Friday, July 25, 2014

Sweden’s school choice disaster? Nope

Great post by Michael McShane of AEI.
"Earlier this week, an article in Slate by Columbia Business School professor Ray Fisman provocatively titled “Sweden’s School Choice Disaster” made the rounds on Twitter, with the perfunctory head nodding and tut-tut-ing from the anti-school choice crowd.

From the jump, much of Fisman’s analysis didn’t really make sense. He blames the drop Sweden has seen in international test scores since 2000 on the country’s voucher program, even though that program precedes the drop by almost a decade. He also highlights the fact that only about 25% of secondary school students and only 13% of elementary school students use vouchers to attend private schools, so it would be hard to blame any nation-wide problems on such a small program. He further cites studies that appear to show that voucher and non-voucher students score about the same on fairly-grade exams. This is perhaps a scandal for schools with inflated grades, but it is not evidence that the voucher program is a “failure.”
But that’s about as deep as I want to dig. Luckily, several others went farther down the rabbit hole to get into numerous other problems with the piece.

Over at National Review, Tino Sanandaji offered myriad other possible explanations for Sweden’s poor performance on assessments. A key paragraph:
There is no doubt that the voucher reform was poorly implemented, but this doesn’t change the fact that the reform worked. Surveys suggest that parents and pupils in private schools tend to be more satisfied than average. Many of the worst schools have simply closed as few students choose them. Bullying is a major problem in Swedish schools; with school choice, children are no longer forced to attend the same school as their tormentors. Ambitious immigrant children have the option to escape the ghetto and attend better schools. Some — though admittedly not most — private schools have been innovative and significantly improved education.
At Education Next, the Cato Institute’s Andrew Coulson lowered the boom. He writes:
Nevertheless, Slate claims that competition from private schools may have led to “a race to the bottom” in Sweden. But since Sweden’s private schools score higher on PISA than its public schools, it’s not obvious what this might mean. Could Slate be claiming that the performance of private schools has been declining faster than that of public schools? If so, the reverse is true. Since the PISA test was first administered in 2000, Swedish private schools lost a scant 6 points overall. The nation’s public schools lost 34 points over the same periodnearly six times as much. If one of these sectors is leading a race to the bottom, it’s not the private sector.
Finally, Jay Greene of the University of Arkansas offers Fisman’s work as a cautionary tale on his blog:
Fisman would never make such sloppy mistakes in a journal submission or conference presentation.  His colleagues would laugh at him.  But nothing seems to deter Fisman or other would-be Paul Krugmans from making laughable claims in the popular press.  Maybe academics should not be given such a free pass for whatever they write outside of journals.  Maybe the credibility of their scholarly work and their status within the academic community should also be called into question if they are willing to be so reckless.
All good food for thought and worth checking out in full!"

Fraud Rampant and Unpoliced on Obamacare Health Insurance Exchanges

Great post By Hans Bader of the Competitive Enterprise Institute Blog.
"Almost anyone can fraudulently obtain taxpayer subsidies to cover most of the cost of their health insurance on the Obamacare health insurance exchanges. That’s the gist of recent news coverage in The New York Times, Reason, and Associated Press. The fraud is possible because the government doesn’t check’s people’s eligibility, or verify the claims they make in their applications, contrary to what former HHS Secretary Sebelius certified in January.  
Applicants can submit a fake name and social security number, and no one even checks—not the government, not  insurers, not Obamacare contractors. This is the finding of a recent investigation by the federal Government Accountability Office, as described in The New York Times and Reason magazine.

This matters because most of the cost of health insurance policies on the exchanges is picked up by taxpayers through tax credits, to the tune of billions of dollars a year. (87% of customers are getting taxpayer subsidies to purchase health insurance, with taxpayers on average footing 76% of the bill.)
Applicants have included documents showing their income is too high to qualify for a subsidy, and received a subsidy anyway.  

As Reason magazine observes, “neither the administration, which wants to sign up as many people as possible regardless of actual eligibility, nor the insurers, which get paid for each person who signs up, have much of an incentive to make the system work better.”

