A Fiscal Real-Bills Doctrine? No Such Thing As Painless Inflation Tax

14 Tuesday Jun 2022

Posted by pnoetx in Fiscal policy, Inflation, Uncategorized

Tags

Biden Administration, Cronyism, Federal Debt, Fiscal Inflation, Fiscal policy, Friedrich Hayek, Hyperinflation, Inflation tax, Knowledge Problem, Modern Monetary Theory, Monetary policy, Money Printing, Nominal GDP Targeting, Pete Buttigieg, Real Bills Doctrine, Reichsbank, rent seeking, Ro Khanna

A remarkable proposal made recently by Representative Ro Khanna (D -CA) would have the Biden Administration impose price controls, which would be bad enough. Khanna also would like the federal government to cover the inflation losses incurred by Americans by having it directly purchase certain goods and services and resell them “cheap” to consumers. In fairness, Khanna says the government should attempt to take advantage of dips in prices for oil, food commodities, and perhaps other necessities, which of course would limit or reverse downward price changes. When asked about Khanna’s proposal, Pete Buttigieg, Joe Biden’s Transportation Secretary, replied that there were great ideas coming out of Congress and the Administration should consider them. Anyway, the idea is so bad that it deserves a more thorough examination.

Central Planners Have No Clothes

First, such a program would represent a massive expansion in the scope of government. It would also present ample opportunities for graft and cronyism, as federal dollars filter through the administrative layers necessary to manage the purchases and distribution of goods. Furthermore, price and quantity would then be shaded by a heavy political component, often taking precedence over real demand and cost considerations. And that’s beyond the crippling “knowledge problem” that plagues all efforts at central planning.

One of the most destructive aspects of allowing government to absorb a greater share of total spending is that government is not invested with the same budgetary discipline as private buyers. Take no comfort in the notion that the government might prove expert at timing these purchases to leverage price dips. Remember that government always spends “other people’s money”, whether it comes from tax proceeds, lenders, or the printing press (and hence future consumers, who have absolutely no agency in the matter). Hence, price incentives take on less urgency, while political incentives gain prominence. The loss of price sensitivity means that government expenditures are likely to inflate more readily than private expenditures. This is all the more critical at a time when inflation is becoming embedded in expectations and pricing decisions. Khanna thus proposes an inflation “solution” that puts less price-sensitive bureaucrats in charge of actual purchases. That’s a prescription for failure.

If anyone in Biden’s White House is seriously considering a program of this kind, and let’s hope they’re not, they should at least be aware that direct subsidies for the purchase of key goods would be far more efficient. It’s also possible to hedge the risk of future price increases on commodities markets, perhaps simply distributing hedging gains to consumers when they pay off. However, having the federal government participate as a major player in commodities options and futures is probably not on the table at this point … and I shudder to think of it, but it might be more efficient than Khanna’s vision.

A Fiscal Real Bills Doctrine

Khanna’s program would almost surely cause inflation to accelerate. Inflation itself a form of taxation imposed by profligate governments, though it’s an inefficient tax since it creates greater uncertainty. Higher prices deflate the real value of most government debt (borrowed from the public), assets fixed in nominal value, and incomes. Read on, but this program would have the government pay your inflation tax for you by inflating some more. Does this sound like a vicious circle?

Khanna’s concept of inflation-relief is a fiscal reimagining of a long-discredited monetary theory called the “Real Bills Doctrine”. According to this doctrine, rising prices and costs necessitate additional money creation so that businesses have the liquidity to pay the bills associated with ongoing productive efforts. The “real” part is a reference to the link between business expenses and actual production, despite the fact that those bills are expressed in nominal terms. The result of this policy is a cycle of ever-higher inflation, as ever-more money is printed. This was the policy utilized by the Reichsbank in Weimar Germany during its hyperinflation of 1922-23. It’s really quite astonishing that anyone ever thought such a policy was helpful!

In Khanna’s version of the doctrine, the government spends to relieve cost pressure faced by consumers, so the rationale has nothing to do with productive effort.

Financing and the Central Bank Response

It’s reasonable to ask how these outlays would be financed. In all likelihood, the U.S. Treasury would borrow the funds at interest rates now at 10-15 year highs, which have risen in part to compensate investors for higher inflation.

My bet is that Khanna imagines the Fed would simply “print” money (i.e., buy the new government debt floated by the Treasury to pay for the program). This is the prescription of so-called Modern Monetary Theory, whose adherents have either forgotten or have never learned that money growth and inflation is a costly and regressive form of taxation.

Most economists would say the response of the Federal Reserve to this fiscal stimulus would bear on whether it really ignites additional inflationary pressure. Of course, rather than borrowing, Congress could always vote to levy higher taxes on the public in order to pay the public’s inflation tax burden! But then what’s the point? Well, taxing at least has the virtue of not fueling still higher inflation, and the Fed would not have a role to play.

But if the government simply borrows instead, it adds to the already bloated supply of government debt held by the public. This borrowing is likely to put more upward pressure on interest rates, and the federal government’s mounting interest expense requires more financing. What then might the Fed do?

The Fed is an independent, quasi-government entity, so it would not have to accommodate the additional spending by printing money (buying the new Treasury debt). Either way, investors are increasingly skeptical that the growing debt burden will ever be reversed via future surpluses. The fiscal theory of the price level holds that something must reduce the real value of government debt (in order to satisfy the long-term fiscal budget constraint). That “something” is a higher price level. This position is not universally accepted, and some would contend that if the Fed simply set a nominal GDP growth target and stuck to it, accelerating inflation would not have to follow from Khanna’s policy. The same if the Fed could stick to a symmetric average inflation target, but they certainly haven’t been up to that task. Hoping the Fed would fully assert its independence in a fiscal hurricane is probably wishful thinking.

Conclusion

There are no choke points in the supply chain for bad ideas on the left wing of the Democratic Party, and they are dominating party centrists in terms of messaging. The answer, it seems, is always more government. High inflation is very costly, but the best policy is to rein it in, and that requires budgetary and monetary discipline. Attempts to make high inflation “painless” are misguided in the first instance because they short-circuit consumer price responses and substitution, which help restrain prices. Second, the presumption that an inflation tax can be “painless” is an invitation to fiscal debauchery. Third, expansive government brings out hoards of rent seekers instigating corruption and waste. Finally, mounting public debt is unlikely to be offset by future surpluses, and that is the ultimate admission of Modern Monetary Theory. A fiscal real bills doctrine would be an additional expression of this lunacy. To suggest otherwise is either sheer stupidity or an exercise in gaslighting. You can’t inflate away the pain of an inflation tax.

Health Insurance Profits Are Not the Problem

08 Thursday Jul 2021

Posted by pnoetx in Health Insurance, Profit Motive

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Capitalization, COBRA, Community Rating, Cronyism, Death Spiral, Economies of Scale, Health Insurance, Medical Loss Ratio, Monopsony, Obamacare, Premium Subsidies, Profit, Profit Motive, Single-Payer System

My dentist said, “Oh well, these days it’s really only about whether the insurance company makes a profit….” A giant appliance was in my mouth at the time, propping it open, so I couldn’t respond. But I made a mental note because it reminded me of the hypocrisy so common in how people regard the concept of profit. That’s especially true of the Left, and I happen to know that my dentist, whom I personally like very much, stands well to my left.

