Tuesday, November 27, 2018

Ed Dolan and Chris Pope Debate the Future of Health Care Reform


Exit polls from the recent midterm election suggest over 40 percent of voters consider health care as the top issue facing the country. Yet after a unified Republican government tried and failed to repeal and replace the Affordable Care Act, the conservative vision for health care reform remains something of an open question.

Here at the Niskanen Center, senior fellow Ed Dolan has been beating the drum for the reform path known as Universal Catastrophic Coverage (UCC) for more than two years. But not everyone agrees. That’s why we invited Chris Pope, a senior fellow of the Manhattan Institute and formidable conservative health care policy thinker, to join Ed Dolan in a debate.

Be it resolved:
Universal catastrophic coverage is a reasonable path to universal and affordable health care.

PRO — Ed Dolan

People have many basic needs, including food, shelter, education, and access to health care, which, if unsatisfied, can make our treasured rights to life, liberty, and pursuit of happiness meaningless. Of these, health care poses unique problems for public policy.

To understand why, imagine a society in which no one’s resources fall below the poverty level. Regardless of whether those resources come from a state-sponsored universal basic income or from some combination of work, family support, and private charity, I argue that such a society could adequately meet needs for food, shelter, and so on but not health care.

There are two reasons for that. One is the highly skewed distribution of the demand for health care services. In the United States, the healthiest half of the population account for just 3 percent of services consumed, while the sickest 5 percent account for 50 percent. For comparison, if the need for food were distributed similarly, half the population would need just 120 calories in their daily diet (one small potato), while the hungriest 5 percent would starve on anything less than 20,000 calories (35 Big Macs). For the top 5 percent, health care consumption exceeds the national median income.

The second reason health care is unique is its uninsurability. To be commercially insurable, a risk must be unpredictable and an actuarially fair premium must be affordable to the insured. Because of pre-existing conditions and advances in genetic testing, health risks are highly predictable. As a result, for many risk-prone individuals, actuarially fair premiums can exceed income.

The combination of skewed need for services and uninsurability means there is no simple market mechanism that would give everyone access to health care. That leaves us either with a nation of medical haves and have-nots, or a major role for government.

Thursday, November 8, 2018

What's Wrong with Employer-Sponsored Health Insurance and How to Fix It

The high proportion of people who get their health insurance through their jobs is one of the most distinctive features of the U.S. health care system. According to the Census Bureau, 56 percent of the population had employer-sponsored health insurance (ESHI) as of 2017. ESHI accounts for 83 percent of all of those with private insurance of any kind. People whose health insurance is tied to their jobs far outnumber the 38 percent of the population served by government insurance of all kinds.

What is more, most people on ESHI appear to be satisfied with the coverage they get. A survey by America’s Health Insurance Plans (AHIP), an insurance industry group, found that 71 percent of respondents were satisfied with their ESHI plans, compared with just 19 percent who were not satisfied. An independent survey by Gallup came up with similar results, finding 69 percent of people on employer-sponsored plans to be satisfied. A study by the Employee Benefit Research Institute found that 50 percent of workers were extremely or very satisfied with their own ESHI plans, with another 39 percent somewhat satisfied.

How should would-be reformers interpret these numbers? Clearly, one possible reaction is, “If it ain’t broke, don’t fix it.” The Affordable Care Act took that approach. Rather than trying to replace ESHI, it made it mandatory for employers with 50 or more workers.

Despite its popularity, though, serious health economists tell us that ESHI is “broke,” after all. No comprehensive reform can succeed unless it is phased out. This commentary examines three of ESHI’s biggest problems: job lock, which reduces labor mobility for ESHI beneficiaries; the fundamental inequity of the way the benefits of EHSI largely accrue to the highest -paid workers; and the increased fragmentation of health care finance inherent in a system administered by thousands of separate employers. We conclude with a plan for phasing out EHSI in a way that can fix these problems while minimizing the disruption for workers who are satisfied with their current coverage.

A Coasean Rationale for a Carbon Tax

Executive summary:

This policy analysis develops a rationale for a carbon tax based on two key insights from the work of Ronald Coase.

The first insight is that problems of pollution should not be viewed simply as situations in which A harms B, so that A should be restrained with a tax, a suit for damages, an injunction, or a regulatory prohibition. Instead, they should be seen as coordination problems in which the plans of two parties conflict. Reaching optimal coordination typically requires action by both parties. Those will usually include both action by polluters to cut emissions (abatement) and action by pollution victims to reduce harm (adaptation). Putting too much of the burden of coordination on either party is inefficient.

The second insight is that a complete analysis must take into account the direct costs of abatement and adaptation, but also the transactions costs of achieving coordination. Transactions costs include the costs of identifying victims and sources of pollution, assessing damages, reaching agreements on actions to be taken, and enforcing those agreements once they are in place. In some cases, superficially attractive policy solutions turn out to be unsuitable because of their high transaction costs.

The analysis uses the example of coastal flooding caused by climate change as a case study in coordination. The polluters are fossil fuel burning power plants and the victims are coastal property owners. The former have a number of abatement options, including fuel switching and carbon capture, while the latter have abatement strategies that include building sea walls, improving construction, and retreating to higher ground. Following Coase, a full range of policy options are examined for their impact on the behavior of both polluters and pollution victims. When all aspects of the coordination problem are considered, including transaction costs, carbon taxes emerge as an attractive mechanism for dealing with climate change.

Read the full brief here.

Sunday, November 4, 2018

Take a Closer Look at Labor Force Participation. Is It Really As Good As It Looks?


The headline take-away from the October employment report was the robust gain of 250,000 payroll jobs. The unemployment rate edged up fractionally from 3.68 in September to 3.74 in October, but commentators dismissed that as insignificant. Instead, they pointed out that the unemployment rate failed to fall because of a flood of new workers into the labor market. That influx produced a welcome rise in the labor force participation rate, from 62.7 percent to 62.9 percent.

Still, that monthly uptick was not enough to break labor force participation out of the stagnation that has prevailed since late 2015. As the following chart shows, the participation rate has wobbled up and down over that period without showing any trend at all.


What is going on here? Isn’t the stagnation of labor force participation just a sign of the aging of the U.S. population? Yes, at least in part. The next chart shows labor force participation for prime-age workers only, aged 25 to 54. that rate has turned up sharply since hitting a low of 80.6 percent in September 2015. The flat trend of the overall participation rate simply means that an increase in the average age of the civilian labor force, which includes retirees, has offset higher participation by people in the working age population.

