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Mercatus scholars apply economic analysis to the issues of the day

Capital/Capitol: Finance and Economic Opportunity

by Dino Falaschetti, Chad Reese on March 27, 2015

William Lewis, Founding Director of the McKinsey Global Institute, makes a clear case for what academic research has long suggested—that is, “the power of productivity” to expand economic opportunity.

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.

Policies that encourage competition in financial services, though frequently overlooked in this context, play an important role in facilitating these ambitions. But if our political capitol doesn’t promote competitive markets, our financial capital cannot power the productivity that has helped generations of Americans enjoy substantial increases in living standards.

We look forward to...

Consumers Are Much More Powerful than Their Government Protectors

by Hester Peirce on March 25, 2015

Last week, in a blog post 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 pledged 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.

The Bureau takes a number of precautionary steps in connection with the database. First, it verifies that a customer relationship exists, which should...

Since Term Limits Took Effect, State Government Has Shrunk

by Randall G. Holcombe on March 25, 2015

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.

In fact, by several measures, Florida's state government has actually shrunk since the imposition of term limits.

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...

Pension Reform Doesn’t Mean Higher Taxes

by Andrew G. Biggs on March 25, 2015

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.

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.

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...

Why Finding a Good Doctor Will Get Even Harder

by Jason J. Fichtner on March 23, 2015

Medicare is contributing to a potential shortage of 90,000 doctors by 2025.

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).

Medicare is the main source of health insurance for those 65 and older and Congress is focused 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.

Under SGR, doctors received annual pay...

Comments on the Administration’s Proposals for Retirement Policy

by Mark J. Warshawsky on March 23, 2015

In early February the Treasury Department released its green book explanation of the Obama administration’s fiscal 2016 revenue proposals.Taken as a whole, the proposals would significantly increase taxes ($1.7 trillion over 10 years) and budget outlays ($122 billion over 10 years), move the burden of taxes substantially toward upper income households, redistribute resources toward lower-income households, and increase the complexity of the tax system. In this article, I offer critical comments on the main revenue proposals ...

The Small Bank Slide

by Hester Peirce, Stephen Matteo Miller on March 23, 2015

In a competitive market with free entry, bank size doesn't really matter, 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. New charts 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.

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...

The Dollar’s Value Isn’t Just Affected by US Policy

by Scott Sumner on March 23, 2015

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?"

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.

Should the Fed be concerned that the strong dollar could slow down the domestic and international economic recovery?

Scott Sumner provided the following response:

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...

Dishwasher Regulations Will Soak Consumers

by James Broughel on March 23, 2015

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 recent regulatory proposal suggests that energy efficiency policies fail to deliver many of these promised benefits.

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...

More Info for Consumers Can Backfire

by Sherzod Abdukadirov on March 18, 2015

In the same month the U.S. Department of Agriculture approved a new breed of apple genetically modified to resist browning, yet another proposal to require the labeling of genetically modified foods (GMOs) hit Congress. Federal regulators chose to follow scientific evidence, which demonstrates that genetically modified organisms are generally safe to eat. Yet, congressmen are still pandering to irrational fears of GMOs, following similar labeling requirements already adopted in several states. That pandering can actually leave consumers worse off -- leading them to make less healthy decisions for themselves and their...

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