Sunday, November 19, 2017

NY Times On How Bureaucracy Slows Infrastructure Projects

See Trump Wants More Big Infrastructure Projects. The Obstacles Can Be Big, Too by BARRY MEIER.
"President Trump says he is frustrated with the slow pace of major construction projects like highways, ports and pipelines. Last summer, he pledged to use the power of the presidency to jump start building when it became bogged down in administrative delays.

“No longer will we allow the infrastructure of our magnificent country to crumble and decay,” Mr. Trump said in August.

In an executive order, the president directed federal agencies to coordinate environmental impact reviews for major projects with the goal of completing them within two years. Such reviews can often take four years and, in some cases, even longer.

Other presidents, including Barack Obama, have tried with mixed success to streamline the approvals for big infrastructure projects by pushing federal agencies to do environmental reviews faster. Frequently, delays are caused because multiple agencies, including the Environmental Protection Agency, the Bureau of Land Management and the United States Army Corps of Engineers, weigh in on the scope of an environmental review or have to issue separate permits before work can begin.
The centerpiece of Mr. Trump’s plan gives an office, the Council on Environmental Quality, within the White House, the authority to coordinate actions and direct how environmental reviews are performed. Much of the plan’s inspiration lies in a report, “Two Years Not Ten Years,” issued in 2015 by Common Good, a nonpartisan research and advocacy group.

The report estimated that the typical six-year delay in starting large building projects costs the country $3.7 trillion in lost economic activity, more than twice the amount needed to address the most urgent infrastructure needs. Along with roadblocks to speedy federal approval, the report blamed delays on such factors as fear of litigation and overly broad environmental reviews on all levels of government.

“They have embraced some of the goals and core ideas” in our report, said Philip K. Howard, who heads Common Good and is a lawyer at Covington & Burling in Manhattan. He had been a member of President Trump’s Strategic and Policy Forum, which disbanded in August after Mr. Trump’s remarks about the racial violence in Charlottesville, Va.

An analysis by the Congressional Research Service found that some of the claims in Common Good’s report, including the $3.7 trillion estimate, lacked a statistical basis, though the group had defended its work.

Infrastructure experts say that a lack of public and private funding, rather than bureaucratic delays, is the principal reason infrastructure projects stall. (In its budget proposal, the Trump administration has issued a six-page fact sheet about infrastructure funding, including private investment.) Still, they agree that the permitting process can be improved and streamlined. In addition to federal reviews, states and local governments must also approve major proposals — frequently a fraught process — and residents and other interest groups often use the courts to block or delay construction."

NY Times On The Mismanagement Of The Subway System

See How Politics and Bad Decisions Starved New York’s Subways: Disruptions and delays have roiled the system this year. But the crisis was long in the making, fueled by a litany of errors, a Times investigation shows.
"Century-old tunnels and track routes are crumbling, but The Times found that the Metropolitan Transportation Authority’s budget for subway maintenance has barely changed, when adjusted for inflation, from what it was 25 years ago.

Signal problems and car equipment failures occur twice as frequently as a decade ago, but hundreds of mechanic positions have been cut because there is not enough money to pay them — even though the average total compensation for subway managers has grown to nearly $300,000 a year.

Daily ridership has nearly doubled in the past two decades to 5.7 million, but New York is the only major city in the world with fewer miles of track than it had during World War II. Efforts to add new lines have been hampered by generous agreements with labor unions and private contractors that have inflated construction costs to five times the international average.

New York’s subway now has the worst on-time performance of any major rapid transit system in the world, according to data collected from the 20 biggest. Just 65 percent of weekday trains reach their destinations on time, the lowest rate since the transit crisis of the 1970s, when graffiti-covered cars regularly broke down.

None of this happened on its own. It was the result of a series of decisions by both Republican and Democratic politicians — governors from George E. Pataki to Mr. Cuomo and mayors from Rudolph W. Giuliani to Bill de Blasio. Each of them cut the subway’s budget or co-opted it for their own priorities.

They stripped a combined $1.5 billion from the M.T.A. by repeatedly diverting tax revenues earmarked for the subways and also by demanding large payments for financial advice, I.T. help and other services that transit leaders say the authority could have done without.

They pressured the M.T.A. to spend billions of dollars on opulent station makeovers and other projects that did nothing to boost service or reliability, while leaving the actual movement of trains to rely on a 1930s-era signal system with fraying, cloth-covered cables.

They saddled the M.T.A. with debt and engineered a deal with creditors that brought in quick cash but locked the authority into paying $5 billion in interest that it otherwise never would have had to pay.

In one particularly egregious example, Mr. Cuomo’s administration forced the M.T.A. to send $5 million to bail out three state-run ski resorts that were struggling after a warm winter.

At the same time, public officials who have taken hundreds of thousands of dollars in political contributions from M.T.A. unions and contractors have pressured the authority into signing agreements with labor groups and construction companies that obligated the authority to pay far more than it had planned.

Faced with funding shortfalls, the M.T.A. has resorted to borrowing. Nearly 17 percent of its budget now goes to pay down debt — roughly triple what it paid in 1997.

“It’s genuinely shocking how much of every dollar that goes to the M.T.A. is spent on expenses that have nothing to do with running the subway,” said Seth W. Pinsky, the former head of the city’s Economic Development Corporation. “That’s the problem.”

Reporters for The Times reviewed thousands of pages of state and federal documents, including records that had not previously been made public; built databases to compare New York with other cities; and interviewed more than 300 people, including current and former subway leaders, contractors and transit experts.

The examination found that the agency tasked with running the subway has been roiled by turnover and changes to its management structure. Dozens of people have cycled through high-level jobs, including many who left to work for contractors who do business with the M.T.A. Byzantine layers of bureaucracy have allowed transit leaders and politicians to avoid responsibility for problems.

But the theme that runs through it all is a perennial lack of investment in tracks, trains and signals.

On a good day, managing New York’s subway is a challenge. It is the largest urban transit system in the country and one of the oldest in the world. It is also one of the few to operate 24 hours every day.

And in the past two decades, M.T.A. leaders have guided the authority through the Sept. 11 attacks and Hurricane Sandy, disasters from which it is still recovering. After the emergency declaration this year, the authority unveiled an $800 million rescue plan that included adding train cars and staff.

But politicians and transit leaders have not acted on a series of chances to turn things around sooner. They ignored decades of warnings from state and city comptrollers. They failed to pass a congestion pricing plan in 2008. They chose not to give mass transit much of the proceeds from large settlements with banks after the financial crisis. They brushed aside the findings of the M.T.A. Transportation Reinvention Commission, a 2014 panel of transit leaders from around the world.

And through it all, The Times found, the M.T.A. has used sloppy data collection and accounting games that hide from the public the true causes of the subway’s problems."

Saturday, November 18, 2017

This Is What “Effective” Looks Like at HUD?

By Vanessa Brown Calder of Cato.

"Yesterday HUD Secretary Ben Carson tweeted that “The Low-Income Housing Tax Credit [LIHTC] is one of the most effective tools we have to create affordable housing.” And Secretary Carson’s presidential advisor published an op-ed yesterday which lauded LIHTC as a prime example of “the most effective and efficient use of the government’s resources.”

