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Posts Tagged ‘Public Policy’

Video of last week’s panel discussion of “Expanding Opportunity in Oklahoma,” sponsored by the Charles Koch Institute and the Oklahoma Council of Public Affairs, is now up.

Things got rather feisty among the three Oklahomans (two progressives and a conservative). I tried to play peacemaker on occasion.

P.S. I did not get any Koch money for participating in this panel, for those who are wondering.

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Which public policies make an economy better for business? One way to answer this question is to ask businesspeople. Two recent surveys ask businesspeople to rank the American states on their friendliness toward business.

Now, libertarians often remind us that friendliness toward business is not the same as friendliness toward markets. Indeed, libertarians believe that many of their favored policies, such as abolishing trade protection, corporate welfare, and regulations that privilege big business, will redound to the benefit of workers and small business owners. What’s so interesting about these two surveys is that they are of different types of business owners: CEOs of large companies and small businesspeople. The first survey was conducted by Chief Executive magazine and the second by thumbtack.com in partnership with the Kauffman Foundation. By relating respondents’ views about the friendliness of their states to those states’ actual policies, we can see where big and small businesses agree and disagree about which policies are most important for their success.

My first step was to draw out of these survey data those numbers that relate specifically to different states’ policy environments, as opposed to other aspects of the economic climate. From the CEO survey, therefore, I took the taxation/regulation score given for each state (higher is better). From the small business survey, I took the “Regulations” component grades. Unfortunately, the small business survey does not include raw scores for each state, so I simply quantified the grades as follows: A+ = 0, A = 1, A- = 2, and so on, up to F = 11. The small business survey only covers 45 states, but for these states, the correlation between CEO and small business scores was -0.76. Since higher is better in the CEO survey and lower is better in the small business survey, that high correlation indicates a surprising degree of agreement between large and small businesses about states’ friendliness toward their businesses.

Nevertheless, there may remain some important differences in which policies large and small businesses prioritize. To get a handle on this question, (more…)

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I have noted before that the contemporary GOP seemed to be AWOL in the war of ideas, citing John Boehner’s recent remarks in Cleveland as exhibit A. Now it appears that the GOP is attempting to shake its recent label as the “Party of No” by releasing a 20 page document entitled A Pledge to America (draft text here) presenting a host of reforms that a Republican controlled Congress would pursue (see a brief overview at Politico).

This certainly is an improvement over the overly general statements of the past. There are some interesting ideas here and I think the electorate is well served when parties provide a unified front and make commitments to relatively specific proposals.  I am concerned that the Pledge promises to reduce the deficit largely through caps on non-security related discretionary spending (everyone knows that the engine of growth is and will be entitlement spending). And on entitlement spending, the Pledge is overly vague:

Reform the Budget Process to Focus on Long-Term Challenges: We will make the decisions that are necessary to protect our entitlement programs for today’s seniors and future generations. That means requiring a full accounting of Social Security, Medicare, and Medicaid, setting benchmarks for these programs and reviewing then regularly and preventing the expansion of unfunded liabilities (p. 11).

I suppose in an electoral season, this is about the best that one can hope for. Anything more specific would give rise to a geriatric revolt.

There are a number of promised reforms in process, including allowing members of any party to offer amendments on any bill that would reduce spending.  Assuming that parties are procedural cartels that control access to the agenda (see Cox and McCubbins, Setting the Agenda) and given the recent history when the GOP as majority party used rules rather ruthlessly to control business in Congress (see Hacker and Pierson, Off Center), I can’t imagine that this promise will be realized.

There are a few nods to social conservatives (e.g., “We pledge to honor families, traditional marriage, life, and the private and faith-based organizations that form the core of our American values” in the preamble). But this document seems to be driven by fiscal conservatives with hopes of appealing to the Tea Party independents.

Undoubtedly, few will read the Pledge (it is far too convenient to listen to the talking heads spinning a document that they too have never read). But I recommend it to Pileus readers and look forward to any reactions.

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The headlines are ablaze with news about the new poverty statistics released by the Census  Bureau.  As Carol Morello notes in the lead to a front page story in today’s Washington Post

In the second year of a brutal recession, the ranks of the American poor soared to their highest level in half a century and millions more are barely avoiding falling below the poverty line, the Census Bureau reported Thursday.

About 44 million Americans – one in seven – lived last year in homes in which the income was below the poverty level, which is about $22,000 for a family of four. That is the largest number of people since the census began tracking poverty 51 years ago.

Is anyone surprised that a deep recession and slow recovery increases the prevalence of poverty? The reactions to the news were predictable. The Obama administration noted that things could be worse: “Because of the Recovery Act and many other programs providing tax relief and income support to a majority of working families – and especially those most in need – millions of Americans were kept out of poverty last year.” And Michael D. Tanner of the Cato Institute noted things are worse: “We’re spending more money fighting poverty than ever before, yet poverty is up. Clearly, we’re doing something wrong.”

Indeed…we are doing a lot wrong.

