viscusi and Ted Gayer, please see “<a href="http://mercatus.org/sites/default/files/Viscusi-Behavioral-Public-Choice.pdf">Behavioral Public Choice: The Behavioral Paradox of Government Policy</a>.”</p> <p class="p4"><b>SUMMARY</b></p> <p class="p2">Behavioral economists have identified certain biases in decision-making that lead to irrational decisions. These findings are important contributions to the field of economics. While biases in decision-making by private parties could justify government intervention in some circumstances, policies should take into account the fact that regulators are themselves behavioral agents subject to psychological biases, based both on their own behavioral biases and on biases reflected in political pressures. An understanding of “behavioral public choice” suggests a more cautious approach to government intervention—one that incorporates the insights of behavioral economics in a way that is less dismissive of the merits of individual choice.</p> <p class="p2">Policymakers are public agents subject to political pressures and biases commonly observed in the political process. Indeed, government policies are subject to a wide range of behavioral biases that in many cases have been incorporated in the overall policy strategy. The paper documents many examples of government policies institutionalizing rather than overcoming behavioral biases, and in some cases justifying inefficient “hard” regulations (such as mandates) based on weak or nonexistent evidence of consumer irrationality that is specific to the particular area of consumer choice.</p> <p class="p4"><b>KEY EXAMPLES</b></p> <p class="p2">There are several examples of government agencies attempting to correct consumer behavior but failing to consider the regulatory agency’s own biases.</p> <p class="p5"><b>Consumer Irrationality<br /></b><span style="font-size: 12px;">In recent years, agencies such as the Environmental Protection Agency (EPA), Department of Energy, and Department of Transportation have justified regulations that mandate energy-efficiency standards for durable goods based on the presumption that consumers irrationally underweight the future cost savings from an energy-efficient product. However, there is no strong, credible evidence that consumers are persistently irrational in their purchasing decisions for energy-consuming products. In fact, choosing a less-energy-efficient appliance may be a rational choice for more consumers than regulators realize. Consumers are a heterogeneous group with different preferences and needs.</span></p> <p class="p5"><b>Irrational Calculation of Risk<br /></b><span style="font-size: 12px;">Behavioral economics suggests that people are prone to underestimating large risks while overestimating small risks, leading to alarmism about extraordinary cases—strange diseases, freak accidents, and violent events—rather than ordinary occurrences, such as heart attacks and car accidents. This bias shows up in numerical calculation biases present in government regulatory agency risk calculations, which tend to overestimate small risks, as well as in the EPA’s bizarre practice of treating as equal both real and hypothetical exposure risks:</span></p> <ul class="ul1"> <li class="li6">Supreme Court Justice Stephen Breyer, as an appellate court judge, criticized the EPA in a Superfund case for cleaning a site in order to prevent children from eating contaminated dirt, despite the fact that the area was unoccupied swamp land.</li> <li class="li6">The EPA treats all exposure risks the same in its risk assessment practices, leading to incorrect valuations that find the risk to one hypothetical exposed individual equal to the current risk to a large population.</li> </ul> <p class="p5"><b>Aversion to Loss at the Expense of Greater Gain<br /></b><span style="font-size: 12px;">People often focus more on losses than gains. This phenomenon has been incorrectly used to justify government policies for products with competing risk effects, such as prescription drugs:</span></p> <ul class="ul1"> <li class="li6">The Food and Drug Administration avoids adverse consequences by placing a greater emphasis on losses than on gains.</li> <li class="li6">As a result, a slower, more burdensome regulatory process has been created to avoid the potential risk of some drugs, despite the fact that there are drugs which may have tremendous benefits for patients if only they did not have to wait for the drug to be approved by the government regulator.</li></ul> <p class="p4"><b>RECOMMENDATIONS</b></p> <p class="p2">Given that government policymakers are not immune to behavioral biases, government agencies should take a more cautious approach to incorporating the insights of behavioral economics, one that is less dismissive of the merits of individual choice:</p> <ul class="ul1"> <li class="li6">Rather than assuming that any class of bias provides a sufficient rationale for overriding consumer preferences, government agencies should assess the empirical prevalence and magnitude of the bias as it specifically pertains to the policy context.</li> <li class="li6">In the design of subsequent intervention, government regulators should recognize the legitimate differences in consumer preferences that may account for the purportedly irrational behavior.</li> <li class="li6">Regulators should thoroughly reexamine the policy approach to many risk and environmental problems, because fundamental behavioral failures are often embedded in the current policy strategies.</li> </ul> http://mercatus.org/publication/behavioral-public-choice-behavioral-paradox-government-policy Tue, 31 Mar 2015 12:13:35 -0400 Update: Top Foreign Buyers of US Exports Subsidized by the Export-Import Bank http://mercatus.org/publication/update-top-foreign-buyers-us-exports-subsidized-export-import-bank <h5> Publication </h5> <p class="p1"><span style="font-size: 12px;">The following charts are an update to </span><a href="http://mercatus.org/publication/top-foreign-buyers-us-exports-subsidized-export-import-bank" style="font-size: 12px;">my previous chart</a><span style="font-size: 12px;">, which showed the top 10 foreign buyers of exports financed by the US Export-Import Bank from FY 2007 to FY 2013. That chart noted that foreign oil and airline companies dominated the list. The first new chart shows the top foreign oil companies that have purchased Ex-Im–financed exports during that time, based on the total amount of financing authorized. The second new chart provides the same information for foreign airline companies.</span></p><p class="p1"><a href="http://mercatus.org/sites/default/files/C1-Ex-Im-Top-Ten-Air.jpg"><img height="360" width="570" src="http://mercatus.org/sites/default/files/C1-Ex-Im-Top-Ten-Air.jpg" /></a></p><p><a href="http://mercatus.org/sites/default/files/C2-Ex-Im-Top-Ten-Oil.jpg"><img height="361" width="570" src="http://mercatus.org/sites/default/files/C2-Ex-Im-Top-Ten-Oil.jpg" /></a></p> http://mercatus.org/publication/update-top-foreign-buyers-us-exports-subsidized-export-import-bank Thu, 26 Mar 2015 09:31:15 -0400 The State of Pension Funds in Pennsylvania http://mercatus.org/publication/state-pension-funds-pennsylvania <h5> Publication </h5> <p class="p1">Chairman Metcalfe, Representative Cohen, and distinguished members of the committee, thank you for inviting me to testify on the subject of pension reform in the Commonwealth of Pennsylvania. My name is Gary Wagner and I am a professor of economics at Old Dominion University.</p> <p class="p1">Pension reform is an extremely important topic for the fiscal health of the commonwealth and for the more than 700,000 active and retired members of the Public School Employees’ Retirement System (PSERS) and the State Employees’ Retirement System (SERS). I commend you for your willingness to address these challenging issues.</p> <p class="p1">My objective this morning is to assist you in understanding the tradeoffs that are involved in any pension reform decision so that you can make the best choice for the commonwealth, in view of the fact that the current unfunded liability of PSERS and SERS is a staggering $135,000 per active member.</p> <p class="p1">The gap needs to be closed, but the benefits for future employees and the treatment of future taxpayers need to be addressed as well.