That is high praise for a program known for expense, complexity, lack of oversight, and abuse. LIHTC is arguably one of the most inefficient housing subsidy programs that the federal government administers.

Chris Edwards and I detail some of LIHTC’s failings in our report published earlier this week. One of LIHTC’s problems is that it doesn’t successfully accomplish its own objectives to redistribute to low-income tenants and create new housing.

First, most of the LIHTC subsidy goes to developers, lawyers, accountants, and financiers rather than low-income tenants. A 2011 study found that low-income tenants capture one-third of the subsidy. That leaves two-thirds of the benefit for corporations, banks, accountants, and lawyers involved in the process.

Second, LIHTC displaces similar market-rate housing. A recent study estimated that “nearly 100 percent of LIHTC development is offset by a reduction in the number of newly built unsubsidized rental units.” That means LIHTC requires taxpayers fund housing that would be built on the private market.

Another problem is that LIHTC is relatively expensive even compared to other housing and other government housing programs. Michael Eriksen’s work suggests LIHTC units cost 20% more per square foot than medium-quality market-rate housing, and the Government Accountability Office (GAO) found LIHTC units cost 19-44% more than housing voucher units over their lifetime.
Not to mention, LIHTC has a history of fraud and abuse. NPR ran a documentary that outlined some of the recent cases earlier this year.

This problem is likely due to the federal government’s “minimal” oversight of the program. The IRS oversees LIHTC but has only audited 13 percent of state administrators during the program’s entire existence. As a GAO auditor put it earlier this year, the “IRS and no one else in the federal government really has an idea of what’s going on.”

This is just a sampling of LIHTC’s problems; additional issues are noted in the report. If LIHTC is HUD’s version of an “effective” and “efficient” government program then that explains a lot.
See our report for more details on the Low-Income Housing Tax Credit."

The gains from cutting corporate tax rates

From Tyler Cowen.
"Here is a recent paper by Stephen Bond and Jing Xing:
We present new empirical evidence that sector-level capital–output ratios are strongly influenced by corporate tax incentives, as summarised by the tax component of a standard user cost of capital measure. We use sectoral panel data for the USA, Japan, Australia and eleven EU countries over the period 1982–2007. Our panel combines internationally consistent data on capital stocks, value-added and relative prices from the EU KLEMS database with corporate tax measures from the Oxford University Centre for Business Taxation. Our results for equipment investment are particularly robust, and strikingly consistent with the basic economic theory of corporate investment.
Via Henry Curr.  Here is a piece by Fuest, Piechl, and Siegloch, forthcoming in the American Economic Review:
This paper estimates the incidence of corporate taxes on wages using a 20-year panel of German municipalities. Administrative linked employer-employee data allows estimating heterogeneous worker and firrm effects. We set up a general theoretical framework showing that corporate taxes can have a negative effect on wages in various labor market models. Using an event study design, we test the predictions of the theory. Our results indicate that workers bear about 40% of the total tax burden. Empirically, we confirm the importance of both labor market institutions and profit shifting possibilities for the incidence of corporate taxes on wages.
Via Dina D. Pomeranz.  I’ve been reading in this area on and off since the 1980s, and I really don’t think these are phony results."

Friday, November 17, 2017

The U.S. trade deficit is not a function of trade policy but of underlying macroeconomic factors in the economy.

See Beware a quick drop in the U.S. trade deficit by Daniel Griswold of Mercatus.
"As he departed Asia yesterday, President Trump tweeted that “The United States has to be treated fairly and in a reciprocal fashion. The massive TRADE deficits must go down quickly!” The president should be careful what he wishes for.

The U.S. trade deficit can shrink for many reasons, some of them good for the United States, some of them not so good. If economic growth accelerates abroad, demand for U.S. exports can rise, reducing our bilateral deficits with those countries experiencing the strongest growth. If Americans start to save more, or the U.S. federal government borrows less, domestic interest rates and the value of the dollar can fall, boosting exports and dampening imports. Those are the benign reasons for a shrinking trade deficit.

In the not so good category of reasons, a U.S. recession can curb domestic demand for imports and foreign demand for U.S. assets, both acting to reduce our overall trade deficit. In fact, if we look back on the past 30 years, there have been only three years in which the U.S. trade deficit in goods has fallen by more than 10 percent compared to the year before. Those years are 1988, 1991, and 2009.
The 22 percent drop in the trade deficit in 1988 came near the end of the long 1980s expansion under President Reagan. The drop was a delayed response to the sharp decline in the dollar that was engineered by central banks from 1985 to 1987. For most of the 1983–1990 expansion, the U.S. trade deficit was growing to what were then record levels.

In both 1991 and 2009, the trade deficit dropped even more quickly, by more than 30 percent in each of those years, but neither year was a happy time for the U.S. economy. Both were recession years, with the trade deficit falling because of plunging domestic demand and investment.

For reasons I’ve explained in a recent paper for the Mercatus Center, the U.S. trade deficit is not a function of trade policy but of underlying macroeconomic factors in the economy. President Trump can sign all the trade deals he wants, but they will not put a dent in the overall U.S. trade deficit. The only proven quick fix for the trade deficit in the past three decades has been a recession."

Myths of the 1 Percent: What Puts People at the Top

By Jonathan Rothwell. Jonathan Rothwell is the Senior Economist at Gallup.

"No, It’s Not Trade

A rise in international trade — as a share of G.D.P., measured as either imports or exports using data from the Penn World Tables — is associated with equality, not inequality. The United States imports only a small fraction of the value of its total economy, whereas Denmark and the Netherlands are highly dependent on imports.

Or the Rise of Information Technology

Countries with higher rates of invention — as measured by patent applications filed under the Patent Cooperation Treaty, an indicator of patent quality — exhibit lower inequality than those with less inventive activity. As it happens, tech industries in the United States have contributed just a tiny bit to the rise of the 1 percent, and the salaries of engineers and software developers rarely reach the 1 percent threshold of an annual income of $390,000.

What About Unions?

Unions are thought to redistribute income from owners to workers, but there is no correlation across countries between the change in labor’s share of G.D.P. since 1980 and an increase in the income share of the top 1 percent. Britain saw an increase in the labor share of G.D.P. but also one of the sharpest increases in inequality. The Netherlands saw a large fall in labor’s share but no rise in inequality.

Scandinavian countries are heavily unionized and egalitarian, but Denmark experienced a large decrease in the share of workers represented by unions from 1980 to 2015, according to O.E.C.D. data, and very little change in inequality. Unionization rates dropped precipitously in the Netherlands and especially New Zealand over the period, but inequality rose as much if not more in Spain, where unionization rates rose.

Not Immigration, Either

Nationalists attribute rising inequality to mass immigration and the supposedly low skills of immigrants.
There is no correlation between changing immigration shares since 1990 and rising top-income shares. In fact, the countries that have absorbed the most immigrants — on a per-capita basis — have seen overall income inequality (measured by the Gini coefficient) fall.
An assumption implicit in this argument is that immigrants drag down earnings at the bottom of the distribution, making inequality worse. If this were an important factor, rising inequality should coincide with large gaps in income between foreign-born and native-born adults. It doesn’t.
My analysis of data from the Gallup World Poll from 2009 to 2016 shows that foreign-born adults earn 37 percent less than native-born adults in the Netherlands, after adjusting for age and gender. This is the largest gap among O.E.C.D. countries, and yet, the country saw no change in top-income inequality. Canada (minus 8 percent) and Britain (minus 7 percent) have small gaps but high and rising inequality.