Obviously, there are many ways to frame the poverty statistics. One compelling story involves race. Another involves family structure. A third involves age. Let’s give consider each briefly, drawing on the Census Bureau report, Income, Poverty, and Health Insurance Coverage in the United States.

Race. Table B-1 provides some striking figures that should give anyone pause. Yes, the overall poverty rate for 2009 was 14.3 percent. But there was incredible variation by race.

  • White non-hispanic poverty rate: 9.4 percent
  • Asian poverty rate: 12.5 percent
  • Hispanic poverty rate: 25.3 percent
  • Black poverty rate: 25.8 percent

It is important to note that the poverty rate for blacks (and Hispanics) has always been a multiple of that for whites. In 2000, after a prolonged economic expansion, the rate fell to a historic low of 21.4 percent. In sharp contrast, the poverty rate for whites has been below 10 percent every year since 1973 except the 1982-84 period. Similarly, blacks and Hispanics have routinely faced double-digit unemployment rates whereas whites have lived largely in a full-employment economy.

We could also tell a story about family structure. We know that there has been a growth in the prevalence of female-headed households with no husband present. One does not have to channel Focus on the Family and present a moral critique.  Even if the gap between male and female salaries is falling (see the above report, page 11), one only needs to accept  that two incomes are better than one.

  • The 2009 poverty rate for “families with female householder, no husband present” was 32.5 percent, roughly 2.3 times as great as the overall poverty rate.
  • Even after the long expansion of the 1990s, the poverty rate for female-headed households was 28.5 percent (approximately twice the level that attracted headlines today)

Of course, the combination of race and family structure is particularly significant. In 2009, black, female-headed households had a poverty rate of 39.7 percent. Hispanic female-headed households had a poverty rate of 40.6 percent

Age. One might also develop a story about age cohorts.  The Census Bureau report (Table B-2) provides a striking picture of this success.  In 1959, the poverty rate for those over 65 was 35.2 percent. It fell steadily over the next several decades from 25.3 percent (1969) to 15.2 percent (1979) to 11.4 percent (1989) and 9.7 percent (1999), reaching a historic low of 8.9 percent in 2009.

In sharp contrast, consider the poverty rate for children. In 1959, the poverty rate for those under 18 was 27.3 percent. It fell significantly in the next decade to 14 percent (1969). Then it increased to 16.4 percent (1979) and 19.6 percent (1989), before declining somewhat to 17.1 percent (1999) and 20.7 percent in 2009.

As we know, our largest entitlement programs provide large transfers to the elderly, who effectively mobilize to secure benefits. These transfers have had a remarkable impact in reducing the poverty rates. The figures for children likely reflect a number of factors, including changes in family structure (see above). But there is evidence that for every dollar that the US government transfers per child, it transfers $8.12 per elderly citizen. Much as one might expect, these decisions carry significant consequences.

There are undoubtedly other stories to tell. For example, one might focus on the decline of manufacturing (as Pat Buchanan might note) and the lack of high-wage service-sector jobs for those with lower levels of educational attainment. We might focus on the failure of public education in the US, particularly as it serves African American and Hispanic communities. In the end, the poverty statistics reflect the complex interplay of a host of factors.

As Tanner notes: “Clearly, we are doing something wrong.”

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This week, House and Senate conferees are working out the details in what will likely be the most significant financial regulatory reform in some time. Should the new Consumer Financial Protection Bureau be housed in the Fed? Should the Volcker rule be universally applied? Should banks really be required to spin off their derivative activities? These are important issues and, in some cases, reform may be justified regardless of whether it actually addresses the causes of the financial collapse.

But what if the House and Senate have simply failed to understand the underlying problem? What if they have allowed politically-defined timetables to force premature closure, resulting in regulatory changes that will not have the intended impact?

A piece by Binyamin Appelbaum and Sewell Chan  published in the New York Times on May 2, entitled “Senate Financial Bill Misguided, Some Academics Say,” should have attracted more attention than it did.

The lead paragraph: “As Democrats close in on their goal of overhauling the nation’s financial regulations, several prominent experts say that the legislation does not even address the right problems, leaving the financial system vulnerable to another major crisis.” The piece continues: “A diverse group of critics… say the legislation focuses on the precipitators of the recent crisis, like abusive mortgage lending, rather than the mechanisms by which the crisis spread.”

Some attention is given to Gary Gorton ( I have discussed his book, Slapped by the Invisible Hand, in a previous posting). In a presentation to the U.S. Financial Crisis Inquiry Commission, Gorton summarized his argument as follows (his entire testimony can be downloaded here, along with additional testimony):