Sunday, October 28, 2018

Discordant Data on Investment and Net Exports Spoil an Otherwise Bright Q3 GDP Report


US GDP continued its long expansion in the third quarter of 2018 at a pace that was only slightly slower than earlier in the year. According to the advance estimate from the Bureau of Economic Analysis, GDP grew at a 3.5 percent annual rate in Q3, compared to 4.2 percent in Q2. The advance estimate, which is based on incomplete data, is subject to revision. Based on past experience, the second estimate, which will be released one month from now, may be about half a percentage point higher or lower than the advance figure.

But the real news from Friday’s data release concerns the structure of growth, which has changed dramatically for the worse, rather than its still-respectable overall pace. The following chart shows the contrast between the structure of growth in Q2 and Q3. The bars show how much of the total growth in each quarter can be traced to changes in each sector of the economy.

In both quarters, consumption and government spending contributed positively to GDP growth, although not quite so strongly in Q3 as in Q2. Changes in other sectors of the economy were more dramatic.

In Q2, fixed investment in factories, business equipment, and housing was a bright spot, contributing 1.1 percentage points, or more than a quarter of GDP growth. In Q3, contributions from fixed investment disappeared, even turning slightly negative. This change can be traced to weakness in investments in business structures, housing, and transportation equipment.

Inventory investment changed in exactly the opposite direction. In Q2, inventories made a negative contribution to growth, but in Q3, swelling stocks of unsold products accounted for 2.09 percentage points of the quarter’s GDP growth — two thirds of all net growth. Rising inventories can be a sign of economic health if they represent the actions of companies that are building inventories to meet expected growth of sales in the future. However, in this case, they more likely represent unplanned accumulation of goods that turned out to be harder to sell than companies thought they would be. If so, producers are likely to cut back output in the fourth quarter to bring inventories back into line.

Net exports were the third area where there was a huge change from Q2 to Q3. In the second quarter, exports surged ahead of expected tariff increases, adding 1.12 percentage points to the quarter’s growth. In contrast, in Q3, exports collapsed, subtracting 0.45 percentage points to growth. What is more, imports surged in Q3, after having had little impact on growth in Q2. Because imports enter the GDP accounts with a negative sign, they subtracted another 1.34 percentage points from growth. In all, the contribution to growth of net exports experienced a massive 3.0 percentage point swing from a positive contribution of 1.22 percentage points in Q2 to a negative contribution of 1.72 percentage points Q3.

The bottom line: Growth does not look too bad at the moment, but in the long run, you can’t build a strong economy on consumer and government spending alone. You need investment and you need exports. If those sectors don’t contribute more in the rest of the year, expect overall GDP growth to turn sharply lower.

Previously posted at Medium.com

Sunday, October 21, 2018

Update on Saving SlideShare from Itself (Reupload)

About a year ago, SlideShare, the presentation sharing website, deleted one of its most useful features: The ability to reupload a presentation to make a correction or update without changing the URL. The change greatly degraded the usefulness of the SlideShare platform for so-called "Power Users" like myself and many others. Power Users are understood to be users with thousands of followers, many of us teachers, professional speakers, and consultants, who post serious material that needs to be accurate and up to date, not just cute pictures of their dogs and cats.

I posted about it at the time, and received many responses. Here is how I explained the importance of reupload:

Reupload is (or was) a feature that allowed users to repost a revised version of a slideshow without changing its URL. Now that it is gone, the only way to revise a slideshow is to delete the original version and repost a new version with an new URL. Why does that matter?
  1. Short-term error correction: We are all human. (Well, at least I am). We make mistakes. After you have posted your slideshow, you, or one of your readers, notices a typo, a wrong number in a calculation, or a broken link. You want to fix it, but meanwhile, you or your readers have bookmarked the original version, or Tweeted the link, or posted it on Facebook. When anyone follows those links or bookmarks, they will be taken to the original version with the error, not your corrected version. If you deleted the original when you made the correction, they won't find anything.
  2. Long-term revisions: Sometimes I publish a slideshow on a topic of lasting interest, say, the economics of a soda tax. I posted this version of my soda tax slideshow in 2010. Last year, soda taxes were back in the news, so I posted this revised version. At the same time, I added the little yellow box on the front page of the original so that anyone who had the old link could find the new version. This week, I wanted to update it again to include the news of the failure of Chicago's soda tax, but with reupload gone, I can no longer steer anyone who finds one of the old versions to the newest version.
  3. Classroom use: College professors and high school teachers use slideshows in their classrooms all the time. They include links to the slideshows in the printed or on-line curriculum materials they give to their students. What if the creator of the slideshow fixes an error or makes an update? Doesn't the teacher want them to find the latest version, not the old one? Without reupload, this won't happen.
At that time, I, and several other Power Users, had exchanges with SlideShare customer support. Those exchanges are cited extensively on last year's post. This past week I have had a new round of exchanges with a "Customer Advocacy Representative" [interesting term] named "Jeff." Here is that exchange in full:

My question to SlideShare 10/20/18:

I used to be an enthusiastic user of SlideShare, a "keynote author" with nearly 12k followers. Then it all came crashing down when you took away the "reupload" feature.
As I explained in a presentation posted on Slideshare a year ago, this feature is essential for my work and that of many other serious users. Nearly 3000 people have viewed that slideshow. 33 of them have commented, and many others have contacted me on Twitter. Please read the presentation and especially the comments to see our concerns. None of us can understand why you made this self-destructive change or why you are reluctant to restore it.
Recently some users have contacted me to indicate there may be some hope of bringing back the reupload feature. Can you give me any updates on this? Can you give me any explanation of why you are reluctant to restore it? Thank you for your attention to this issue.
Response the same day from "Jeff"
Hi Ed,