In the U.S., Managers Are a Minority of Top Earners

Most top earners in the United States are neither executives nor even managers. People in those occupations make up just over one-third of all top earners in the United States. This share has been falling — particularly for corporate executives — and is lower than in many other advanced countries. In Denmark, Canada and Finland, close to half of top earners are in managerial occupations, according to my analysis of data from the Luxembourg Income Study.

So What’s Going On?

Almost all of the growth in top American earners has come from just three economic sectors: professional services, finance and insurance, and health care, groups that tend to benefit from regulatory barriers that shelter them from competition.
The groups that have contributed the most people to the 1 percent since 1980 are: physicians; executives, managers, sales supervisors, and analysts working in the financial sectors; and professional and legal service industry executives, managers, lawyers, consultants and sales representatives.
Without changes in these largely domestic services industries — finance, health care, the law — the United States would look like Canada or Germany in terms of its top income shares.

The United States also stands out in terms of how much money its elite professionals earn relative to the median worker. Workers at the 90th percentile of the income distribution for professionals make 3.5 times the earnings of the typical (median) worker in all occupations in the United States. Only Mexico and Israel, which have very high inequality, compensate professionals so disproportionately. In Switzerland, the Netherlands, Finland and Denmark, the ratio is about 2 to 1.
This ratio, the elite professions premium, is very highly correlated with income inequality across countries.
Others are noticing these trends. A new book, “The Captured Economy” by Brink Lindsey and Steven Teles, argues that regressive regulations — laws that benefit the rich — are a primary cause of the extraordinary income gains among elite professionals and financial managers in the United States and of a reduction in growth. 
This year, the Brookings Institution’s Richard Reeves wrote a book about how people in the upper middle class have shaped both legal and cultural norms to their advantage. From different perspectives, Joseph Stiglitz, Robert Reich and Luigi Zingales have also written extensively about how the political power of elites has undermined markets. 

Problems cited by these analysts include subsidies for the financial sector’s risk-taking; overprotection of software and pharmaceutical patents; the escalation of land-use controls that drive up rents in desirable metropolitan areas; favoritism toward market incumbents via state occupational licensing regulations (for example, associations representing lawyers, doctors and dentists that block efforts allowing paraprofessionals to provide routine services at a lower price without their supervision).
These are just some of the causes contributing to the 1 percent’s high and rising income share. 

Reforming relevant laws can make markets more efficient and egalitarian, and in contrast with trade, immigration and technology, the political causes of the 1 percent’s rise are directly under the control of citizens."

Thursday, November 16, 2017

Many of the people who will "lose" health insurance if the mandate is repealed are people who want to lose health insurance

By David Henderson.

"Someone tells you that you have to buy something, and levies a penalty if you don't. So you buy it. Then someone else countermands the first person's order. You no longer have to buy it. So, assuming it's not because the price of what you had to buy rose, you don't buy it. Are you worse off? 

Various media outlets have reported on the loss of health insurance that the Congressional Budget Office thinks will come about if Congress gets rid of the mandate that requires individuals to buy health insurance. Estimating the effects of changes in laws is always tricky, of course. What's not tricky is to explain to readers something that many of the reports don't do a good job of.

Are you ready?

Many of the people who will "lose" health insurance if the mandate is repealed are people who want to lose health insurance. That is, according to the CBO, what is causing them to get health insurance now is the mandate. So, by their standards, even if we, observing them paternalistically, might think different, they would be better off.

How many of the millions who lose health insurance are people who want to lose it? We can't tell exactly but we can probably come close.

Let's take the number that many people are focusing on--the number of people who will be without health insurance in 2027 who would otherwise have it: 13 million. Of these, we know, if the CBO is correct, that fully 5 million people want to be without health insurance. How do we know? Because they would otherwise be on Medicaid. They would choose to be without Medicaid even though they could be on it. And it's not because the price to them of Medicaid would change. The price, excluding their time cost to apply and qualify, is zero with or without the mandate.

Another 5 million would drop their non-group coverage, according to the CBO. Some of these would be healthier people willing to do without health insurance who don't find the current rates attractive. Let's guesstimate that this would be half of the five million, or 2.5 million. I think that's probably an underestimate. Why would the other half drop their insurance? Because, estimates the CBO, with fewer healthy people in the pool, insurance rates for non-group coverage would rise by about 10%.
So arguably over half of the 13 million without health insurance in 2027 would choose not to have it, not because the premiums would go up, but because the coercion would be gone.

Check the CBO's Table 1 for a breakdown that shows why the CBO estimates a multi-billion dollar saving in government subsidies in each year, adding to over $300 billion for the 10-year time period."

Free-Market Failure Has Been Greatly Exaggerated: Few things in human history have done so much to reduce absolute poverty

By Noah Smith.

"Harvard economist Dani Rodrik has a long and thoughtful essay about the shortcomings of neoliberalism -- the economic program of free markets and free trade. He writes:
Economists’ contributions to public debate are often biased in one direction, in favor of more trade, more finance, and less government. That is why economists have developed a reputation as cheerleaders for neoliberalism, even if mainstream economics is very far from a paean to laissez-faire. The economists who let their enthusiasm for free markets run wild are in fact not being true to their own discipline.
As someone who has done decades of pioneering work in the field of trade and growth, and who has been intimately involved in practical policy-making, Rodrik is as much of an expert on this topic as anyone . But although his criticisms are accurate, he overlooks much of the good that neoliberalism has done.

Rodrik very wisely explains why it's so easy for economists to seem like shills for simplistic free-market policies. Confronted with a desire for quick fixes and easy explanations, many economists instinctively revert back to the toy models they learned in their introductory economics courses -- models where free-market competition solves almost any problem. As Rodrik notes, these models represent a common fable -- University of Connecticut law professor James Kwak calls it "economism" -- that ignores a million and one important features of real-world markets. Government institutions, for example, matter a lot -- from the corporatism of 20th century Japan to Germany's innovative unions, there are many flavors of capitalism that all seem to work fairly well. And without good institutions, capitalism can easily degenerate into inefficient monopoly, crash-prone financial excess, short-sighted environmental destruction, or a number of other undesirable conditions.

But when it comes to the harms that neoliberalism has wrought, Rodrik cherry-picks quite a bit. He focuses on two countries -- Mexico and Chile. In the 1970s and 1980s, under dictator Augusto Pinochet, Chile took advice from a number of free-market economists, but the results were underwhelming. Since undertaking its own free-market reforms and signing the North American Free Trade Agreement, Mexico's economy has underperformed more interventionist countries like South Korea and China.

These examples of neoliberal disappointment are real enough. It's no accident that both come from Latin America -- the region where neoliberal advice, in the form of a 10-point plan called the Washington Consensus, garnered the most publicity. The Washington Consensus has been the target of bitter criticism for years, and Rodrik himself has been one of its most prominent detractors.
But Latin America is only one part of the world. Elsewhere, broadly neoliberal ideas have been much more of a success. Rodrik's essay should have taken these into consideration.