Profit Is Income

It’s worth pointing out that profit is merely compensation. My dentist collects revenue, often paid to him by insurers. If he runs an efficient practice, then he earns an income after paying staff, office rent, various suppliers, and for equipment, including interest on any debt outstanding. You wouldn’t be wrong to call that profit, and he does pretty well for himself, but somehow he thinks it’s different.

My dentist probably feels locked into an adversarial position with my insurer, and of course he is in the short run. He says his price is $750; the insurer says, “Sorry Charlie, you get $250”. So as far as he’s concerned, it’s a zero-sum game. Not so in the long run, however. He needs to partner with insurers to get and keep patients, so the exchange is mutually beneficial. And while he might do some picking and choosing among insurers, he’s essentially a price taker. His “price” of $750 is something of a fiction, as he’s clearly willing to do the work for the insurer’s reimbursement.

I think the key qualitative difference between my dentist’s income and that of any wage earner is that his income is always at risk. After all, profit is often regarded as a return to entrepreneurial risk-taking. As it happens, he’s taking a loss on my new crown because it cracked as soon as he put it in. Then, he had to start from scratch with new impressions, after painstakingly removing the cemented, cracked pieces with what felt like a tiny circular saw.

Middling Profitability

But what about those profit-hungry health insurers? In fact, they are not known for outrageously high profits, and their earnings are typically not valued as highly by the market as those of other industries, dollar for dollar. Competition helps restrain pricing and enhance performance, of course. And since the advent of Obamacare, profits have been subject to a loose “cap” (more on that below).

The profitability of health insurers improved in 2020, however, because so many tests and elective procedures were postponed or foregone due to the coronavirus pandemic. That also prompted the government to make more generous subsidies available to consumers to pay COBRA insurance premiums.

Profits Drive Efficiency

I’ll put aside concerns about the crony capitalism inherent in the health system-insurer-regulator nexus, at least for a moment. The profit motive is the fundamental driver of efficiency in the production of insurance contracts and pooling of risks, as well as efficient servicing and administration of those contracts. Absent the possibility of profit, these tasks would become mere bureaucratic functions with little regard for cost and resource allocation. Furthermore, managing risk requires a deep pool of capital to ensure the ability of the insurer to meet future claims. Reinvestment and growth of the enterprise also requires capital. That capital is always at risk and it is costly because its owners demand a return as fair compensation.

Poor Alternatives

Eliminating profit from the insurance function implies that resources must be put at risk without compensation. That’s one of the reasons why non-profit insurers, over the years, have tended to be thinly capitalized and unstable, or limited in their offerings to “health maintenance” benefits, like primary or preventative care, as opposed to insuring against catastrophic events. Capital grants to non-profits (private or governmental) usually come with strings attached, which can severely limit the effectiveness of the capital for meeting existing or future needs of the operation. Growth requires reinvestment, so a profit margin must be earned in order to grow with internal funds. Where non-profits are concerned, you can call the “margin” whatever you want, but it is functionally equivalent to a profit margin.

On the other hand, insurance provided by the public sector puts the taxpayer at risk, and the potential liability to taxpayer “capital” is never rewarded nor indemnified. But it is not free. Now, you might insist that we’d all benefit from government-sponsored health insurance because of the broader risk pool. The problem with that perspective is that it turns the pricing of risk into a political exercise. We’ve already seen the destructive effects of community rating. Younger, healthier, but budget-constrained individuals tend to opt out due to excessive premiums, leading to a systemic “death spiral” of the pool.

Administrative Costs

A puzzling contention is that private insurers drive up administrative costs, presumably when compared to a single-payer system. Obamacare regulations limit the so-called Medical Loss Ratio of a health plan. To simplify a bit, this requires rebates to customers if premiums exceed claims by a certain threshold, which varies across individual, small, and large group markets. This regulation obviously places a loose cap on profits. It is also arbitrary and probably has hampered competition in the individual market. And of course there have always been suspicions that the ratio can be “gamed”.

Nevertheless, under a single-payer system, it would be shocking if economies of scale were sufficient to reduce administrative costs to levels below those incurred by private insurers (especially if we exclude profit!). After all, scale is seldom a prescription for government efficiency, and that’s largely due to the absence of a profit motive and any semblance of competition! What administrative savings might be achieved by a monopsony public payer are likely to derive mainly from “one-size-fits-all” decision-making and product design, with little heed to consumer preferences and choice.

I’ll Take the Profit-Maker’s Coverage

There is plenty to criticize about the health insurance industry. In important ways, it has already succeeded in shifting risks to taxpayers with the help of its policy-making cronies. The insurers are further protected by a flow of government premium subsidies to the individual market; and the largest insurers have benefitted from Obamacare regulations, which encourages increased market power by large hospital networks, which are happy to negotiate charges that benefit themselves and insurers. All else equal, however, I’d rather have a few choices from profit-making health insurers than a single, community-rated choice from the government. I’d rather see risk priced correctly, with direct subsidies made available to individuals in high-risk segments unable to afford their premiums. And I’d rather see less government involvement in health care delivery and insurance. We’d all be better off, including my dentist!

TikTok Tax: The Heavy Wants a Cut

05 Wednesday Aug 2020

Posted by pnoetx in Industrial Policy, Regulation, Trump Administration

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AOC, Barack Obama, CCP, Chinese Communist Party, Coyote Blog, Cronyism, Donald Trump, Hong Kong, Larry Kudlow, Likee, Microsoft, Muslim Uighurs, Peter Navarro, Regulatory State, statism, Steve Bannon, Taiwan, TikTok, Varney & Co, Video Sharing, Warren Meyer

I have a certain ambivalence toward Donald Trump, and I could go on and on about why it’s so “complicated” for me. One thing for which I’ve credited the Trump Administration is its effort to “deconstruct the administrative state”, as Steve Bannon so aptly put it shortly after the 2016 election. Of course, the progress thus far hasn’t always lived up to my hopes, but the effort to deregulate continues. And after all, the regulatory state is deeply entrenched and difficult to uproot.

Then my eyes glazed over as Trump floated an idea so bad, an intervention so awful, that I can hardly gather it in! It has to do with TikTok, the Chinese video sharing service that has gained popularity worldwide. Crazy as this might sound, it’s not so much Trump’s threat to shut down TikTok’s U.S. operations. Like most libertarians, I’d find that appalling in and of itself, except for the legitimate data security issues at stake. The company’s ties to the Chinese Communist Party (CCP) are a national security concern and an ethical blot on the company, given the CCP’s brutal treatment of Muslim Uighurs, its roughshod treatment of Hong Kong, and its threats to Taiwan. In any case, at least Trump said he’s amenable to a sale of the company’s U.S. operations to a domestic firm. Several large tech firms have expressed strong interest, including Microsoft. So, while any government imposed shutdown or forced sale makes me squirm, it’s not my main issue here.

What really stunned me was to hear Trump say the U.S. Treasury must get a cut of the deal! This is “Hall-of-Fame” statism. Where in the hell does the U.S. government get a legitimate financial claim to the value of any private business that changes hands? Well, Trump seems to think the federal government is adding value as the heavy:

“But if you buy [TicTok], the United States, which is making it possible to buy, because without us they can’t do anything, should be compensated.”

