Tag Archives: CATO Institute

Progs Give New Meaning To “Tax Distortions”

16 Tuesday Apr 2019

Posted by in Taxes

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Tax day has come and gone, but I’m struck by 1) the incredible misconceptions people express about the change in their tax liabilities caused by the 2018 income tax legislation; and 2) the confusion about how our progressive income tax system actually works! Some of these misapprehensions are encouraged by progressives who would rather misinform the public than evaluate policy on its own terms. I am not a fan of our income tax system, nor all aspects of the 2018 tax law, but let’s at least discuss it honestly.

First, a substantial majority of taxpayers paid lower taxes on their 2018 income than they would have under prior tax rules (also see here). However, as I’ve observed before, many people conflate the change in the amount of their tax refund with the change in their taxes paid. And again, the progressive media hasn’t helped to allay this misconception, as noted by Vox cofounder Matthew Yglesias when he tweeted this:

“Nobody likes to give themselves credit for this kind of messaging success, but progressive groups did a really good job of convincing people that Trump raised their taxes when the facts say a clear majority got a tax cut.”

Even worse, members of Congress misrepresent the facts with little media backlash. For example, Andrew Wilford of the National Taxpayers Union Foundation reports the following:

“… the tax cut actually made the tax code more progressive, not less.  … Of course, none of this stopped Democrats such as Sen. Kamala Harris (D-Calif.) from claiming that the TCJA was a “middle-class tax hike.” Nor did it prevent three separate Democratic senators from claiming that the average family making up to $86,000 would see a tax hike of $794, despite the fact that the source for this claim clarified that this tax hike would apply to only 6.5 percent of households in this income bracket.”

It’s amazing just how drastically our income tax system is misunderstood or often misrepresented by the media. Apparently, it’s considered politically advantageous to do so. Chris Edwards offers the following quote from Christine Elba in the Washington Post:

“Meanwhile, the wealthier among us (remember: corporations are people, too!) are able to hire tax lawyers, consultants and accountants to clue them in on lightly advertised but heavily lobbied for loopholes that allow them to pay a lower tax rate or even no taxes at all.”

That is simply not a fair characterization of our income tax system. Edwards goes on to demonstrate the progressive nature of U.S. income taxes based on information from the Tax Policy Center. Not only do statutory federal income tax rates rise with income, but so do average effective tax rates, which account for the effects of deductions, credits and exclusions. In fact, average effective rates are negative in the lowest income groups and are zero on balance for the lowest 50% of earners. And average effective rates keep rising in the top quintile, moving up through the top 10%, 5%, 1% and 0.1%. Ms. Elba is clearly confused. And if she is aware of the pernicious double-taxation of corporate income, she probably would never admit it.

Apparently the current state of income tax progressivity is not enough to satisfy statists and redistributionists, who take license to lie about it in order to make their case for higher taxes on the rich, and even the not-so-rich. But here’s some advice for Bernie Sanders, Kamala Harris, and others who insist that, while they are rich, they desperately want to pay more taxes: you are free to do so without penalty. Better yet, give it to a good charity instead!

Opioids and The War On Pain Treatment

08 Friday Mar 2019

Posted by in Prohibition, War On Drugs

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I repeatedly hear the bogus claim that prescription pain killers are a primary cause of opioid addiction. Twice this week I heard Geraldo Rivera prattling about it, blaming the drug companies for the opioid epidemic, expressing his view of the righteousness of the many lawsuits faced by Purdue Pharma and other firms. But these cases are hardly sure wins for the plaintiffs, and for good reason. The idea that pharmaceutical companies misleadingly promoted the effectiveness of drugs like Oxycontin for pain relief, and minimized their addictive potential, might appear credible, but there are a number of factors that argue strongly against these claims. Of course, opioids are legal prescription drugs, approved for pain relief by the FDA, and are generally marketed by drug companies under guidelines established by the FDA at the time of approval. And sadly, the narrative promoted by Rivera and many others is at tension with the needs of patients suffering from chronic pain.

In fact, opioids are effective for temporary and chronic pain relief, and they have been used for those purposes for many decades. In “The Other Opioid Problem“, anesthesiologist Dr. Ted Noel asserts that few chronic pain patients have overdosed or been killed by ODs. According to Scientific American:

“A Cochrane review of opioid prescribing for chronic pain found that less than one percent of those who were well-screened for drug problems developed new addictions during pain care; a less rigorous, but more recent review put the rate of addiction among people taking opioids for chronic pain at 8-12 percent [but less than 1% abuse].”

Those prescribed opioids for temporary relief after an injury or surgical procedure are even less likely to develop an addiction. The large majority of addicts are self-selected out of a population of individuals who want to get high. And most of them feed their addictions on opioids obtained illegally, often from imported heroin and fentanyl. Yes, opioids are stolen from legitimate patients, pharmacies, or elsewhere, and sometimes they are prescribed illegally by unscrupulous physicians. That might be the way many addicts get started, but most of the illegal opioid supply in the U.S. is imported heroin and fentanyl.

A causal linkage between opioid prescriptions, addiction and opioid deaths would imply a strong, positive correlation between prescription and death rates. However, Jacob Sullum reports that there is no correlation across states between prescription rates and death rates from opioids. As Sullum notes, this result offers “more reason to doubt that pain pill restrictions will save lives”.

In fact, in a separate article, Sullum writes of other evidence strongly suggesting that those restrictions may have counterproductive effects on opioid deaths, in addition to denying some patients access to the pain pills they legitimately need for treatment. According to Sullum, all 50 states have Prescription Drug Monitoring Programs (PDMPs) that monitor controlled substances and keep tabs on prescribers and pharmacies. These have succeeded in discouraging opioid prescriptions, but research appearing in the Annals of Internal Medicine suggests that the programs might be doing more harm than good:

“Fink et al found six studies that included heroin overdoses, half of which reported a statistically significant association between adoption of PDMPs and increases in such incidents. … To the extent that PDMPs succeed in making pain pills harder to obtain, they encourage nonmedical users to seek black-market substitutes. ‘Changes to either the supply or cost of prescription opioids after a PDMP is instituted,’ Fink et al. observe, ‘might reasonably drive opioid-dependent persons to substitute their preferred prescription opioid with heroin or nonpharmaceutical fentanyl.’

The FDA has enforced quotas on the production of legal opioids. According to the CATO Institute:

“The tight quotas on opioid production contributed to the acute shortage of injectable opioids being felt in hospitals across the nation. It is not only making patients suffer needlessly but places them at increased risk for adverse drug reactions or overdose.”

The FDA’s restrictions were eased somewhat after complaints from the medical community, but the harm continues. At the time of CATO’s report, opioid prescriptions had declined by 41% since 2010, while the overdose rate continued to escalate.