Take China. In the 1980s, after decades of economic and social disaster under Mao Zedong, China started experimenting with a market economy under party leader Deng Xiaoping. The regime began to allow small businesses and granted limited land rights. State-owned enterprises were partially privatized. The country opened to foreign investment, and went from a state of isolation to the world's biggest trading economy. By 2005, China's market economy passed its state-run economy in size. What happened after China's market reforms is now well-known -- the most dramatic explosion of economic growth in world history.

As Rodrik points out, state intervention still plays a prominent role in China's economy. But the shift from a rigid command-and-control economy to one that blended state and market approaches -- and the liberalization of trade -- was undoubtedly a neoliberal reform. Though Deng's changes were mostly done in an ad-hoc, common sense manner, he did invite famed neoliberal economist Milton Friedman to give him advice.

A decade after China began its experiment, India followed suit. In 1991, after a sharp recession, Prime Minister Narasimha Rao and Finance Minister Manmohan Singh scrapped a cumbersome system of business licensing, eased curbs on foreign investment, ended many state-sanctioned monopolies, lowered tariffs and did a bunch of other neoliberal things. Although the results were not as dramatic as in China, there was a sustained rise in economic growth:

It's almost impossible to overstate how important the growth explosions of India and China have been. So many people live in these two supergiant countries -- almost 40 percent of humanity, several times the total living in the developed world -- that together they determine the entire shape of human progress. During the last three decades, India and China have done more to reduce world poverty than any other force in history:

Dry facts and figures shouldn't obscure the poignant human reality of this miracle. People who once bathed in dirty rivers, defecated outside and saw a quarter of their children die before age 5 are getting food, shelter and clean water. Hundreds of millions of indigent farmers have moved on to better lives in cities. Child mortality in India is down by almost five-sixths.

It could reasonably be argued that nothing this good has ever happened before in human history. And India and China's growth appears far from over.

So sure, the Washington Consensus didn't boost Latin America into the ranks of rich countries. And the neoliberal reforms in the former Soviet Union met with mixed success. But India and China account for more than three times as many people as all of those countries combined. Their sweeping reduction in extreme poverty alone makes neoliberalism a qualified success. Though the free-market approach unquestionably has its shortcomings, it would be wrong to label it "bad economics," as Rodrik does. The truth, as usual, is more complicated."

Wednesday, November 15, 2017

The working rich are driving income inequality, not the rentiers

From Tyler Cowen.
Have passive rentiers replaced the working rich at the top of the U.S. income distribution? Using administrative data linking 10 million firms to their owners, this paper shows that private business owners who actively manage their firms are key for top income inequality. Private business income accounts for most of the rise of top incomes since 2000 and the majority of top earners receive private business income—most of which accrues to active owner-managers of mid-market firms in relatively skill-intensive and unconcentrated industries. Profit falls substantially after premature owner deaths. Top-owned firms are twice as profitable per worker as other firms despite similar risk, and rising profitability without rising scale explains most of their profit growth. Together, these facts indicate that the working rich remain central to rising top incomes in the twenty-first century.
That is from a new paper by Matthew Smith, Danny Yagan, Owen Zidar, and Eric Zwick, via the excellent Kevin Lewis."

Jon Murphy On Why It Is Okay To Have Trade Deficits That Lead To Foreign Investment

See Surprise!

"At Cafe Hayek, Don Boudreaux has a blog post discussing the rather frequent argument used by some protectionists who object to foreigners owning American assets.  Don writes:
One of the facts that I pointed out [in Don’s recent debate with Ian Fletcher] is that a U.S. trade deficit is good for the U.S. insofar as such a deficit means that capital is flowing into the U.S. and creates new businesses (or bolsters existing businesses).  Think, for example, of BMW’s factory in Greer, South Carolina, or of any of the many Ikea stores across the United States.
In reply, Fletcher agreed that such investment is productive, and even that it’s beneficial for Americans.  “However,” he replied (and here I quote from memory), “it would be even better if those assets were owned by Americans.”

The core error in Fletcher’s reply is the assumption that the productive assets that are brought into being by foreign investment would exist in the absence of foreign investment.  Fletcher assumes, for example, that the successful Ikea store in Dale City, Virginia, would exist in the absence of Ikea’s decision to build and operate a store there.  Fletcher assumes, in other words, that the ownership of an asset is economically distinct from the creation of an asset.  But this assumption is plainly mistaken.  Nothing prevented Americans from building a large furniture (or other kind of) store on that very location before Ikea built its store there – nothing, that is, other than the failure of any Americans to have the vision or the willingness to do so.  Ikea’s entrepreneurial vision and willingness to take the risk of building a store in Dale City added tothe capital stock in America (and in the world).
To build upon Don’s point:

People like Fletcher treat assets and resources as if they are mana from Heaven, that these factories and stores and the like just fall to the Earth, waiting to be claimed by whoever walks by.  But goods and services are brought into existence and traded through human action. It’s man, not God, that transforms and produces. God just gave us the faculties to do so.

However, there is also a crucial element of what Israel Kirzner called “surprise” needed.  That is, being aware when an opportunity presents itself.  Allow me to explain via metaphor:

Two shoe salesmen land in a foreign country. Both notice no one in this country wears shoes. The first calls back to headquarters: “I’m headed home. There are no sales opportunities here. No one wears shoes!” The second calls back to headquarters: “Send me more people. There are lots of sales opportunities here. No one wears shoes!”

The point of this story is that entrepreneurial activity includes “surprise,” that is: being aware of an opportunity that presents itself even when not actively searching for it.  One of the salesmen, the one who thought no opportunity existed, had no such element of surprise.  The other did.

There’s no reason to assume that if Ikea hadn’t shown up, someone else would have. This isn’t a “search cost” thing (ie, other people did not simply look hard enough and Ikea just looked harder/longer), but rather an entrepreneurial surprise thing. Ikea spotted an opportunity and invested. It’s probable no one else would have spotted (or, at least spotted at the same time) this opportunity.

But let’s say more. Let’s say that some American firm did spot the same opportunity at the same time and were competing against Ikea for the same resources (land, labor, etc). Would it be safe to say that the community would be better off if the assets were owned by the American firm rather than Ikea?

Not necessarily. Given that Ikea won the bidding war, that probably means Ikea had a higher value on the resources than the other firm. This, in turn, means that Ikea can likely produce more value out of the resource, which means providing value to the consumers of furniture. By being more efficient (that is, using fewer inputs to achieve the same or greater outputs), Ikea produces more value for the community than the other firm that lost the bid.

Economic growth occurs through the mechanisms of discovery and surprise (a la Kirzner) and resources going to their most valued uses.  We cannot take for granted either one of these processes."