<span style="font-size: 12px;">&nbsp;</span></p> <p class="p1"><b>The Funding Ratio<br /> </b>The most common metric for gauging the health of a pension plan is the actuarial funding ratio (or funded ratio). An easy way to think about this is that a funding ratio of 100 percent means that if the actuarial assumptions turn out to be true, then the plan could pay all its promised benefits and would have zero dollars remaining at the end of its time horizon.</p> <p class="p1">The current funding situation for PSERS and SERS is near-critical. Based on each plan’s current funding ratio and the assumed distribution of investment returns, the plans are only guaranteed to be able to pay the benefits that have already been earned for the next five years. By 2030, just 15 years from now, the probability that each plan will be able to meet its promised obligations without additional contributions drops to 31 percent for PSERS and just 16 percent for SERS.</p> <p class="p1">The most important point I can make today is that, while a pension plan’s funding ratio gives you some information about the solvency of a plan, it does not measure what is really the most important piece of information: What is the probability the plan will be able to make its promised benefit payments without additional contributions?</p> <p class="p1"><b>Looking beyond the Funding Ratio to Solvency<br /> </b>Even if we assume that PSERS and SERS are “fully funded” in an actuarial sense today with a 100 percent funded ratio, there is only a 42 percent chance the funds will be able to make all their promised benefit payments over the next 65 years without needing additional contributions. This is because of the volatility in investment returns and the effect it has on the asset side of the ledger. For example, based on SERS’s <i>2013 Comprehensive Annual Financial Report</i>, the plan had investment returns of 24.3 percent in 2003 and losses of −28.7 percent in 2008.<a href="http://mercatus.org/sites/all/libraries/tinymce/jscripts/tiny_mce/plugins/paste/pasteword.htm?E#_ftn1">[1]</a> More recently, the investments earned just 2.7 percent in 2011 and 13.6 percent in 2013. This is a simple demonstration of how the volatility in investment returns has varied by more than 50 percent in just the last 11 years. This is critical because 70 percent of the plans’ funding is derived from investment returns.</p> <p class="p1">Given that pension plans are forward-looking and that investment returns are uncertain, the correct way to think about the funding issue is in a probabilistic sense, meaning that we do not know the exact outcome in advance. Standard pension accounting models are deterministic because they assume investment returns will be exactly equal to their assumed rate of return. Once you allow for investment returns to be uncertain, the funding calculus changes dramatically and the changes do not favor the commonwealth.</p> <p class="p1"><b>The Extent of the Shortfall<br /> </b>For example, if the commonwealth wanted to be 90 percent certain to make the benefit payments that have already been earned without additional contributions, the funding ratios in PSERS and SERS would need to be equal to 180 percent using standard actuarial methods (roughly three times where they are now). This means the commonwealth would need to find $150 billion additional dollars today in order to be 90 percent certain it could make the benefit payments that have already been earned without additional contributions down the road. On the other hand, if the commonwealth wanted a coin-flip, a fifty-fifty chance of being certain to make the benefit payments that have already been earned without additional contributions, the commonwealth would need a total of $65 billion in additional assets today to achieve this objective. It is also worth pointing out that all the figures I am reporting are in present-value terms.</p> <p class="p1">Of course, if the investments were to earn returns that are higher than assumed for a significant period of time, then this would reduce the size of the funding shortfall. However, based on historical investment returns, PSERS and SERS are imposing considerable risk on future generations to close the funding gap. The current pension structure makes this is a question of “when” rather than a question of “if.” So, in addition to closing the approximately $50 billion pension shortfall that currently exists between PSERS and SERS, the commonwealth will almost certainly be required to make additional adjustments at some point in the future.</p> <p class="p1">It may be a natural course of action to simply consider shifting the plans’ investment portfolios to less risky investments. Since less risky investments will also have a lower average rate of return, shifting to a less risky investment strategy will increase the probability of making promised payments in the near term, but it will drastically lower the probability of making those payments over the longer term because assets will not be growing nearly as rapidly as benefits. Without a considerable increase in contributions, shifting to a safer investment strategy simply will not work.<span style="font-size: 12px;">&nbsp;</span></p> <p class="p1"><b>Closing the Gap<br /> </b>There is no way for the commonwealth to avoid closing the funding gap on the benefits that have already been earned. The only true issues are when do you close the gap and how do you close the gap. Do you address the underfunding by increasing employee contributions, increasing the commonwealth’s contributions, or some mix of approaches?</p> <p class="p1">While the current funding shortfall cannot be avoided even if the defined benefit plans are closed, the commonwealth can eliminate the possibility of these costs occurring again in the future by moving new employees to a defined contribution plan. Another considerable advantage to a defined contribution plan is that short-term and long-term employees in those plans will be treated much more equitably than in the current defined benefit plans.</p> <p class="p1">I would encourage you to also keep in mind the broader the picture when considering reforms. The commonwealth’s bond ratings have been lowered twice by Moody’s and Fitch since 2012, with pension funding cited as a contributing factor. Given the volume of debt that the commonwealth issues and has outstanding, these downgrades are not a trivial matter. The commonwealth currently has roughly $47 billion in outstanding debt. Assuming that borrowing costs for the commonwealth rise by 25 basis points owing to the credit rating downgrades, which is one-third of the estimated increase in Illinois and on the conservative side, then these downgrades will cost the commonwealth $120 million per year in additional interest costs when all the outstanding debt is rolled over.</p> <p class="p1">I thank you for your time and hope you find my testimony helpful in your deliberations. I would be happy to answer any questions that you may have.</p> http://mercatus.org/publication/state-pension-funds-pennsylvania Tue, 24 Mar 2015 12:07:47 -0400 Transition Costs and Public Employee Pension Reform http://mercatus.org/publication/transition-costs-and-public-employee-pension-reform <h5> Publication </h5> <p class="p1">Chairman Metcalfe, Representative Cohen, and distinguished members of the committee, thank you for inviting me to testify on the subject of pension reform in the Commonwealth of Pennsylvania. I am a resident scholar at the American Enterprise Institute in Washington, DC. Previously I served as the deputy commissioner for policy and as the principal deputy commissioner of the Social Security Administration. In 2013–2014 I was the co-vice chair the Society of Actuaries Blue Ribbon Panel on Pension Funding. The opinions I express, however, are my own and not made on behalf of any organization with which I am or have been affiliated.&nbsp;</p> <p class="p1">I regret that I am unable to testify in person today owing to a travel conflict, but I hope that my written testimony will assist the committee in its consideration of public employee pension reforms. I would be happy to answer any written questions that members of the committee may have.</p> <p class="p1">My testimony will focus on the idea that closing a traditional defined benefit (DB) pension to new hires and enrolling those newly hired employees in an alternate plan creates temporary or permanent “transition costs” that increase the cost of the now-closed DB plan. Claims of transition costs have been raised as an objection to public pension reforms in many states. One type of transition costs is based on the claim that accounting rules require that a closed plan pay off its unfunded liabilities more quickly. A second type of transition cost is based on the argument that a closed plan must fund its liabilities with a much lower-risk, and thus lower-returning, portfolio than a plan that is open to new entrants. I find that so-called transition costs are largely illusory and should not serve as an impediment to public employee pension reforms.