This pattern is all too familiar to those who have been arguing against drug prohibition for years. The flood of fentanyl into the country, and into what is sold as street heroin, is a direct consequence of prohibitions on supplies of legal heroin and other narcotics. But breaking through the puritanical and bumptious mentality of drug warriors is almost impossible. The worse the situation gets, the tighter they turn the screws, doubling down on the policies that have repeatedly failed in the past. Here I repeat the concluding paragraph of a Sacred Cow Chips post from January 2018 on the opioid epidemic:

“There are solutions to the deadly nature of the opioid epidemic, but prohibition is not one of them and never will be. If anything, prohibition in varying degrees has aggravated the dangers of opioids. To truly solve the problem, we should eliminate restrictions on the production and distribution of legal opioids for pain management, legalize heroin, and stop interfering in markets. That would be merciful for patients in real pain, make recreational use of opioids dramatically safer, and put an end to the gangland violence associated with underground competition. Second, redirect those resources into … harm reduction programs. [Jeffrey] Miron notes that legalization has worked in other countries, like Portugal and France, to reduce overdoses and opioid deaths. As a political matter, however, these steps might not be feasible unless we get over the cultural bias stigmatizing recreational opioid use as ‘evil’, and the idea that laws and enforcement can actually prevent people from trying to get high.

You’re Entitled To Better Returns Than Social Security

08 Monday Jan 2018

Posted by in Social Security

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It’s one thing for indignant seniors (or anyone nearing retirement) to defend the crappy returns they get on their lifetime Social Security payroll taxes … er, contributions, against the arguments of reformers. It’s another for younger individuals to rant about the threat to the crappy returns they will get while resisting an idea for reform that would almost certainly improve their eventual well-being: privatization. Both of the aforementioned reactions are marked by confusion over the use of the word “entitlement” in federal budgeting, though in another sense, entitlement is manifested in the very defensiveness of the reform critics. At its root, this self-righteous naiveté is a product of ignorance about the program, its insolvency, how its rewards compare to private savings, and longstanding media propaganda favoring big government as grubstaker… because it feels virtuous.

There’s really not much to like about Social Security, though the status quo will always appeal to some.

Insolvency: The trust fund held $2.7 trillion of reserves at the end of 2016, but benefit payments are growing faster than contributions (plus interest on the public bonds held by the fund). The wave of retiring baby boomers and increasing longevity (and a declining number of workers per retiree) are placing a strain on the system. According to the trustees, depletion of the fund will begin in earnest in 2022, and the Old Age Survivors and Disability Insurance (OASDI) fund will be exhausted by 2034. This might be delayed if the economy and employment grow faster than expected. The actuarial deficit through 2091 is $12.5 trillion, as Brenton Smith notes in this post.

The returns are lousy: Two years ago, I posted an examination of the returns earned on Social Security “contributions” in: “Stock Crash at Retirement? Still Better Than Social Security“. The title is an accurate summary of the conclusions.

“Suppose you are given an option to invest your FICA taxes (and your employer’s contributions) over your working life in a stock market index fund. After 40 years or so, based on historical returns, you’ll have stashed away about 12 – 18 times your total contributions (that range is conservative — 40 years through 2014 would have yielded 19x contributions). A horrible preretirement crash might leave you with half that much. At the low-end, you might have as little as 4.5 times contributions if the crash is as bad as the market decline of 1929-32. That would be very bad.

But you don’t have that option under current law. Instead, the return you can expect from Social Security will leave you with only 1 to 4 times your contributions — without further changes in the program — based on your current age, lifetime earnings, marital status and retirement age. The latter range is based on the Social Security Administration’s (SSA’s) own calculations, as quoted in ‘Social Security: Saving or Tax? Proceeds or Aid‘ on Sacred Cow Chips.”

Reforms? The prototypical reform proposals always involve cutting benefits or raising taxes in one way or another. No wonder there is so much suspicion among the public! For seniors and near-retirees, the lousy returns noted above are at least fairly certain: generally, reform proposals haven’t applied to those of age 55+. Nonetheless, those projected returns are not a promise. There is a risk that the benefits could be changed or eroded by Congress, as discussed here by Lance Robert. For youngsters, the returns are much more uncertain, and changing the structure of distant benefits is always more politically palatable.

Examples of typical reform proposals include delaying the age at which benefits can be claimed, increasing the income cap on payroll taxes, and changing the way in which benefits are indexed to inflation. Many of the “new ideas” shown at this link are variations on finding additional tax revenue or delaying benefits. Rep. Sam Johnson has proposed a set of fairly conventional reforms, including gradual increases in the retirement age and elimination of the earnings test, so that some income could be earned without reducing benefits. Also, Johnson’s plan would redistribute benefits toward low-income beneficiaries. AARP provides a summary of 12 proposals, one of which is to index benefits for life expectancy at each age: as expected longevity increases, annual benefits would decrease. There are other proposals with a strongly redistribution aspect, such as reducing benefits for those with high lifetime earnings or means-testing benefits.

Better ideas: There are currently some incentives in place for retirees to delay benefits for a few years, and some of the proposals at the “new ideas” link would attempt to strengthen those rewards. Another idea mentioned there is to offer an inducement to delay claims by allowing at least a portion of future benefits to be taken as a lump sum. This is more novel and has greater potential savings to the system in a world with increasing longevity. To the extent that retirees can privately invest at more advantageous returns, they might be willing to accept a substantial discount on the actuarial value of their benefits.

The interests of future beneficiaries would be served most effectively by allowing them to choose between contributing to the traditional program or setting a portion of their contributions aside in a private account. These accounts would give individual workers flexibility over investment direction. As discussed above, better returns than the traditional program can be had with near-certainty given sufficient time until retirement. Michael Tanner at CATO is correct in insisting that workers control their own accounts should they opt-out of the traditional program. And the government itself should stay out of private capital markets. 

It is this proposal that is always greeted with the most vitriol by opponents of reform. The very idea of private accounts seems to them an affront. One explanation is the fear of financial risk, but this would be mitigated by limiting the opt-out to younger workers with adequate time for growth. Another explanation is the fear that lower-income beneficiaries would not fare well under this reform. In fact, there is a strong semblance of redistribution in the system’s existing benefit formulas, but these features do not amount to much once adjusted for the differing life expectancies of income groups and the benefits paid to survivors. There is no reason, however, why the private account option would prevent redistribution through the traditional portion of contributions. Moreover, there is value in creating greater transparency when it comes to redistribution, as it promotes more effective scrutiny.

Funding: Unfortunately, the Social Security program has long relied on funding current benefits to retirees with dollars contributed by current workers. This is one of the biggest areas of misunderstanding on the part of the public. Allowing workers to opt-out would improve the long-term benefits received by those retirees, but it would also remove a portion of the funding for current retirees, thus accelerating a portion of the system’s unfunded obligations. A similar acceleration of the funding gap would accompany any reform to discount future benefits in exchange for payment of a lump sums in advance. The tradeoff is favorable over a time horizon lengthy enough to cover the retirement of today’s younger workers, but the near-term shortfall can only be met by reduced benefits, borrowing, or new sources of funds.

Asset Sales: The best option for bridging the funding needs of a transition to private, individually-controlled accounts is to sell federal assets. I have discussed this before in the context of funding a universal basic income, which I oppose. The proceeds of such sales, however, could be used to pay the benefits of current and near-term retirees so as to allow the opt-out for younger workers. The asset sales would have to proceed at a careful and deliberate pace, perhaps stretching over a decade or more, but those sales could include everything from unoccupied federal buildings to vast tracts of public lands in the west, student loans, oil and gas reserves, and airports and infrastructure such as interstate highways and bridges. In 2011, it was estimated that the federal government owned $1.6 trillion worth of liquid assets alone. The value of less liquid federal assets would be in the many trillions of dollars. (Read this eye-opening assessment of federal assets.) Of course, these assets would be more productive in private hands.