I understand your frustration, and I sincerely apologize for any inconvenience. Please note that we did look at the usage of this feature compared to the usage of other SlideShare features. Through that investigation, we found that the re-upload feature wasn't as heavily used - this is why the feature was removed.   However, we realize that this is a useful feature for some power users. We are actively working on making foundational improvements to our platform, which will make building and supporting a feature such as re-upload much easier in the near future.   Again I apologize for any inconvenience this may have caused. If you need anything else, please let me know and I will gladly assist.
Best Regards, Jeff Customer Advocacy Representative
My rejoinder:
Dear Jeff: You say, "However, we realize that this is a useful feature for some power users. We are actively working on making foundational improvements to our platform, which will make building and supporting a feature such as re-upload much easier in the near future." That sounds very nice, except that it is exactly word for word the same response that I got from someone named "Allison" a full year ago (10/23/17). I wonder if you could spin this out a little for me.
(1) Can you send me some "proof of life" to let me know that you are a human and not a bot. For example, can you tell me the middle initial of the current president of the United States? 
(2) Assuming you can answer Question 1, can you give me some idea in human time of how far off "the near future" is?
(3) Can you explain why "foundational improvements" are needed to restore the reupload feature, since you offered that feature for years? It seems to me that if you turned it off, you could just turn it back on again.Thank you, and I promise I will share your answers with the community of SlideShare "power users" with which I have corresponded on this matter. 
Ed 
Jeff, back to me:
Hi Ed, Thanks for getting back to me. I'll let you know that I actually reviewed your previous case with Allison prior to responding to you earlier. I don't see anywhere in that specific case where the response I sent to you was by Allison in that conversation from a year ago. I was trying to make sure to not send you information you had already received in that previous case, so I apologize if you had previously received that information.
I assure you that I am, in fact, a human. In response to your specific questions:
1) The middle initial of the current president of the United States is 'J'. 
2) Unfortunately, we don't have any specific timeframe in place at this time. For this reason, I am unable to provide any kind of range or ballpark figure at this time. I'm very sorry for any frustration this may cause.   
3) We are unable to disclose any additional details regarding the decision to remove this feature, as that information is proprietary. All we're able to share is what has previously been provided - we looked at the usage of this feature compared to the usage of other SlideShare features. Through that investigation, we found that the re-upload feature wasn't as heavily used, so we have currently removed the feature due to the support cost.   I'm sorry that I can't provide additional details at this time. We sincerely appreciate your patience and understanding. If anything else happens to come up, please let me know.  
Wishing you all the best, Ed!   Jeff
Me, back again to Jeff:
Thank you, Jeff, for your reply. I am sorry if my request for proof of life sounded snarky, but I was genuinely concerned, since not only I, myself, but other "power users" (PUs) have received boilerplate in the past. I am sure you know that some companies, happily not yours, do use AI rather than humans in their customer service divisions. I appreciate your "J" response and the fact that you and Allison are talking to each other.
I am evidently in error about getting the cited message from Allison. I found it in an archive of messages exchanged with SS last October, but the header and footer were cut off, so evidently the cited passage is from a message sent to another PU. In any event, the point stands that I (we, I should say -- the community of PUs who are communicating about this) are concerned that there is no real forward motion despite the teasers. You (and Allison) would probably be interested to read the whole thread from last October, including my initial blog post explaining the reasons why reupload is so important to us and the 30 comments. I plan to add this exchange to that thread. You can find it here
BTW, as an economist, I appreciate your need to balance the cost and benefit of a feature like reupload. I would hope that you would rethink that balance. You should consider that material from your relatively few PUs is widely disseminated on other social media and becomes one of the ways that new users are attracted to your platform. If you treat us like humans, you may find that you are rewarded for the costs and efforts.


Yours truly,  Ed Dolan 
This exchange is in someways discouraging, because of the repeated use of boilerplate excuses and the lack of a timeline for addressing the problem, but in some ways encouraging, because they are not outright refusing to restore reupload. I think it would be worthwhile for all of us who value SlideShare and hope to see it restored to its previous functionality to contact them. We need as many voices as possible in support of reupload.

Here is how to start a new customer support case:
  1.  Go to the SlideShare home page: https://www.slideshare.net/
  2. Scroll down to the very bottom and click on "Support" (you have to look hard, but it is there)
  3. Type "Reupload" in the search box at the top of the main support page
  4. Next, you will get a page that says, "Sorry, we couldn't find any information about 'Reupload' (unless, by the time you do this, they have added some information).
  5. Go to the bottom of that page and click on the "Contact us" link
  6. That will take you to a page where you can send a message to SlideShare help. Ask them to bring back reupload, and tell them why you care.
Thanks! If we all work together, we can save SlideShare from itself

Saturday, October 6, 2018

Universal Catastrophic Coverage FAQs


What is Universal Catastrophic Coverage and Why Do We Need It? 

Across America, health care is a top priority for the reform of social policy. The United States spends more per capita on health care than any other country, but by many measures, its performance is disappointing. Yet, wide differences remain over how to characterize the failures of the current system and what kind of reforms are needed. Universal catastrophic coverage (UCC) offers a way to bridge these differences.

On the one hand, many would-be reformers see the problem primarily as one of a broken health care payment system. Too many Americans do not have have affordable access to quality care. Too many remain one serious illness away from medical bankruptcy. Viewed in this way, the obvious solution would seem to be a guarantee that no one has to pay more than they can afford for the care they need. Proponents of such a policy often say they want “single-payer” health care like other high-income countries have.

Meanwhile, other reformers see the problem more as the lack of a working market for health care services. On the demand side, they say, the prevalence of third-party payments erodes incentives for health care consumers to shop for effective and reasonably priced services. On the supply side, regulations stifle competition, block entry by would-be innovators, and protect the interests of providers at the expense of consumers and taxpayers. Viewed in this way, the solution would seem to be to get the government out of the way let the market do its job.

Although single-payer advocates and market reformers often seem to talk past one another, they have more in common than it might at first appear. By and large, they agree that even under the most market-oriented reforms, there would still be a need for some kind of social insurance to assure that even the very poor and very sick have access to appropriate care. At the same time, everyone agrees that whatever is done about the payment system, there is a need for more transparency, more choice, and more innovation than the current system seems able to deliver. 

Universal catastrophic coverage combines both approaches. Under UCC, everyone would be protected against financially ruinous medical expenses though insurance that would be issued free to the poorest beneficiaries while requiring income-based cost-sharing from those who can afford it. UCC posits a robust role for the government as a provider of social insurance where needed while creating room for market mechanisms where they have the best chance of working.

Friday, October 5, 2018

Think You Are Fully Insured? You Could Be in for a Big Surprise


Think you’re fully insured? You could be in for a big surprise if you have a heart attack or a car crash and the ambulance takes you to the nearest hospital — one that is not on your insurer’s list of preferred providers.

Drew Calver found that out when he was billed $109,000 for emergency treatment of a heart attack, even though the emergency room he was taken to assured him it would accept his employer-provided insurance. The problem is, the insurer only paid as much as it would have allowed for an in-network hospital. The out-of-network hospital that treated him wanted three times as much, so it billed Calver for the balance. The bill came to more than twice his annual salary as a high school teacher.

Surprise medical bills are known in medical circles as “balance billing.” Emergency room treatment is one of the most common sources of surprise bills, but not the only one. You may also be on the hook for a balance bill if you receive a complex treatment like a joint replacement or transplant, even if the operation is done at an in-network hospital. Often, it turns out later that some out-of-network practitioner, such as a radiologist or anesthesiologist, has assisted without your even knowing about it, let alone having a chance to give or withhold consent.

Thursday, September 27, 2018

GDP Growth Helps Poor Countries More Than Those That Are Already Rich


Money can’t buy you love, says the song, but can GDP buy prosperity? The question is an important one given the emphasis that the White House and Congress have placed on pushing GDP growth to its limits.