Tuesday, November 14, 2017

NAFTA has been a smashing success, let’s hope the protectionist-in-chief doesn’t make America poorer by scrapping it

From Mark Perry.
"Below are a few excerpts from some recent reports on NAFTA and Trump’s threat to pull out of what the protectionist-in-chief calls the “worst trade deal ever made.” From the Wall Street Journal’s editorial yesterday (“A NAFTA Recession?“), emphasis mine:
President Trump keeps touting the 3% U.S. GDP growth of the last two quarters and “record” stock prices, and the economy is his best talking point. But he might want to take a look at the latest Journal survey of economists about the impact of a U.S. withdrawal from the North American Free Trade Agreement.
Not a single economist said that the withdrawal Mr. Trump has threatened would help the economy. Some 82% said the economy would grow more slowly for the next two years than it would otherwise, and 7% predicted a recession. That underestimates the risks of recession in our view, given the political shock from such a reckless act by a U.S. President and the damage that would ensue to North American and even global supply chains.
Mr. Trump is doing well overall on economic policy, with deregulation and support for tax reform. But his Achilles’ heel is his protectionist trade agenda and his lack of knowledge about the international economy.
And this excerpt below is from Kevin Williamson’s cover story in the latest issue of National Review (“The Triumph of NAFTA: The Trade Pact is a Smashing Success — Why Does Everybody Hate It?“), subscription required (emphasis mine):
Trump has threatened to pull out of NAFTA if he does not get his way, a move that would be, in the estimate of the Wall Street Journal’s editorial page, the “worst economic blunder since Nixon.” The U.S. Chamber of Commerce shares this view, and hundreds of state and local Chamber affiliates signed a letter asking that Trump not inflict needless chaos on North American trade rules out of pure pique and malice and stupidity. (They did not put it quite like that.) The U.S. Automotive Policy Council is spooked by the prospect of losing NAFTA, a development that would constitute a “$10 billion tax on the auto industry in America.” The Boston Consulting Group says that losing NAFTA could cost 50,000 jobs in the auto-parts business alone, and American farmers do not want to see new tariffs on the $40 billion in farm produce they send to Canada and Mexico, two of our three largest export markets. In the years since NAFTA was enacted, U.S. manufacturing has grown, trade has grown, exports have grown, employment has grown, wages have grown, the services industry has absolutely boomed, and consumer prices for many North American–traded goods have gone down. Why mess with a good thing?
Criticisms of NAFTA tend to be either very vague or dramatically sweeping. But the economic data do not support the populist indictment of free trade and free-trade pacts. The overwhelming consensus among economists is that NAFTA has had a negligible to modestly positive impact on U.S. employment and wages, and a modest to substantial effect on GDP growth — adding as much as 0.5 percent annually by some estimates. It is true that manufacturing employment has declined in the NAFTA era. It was declining before that, too, beginning in the 1950s. As J. Bradford DeLong of Berkeley runs the numbers, the effect of free-trade pacts on manufacturing employment accounts for less than 5 percent of the job losses, and probably more like 1 percent. That “giant sucking sound” that H. Ross Perot so feared has not come to pass, and in certain high-paying industrial fields, such as automobile manufacturing, NAFTA has been a boon in unexpected ways: It is true that some manufacturing work has been outsourced to low-wage Mexico and to high-wage Canada, but access to an integrated North American supply chain and duty-free access to the three national markets are key parts of what brought the “transplants” — European and Asian automakers building in the United States with American labor — to places such as Texas and Alabama.
Prosperity always emerges in unexpected ways, and NAFTA is one way in which we get the bureaucrats and mandarins and central planners out of the way to let that happen.
MP: The map and table above help tell the story of the economic importance of NAFTA, and trade with Mexico and Canada, to each US state’s economy. The table above shows the total merchandise trade for each US state with Canada and Mexico last year (exports + imports), both in total volume and as a share of each state’s GDP. The map above displays the trade with Mexico + Canada in 2016 as a share of each state’s GDP. Note that for automotive manufacturing-intense states like Michigan, trade with Mexico ($61 billion) and Canada ($71 billion) last year represented more than 25% of the state’s GDP of $487 billion. Other states with significant automotive production like Texas, Kentucky, Indiana, Tennessee, Ohio, Alabama and South Carolina had trade with Canada and Mexico last year that represented more than 5% of state GDP. For border states like Texas, North Dakota, and Vermont, trade with NAFTA partners represented more than 10% of the state’s economic output in 2016. In total, merchandise trade with Mexico and Canada (exports + imports) last year totaled more than $1 trillion and represented nearly 6% of US GDP.

As the WSJ pointed out, Trump’s Achilles’ heel is his protectionist trade agenda and his lack of knowledge about the international economy. Part of that lack of knowledge about the international economy is Trump’s failure to appreciate how important NAFTA trade is for American workers and consumers. Kevin Williamson correctly assesses NAFTA as a “triumph” and a “smashing success.”

The data support that assessment. Let’s hope the protectionist-in-chief reviews the economic data and hope that his Achilles’ heel for protectionism doesn’t result in scrapping a very successful economic trade deal that has generated significant economic benefits for the workers, consumers, and companies in all three countries."



Lessons from Free Banking Systems For Today

See Governing the Financial System: A Theory of Financial Resilience by Alexander Salter and Vlad Tarko of Mercatus.
"The 2008 financial crisis has sparked a renewed discussion of ways to combat financial instability. Alexander W. Salter and Vlad Tarko argue that a system of multiple, interlocking financial regulatory institutions—a polycentric system—could be a more effective policy tool for combating potential instability of financial and banking systems, which are largely governed today by top-down regulatory institutions (a monocentric system).

Lessons from Free Banking Systems

Institutional resilience is key to stable governance and is defined by robustness (the ability to absorb and recover from shocks) and adaptability. Contrary to their reputation for instability, banking systems in which banks issued their own money and operated without oversight from a central bank (free banking systems) were remarkably resilient, in large part because of three nested mechanisms:
  • The distinction between the medium of redemption and the medium of exchange. Today, money created by the central bank is the medium of redemption, but it can also be spent in the economy as the medium of exchange. In a free banking system, each bank printed its own currency but held the medium of redemption (historically, gold or silver) in its vault. Since an inability to fulfill withdrawal (redemption) requests would require a bank to sell its assets to meet demand, this encouraged banks to maintain adequate liabilities in circulation to meet the needs of trade.
  • The interbank clearinghouse enforced minimum-quality standards, cleared liabilities, and provided emergency loans to minimize transactions costs.
  • The hard budget constraint, or the fact that the amount of money in circulation was finite, was the result of extended liability, which made the owners of banks liable if banks couldn’t meet their obligations. These mechanisms provided strong incentives to banks to avoid taking on too many risky assets.

Using Design Principles to Understand Robust Governance

Whether or not a transition to a fully polycentric banking system is plausible or contemplated, lessons from free banking can improve understanding of what makes polycentric financial regulation resilient, which, in turn, can provide guidance for more effective financial regulation.
Salter and Tarko build upon the broader literature on polycentric governance and institutional resilience, and adapt the Nobel laureate Elinor Ostrom’s “design principles” for robust governance institutions to the problem of financial stability. Accordingly, they argue that in a successful system,
  • Boundaries are clearly defined, such as those established by clearinghouses and financial exchanges.
  • The price system and bankruptcy match benefits with costs as banks compete for customers by offering lower prices, but will remain in business only if they can earn enough to cover their costs.
  • Those affected by the rules have the ability to change them. In free banking systems the banks were self-regulating, whereas currently they do not play a direct role in rulemaking.
  • Those who monitor and enforce the rules are accountable, such as through members contesting the actions of clearinghouses.
  • The price system and the rules for settling property and contract disputes under the common law provide gradually increasing penalties for breaking the rules.
  • Low-cost options for dispute resolution encourage banks to solve disputes without costly legal battles under free banking.
  • Outside authority respects the rulemaking rights of the community, a major challenge for a financial system with a single, external regulator.
  • Responsibility for governing the system is dispersed through nested levels of governance through the entire system, allowing free banking systems to accommodate the wide variety of services offered in the financial system in a way that is difficult for top-down regulation."