  • As traditional banking became unprofitable in the 1980s, due to competition from, most importantly, money market mutual funds and junk bonds, securitization developed. Regulation Q that limited the interest rate on bank deposits was lifted, as well. Bank funding became much more expensive. Banks could no longer afford to hold passive cash flows on their balance sheets. Securitization is an efficient, cheaper, way to fund the traditional banking system. Securitization became sizable.
  • The amount of money under management by institutional investors has grown enormously. These investors and non‐financial firms have a need for a short‐term, safe, interest‐earning, transaction account like demand deposits: repo [repurchase agreements]. Repo also grew enormously, and came to use securitization as an important source of collateral.
  • Repo is money. It was counted in M3 by the Federal Reserve System, until M3 was discontinued in 2006. But, like other privately‐created bank money, it is vulnerable to a shock, which may cause depositors to rationally withdraw en masse, an event which the banking system – in this case the shadow banking system—cannot withstand alone. Forced by the withdrawals to sell assets, bond prices plummeted and firms failed or were bailed out with government money.
  • In a bank panic, banks are forced to sell assets, which causes prices to go down, reflecting the large amounts being dumped on the market. Fire sales cause losses. The fundamentals of subprime were not bad enough by themselves to have created trillions in losses globally. The mechanism of the panic triggers the fire sales. As a matter of policy, such firm failures should not be caused by fire sales.
  • The crisis was not a one‐time, unique, event. The problem is structural. The explanation for the crisis lies in the structure of private transaction securities that are created by banks. This structure, while very important for the economy, is subject to periodic panics if there are shocks that cause concerns about counterparty default. There have been banking panics throughout U.S. history, with private bank notes, with demand deposits, and now with repo. The economy needs banks and banking. But bank liabilities have a vulnerability.

Returning to the New York Times piece, the authors write: “Gorton…said the financial system would remain vulnerable to panics because the legislation would not improve the reliability of the markets where lenders get money, by issuing short-term debt called commercial paper or loans called repurchase agreements or ‘repos.’ … ‘It is unfortunate if we end up repeating history,’ Professor Gorton said. ‘It’s basically tragic that we can’t understand the importance of this issue.’

I find Gorton’s case compelling, although there are additional dimensions to the collapse that need to be explored. Moreover, there are the larger public choice problems and the difficulties inherent in engaging in social engineering via the political manipulation of credit markets).

The New York Times piece, which I strongly recommend to readers interested in understanding the debates, ends on a sober note: “critics point to the words of Nicholas F. Brady, a former Treasury secretary who led the bipartisan investigation into the 1987 stock market crash: ‘You can’t fix what you can’t explain.’”

Does anyone believe that the hard intellectual work of understanding the financial collapse has been completed (note: The Financial Crisis Inquiry Commission created by Congress, is not even scheduled to report its findings until December 2010) Does anyone believe that what we have learned thus far has informed the legislative debates?

By now it has become axiomatic that we should never let a good crisis go to waste. But what if moving rapidly to capitalize on the current crisis does nothing to prevent (or even worse, increases the likelihood of) a future crisis?

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This week should be remarkably interesting for those following the financial reform legislation.  Among the big issues on the table include the so-called derivatives “push out” (forcing banks to spin off their derivative trading activities) and the “Volcker rule” that would prohibit proprietary trading at banks. Silla Brush (the Hill) has a quick summary of the work that remains to be done and how the interests are lining up.

Shock of the day: Banking Lobbyists are Making a Run at Reform Measures. Eric Dash and Nelson Schwartz (New York Times) report that “the banking industry is mounting an 11th-hour end run.” Primary focus: the Volcker rule. There are several alternatives being floated and Dash and Schwartz nicely delineate them.

Are these provisions going to survive? Hillary Canada (WSJ) provides one indicator: Citigroup is planning to raise more than $3 billion for private equity and hedge funds via Citi Capital Advisors, its alternatives arm. And as the Times reports, JP Morgan Chase is moving ahead with talks to acquire a Brazilian alternative investment fund manager, Gávea Investimentos. Is this irrational exuberance or a rational calculation that past investments in Congress will yield the projected returns?

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The Big Shakedown

The Art of Misconstruction

As you know, BP agreed to set aside a $20 billion fund for those affected by the oil spill. It was a moment of high drama yesterday when Congressman Joe Barton (R-Texas), ranking member on the House Energy and Commerce Committee, held BP CEO Tony Hayward’s feet to the fire, noting:

“I’m ashamed of what happened in the White House yesterday… I apologize. I do not want to live in a country where anytime a citizen or a corporation does something that is legitimately wrong is subject to some sort of political pressure, that is again, in my words, amounts to a shakedown. So I apologize.”

After being subjected to some significant pressure by House GOP leadership, Barton quickly apologized for his apology, noting: “If anything I’ve said this morning was misconstrued from that I want to apologize for that misconstruction.”(I will leave it to my colleagues in the humanities to deconstruct the misconstruction).

Did the agreement to set aside a $20 billion fund amount to a “shakedown?” There is little question that BP caused significant damages.   It also seems both politically expedient (for Obama and BP) and prudent to establish such a fund immediately. One can only hope that the fund will allow for some immediate compensation free from the extraordinary transaction costs that turned Superfund into a lawyers’ trust fund.

Of course, “shakedowns” are ubiquitous in Washington. Elected officials commonly extract campaign contributions as the cost of access (without, of course, referring to them as “shakedowns”).  Joe Barton, for example, may find some “shakedowns” unpalatable, but his campaign committee and leadership PAC have extracted close to $14 million in “donations” in the past decade (the leading industry contributors, unsurprisingly, have been in the energy sector).