What do the data say? My favorite measure of overall prosperity is the Social Progress Index (SPI), which has just been updated for 2018. The SPI is a comprehensive measure of human flourishing that draws on a broad set of indicators of public health, education, safety, human rights and personal freedoms. It purposely omits purely economic indicators such as GDP, inflation, or income distribution, which makes it especially well-suited to address the question of how GDP is related to noneconomic indicators of prosperity.

The following chart shows the relationship between the SPI and GDP for the 146 countries in the SPI database. The horizontal axis measures 2018 GDP per capita using estimates from the July 2018 update of the IMF’s WEO database, expressed I 2011 constant dollars at purchasing power parity.


Wednesday, September 12, 2018

Why Do So Many Teachers (and Others) Work Second Jobs? An Explainer



When the latest report on the employment situation arrived last week, most commentary focused either on job creation (a healthy 200,000) or the unemployment rate (unchanged at 3.9 percent). Beneath the surface, though, there were many other signs of growing strengths and remaining weaknesses in U.S. labor markets. One of these was a strong uptick in the number of people holding multiple jobs. Is that a good sign, or a bad one?

The idea that multiple job holders are a sign of crisis is fueled in part by stories like one in the New York Times about school teachers who work second jobs to make ends meet:
There are times when my lower back hurts, my feet hurt, my hands hurt. I have calluses on my hands that I shouldn’t have. You really don’t have much in the way of free time, and when you do, you’re consumed by housework, but you basically just sit on the couch like a big blob, and then I feel guilty about doing that. (Shauntel Highley, English teacher/window washer, Vinita, Okla.)
Some business analysts, too, are wary of the rise in multiple job holders. As Komal Sri-Kumar puts it in a piece for Business Insider,
In a robust economic recovery, the number of full-time workers should be rising, and the number of workers employed part-time or holding multiple jobs, should decline. The rise in the number of multiple job holders is troubling, and is yet another signal that there is still slack in the labor market.
Yet, if we look at the data, the rise in multiple jobholders looks less dire than these accounts suggest. The first thing we learn is that although multiple jobholders are not rare, they are not as common as the impression you might get the media. Currently, multiple jobholders account for just 4.8 percent of the labor force. These include 2.6 percent who hold a part-time job in addition to a full time job — a pattern called FT/PT — and another 1.1 percent who piece together two or more part time jobs, or PT/PT. Smaller numbers work two full-time jobs or hold multiple jobs that are unclassified because they vary in hours from week to week.

Tuesday, September 11, 2018

Administration Supports Elimination of Pre-existing Conditions Protections


Last week, a Texas judge heard oral arguments in a case brought by state attorneys general against the Affordable Care Act (ACA). The suit aims to overturn the ACA in its entirety on the dubious grounds that since Congress has eliminated the penalty for not having insurance, a key provision of the act, it thereby invalidated the act as a whole.

The Department of Justice, which supports the lawsuit in part, wants to keep the ACA on the books but does support elimination of one key provision — the guarantee that people will get full coverage for pre-existing conditions without paying higher premiums. But that is the scariest part of the lawsuit. As a recent tracking poll from the Kaiser Family Foundation confirms, an overwhelming majority of people support the pre-existing conditions proviso.

There is some cold economic rationality in tying pre-existing conditions protections to the penalty for not having insurance. The link between the two is a phenomenon known in insurance circles as adverse selection. Adverse selection occurs when people with high exposure to risk buy insurance. Since such people are likely to have large claims, insurance companies must charge high premiums. High premiums encourage more people to drop coverage, and the insurance market enters a death spiral.

Saturday, August 25, 2018

No, Health Care for All Would Not Turn Us into a Venezuela


In a recent editorial for the Wall Street Journal, James Freeman plays the red scare card against Bernie Sanders’ Medicare for All (M4A) plan, which he compares to the policies of “Venezuela’s Nicol├ís Maduro, whose mania for wealth redistribution has brought a country to its knees.”

Freeman gets the causation backwards. Venezuela is not in crisis because Maduro has been too generous with socialist goodies like health care. Quite the opposite. The Lancet reports that from 2010 to 2014, Maduro slashed health care spending by a third — and then stopped the publication of official statistics. Since then things have only gotten worse. Collapse of the health care system is one of the major reasons Venezuelans are fleeing their country by the tens of thousands every day.

But enough of Venezuela. Freeman misses the point about Sanders’ health care plan in more important ways, as well.

It is true that M4A would be expensive. Freeman relies on a study by Charles Blahous for the Mercatus Center, which estimates that M4A would cost taxpayers $32.6 trillion over ten years, even after positing substantial savings in total national health care spending. A more detailed study by Jodi Liu for RAND (of which Blahous appears not to have been aware when he wrote his Mercatus paper) comes in a significantly lower. It estimates that a baseline version of M4A would add about $1.8 trillion a year to net federal healthcare spending without cost savings and $1.7 trillion a year with. (Those numbers assume that current revenue sources for health care remain in place but do not include any proposed new revenue sources.) A trillion here, a trillion there — either way, it’s real money.

Wednesday, August 15, 2018

The EPA's SAFE Vehicle Rule Poses a False Choice. We Can Have Safe Vehicles AND Clean Air.

The EPA has released a proposed rule that would freeze corporate average fuel economy (CAFE) standards at 37 miles per gallon, rather than allowing them to rise to the Obama administration’s target of 54 MPG, as currently scheduled. The administration’s  proposal has the cute name of Safer and Affordable Fuel-Efficient Vehicles Rule, or “SAFE Vehicle Rule,” for short.

The proposed rule has been widely panned by environmentalists, and rightly so. However, the critics of the rule are wrong simply to defend the existing CAFE standards. The EPA’s analysis of the flaws of those standards is justified. But neither the EPA nor its critics are reaching the right conclusion, which is that we should repeal CAFE standards and replace them with a carbon tax — one tough enough to reduce carbon emissions by as much, or more, without the unintended consequences.

Tuesday, August 14, 2018

Is That Government Best Which Regulates Least?


In a recent post, I questioned Henry David Thoreau’s aphorism, “That government is best which governs least.” The data, it seems, show something different. Countries with small governments, as measured by the share of expenditures and taxes in GDP, tend actually to be somewhat less free and prosperous than those with larger governments. The quality of government, as measured by things like rule of law, independent judges, and integrity of government officials turns out to matter much more than the size of government. I concluded that Thoreau’s aphorism should be revised to read, “That government is best which governs well.

In response, several readers questioned whether the size of government, as measured by spending, was the right measure of “governs least.” Excessive regulation, they pointed out, may do more damage than spending and taxes. Maybe what we should say is, “That government is best which regulates least.”

