Milton & Rose Friedman On Externalities, Market Failure And Government Failure

Excerpt from Free to Choose:

 "Almost everything we do has some third-party effects, how-
ever small and however remote. In consequence, Adam Smith's
third duty may at first blush appear to justify almost any proposed
government measure. But there is a fallacy. Government measures
also have third-party effects. "Government failure" no less than
"market failure" arises from "external" or "neighborhood" effects.
And if such effects are important for a market transaction, they
are likely also to be important for government measures intended
to correct the "market failure." The primary source of significant
third-party effects of private actions is the difficulty of identifying
the external costs or benefits. When it is easy to identify who is
hurt or who is benefited, and by how much, it is fairly straight-
forward to replace involuntary by voluntary exchange, or at least
to require individual compensation. If your car hits someone
else's because of your negligence, you can be made to pay him
for damages even though the exchange was involuntary. If it
were easy to know whose collars were going to be dirtied, it would
be possible for you to compensate the people affected, or alterna-
tively, for them to pay you to pour out less smoke.

If it is difficult for private parties to identify who imposes costs
or benefits on whom, it is difficult for government to do so. As a
result a government attempt to rectify the situation may very
well end up making matters worse rather than better—imposing
costs on innocent third parties or conferring benefits on lucky
bystanders. To finance its activities it must collect taxes, which
themselves affect what the taxpayers do—still another third-
party effect. In addition, every accretion of government power for
whatever purpose increases the danger that government, instead
of serving the great majority of its citizens, will become a means
whereby some of its citizens can take advantage of others. Every
government measure bears, as it were, a smokestack on its back.

Voluntary arrangements can allow for third-party effects to a
much greater extent than may at first appear. To take a trivial
example, tipping at restaurants is a social custom that leads you
to assure better service for people you may not know or ever
meet and, in return, be assured better service by the actions of
still another group of anonymous third parties. Nonetheless, third-
party effects of private actions do occur that are sufficiently im-
portant to justify government action. The lesson to be drawn from
the misuse of Smith's third duty is not that government interven-
tion is never justified, but rather that the burden of proof should
be on its proponents. We should develop the practice of examining
both the benefits and the costs of proposed government interven-
tions and require a very clear balance of benefits over costs be-
fore adopting them. This course of action is recommended not
only by the difficulty of assessing the hidden costs of government
intervention but also by another consideration. Experience shows
that once government undertakes an activity, it is seldom ter-
minated. The activity may not live up to expectation but that is
more likely to lead to its expansion, to its being granted a larger
budget, than to its curtailment or abolition."

Oren Cass On The Problems With Cost-Benefit Analysis

See The New Central Planners. Cass is with the Manhattan Institute. Excerpts: 

"The approach of the National Transportation Safety Board in a conflict with the Federal Aviation Administration illustrates the devastatingly foolish mindset the order aimed to counteract, and the valuable role a cost-benefit analysis can play. As any parent knows, a child under two years old can fly without purchasing a ticket by sitting on an adult's lap. But in 1994, a DC-9 crashed while attempting to land in Charlotte, North Carolina. Thirty-seven of 52 passengers were killed, including a nine-month-old infant held by her mother. The NTSB concluded that "if the child had been properly restrained in a child restraint system, she might not have sustained fatal injuries," and thus issued a formal safety recommendation requiring that small children have their own seats and appropriate restraint systems.

In response, the FAA used the number of annual aviation accidents with survivors and the share of passengers under the age of two to estimate that the proposed regulation could save no more than five infant lives per decade. With more than 6 million such infants flying each year, and assuming a ticket price of $200 per person, the cost per life saved would exceed $2 billion. Further, as the FAA noted, the additional cost would lead some families to drive in situations where they otherwise would have flown, and deaths resulting from "diversions" to far more dangerous highways would cause many more infant deaths than the new rule could prevent. Amazingly, the interagency battle continued for 12 years before the NTSB, without changing its opinion, "reluctantly concluded that it cannot convince the FAA to take the action recommended" and closed the matter."

"Perhaps the greatest flaw in cost-benefit analysis runs parallel to one that bedevils the identification of externalities: the subjectivity inherent in deciding what factors to include. Take the EPA's recent effort to tighten limits on atmospheric ozone levels. Its cost-benefit analysis identified between $19 billion and $38 billion in annual benefits as compared to $15 billion in annual costs. But the comparison is apples-to-oranges. The EPA cast its benefit net widely, counting whatever public-health benefits it could infer from past epidemiological studies and finding two-thirds of its total not from ozone reductions but rather from the "co-benefits" of incidental reductions in other pollutants. For example, missed workdays for mothers staying home to care for asthmatic children — avoided thanks to cleaner air — are valued at $75 each.

On the other side of the ledger, only the most direct compliance costs facing regulated facilities are considered. Even then, the analysis relies on the appearance of as-yet-uninvented technology (and its hypothetically declining cost) to make compliance plausible and affordable. In 2011, when President Obama (facing re-election) rejected the EPA's first attempt to tighten the ozone standard, he explained, "I have continued to underscore the importance of reducing regulatory burdens and regulatory uncertainty, particularly as our economy continues to recover." But the EPA's final 2014 analysis of cost excludes any consideration of how the policy might affect direct economic indicia like energy prices, employment levels, and economic growth, to say nothing of the broader socioeconomic impact of restricting industrial activity across broad swaths of the country. No consideration is given to the damage increased regulation and uncertainty does to the economy's dynamism, or the opportunity cost of firms never started and ideas never pursued.