Members of the House Energy and Commerce Committee have extracted some $3.2 million from the oil industry since 2008. This  may seem like a pittance, given that the industry as a whole has invested $88.3 million in House and Senate races since 2000.

Does any of this matter?

One of the core insights of public choice was that we should assume that the same models of behavior should be applied across institutions (the symmetry argument). We cannot restrict the model of homo economicus to the market and presume that different models of behavior (altruism, public-spiritedness) prevail in nonmarket settings. This is not to say that there are not altruists or public-spirited individuals. But, as Geoffrey Brennan and James Buchanan remind us in The Reason of Rules, they are “delicate flowers, and crucial to their blooming may be the existence of institutions that do not make social order critically dependent on their effectiveness.”

Our political institutions are designed to facilitate mutually beneficial exchanges between transfer seekers (corporations, interest groups of any given stripe) and vote-maximizing officials. One should not expect that such exchanges are normally executed with more than fleeting consideration of altruism or the public good (those “delicate flowers”).  Such exchanges usually have a monetary component (as the campaign donations to Barton, the Energy and Commerce Committee, the House and Senate suggest) and they almost always impose costs (some financial, some environmental) on the unorganized. That, my friends, is the big shakedown.

Most of the pieces on the misconstruction of Barton are rather predictable. Here is a sampling.

Michael Kieschnick at Huffington Post is obviously pleased by Barton’s comments and begs him: “please keep talking!”

Erick Erickson at Red State makes the case that Barton was right and the congressional hearing was little more than a show trial.

At NRO, Daniel Foster recognizes the political ham-handedness of Rep. Barton but argues that the $20 billion fund “if not illegal, [is]at least extra-legal, and another example of Democrats’ selective disdain for the rule of law when it gets in the way of a government-run redistribution scheme.”

At WaPo David Weigel correctly sees the political consequences of Barton’s statement, providing Democrats with “an opportunity here to discredit the GOP’s rhetoric in support of small government.”

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The president will address the nation tonight from the Oval Office to discuss the BP/Deepwater Horizon fiasco. The New York Times reports: “It is Mr. Obama’s goal… to acknowledge the uncertainties and what one called “the new reality,” allay people’s fears and give reason to hope,” drawing parallels to FDR’s fireside chats.

One wonders: will there will be more in store this evening? Candidate Obama made a series of campaign promises about charting a course to a new green economy, reducing our reliance on carbon-based fuels through what amounted to a green industrial policy.

As political scientist John Kingdon reminded us in his classic Agendas, Alternatives, and Public Policies: “people in and around government sometimes do not solve problems. Instead, they become advocates for solutions and look for current problems to which to attach their pet solutions.”

What kinds of solutions can be attached to this problem? A new carbon tax? Increased CAFE standards? New investments in the “green technologies of the future” that will create “green jobs?” Cap-and-trade?

My best guess is that advocates in the administration, Congress, and the larger interest group universe are actively searching for means of coupling their favored solutions to the problem in the Gulf. A window of opportunity has opened, and as we know, a crisis is a terrible thing to waste.

Unfortunately, crises may result in good politics, but they rarely result in good public policies. More often than not, they also result in an expansion of the public sector often with minimal attention to whether the resulting policies will have the intended impact on the problems in question.

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There have been some remarkably interesting posts and comments as of late regarding libertarianism. Some of them emerged in various postings on Rand Paul. Damon Linker, for example, congratulated Jason on diverging from “absolute libertarian principles” and approvingly posted Bruce Barlett’s take on Rand Paul:

“I don’t believe Rand is a racist; I think he is a fool who is suffering from the foolish consistency syndrome that affects all libertarians. They believe that freedom consists of one thing and one thing only–freedom from governmental constraint. Therefore, it is illogical to them that any increase in government power could ever expand freedom.”

The consistency syndrome is, indeed, common. It may stem from the fact that libertarians rarely [never] carry the weight of political power. Rather than having to make concrete decisions about how to address a complex problem in real time with limited information, resource constraints, and blunt policy tools, they often have the luxury of working within the confines of thought experiments constructed of simplifying assumptions and freed from historical context.

Name a problem, I got a solution. It will begin as follows:

“Assume we have perfectly functioning markets and perfectly delineated property rights. Assume, furthermore, that individuals behave rationally. Then we can eliminate [fill in blank with social or economic problem of your choice].”

Alright. This is a lovely posture to strike among academics and in the classroom.

But now comes the hard part. We will never have perfectly functioning markets and we will never have perfectly delineated property rights. Human nature is fixed and flawed and there is little reason to expect that rationality will prevail relative to the passions. Moreover, we have vexing problems and social pathologies that have been created or exacerbated by a long history of poor policy decisions. There is no way to cut the Gordian knot. There is no way to return to the original position. There are massive issues of path-dependency.

We see these problems in the financial mess. We see these problems in the current debacle in the Gulf of Mexico (and we certainly saw it with Katrina). The persistence of intergenerational poverty and the looming entitlement crisis (ditto).