Sustainability: The outrage greeting ideas for entitlement reform largely denies the economic reality of inadequate funding. Social Security is just one example of an unsustainable entitlement program. Few participants in the system seem to realize that their benefits are paid out of contributions made by current workers, or that surpluses of the past were simply borrowed by the government and used to fund other spending. It was sustainable only with a sufficient number of contributing workers to support a stable class of retiree-beneficiaries. It cannot withstand an expanding class of longer-living beneficiaries relative to the labor force.

Ideally, reform would address the system’s insolvency as well as the weak returns to beneficiaries on their payments into the system. Self-direction and individual control over at least a portion of invested contributions should be viewed as a long-term fix for both. It will yield much better returns than the traditional system, but for workers this depends on the amount of time remaining until retirement. Young workers can elect to opt-out of the traditional system at little risk because they have the time to invest over several market cycles, but older workers must be circumspect. In any case, it is unlikely that politicians would take the chance of allowing older workers to opt-out, then face a potential backlash after a market downturn.

The insolvency problem, and the short-term funding shortfall created via the opt-out alternative, require hard decisions, but asset sales can bridge a large part of the gap, if not all of it. Lump-sum benefit payments might also be made at a savings, but they would worsen the short-term gap between benefit payments and contributions. In the long-run, the tradeoffs would become more favorable as today’s young workers age and retire with the more handsome returns available via individually-controlled and privately-invested accounts.

Our Homicidal Drug War

17 Tuesday Oct 2017

Posted by in Prohibition, War On Drugs

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Drug prohibition and the war on drugs are destructive policies and most burdensome to communities that can least afford it: impoverished and often minority neighborhoods. Drug laws and their enforcement likely account for the bulk of homicides that occur there, directly or indirectly. A post on SacredCowChips last week discussed the violence that frequently beleaguers communities that are home to unassimilated minorities. Drug prohibition compounds the tragedy in several ways: deadly rivalry among supplier organizations; violent confrontations with law enforcement; user criminality; drug-related incarceration; degraded user productivity; and tainted supplies that exacerbate health risks for users.

Ultimately, bad laws are distinguished by their failure to achieve broad compliance. The thing is, people who want to do drugs will do so regardless of their legality. Most recreational users are sufficiently imbued with a survival instinct and the self-control to govern their use effectively, without ostensible harm. Nearly all recreational users believe they are engaging in a harmless activity, and most of them are right. That is, quite simply, why the drug war just doesn’t work, and it won’t ever work. It doesn’t work for pot, LSD, cocaine, or anything else, including opioids and heroin. (Also see this.)

Prohibition, however, delivers the drug trade into the hands of gangs and mobsters. The supply side of the business attracts individuals having few legitimate market opportunities, who happen to be concentrated in economically depressed neighborhoods. The drug trade’s illegality transforms it into a risky and violent enterprise, and efforts to enforce prohibition magnify those dangers and expose law enforcement to great risk as well. Then, there are the effects of mass incarceration on individuals and their home communities. The situation is self-reinforcing, adding to the instability of these struggling areas.

There is ample evidence that drug prohibition is a driver of crime and responsible for a large number of homicides in the U.S. A Chicago prosecutor was quoted by HuffPo in 2013 as saying that 80% of homicides in the city were gang-related, and therefore primarily drug-related. Economist Jeffrey Miron has linked drug prohibition to international differences in violent crime rates. Scott Sumner has this take on the drug war and crime rates, including a brief analysis of the drop in homicides (40%) after alcohol prohibition was repealed. In 1991, Milton Friedman stated that the repeal of drug laws would eliminate about 10,000 U.S. homicides every year, which at the time would have been about a 40% reduction. And here is Yale’s Dan Kahan on the subject of drug laws and homicide:

“The weight of the evidence pretty convincingly shows that drug-related homicides generated as a consequence of drug prohibition are tremendously high and account for much of the difference in the homicide rates in the U.S. and those in comparable liberal market societies.“

In my last post on the U.S. homicide rate, I drew on Britigne Shaffer’s On the Banks blog post entitled “Michael Owen Nails the Gun Debate“. As log as we have prohibition and a drug war, the U.S. homicide rate is likely to exceed most other industrialized countries:

“We have a system in place where the government subsidizes poverty in urban areas, imposes economic blight in those same areas through heavy taxes and regulations, renders the residents permanently unemployable via the ‘criminal justice’ (sic) system, and creates a lucrative black market in drugs by restricting supply (not to mention increasing demand as people are desperate to escape their circumstances by getting high), meaning the only game in town is often entering the drug trade. The drug trade is violent because those in it have no access to courts to settle disputes. Powerful industries lobby to keep the drug war going; the top spenders are law enforcement unions, the prison industry, big alcohol, tobacco, and pharma.“

The CATO Institute‘s Handbook for Policymakers, Issue #23, advocates the following: repeal of the Controlled Substances Act; allowing states to pursue their own initiatives without federal interference; complete repeal of mandatory minimum sentences; and termination of the Drug Enforcement Administration (DEA). These actions would allow the federal government to focus its resources on real threats, rather than fighting an unending war with an underworld empowered by those very laws, and with Americans who wish to exercise freedom over their use of drugs for medicinal or recreational use. From the CATO Handbook:

“Repeal of prohibition would take the astronomical profits out of the drug business and destroy the drug kingpins who terrorize parts of our cities. It would reduce crime even more dramatically than did the repeal of alcohol prohibition. Not only would there be less crime: reform would also free federal agents to concentrate on terrorism and espionage and would free local police agents to concentrate on robbery, burglary, and violent crime. … The war on drugs has lasted longer than Prohibition, longer than the Vietnam War. Prohibition has failed, again, and should be repealed, again.”

Despite the destructive effects of prohibition, a great many Americans—and politicians—base their opinions about drug laws on flawed moral reasoning that somehow it is more “wrong” or more “dangerous” to do drugs than to drink alcohol, itself a drug posing great danger to abusers, but a legal one. Responsible drug use, like responsible drinking, is a victimless act, or would be without the engagement of underworld suppliers. But it’s clear that President Donald Trump and Attorney General Jeff Sessions are committed to a continuation of the failed drug war, as are a majority of both Democrats and Republicans in Congress. The drug-related killings will continue, as will the ongoing damage to so many American families and communities. The refusal to end the drug war is a tragedy of many tragedies past and future.

Can Health Care Bill Get GOP Off the Schneid?