Yes, the buyer would be the beneficiary of a shakedown, and the demand is another poke in the eye to the Chinese. Of course, it might well threaten the transaction, and I’m not even sure it’s in Trump’s interest politically. But that’s not even the worst of it: as Warren Meyer explains, it would be hard to think of a better way to weaponize financial regulation than having the Treasury at the bargaining table in private negotiations for corporate control:

“Already there are too many regulatory hurdles to doing about anything, and Trump wants agencies to use regulatory approvals to hold up corporations for payments. And you can be sure this is a precedent the Democrats will be only too happy to latch onto — want a pipeline built, where’s our vig? Who wants [this to be] the first Trump decision AOC comes out in support of? The Republican Party sure has come a long way in my lifetime.”

The Left would certainly love to exercise this kind of coercion as a revenue source, as a cudgel of industrial policy to wield against disfavored firms and industries, and as a way to favor cronies. It’s a ready extension of Barack Obama’s deranged “You-didn’t-build-that” theme.

Is this one of trade advisor Peter Navarro‘s brainstorms? I was relieved to see Trump economic advisor Larry Kudlow cast some doubt on whether the government would follow through on Trump’s idea:

“‘I don’t know if that’s a key stipulation. …. A lot of options here,’ Kudlow told ‘Varney & Co.’ on Tuesday. ‘Not sure it’s a specific concept that will be followed through.’“

I think Trump would really like to kill TikTok. Maybe his grudge is driven in part by the presumptive role that TikTok played in his under-attended Tulsa rally. But there are domestic competitors to TikTok, so consumers will have alternatives. The most popular of those seems to be another Chinese app called Likee. In any case, downloads of other video sharing apps have spiked over the past few weeks. If Trump’s real aim is simply to shut down TikTok in the U.S., I’d almost rather see him do that than start making a practice of horse trading with cronies over shares of corporate booty.

Another Flop at the Impeachment Playhouse

04 Friday Oct 2019

Posted by pnoetx in Impeachment

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Adam Schiff, Australia, China, Cronyism, Donald Trump, FISA Abuse, House Intelligence Committee, Hunter Biden, Impeachment, Inspector General, Joe Biden, Michael Horowitz, Nancy Pelosi, Obama administration, Presidential Powers, Protectionism, Quid Pro Quo, Russia Investigation, Ukraine, Volodymyr Zelenskiy, Whistleblower

Listen, President Trump drives me crazy. His policy instincts often strike me as dangerous: trade protectionist, inflationist, and cronyist. I’m still suspicious that he might play ball with statists left and right on critical issues, when and if he perceives a political advantage in doing so. And Trump is hopelessly inarticulate and belligerent. Nevertheless, I will almost certainly vote for him in 2020 for several reasons, not least because the feasible alternatives are completely unacceptable. That view is reinforced by the behavior of the Democrat party in their effort to fabricate “high crimes and misdemeanors” on Trump’s part. That effort is not just dishonest, it is foolish, and they have a lot to lose. Their machinations are likely to blow up in their faces.

For one thing, the Democrats don’t seem to have much of a case. This time they are focused on a May 2019 phone conversation that took place between Trump and the recently-elected Ukrainian President Volodymyr Zelenskiy. The Democrats contend that Trump held up military aid in order to pressure Zelenskiy to investigate the Biden family’s activities in the Ukraine, a charge flatly denied by Zelenskiy. In fact, at the time of the call, the Ukrainians has no idea that military aid had been suspended, a fact first reported by The New York Times.

The Trump Administration released a transcript of the Zelenskiy call, which offers no evidence that a quid pro quo was offered by Trump. Even the text messages released this morning fail to support the claim. Joe Biden’s name came up during the call in connection with potential interference by the Ukraine in the 2016 U.S. presidential campaign. That’s reasonable in light of the events reported to have taken place, and it is certainly within the scope of presidential powers, as were Trump’s efforts to discuss election interference with Australia, the U.K., and other countries.

If you don’t know it already, a successful impeachment in the House of Representatives will not remove Trump from office. It will constitute a referral of charges to the Senate, which is controlled by Republicans, and a conviction requires a two-thirds majority. Ain’t gonna happen.

In the meantime, there really is no formal “impeachment” underway, despite what you think you’ve heard. This is a “proceeding” that House Speaker Nancy Pelosi really had no authority to initiate, and there is no set of rules or procedures guiding the spectacle. An impeachment investigation requires a House vote, but Democrats voted to table a resolution calling for such a vote because they really don’t want one, not yet anyway. Why? Because it would force them to go on record before they’re quite sure they want to, but more importantly it would demand due process for the accused. A House vote for an impeachment investigation would give House Republicans subpoena powers, something Democrats don’t want to take a chance on.

Again, the whole effort by the Democrats will ultimately be futile, and the trial proceedings in the Senate might be very ugly for them as well. It is likely to shed light on several matters that offer unflattering context for the impeachment effort and might well lead to criminal charges against prominent Democrats and their operatives:

Did members of the Obama Administration, the DNC, and Hillary Clinton’s campaign work with the Ukrainian government to undermine the Trump’s candidacy, hatching the Russian collusion narrative in the process? Politico said so in 2017.
Did the Biden family trade on Joe Biden’s position to attract capital from large investors for a venture in the Ukraine?
What was exchanged in order for Joe Biden’s son Hunter to land a $50,000/month job with a Ukrainian gas company?
Did Joe Biden use the authority of his office to strong-arm the Ukrainians into dropping the prosecution of the company that employed his son? “Son of a B“, Joe said, I threatened to walk away and they dropped the investigation. Son of a Biden?
Members of Congress sent a letter to the Ukrainian government in May of 2018 that threatened reductions in aid without Ukrainian cooperation with the Mueller investigation into the Trump campaign.
A member of the Obama Administration is known to have approached the Ukrainian Embassy in Washington in 2016 to solicit the Ukraine’s participation in a scheme to interfere with the U.S. election.
The Intelligence Community Inspector General’s report stated that the “whistleblower” or operative had a political bias. Well, might that have been a motive in the case?
Who authorized the change in requirements for whistleblower referrals from first-hand information to second-hand information, or hearsay? And when? Despite denials from left-wing fact-checkers, the Intelligence Community Inspector General’s narrative here doesn’t quite hang together. They gave the operative the wrong form? It’s been claimed that the operative provided first-hand information after all, but where is it?
Did members of Congress know about the operative’s complaint before it was formally referred to Congress? Apparently Adam Schiff, Chairman of the House Intelligence Committee, knew before the complaint was drafted, and he lied about it. Was there collaboration with the operative?
What are Adam Schiff’s connections in the Ukraine? Let’s find out!

These are all troubling questions that should be investigated. We may or may not get to the bottom of it before the impeachment vote in the House, if it ever occurs. Senate Republicans will undoubtedly be interested in pursuing many of these areas of inquiry, and Joe Biden will not come out of this unscathed. There is likely considerable evidence to support claims that he used political influence to gain his son Hunter favor in the Ukraine and China.

This month, DOJ Inspector General Michael Horowitz is expected to release his report on the origins and conduct of the Russia investigation into Trump’s 2016 presidential campaign. including potential corruption of the FISA process. His report will reflect the findings of two U.S. attorneys conducting separate inquiries into various aspects of the matter. These reports are a potential disaster for Democrats. Perhaps the distraction of impeachment theatre seems desirable to them, but the longer they continue the fruitless effort to “get Trump”, which began well before he was elected, the more incompetent they look. They don’t seem to have noticed that the whole spectacle is strengthening Trump’s base of support.