So here is the challenge: assuming that what I have said in the above paragraphs is correct, what is the role of libertarians? How can libertarians be mindful of not falling into the consistency syndrome while still offering something of value to the policy debates and political discourse more generally?

What can and cannot be compromised in this quest?

My fear is that libertarianism could [has] degenerate[d] into:

  1. A set of insular debates grounded in a set of simplifying assumptions shared by the “tinfoil hat” crowd (or the remnant, to be more positive) but of no real relevance to flesh-and-blood policy problems
  2. A way for those who are more conservative in their political orientations to remain hip among their liberal friends (Hey, I believe we should legalize drugs and prostitution! Gay marriage? The state should not marry anyone!]
  3. The limited insight that, given the option, markets are preferable to non-market solutions. Beyond that, one can still embrace the welfare-regulatory-entitlement state in all its glory.
  4. Mere muckraking.  Focusing attention on government incompetence without simultaneously offering viable alternatives that could be implemented under existing constraints.

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I have a somewhat different take on the financial legislation passed by the Senate than that presented by Jim Otteson, although I agree with his argument. Here is my take:

The New Deal era financial regulations created several separate financial industries, each governed by its own set of regulators and insulated by regulatory barriers to entry. Although this system functioned remarkably well for several decades, the pressures imposed by high inflation and new technologies forced a process of deregulation, which gained steam over the past several decades. In 1999, Congress passed the Gramm-Leach-Bliley Financial Services Modernization Act. It permitted the consolidation of commercial banks, investment banks, securities firms and insurance companies in financial holding companies, thereby eliminating the last vestiges of Glass Steagall. “Functional regulation” continued to exist, even if the functions were consolidated in financial holding companies. Moreover, while the 1999 Act essentially revoked Glass-Steagall, many of the changes had already occurred incrementally. For example, often through mergers and acquisitions, commercial banks had already made forays into investment banking and brokerage activities, creating more diversified financial service companies.

In an ideal world, a new regulatory architecture would acknowledge these changes rather than layering another set of processes and institutions over an already fragmented system.

As we discovered in the last few years, regulators will come to the rescue of large financial firms regardless of which industry or industries they are in.  Under the assumptions:

(1) We cannot return to the tidy world of Glass-Steagall where there are clear regulatory firewalls between financial industries, and

(2) There are few things more dangerous than implicit guarantees

One would have hoped that regulations would have subjected all financial firms, regardless of industry, to a form of insurance comparable to that in place with the Federal Deposit Insurance Corporation. The funds, could be used to rescue failing firms.  More importantly, the system could be used to subject insured firms to higher levels of oversight and there could be a uniform set of procedures in place for liquidating (or “winding down”) failing firms.

The Senate legislation makes motions in this direction (i.e., it expands the reach of the FDIC) but it retains the high fragmented regulatory structure and simply creates new means of coordination (i.e., through the creation of a new Financial Stability Oversight Council).

There are a number of potentially positive features of the legislation.

It makes sense to bring much derivative trading off of “dark markets.” The requirement that banks spin-off their derivative activities is unlikely to survive conference (and may well die at the Obama administration’s request).

Some of the duties assigned to the new Consumer Financial Protection Bureau are necessary. Markets cannot function effectively when there are great information asymmetries and this has been a serious problem  in consumer financial markets (as Elizabeth Warren has documented). However, one can question whether the Senate’s desire to place this new agency within the Fed will survive conference. Moreover, regulators often over-reach. Can we be confident that the new bureau will restrict itself to the functions promoted by Warren?

It is also quite positive that the legislation addresses the conflicts of interest among credit rating agencies (they are compensated by the financial firms whose securities they rate).

But there is also much room for mischief. Banks with more than $250 billion in assets will be subject to higher capital standards. One can imagine that the process of setting these standards will lead to efforts of social engineering (e.g., setting standards to create an “ideal” industrial structure).

Most important: I remain highly skeptical that this legislation is based on a coherent understanding of the causes of the financial collapse. If, as Gary Gorton has argued in his new book, Slapped by the Invisible Hand, the crisis was a panic in the repo market, it is unclear how this legislation will prevent a similar set of events from occurring in the future—or, more to the point, that such events can be prevented.

Of course, financial regulation is only part of the problem. The existing regulatory framework was inadequate. But absent the housing bubble, the collapse would not have occurred. The bubble, in turn, cannot be understood without reference to elected officials leveraging financial markets and using government sponsored enterprises (Fannie and Freddie) to engineer a desired level of home ownership, and  the Fed’s promotion of low interest rates rather than acting under the discipline of the Taylor Rule.

Needless to say, neither of these issues has been addressed by the legislation.

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Every once and a while, one trips across a politician who actually states the truth regardless of what the political consequences might be. These are rare and perhaps unguarded moments. But let’s celebrate them when they occur.

I have scant interest in Florida politics (or Florida, for that matter). But Marco Rubio has received a bit of attention for his comments during a debate with former RINO and current independent Charlie Crist.

When discussing the future of Social Security, Rubio suggested that there will have to be significant changes, including increases in the retirement age or changes in the cost of living adjustment (COLA).  Crist issued what might be included in a 21st century “profiles in courage.” He rejected Rubio’s remedies and, instead, offered to attack “waste and abuse.” There is an entry worth reading by Andrew Biggs on the Enterprise Blog.