Such things may seem unquantifiable, but that challenge is no different from the one faced in the translation from air-pollution levels to premature death to a dollar value. When the president of the United States says his policies are saving "tens of thousands of lives each year" and producing "hundreds of billions of dollars in benefits for the American people," one assumes the claim must have a solid basis. But few who see that particular sausage being made would be inclined to ever consume it again.

The claim of lives saved, for instance, does not represent actual lives actually saved. In fact, EPA offers no evidence of the relevant pollutants at the relevant levels ever causing a single death. Instead, it relies on epidemiological studies showing that deaths tend to increase slightly (on the order of 1% to 2% in the case of ozone) on days when atmospheric pollution concentrations are significantly higher. Thus the suggestion is that, by reducing those concentrations, each person faces some minutely smaller chance of dying. When EPA reports its rule will avoid 630 premature deaths from short-term exposure, it means only that each American's risk of death will be reduced by 0.0002%.

To determine the value of that risk reduction, EPA must then use the "Value of a Statistical Life," calculated in large part from wage-risk studies that examine the wage premium given workers in high-risk occupations. For instance, as one Harvard University study sponsored by the EPA found, male blue-collar workers in higher-risk industries earned an additional $0.32 per hour. This was nearly three times the equivalent premium for female blue-collar workers. For white-collar workers, there appeared to be no wage premium at all. Statistical analysis nevertheless translated these findings into a "value" of approximately $10 million per life, roughly the current figure used by the EPA, thus the billions of dollars in savings.

Table 5-20 on page 305 of the 575-page Regulatory Impact Analysis for the EPA's proposed ozone standard shows a "monetized ozone-only benefit" of $6.4 billion for the prevention of premature deaths. When combined with its estimated benefits from the coincidental reduction of other pollutants, the total benefits of $19 billion to $38 billion exceed the $15 billion in estimated compliance costs. But there is no $6.4 billion. There is only a statistical relationship between ozone levels and mortality showing a lower level could lower risk of death for some people on particular days by a thousandth of a percent, and a finding that certain blue-collar workers in certain higher-risk industries receive slightly higher wages.

Perhaps that is the best possible translation of environmental harm into economic cost. The analysis does have some use, insofar as it provides a basis for comparing the relative harm of various pollutants or the relative cost-effectiveness of different mitigation strategies. But it does not follow that society should spend up to 6.4 billion actual dollars to achieve a 6.4 billion "dollar" benefit, or 15 billion actual dollars for the full 19 billion to 38 billion "dollars" of benefit in the EPA's analysis. Nor does it follow that an economist can confidently use these estimates to design a tax that will improve the market's efficiency."

Thanks to the past 40 years of environmental regulation, an extensive literature now documents its economic effects. For instance, a 2000 study in the Journal of Political Economy found counties in "nonattainment" with Clean Air Act standards (as many more would be under the EPA's new ozone rule) saw the construction of new plants in polluting industries decline by 26% to 45%. A 2001 NBER working paper found that, between 1972 and 1987, such counties lost 590,000 jobs and $75 billion in economic output. More broadly, a 2013 study in the Quarterly Journal of Economics found that, after the passage of the 1990 Clean Air Act amendments, "the average worker in a regulated sector experienced a total earnings loss equivalent to 20% of their preregulatory earnings." In Consequences of Long-Term Unemployment, the Urban Institute provides a helpful literature review of the many findings on how such economic outcomes lead to "declining human and social capital," "impacts on future labor market attachment," "impacts on physical and mental health," "effects on children and families," and "impacts on communities."

Beyond the concrete effects within affected industries, policymakers committed to giving benefits and costs equal attention could also examine the macroeconomic implications of increased regulation. The Mercatus Center, for instance, has recently launched RegData, a comprehensive database quantifying industry-specific federal regulations. The regulatory equivalent of studies measuring concentrations of pollution in the atmosphere, RegData allows analysts to identify relationships between regulation and outcomes like economic growth and productivity. One early study found that from 1997 to 2010, the least-regulated industries experienced productivity growth at twice the rate of the most-regulated industries."

"The Department of Energy, approvingly analyzing its own proposed energy-efficiency requirements for commercial refrigeration equipment, assumed that increased prices would produce no decline in purchases and further concluded the new requirements would increase both employment and wages."

Oren Cass On The Problems Governments Face In Trying To Control Externalities

See The New Central Planners. Cass is with the Manhattan Institute. Excerpt:

"The theory is fine. If producing a ton of steel costs $50 but also releases $10 of pollution, society should want the manufacturer to behave as if the ton's cost were $60. A $10-per-ton tax would accomplish that. This idea can be formulated as a more general rule; as Nathaniel Keohane and Sheila Olmstead write in Markets and the Environment, the basic text of the Harvard Kennedy School's course in environmental economics: "A tax on pollution equal to the marginal damage at the socially efficient level of pollution will achieve the socially efficient outcome."