As Peter Suderman noted at Reason,

On January 1 . . . former Health and Human Services Secretary Kathleen Sebelius submitted a  letter to the president. On the very first page of the letter, Sebelius personally certified that Obamacare’s health insurance exchanges “verify that applicants for advance payments of the premium tax credit and cost-sharing reductions are eligible for such payments and reductions” as required by the law. “When a consumer applies . . . [the exchange] verifies application information provided by the consumer” in order to assess eligibility.

In short, when people apply for Obamacare’s health insurance subsidies, there’s a robust, reliable system in place to check their documentation . . .But as it turns out, there isn’t. . .Not one that actually works, or even really attempts to work.

Undercover investigators from the Government Accountability Office (GAO) spent some time this year attempting to see if it would be possible to get subsidies using false application information. They set up fake names and Social Security numbers that aren’t real, then claimed citizenship or legal residence, according to the AP, which obtained an early copy of the GAO report. They submitted applications with income amounts that should have been too high to get subsidies. In other words, they fed the system blatantly fraudulent information that should have been swiftly rejected.

But the majority of their attempts were successful anyway (. . .The New York Times reports 11 of 12). Indeed, the agency is still paying its share of the premiums on those accounts, because the Obama administration, which certified the validity of its subsidy verification system, just a few months ago, hasn’t caught on to the fraudulent accounts yet. . .The lone rejection occurred when the GAO investigator refused to supply a Social Security number at all. . .The federal contractor supposedly in charge of weeding out fraudulent applications told the GAO that “it does not seek to detect fraud and accepts documents as authentic unless there are obvious alterations.” . . .

The upshot, then, is this: Not only did the administration not set up a working verification system, they lied about it and said they did.

These tax credits awarded to participants in the Obamacare exchanges have eligibility requirements that operate as massive marriage penalties and work disincentives. The Congressional Budget Office estimated those work disincentives may shrink the number of people employed in America by two million people.  That is one reason why analysts at institutions such as Bank of America expect Obamacare to increase the budget deficit. The GAO estimated in a 2013 report that Obamacare will increase the long-term federal deficit by $6.2 trillion."

Thursday, July 24, 2014

Why Does Government Fail?

By Peter Boettke of "Coordination Problem." 
"One of the books I have been reading this summer is Peter Schuck's Why Government Fails So Often? (Princeton, 2014).  So far, it is excellent.  Here is David Henderson's reaction to his work, which I basically share.

My own view of how to approach this question takes its cue from Ronald Coase's 1959 paper on the FCC published in the Journal of Law and Economics.  As Coase walks through his argument, he states clearly on p. 18 the following:
This "novel theory" (novel with Adam Smith) is, of course, that the allocation of resources should be determined by the forces of the market rather than a result of government decisions.  Quite apart from the misallocations which are the result of political pressures, an administrative agency which attempts to perform this function normally carried out by the pricing mechanism operates under two handicaps.  First of all, it lacks the precise monetary measure of benefit and cost provides by the market. Second, it cannot, by the nature of things, be in possession of all the relevant information possessed by the managers of every business which uses or might use radio frequencies, to say nothing of the preferences of consumers for the various goods and services in the production of which radio frequencies could be used.
In this short passage, Coase highlights the incentive problems that government faces in making decisions about resource utilization, the problems of bureaucracy and interest groups, the problem of monetary calculation (or the absence thereof), and the discovery and use of dispersed information/knowledge in the economic system.  And, of course, he is right to link the identification of these problems with governmental decision making back to Adam Smith.  Economists have known about these problems for a long time -- though of course in the course of the history of economic thought different individuals have given particularly crisp explanations of the respective problems -- most notably the work of Mises-Hayek and Buchanan-Tullock.  But Coase gets this right, and from what I have read so far of Peter Schuck's book -- so does he."