Which brings me back to Trump’s belligerence, which I briefly decried above. And it’s true, I often wince, but then I often laugh out loud as well. His political opponents and the media are constantly aghast at his every unapologetic response to their attacks. I will readily admit that it’s deeply satisfying to witness him hurling the crap right back at them, right on the schnoz. In the case of the impeachment drama, his base of support and many others in the middle know the Dems richly deserve it.

The Bad News Industrial Complex

20 Friday Apr 2018

Posted by pnoetx in Big Government, Corruption, Risk Management

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Beepocalypse, Cronyism, Matt Ridley, NASA, News Media, Oxfam, Precautionary Principle, rent-seeking behavior, Risk Aversion, Risk Mitigation, The Lancet

Matt Ridley had an interesting piece on his blog last month entitled “Bad News Is Sudden, Good News Is Gradual“. It’s about the timing of news, as stated, and it’s about our bias toward bad news more generally. There is no question that bad news tends to be more dramatic than good news. But with steadily increasingly lifespans, growing prosperity, and world poverty at an all-time low, surely good news must come as much or more frequently than bad. But good news can be inconvenient to certain narratives. It is therefore often ignored, and some other purported disaster is found as a substitute:

“Poverty and hunger are the business Oxfam is in, but has it shouted the global poverty statistics from the rooftops? Hardly. It has switched its focus to inequality. When The Lancet published a study in 2010 showing global maternal mortality falling, advocates for women’s health tried to pressure it into delaying publication ‘fearing that good news would detract from the urgency of their cause’, The New York Times reported. The announcement by Nasa in 2016 that plant life is covering more and more of the planet as a result of carbon dioxide emissions was handled like radioactivity by most environmental reporters.“

Tales of bad outcomes can be alluring, especially if they haven’t happened yet. In fact, bad things might even happen gradually, but dark visions of a world beyond the horizon impart a spooky sense of immediacy, and indeed, urgency. Ridley notes the tendency of people to regard pessimists as “wise”, while optimists are viewed as Pollyannas. And he recognizes that risk aversion plays an important role in this psychology. That brings me to the point I found most interesting in Ridley’s piece: the many vested interests in disasters, and disasters foretold.

Risk management is big business in an affluent society. There is a lot to lose, and a squeamish populace is easily cowed by good scare stories. The risk management and disaster-prevention narrative can be wrapped around any number of unlikely or exaggerated threats, serving the interests of the administrative state and private rent-seekers. One particular tool that has been most useful to this alliance is the precautionary principle. It is invoked to discourage or regulate activities presumed to pose risks to the public or to the environment. But there are three dimensions to the application of the precautionary principle: it provides a rationale for public funding of research into the risk-du-jour, for funding projects designed to mitigate its consequences, and for subsidizing development of alternative technologies that might help avoid or reduce the severity of the risk, often at great expense. The exaggeration of risk serves to legitimize these high costs. Of course, the entire enterprise would be impossible without the machinery of the state, in all its venality. Where money flows, graft is sure to follow.

Well-publicized disaster scenarios are helpful to statists in other ways. Risk, its causes, and its consequences are not distributed evenly across regions and populations. A risk thought to be anthropomorphic in nature implies that wealthier and more productive communities and nations must shoulder the bulk of the global costs of mitigation. Thus, the risk-management ethic requires redistribution. Furthermore, wealthier regions are better situated to insulate themselves locally against many risks. Impoverished areas, on the other hand, must be assisted. Finally, an incredible irony of our preoccupation with disaster scenarios is the simultaneous effort to subsidize those deemed most vulnerable even while executing other policies that harm them.

Media organizations and their newspeople obviously benefit greatly from the subtle sensationalism of creeping disaster. As Ridley noted, the gradualism of progress is no match for a scare story on the nightly news. There is real money at stake here, but the media is driven not only by economic incentives. In fact, the dominant leftist ideology in media organizations means that they are more than happy to spread alarm as part of a crusade for state solutions to presumed risks. There are even well-meaning users of social media who jump at the chance to signal their virtue by reposting memes and reports that are couched not merely in terms of risks, but as dire future realities.

Mitigating social risks is a legitimate function of government. Unfortunately, identifying and exaggerating risks, and suppressing contradictory evidence, is in the personal interest of politicians, bureaucrats, crony capitalists, and many members of the media. Everything seems to demand government intervention. Carbon concentration, global warming and sea level changes are glaring examples of exaggerated risks. As Ridley says,

“The supreme case of unfalsifiable pessimism is climate change. It has the advantage of decades of doom until the jury returns. People who think the science suggests it will not be as bad as all that, or that humanity is likely to mitigate or adapt to it in time, get less airtime and a lot more criticism than people who go beyond the science to exaggerate the potential risks. That lukewarmers have been proved right so far cuts no ice.”

Other examples include the “beepocalypse“, genetic modification, drug use, school shootings, and certain risks to national security. Ridley offers the consequences of Brexit as well. There, I’ve listed enough sacred cows to irritate just about everyone.

In many cases, the real crises have more to do with government activism than the original issue with which they were meant to reckon. Which brings me to a discomfiting vision of my own: having allowed the administrative state to metastasize across almost every social organ and every aspect of our lives, a huge risk to our future well-being is continuing erosion of personal and economic liberties and our ability to prosper as a society. Here’s Ridley’s close:

“Activists sometimes justify the focus on the worst-case scenario as a means of raising consciousness. But while the public may be susceptible to bad news they are not stupid, and boys who cry ‘wolf!’ are eventually ignored. As the journalist John Horgan recently argued in Scientific American: ‘These days, despair is a bigger problem than optimism.'”

The Master Negotiator: I’ll Beat Myself Till You Accept My Terms!

07 Wednesday Mar 2018

Posted by pnoetx in Free Trade, Tariffs, Trump Administration

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Balance of Trade, Chinese Trade Policy, Coyote Blog, Cronyism, Donald Trump, Dumping, NAFTA, National Security, Panda Blog, Peter Navarro, Pierre Lenieux, Protectionism, Stephen Mihm, Tariffs, Trade Retaliation, Trade War, Warren Meyer, Wilbur Ross

As if you needed more evidence that governments are incompetent, look no further than trade policy: public officials the world over are almost universally ignorant regarding the effects of international trade and trade imbalances. In this sense, the Trump Administration’s new tariffs on imported steel and aluminum are in keeping with the long history of public sector foibles on trade. This phenomenon stems from an unhealthy and obsessive focus on the well-being of producers without regard to the implications of policy for consumers. Warren Meyer of Coyote Blog offers an evaluation of Chinese trade policy, which he mischievously (I believe) claims was written by a Chinese blogger on a “sister blog” called “Panda Blog“. Despite Meyer’s playfulness, the post is instructive:

“Our Chinese government continues to pursue a policy of export promotion, patting itself on the back for its trade surplus in manufactured goods with the United States. The Chinese government does so through a number of avenues, … each and every one of these government interventions subsidizes US citizens and consumers at the expense of Chinese citizens and consumers. A low yuan makes Chinese products cheap for Americans but makes imports relatively dear for Chinese. So-called ‘dumping’ represents an even clearer direct subsidy of American consumers over their Chinese counterparts. And limiting foreign exchange re-investments to low-yield government bonds has acted as a direct subsidy of American taxpayers and the American government, saddling China with extraordinarily low yields on our nearly $1 trillion in foreign exchange. Every single step China takes to promote exports is in effect a subsidy of American consumers by Chinese citizens.“

The very idea of a trade deficit is often used to intimate a threat to a nation’s economic health. Conversely, a trade surplus is used to suggest that a nation is achieving great economic success. Both contentions are nonsense. Here is more from “Panda Blog“:

“We at Panda Blog believe it is insane for our Chinese government to continue to chase the chimera of ever-growing foreign exchange and trade surpluses. These achieved nothing lasting for Japan and they will achieve nothing for China. In fact, the only thing that amazes us more than China’s subsidize-Americans strategy is that the Americans seem to complain about it so much. They complain about their trade deficits, which are nothing more than a reflection of their incredible wealth. … They complain about China buying their government bonds, which does nothing more than reduce the costs of their Congress’s insane deficit spending. They even complain about dumping, which is nothing more than a direct subsidy by China of lower prices for American consumers.