29 Thursday Jun 2017

Posted by in Health Insurance, Obamacare

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health insurer bailout

For those who are “woke” to Obamacare’s failures, the Senate GOP’s health insurance reform bill has plenty to hate and maybe some things to love. There are likely to be some changes in the bill before it goes to a vote, which now has been delayed until sometime after Congress’ July 4th recess. Known as the Better Care Reconciliation Act of 2017 (BCRA), the bill is another mixed bag of GOP health care reforms and non-reforms. It is the Senate Republicans’ effort to improve upon the bill passed by the House of Representatives in May. The non-reforms are tied to an inability to repeal all aspects of Obamacare (the Affordable Care Act, or ACA) within the context of budget reconciliation, a process which permits a simple majority for approval of changes linked in some way to the budget (the so-called Byrd rule). Yuval Levin offers an excellent discussion of the bill and the general motivations for the form it has taken:

“They are choosing to address discrete problems with Obamacare within the framework it created and to pursue some significant structural reforms to Medicaid beyond that, and they should want the merits of their proposal judged accordingly. Their premise is politically defensible — it is probably more so than my premise — and the proposal they have developed makes some sense in light of it.“

It’s necessary to get one thing out of the way at the outset: the CBO’s scoring of the Senate bill is flawed in a massive way, like the earlier score of the House bill. The estimate of lost coverage for 22 million individuals is based on the CBO’s errant predictions of Obamacare coverage levels. (See here and here, and see Avik Roy’s latest entry on this topic.) Does anyone believe that enrollment on the exchanges will decline by 15 million in 2018 due to the elimination of the individual mandate? That’s over 40% more than total enrollment in 2017, by the way. Even if we attribute the CBO’s prediction to the elimination of both the individual and employer mandates, it would be an incredible plunge, especially given the means-tested tax credits in the BCRA. Does anyone believe that coverage levels under Obamacare would increase by 18 – 19 million by 2026 (mostly on account of the individual mandate)? That is the baseline assumed by the CBO in its scoring of the BCRA, which is laughable. A more realistic estimate of lost coverage under the BCRA might be 2 to 3 million, but remember that many of those coverage losses would not be “forced” in any sense. Rather, they would be purposeful refusals to take coverage with the demise of the individual mandate. But they would tend to be the healthiest of the current, coerced enrollees.

A related point has to do with hysterical claims that the BCRA will “kill thousands of people”. Someone cooked-up this talking (screaming?) point to rally the ignorant left and perhaps frighten the ignorant right (including a few GOP Senators). As Ira Stoll explains, there are several reasons to dismiss these assertions, not least of which is its tradeoff-free conceit. More ugly detail on the basis of these claims can be found here.

Will the BCRA “gut” Medicaid, as Charles Schumer, Nancy Pelosi and other have claimed? Program spending would not decline by any means, only its growth rate. Enrollment would decline with tougher eligibility rules, but as noted above, tax credits more generous than the Medicaid savings (relative to Obamacare) would help replace lost Medicaid coverage with private insurance. Steve Chapman has contributed one of the most nitwitted commentaries on Medicaid reform that I have seen. Not only do critics consistently ignore the proposed tax credits for coverage at low incomes, but they never address the monumental waste in the program., something that would likely improve under the budgeting requirements and additional discretion given to states by the BCRA.

An even crazier scare story going around is that the Senate bill will cut Medicare benefits. That is not the case, though the bill repeals an Obamacare Medicare tax increase on the self-employed.

Getting back to the broader BCRA, here are some of the major provisions:

  • Medicaid reform to replace the budgetary disaster of federal matching with per capita caps or block grants, and state program control.
  • Means-tested tax credits for insurance purchases would extend to low-income individuals who might otherwise lose their expanded Medicaid eligibility. According to Levin, this group is heavily weighted toward the unmarried and childless.
  • Greater state authority over regulation of the individual insurance market. This is accomplished through the availability of state waivers from many Obamacare regulations, including essential health benefits.
  • Almost all Obamacare tax provisions would be repealed. One exception is the “Cadillac” tax on high-cost employer plans starting in 2026 (after a temporary hiatus). Many of these repeals would benefit individuals broadly as taxpayers, employees, business people, and patients.
  • Expanded allowable age rating to 5/1 from 3/1. This helps limit adverse selection by pricing more risk where it exists, and the means-tested credits would help offset higher premiums for older individuals with low incomes.
  • Provides about $130 billion in “stabilization” funds for insurers over a three-year period. This is an attempt to keep premiums down during a transition over which the GOP probably hopes to enact additional deregulatory measures. Is this a practical maneuver? Yes, but it also reflects a bit of “corporatism-when-it’s-convenient” hypocrisy.
  • Eliminates funding for Planned Parenthood. Presumably funding could be restored later were the organization to split off its abortion services into a financially distinct division, which the Hyde Amendment would seem to require.
  • Retains coverage for pre-existing conditions.
  • Elimination of the individual and employer mandates, including the tax penalty. However, individuals who go without coverage for two months would face a six-month waiting period before they could re-qualify for coverage.

Eliminating the mandates is great from a libertarian and an economic perspective. The coercion inherent in those requirements is bad enough. In practice, the individual mandate has proven less effective in encouraging enrollment than Obamacare’s architects had hoped, which makes the CBO’s conclusions all the more puzzling. The employer mandate gives firms an incentive to reduce hours and employment, so it has extremely undesirable labor-market implications.

Most criticism of the BCRA from the right has centered on its failure to fully repeal Obamacare insurance and health care regulations. The continuation of Obamacare community rating is a major shortcoming of the bill, as it distributes the financial risks of medical needs in ways that do not correspond to the actual distribution of health risks. The result is the very same adverse selection problem we have witnessed on the Obamacare exchanges. Unfortunately, this raises the specter that we’ll be stuck with some form of community rating in the long-term, along with employer-provided coverage and the ill-advised premium tax deductions, which tend to inflate premium levels.

Michael F. Cannon of the CATO Institute calls the BCRA an Obamacare rescue package. John C. Goodman is largely in agreement with Cannon, stating that Republicans have no real desire to repeal Obamacare. Peter Suderman at Reason has many of the same concerns. In addition to community rating, Cannan (and Senator Rand Paul) are unhappy that Medicaid spending continues to grow under the bill with a new program of subsidies (tax credits) to boot! They also condemn the so-called “stabilization” or “cost-sharing” subsidies that would be paid to insurers under the bill. While a broader range of plans would become available, there is little confidence that insurers will be able to  bring down premiums and/or deductibles substantially without the added subsidies.

Avik Roy has defended the Senate bill for its proposed reforms to Medicaid, replacement of Obama’s Medicaid expansion with tax credits for private coverage, and transitional tax credits to smooth jumps in premium levels as income rises from low levels. This is an improvement over the House bill. However, marginal tax rates would be high under the BCRA for individuals in the range of income over which the credits phase out, which is a legitimate “welfare trap” criticism.

David Harsanyi also believes the bill is a good start:

“If Republican leadership had told conservatives in 2013 that they could pass a bill that would eliminate the individual and employer mandates, phase out Obamacare’s Medicaid expansion, cut an array of taxes, and lay out the conditions for full repeal later, I imagine most would have said ‘Sign me up!’“

Naturally, most critics of Obamacare have strong misgivings about a bill that would leave major components of the ACA’s structure in place. That includes Obamacare’s regulation of health care delivery itself, not just health insurance coverage. The BCRA might incorporate signifiant changes before it goes to a vote, however. One can only hope! Rand Paul has suggested breaking the bill into two parts: repeal of the ACA and other spending provisions, though it’s not clear how a repeal bill would qualify under the Byrd rule. Either way, the GOP intends to follow-up with additional health care legislation and administrative changes. Were a bill enacted soon, there is some chance that additional legislation could garner limited bi-partisan support. Long-term stability of the health insurance and health care markets would be better-served by a stronger semblance of political equilibrium than we have seen in the years since Obama was elected.