Niskanen Center’s Will Wilkinson puts it this way:
Whether a country’s market economy is free — open, competitive, and relatively unmolested by government — is more a question of regulation than a question of taxation and redistribution. . .
If we want to encourage freedom and prosperity, we should pay more attention to easing the grip of the regulatory state.
The point is a good one — worth putting to the same kind of statistical test used in the previous post. Here we go:

Thursday, August 2, 2018

More on Work Requirements: A Response to AEI

An op-ed by Angela Rachidi and Robert Doar in Real Clear Policy, reprinted on the American Enterprise Institute’s blog, challenges some points I made about the effects of work requirements in my commentary on the topic last week. Rachidi and Doar’s critique focuses on the interpretation of data from the National Evaluation of Welfare to Work Strategies (NEWWS), which analyzed the results of 11 controlled experiments conducted around the country in the 1990s. Each experiment compared the experience of a group of welfare recipients who were subject to work requirements with a control group who did not face work requirements.

Rachidi and Doar point out that some of the programs were “jobs-first” programs that placed a primary emphasis on job placement, while others were “education-first” programs that emphasized human capital development before job placement. They claim that only the jobs-first variants are relevant to today’s debate over work requirements for noncash welfare such as SNAP, Medicaid, and housing assistance. Linking specifically to my commentary, they maintain that critics:
incorrectly cite the results from the education-focused programs, which were found to be largely ineffective compared to jobs-first programs, to suggest that work requirements would not be effective today in SNAP or Medicaid. The education-first programs are largely irrelevant to today’s discussion of extending work requirements to other safety-net programs — no one proposes that recipients be required to go to college in order to receive SNAP or Medicaid.

Wednesday, August 1, 2018

Does the Government That Governs Least Really Govern Best? A Quick Look at the Data.


Libertarians are fond of quoting Henry David Thoreau’s aphorism, “That government is best which governs least.” Thoreau was evidently paraphrasing his contemporary John O’Sullivan, but no matter who first said it, the quotation has become an axiom of those who love freedom. But is it true?

Let’s treat this aphorism as a hypothesis and test it against the data. To know what data we want, we first need to decide just what we mean by “best government” and “least government.”

“Best government” could mean one of three things: 
  1. It could mean the government that produces the best results in terms of human prosperity –  not just high GDP, but good health; access to food, clean water, shelter and education; safe communities; clean environment; and so on. To measure those things, we will use the Legatum Prosperity Index (LPI). 
  2. “Best government” could instead mean the government that allows the greatest degree of human freedom, including freedom of speech and religion, freedom in personal relationships, personal safety and security, security of property rights, freedom to trade, and so on. To measure those things, we will use the Human Freedom Index (HFI) from the Cato Institute. 
  3. Rather than a results-based measure, we could define “best government” in a procedural sense – a government that adheres to rule of law, maintains fair and impartial criminal justice, and is free from corruption. We can compile such a measure by extracting and combining relevant indicators from the LPI and HFI to construct a Quality of Government Index (QGOV). 

Saturday, July 28, 2018

Is the War on Poverty Really Over?



The Council of Economic Advisers recently released a report that began with the startling statement that the War on Poverty is over and has ended in victory. Properly measured, says the CEA, the poverty rate has fallen to just 3 percent.

Can such a low poverty rate, less than a quarter of the official measure (12.7 percent for 2017), be in any way credible? The answer turns out to be both “yes” and “no.”

There are, in fact, many different measures of the poverty rate. In addition to the official measure, the Census Bureau also publishes a modernized version called the Supplemental Poverty Measure, estimated at 13.97 percent for 2016. The Organization for Economic Cooperation and Development, a club of 36 middle- and high-income democratic countries, defines poverty as earning less than half of a country’s median income. By that definition, the U.S. poverty rate is 16.8 percent, the third highest in the OECD. Only Israel and Turkey have higher poverty rates.

Tuesday, July 24, 2018

Work Requirements Are the Newest Front in the War on the War on Poverty


On July 12, President Trump’s Council of Economic Advisers released a report titled “Expanding Work Requirements in Non-Cash Welfare Programs” in response to an April 2018 executive order on reducing poverty in America.

The CEA’s basic argument is simple: The war on poverty has been won — properly measured, the poverty rate is just 3 percent, a historic low. However, victory has left an ever-increasing number of able-bodied working-age adults dependent on in-kind welfare, especially on Medicaid, SNAP (formerly food stamps), and housing assistance. This problem can best be addressed by expanding work requirements for non-cash welfare programs. Work requirements will encourage self-sufficiency, strengthen the economy, and ultimately benefit the welfare recipients themselves.

The CEA is right, at least in part, in its critique of current in-kind public assistance programs. However, the picture it draws is misleading in a number of ways, and the case it makes for work requirements is unconvincing. There are better ways to address the weaknesses of the current welfare system. Here are some questions that need to be addressed before undertaking a wholesale expansion of work requirements.

Thursday, July 5, 2018

Is Single-Payer the Right Way Forward for Health Care?


America’s progressives are right when they say we need a health care system that guarantees everyone affordable access to essential care, asks everyone to pay their fair share of the cost, but not more, and makes health care transparent, efficient, and consumer-friendly. But are the also right about the best way to get there?

They ask, why don’t we just adopt a single-payer health care system like every other rich democratic country has? Why can’t the government just pay everyone’s medical bills and be done with it?

These are understandable questions, but they oversimplify. If we look closely at the world’s top-rated health care systems – those in countries like the UK, Australia, and the Netherlands – we find that they are not true single-payer systems. Compared with proposals like Bernie Sanders’ Medicare for All, other countries’ health care systems are much more decentralized, and stop well short of paying for all care for everyone.

To get a health care system that is universal, affordable, fair, and efficient, the United States needs to learn from other countries’ experience and adapt it to specific American circumstances. Universal catastrophic coverage offers a more plausible model than an idealized single-payer system that exists nowhere else.

For a full discussion, check out the slideshow of my July 5th presentation to the Cracker Barrel Society of Northport, Michigan.

Friday, June 29, 2018

High-Risk Pools, Reinsurance, and Universal Catastrophic Coverage

The most challenging problem in health care policy is how to deal with the very tip of the cost curve — the 10 percent of the population who account for two-thirds of all personal health care spending; or among them, the 5 percent of the population who account for half of all spending; or among them, costliest of all, the 1 percent who account for a fifth of all spending.



The challenge is made harder still by the fact that insurance — in the traditional meaning of the term — is not an option. A large percentage of cases at the upper end of the curve fail to meet two standards of insurability.

One is that an insurable risk must be the result of unpredictable chance. In reality, though, many individuals suffer from chronic conditions like diabetes that make them certain to require costly care for the rest of their lives. Others have genetic markers that make them medical time bombs from the point of view of private insurers.

A second standard of insurability is that the actuarially fair premium — one high enough to cover the expected value of claims — must be affordable. However, an actuarially fair premium for many people with costly chronic conditions would exceed their entire income.