And, incredibly, the Americans complain that it is they that run a security risk with their current trade deficit with China! This claim is so crazy, we at Panda Blog have come to the conclusion that it must be the result of a misdirection campaign by CIA-controlled American media. After all, the fact that China exports more to the US than the US does to China means that by definition, more of China’s economic production is dependent on the well-being of the American economy than vice-versa.“

By the way, those “quotes” from “Panda Blog” appeared on Coyote Blog 12 years ago!

All nations tend to play these trade games to one extent or another. But protectionist actions always harm a nation’s consumers more than they help producers, a proposition that is easy to demonstrate using a simple supply and demand diagram. While the class of consumers is broader than the class of producers, ultimately “producer” and “consumer” are different roles played by the same individuals. So protectionism is always harmful to a nation, on balance. Furthermore, retaliation against another nation for its dim-witted trade barriers also harms the retaliating nation’s consumers more than it helps its producers, and that’s true regardless of whether retaliation begets reciprocal actions.

Of course, producers are generally in a better position than consumers to grease the political skids in their favor. In a separate post, Meyer notes that protectionist trade policies are rooted in cronyism. The costs to society are very real, but they tend to be diffuse and therefore less obvious to most consumers.

“A lot of the media seems to believe the biggest reason they are bad is that they will incite retaliatory tariffs from other countries, which they almost certainly will. But even if no one retaliated, even if the tariffs were purely unilateral, they would still be bad. In case after case, they are justified as increasing the welfare of a certain number of workers in targeted industries, but they hurt the welfare of perhaps 100x more people who consume or work for companies that consume the targeted products. Prices will rise for everyone and choices will be narrowed.“

A couple of points deserve emphasis in relation to my last post on Trump’s tariff action:

In terms of jobs, the tariffs announced by President Trump present a very poor risk-reward tradeoff (WSJ article is gated):

“The policy point is that Mr. Trump’s tariffs are trying to revive a world of steel production that no longer exists. He is taxing steel-consuming industries that employ 6.5 million and have the potential to grow more jobs to help a declining industry that employs only 140,000.“

Stephen Mihm discusses ways in which the U.S. steel industry squandered its superiority in the post-World War II era. Much of Mihm’s article is devoted to the industry’s failure to upgrade to new production technologies. Interestingly, however, it fails to mention the damaging role played by unions in the process. “Dumping” had very little to do with it.
Finally, Pierre Lemieux takes a closer look at the national security argument for trade barriers. He concludes that it is fallacious. Of course, it is an excuse for cronyism. Protectionism harms the competitiveness of the protected industries, which actually undermines national security. And protectionism is usually unnecessary on close examination. In the case of steel, for example, national defense and homeland security use only about 3% of American steel production. Beyond that simple fact, the argument is dangerously open-ended. Almost anything can be represented as critical to national security: steel, food, clothing, and many other categories. Even human resources.

Today, Trump announced that Canada and Mexico will be exempt from the new tariffs while a renegotiation of the North American Free Trade Agreement (NAFTA) is underway. That’s better, but this carve-out exempts only 25% of U.S. steel imports. Perhaps Australia will be granted an exemption as well, but additional carve-outs will prompt further increases in tariffs on non-exempt imports. Trump also said that U.S. flexibility in applying the new tariffs to allies will depend on their commitments for military spending!

Thus, rather than maintaining the pretense that trade relationships are about economics, the administration has conceded that the tariffs and the exemption process will be transparently political, never a prescription for efficient resource allocation. Moreover, U.S. trading partners are likely to be reluctant to test the politics of modifying their own trade manipulations at home. Indeed, the politics may dictate retaliation, rather than concessions. In any case, the governments of our trading partners are as clueless on trade as Trump, his Commerce Secretary Wilbur Ross, and his economic advisor Peter Navarro, or they would never intervene in private trade decisions to begin with.

Good Profits and Bad Profits

18 Thursday May 2017

Posted by pnoetx in Health Care, Profit Motive

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ACA, Affordable Care Act, Big government, Corporatism, Cronyism, Economic Rents, Health Insurance, Opportunity cost, Profit Motive, Regulatory Capture, Reinsurance, rent seeking, Risk corridors, Supra-Normal Profit

Toles-on-Regulatory-Capture

There are two faces of profit. It’s always the fashion on the left to denigrate profits and the profit motive generally, as if it serves no positive social function. This stems partly from a failure to examine the circumstances under which profits are earned: is it through competitive performance, innovation, hard-won customer loyalty, and the skill or even luck to spot an underpriced asset? Such a “good” profit might even exceed what economists call a “normal profit”, or one that just covers the opportunity cost of the owners’ capital. On the other hand, profit can be derived from what economists call “rent seeking”. That’s the dark side, but the unrecognized spirit of rent seeking seems to lurk within many discussions, as if the word profit was exclusively descriptive of evil. The “rent” in rent seeking derives from “economic rent”, which traditionally meant profit in excess of opportunity cost, or a “supra-normal” profit. But it’s impossible to know exactly how much of any given profit is extracted by rent seeking; a high profit in and of itself is not prima facie evidence of rent seeking, even though we might argue the social merits of a firm’s dominant market position.

Rent seeking takes many forms. Collusion between ostensible competitors is one, as is any predatory attempt to monopolize a market, but the term is most often associated with cronyism in government. For example, lobbying efforts might involve favors to individuals in hopes of swaying votes on regulatory matters or lucrative government contracts. Sometimes, a rent seeker wants lighter regulation. At others, a rent seeker might work the political system for more regulation in the knowledge that smaller competitors will be incapable of surviving the heavy compliance costs. Government administrators also have the authority to change fortunes with their rulings, and they are subject to the same temptations as elected officials. In fact, in the aggregate, administrative rule-making and even enforcement might outweigh prospective legislation as attractors of intense rent-seeking.

Rent seeking is big-time and it is small-time. It takes place at all levels of government, from attempts to influence zoning decisions, traffic patterns, contract awards, and even protection from law enforcement. When it’s big time, rent seeking is the very essence of what some call corporatism and more generally fascism: the enlistment of coercive government power for private gain. A pretty reliable rule is that where there’s government, there is rent-seeking behavior.