 

 

The CBO’s Obamacare Fantasy Forecast

28 Tuesday Mar 2017

Posted by in Health Care, Obamacare

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The Congressional Budget Office (CBO) is still predicting strong future growth in the number of insured individuals under Obamacare, despite their past, drastic over-predictions for the exchange market and slim chances that the Affordable Care Act’s expansion of Medicaid will be adopted by additional states. Now that Republican leaders have backed away from an unpopular health care plan they’d hoped would pass the House and meet the Senate’s budget reconciliation rules, it will be interesting to see how the CBO’s predictions pan out. The “decremental” forecasts it made for the erstwhile American Health Care Act (AHCA) were based on its current Obamacare “baseline”. A figure cited often by critics of the GOP plan was that 24 million fewer individuals would be insured by 2026 than under the baseline.

It was fascinating to see many supporters of the AHCA accept this “forecast” uncritically. With the AHCA’s failure, however, we’ve been given an opportunity to witness the distortion in what would have been a CBO counterfactual. What a wonderful life! We’re stuck with Obamacare for the time being, but this glimpse into the CBO’s delusions will be one of several silver linings for me.

Again, the projected 24 million loss in the number of insured under the AHCA was based on an actual predicted loss of about 5 – 6 million and the absence of an Obamacare gain of 18 – 19 million. Those figures are from an excellent piece by Avik Roy in Forbes. I drew on that article extensively in my post on the AHCA prior to its demise. Here are some key points I raised then, which I’ve reworded slightly to put more emphasis on the Obamacare forecasts:

  1. The CBO has repeatedly erred by a large margin in its forecasts of Obamacare exchange enrollment, overestimating 2016 enrollment by over 100% as recently as 2014.
  2. The AHCA changes relative to Obamacare were taken from CBO’s 2016 forecast, which is likely to over-predict Obamacare enrollment on the exchanges by at least 7 million, according to Roy.
  3. The CBO also assumes that all states will opt to participate in expanded Medicaid under Obamacare going forward. That is highly unlikely, and Roy estimates its impact on the CBO’s forecast at about 3 million individuals.
  4. The CBO believes that the Obamacare individual mandate has encouraged millions to opt for insurance. Roy says that assumption accounts for as much as 9 million of total enrollment across the individual and employer markets, as well as Medicaid.

Thus, Roy believes the CBO’s estimate of the coverage loss of 24 million individuals under the AHCA was too high by about 19 million!

In truth, Obamacare will be watered down by regulatory and other changes instituted by the Trump Administration, which has said it will not enforce Obamacare’s individual mandate. Coverage under the “new” Obamacare will devolve quickly if the CBO is correct about the impact of the individual mandate.

The CBO’s job is to “score” proposed legislation relative to current law; traditionally, it made no attempt to account for dynamic effects that might arise from the changed incentives under a law. The results show it, and the Obamacare projections are no exception. In the case of Obamacare, however,  the CBO seems to have applied certain incentive effects selectively. The supporters of the AHCA might have helped their case by focusing on the flaws in the CBO’s baseline assumptions. We should keep that in mind in the future with respect to any future health care legislation, not to mention tax reform!

 

 

 

 

 

Administrative Cost Causers

20 Monday Feb 2017

Posted by in monopoly

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Certain enterprises seem plagued by declining productivity and increasing costs, or what is sometimes called the “cost disease”. This includes such areas as education, health care, and infrastructure development. Prompted by a fascinating post by Scott Alexander at Slate Star Codex, John Cochrane boils things down to administrative bloat, sometimes caused by regulation. He also identifies a lack of competition as a cause of the bloat. To that I would add institutional arrangements like third-party payments that create gaps between the scheduled prices established by payers and the user’s willingness to pay. Ryan Bourne at the CATO Institute also comments on Alexander’s post; he presents a framework for analysis but demurs from weighing-in on the causes because the U.S. lacks a proper index of public sector output. He mentions Cochrane’s post, but essentially ignores his contribution to the discussion, which I believe is essential to understanding the phenomenon described by Alexander.

The facts are: 1) costs in K – 12 education have tripled since 1970 (but not the student population), while student achievement has remained flat; as a consequence, productivity in education has declined by two-thirds! Alexander notes, “College is even worse.” 2) The cost of health care has increased by 400% since 1970. While longevity has increased and treatments for many ills have improved, we have not enjoyed a 400% improvement in health care delivery and outcomes, and other developed countries achieve the same outcomes at much lower cost; 3) the cost of new infrastructure has increased drastically in the U.S. Alexander cites the cost of the new subway extension in New York City ($2.2 billion per kilometer) at a cost of about 10 – 50 times that of equivalent projects in other parts of the world. These are just a few examples.

What explains these rampant cost increases? Economists are often tempted to attribute such phenomena to “Baumol’s disease“, which holds that sectors in which productivity is relatively static will experience increasing costs due to advances in productivity in other sectors. A classic example is an orchestra. In the act of playing a particular piece of music, an orchestra today has about the same productivity as an orchestra of 200 years ago (though technology can make musicians more productive in other ways). But as productivity grows for workers in the rest of the economy, their real wages will increase. Musicians, and potential future musicians, will then face a steeper tradeoff in their decision to proceed with musical careers. This tendency will increase their reservation wages as musicians. Moreover, consumers achieving more affluence from their work in other sectors — higher real wages — may demand more concerts, and some of those benefits will flow to members of the orchestra.

Have the orchestra’s costs increased without any corresponding increase in real productivity? Well, that argument isn’t quite cinched, since the real wages of the orchestra members and the real revenue derived from their productivity have both increased. Nevertheless, Alexander presents data showing that the real pay of public school teachers, hospital workers, and most physicians (excepting some specialists) has been stagnant, so at least those crucial labor inputs do not account for the increasing costs. While the pay of construction workers has undoubtedly increased, it cannot plausibly account for the cost increases in infrastructure development. But here is Alexander:

“I don’t have a similar graph for subway workers, but come on. The overall pictures is that health care and education costs have managed to increase by ten times without a single cent of the gains going to teachers, doctors, or nurses.”

So what might explain the “cost disease” plaguing these sectors? Alexander discusses, and dismisses, several possible theories, and finally settles on a very partial cause: regulation. From personal experience, I can attest to the bizarre commitment of large pools of talent to regulatory compliance. And there is validity to the argument that this bloat is related to legal risks, which organizations attempt to mitigate by creating layers of controls. Cochrane agrees that the real answer is sometimes related to regulation, but the explanation is much broader:

“The ratio of teachers to students hasn’t gone down a lot — but the ratio of administrators to students has shot up. Most large public school systems spend more than half their budget on administrators. Similarly, class sizes at most colleges and universities haven’t changed that much — but administrative staff have exploded. There are 2.5 people handling insurance claims for every doctor. Construction sites have always had a lot of people standing around for every one actually working the machine. But now for every person operating the machine there is an army of planners, regulators, lawyers, administrative staff, consultants and so on.”

