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Mercatus scholars apply economic analysis to the issues of the day

Subsidies for Big Business and Megabanks

by Veronique de Rugy on August 21, 2014

In the little time she’s been in Congress, Sen. Elizabeth Warren has made a name for herself as a populist who talks tough about Wall Street and other large corporations. But is she going to do more than just talk about it?

Recently, Warren confirmed that she is renewing her support for the Export-Import Bank — an agency that lends money to foreign companies to buy U.S. goods and services. This may sound good on paper; however, Warren’s endorsement of the Ex-Im Bank is inconsistent with her otherwise populist stand.

The biggest Ex-Im Bank beneficiaries are giant corporations like Boeing, General Electric, Caterpillar and their very wealthy foreign buyers. These companies don’t need the bank, but they love it. It increases their profits and transfers onto taxpayers the risk that the companies should be shouldering since they pocket the benefits.

The foreign companies love it, too. While most of them do have access to...

Let Customers — Not Regulators — Decide the Right Size for Banks

by Stephen Matteo Miller on August 21, 2014

To see why it's absurd for Washington to be debating how big the country's banks should be, imagine the following scenario:

You leave your hometown after high school to study and later work abroad for several years. After some time, you decide it's time to come home, at which point you reacquaint yourself with your high school prom date, who never left. You decide to get married. After the honeymoon, it's time to pay the bills, which means you have to choose how to bank. Your spouse has banked for years at a local small bank because of the personalized service it offers. It has only a few branches. But having moved around, you think fondly about all those times you found a bank branch during your travels — and you appreciate that you didn't have to close your account just because you moved to a different part of the state, let alone an entirely different state, or even abroad.

What's the right way to go? That's for you and your spouse...

Regulatory Measurement Can Lead to Actionable Knowledge

by Patrick McLaughlin on August 18, 2014

Scientific progress requires measurement, especially when working with a complex system such as the economy or the human body. For example, our understanding of the relationship between cholesterol and human health continues to evolve, but it has only gotten to the point where we debate the merits of "good" cholesterol and "bad" cholesterol via a century of investigation and the development of measurement techniques. Similarly, although in a very different field, professional sports teams increasingly develop new, quantitative metrics of player performance in order to optimize team performance — as described by the book and movie "Moneyball."

Good governance also can develop over time through careful measurement combined with scientific inquiry. To that end, I developed (along with my...

Economic Patriotism Would Be Bringing Taxes and Spending in Line

by Pavel A. Yakovlev on August 18, 2014

Several states cut a wide variety of taxes this summer. Indiana and Rhode Island, for example, cut the conventional corporate tax. Idaho, meanwhile, took an unconventional route by cutting sales taxes on software purchased through “the cloud.” When revenues are on the rise, some states choose to lower taxes, while others prefer to spend the tax windfall. Both moves could be wrong.

All states except for Vermont must balance their budgets, making state finances very pro-cyclical. In other words, tax revenues rise during good economic times and fall during hard times. The latter can often force policymakers to raise taxes when residents can least afford it.

A wise policy would be to stash budget surpluses in a rainy day fund to help pay for government spending in tough times without raising taxes. Regrettably, policymakers often end up with their hands in the fiscal cookie jar and quickly spend the accumulated surpluses even in good times...

FDA Fails to Account for E-Cigarettes’ Health Benefits

by Michael L. Marlow on August 18, 2014

Nevada Attorney General Catherine Cortez Masto joined 28 other state attorneys general last week in a letter supporting the Food and Drug Administration’s proposal to expand its regulatory umbrella over tobacco products to include electronic cigarettes. Unfortunately, the FDA jeopardizes public health by not adequately assessing the costs of suppressing the e-cigarette market.

The FDA errs on the side of assuming e-cigarettes pose more of a health risk than an opportunity to improve public health. Numerous studies, however, show that e-cigarettes help some smokers reduce or quit smoking. Studies also suggest that e-cigarettes are at least as effective, if not more, than FDA-approved nicotine replacement therapies such as patches, gums and pills. Their effectiveness appears to be related to how they mimic the act of smoking.