</p> <p class="p3"><b>Introduction<br /></b><span style="font-size: 12px;">Policymakers in cities and states around the nation are considering changes to address the rising costs and increasing budgetary risks of defined benefit public employee pensions. Some policymakers, including here in Pennsylvania, propose shifting newly-hired employees to defined contribution (DC) pensions similar to the 401(k)s used by most private sector workers. In a DC pension, employers and employees make a set (or “defined”) contribution to a retirement savings account. The account belongs to the employee, and he or she can choose how it is invested. The employee also bears the risk of the account’s investments.&nbsp;</span></p> <p class="p1">DC pensions pose less risk to taxpayers than DB plans and over the long term almost certainly would be cheaper. DC pensions are more transparent to policymakers, who have a clearer idea of how much pension provisions for employees will cost, today and in the future. And DC pensions can be more equitable to employees of different career-lengths. DB plans are very generous to full-career workers but pay little to short- and mid-term employees. DB plans’ uneven benefit accrual patterns endanger the retirement security of short- and mid-career employees.&nbsp;</p> <p class="p1">However, one objection to DC-based pensions for public employees is so-called transition costs. Transition costs are temporary cost increases associated with switching from a defined-benefit to a defined-contribution pension plan. Some advocates argue that these transition costs make switching to DC plans prohibitively expensive. The National Association of State Retirement Administrators states the logic succinctly: “The more underfunded a plan is, the more expensive it is to try to switch.”</p> <p class="p1">I will address claims of transition costs in detail. However, common sense dictates that, if transition costs exist, they cannot be large. After all, there has been a massive shift in the US and throughout the world from DB to DC pensions. Not only did transition costs not prevent such a shift, but such costs have barely been mentioned in the several decades over which this DB-to-DC pension change has taken place.</p> <p class="p1">I will here examine two types of transition costs. The first arises from an interpretation of accounting rules promulgated by the Government Accounting Standards Board (GASB) and claims that GASB rules would require a closed plan to more aggressively amortize its unfunded liabilities, raising costs in the short term. The second type of transition cost is believed to be generated by the need for a closed pension plan to shift to a less-risky, lower-returning investment portfolio. Neither of these claims should stand in the way of reforms to public employee pensions.<span style="font-size: 12px;">&nbsp;</span></p> <p class="p3"><b>Accounting-Based Transition Costs<br /></b><span style="font-size: 12px;">Some claim that the GASB accounting rules require that a closed plan pay off its unfunded liabilities more aggressively. Doing so would causing a short-term increase in amortization costs, followed by lower costs thereafter. The National Institute for Retirement Security, the so-called “research and education” arm of the pension industry, claims that “Accounting rules can require pension costs to accelerate in the wake of a freeze.”</span></p> <p class="p1">In fact, GASB standards don’t have the force of law, as is amply demonstrated by the nearly 60 percent of plan sponsors nationwide who last year failed to pay GASB’s supposedly “required” pension contributions. As economist Robert Costrell has clearly shown and as many pension actuaries now acknowledge, GASB standards are for disclosure purposes, not to guide funding. GASB itself declared that updated accounting rules issued last year “mark a definitive separation of accounting and financial reporting from funding.”</p> <p class="p1">The Pennsylvania Public Employee Retirement Commission took a slightly different approach to the issue. It warned in 2013 that when a traditional pension plan is closed, “payroll will begin shrinking in the future and [amortization payments] will represent an increasingly larger percentage of payroll.” These payments “may become excessively burdensome for the remaining active member employers.”</p> <p class="p1">But why? It is the government, not employees, who make amortization payments. What matters to the government is the actual dollar value of these payments, not the number of employees or employee payroll that amortization payments are “spread” over. Shifting newly hired employees to DC pensions will not magically make existing unfunded pension liabilities go away. These unfunded liabilities are effectively debts of the government, the vast majority of which must ultimately be paid. But nor does shifting newly hired employees to DC plans make these old unfunded liabilities larger.</p> <p class="p3"><b>Investment-Based Transition Costs<br /></b><span style="font-size: 12px;">The second type of transition cost is based upon changing investment portfolios. The argument is that, once a DB pension is closed to new entrants, it must shift its investments toward much safer, more liquid assets that carry lower returns. Pennsylvania’s Public Employee Retirement Commission noted that such investment changes “would result in a lower valuation interest rate, which would result in higher actuarial accrued liabilities, requiring larger employer contributions as a percentage of payroll.”</span></p> <p class="p1">Now, even if we assume that this claim is entirely correct, it does not imply that the government or taxpayers are made worse off by shifting to a less risky portfolio. Such a portfolio does carry lower expected returns but comes with a reward—lower risk, which means lower volatility of government pension contributions. The fact that the State Employees’ Retirement System (SERS) actuarially required contribution rose from about 4 percent of wages in 2007 to over 20 percent of wages today should warn policymakers about the dangers of taking excessive investment risk. The risk of pension investments passes through to the volatility of pension contributions. Lower-risk investments means more stable contributions for the government. Likewise, it can be shown using common financial calculations that the reduction in investment risk fully compensates the government for the reduction in expected investment returns. If holding bonds unequivocally made investors worse off, no one would hold bonds.</p> <p class="p1">Nevertheless, there is good reason to treat these claims with skepticism. The logical reasoning is fairly straightforward. Most pensions do (or at least should) fund their near-term liabilities using less risky investments than their longer-term liabilities. This practice is often referred to as “asset-liability matching.” A closed plan no longer accumulates long-term liabilities, so over time the stock share of its portfolio declines, as does the expected return on its investment portfolio. But this cannot increase liabilities, precisely because it is the reduction in liabilities that causes the change in the investment portfolio. Simply put, eliminating liabilities cannot increase liabilities.&nbsp;</p> <p class="p1">It is difficult to estimate these effects precisely for SERS or other Pennsylvania plans because the plans release neither a year-by-year projection of their liabilities nor the mix of assets they use to fund short-, medium-, or long-term liabilities. In other words, the plans release a single figure representing their total liabilities discounted at a chosen interest rate. But plans do not release projections on the benefits they are obligated to pay in any given year. The Society of Actuaries Blue Ribbon Panel on Pension Funding recommended that plans do so, which would facilitate the type of calculations that are of interest here.