Cochrane shines a light on perhaps the most important reason for administrative bloat: an absence of competition:

“These are all areas either run by the government or with large government involvement. …with not much competition. In turn, however, they are not by a long shot ‘natural monopolies’ or failure of some free market. The main effect of our regulatory and legal system is not so much to directly raise costs, as it is to lessen competition (that is often its purpose). The lack of competition leads to the cost disease.

Though textbooks teach that monopoly leads to profits, it doesn’t. ‘The best of all monopoly profits is a quiet life’ said Hicks. Everywhere we see businesses protected from competition, especially highly regulated businesses, we see the cost disease spreading. And it spreads largely by forcing companies to hire loads of useless people.“

The quote of Sir John Hicks is particularly informative. Protection from competition means that profits are less risky. The protected monopolist’s profits might be limited by social contract, but they are subject to less business risk. Hicks’ observation suggests that monopolists are likely to take a more langourous approach to cost control.

There is another characteristic shared by public education, health care and infrastructure: not only do those enterprises face minimal, if any, competition, but there is a disconnection between the users of those services and the payers. The cost of public education to taxpayers often bears no relationship to their use of the system. The cost of health care is often borne by third-party payers, rather than patients. The users of public infrastructure are seldom asked to cover its costs. So while monopoly is worse than competition, third-party payments free users of the responsibility to make decisions at the margin, short-circuiting the role of consumer incentives in controlling costs. This could manifest in increasing marginal costs, but it is very likely to enable or even require administrative bloat to take place.

Free of competition, and with customers who do not face tradeoffs between usage and price, providers will manage both their services and costs based on rules established by third-parties, and worse, by multiple layers of payers (as when government subsidizes insurers, when employers offer insurance coverage, and when government subsidizes those employers for doing so). Third-party payers are sometimes lacking in information or direct control (e.g., taxpayers). Payers often face incentives that do not promote efficient delivery of services for which they are obligated to pay. The standards by which costs are justified are seldom subjected to a true market test.

If Cochrane is right, that cost disease is driven by administrative bloat, which in turn is often a consequence of regulation, a lack of competition, and third-party payments, then several general solutions suggest themselves: first, regulate lightly; second, promote competition; third, rely on direct, non-subsidized payments by users whenever possible. In education, these guidelines mean giving public schools more autonomy and allowing parental choice. For health care, they mean an end to mandates and regulatory burdens on insurers, employers and providers, allowing consumer choice in selecting health coverage, ending prohibitions on competition in the insurance marketplace, and eliminating tax subsidies. In infrastructure, the guidelines support streamlining the review process for infrastructure projects, avoiding subsidies to over-invest, relying more heavily on user fees to pay for infrastructure, and expanding the role of private developers and operators of infrastructure facilities.

The Progressive Underclass

09 Friday Sep 2016

Posted by in Poverty, Welfare State

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The underclass has not fared well under government policies enacted in explicit efforts to improve its members’ well being. If there is any one point on which I agree with Donald Trump, it is his recent assertion that “progressive” policies have been disastrous for minorities. Indeed, there is evidence that many public programs have been abject failures, even in terms of achieving basic goals. Some programs have managed to improve the immediate lot of the impoverished, but they have done so without freeing the beneficiaries of long-term dependency,  and perhaps have encouraged it. An underlying question is whether there is something endemic to these public initiatives that guarantees failure.

Arguments that public programs have such weaknesses are often based on the negative incentives they create, either for the intended beneficiaries (certain anti-poverty programs) or for employers who might otherwise work with them (absent minimum or “living” wages or regulatory obstacles). Then, of course, there are public services that are effectively monopolized (public schools) because they are “too important” to leave in the hands of private enterprise, with little recognition of the shoddy performance that is typical of institutions operating free of competitive pressure. And government action such as environmental policy often has a regressive impact, costing the poor a far greater share of income than the rich, and causing direct job losses in certain targeted industries.

A post from The Federalist Papers on “The Top 5 Ways Liberal Policies Hurt The Poor” is instructive. In addition to the welfare incentive trap, it highlights the failure of public schools to serve the educational needs of the poor, the minimum wage as a system of marginalization, urban gun control as a sacrifice of defenseless victims, and the extension of rights to illegal immigrants at the expense of U.S. citizens, especially low-skilled workers.

A fine essay by Kurt Williamsen entitled “Do Progressive Policies Hurt Black Americans?” focuses on three general areas of failure: public education, the workplace and welfare. He notes that certain educational innovations have met with success, yet are ridiculed by the progressive left because they promote competition.  He cites the dismal consequences for blacks of various labor and employment laws: “prevailing wage rates, the minimum wage, union bargaining power, occupational and business licensing laws, and affirmative action laws to comply with federal and state contracting requirements“. Even more astonishing is that the original motive for some of these policies, such as minimum wages and prevailing wage laws, was to keep unskilled blacks from competing with white union labor. They still work that way. Williamsen also discusses the fact that the welfare state has essentially left low-income blacks running in place, rather than lifting them out of dependency. Unfortunately, those programs have also inflicted large social costs, such as the disintegration of family in the black community:

“Welfare programs had an insidious effect on black culture — more so than white culture — because of the way they were designed. With dramatically more blacks than whites being in poverty and with less future prospects when the War on Poverty got started, young black women often had children out of wedlock, beginning a cycle of enduring poverty and welfare wherein they relied on welfare as a main source of income, as did their children. Welfare provided more money for young women with fatherless children, on average, than the same young women could have made if they were employed. If a woman became married, she would lose benefits, making it beneficial for her to either just hook up with men or cohabitate, rather than marry.“

Redistributionist policies have long been criticized for creating incentive problems among recipients of aid. Some of those problems have been corrected with the Earned Income Tax Credit, which operates as something of a negative income tax, and Temporary Assistance for Needy Families (TANF), which incorporates work requirements. However, as Vanessa Brown Colder at the CATO Institute points out, there is a need for further reforms to the many underperforming programs.

Like any large government program, redistribution also damages incentives for those who must pay the tab, generally those at higher income levels. High taxes ultimately discourage investment in capital and in new businesses that could improve the employment and income prospects of low-income segments. Here is Andrew Lundeen at The Tax Foundation:

“When fewer people are willing to invest, two things happen. First, the capital stock (i.e. the amount of computers, factories, equipment) shrinks over time, which makes workers less productive and decreases future wages.“

Redistributionists do their intended beneficiaries no favor by advocating for steeply progressive tax structures, which simply discourage investment in productive risk capital, impairing growth in labor income. This chart from Dan Mitchell shows a cross-country comparison of capital per worker and labor compensation. Not surprisingly, the relationship is quite strong. The lesson is that we should do everything we can to improve investment incentives. Punitive taxes on those who earn capital income is counterproductive.

Mitchell emphasizes a few other statist obstacles to empowering the disadvantaged here, including a brief discussion of how land-use regulations harm the poor. He quotes Leigh Franke of The Urban Institute:

“Restrictive land-use regulations, including zoning laws, are partially to blame for the stagnant growth… Land-use regulations may be intended to protect the environment or people’s health and safety, and even to enhance the supply of affordable housing, but in excess, they restrict housing supply, drive up home prices, and limit mobility. …More and more zoning restrictions meant less construction, fewer permits, and a restricted housing supply that drove up prices even further. …cities often have stringent zoning laws, a restricted housing supply, and high prices, making it nearly impossible for lower-income residents and newcomers, who would likely benefit most from the opportunities available, to find affordable housing.“

On the topics of local housing, labor laws, services, and regulatory burdens, Scott Beyer covers the maladies of that most progressive of cities, San Francisco. The city’s policies have helped create one of the nation’s most expensive housing markets  and have made the city’s distribution of income highly unequal. It is no coincidence that the politics of most of our declining cities are dominated by the progressive left.