Otherwise, the profit motive serves a valuable and massive social function: resources are attracted to profitable uses because they signal the desires of potential buyers. In this way, profits assure that resources are drawn into the most-valued uses. The market interactions between new competitors, drawn by the prospect of profits, and willing buyers leads to a self-correction: supra-normal profits get competed away over time. In this way, the spontaneous actions of voluntary market participants lead to a great achievement: all mutually beneficial trades are exhausted. Profit makes this possible in the short-run and it assures that trades evolve optimally with changes in tastes, technology and resource availability. By comparison, government fares poorly when it attempts to plan outcomes in the short- or the long-run. Rent seeking is an attempt to influence and even encourage such planning, and the profits it enables impose costs on society.

Good and Bad Profits In Health Insurance

I’ve written a few posts about health insurance reform recently (see the left margin). Health care is scarce. If relying on government is the preferred alternative to private insurance, don’t count on better access to care: you won’t get it unless you’re connected. Profits earned by health insurance carriers are roundly condemned by the left. It is as if private capital utilized in arranging coverage and carrying the risk on pools of customers deserves zero compensation, that only public capital raised by coercive taxation is morally acceptable for this purpose. But aside from this obvious hogwash, is there a reason to question the insurers’ route to profitability based upon rent seeking?

The health insurers played a role in shaping the Affordable Care Act (ACA, i.e., Obamacare) and certainly had hoped to benefit from several of its provisions, even while sacrificing autonomy over product, price, coverage decisions, and payout ratios. The individual and employer mandates would force low-risk individuals to purchase extensive coverage, and essential benefits requirements would earn incremental margins. Sounds like a nice deal, but those policies were regarded by the ACA’s proponents as necessary for universal coverage, stabilizing risk, and promoting adequate coverage levels. There were other provisions, however, designed to safeguard the profitability of insurers. These included an industry risk adjustment mechanism, temporary reinsurance to help defray the cost of covering high-risk patients, and so-called risk corridors (also temporary).

As it turned out, the ACA was not a great bet for insurers, as their risk pools deteriorated more than many expected. With the expiration of the temporary protections in Obamacare, it became evident that offering policies on the exchanges would not be profitable without large premium hikes. A number of carriers have stopped offering policies on the exchanges.

It should be no surprise that health insurance profitability has been anything but impressive over the past three years. The average industry return on equity was just 5.6% during that time frame, and it was a slightly better 6.2% in 2016, about 60% of the market-wide average. It’s difficult to conclude that insurers benefitted greatly from rent seeking activity with regard to the ACA’s passage, but perhaps that activity had a sufficient influence on policy to stabilize what otherwise might have been disastrous performance.

The critics of insurance profits are primarily interested in scapegoating as a means to promote a single-payer health care system. While some are aware of the favors granted to the industry in the design of the ACA, most are oblivious to the actual results. Even worse, they wish to throw-out the good with the bad.

The left is almost universally ignorant of the social function served by the profit motive. Profits stimulate supply, competition and innovation in virtually every area of economic life. To complain about profits in general is to wish for a primitive existence. Unfortunately, the potential for government to change the rules of the market makes it a ripe target for rent-seeking, and it creates a fog through which few discern the good from the bad.

Clinton Corruption Remedy: Keep Her Out

07 Monday Nov 2016

Posted by pnoetx in Corruption, statism

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Broomstick One, Clinton Foundation, Constitutional Remedy, Cronyism, Department of Justice, Department of State, Deroy Murdock, DOJ, Donald Trump, FBI, Gary Johnson, Government Corruption, Hillary Clinton, Impeachent, Independent Women's Forum, Influence Buying, Jason Chaffetz, Jeffrey Epstein, Lisa Schiffren, Loretta Lynch, Money Laudering, Pay to Play, statism, Trey Gowdy, Wikileaks

Would I ever vote for Donald Trump? I’ve been critical of Trump’s positions on foreign trade, immigration policy and eminent domain. I think he’s an extremely risky candidate for any supporter of small government. But I’ve been much more critical of Hillary Clinton: she is a statist through and through, and she so often finds herself in close proximity to corruption and some other highly suspicious circumstances. I consider myself a libertarian, and I like Gary Johnson. Unfortunately, Johnson has disappointed me with his selection of Bill Weld as a running mate, his goofs on foreign policy and his often poor presentation of libertarian principles.

FBI Director James Comey has again concluded that there was no intent on Clinton’s part to violate national security with her private email server, but he also concluded that she was reckless in conducting sensitive government business, including the transmission of classified information, on that server. Unfortunately, Comey limited his investigation to the period during which she was Secretary of State. The server, however, was put in place before she was confirmed by Congress. The question of intent makes that time period relevant, but Comey ignored it. She broke the law concerning the handling of classified documents, there is no question about that. No less than five of Clinton’s aides took the Fifth Amendment to avoid prosecution. Evidently, Mr. Comey has been under pressure from a highly-politicized Justice Department. There are other investigations underway at the FBI and by Congress involving the Clintons, however.

The deluge of information via Wikileaks over the past month reflects horribly on the Clintons. I don’t care whether the leaks came from government sources, the Russians, or from other foreign actors. No one has challenged the authenticity of these leaks. Again, Hillary Clinton compromised national security by conducting her duties as Secretary of State on a private computer server. That’s what got her into the email mess. Now, we’ve learned that she gave her housekeeper access to her computer to print documents! At least five foreign intelligence services hacked into that server. Clinton also obstructed justice on the matter by destroying evidence and perjuring herself before Congress.

Wikileaks has shed additional light on the Clinton Foundation as well. The foundation functions as a money laundering scheme intended to disguise influence-buying as charitable giving, with the Clinton’s and their cronies as the real beneficiaries. Foreign governments, including several middle eastern powers, funneled money to the foundation while Hillary served as Secretary of State. Here’s Deroy Murdock on the Foundation:

“… its 2014 IRS filings show that it spent a whopping 5.76 percent of its funds on actual charitable activities — far below the 65 percent that the Better Business Bureau calls kosher. That paltry figure also mocks Hillary’s Las Vegas lie, uttered at the final presidential debate on October 19: ‘We at the Clinton Foundation spend 90 percent — 90 percent of all the money that is donated on behalf of programs of people around the world and in our own country.’ The Clinton Slush Fund . . . uh . . . Foundation seems to be mainly a travel and full-employment program for Hillary’s government in waiting. It’s also a bribe pump that sucks in money and spews out favors.“

The Clintons also have had strong ties to individuals with criminal histories, such as the notorious child predator Jeffrey Epstein. And Hillary Clinton’s reputation for contemptuous behavior toward others was so strong that State Department security personnel requested reassignment. It’s been reported that members of her Secret Service detail called her plane “Broomstick One“.

A Hillary Clinton victory in the president election will not end the investigations. Congressional leaders such as Jason Chaffetz and Trey Gowdy have vowed to press on aggressively, given that Clinton lied before their committees and to the American people about the existence of classified emails on her server. Impeachment by the House might occur, though Clinton’s offenses have occurred prior to her term in office, and the Senate would never attain the two-thirds majority necessary to convict.

It is possible that the FBI investigation into the Clinton Foundation will be damaging, but it is unlikely to bring an indictment. The DOJ under Clinton would be headed by Loretta Lynch or some other Hillary/Obama sycophant. There will be no DOJ indictment or special prosecutor as long as the Attorney General reports to the criminal herself. (The FBI cannot indict; it can only recommend indictment.) There would hardly be a real opportunity to render justice to Hillary at the federal level.