When Rubio was given the opportunity to withdraw “clarify” his remarks, he said:  “I stand by it squarely.”

It is refreshing that Rubio was willing to make a statement like this in a race for the Senate in Florida  (i.e., the East Coast Democratic equivalent of the elephant graveyard). One can only hope that a few more politicians decide to strike a principled position on our major entitlement programs. I hold out little hope, of course, given the current administration’s claims that some of the funding for the new health care entitlement will come from…waste, fraud, and abuse.

I know that complete privatization is the dream of libertarians.  Realistically, it will never occur. But finding a glide path to sustainability is doable. Progressive indexing (suggested as part of Bush’s “risky privatization scheme”) would go far in saving Social Security. Essentially, higher income individuals would receive lower COLAs than middle and lower income individuals (i.e., a benefit cut). This scares the Left because they realize that the closer Social Security comes to being a means-tested program, the lower the political support will be for retaining the program. In essence, they have chosen to sacrifice sustainability for political expediency.

Increasing the retirement age, also recommended by Rubio, is likely a nonstarter. It would force large portions with lower life expectancies to pay into a system that they could never hope to benefit from.  With the nation’s changing demographics, it would force those with lower life expectancies to subsidize the retirements of a dwindling white genontocracy—not a recipe for political stability.

Ideally, Americans would come to the realization that they must engage in Asian savings rates if they hope to achieve anything approaching an acceptable income in their final decades. But again, I hold out little hope.

In the end, one can only hope that more politicians follow the lead of Mr. Rubio and take the risk of speaking truth, even if (horror of horrors), such actions carry consequences.

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The leaking underwater oil well in the gulf has attracted much attention, as it should. The effects could be devastating for the already battered economy of Louisiana and other states dependent on tourist dollars. President Obama has announced, quite correctly: “BP is responsible for this leak. BP will be paying the bill.” The President’s response in terms of limiting the immediate damages and stopping the leak seems prudent as well. Read the story on Politico.

However, this is an election year and thus I get more than a little nervous when I read statements like: “every American affected by this spill should know this: Your government will do whatever it takes for as long as it takes to stop this crisis.”

“Whatever it takes” is a big category and one cannot see the word “crisis” without recalling the sage words of Rahm Emanuel: “You never let a serious crisis go to waste. And what I mean by that it’s an opportunity to do things you think you could not do before.”

Crisis always opens a window of opportunity for policy change.  One could only hope that this and similar crises would lead to a re-evaluation of our energy policy. We have a heavy reliance on petroleum and, as everyone knows, our dependence on imports has increased dramatically in the past few decades. I am certain that the oil spill will lead to new calls for a green industrial policy and heavy investments in solar energy and other green alternatives.

There is an old saying: the first thing you should do when you find yourself in a hole is stop digging. The heavy reliance on petroleum is, in many ways, a product of past policy decisions.

As a recent study by David Victor and the Global Subsidies Initiative notes that governments around the world spend some $500 billion per year in fossil fuel subsidies. In the US, government spent $72 billion on fossil fuel subsidies between 2002 and 2008. These subsidies do not include myriad other forms of taxpayer support for fossil fuel based energy.

As we know, subsidies lead to overconsumption.  They blunt the incentives to invest in alternatives. Before we respond to this new crisis by creating new subsidies for alternative energy or initiating a green industrial policy, it would be advisable to (1) eliminate the subsidies and (2) use a Pigouvian tax to internalize the negative externalities created by fossil fuel consumption. We might discover that this alone could create the incentives for the development of energy sources that do not lead, quite predictably, to the kinds of problems we are witnessing in the gulf coast.

Unfortunately, the probability of this response approaches zero. In Congress, Republicans would gnash their teeth at the idea of an expanded fuel tax and sing the praises of “free” markets while quietly accepting campaign donations to maintain the system of fossil fuel subsidies. Democrats might be more willing to embrace a tax, but they would wither at the thought of allowing markets to create incentives for alternative fuels (oh yes, and they would never refuse the ongoing financial support of the very industries they vilify).

So what can we expect? My best guess: new transfers layered upon existing transfers combined with unsustainable promises made in the heat of an election year.

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President Obama gave a rousing speech today on the proposed financial reforms.

We know that financial regulations can bring far greater stability to the economy. Even Milton Friedman and Anna Jacobson were forced to acknowledge that the FDIC “succeeded in achieving what had been a major objective of banking reform for at least a century, namely, the prevention of banking panics.”