Here is another fascinating example of negative unintended consequences arising from intervention on behalf of a disadvantaged group: so-called “Ban the Box” (BTB) initiatives. These laws prevent employers from inquiring about a job applicant’s  crime record, at least until late in the hiring process. Mitchell recently cited a study finding that BTB laws are associated with a reduction in employment opportunities for minorities. This disparate impact might be the result of more subtle screening by employers, demonstrating a reluctance to interview individuals belonging to groups with high crime rates. Apparently, employers are willing to give minorities a better chance when information on crime history is disclosed up-front.

Deleterious forms of intervention may vary from one disadvantaged group to another. For example, Native Americans have long been handicapped by federal control of their lands and their natural resources. Regulation of activity taking place on reservations is particularly burdensome, including a rule under which title to land must:

“… be passed in equal shares to multiple heirs. After several generations, these lands have become so fractionated that there are often hundreds of owners per parcel. Managing these fractionated lands is nearly impossible, and much of the land remains idle.“

Progressives often vouch for interventionism on the belief that thpse policies are ethically beyond question, such as climate change regulation. Of course, the science of whether anthropomorphic climate change is serious enough to warrant drastic and costly action is far from settled. The existence of high costs is deemed virtually irrelevant by proponents of activist environmental laws. Those costs fall heavily on the poor by raising the cost of energy-intensive necessities and by raising business costs, in turn diminishing employment opportunities. This is more pronounced from a global perspective than it is for the U.S., as emphasized in “Protect the poor – from climate change policies“, at the Watts Up With That? blog.

The world’s poor secure massive benefits from trade, but progressive policies often seek to inhibit trade based on misguided notions of “fairness” to workers in low-wage countries. And trade restrictions tend to benefit relatively high-wage workers by shielding them from competitive pressure. Brian Doherty in Reason talks about the nationalism of the Bernie Sanders brand, and how it undermines the poor. Donald Trump’s trade agenda has roughly the same implications. Protectionism should be rejected by the under-privileged, as it increases the prices they pay and ultimately reduces employment opportunities.

Certainly progressives always hope to assist the disadvantaged, but their policies have created a permanent dependent class. The simple lessons are these: working, producing and hiring must be rewarded at the margin, not penalized; interfering with wages and prices is counterproductive; all forms of regulation are costly; programs must be neutral in their impact on personal decisions; and property rights must be secure. Historically, economic freedom has lifted humanity from the grips of poverty. In virtually every instance, government micro-management has done the opposite. Unfortunately, it is difficult for progressives to overcome their reflexive tendency to “do something” about the poor by invoking the ever-klutzy power of the state.

Good Leaders Aren’t Trade Warriors

30 Wednesday Mar 2016

Posted by in Free Trade, Protectionism

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Protectionism

The protectionist foreign trade rhetoric issued by the major-party presidential candidates is intended to appeal to ignorant economic instincts. Donald Trump and Bernie Sanders come to mind most readily, but Ted Cruz and Hillary Clinton are jumping in with similar campaign positioning. The thrust of these populist, anti-trade appeals is that America is losing jobs to “unfair” foreign competition, an argument that distorts the very objective of trade: consumers take part in exchange in order to consume; they capture value from high quality, unique merchandise and competitive terms. Ultimately, producers engage in trade to gain the wherewithal to consume. Consumption is the real end-game.

It can be misleading to talk about “nations” engaging in trade with each other, despite the emphasis placed on trade agreements like NAFTA and TPP. In the first place, it is better to stress consumers and producers, rather than “nations”, because most foreign trade is private, cooperative activity, not national decision-making. But the candidates persist in characterizing trade as a “contest”. That misleading notion is what prompts governments to muck up the trade environment by imposing restrictions on the free flow of goods and services. Trade agreements have been heralded as great achievements, but they never approximate a regime of truly liberalized trade because the latter requires no formal agreement whatsoever, merely a hands-off approach by government. And trade agreements tend to entangle trade issues with other policy objectives, holding consumers hostage in the process.

We hear from opportunistic candidates that jobs are lost to trade with foreigners. But again, consumption, not “jobs” per se, is the real objective of economic activity. If domestic jobs are lost, it is generally because consumers judge the value produced inferior to what’s offered from abroad. American consumers should not be obliged to support inferior value, domestic market power unchecked by competition, monopoly prices and limited choices. Patriotic jingoism attempts to blind us from these economic imperatives.

The standard protectionist narrative is that foreign “nations” cheat on trade with the U.S. via currency manipulation, predatory pricing or “dumping”, “unfair” wages or other unfair labor practices. Do any of these objections to free trade hold water?

The “fairness” of foreign wages and labor practices is a matter of perspective. Wages cannot be considered unfair merely because they are low relative to U.S. wages. Wages paid to workers by foreign exporters tend to be consistent with the standard of living in those societies, and they are often some of the best income opportunities available there. This is economic dynamism that lifts masses from the grips of poverty. It’s absurd to caste it as “exploitation”.

Is it “unfair” to competitors in the U.S.? Not if they know how to compete and are allowed to do so. Unfortunately, government regulatory policies in the U.S. often present obstacles to the competitiveness of domestic producers. This is well-illustrated by Daniel J. Ikenson of The CATO Institute in “Crucifying Trade For The Sins Of Domestic Policy“. He emphasizes that trade promotes economic growth, but when it causes job losses for some workers, U.S. economic policies make it difficult for those workers to find new jobs.

“Incentivize businesses to hire people to train them in exchange for their commitment to work for the company for a period of time. Reform a corporate tax system that currently discourages repatriation of an estimated $2 trillion of profits parked in U.S. corporate coffers abroad, deterring domestic investment, which is needed for job creation. Curb excessive and superfluous regulations that raise the costs of establishing and operating businesses without any marginal improvements in social, safety, environmental, or health outcomes. Permanently eliminate imports duties on intermediate goods to reduce production costs and make U.S.-based businesses more globally competitive. Advocate the retirement of protectionist occupational licensing practices.“

So-called “dumping” by foreign producers, or selling below cost, is an unsustainable practice, by definition. Pricing below cost is difficult to prove, especially if local wages are low and raw inputs are plentiful. If dumping can be proven, retaliation might feel good but would punish American consumers. A foreign producer might be subsidized by its government as a matter of industrial policy and economic planning, an unhealthy policy to begin with, and possibly to facilitate a long-run market advantage in foreign trade. The U.S. itself is thick with subsidized industry, however, so arguing for retaliation on those grounds is more than a little hypocritical.

I rarely quote Paul Krugman, but when I do, it’s from work he’s done as an actual economist, not as an agenda-driven pundit. So we have the following Krugman quote courtesy of Don Boudreaux:

“I believe that if the rhetoric that portrays international trade as a struggle continues to dominate the discourse, then policy debate will in the end be dominated by men like [James] Goldsmith, who are willing to take that rhetoric to its logical conclusion. That is, trade will be treated as war, and the current system of relatively open world markets will disintegrate because nobody but a few professors believes in the ideology of free trade.