</p> <p class="p1">However, I can estimate, based on a stylized time-path of pension liabilities and the assumption that long-term liabilities are funded with 30 percentage points more stocks than near-term liabilities, that closing the plan to new entrants and thereby shortening the duration of plan liabilities would have a negligible effect on the expected investment return over the first several decades. Even over the longer term, the effects are small, perhaps 0.2 percentage points. The main reason the effects are so small is that pensions’ long-term liabilities also are small. In present value terms, most of a plan’s liabilities occur within the next 15–20 years. At the same time that SERS’s portfolio risk is declining, of course, the plan’s overall liabilities would be declining as well.</p> <p class="p1">If this is the case, how is it that pension actuaries sometimes arrive at much larger estimates? The answer is unclear, given that they rarely specify their calculations. For instance, the Public Employee Retirement Commission cited an estimate from the Hay Group that, were SERS closed to new entrants, the risk of its portfolio should be reduced such that the expected return would decline by 1.5 percentage points over 40 years. However, as the Public Employee Retirement Commission noted, the “Hay Group did not provide an analysis of how they arrived at the interest rate structure.” A second actuarial firm, Buck Consultants, estimated that the expected return on SERS investments should fall by a larger 2.5 percentage points over 40 years. Yet a third actuarial firm, Milliman, recommended <i>no</i> change in investment practices. This is a case in which the actuarial firms should be asked, as we were back in grade-school, to “show your work.”</p> <p class="p1">My best guess is that public plans assume that when a plan is open to new hires, it need not practice <i>any</i> significant asset-liability matching. That is, it might fund near-term liabilities with investments that are just as risky as those it uses to fund long-term liabilities. Indeed, it is almost mathematically impossible to assume otherwise. Given SERS currently places roughly 80 percent of its investments in risky assets, it would be difficult for SERS to make large distinctions between how it funds short- and long-term liabilities.</p> <p class="p1">Indeed, there is evidence that supports this view. Over time, public plans have “matured,” meaning that more of their liabilities are for retirees and older workers and less are for younger employees. This process of maturation creates precisely the shortening of the duration of liabilities as would closing the plan, albeit on a more limited scale. And standard financial practice would be for a maturing pension plan to shift its portfolio toward safer investments. This is what US corporate pensions and public employee plans in other countries have done.&nbsp;</p> <p class="p1">Yet, US public sector plans have done precisely the opposite: even as their participant populations matured and the duration of their liabilities shortened, state and local pensions have opted to take <i>more</i> investment risk. This practice by public plans, the Society of Actuaries recently noted, goes “against basic risk management principles.” Thus, I would personally not be inclined to grant plans the benefit of the doubt on this issue.</p> <p class="p3"><b>Conclusion<br /></b><span style="font-size: 12px;">Elected officials around the country are considering reforms to public employee retirement plans—and with good reason. The costs of these plans have risen significantly in recent years and the increasing risk of pension investments threaten to destabilize government budgets. Many reform options are available and policymakers should consider how much cost and risk taxpayers are willing and able to bear.</span></p> <p class="p1">But one objection to shifting newly hired public employees to defined contribution pensions is the claim that doing so entails large “transition costs” owing to a closed pension plan taking less risk with its investments. If these claims were true, the massive world-wide transition from DB to DC pensions that we already have witnessed would not have taken place.</p> http://mercatus.org/publication/transition-costs-and-public-employee-pension-reform Tue, 24 Mar 2015 12:08:22 -0400 Subsidies Are the Problem, Not the Solution, for Innovation in Energy http://mercatus.org/publication/subsidies-are-problem-not-solution-innovation-energy <h5> Publication </h5> <p class="p1">Good afternoon Chairman Weber, Ranking Member Grayson, and members of the subcommittee. Thank you for inviting me here to discuss the Department of Energy’s energy efficiency and renewable energy programs. I appreciate the opportunity to testify.</p> <p class="p1">My name is Veronique de Rugy, and I am a senior research fellow at the Mercatus Center at George Mason University, where my primary research interests include the US economy, the federal budget, federal programs, and tax policy.</p> <p class="p1">The Obama administration’s FY 2016 budget asks for a 42 percent increase in funding for the Department of Energy’s Office of Energy Efficiency and Renewable Energy (EERE) and its portfolio of programs. Yet more than 40 years after President Richard Nixon announced “Project Independence”—to wishfully wean the American economy off oil and decades of federal involvement in efforts to develop “alternative” energies—we are once again discussing how many more taxpayer dollars should be thrown at the alternative energy wall in the hopes that something will finally stick.</p> <p class="p1">Far from suggesting that alternative energies aren’t welcome or desirable, I believe that it’s time for policymakers to recognize that allowing the marketplace to determine winners and losers is preferable to a politicized, top-down approach that has produced more black eyes than benefits.</p> <p class="p1">These black eyes belong to both parties and extend well beyond Solyndra and the ill-fated 1705 energy loan program, which has become a symbol of the problems with federal involvement in energy markets. Indeed, a short list of the federal missteps over the years would include so-called clean coal, the Synthetic Fuels Corporation, the Clinch River Breeder Reactor, National Ignition Facility, Superconducting Super Collider, FutureGen, Partnership for a New Generation of Vehicles, FreedomCAR, and the Yucca Mountain nuclear waste repository mess.<sup>1</sup></p> <p class="p1">I would argue that the most important consideration today should not be whether the Obama administration wishes to spend too much on EERE programs. (It does.) Nor should it be to figure out which special-interest squeaky wheels should get the most grease. What I believe we should be discussing is whether these subsidy programs should exist at all. I would argue that EERE programs should be abolished, along with all other energy subsidies—including those that benefit fossil-fuel production—because</p> <p class="p2">1) government lacks the incentives to manage funds that private investors have;</p> <p class="p2">2) giving subsidies to some businesses puts other businesses that do not receive such subsidies at a disadvantage, distorting investment and other economic activity; and</p> <p class="p2">3) the existence of government subsidies increases the incentive to lobby and the power of special interests.</p> <p class="p3"><b>GOVERNMENT LACKS THE PROPER INCENTIVES<br /></b><span style="font-size: 12px;">Even with the best of intentions, elected officials and bureaucrats simply do not possess the proper incentives to manage taxpayers’ money prudently. They are not rewarded when they maximize consumer value; nor are they punished when they take unnecessary risks or fail to minimize costs. Government actors operate with limited knowledge. While individuals acting in markets are able to use price signals to guide their decisions. When a private company fails, the owners and its investors lose. Government decision makers have no such guide. They have no way of accounting for the value or costs of their decisions. And when the government fails, taxpayers lose.</span></p> <p class="p1">Subsidies are justified as being necessary to encourage the development of alternative energies because the private sector is unwilling to undertake the risk necessary for their development. The truth is that private investors <i>should </i>avoid throwing scarce dollars at endeavors that do not make economic sense. Instances where the private sector will not invest signal that it would also be a bad idea for taxpayers to “invest.”