Monday, November 13, 2017

Agricultural subsidies aid the wealthy, not those in rural poverty

By Vincent H. Smith & Ryan Nabil of AEI.

"As Congress and the current administration seek to reduce poverty, policymakers should be wary of wasteful programs that do little to help poor Americans. Agricultural subsidies — especially popular with the largest and wealthiest farm business operations — largely fall into that category.

Those subsidy programs are often marketed by farm interest groups as helping the rural poor, many of whom voted for the current president in key Electoral College states such as Pennsylvania, Wisconsin, Georgia, North Carolina and in the Florida panhandle. In fact, farm subsidy programs do little for the rural poor and even less for the urban poor.

The subsidy programs that the House and Senate agricultural committees are defending and would like to expand include the federal crop insurance subsidy program, direct payments to farm businesses through so-called supplementary “farm income safety net” initiatives, and outlays on conservation programs.

Taken together, these programs cost about $20 billion every year. Crop insurance subsidies alone cost $8 billion, 30 percent of which goes to private insurance companies. Two additional “safety net” programs — price loss coverage and agricultural risk coverage — cost taxpayers between $6 billion and $8 billion in annual payments. Farm businesses also receive $5 billion a year in subsidies for adopting or simply continuing farming practices (such as soil conservation and protecting the environment) that are already being used because they are profitable.

Who gets all that federal money? About 70 percent of all crop insurance and other farm income safety net payments flow to 10 percent of the largest crop-producing farm businesses. This group comprises less than 100,000 farm operations, each of which on average receives more than $140,000 every year. Those farms are owned by households with annual incomes and levels of wealth that are multiple times higher than those of the typical American family, and certainly far higher than those of families in poverty. Conservation subsidy payments also predominantly flow to the largest farm operations and wealthiest farming households.

In contrast, 10 percent of the smallest farms receive a mere pittance, on average no more than about $50 — from the federal crop insurance and safety net programs. And the bottom 80 percent, including midsize farms, receive less than 10 percent of all subsidy payments.

Subsidy advocates have also argued that farm subsidies increase employment opportunities in rural areas, but there is no substantive evidence to support that claim. Labor needs continue to decline within and beyond farm households, and among farms that receive most of the subsidies. For example, about 70 percent of all crop insurance subsidies and other safety net program outlays are paid to the producers of three crops: corn, soybeans and wheat. The production of those crops is heavily mechanized and very little unskilled labor is needed. Conversely, farm enterprises that are more labor intensive such as those that raise livestock, and grow fruits and vegetables, receive very little in the way of direct farm subsidies.

Effectively, these programs do nothing to alleviate poverty in rural areas. As Dan Sumner, Joe Glauber and Parke Wilde point out in their study “Poverty, Hunger, and U.S. Agricultural Policy,” those programs also do little for the urban poor, as their effects on the price of food in supermarkets and inner-city bodegas are negligible.

If a major objective of Congress and the Trump administration is to develop and sustain programs that help many low-income households, then continuing these programs is not the way to go. While far from perfect, the supplemental nutrition assistance program (SNAP) targets 43 million Americans — including 13 million children — whose family incomes fall below the poverty line. Many of those families and children are not able to have adequate access to food.

Programs that increase food availability for those families, and feed children in need who would otherwise go to bed and to school hungry, are far more effective tools in the fight to mitigate hunger and improve nutrition. In the present, they would improve the health of those in need, and in the future, they would improve the children’s learning outcomes.

One current problematic idea that is being given serious consideration by some lobbyists and legislators is the proposal to cut nutrition programs to provide more farm bill revenues for expanded farm safety net subsidy programs. The reality is that those programs would continue to favor financially advantaged farm business owners.

Instead, improving the cost effectiveness and targeting of SNAP and other nutrition programs makes better policy sense. Robbing anti-poverty programs to fund farm subsidy initiatives for the benefit of high-income, wealthy households should be of concern to all legislators and voters."

As The Trade Deficit Grows, U.S. Net Worth Rises

See Tell Me Again Why A Net Inflow of Capital Into America Makes Americans Poorer from Cafe Hayek.

"Mark Perry used data to construct this revealing graph that makes a point very much like one of the points that I made in my debate last week at Hillsdale College with Ian Fletcher – namely, a rising
U.S. trade deficit
U.S. capital-inflow surplus does not mean that Americans are losing net wealth.  Quite the opposite, as reality turns out.


Sunday, November 12, 2017

Why Does California Have The Nation's Highest Poverty Rate?

By Chuck DeVore.
"As averaged from 2013 to 2015, California had America’s 17th-highest poverty rate, 15 percent, according to the U.S. Census Bureau. But, by a newer, more comprehensive Census accounting, California’s true poverty rate is an eye-popping 20.6 percent—the highest in the nation.
What poverty measure a politician or an organization uses can be very informative.

Because the Official Poverty Measure excludes the high cost of living on the coasts, it undercounts poverty in California and New York while exaggerating poverty throughout much of the South and Midwest. This leads to a gross misunderstanding of poverty, much of it willful, by

In fact, three factors, the cost of living, labor force participation, and demographics, together explain most of America’s poverty rate at the state level.

The U.S. Census Bureau’s Official Poverty Measure, more than a half-century old, is showing its age. Originally derived from a U.S. Department of Agriculture Household Food Consumption Survey in 1955, Census determines the yardstick poverty threshold by multiplying the subsistence food budget by three while only counting income and cash assistance. As a result, the official measure doesn’t consider food assistance provided by the Supplemental Nutrition Assistance Program (SNAP—formerly known as Food Stamps) because it isn’t technically cash, though it spends the same at a supermarket. It also doesn’t include housing subsidies. Most importantly, the official poverty rate doesn’t account for regional cost of living differences, most of which is determined by the price of housing.

Concerned about the lack of a regional cost of living poverty calculation, Congress called for a report in 1974. Ever since, the issue has been studied, with increasingly detailed reports showing that, in fact, the cost of living matters a lot to Americans’ standard of living. For instance, according to one readily available cost of living calculator that uses Census data, for every dollar earned in Abilene, Texas, it takes $1.51 to achieve the same standard of living in Los Angeles, California, a 51 percent difference. But, the official poverty threshold makes no account of this.

Changing the official poverty calculation to include regional living costs would be very difficult politically because only a handful of high-cost, mostly liberal states would benefit, while large swaths of Middle America would see a loss of federal dollars.

While it doesn’t count in the granting of government assistance, five years ago the U.S. Census Bureau developed the Supplemental Poverty Measure to address many of the shortcomings in the long-used poverty measure. Census’ latest Supplemental Poverty Measure report was issued on September 13.