There are several partial solutions to the noninsurability of high-end health care risks. Guaranteed renewal requires insurers to continue to issue policies to those who become ill, provided there is no break in coverage. Guaranteed issue, which requires insurers to accept any applicants, regardless of pre-existing health conditions, is an even stronger step in the same direction. Community rating requires insurers to charge the same premium, based on average claims, to everyone in a general category regardless of their health status.

The Affordable Care Act uses a combination of these requirements to ensure that people can buy health insurance at a standard price regardless of pre-existing conditions. However, doing so creates problems of its own. For one thing, these requirements make the system vulnerable to adverse selection since healthy people can remain uninsured and buy into the system only when they become ill. Also, even with community rating, spreading health care costs evenly over an entire population can mean unaffordably high premiums for people with low incomes.

That brings us to the subject of this commentary — policies that aim to cut off the top end of the cost curve in order to make health care more affordable and accessible for everyone else. High-risk pools and reinsurance are two ways of doing this. After reviewing the way these approaches work, we will explain how their benefits can be realized through a policy of universal catastrophic coverage (UCC).

Thursday, June 28, 2018

How to Leave the Euro: A Practical Roadmap for Italy

The leaders of Italy’s new populist government say they do not want to leave the euro. Except, no one believes them.

They are on record as saying the euro was a bad idea. Until they were stopped by the President of the Italian Republic, they tried to appoint Paulo Savona, a well-known euroskeptic, as finance minister. Instead, they appointed him European Affairs Minister. In a recent book, Savona called the euro a “German cage” and wrote that “we need to prepare a plan B to get out of the euro if necessary ... the other alternative is to end up like Greece.” In short, it is not surprising that the new government’s commitment to the euro is in doubt.

When whenever the possibility that some country might leave the euro arises. Leaving abandoning one currency and introducing a new one just too difficult, they say. They point to the years of planning that went into launching the euro in the first place. They warn that a country facing currencies would face a host of problems, ranging from panicked runs on banks to the need to reprogram vending machines.

Ultimately, though, such technical difficulties are surmountable. If Italy decides to leave the euro, the key to success will be to learn from the experience of the many countries that have changed currencies in the past. Here is a practical roadmap, drawing on the imaginative, pragmatic, devices that other countries have used to ease the introduction of a new currency.

Saturday, June 9, 2018

Could We Afford Universal Catastrophic Health Care Coverage?

Universal catastrophic coverage (UCC) is a health care plan that aims to protect all Americans against financially ruinous medical expenses, while preserving the principle that those who can afford it should contribute toward the cost of their own care. It offers a potentially attractive compromise between the current system, which leaves millions of people uninsured or underinsured, and more expensive, “first dollar” proposals that would cover all health care costs for everyone.

Skeptics often ask whether such a plan is affordable. The short answer is “Yes,” but I would prefer to frame the question differently. Rather than asking how much any given health care plan would cost, it is more useful to ask, “What is the best plan we could design for what we are politically willing to spend?” If we set that amount somewhere close to what the government now spends on health care, universal catastrophic coverage looks rather good. This post explains why.

The parameters of universal catastrophic coverage

First, we need to review the basic parameters that define any UCC plan. The simplest version of UCC would have just two parameters, a low-income threshold and, for those above the threshold, a deductible that varies with household income.

Saturday, June 2, 2018

Inflation Increasingly Erodes Wage Gains Even as Unemployment Falls

According to the latest Employment Situation Summary from the Bureau of Labor Statistics, average nominal hourly earnings for all employees on private nonfarm payrolls rose at a compound annual rate of 3.6 percent in May, 2016. That rate is well above the 2.6 percent average for the preceding 12 months, and also above the average CPI inflation rate of 2.5 percent for the same period. Monthly observations are shown by the dotted lines in the chart, while the solid lines show 12-month moving averages.

Monthly data include a lot of statistical noise and are subject to revisions, so policymakers will be paying more attention to trends than to individual data points. The trend lines show that over the past three years, CPI inflation has accelerated more rapidly than has the rate of nominal wage gains. CPI data for May will not be released until June 12, but by April, the last month for which full data are available, the 12-month moving average for wages exceeded that for inflation by just 0.1 percent (2.6 percent vs. 2.5 percent).

The trends of the moving averages contain both not-so-good news and better news. For workers, the news is not so good, inasmuch as the wage gains for May, which are hopeful taken in isolation, may turn out to be a statistical fluke. From a macroeconomic point of view, however, the news is better. With CPI and wage trends still holding at or close to 2.5 percent, there is little sign of overheating yet.

Reposted from Niskanen Notes

Friday, June 1, 2018

How Framing Affects Attitudes Toward the Social Safety Net

An article by Caitlin Dewey in the Washington Post led me to an interesting new piece of research by Rachel Wetts of U.C. Berkeley and Rob Willer of Stanford (unrestricted draft version here). The research, which is relevant for anyone in the area of public policy advocacy, shows how strongly framing—and the framing of charts, in particular—can affect attitudes toward pubic policies.

The specific issue that the authors investigate is the influence of information related to race on attitudes toward pubic assistance. As they put it in their abstract,
We argue that when whites perceive threats to their relative advantage in the racial status hierarchy, their resentment of minorities increases. This increased resentment in turn leads whites to withdraw support for welfare programs when they perceive these programs to primarily benefit minorities.
In one of several experiments, Wetts and Willer presented a questionnaire to a sample of participants recruited from Amazon Mechanical Turk. Before answering questions about welfare policy, participants were shown one of two variants of a chart depicting U.S population trends by race and ethnicity. Both charts were based on the same data from the Census Bureau, but Chart A shows a short time period, over which the trends appear relatively weak, while Chart B shows a longer time period, over which the trends appear stronger. Chart B also adds a line for “all nonwhite” which more dramatically shows that the white population is trending toward minority status.


After viewing the information, participants were presented with scenarios designed to reveal attitudes toward welfare. In one scenario,
participants were told to imagine that they were on a Congressional committee charged with cutting $500 million from the federal budget.  They were given a list of nine spending areas including “Temporary Assistance for Needy Families (Welfare)” and asked to indicate how much they would cut from each area.
White participants said they would cut TANF by 28 percent if they had viewed Chart A and cut by 51 percent if they had viewed Chart B—a statistically significant difference.

Although there were too few minority participants to produce a statistically significant results, their answers provide some food for thought. The nonwhites who had viewed Chart A said they would cut TANF by 53 percent, while those who had viewed Chart B said they would cut by 57 percent. About three-quarters of the recipients of cash assistance programs are nonwhite. Does TANF look better from a distance than from up close, or is this a statistical fluke?