</p> <p class="p1">Policymakers who believe that entrepreneurs and venture capitalists are investing insufficiently in new technologies should focus their efforts on reducing the federal tax burden on businesses and investment rather than attempting to subsidize specific firms, industries, or technologies. Lowering the tax burden is more likely to result in higher economic growth, innovation, and job creation—the same canned justification that policymakers often fall back on to justify subsidy programs.</p> <p class="p1">It is amazing that many of the policymakers who believe that the private sector needs the government to fill this mythical investment gap are the same ones who want to further tax the rewards of investment, and support sending the money to agencies like EERE that fund the research and development of commercial products. Advanced research and development subsidies are a form of corporate welfare because the rewards end up going to private interests while the costs are borne by taxpayers. This cycle of “tax and subsidize” is just another example of the government robbing Peter to pay Paul. Policymakers like to tout Paul’s “success stories” when defending energy subsidies, but somehow Peter escapes acknowledgement.</p> <p class="p5"><b>SUBSIDIES DISTORT ECONOMIC ACTIVITY<br /></b><span style="font-size: 12px;">Policymakers justify energy subsidies by arguing that they are needed to fix alleged imperfections in the marketplace. The imperfections, however, are typically short-term issues (e.g., oil price spikes) that the marketplace will address—if allowed. Policymakers often rush to address short-term concerns with government interventions, including subsidies, which end up distorting economic activity and generating failures of their own.<sup>2</sup> The problem is compounded by the reality that policymakers usually have political and parochial interests in mind when creating and sustaining subsidy programs. When government intervenes,</span></p> <p class="p2">1) subsidized firms get an unfair competitive advantage over firms that do not receive a government subsidy, and</p> <p class="p2">2) policymakers, instead of the market, pick winners and losers.</p> <p class="p6"><b>Unseen Losses of Unsubsidized Competitors<br /></b><span style="font-size: 12px;">By aiding particular businesses and industries, subsidies put other businesses and industries at a disadvantage. This market distortion generates losses to the economy that are not easily seen and thus generally aren’t considered by policymakers. For example, energy companies that don’t receive a government subsidy are disadvantaged when they compete against companies that do receive government backing. A company or entrepreneur with a superior product or technology might never reach the market because they didn’t have access to government handouts. The result is a diversion of resources from businesses preferred by the market to those preferred by policymakers, which leads to losses for the overall economy.</span></p> <p class="p6"><b>The Cost of Policymakers Picking Winners and Losers<br /></b><span style="font-size: 12px;">When the government starts choosing industries and technologies to subsidize, it often makes bad decisions at taxpayer expense, because policymakers possess no special knowledge that allows them to allocate capital more efficiently than markets. Businesses and venture capital firms make many mistakes as well, but they bear the consequences of those mistakes. When the government picks losers, the costs are involuntarily borne by taxpayers.</span></p> <p class="p1">Even the supposed “success stories” that government officials and the direct beneficiaries of subsidies like to tout at congressional hearings do not come without cost. In addition to the taxpayer money that’s spent when policymakers try to steer the market in certain directions, government intervention can also delay the development of superior alternatives by companies and entrepreneurs who didn’t receive government backing. Worse, young companies and entrepreneurs can have a harder time acquiring capital because private investors usually prefer to provide capital to projects that are subsidized over ones that are not.</p> <p class="p1">In a 2009 article in <i>Wired </i>magazine, Darryl Siry, a former executive with Tesla Motors, which has benefitted from government handouts, wrote that startup companies applying for energy subsidies “have admitted that private fundraising is complicated by investor expectations of government support.”<sup>3</sup> He noted that the government trying to pick winners distorts the market for private capital, which “will have a stifling effect on innovation, as private capital chases fewer deals and companies that do not have government backing have a harder time attracting private capital.”<sup>4</sup></p> <p class="p5"><b>CORRUPTING INFLUENCE OF SPECIAL INTERESTS<br /></b><span style="font-size: 12px;">Numerous economists have demonstrated that government officials benefit by acting on behalf of special interests under the guise of working on behalf of the public good.<sup>5</sup> Policymakers aren’t driven by the profit motive as is the case in the marketplace; rather, concerns about reelection and other self-rewarding benefits drive the decision-making process. Thus, interest groups who gain, or stand to gain, from government subsidies are willing and able to exploit the natural self-interest of policymakers.</span></p> <p class="p1">When “free” government money is up for grabs, interests that stand to benefit have a strong incentive to organize and lobby for a slice of the pie. Policymakers face little or no cost for conferring benefits on particular interests who return the favor by delivering votes and campaign funds. Adding in the lack of incentive for policymakers to be good stewards of taxpayers’ money results in government programs that exist to pick winners and losers in the marketplace—the “winner” being a politically predetermined outcome. Unfortunately, when the government tries to pick winners and losers, it often picks the wrong horse at the expense of taxpayers and the broader economy.</p> <p class="p1">Government subsidies create an unhealthy—and sometimes corrupt—relationship between commercial interests and the government. The more the government has intervened in energy markets, the more lobbying activity has been generated. The more subsidies that it hands out to businesses, the more pressure policymakers face to keep the federal spigot flowing. As the number of lobbyists grow, more economic decisions are made on the basis of politics, and more resources are misallocated. And the door opens to cronyism and corruption.</p> <p class="p1">Solyndra has become emblematic of these issues, even as policies expanding subsidies for alternative energy companies have been pursued enthusiastically over the past several years. According to the New York Times, Solyndra “spent nearly $1.8 million on Washington lobbyists, employing six firms with ties to members of Congress and officials of the Obama White House” during the period of time that its subsidized loan request was under review by the Department of Energy.<sup>6</sup> Beyond Solyndra, the Washington Post found that “$3.9 billion in federal grants and financing [from the Department of Energy] went to 21 companies backed by firms with connections to five Obama administration officials.”<sup>7</sup></p> <p class="p3"><b>THE DEPARTMENT OF ENERGY’S 1705 LOAN PROGRAM</b><sup>8<br /></sup><span style="font-size: 12px;">The Department of Energy’s 1705 loan program is a good example of the gap between what subsidy proponents claim they will achieve and what actually happens. The program was a key part of the Obama administration’s 2009 stimulus program and was justified on the grounds that viable renewable energy companies lack sufficient access to capital. The alleged imperfections of capital markets is a common—and mistaken—claim often used by policymakers to justify government intervention in various areas of the economy.</span></p> <p class="p1">In reality, nearly 90 percent of the 1705 loan guarantees went to subsidize projects backed by large, politically connected companies including NRG Energy Inc. and Goldman Sachs. Thus, it’s hard to believe that taxpayer-backed loans were necessary to make up for a supposed lack of capital available to economically viable commercial concerns.