Unlike the traditional poverty calculation in use for 50-plus years, the U.S. Census Bureau’s Supplemental Poverty Measure accounts for many of the costs incurred by poor families, such as rent, employment-related childcare expenses, and payroll taxes, but not food, clothing, or other costs not directly related to employment. The Supplemental Poverty Measure also accounts for the value of noncash benefits, such as housing vouchers and food assistance.

The nation’s poverty map changes significantly between the Official and Supplemental measures, with poverty migrating from the low-cost South to high-cost California and New York.

And, what makes California, New York, and other high-cost areas high cost? Mostly land-use restrictions that create artificial scarcity in the housing market by preventing builders from bringing the sorts of houses and apartments to market when and where people want them.

Lastly, a word on demographics. Demographers say that America will be a minority-majority nation by 2055. Today, four states are already there: California, Hawaii, New Mexico and Texas. Of these four states, Texas has by far the lowest Supplemental Poverty Measure, 14.9 percent. This compares to 16.8 percent in Hawaii, 17.1 percent in New Mexico, and 20.6 percent in California.

Proportionately, California’s Supplemental poverty rate is 38 percent higher than Texas’—something that should be a source of embarrassment for the home of Hollywood, the Silicon Valley and the nation’s highest marginal income tax rate."

Aluminum Foil Tariffs Will Not Help The U.S.

See Won’t Get Foiled Again by 
"The Trump administration has just put crippling tariffs (97-162%) on the import of aluminium foil from China. Making America great again? It’s doubtful. Far more American firms use aluminium foil than make it. Indeed, only two US-based firms make it and one of them is owned by Swedes. Virginia Postrel has the details:
Only two companies have U.S. mills making the thin-gauge foil affected by the duties. The ones owned by Sweden-based Gränges are already selling all they can produce; the company has announced plans to expand capacity at its Tennessee mill by 2019. Converters say that JW Aluminum Co., the Mt. Holly, South Carolina-based company that lobbied strongly for the duties, isn’t offering them much, if any, additional supply.
Most of the ex-Chinese sales won’t even go to US firms but to firms in countries not affected by the tariffs, including Russia, Bulgaria, South Korea and Taiwan. Yes, Russia."

Saturday, November 11, 2017

The Trouble with Trump’s Tariff Reciprocity

By Colin Grabow of of Cato.

"President Trump’s favored catchphrase when speaking about trade policy is that it must be “free, fair, and reciprocal.” His penchant for such language has certainly been on display during his current trip to Asia, where in Japan alone Trump used some variation of it on at least three separate occasions.

Conducting a joint press conference with Prime Minister Abe, Trump professed a particular affinity for the reciprocal aspect of this formulation:
[F]rankly, I like reciprocal the best of the group. Because when you explain to somebody that you’re going to charge tariffs in order to equalize, or you’re going to do other things – some people that don’t get it, they don’t like to hear that. But when you say it’s going to be reciprocal – that we’re going to charge the same as they’re charging us – the people that don’t want a 5 percent or a 10 percent tariff say, oh, reciprocal is fair – and that could be 100 percent. So it’s much more understandable when you talk about reciprocal.
Trump also noted that this prized reciprocity does not exist in the U.S.-Japan trade relationship, telling a group of U.S. and Japanese business leaders that “We want free and reciprocal trade, but right now our trade with Japan is not free and it’s not reciprocal.”

On the surface, Trump’s comments may appear to be commonsensical and correct. Indeed, ideal tariff levels between two countries are a reciprocal zero. It is also accurate that the United States and Japan do not enjoy reciprocal trade in the context of tariffs. A deeper examination of the subject, however, reveals that the president gets more wrong than he gets right.

Let’s first note that while President Trump often frames the reciprocity argument as one in which the United States is the aggrieved party charging lower tariffs while its trading partners opt for higher ones, the opposite is also frequently the case.

The U.S.-Japan trading relationship is a useful example. Perusing the two countries’ HTS codes, one can see that the United States charges tariffs on a number of goods produced by Japan including a 2.5% duty on automobiles, a 25% tariff on trucks, and 14% tariff on imports of railway passenger coaches. Japan, in contrast, charges no tariff at all for any of these products. 

Even where the two sides both extend duty-free treatment to the same product, this can simply mask underlying protectionism. Like Japan, the United States does not apply tariffs to imports of ships used for the transport of people and goods (HTS code 8901.90.00 for those who care to look it up). It does, however, have a law on the books called The Merchant Marine Act of 1920—more commonly known as the Jones Act—which mandates that any vessel used to transport goods or people between U.S. ports must be domestically built. While a ship can be purchased from Japan tariff-free, this protectionist law ensures that its usefulness will be greatly diminished.

None of this is to suggest that the United States is always the villain and never the victim. Japan is notoriously protectionist in the area of agricultural products, which is particularly costly to an agricultural powerhouse such as the United States. Japanese tariffs on beef, for example, are typically 38.5%—and currently 50% due to the imposition of a “safeguard” measure to give the country’s beef producers additional protection—while the U.S. rate is a comparatively low 4%. Oranges, meanwhile, incur a Japanese duty ranging from 16-32% depending on the time of year they are imported, while 100 kilograms of the fruit imported into the United States will face a tariff bill of just $1.90. Fish, mostly duty-free in the United States, typically face duties of 3.5% and higher in Japan.
Under a tariff regime based on perfect reciprocity, the United States would impose tariffs on such food products to match those of Japan. But other than raising the cost to U.S. consumers of Waygu beef or Japanese fish (Americans do not consume Japanese citrus products in any significant quantity), what would this accomplish? Japan’s high food tariffs reflect the influence of the country’s powerful farm lobby (sounds familiar!), and the prospect of diminished exports to the U.S. is unlikely to dissuade those in Japan’s agricultural sector from their protectionist stance. The likely result would be the status quo by Japan, but with American consumers facing elevated prices and reduced choice and American businesses confronted with increased input costs, thus reducing their competitiveness. Copying a trading partner’s misguided approach is not a sensible policy.

Rather than hewing to a blind insistence on tariff reciprocity which holds U.S. businesses and consumers hostage to decisions made in foreign capitals, the Trump administration should push for the conclusion of trade agreements which reduce tariffs and other forms of trade barriers by both the United States and its trading partners to the greatest extent possible. This, not simplistic sloganeering, represents the best path towards freer and expanded trade."

Low-Cost Private Schools Are Changing the Developing World

In war-torn countries like Liberia and South Sudan, a multitude of private schools.

By James Tooley of FEE.

"In the world of international development, Liberia has recently gotten attention for contracting out management of some public schools to the private sector. The Financial Times and The Economist have covered this story. That is partly due to the fact that the large American company involved, Bridge International Academies, is funded by, among others, Mark Zuckerberg and Bill Gates. Predictably, Liberia’s policy has aroused the ire of international teacher unions and NGOs.

This focus on Bridge is a shame. Something else is happening in Liberia – and other war-affected countries – which is much more noteworthy. I have been to Liberia and Sierra Leone, countries recently torn by civil war, as well as South Sudan, still in the throes of bloody conflict. Journeying into the slums, I quickly found what I’ve found in every other developing country: low-cost private school, after low-cost private school. Experts I’d spoken to before my visit told me I might find a small number of church or NGO schools, but nothing else. In fact, I found huge numbers of schools run by proprietors – “for-profit” low-cost schools.