The Lingering, Hidden Costs of the Bank Bailout

Why is growth so anemic? New economic activity has been discouraged. Here are some ways to change that.
Click here to read this WSJ article by Noble prize winner Vernon L. Smith. Excerpts:

"New economic activity is hobbled if it is not freed from the burden of sharing its return with investors who bore risks that failed. The demand for new economic activity is enlarged when its return does not have to be shared with former claimants protected from the consequences of their risk-taking."

"Requiring new investment to share its return with failed predecessors is tantamount to having required Henry Ford to share the return from investment in his new horseless carriage with the carriage makers, livery stables and horse-breeding farms that his innovation would render obsolete. 

This burden on new investment helps explain the historically weak recovery since the "Great Recession" officially ended in June 2009, and the recent downturn in gross-domestic-product growth." 

"Japan and Sweden are examples of economies that followed distinct pathways after crises in the early 1990s. In Japan the economy floundered in slow growth for over two decades; Sweden recovered much more quickly. The difference can be attributed to following different policies in the treatment of severe bank distress."

"Japanese policy permitted banks to carry mortgage loans at book value regardless of their accumulating loss. Loans were expanded to existing borrowers to enable them to continue to meet their mortgage payments. This response could be rationalized as "smoothing out the bump." Bank investors were protected from failure by stretching out any ultimate return on their investment, relying on a presumed recovery from new growth that never materialized. This accounting cover-up was coupled with government deficit spending—tax revenues declined and expenditures rose—as a means of stimulating economic growth that was delayed into the future."

"From the beginning Japan was caught in the black hole of too much negative equity. The banks, burdened with large inventories of bad loans, geared down into debt reduction mode, reluctant to incur more debt, much as their household mortgage customers were mired in underwater mortgages and reluctant to spend. The result was a decade of lost growth that stretched into and absorbed a second decade of dismal performance. The policy cure—save the banks and their incumbent investors—created the sink that exceeded the pull of recovery forces."

"Sweden's response to deep recession in the early 1990s was the opposite of Japan's: Bank shareholders were required to absorb loan losses, although the government financed enough of the bank losses on bad assets to protect bank bondholders from default. This was a mistake: Bondholders assumed the risk of default, and a bank's failure should have required bondholder "haircuts" if needed. Nevertheless, the result was recovery from a severe downturn."

"The political process will always favor prominent incumbent investors."

"Invisible are the investors whose capital will flow into the new economic activity that constitutes the recovery."

"U.S. firms face exceptionally high corporate income-tax rates, the highest in the developed world at 35%, which hobbles growth and investment."

"To encourage investment, the U.S. needs to lower its corporate rates by at least 10 percentage points and reduce the incentive to escape the out-of-line and unreasonably high corporate tax rate."

Wednesday, July 23, 2014

Average hourly earnings have increased more over the last 14 years than food and beverage prices

See Chart of the day: Hourly wages vs. CPI-Food vs. CPI-All by Mark Perry of "Carpe Diem."
Updated: The chart above shows the percent changes between January 2000 and June 2014 for: a) Average Hourly Earnings (blue line), b) the CPI for Food and Beverages (red line) and c) the CPI for All Items. As the chart shows, average hourly earnings have increased over the last 14 years by more (49.6%) than food and beverage prices (45.7%) and all prices on average (40.3%).
Updated: This then provides more evidence that: a) average hourly earnings have increased more than the CPI for Food and Beverages since 2000, and b) real, inflation-adjusted average hourly earnings have risen since 2000.

Note: This chart is partly in response to a recent article in The Federalist by Sean Davis who claims that “food inflation blows away wage growth,” “food prices have soared since 2009,” and “food prices are growing 64 percent faster than wages.”"

Is the U.S. in the midst of a bee-pocalypse? The science says no.

See Why the Buzz About a Bee-pocalypse Is a Honey Trap: Populations of the pollinators are not declining and a ban on neonic pesticides would devastate U.S. agriculture. From the WSJ. By
Bee populations in the U.S. and Europe remain at healthy levels for reproduction and the critical pollination of food crops and trees. But during much of the past decade we have seen higher-than-average overwinter bee-colony losses in the Northern Hemisphere."
"Citing this disorder, antipesticide activists and some voluble beekeepers want to ban the most widely used pesticides in modern agriculture—neonicotinoids ("neonics" for short)—that account for 20% of pesticide sales world-wide. This would have disastrous effects on modern farming and food prices."