</p> <p class="p1">The 1705 program is also a good example of the government favoring multiple interest groups at the expense of taxpayers: (1) lenders who are reimbursed by taxpayers in the event of a default and (2) the companies that borrow at beneficial rates and conditions. But while banks and companies that receive the guarantees get the upside of the program, taxpayers bear the risk and shoulder the burden when companies like Solyndra go under and default on their loans.</p> <p class="p1">While the results of the 1705 loan program speak for itself, the true problem is deeper than the numbers. Like most government interventions, this program—and government interventions in general—create serious and systemic distortions in the market. These distortions create the conditions for businesses to maximize profits by pleasing government officials rather than customers. This is called cronyism, and it entails enormous—and, most often, unseen—economic costs.</p> <p class="p3"><b>CONCLUSION<br /></b><span style="font-size: 12px;">When the government subsidizes businesses, it weakens profit-and-loss signals in the economy and undermines market-based entrepreneurship. Most of America’s technological and industrial advances have come from innovative private businesses in competitive markets. Indeed, it is likely that most of our long-term economic growth has come not from existing large corporations or governments but from entrepreneurs creating new businesses and pioneering new industries. Such entrepreneurs have often had to overcome barriers put in place by governments and dominant businesses receiving special treatment.</span></p> <p class="p1">Policymakers who are interested in supporting the entrepreneurs and companies that will deliver the next generation of energy supplies and products should focus their attention on correcting the federal government’s hostile tax climate and dispense with the futile hopes of outsmarting the marketplace.</p> http://mercatus.org/publication/subsidies-are-problem-not-solution-innovation-energy Tue, 24 Mar 2015 20:21:58 -0400 Dishwasher Regulations Will Soak Consumers http://mercatus.org/expert_commentary/dishwasher-regulations-will-soak-consumers-environmental-regulation <h5> Expert Commentary </h5> <p>Protecting the environment is a priority for many Americans, and the U.S. Department of Energy applies numerous standards intended to reduce energy use and its environmental impacts, while hopefully also saving Americans money on monthly utility bills. Unfortunately, a <a href="https://www.federalregister.gov/articles/2014/12/19/2014-29519/energy-conservation-program-energy-conservation-standards-for-residential-dishwashers">recent regulatory</a> proposal suggests that energy efficiency policies fail to deliver many of these promised benefits.</p> <p>As it has done for other home appliances, DOE intends to limit energy and water consumed by dishwashers. The department intends to act in the public interest, but its own analysis shows that the rule’s environmental benefits fall well short of its costs. Additionally, rather than delivering general benefits, the rule will make many consumers worse off. In fact, the rule will hit low-income households and seniors especially hard despite legal requirements that DOE consider potentially disadvantaged subsets of the public.</p> <p><a href="http://www.usnews.com/opinion/economic-intelligence/2015/03/23/department-of-energy-dishwasher-regulations-will-soak-consumers">Continue reading</a></p> http://mercatus.org/expert_commentary/dishwasher-regulations-will-soak-consumers-environmental-regulation Mon, 23 Mar 2015 16:28:23 -0400 The Dollar’s Value Isn’t Just Affected by US Policy http://mercatus.org/expert_commentary/dollars-value-isnt-just-affected-us-policy-monetary <h5> Expert Commentary </h5> <p><strong><i>The New York Times Room for Debate posed this question, "Should the Fed be concerned that the strong dollar could slow down the domestic and international economic recovery?"</i></strong></p> <p>The dollar’s rise is evidence of the U.S. economy’s strength. But a strong dollar hurts U.S. exports and could be a problem for emerging market economies. Last week the Federal Reserve signaled that it might start raising interest rates later this year, a move that might further strengthen the dollar.</p> <p>Should the Fed be concerned that the strong dollar could slow down the domestic and international economic recovery?</p> <p><strong><i>Scott Sumner provided the following response:</i></strong></p> <p>In the past few months, the euro has fallen from roughly $1.35 to $1.08, triggering concern that the dollar is becoming overvalued. Some economists have suggested that the Fed should ease monetary policy by printing money or holding down interest rates, in order to weaken the dollar in the foreign exchange markets.</p> <p>But the foreign exchange value of the dollar is not a reliable indicator of whether monetary policy is easy or tight. For instance, expectations of more rapid economic growth in the United States could easily lead to an appreciation of the dollar. And yet obviously expectations of faster growth would not call for the Fed to print money or cut rates, which normally occurs when the economy slows.</p> <p>There are cases where a strong currency can be an indicator that the Fed had not supplied enough money to the economy, which is slowing economic growth. The foreign exchange value of the dollar soared in the second half of 2008, and in retrospect the Fed should have printed more money and/or reduced interest rates even faster to encourage economic growth during that difficult period.</p> <p>It is essential to keep in mind, however, that any foreign exchange rate reflects conditions in two economies, not one. In recent months the euro and the Japanese yen have depreciated in response to monetary stimulus by their respective central banks. The falling price of oil has pushed down the currencies of many commodity exporters.</p> <p>None of these changes necessarily harm the U.S. economy. If one were going to argue that the strong dollar means that monetary policy is too tight in the United States, you'd have to also argue that a weak euro implies policy is too expansionary in Europe. It takes two currencies to produce an exchange rate, hence a stronger dollar means a weaker euro. And yet it makes little sense to view European Central Bank policy as excessively expansionary when the eurozone is experiencing deflation and high unemployment.</p> <p>Fortunately, there are ways of getting beyond the ambiguous message contained in the exchange rate between two countries. We don't really want to know whether a currency is stronger or weaker relative to another currency, as that other currency might also be too strong or too weak. What we really need is some sort of absolute standard against which to judge the value of a currency.</p> <p>The Fed’s 2 percent inflation target offers that sort of standard, measuring the value of the dollar in terms of its purchasing power over goods and services. If there is an argument for continuing the Fed's low rate policy, it's not to be found in the foreign exchange markets, but rather in the domestic bond market, where investors expect the Fed to continue undershooting its 2 percent inflation target.</p> http://mercatus.org/expert_commentary/dollars-value-isnt-just-affected-us-policy-monetary Mon, 23 Mar 2015 22:47:44 -0400 The Small Bank Slide http://mercatus.org/expert_commentary/small-bank-slide-dodd-frank <h5> Expert Commentary </h5> <p>In a competitive market with free entry, <a href="http://www.americanbanker.com/bankthink/let-customers-not-regulators-decide-the-right-size-for-banks-1069527-1.html">bank size doesn't really matter</a>, but regulations can distort firm size. At a recent Senate Banking Committee hearing on Federal Reserve reforms, Professor Allan Meltzer suggested that bank concentration is being driven by the new regulations that disproportionately affect small banks. <a href="http://mercatus.org/publication/small-banks-numbers-2000-2014">New charts</a> just released by the Mercatus Center at George Mason University paint a portrait of that concentration. As the charts show, the concentration trend did not begin with Dodd-Frank, but Dodd-Frank certainly won't halt that decline either.</p> <p>The number of small banks — defined as those with $10 billion or less in assets — dropped from 8,263 at the start of the year 2000 to 5,961 at the end of 2014. During 2014, 252 small banks disappeared. At the end of last year, small banks held 21.7 percent of domestic deposits. The rest of domestic deposits were nearly evenly split between the top five banks and all other large banks. By comparison, in 2000, the top five banks held just under 20 percent of domestic deposits, and small banks held just over 40 percent. Approximately 18 percent of banking assets are now held by small banks, compared to 30 percent at the beginning of 2000.