Federal regulators dismiss “harm reduction theory” — the theory that minimizing damage from risky behavior may...

Introducing RegData 2.0: A New Way of Measuring the Size and Scope of Federal Regulation

by Patrick McLaughlin on August 18, 2014

Today, the Mercatus Center at George Mason University launched the latest version of RegData, a tool created by Patrick McLaughlin and Omar Al-Ubaydli that improves the way we measure the size and scope of federal regulations.

...

End Toxic Alliance with Big Business

by Veronique de Rugy on August 14, 2014

Great leaders make the right decisions, even when they are inconvenient. Serious policy analysts understand that not reauthorizing the New Deal-era corporate welfare program known as the Export-Import Bank is good economics. Leaders in Congress should let the government bank’s charter expire.

It is also good politics. Ohioans and Americans in general are tired of the toxic alliance between big business and big government. Whether through the Occupy Wall Street or the Tea Party movements, more people are expressing opposition to noxious cronyism, of which the Ex-Im Bank is the epitome. Americans simply will not stand for it anymore.

The Ex-Im Bank uses its special borrowing privileges with the Treasury Department to finance foreign purchases from a chosen few U.S. exporters. It provides taxpayer-backed loans, insurance, and loan guarantees for foreign companies, like Air China, to buy products from select U.S. exporters, like Boeing. In...

Small Pennsylvania Firms Don't Need Ex-Im Bank

by Veronique de Rugy, Andrea Castillo on August 13, 2014

Letting the New Deal-era corporate welfare program known as the Export-Import Bank of the United States expire is good economics for Pennsylvanians. There are plenty of bad arguments to reauthorize the Ex-Im Bank's charter, but none is more misleading than the claim that this government bank serves small businesses.

First, more than 80 percent of the bank's portfolio primarily benefits huge corporations. This leaves less than 20 percent of Ex-Im Bank's portfolio for small firms - which is in violation of its own charter.

But even this is misleading, since the Ex-Im Bank's definition of a "small business" isn't exactly "small." Most government bodies set the threshold at firms with fewer than 500 employees. However, Ex-Im Bank will consider "small businesses" that are three times that large and can earn up to $21 million in annual revenues.

For example, the Ex-Im Bank considers Pennsylvania company CyOptics Inc. a...

'Living Wills' for Banks are Pointless Without Market Discipline

by Hester Peirce on August 13, 2014

Last week's rejection of 11 large financial institutions' living wills was a dramatic gesture by the Federal Deposit Insurance Corporation and the Federal Reserve. The living wills are supposed to be a roadmap for the orderly resolution of these companies, should they run into trouble. Living wills make good sense, but until markets are forced to live by them, there is little incentive to get them right.

The Fed and FDIC rejected the living wills, which were filed in October 2013, for falling short in a number of areas. Regulators took issue, among other things, with the banks' "assumptions about the likely behavior of customers, counterparties, investors, central clearing facilities, and regulators" and their "failure to make, or even to identify, the kinds of changes in firm structure and practices that would be necessary to enhance the prospects for orderly resolution."

...

Unsustainable Platitudes

by Donald J. Boudreaux on August 12, 2014

Platitudes are a poor basis for policy. The reason is that, no matter how melodious they sound, platitudes are practically meaningless. People who utter platitudes often seem to be saying something meaningful when in fact they're merely stating the obvious.

A good way to test if someone is speaking in platitudes is to ask yourself if you can imagine a normal human adult believing the opposite.

Suppose someone informs you that he favors policies that promote human happiness. Can you imagine, say, your neighbor responding, “I disagree. I favor policies that promote human misery”? Probably not.

If you cannot imagine any normal person disagreeing with some proclamation, then that proclamation is a platitude. It tells you nothing of substance.

Consider today's fashionable calls for “sustainability.” The academy, media, cyberspace are full of people proclaiming support for policies that promote economic...

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