A local jurisdiction could bring an indictment for criminal activity. The Anthony Weiner laptop investigation by the NYPD could be troublesome for Clinton, depending on the extent to which any Clinton dealings with Jeffrey Epstein were recorded there.

There remains only one sure constitutional remedy for Hillary Clinton’s corruption: Tuesday’s election. Preventing her from taking office must be priority one. Hillary Clinton’s days of insider dealing would then be over, as would the politicized government created by Barack Obama, who was just recorded encouraging illegal aliens to vote! But Gary Johnson obviously won’t beat Clinton… the only real option is Donald Trump.

Yes, Trump is risky, and I’ll have plenty to criticize on my blog if he takes office. He is plainspoken but sometimes crude and offensive. Naturally, that “style” is especially offensive to the tender snowflakes who cling to identity politics, but I do not believe Trump is a racist. It’s true, I don’t know exactly what we’d get with Trump. I suspect he has some statist tendencies of his own, but I prefer that risk to the corruption and certain statism of Hillary Clinton.

So I must vote for Donald Trump. Putting Hillary Clinton in the White House would compromise our system of government. She is an accomplished grafter and cronyist, expert at leveraging her position of power for personal enrichment, and she is prone to taking retribution against enemies. The IRS, the DOJ and other agencies have already become partisan organizations under Obama. And as I mentioned earlier, Clinton is a statist who desires centralized power. That is always dangerous.

Read this excellent essay: “The Case Against Hillary Clinton“, by Lisa Schiffren of the Independent Women’s Forum.

Here is a page with a number of past posts about Hillary Clinton on Sacred Cow Chips.

Parks, Prisons and Profits

30 Friday Sep 2016

Posted by pnoetx in Government, Profit Motive

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Ann Althouse, Bernie Sanders, Coyote Blog, Cronyism, Hillary Clinton, incentives, Morality of Profit, Netflix, Occupancy Guarantees, Orange Is the New Black, Private Operators, Private Park Operations, Private Prisons, Profit Motive, Reason Foundation, Sasha Volokh, The Volokh Conspiracy, Warren Meyer

One of my favorite pastimes is tallying the economic and social death wishes espoused by leftists, populists and other statists. A frequent theme of their entreaties is the presumed ugliness of profits sought by private businesses. Their expressed distaste is usually couched in terms suggesting that profits are a certainty, which of course they are not. Profits are always at risk unless protected by government. The critics are sometimes focused on lines of business that involve public assets or a supposed public purpose, such as education. Two other examples of that nature recently came up in my news feed: privately-operated prisons and private management of public parks.

The complaints heard about these kinds of business operations are based on ill-founded notions about the function of profit: that it is appropriate for resources to earn rewards only in some endeavors and not others, regardless of the property invested and the risks assumed by the enterprise. Another fallacy is that somehow, as if by magic, the motives and competence of public employees are beyond question. In fact, the ineffective and sometimes perverse incentives faced by public institutions and employees tend to undermine effective performance. That’s the underlying reason why privatization of services is often in the public interest. The detractors of profit usually rely on anecdotal evidence of poor performance by private managers without any objective basis of comparison.

Warren Meyer at Coyote Blog discusses the common misconception held by many regarding the relative morality of profits and wages. His comments are in the context of the company he owns and manages, which operates public parks under contract with the US Forest Service (USFS) and other public agencies, collecting revenue via entry and camping fees. Meyer (and I) find it astonishing that the aversion to private park operations is so common:

“The most typical statement I hear from USFS employees that summarizes this opposition — and it is quite common to hear it — is that ‘It is wrong to make a profit on public lands.’ …. This general distaste for profit, which is seen as “dirty” in contrast to wages which are relatively ‘clean’ (at least up to some number beyond which they are dirty again), is not limited to the USFS or even to government agencies in general, but permeates much of the public.“

Meyer goes on to describe a conversation he had with a USFS District Ranger. I provide a few excerpts below:

“Me: If you think it’s wrong to make money on public lands, I assume you must volunteer, else you too would be making money on public lands.
Ranger: No, of course I get paid.
Me: Well, I know what I make for profit in your District, and I have a good guess what your salary probably is, and I can assure you that you make at least twice as much as me on these public lands.
Ranger: But that is totally different.
Me: How? … My profit is similar to your wage in that it is the way I get paid for my effort on this land — efforts that are generally entirely in harmony with yours as we are both trying to serve visitors and protect the natural resources here. But unlike your wage, my profit is also a return on the investment I have made. Every truck, uniform, and tool we use comes out of my profit, whereas you get all the tools you need paid for by your employer above and beyond your salary. Further, your salary is virtually guaranteed to you, short of some staggering malfeasance. Even if you do a bad job you likely would just get shunted to a less interesting staff position at the same salary, rather than fired. On the other hand if I do a bad job, or if one of my employees slips up, or even if some absolutely random occurrence entirely outside my control occurs (like, say, a flood that closes our operations) my profit can completely evaporate, or even turn into a loss. So like you, I get paid for my efforts here on public lands, but I have to take risk and make investments that aren’t required of you. So what about that makes my profit less honorable than your wage?
Ranger: Working on public lands should be a public service, not for profit
Me: Well, I think you are starting to make the argument again that you should be volunteering and not taking a salary. But leaving that aside, why is profit inconsistent with service to the public?”

Privatization is not inconsistent with service to the public except under one circumstance highlighted by Meyer in a postscript. The ranger might have asked:

“How do we know your profits are not just the rents from a corrupt, cronyist government contracting process?“

Of course, if that were true, it would not necessarily be worse than a park operated exclusively by a public agency with no incentive to operate efficiently. The key here is to have effective review of the contracting process and good performance incentives in place. Meyer notes that his company serves millions of visitors each year at high service levels for a cost that is low relative to government-operated parks, and the company receives excellent reviews. More power to him! Profits are not synonymous with graft. Unfortunately, the purely emotional “feeling” that profits are immoral or dishonorable is amplified by the public nature of park assets, and that idea won’t ever be purged from the populist mind.

Ann Althouse brought similar thoughts to mind in describing Hillary Clinton’s weakly-reasoned condemnation of privately-operated prisons. Here’s Hillary at the first presidential debate early this week, after expressing approval of the Obama Administration’s decision to phase out most privately-operated federal prisons:

“You shouldn’t have a profit motivation to fill prison cells with young Americans.“

You can almost hear Althouse, a law professor at the University of Wisconsin, laughing at the idea that operators of private correctional facilities have any ability “to fill prison cells”. That’s not how our justice system works, Hillary! Some argue that “occupancy guarantees” in private prison contracts give prosecutors an incentive to seek harsh sentences, but that is a tenuous argument, especially with prisons generally over-crowded as they are. And it isn’t as if private prisons are free of oversight. Althouse contends that Hillary Clinton’s position is a concession to the left made necessary by earlier outrage that the Clinton campaign had accepted contributions from the private prison industry, itself prompted by a Bernie Sanders’ attack on that point.

Reason Magazine commented on Sanders’ condemnation of private prisons last year, which then housed only about 12 percent of the federal prison population. Reason noted that closing private federal prisons would contribute to over-crowding at publicly-operated facilities. Sanders also proposed forcing state and local governments to close private prisons under their jurisdictions within two years. Not only would that action ignore objective measures of performance and cost, it would violate established contracts and constitute an outrageous overreach of federal authority.