</p> <p>In the four years since Dodd-Frank was passed, total small bank assets and deposits have stagnated, and the number of small banks has fallen by 14 percent. During the same period, small banks' assets dropped from 20.7 percent of total bank assets to 18 percent, and their share of domestic deposits dropped from 28 percent when Dodd-Frank was passed to under 21 percent at the end of 2014.</p> <p>Meltzer's proposal for addressing concentration was to force banks to regulate themselves. As he suggested, regulators' incentives to get regulation right are a lot weaker than the incentives of bank shareholders when their money is on the line.</p> <p>Shareholders and long-term creditors worry about getting back the money they put into banks. However, if the government is on hand to bail out banks that make bad decisions, shareholders and creditors pay a lot less attention to the risks banks are taking. Regulators try to make up for the inattentive private market by scrutinizing banks closely. But regulatory monitoring will always fall short of monitoring by parties whose money is on the line. Private monitoring works best in a regulatory system that is built around a few core rules — such as strong capital requirements — rather than a plethora of micromanaging rules.</p> <p>A system that relies primarily on shareholders and creditors offers a distinct advantage for small banks. Shareholders and creditors may find it easier to monitor them than their bigger, more complex rivals. But that is not the system we have; the U.S. bank regulatory framework is complex, prescriptive and extensive. Large banks have an easier time navigating a highly complex regulatory environment than their small rivals.</p> <p>Bank regulators are engaged in a process that could make the regulatory environment less complex. The <a href="http://egrpra.ffiec.gov/about/the-law.html">Economic Growth and Regulatory Paperwork Reduction Act</a> (EGRPRA) obligates bank regulators to scan their rulebooks at least once a decade for "outdated or otherwise unnecessary regulatory requirements." Regulators are in the midst of such a review right now, but it is hard for regulators to give up existing rules. Once a rule makes it onto examiners' checklists, regulators have trouble imagining that it is not necessary.</p> <p>The EGRPRA process might be more effective if regulators are willing to rigorously rethink their rules. What was this rule's objective when it was adopted? Is it meeting that objective? At what cost to banks, bank customers and the broader economy? How does it work with other rules? Finding answers to these questions is particularly important at a time like this when new rules are being added at a record pace.</p> <p>There is a lot behind the numbers in our charts. Some small banks expand and become big banks. Others fail because they make poor risk management decisions. Still others close their doors because the populations they serve shrink. But regulation also plays a role in this story of declining small bank market share. Washington regulators can do something about that.</p> http://mercatus.org/expert_commentary/small-bank-slide-dodd-frank Mon, 23 Mar 2015 10:48:01 -0400 Comments on the Administration’s Proposals for Retirement Policy http://mercatus.org/expert_commentary/comments-administration-s-proposals-retirement-policy-IRA <h5> Expert Commentary </h5> <p class="p1">In early February the Treasury Department released&nbsp;<span style="font-size: 12px;">its green book explanation of the Obama&nbsp;</span><span style="font-size: 12px;">administration’s fiscal 2016 revenue proposals.<sup>1&nbsp;</sup></span><span style="font-size: 12px;">Taken as a whole, the proposals would significantly&nbsp;</span><span style="font-size: 12px;">increase taxes ($1.7 trillion over 10 years) and&nbsp;</span><span style="font-size: 12px;">budget outlays ($122 billion over 10 years), move&nbsp;</span><span style="font-size: 12px;">the burden of taxes substantially toward upper income&nbsp;</span><span style="font-size: 12px;">households, redistribute resources toward&nbsp;</span><span style="font-size: 12px;">lower-income households, and increase the complexity&nbsp;</span><span style="font-size: 12px;">of the tax system. In this article, I offer&nbsp;</span><span style="font-size: 12px;">critical comments on the main revenue proposals&nbsp;</span><span style="font-size: 12px;">for retirement, an area that I have addressed in prior&nbsp;</span><span style="font-size: 12px;">Tax Notes articles.</span></p> <p class="p2"><span style="font-size: 12px;"><b>Require Automatic IRAs<br /></b></span><span style="font-size: 12px;">Current law has several tax-preferred, employer sponsored&nbsp;</span><span style="font-size: 12px;">retirement savings programs for various&nbsp;</span><span style="font-size: 12px;">types of employers: large, small, private, nonprofit,&nbsp;</span><span style="font-size: 12px;">and public. Small employers can get a temporary,&nbsp;</span><span style="font-size: 12px;">three-year business tax credit for start-up costs for&nbsp;</span><span style="font-size: 12px;">retirement plans. Individuals who lack access to an&nbsp;</span><span style="font-size: 12px;">employer plan may make tax-deductible contributions&nbsp;</span><span style="font-size: 12px;">to IRAs.</span></p> <p class="p1">In the belief that retirement preparedness is inadequate,&nbsp;<span style="font-size: 12px;">particularly for low-wage workers at&nbsp;</span><span style="font-size: 12px;">small employers, the administration is proposing&nbsp;</span><span style="font-size: 12px;">that all employers that have more than 10 employees&nbsp;</span><span style="font-size: 12px;">and do not sponsor a retirement plan be required&nbsp;</span><span style="font-size: 12px;">to offer workers an automatic IRA option,&nbsp;</span><span style="font-size: 12px;">under which regular contributions would be made&nbsp;</span><span style="font-size: 12px;">to an IRA through payroll deductions. The administration&nbsp;</span><span style="font-size: 12px;">would also increase the small employer tax&nbsp;</span><span style="font-size: 12px;">credit for expenses of new retirement plans and&nbsp;</span><span style="font-size: 12px;">create a modest small employer tax credit for the&nbsp;</span><span style="font-size: 12px;">automatic IRA.</span><span style="font-size: 12px;">&nbsp;</span></p> <p class="p1">The green book description implies that all employees&nbsp;<span style="font-size: 12px;">would be included in the automatic IRA,&nbsp;</span><span style="font-size: 12px;">including those under age 18, nonresident aliens,&nbsp;</span><span style="font-size: 12px;">and new hires. It is unclear whether part-time&nbsp;</span><span style="font-size: 12px;">employees would also be included. The green book&nbsp;</span><span style="font-size: 12px;">says that the employer would be responsible for&nbsp;</span><span style="font-size: 12px;">providing employees a standard notice and election&nbsp;</span><span style="font-size: 12px;">form and that the default employee contribution&nbsp;</span><span style="font-size: 12px;">rate would be 3 percent of compensation, up to&nbsp;</span><span style="font-size: 12px;">current-law IRA dollar limits, paid to a Roth IRA. At&nbsp;</span><span style="font-size: 12px;">the same time, the green book says that employees&nbsp;</span><span style="font-size: 12px;">and not employers would be responsible for determining&nbsp;</span><span style="font-size: 12px;">IRA eligibility. The apparent contradiction&nbsp;</span><span style="font-size: 12px;">between an employer obligation for notice to employees&nbsp;</span><span style="font-size: 12px;">and the employee self-determination for&nbsp;</span><span style="font-size: 12px;">IRA eligibility is not explained.