My concerns focus on what was not addressed by the president by seems every bit as important as regulatory reform.  The asset bubble that burst in 2007/08 was itself a product of public policy decisions.  To be more specific:

  • Ongoing regulatory pressure for relaxed underwriting standards as a means of promoting social goals (e.g., higher levels of home ownership, and under Bush, the “ownership society”)
  • The Federal Housing Enterprises Financial Safety and Soundness Act of 1992, which  mandated that HUD set quantitative targets for GSE purchases of mortgages serving a low and moderate-income clientele (the target would ultimately reach 55 percent).
  • The Taxpayer Relief Act of 1997 that exempted the first $500,000 in gains from any home sale (for couples, $250,000 for single filers)
  • Persistent trade deficits that provided funds for reinvestment in mortgage-backed securities combined with Greenspan’s pursuit of historically low interest rates

Voters who can use homes they can’t afford as ATMs to purchase goods they could not otherwise justify may be quite content, even if the policies that make this all possible simultaneously create the preconditions for an asset bubble.

The president, in focusing exclusively on regulatory reform, seems content with changes that will reduce the extent to which, when the next bubble bursts, the collateral damage will not be as great.  It feels like mandating that all cars have better airbags before liquoring up a teenage boy and handing him the car keys. Without the liquor, the need for better airbags might not be as great.

What would be necessary to assure that future elected officials won’t pursue social policy goals (e.g., creating an “ownership society”) that have the unintended consequences witnessed in the past few years?

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I remember a few decades ago when figuring out how a given regulatory agency functioned (or failed to function) required endless hours in the library stacks, paging through poorly bound government documents. Life has become far simpler thanks to the combined efforts of regulators and youtube.

To celebrate Earth Day, the EPA stepped into the youtube age by inviting people to submit “a video clip up to 10 seconds long of someone doing something for the environment, then reading and passing along a sign that says ‘It’s My Environment.’” To assist in this contest, the EPA has provided pdf files of their sign in English, Spanish, French, Chinese (traditional and simplified), Portuguese, Quechua, Urdu, Russian, Albanian, Croatian, Slovenian, German, Vietnamese, Hindi, Japanese, Irish, and American Sign Language. Ultimately, selected clips will be combined to create a “human chain.” So if you’ve got something to say about the EPA and you can keep it to under 10 seconds, submit. The deadline has been extended until the end of December.

(NB. the EPA notes that videos cannot contain “direct attacks on individuals or organizations.”)

If ten seconds seems like too great a constraint, or you really feel like a challenge, the EPA has also introduced a video contest to “explain rulemaking.” According to the EPA, “the video contest is your opportunity to explain federal rulemaking and motivate others to participate in the rulemaking process.” Not only do you get 90 seconds—nine times longer than you would receive to explain why its “your” environment—you could win a cash prize ($2,500). The video must use the phrase “Let your voice be heard.”

(NB. The EPA once again notes that videos cannot include “attacks on individuals or organizations.”)

Having taught regulation to college students for over a decade, I can testify that anyone capable of explaining the rulemaking process in 90 seconds deserves a Nobel, not a mere $2,500.

The EPA is a little late in entering the world of video. USA.gov—“the official web portal of the U.S. federal government”—has already concluded its video contest sponsored by the General Services Administration, awarding a $2,500 prize. Contestants were asked to explain how USA.gov had made their lives easier. There were 30 entries between February 22 and April 2, when the contest formally closed. Let me repeat: 30 entries.

Promoting government through short videos is a compelling concept. I would love to propose new contests, each of which would require contestants to address the theme in question (NB. videos cannot contain “direct attacks on individuals or organizations”) expending no more than 90 seconds. Here are some ideas:

Explain the Social Security Trust Fund’s role in covering future liabilities.

Explain how specific features of the stimulus package made your life easier.

Explain how Freddie and Fannie helped us build an “ownership society.”

The Question: Does anyone have any ideas for additional contests? Undoubtedly, there are endless opportunities for explaining how [fill in government agency of your choice] has improved your life.

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You’re unlikely to get a patient’s prescription right if you haven’t properly diagnosed the illness you’re trying to treat. Predictions both rosy, catastrophic, and everywhere in between have issued forth from supporters and opponents of the recent health care reform bill. The truth is that economics is not a precise, predictive science, and we simply don’t know what the medium-term consequences of the bill will be. But we do know that if the bill’s treatment of the ailing U.S. health care payment system is based on a faulty diagnosis, it is likely to fail. So let’s be good empiricists and look at the evidence: What is wrong with U.S. health care payment system, and are these problems rationally related to the solutions offered by supporters of a government regulatory takeover, whether Obamacare or something more radical like single payer? Virtually everyone agrees that rising health care costs are the main problem we need to address, but why are health costs rising so much?

Any argument for government intervention must depend on showing that any health care payment system suffers from market failure. Market failure comes in essentially two varieties: public goods and market power.*

Public goods are goods that have to be provided for “everyone” if they are provided to anyone. You can’t find ways to exclude non-payers – thus, strategic customers will not pay even if they want the good, and the good isn’t provided. Everyone is worse off. Public goods include externalities, the tragedy of the commons, etc. Is health insurance a public good? Probably not. The left’s main complaint about market-provided health insurance is that those who cannot pay are excluded from it. However, during the course of the health care debate, supporters of the Democrats’ plan argued that health insurance was a public good, mainly because people who do not have insurance can obtain emergency care anyway and impose costs on others (“uncompensated care”). Therefore, everyone would be better off if everyone were forced to obtain health insurance.