And while we are on the subject of framing—would the results have been significantly different if the parenthetical word "Welfare," which is perceived pejoratively by many people, had not been inserted after "Temporary Assistance for Needy Families," which implies that the people who get it actually need it?

A previous version of this post appeared on Niskanen Notes

Monday, May 21, 2018

Why We Should be Skeptical About Guaranteed Jobs

The idea of a national job guarantee (JG) is about to go mainstream. The concept is far from new, but for the first time in decades, it is being endorsed by politicians with national stature. Sen. Bernie Sanders has promised to submit a legislative proposal. Other Democratic presidential hopefuls are showing interest. Academics, including Levy Economic Institute’s L. Randall Wray and Pavlina Tcherneva, have provided detailed blueprints for a national JG program.

No one denies that it would be nice if everyone who wanted to work could find a job, but before we start to beat the drum for a full-bore national job guarantee, we need a reality check. In a recent post, my  Niskanen Center colleague  Samuel Hammond outlined three reasons to be skeptical:
  1.     The private sector is better at allocating labor than public bureaucracies.
  2.     A JG program would be too easily politicized.
  3.     Other active labor-market policies, including wage subsidies, would work better than a JG.
These are valid points. Let me add three more reasons to be cautious about a national job guarantee.

4. Don’t exaggerate the pool of eligible candidates

As of April 2018, some 6 million people were officially unemployed, that is, counted as not working but actively looking for work. However, not all of those would be candidates for public-service jobs. Both in good times and bad, many of the unemployed are merely on temporary layoff or engaged in short spells of unemployment between jobs. At present, 33 percent of unemployed workers have been out of work for 5 weeks or less and another 31 percent for 5 to 14 weeks. Even in a bad year like 2010, nearly 40 percent of the unemployed were out of work for 14 weeks or less. Providing short-term in-and-out jobs for the temporarily unemployed is not the purpose of a JG. Even if offered such jobs, most of the short-term unemployed would probably prefer to keep looking for something more suited to their skills and interests.

Friday, May 18, 2018

Crop Insurance Should Die, Yet It Lives On

As I post this, Congress is debating the farm bill renewal. In a rational world, it would eliminate or greatly scale back our absurd system of crop insurance, but it appears that once again, the program will live on.

Insurance plays an essential role in any market economy. By spreading losses among members of a group with similar exposure, insurance encourages people to take prudent risks while protecting them from financial ruin in case they are the unlucky ones. But not all insurance is equal. Sometimes, rather than representing the public interest, a public insurance program can come to represent a special interest subsidy in disguise. Crop insurance, the multi-billion-dollar government subsidy that lies at the heart of the farm bill that is now working its way through Congress, is a case in point.

Let’s take a look at the strange economics of crop insurance, and what can be done to fix it.

Crop losses are not an insurable risk

The problems of crop “insurance” begin with the fact that crop losses are not really an insurable risk. Crop insurance violates three of the most important rules that economists have developed to identify which risks are insurable and which are not.

Sunday, May 6, 2018

The Role of Preventive Care in Healthcare Reform


“Remember the old saying that ‘an ounce of prevention is worth a pound of cure’?” asks United Healthcare. “Maintaining or improving your health is important – and a focus on regular preventive care, along with following the advice of your doctor, can help you stay healthy … Routine checkups and screenings can help you avoid serious health problems, allowing you and your doctor to work as a team to manage your overall health, and help you reach your personal health and wellness goals.”

You would think that a private insurer, on the hook for big claims down the road if preventive measures did not catch health problems early, would know, if anyone did. Popular opinion seems to agree. Readers of some of my own earlier healthcare posts have often offered opinions such as, “A couple hundred dollars of preventive medicine will prevent tens to hundreds of thousands of dollars being spent,” and, “Anyone who has ever visited a physician knows that preventive care is cheaper in the long run.”

But there is more to the story. Yes, healthcare reform needs to get preventive care right, but preventive care by itself will not make us healthier and cut national healthcare spending. Here are some of the issues.

Thursday, April 12, 2018

Why a Balanced Budget Amendment Would Be Profoundly Destabilizing

This week the House is expected to vote on a balanced budget amendment (BBA), introduced by Bob Goodlatte (R-VA), chairman of the Judiciary Committee. The amendment would require federal budget outlays to equal receipts each year.

Subjecting fiscal policy to rules, rather than allowing it to be driven purely by political impulse, would be a good idea, but not if the rules are the ones envisioned by this amendment. Far from stabilizing the economy, this kind of BBA would radically destabilize it, leading to dizzier booms and deeper recessions. Here is why.

How the budget affects the business cycle, and vice versa

To see why a balanced budget amendment would undermine stability, we need to understand how the budget affects the business cycle, and how the business cycle affects the budget. When we look at the pattern of federal receipts and outlays over time, as shown in the following chart, we see a lot of ups and downs. Where do they come from?

Wednesday, April 11, 2018

Trump Signs Executive Order on Work Requirements. Why Such Requirements Have Failed in the Past

On Tuesday, President Donald Trump signed an executive order directing all federal agencies to review and strengthen work requirements for all federal poverty programs, including Medicaid, food stamps, housing, and others. The preface to the order invokes familiar rhetoric:
The United States and its Constitution were founded on the principles of freedom and equal opportunity for all.  To ensure that all Americans would be able to realize the benefits of those principles, especially during hard times, the Government established programs to help families with basic unmet needs. Unfortunately, many of the programs designed to help families have instead delayed economic independence, perpetuated poverty, and weakened family bonds.  While bipartisan welfare reform enacted in 1996 was a step toward eliminating the economic stagnation and social harm that can result from long-term Government dependence, the welfare system still traps many recipients, especially children, in poverty and is in need of further reform and modernization in order to increase self-sufficiency, well-being, and economic mobility.
Conservatives have hoped for years that shouting “Get a job!” loudly enough will induce people now on public assistance either to enter the workforce, or if not, to quietly fade from view. Although work requirements have proved ineffective time and again, hope dies last.

There are better ways to address the problems of our broken social safety net. Here are some points I have made in previous posts:
  • The new executive order invokes the 1996 welfare-to-work reforms as a success story, but a careful review of the results shows that the effects of those reforms were disappointingly small.
  • The main reason that work requirements have small effect on actual work behavior is that a majority of low-income people who can work already do work. Most of those who do not have paid jobs are working as unpaid caregivers, in school, or hampered by physical and mental health problems.
  • Where requirements are introduced simply as a stick to drive people to work, they fail. To the extent they are successful, they must be backed up by substantial investment in training, job placement, and one-on-one counseling to cajole people into overcoming personal problems that may make them unattractive to employers. If state and federal governments are unwilling to invest in the administrative infrastructure needed to run work requirement programs well, they will do more harm than good.
  • Often the biggest barriers to self-sufficiency are the punitive benefit reduction rates and other implicit and explicit marginal taxes on low-income workers. This earlier post provides details and explains how programs could be redesigned to reduce work disincentives.
The continuing conservative hope is that shouting “Get a job!” loudly enough will induce people now on public assistance either to the workforce, or if not, to quietly fade from view. Hope dies last.