The Necessity of Private Education

In Liberia I researched seven major slums, some with expressive names: you can guess why the slum “Chicken Soup Factory” is so called, although you’d be wrong about “Red Light”, which is named after Monrovia’s functioning traffic light. In these slums, I found 430 private schools, serving 100,000 children. Sixty-one percent of the schools were “for profit”, run by men and women entrepreneurs as small businesses, to provide better education than was available elsewhere. Going door to door for a household survey in the largest slum revealed 71 percent of children in private schools, and only 8 percent in government schools (the remaining 21 percent were out of school).

Children in the low-cost private schools outperformed those in government schools, and private schools provide better quality for a fraction of the cost.  The cost to parents of sending a child to private school turned out to be not much more than sending to a supposedly “free” government school, as any school – public or private – requires extra costs such as shoes, uniform, books and transport, and these tended to dwarf the cost of school fees.

What’s not to like? Development experts concede that such schools might be tolerated as a “necessary evil”. But only temporarily. They argue that every effort should be made to “normalize” education, to ensure government education ministries fulfill their proper roles of regulating, funding and providing state education for all. The only twist in that story is Liberia’s bold attempt to bring in international operators to manage some state schools. Given that there are so many existing low-cost private schools in Liberia, run by local entrepreneurs, maybe it would have been better to have harnessed their energies, perhaps by providing parents with vouchers to use in private schools of their choice, than to bring in controversial outsiders?

State Controlled Education Was Always the Problem

In any case, there’s a huge elephant in the room. It is well documented that one of the primary causes of civil war in each of these countries was government control of education. In Liberia, witness after witness to the Truth & Reconciliation Committee, established to soothe the tribulations of war, spoke of government using education as a tool of oppression. In Sierra Leone, those in power favored their own peoples educationally at the expense of others. One of the major reasons for the breakaway of South Sudan was enforced Islamisation of schooling, as well as severe educational inequalities perpetuated against the people of the south.

Surprisingly, this is accepted by development experts. They don’t see any contradiction between acknowledging this and promoting as the only way forward a return to full government control of education. There will be the “right kind” of government education this time, they claim.

But my research suggests an alternative approach that goes with the grain of what poor parents are choosing. In conflict-affected countries, low-cost private schools should be celebrated as major contributors to providing high-quality educational opportunities for all. Let education in conflict-affected states be as far as possible left to the private sector. This will reduce the temptation for governments to use education for political purposes, reduce corruption, and lead to higher standards and better value-for-money to boot.

Once one is going down this road, it may have implications for ideas on the role of government in education elsewhere.  Why not extend the same argument to Nigeria or India, where there’s also a burgeoning low-cost private sector, which outperforms government education at a fraction of the cost? And even – now here’s a thought – to the UK too.

In developing countries, one reason parents prefer low-cost private education is because of the parlous state of government education; state schools in England & Wales or Scotland aren’t as bad as all that. But my current research suggests that it may be better for a nation, for its democracy and its people, if education is outside of the state altogether.

I’m not convinced that this principle of independence applies only to war-torn nations, so I’m exploring the possibility of creating a chain of low-cost private schools here too. My inspiration is the extraordinary endeavors of educational entrepreneurs, battling against odds that others would find daunting, who have succeeded in providing quality education in the most difficult places on earth."

Friday, November 10, 2017

Senators Are Misguided in Attempt to Lower Drug Prices

By Veronique de Rugy.
"Most Republicans are rightfully counting on their reduction of the corporate income tax rate to lift stagnant wages. They should also continue to fight for a higher standard of living for all by reforming health care, hence lowering its costs. That requires fixing excessive government involvement and getting special interests' influence out of the way. Unfortunately, in that quest for lower health care prices, lawmakers are often tempted to take opposite routes.

Take their recent attempt to cut drug prices by forcing companies to sell you medicine at lower prices. I guess railing against manufacturers for high drug prices and assuming that they are all greedy, dishonest actors is easier than actually looking for the underlying factors driving these higher prices.

In that spirit, a group of Democratic senators sent a letter to the Trump administration demanding implementation of an Obama-era rule intended to penalize drug manufacturers for alleged price gouging. The penalties were proposed as part of the 340B drug pricing program, itself an example of how misguided attempts at controlling the health care market from the top down never produce the promised benefits for patients.

The purported aim of 340B is increased access to drugs for the poor and uninsured. Yet being a government program, it goes about it in the most convoluted way. 340B effectively mandates — by making it a requirement for participation in Medicaid — that manufacturers reduce prices for participating clinics and hospitals regardless of whether they pass any savings on to patients or whether the patients who ultimately receive the drugs are poor or wealthy.

This system is terribly designed. It lets hospitals take advantage of an arbitrage opportunity at the expense of drugmakers and has done little to nothing for patients. Hospitals get access to drugs that are 30 to 50 percent cheaper than list prices and are still allowed to offer them at full cost, simply pocketing the difference. Obamacare made the problem worse by drastically expanding eligibility for hospitals to participate in the program. The number of hospitals enrolled doubled between 2009 and 2012.

The program has not only failed to benefit patients but also, in some ways, done significant harm. Thanks to 340B's distortive effects — and the fact that the nonparticipating providers that are unable to acquire drugs at deeply discounted prices have been forced to close or consolidate with participating facilities — chemotherapy treatments have shifted dramatically from lower-cost physician offices to higher-cost hospital outpatient facilities. By pushing chemotherapy infusions to hospitals, 340B makes cancer treatment even more expensive.

Drug prices are indeed higher than they should be, but if the senators behind the recent letter want someone to blame, they should start by looking in the mirror. The heavy hand of government is found throughout the health care system, and the drug market is no exception. Thanks to high regulatory barriers, the Tufts Center for the Study of Drug Development estimates a cost of $2.6 billion to develop and bring to market a new prescription drug. Some of this is caused by the nature of the market and the uncertainty of scientific research, but a significant portion is caused by bureaucracies such as the Food and Drug Administration. Such high barriers ultimately suppress competition and reduce innovation, leaving patients to face higher prices and have fewer treatment options.

If members of Congress had cracked open any random Economics 101 textbook prior to passage of 340B, they would've learned that price controls always create market distortions. Instead, many are now urging even more onerous burdens on manufacturers in the form of penalties when they sell their products at a price not approved by the government. There's absolutely no reason to suspect this would work out better for American patients looking for drugs than Venezuela's price control regime, which has reduced a once prosperous nation to the brink of starvation.

It's clear that curbing the cost of health care would go a long way toward providing Americans with much-needed relief. The right way to achieve that goal, however, is one that's unfortunately counterintuitive to most lawmakers. Rather than try to arbitrarily force health care prices down under the pretense of price gouging, they should remove barriers that prevent the market from working effectively and cause prices to go up in the first place.

Anti-gouging policies create scarcity, impede innovation and raise prices. Scaling back government intervention in the health care market would increase the quality of health care and lower costs to consumers, including drug prices."