The Administration’s decision to phase out private prisons was subjected to an even-handed critique by Sasha Volokh (younger brother of Eugene) in August. Volokh covers the evidence on costs and quality of private versus publicly-operated prisons. He finds that the DOJ memo announcing the decision to phase out private operators exaggerates cost and quality differences that favor government operations, and discounts evidence that favors private prisons. Reminiscent of Warren Meyer’s notes on privately-operated parks, Volokh stresses the importance of creating appropriate incentives for operators. Current quality incentives are weak, and he believes there is vast room for improvement:

“It might seem surprising, but private prisons have almost never been evaluated on their performance and compensated on that basis. …. In light of that, maybe it’s even surprising that private prisons have done as well as they have in the comparative studies. Be that as it may, the advent of performance-based contracting could open up possibilities for substantial quality improvements. This could work in the public sector too (bonus payments for public prison wardens?), but the private sector is probably better situated to take advantage of monetary incentives.“

The Reason Foundation published a report earlier this year entitled “Private Prisons: Quality Corrections at a Lower Cost“. The study reveals the leftist critique of private prisons to be a sham. Here are the two major takeaways:

“Private prisons save money-10 to 15 percent average savings on operations costs, based on fourteen independent cost comparison studies.

Private prisons provide at least the same quality services that government prisons do-based on six independent quality comparison studies, rates of American Correctional Association accreditation, recidivism comparison studies, contract terminations, and prisoner and correctional officer lawsuits.“

People often get their “facts” from questionable sources. As to privately-operated correctional facilities, I’ve heard critics state that people should watch the fictional Netflix serial “Orange Is the New Black” to gain a proper understanding of the horrors of private prisons. And many seem eager to accept that narrative without any knowledge of the facts. That’s probably because they have been taught that profits are “dirty”, that public purposes like the operations of parks and prisons are so pure of public purpose that private operators can have no legitimate role, and that government operation can be counted upon for quality and efficiency. Now doesn’t that sound oxymoronic?

Big-Time Regulatory Rewards

26 Tuesday Jul 2016

Posted by pnoetx in Big Government, Central Planning, Regulation

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Cronyism, Daniel Mitchell, Glenn Reynolds, Guy Rolnik, Harvard Business Review, Industrial Policy, James Bessen, Matt Ridley, Mercatus Center, Regdata, regressivity

Why does regulation of private industry so often inure to the benefit of the regulated at the expense of consumers? In the popular mind, at least, regulating powerful market players restrains “excessive” profits or ensures that their practices meet certain standards. More often than not, however, regulation empowers the strongest market players at the expense of the very competition that would otherwise restrain prices and provide innovative alternatives. The more complex the regulation, the more likely that will be the result. Smaller firms seldom have the wherewithal to deal with complicated regulatory compliance. Moreover, regulatory standards are promulgated by politicians, bureaucrats, and often the most powerful market players themselves. If ever a system was “rigged”, to quote a couple of well-known presidential candidates, it is the regulatory apparatus. Pro-regulation candidates might well have the voters’ best interests at heart, or maybe not, but the losers are usually consumers and the winners are usually the dominant firms in any regulated industry.

The extent to which our wanderings into the regulatory maze have rewarded crony capitalists — rent seekers — is bemoaned by Daniel Mitchell in “A Very Depressing Chart on Creeping Cronyism in the American Economy“. The chart shows that about 40% of the increase in U.S. corporate profits since 1970 was generated by rent-seeking efforts — not by activities that enhance productivity and output. The chart is taken from an article in the Harvard Business Review by James Bessen of Boston University called “Lobbyists Are Behind the Rise in Corporate Profits“. Here are a couple of choice quotes from the article:

“Lobbying and political campaign spending can result in favorable regulatory changes, and several studies find the returns to these investments can be quite large. For example, one study finds that for each dollar spent lobbying for a tax break, firms received returns in excess of $220. …regulations that impose costs might raise profits indirectly, since costs to incumbents are also entry barriers for prospective entrants. For example, one study found that pollution regulations served to reduce entry of new firms into some manufacturing industries.”

“This research supports the view that political rent seeking is responsible for a significant portion of the rise in profits [since 1970]. Firms influence the legislative and regulatory process and they engage in a wide range of activity to profit from regulatory changes, with significant success. …while political rent seeking is nothing new, the outsize effect of political rent seeking on profits and firm values is a recent development, largely occurring since 2000. Over the last 15 years, political campaign spending by firm PACs has increased more than thirtyfold and the Regdata index of regulation has increased by nearly 50% for public firms.“

A good explanation of Bessen’s findings is provided by Guy Rolnik, including an interview with Bessen. Law Professor Glenn Reynolds of the University of Tennessee put his finger on the same issue in an earlier article entitled “Why we still don’t have flying cars“. One can bicker about the relative merits of various regulations, but as Reynolds points out, the expansion of the administrative and regulatory state has led to a massive diversion of resources that is very much a detriment to the intended beneficiaries of regulation:

“… 1970 marks what scholars of administrative law (like me) call the ‘regulatory explosion.’ Although government expanded a lot during the New Deal under FDR, it wasn’t until 1970, under Richard Nixon, that we saw an explosion of new-type regulations that directly burdened people and progress: The Clean Air Act, the Clean Water Act, National Environmental Policy Act, the founding of Occupation Safety and Health Administration, the creation of the Environmental Protection Agency, etc. — all things that would have made the most hard-boiled New Dealer blanch.

Within a decade or so, Washington was transformed from a sleepy backwater (mocked by John F. Kennedy for its ‘Southern efficiency and Northern charm’) to a city full of fancy restaurants and expensive houses, a trend that has only continued in the decades since. The explosion of regulations led to an explosion of people to lobby the regulators, and lobbyists need nice restaurants and fancy houses.“

Matt Ridley hits on a related point in “Industrial Strategy Can Be Regressive“, meaning that government planning and industrial regulation have perverse effects on prices and economic growth that hit the poor the hardest. Ridley, who is British, discusses regressivity in the context of his country’s policy environment, but the lessons are general:

“The history of industrial strategies is littered with attempts to pick winners that ended up picking losers. Worse, it is government intervention, not laissez faire, that has done most to increase inequality and to entrench wealth and privilege. For example, the planning system restricts the supply of land for housebuilding, raising property prices to the enormous benefit of the haves (yes, that includes me) at the expense of the have-nots. …

Why are salaries so high in financial services? Because there are huge barriers to entry erected by government, which hands incumbent firms enormous quasi-monopoly advantages and thereby shelters them from upstart competition. Why are cancer treatments so expensive? Because governments give monopolies called patents to the big firms that invent them. Why are lawyers so rich? Because there is a government-licensed cartel restricting the supply of them.“

Ridley’s spirited article gives emphasis to the fact that the government cannot plan the economy any more than it can plan the way our tastes and preferences will evolve and respond to price incentives; it cannot plan production any more than it can anticipate changes in resource availability; it cannot dictate technologies wisely any more than it can predict the innumerable innovations brought forth by private initiative and market needs; it almost never can regulate any better than the market can regulate itself! But government is quite capable of distorting prices, imposing artificial rules, picking suboptimal technologies, consuming resources, and rewarding cronies. One should never underestimate the potential for regulation, and government generally, to screw things up!