Reposted from NiskanenCenter.com

Guaranteed Jobs, Hungarian Style

In a recent blog post, Niskanen Center’s Samuel Hammond expressed skepticism about the idea of job guarantees. In his view, such policies do not attack the real problem, they are easily politicized, and, as active labor market policy, are inferior to wage subsidies for private sector jobs.

To see how guaranteed jobs work out in practice, we need look no farther than Hungary, where Prime Minister Viktor Orban has made the replacement of welfare by workfare a centerpiece of the claimed Hungarian economic miracle that helped him win re-election in last Sunday's election.

Writing recently for The New York Times, Patrick Kingsley and Benjamin Novak provide an overview of job guarantees, Hungarian style. Their article, which focuses on a small village in which 73 of 472 residents participate in the program, makes an effort to show both the positive and negative side of workfare. They note that although the guaranteed jobs pay only about half the minimum wage, that is twice what participants previously received in unemployment benefits. Participants told them that the pay, although minimal, was enough to make a difference. The program has also brought some small but welcome improvements in the town’s infrastructure.
“This little bit of money goes a long way in this village,” said Eva Petrovics, 60 who helps to clean the village nursery school. “The fridge is full now.”
The program has also helped to spruce up the village. Since 2012, workfare participants have built a small bridge, added a drainage system, and renovated the town hall and sports fields.
However, there are downsides to workfare, too. Hammond’s concerns about politicization seem to have been borne out. Kingsley and Novak note that the program have made participants more dependent on Orban’s Fidezs party, which is expected to retain power in this weekend’s election, and on the town’s mayor, who determines job assignments.

Moreover, despite better drainage and tidier soccer fields, workfare participants do not really put in all that much time doing useful work. Often, they report to work for an hour or so and then go home. There is especially little to do in winter.

Popular though it may be in the Hungarian countryside, Orban’s workfare policy has many critics, both in Hungary and in Western Europe. Annam├íria Artner is a Senior Research Fellow at the Centre for Economic and Regional Studies of the Hungarian Academy of Sciences. Writing for the progressive website Social Europe, headquartered in London, Artner maintains that
The implied threat of the punitive workfare regime is effectively sweeping the unemployed under the carpet. The unemployment insurance system in Hungary, introduced in the early 1990s following the transition to a market economy, effectively no longer exists.
Reposted from NiskanenCenter.com.


Wednesday, April 4, 2018

Why the "Sound Money" Components of Popular Economic Freedom Indexes Should Be Used with Caution

Institutions matter. Economists of the classical period knew that well. In recent years, economists have increasingly included institutional variables in their empirical work. The economic freedom indexes from the Fraser Institute and the Heritage Foundation have been among the most widely used institutional indicators.

The purpose of an economic freedom index, according to Heritage, is to “document the positive relationship between economic freedom and a variety of positive social and economic goals.” Many studies support that claim, finding that countries with high economic freedom scores are, in fact, more prosperous and dynamic than those that are less free. However, not all aspects of economic freedom turn out to be equally important. In earlier posts, I have been critical of the components of the economic freedom indexes that focus on the size of government and regulation. Here, I take on those that focus on price stability—the Fraser “Sound Money” component and the Heritage “Monetary Freedom” component.

I find that these price stability components add little to our understanding of economic freedom. Furthermore, because they incorporate an exaggerated fear of even moderate inflation, an attempt to achieve maximum price stability, as defined by these indicators, would be less likely to bring prosperity than to undermine it.

Is price stability an institution or a policy outcome?

The first problem with the Fraser and Heritage price stability indicators is that they do not really measure economic freedom in the sense that it underlies other components of the indexes. Robert Lawson, a senior member of the team that publishes Fraser’s Economic Freedom of the World reports, once wrote that an economic freedom index is, or should be, only that—“not an index of economic growth policies, efficient government provision of public goods, macroeconomic stabilization policies, or ideal income distribution policies.” If so, then the sound money indicators, as indexes of the success of monetary policy, are just what an economic freedom index should not be.

Tuesday, April 3, 2018

The Chickens Come Home to Roost: EPA Seeks to Weaken Fuel Economy Standards as New Car Prices Soar

On Monday, the EPA announced that it is is getting ready to  relax the ambitious automotive fuel economy standards (CAFE standards) that were set during the Obama administration. Those standards would have required new cars sold in 2025 to average more than 50 miles per gallon. EPA administrator Scott Pruitt said that the Obama administration had set the standards "too high" and "made assumptions about the standards that didn't comport with reality."

CAFE standards are coming under fire, in part, because of the rising cost of new cars, which reached a record high of $36,000 at the end of 2017. The extra costs of building fuel-efficient cars might be worth it if CAFE standards were really an effective way to cut greenhouse gas emissions, but they are not. Instead, they are among the most notoriously inefficient of federal regulations.

The fundamental problem is that CAFE standards attack emissions only indirectly. Buying an efficient hybrid instead of a gas-guzzling SUV is just one of many ways you can cut back on fuel use. You can, instead, consolidate errands or make your next trip to the supermarket in your Honda, instead of your Ford F-250, if you have one of each. Given more time to adjust, you can switch to public transportation, move closer to work and shopping, or work at home.

CAFE standards encourage fuel saving only when choosing what car to buy. Once you upgrade to a low-mileage vehicle, though, the cost of driving an extra mile goes down, reducing your incentive to take other fuel-saving measures. As a result, the cost of cutting fuel use via CAFE standards is higher than achieving the same result more directly through a carbon tax or higher gasoline taxes—six to fourteen times higher, according to a study by a team of researchers at MIT.

So, if CAFE standards are such a bad idea, why do we have them? As I explained in an earlier post,
If you are an economist, choosing higher fuel taxes over CAFE standards looks like a no-brainer, but if you are a politician, fuel taxes have an obvious drawback. Fuel taxes make the cost of reducing consumption highly visible. You see the big dollars-per-gallon number right there in front of you every time you drive up to the pump. CAFE standards, in contrast, hide the cost. You pay the price of a higher-mileage car only when you buy a new one, and even then, the part of the price attributable to the mileage-enhancing features is not broken out as a separate item on the sticker. You may notice that your new car costs more than your old one did, but there are lots of other reasons for that besides fuel economy.
But that logic only goes so far. As new car prices push into the stratosphere, the chickens are coming home to roost. The administration is sure to get a lot of political mileage out of making cars more affordable, climate be damned.

Reposted from NiskanenCenter.com