"neonics are much safer for humans and other vertebrates than previous pesticides."

"Yet there is only circumstantial or flawed experimental evidence of harm to bees by neonics. Often-cited experiments include one conducted by Chensheng Lu of the Harvard School of Public Health that exposed the insects to 30-100 times their usual exposure in the field."

"According to University of Maryland entomologist Dennis vanEngelsdorp, no cases (of collapse) have been reported from the field in three years

The reality is that honeybee populations are not declining. According to U.N. Food and Agriculture Organization statistics, the world's honeybee population rose to 80 million colonies in 2011 from 50 million in 1960. In the U.S. and Europe, honeybee populations have been stable—or slightly rising in the last couple of years—during the two decades since neonics were introduced, U.N. and USDA data show. Statistics Canada reports an increase to 672,000 honeybee colonies in Canada, up from 501,000, over the same two decades."

"Australian honeybee populations are not in decline, despite the increased use of [neonicotinoids] in agriculture and horticulture since the mid-1990s."

"In April the EU released the first Continent-wide epidemiological study of bee health in Europe, covering 2012-13 (before the EU's neonic ban went into effect). Seventy-five percent of the EU's bee population (located in 11 of the countries surveyed) experienced overwinter losses of 15% a year or less—levels considered normal in the U.S. Only 5% of the EU's bee population (located in six northern countries) experienced losses over 20%, after a long, severe winter."

"A ban on neonics would not benefit bees, because they are not the chief source of bee health problems today. Varroa mites are, along with the lethal viruses they vector into bee colonies. If neonics were dangerous, how to explain that in Canada, Saskatchewan's $19 billion canola industry depends on neonics to prevent predation by the ravenous flea beetle—and those neonic-treated canola fields support such thriving honeybee populations that they've been dubbed the "pastures for pollinators.""

Monday, July 21, 2014

East Germans who were exposed to socialism cheat more than West Germans who were exposed to capitalism.

See Moral Effects of Socialism by Alex Tabarrok of "Marginal Revolution"
"Dan Ariely and co-authors have an interesting new paper looking at moral behavior, specifically cheating, in people who grew up in either East or West Germany. 
From 1961 to 1989, the Berlin Wall divided one nation into two distinct political regimes. We exploited this natural experiment to investigate whether the socio-political context impacts individual honesty. Using an abstract die-rolling task, we found evidence that East Germans who were exposed to socialism cheat more than West Germans who were exposed to capitalism. We also found that cheating was more likely to occur under circumstances of plausible deniability.

…If socialism indeed promotes individual dishonesty, the specific features of this socio-political system that lead to this outcome remain to be determined. The East German socialist regime differed from the West German capitalist regime in several important ways. First, the system did not reward work based to merit, and made it difficult to accumulate wealth or pass anything on to one’s family. This may have resulted in a lack of meaning leading to demoralization (Ariely et al., 2008), and perhaps less concern for upholding standards of honesty. Furthermore, while the government claimed to exist in service of the people, it failed to provide functional public systems or economic security. Observing this moral hypocrisy in government may have eroded the value citizens placed on honesty. Finally, and perhaps most straightforwardly, the political and economic system pressured people to work around official laws and cheat to game the system. Over time, individuals may come to normalize these types of behaviors. Given these distinct possible influences, further research will be needed to understand which aspects of socialism have the strongest or most lasting impacts on morality.
It’s interesting that Ariely et al. try to explain cheating as a result of socialism. My own approach would look more to the virtue ethics of capitalism and Montesquieu who famously noted that
Commerce is a cure for the most destructive prejudices; for it is almost a general rule, that wherever we find agreeable manners, there commerce flourishes; and that wherever there is commerce, there we meet with agreeable manners.
 See Al-Ubaydli et al. for a market priming experiment and especially McCloskey on The Bourgeoise Virtues for more work consistent with this theme."