And that will be a shame, because for all their faults the professors are right. The conflict among nations that so many policy intellectuals imagines prevails is an illusion; but it is an illusion that can destroy the reality of mutual gains from trade.“

David Harsanyi asks how American consumers will like more restrictive trade policy when forced to pay more for smart phones, laptops, HDTVs, cars, food, and any number of other goods. The usual anti-trade narrative is that foreign producers have harmed the manufacturing sector disproportionately, but in another article, Ikenson lays bare the fallacy that U.S. manufacturing has been victimized by trade.

The consequences of trade restrictions are higher prices, reduced production and reduced consumption, an undesirable combination of outcomes. This means higher prices of imported goods as well as domestic goods, whose producers will face less competition by virtue of the trade barriers. With reduced availability of imported goods, economic theory predicts that domestic producers will not fully meet the frustrated demands. This is a classic response of producers with monopoly power: restraint of trade. The negative consequences are compounded when foreign governments impose retaliatory measures against the U.S., harming American exporters.

A further misgiving expressed by politicians regarding free trade is that America’s trade deficit implies greater indebtedness to the rest of the world. This argument has been made by a few leftist economists who misunderstand the nature of direct investment, and who tend to think erroneously of economic outcomes as zero-sum. It’s true that foreign producers who receive dollars in exchange for goods often invest those proceeds in U.S. assets. A fairly small share of that investment is in debt issued by U.S. governments and private companies. But a much larger share is invested in U.S. equities and real assets, which are not U.S. debts. As Don Boudreaux points out, the domestic sellers of those assets generally reinvest in other U.S. assets, so private U.S. ownership of global capital is not diminished by increased foreign investment in the U.S.

An interesting aspect of the trade debate is that the dollar’s role as a global reserve currency implies that the U.S. must run a chronic trade deficit. The rest of the world uses dollars to trade goods and assets, but to acquire dollars, foreigners must sell things to holders of dollars in the U.S. This keeps the foreign exchange value of the dollar elevated, which makes imports cheaper to Americans and U.S. exports more costly to foreigners. Those dollars are a form of U.S. debt, but it is debt for which we should feel flattered, as long as confidence in the dollar remains. A diminished role for the dollar in world trade would lead to a surplus of dollars, undermining its value and promoting inflation in the U.S. Let’s hope for a gradual transition to that world.

Finally, the presidential candidates allege that foreign currency manipulation is another reason for American job losses. One prominent example occurred last year when China allowed the renminbi to decline to more realistic levels on foreign exchange markets. Donald Trump called this an unfair trade tactic, but apparently the People’s Bank felt that it couldn’t support the renminbi without undermining economic growth. The earlier dollar peg also helped to keep Chinese inflation in check. Contrary to Trump’s assertions, if China stopped manipulating its currency altogether, the renminbi would go even lower!

Beyond the opportunistic political arguments, the point is that central banks (including the U.S. Federal Reserve) manage their currencies to achieve a variety of objectives, not merely to promote exports. That is not an endorsement of such policies. It is an objective fact. Anyone can argue that a foreign currency is “too low” if their objective is to demonize a country and it’s exports to the U.S., but the assertion may not be grounded in facts as markets assess them.

The arguments against open trade policies are generally specious, hypocritical or grounded in a mentality of victimhood. Vibrant producers who are free of government restrictions should welcome the expanded markets available to them abroad and should not seek redress against competition via government protection. Liberalized trade has engendered tremendous economic benefits over the years, while protectionist policies have only brought severe contractions. Let’s be free and trade freely!

 

Proof of Concept: School Choice vs. Failing Publics

09 Monday Nov 2015

Posted by in Education, School Choice

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School Vouchers2

The evidence that school choice is associated with better educational outcomes has been mounting. Given the poor performance of so many public schools, it is time to reject the “sanctity” of their monopoly privilege. The link above emphasizes the promise of choice as a reform for public schools in the U.S. (as do several other links below from the Show-Me Institute and elsewhere).

It is implausible to suggest that the opportunities afforded by choice could make things worse than public-school outcomes. Poorly-served students and families have too much to gain from broadening their educational options and they know it. A recent survey of African-American parents of school children found that more than 75% of the respondents were interested “in obtaining a voucher to cover the cost of private or parochial school tuition for [their] children“. A majority agreed that:

“… I should be able to enroll my child in the school I think will give my child the best educational opportunity. If my choice is a private or parochial school then I should be allowed to use the same tax dollars allotted to every child in public school to cover the cost of their tuition.“

Choice should not be viewed as a threat to the public school system, although that is a familiar narrative issued by school-choice opponents. In fact, it will create new opportunities for public schools to excel, taking advantage of the benefits of specialization that are well-known in most walks of life. Choice and competition will either reform or weed-out the worst-performing schools and will encourage a rationalization of the administrative bloat so characteristic of public institutions. That’s all to the good, but by weakening schools’ market power, choice will change the relationships between public schools and families. Apparently that is threatening to vested interests, which underscores the importance of reform.

The Netherlands has had a system of school vouchers in place for almost 100 years, and research indicates that it has been highly successful:

“Specifically, access to private schooling has helped Dutch students. A 2013 study reveal[ed] strong positive effects for students using the voucher program to attend private schools. The effects were anywhere between 0.2 and 0.3 standard deviations, which would move a student at the mean of the standard bell curve of student performance up 10 or so percentile points (from a 50 to a 60).

Given these large effects, it shouldn’t be surprising that in a system where two thirds of the schools are private, we see strong academic performance. What’s more, according to the National Center on Education Statistics, Dutch schools spend on average $1,500 less per student per year than American schools do.“

A recent study from the CATO Institute demonstrated the long-run impacts of school choice on several types of outcomes. Little wonder that choice is described as a “Moral and Financial Imperative” (video). School choice is also an option for providing better educations to students in rural areas, despite the worn-out argument that distances make it impossible. Under today’s archaic structure, course offerings at many rural schools are necessarily limited, but new technology and choice programs can allow those schools to specialize and give their local students broader access to educational resources.

Teacher’s unions have been consistent opponents of school choice. They view choice as a threat to their members’ job security and their own ability to negotiate favorable contract terms. Perhaps, but the goal of improving educational outcomes cannot be subjugated to the goals of union monopsonists. When it comes to education, the schools should focus on serving children and their parents, and parents in failing schools want the kind of solution choice can offer.

Several months ago, a post here on Sacred Cow Chips discussed an entertaining question posed by Don Boudreaux: What if supermarkets were like public schools? To quote Boudreaux directly:

“In the face of calls for supermarket choice, supermarket-workers unions would use their significant resources for lobbying—in favor of public-supermarkets’ monopoly power and against any suggestion that market forces are appropriate for delivering something as essential as groceries.“

Parental control is a critical change needed in our schools. Schools should never be placed in a position exceeding the authority of parents over their children, even if public funds are involved. Teachers and administrators of public schools must learn to treat parents like customers. The only way to assure that kind of responsiveness is to give parents a choice.