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Mercatus scholars apply economic analysis to the issues of the day

Regulation In the Form of Big Bank Coercion

by Hester Peirce on April 22, 2015

One of Dodd-Frank's aspirations was increased competition to dilute the power of large financial institutions. The status quo, however, plays right into impatient regulators' hands. It's easy to force changes in the global financial industry by nudging-gently or otherwise-large banks to fall in line with regulators' wishes. Bank regulators are not shy about exercising this kind of control. As convenient as such regulatory strong-arming might seem to be, it sidesteps the regulatory processes designed to ensure accountability, public input, and transparency.

The most recent example-reported last week by the Wall Street Journal-is an effort to force contractual changes in securities lending and repurchase (repo) agreements. These short-term borrowing arrangements among financial institutions can aggravate liquidity...

More Data Collection Won't Stop Future Financial Crises

by Stephen Matteo Miller on April 20, 2015

National Security Agency data collection has received considerable attention of late, and some have likened the Consumer Financial Protection Bureau’s data collection efforts – like collecting information on 991 million credit card accounts – to those of the NSA. While its director, Richard Cordray, has denied the comparison, this data collection seems excessive and won’t stop future crises.

Having people in government collect information about your credit records and income seems as valid a cause for concern as having people collect information about your telephone calls. (If that doesn’t trouble you, consider the rise...

Credit Is a Powerful Tool for American Families

by Todd Zywicki on April 17, 2015

Americans have an ambivalent relationship with non-mortgage consumer credit: We all use it, yet we feel as if there is something slightly wrong about it. Should we?

Consumer credit is often thought to be just a way to live beyond one’s means and to shift consumption – to spend today instead of saving for tomorrow. But the assumption that families use credit profligately is misleading. To understand how consumers use credit – and why it is a boon to American families and the economy – it is useful to understand how businesses use credit.

Businesses use it for two basic reasons: to invest in capital goods and to smooth income and expenses. Capital goods generate a stream of benefits over time – for example, a construction company could employ workers with shovels to dig foundations for buildings or buy a backhoe to do the same work and finance it out of the crew’s increased productivity.

...

The Key to Reviving the U.S. Economy: New Book Explains the Importance of Economic Freedom and Entrepreneurship for U.S. Economic Growth

by Bob Ewing on April 16, 2015

Why did the U.S. economy recover so slowly from the 2008 recession?  What lessons have economists learned that can encourage economic growth in the future? 

A new book jointly published today by the Fraser Institute of Canada in conjunction with the Mercatus Center at George Mason University offers the answers.

“The United States was once considered the land of opportunity, where entrepreneurs such as Henry Ford, Ray Kroc and Steve Jobs improved standards of living by providing new products and services at prices people were willing and able to pay,” said Donald J. Boudreaux, senior fellow at both the Fraser Institute and the Mercatus Center, and editor of What America’s Decline in Economic Freedom Means for Entrepreneurship and Prosperity.

*Read the U.S. News...

U.S. Regulations and Taxes Stifling Entrepreneurs

by Liya Palagashvili on April 15, 2015

The current state of entrepreneurship is receiving considerable attention as debate simmers around questions of business dynamism in the United States. According to a Gallup article, the U.S. has dropped to 12th among developed nations in terms of business startups. Economists also recently found evidence for this downward trend in business activity and attribute it to diminished incentives for entrepreneurs to start new firms.

This raises some questions: What exactly are the factors leading to the decline in business activity in the United States? And what can be done to revive the American entrepreneurial environment?

Economists identify the costs imposed on entrepreneurs by the regulatory environment as one of the most important influences on business dynamism....

State Government Becoming Increasingly Affordable

by Randall G. Holcombe on April 15, 2015

Fiscal horror stories from populous states like Illinois, California and New Jersey are becoming all too common these days, but Florida’s finances have yet to make the front pages of the national news. In an era when state governments are growing, and many strain to merely pay for past commitments, Florida has stood out for its fiscal responsibility.

In a comprehensive new study published by the Mercatus Center at George Mason University, I document just how remarkable this is. The Sunshine State certainly has policy areas of concern — including homeowners insurance, land use regulation, pension accounting and rising health care costs. But for two decades, we’ve had a balanced budget without raising taxes, and have in many cases cut them.

Florida’s state government appropriations as a percentage of Gross State Product (GSP) peaked in the 1994-95 budget at 11.86 percent. In the two decades since, this number has steadily declined to 10....

Get Rid of State and Local Tax Deductions

by Veronique de Rugy on April 14, 2015

The New York Times Room for Debate posted this question: What are the most useless, unfair or counterproductive personal tax breaks?

Veronique de Rugy provided the following response:
Genuine income tax reform would lower tax rates, reduce double taxation of income that is saved and invested, and cut out loopholes that tilt the playing field in favor of politically connected interest groups.

In this vein, we should get rid of deductions that let taxpayers write off state and local income taxes. I’m all for people keeping more of their income, but this exemption actually leads to bad policy by state and local government.

This loophole lets politicians raise taxes without upsetting voters as much as they should be, because this additional burden can be deducted from their federal tax bill. But people in responsible low-tax states shouldn't be...

Gaming Out the Scenarios in King v. Burwell

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by Charles Blahous on April 13, 2015

Earlier this year the U.S. Supreme Court heard arguments in King v. Burwell, a case critical to the future of the Affordable Care Act (ACA, or so-called Obamacare). Readers interested in the details of the case should find them elsewhere. Suffice it to say here that the case concerns whether individuals can receive tax credits for buying health insurance on exchanges established by the federal government, though the text of the ACA indicates such subsidies are provided for those buying coverage through an “exchange established by the State.”

The case has the potential to invalidate substantial subsidies now being provided by federal taxpayers to millions of Americans using federal exchanges in 37 different...

Taxing Peter to Improperly Pay Paul (or His Corpse)

by Veronique de Rugy on April 13, 2015

Taxes are obviously on everybody's mind this time of year, which makes it the perfect time to ask where — or to whom — all our money is going.

First things first: In 2014, the government collected roughly $3 trillion. It spent $3.5 trillion. In other words, it had to borrow $500 billion to pay for all the spending on top of the taxes collected.

Of the $3.5 trillion, about half went to pay for "entitlement" programs — though we are not actually entitled to all of them. These programs are better-known as Social Security, Medicare, Medicaid and Affordable Care Act subsidies. So right there, you have $1.77 trillion in spending, with $851 billion going toward paying for seniors' retirement benefits.

Then, the government spent almost $600 billion on defense spending and $513 billion on "income security" programs, such as food stamps and unemployment insurance. Finally, the government pays some $229 billion in interest,...

John Tamny Is Making Economics Popular Again

by Veronique de Rugy on April 10, 2015

When The Rolling Stones rerelease their classic 1971 album, "Sticky Fingers," in June, it will present an opportunity to learn a thing or two about rock 'n' roll — and also tax policy.

Indeed, one of the many great stories in a very compelling new book by John Tamny recounts how, in the 1970s, the British government forced the Stones into exile, first to France and then to the United States. In "Popular Economics: What the Rolling Stones, Downton Abbey, and LeBron James Can Teach You About Economics," Tamny recalls how the British government imposed an 83 percent marginal tax rate in the 1970s, which it then hiked to 98 percent for investments and so-called unearned income. That's when the Stones "upped and went to France," according to the group's guitarist Keith Richards.

The book establishes Tamny, the editor of RealClearMarkets and the political economy editor at Forbes, as the modern and American Frederic Bastiat. Each of Tamny's...

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