</span><span style="font-size: 12px;">&nbsp;</span></p> <p class="p1">The employer could choose the IRA trustee,&nbsp;<span style="font-size: 12px;">allow for employee designation of the IRA vendor,&nbsp;</span><span style="font-size: 12px;">or forward collected funds to a savings vehicle&nbsp;</span><span style="font-size: 12px;">(‘‘standard, low-cost investment alternatives’’)&nbsp;</span><span style="font-size: 12px;">specified by statute or regulation. This last choice&nbsp;</span><span style="font-size: 12px;">for the employer, presumably the default, is left&nbsp;</span><span style="font-size: 12px;">quite vague in the green book, but others have&nbsp;</span><span style="font-size: 12px;">proposed using the federal employee Thrift Savings&nbsp;</span><span style="font-size: 12px;">Plan or creating a new federal program. Indeed,&nbsp;</span><span style="font-size: 12px;">because almost all these IRAs would be very small&nbsp;</span><span style="font-size: 12px;">and difficult to administer, at least initially, it is hard&nbsp;</span><span style="font-size: 12px;">to imagine that employers and employees would&nbsp;</span><span style="font-size: 12px;">find any private-sector IRA vendors interested in&nbsp;</span><span style="font-size: 12px;">this money-losing business. The federal government,&nbsp;</span><span style="font-size: 12px;">needing to make a considerable administrative&nbsp;</span><span style="font-size: 12px;">investment in creating a system of retirement&nbsp;</span><span style="font-size: 12px;">accounts (not unlike what was required for the&nbsp;</span><span style="font-size: 12px;">federal health insurance exchange), would perforce&nbsp;</span><span style="font-size: 12px;">step in. Perhaps the Obama administration has the&nbsp;</span><span style="font-size: 12px;">Social Security Administration or the IRS in mind&nbsp;</span><span style="font-size: 12px;">for this responsibility or has simply not thought the&nbsp;</span><span style="font-size: 12px;">proposal through.</span></p><p class="p1"><span style="font-size: 12px;"><a href="http://mercatus.org/sites/default/files/Warshawsky-Comments-on-Administrations-Retirement-Policies-146TN1273.pdf">Continue reading</a></span></p> http://mercatus.org/expert_commentary/comments-administration-s-proposals-retirement-policy-IRA Fri, 27 Mar 2015 13:12:25 -0400 Why Finding a Good Doctor Will Get Even Harder http://mercatus.org/expert_commentary/why-finding-good-doctor-will-get-even-harder-medicare <h5> Expert Commentary </h5> <p>Medicare is contributing to a potential <a href="https://www.aamc.org/download/426242/data/ihsreportdownload.pdf">shortage</a> of 90,000 doctors by 2025.</p> <p>Two Medicare issues, if left unresolved, would limit the future supply of doctors and reduce the ability to find a doctor during retirement: Physician payments under the Sustainable Growth Rate (SGR) and financing of Graduate Medical Education (GME).</p> <p>Medicare is the main source of health insurance for those 65 and older and Congress is <a href="http://www.wsj.com/articles/congressional-leaders-seek-longer-term-solution-for-medicare-physician-payments-1426109264">focused</a> on preventing an automatic 21% cut in Medicare physician payments due to occur March 31. The Sustainable Growth Rate, or SGR, was established in the 1997 Balanced Budget Act to curtail the rise in health-care costs by linking physician payments under Medicare to an arbitrary target of economic growth.</p> <p>Under SGR, doctors received annual pay increases until 2002, at which point Medicare spending started to outpace economic growth. As a result, doctors were set to receive a 4.8 % payment cut. Not surprisingly, doctors successfully lobbied Congress for a change. Ever since, Congress has routinely passed a "doc fix" that puts off the scheduled cuts. Just like the <a href="http://www.imdb.com/title/tt0107048/">movie</a> Groundhog Day, if Congress fails to <a href="http://www.wsj.com/articles/house-near-a-fix-for-medicare-1426549429">permanently</a> fix the SGR, it will have to vote year after year on this contentious issue.</p> <p>These "fixes" have done nothing to solve the underlying problem and have only deferred and compounded the necessary cuts, resulting in more costly fixes each year. The Congressional Budget Office (CBO) estimates that a 10-year <a href="https://www.cbo.gov/sites/default/files/cbofiles/attachments/49923-SGR_Options.pdf">fix</a> would cost between $137 billion and $175 billion, while the Committee for a Responsible Federal Budget estimates a permanent <a href="http://crfb.org/document/prep-plan-permanent-fix-sustainable-growth-rate">fix</a> would cost up to $215 billion over 10 years.</p> <p>A 21% cut in doctor payments would have a significant impact on physicians' willingness to see Medicare patients and limit the ability of many retirees to see a doctor. Further, legislating temporary SGR "fixes" year after year only creates uncertainty among physicians and leads to further erosion of faith in our political system and the government's ability to deal with health care reform issues efficiently and effectively.</p> <p>Adding to the problem, and yet less noticed, is how the financing of graduate medical education is restricting the supply of doctors. This will be a surprise to many readers — Medicare funds GME and residency programs. To be a <a href="http://www.ama-assn.org/ama/pub/education-careers/becoming-physician.page?">licensed physician</a>, a person must attend medical school and then pass board certification (both at great expense). What a lot of people outside the field of medicine don't realize is that to be a licensed physician, a doctor must also complete additional graduate medical education in a residency program. Finding a proper <a href="http://www.nrmp.org/">"match"</a> for a residency relies in part on an <a href="http://www.nrmp.org/match-process/match-algorithm/">algorithm</a> that appears more complicated than astrophysics.</p> <p>A Wall Street Journal <a href="http://www.wsj.com/articles/SB10001424127887324563004578525454050176758">article</a> addressed the problem of a residency program shortage back in 2013, but the financing problem has only increased since. According to the <a href="http://www.iom.edu/Reports/2014/Graduate-Medical-Education-That-Meets-the-Nations-Health-Needs.aspx">Institute of Medicine</a>, taxpayers provide $15 billion in GME support; Medicare provides $9.7 billion, Medicaid $3.9 billion, and the Veterans Health Administration an additional $1.4 billion. These funding levels have essentially been capped since 1997.</p> <p>From a public policy perspective, it is questionable whether the federal government should finance GME, or whether hospitals that benefit from the cheap labor of residents should be picking up the cost of training doctors. Either way, without additional resources to fund residency programs, the nation may end up with a shortage of physicians and limit the availability of retirees to see and choose a doctor.</p> <p>A properly functioning health-care system requires a sufficient number of doctors to meet demand. Unless we adequately train and compensate physicians, we'll eventually end up with limited choices and worse health care overall. The sustainable growth rate and financing of graduate medical education serve as a reminder that Medicare has enormous influence on health care delivery in the U.S. The Institute of Medicine <a href="http://www.iom.edu/Reports/2014/Graduate-Medical-Education-That-Meets-the-Nations-Health-Needs.aspx">report</a> on GME provides options for <a href="http://www.iom.edu/Reports/2014/Graduate-Medical-Education-That-Meets-the-Nations-Health-Needs/Recommendations.aspx">reform</a> that continues government funding of GME and expands the number of residency programs. Providing market-based ideas for reform, a Heritage Foundation <a href="http://www.heritage.org/research/reports/2014/12/reforming-graduate-medical-education-in-the-us">report</a> suggests an increase role for private funding of GME, as well as allocating federal funding directly to the states instead of to teaching hospitals so states can tailor GME to their own regional needs.</p> <p>Finally, fixing the SGR, and the way we as a nation finance GME, must not distract us from reforming the overall health-care system and curtailing the public cost of providing health care. According to the <a href="http://www.cbo.gov/publication/49973">Congressional Budget Office</a>, federal spending on government health care programs will total $1.87 trillion by 2025, or 31 % of all federal spending and almost 7 % of U.S. gross domestic product (GDP).</p> <p>Congress will never find the willpower necessary to tackle the larger problems associated with the U.S. health-care system if it first can't address the urgent need to permanently fix SGR or reform GME.</p> http://mercatus.org/expert_commentary/why-finding-good-doctor-will-get-even-harder-medicare Fri, 27 Mar 2015 16:59:43 -0400