To this argument there are three main responses: 1) uncompensated care represents no more than 3% of health care expenditures, so it cannot be responsible for much of the escalation of health care costs; 2) the rational solution to uncompensated care is not forcing everyone to buy insurance, but forcing everyone who can pay to pay for the care that they actually receive, for instance through wage garnishments; 3) even if #1 weren’t true, and #2 weren’t feasible, at most this argument would justify forcing people to obtain coverage for emergency care, but Obamacare essentially prohibits high-deductible, emergency-only plans! (See also here.)

What about market power? Economic theory predicts that monopolies – and maybe oligopolies too – will raise prices to the consumer and reduce the quantity of service. Health care prices have risen, but is there any more direct evidence of market power in health insurance?

We can look at profits. Monopolies should be able to reap profits well above the norm for most industries, because they enjoy monopoly power only due to the inability of other firms to enter the market. According to Henry Aaron at the liberal Brookings Institution, “Insurance company profits in the large picture have very little to do with the overall rising cost of health care.” Insurance companies’ profit margins tend to be under 5%, right about average for the American economy as a whole. In most states (those that have not regulated the industry to the brink of expiry), the health insurance market is competitive.

So why have health insurance costs risen so much? Because health care costs have risen so much. What does Obamacare do about health care costs? Almost nothing. Instead, the bill forces insurance companies to take all comers (guaranteed issue), forbids them from pricing risk (community rating), and gives the federal government review over their prices (price controls). These policies might make sense if the main problem with U.S. health care were market power in the insurance market, but it isn’t, and so they don’t.

Obamacare makes no economic sense. It should be repealed and replaced with true, consumer-powered reform that will force doctors and hospitals to reduce their prices.

*Allow me to quickly dispense with a third set of problems that really don’t count as market failure, because they don’t actually lead to socially suboptimal outcomes in competitive markets. I’m referring to moral hazard and adverse selection, which afflict finance and insurance markets in general. When a person is insured against a risk, that person is more likely to engage in behavior likely to actualize that risk (moral hazard). When insurance is offered, more risky persons are more likely to seek it out (adverse selection). But all insurance and financial markets have ways of dealing with these problems, from credit checks to claims adjustment. If you really thought these were insuperable problems requiring massive federal intervention, then you would also advocate this same intervention in, say, auto and homeowners’ insurance. But no one does.

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As an economist, I’m trained to apply positive models and empirical methods to (hopefully) illuminate important phenomena in the real world.  That is what I want to do in this blog, preferably in an engaging and helpful fashion.

But what really interests me is the moral groundwork of public policy analysis.   Unfortunately, my fellow Pileus bloggers know far more than about moral philosophy than I.  Fortunately for me, moral philosophy has accomplished precious little in the past three millennia , so I am not that far behind.

So, what do I think a moral groundwork should consist of?  Here is my view.  I will call it Sven’s Principles of Public Morality:

* Human autonomy and freedom must lie at the bedrock of any human society that has a claim of moral legitimacy.

*All human beings have equal moral value.

* Any moral system that ignores the centrality of human happiness and flourishing is fundamentally silly.   (Technical terms such as “silly” will not be defined at this point).

* Freedom without responsibility does not lead to human flourishing, though it can lead to a lot of fun.

* The factors determining human happiness and human flourishing vary across individuals, but the most important determinants are human relationships.

* Communities can have strong instrumental value in producing a society of free, responsible, and happy individuals.

* The idea that communities have non-instrumental value, meaning they contain something worth promoting independent of the people belonging to or affected by the community, is very silly (not to mention the whole slippery-slope to totalitarianism thing).

* Similarly, the State can be a useful concept with instrumental value as long as we remember that it does not really exist.  People exist.

* Other intellectual constructs such as “social contracts” or the “state of nature” can be useful, but only to the extent that they are not used to obstruct moral principles, such as the equal moral value of all human beings.

* Some notion of positive liberty is useful, even necessary.  However, public policy should generally be concerned with negative liberty (freedom from coercion) and avoid the explicit promotion of positive liberty (the capability to act).

* Limited coercive power is necessary in a free society.  But citizens should be greatly concerned about any concentration or use of coercive power.

* Morality is not the product of the biological or natural world, even though many moral norms often make sense from an evolutionary perspective.  Indeed, many natural human tendencies are profoundly immoral.

* Moral reasoning requires the specification of true moral axioms.  Otherwise, we are just playing games.

* As far as I can tell, my moral axioms are the true ones—though I reserve the right to change my mind.

Fundamentally, a policy analysis focused on justice and right is about weighing and balancing core public values—liberty, utility, equality, community.   So I have no patience with those who say I have to pick just one value and run with that.   To be useful and relevant moral philosophy must acknowledge the need for balancing.   Determining the appropriate public policy that accounts for all these principles is not a simple endeavor.

Now some would say that these propositions are not internally consistent, ignore a variety of nuances, and rely on different philosophical traditions (or no tradition at all).  Others might say we would need a lifetime to define and discuss all the terms used and how they relate to one another.  But I don’t care.  I want them all.

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