But what is the socially efficient level of pollution? A market economy traditionally relies upon a market price to facilitate an efficient level of production and consumption, yet that signal is precisely what the new central planner wishes to subvert. Even if he can determine that a marginal ton of pollution at the current level costs $10 (which he cannot, because of the challenges in cost-benefit analysis discussed below), he has considered only one external effect of the economic activity and has no idea of the magnitude or even the direction of its net social impact, nor whether the socially efficient level is higher or lower than the current one. Even if he could reliably determine the net impact of that factory's steel production for each marginal ton, he could not extend the conclusion to other locations or other points in time. Nor would his calculation identify the potentially counterintuitive and counterproductive distributional implications of his intervention.

The greatest obstacle to counteracting an externality is that neither the externality nor its "solution" acts in isolation. The case of fossil fuels provides an excellent example. Recall the IMF's conclusion that market prices for the fuels represented a multi-trillion dollar "subsidy" because negative externalities went uncorrected. But deep in that report, the Fund acknowledged that, at the "right" price, electricity and gasoline consumption in Asia would fall by about 25%. Any positive externalities of that energy use among predominantly impoverished communities — from general economic growth and associated public-health improvements, to the education of children whose schools need heat and light — would disappear. Depending on the relative value of those positive externalities compared to the negative ones emphasized by the IMF, the socially optimal level of fossil-fuel consumption may actually be higher, lower, or equal to the prevailing market level.

More generally, the same industrial activities that produce negative environmental externalities also provide employment, wages, and tax payments, offering a variety of social and public-health benefits to families and communities. Anne Case and Angus Deaton of Princeton University provide a prominent recent example, finding that increased substance abuse, liver disease, and suicide among non-Hispanic whites aged 45 to 54 had led to the equivalent of nearly 500,000 extra deaths between 1999 and 2013, affecting most dramatically those with a high-school education or less. The authors suggest that "economic insecurity" may be a driver. Indeed, it would be surprising if declining economic fortunes for blue-collar workers did not produce an uptick in such maladies, just as surely as an increase in pollution from industrial facilities might produce an uptick in other health problems. One can add any favored or disfavored social phenomenon to the ledger. The IMF study includes the congestion, accidents, and road damage associated with driving petroleum-powered vehicles.

Researchers in the United Kingdom have linked road-traffic noise to strokes and death, a finding that should interest residents protesting the construction of subsidized but noisy wind-turbine farms near their homes. If our ton of steel were manufactured at night, perhaps "light pollution" — which EPA administrator Gina McCarthy has declared to be "in our portfolio" — would come into play, to say nothing of the effect night shifts may have on family and social-capital formation. On the other hand, long-term unemployment — including of those who might otherwise work a night shift — has been linked to poor outcomes for the children of the unemployed.

The eager analyst may be tempted to begin quantifying all the steel ton's externalities, so that a careful calibration of taxes and subsidies to offset each will get the price just right. But such an exercise is ludicrous on its face, both because each individual quantification will be wrong and because unintended consequences will be ignored. If government were capable of it, central planning might actually work. Instead, it mandates children remain in bulkier car seats for more years, then discovers with dismay that families purchase larger and less fuel-efficient cars, then mandates automakers improve fuel-efficiency and promises it will save those families money as gas prices rise, then provides large subsidies for the purchase of electric vehicles that are too small for those families and out of their price range anyway, then watches gas prices plummet, then celebrates that gas prices are low while lamenting they are not higher.

The good news is that such a comprehensive analysis of all relevant externalities is unnecessary, because it amounts to asking a much simpler question: Is the steel factory, given all its social benefits and costs, helping or harming the community in which it is located? If the community sees the steel factory — or, more precisely, the factory's marginal unit of production — as beneficial, restricting its output through a tax is backward. If anything, the community would prefer a subsidy that expands production further. The carefully calculated cost of the associated pollution determines nothing.

The question is also exceedingly situation-specific. A struggling community with clean air and large numbers of unemployed blue-collar workers probably favors production increases — a colloquial way of observing that the net externalities are likely positive, an insight confirmed by the enormous tax breaks new facilities frequently attract. A booming metropolis struggling to reduce smog, meanwhile, may view the marginal cost of further pollution as exceeding the marginal benefit of an additional job. A coastal enclave of educated elites may care mostly about increased traffic and an influx of new workers and thus have no interest in any facility regardless of either job creation or pollution.

Such NIMBYism raises the further question of whose costs and benefits should even count and whether distributional impacts matter. If the coastal enclave's relevant population expands to include outlying working-class communities, its analysis would change. When the costs and benefits act at different scales, managing the balance of equities becomes more difficult still. In some situations the air pollution might spread downwind while jobs remain local, but in others there may be regional economic benefits while only the facility's immediate neighborhood suffers the stench. Particularly in the case of environmental regulation, concentrated costs will often fall on labor and capital within an industry, and on its customers through higher prices, while diffuse benefits will accrue to different groups entirely.

It is also critical to contemplate how changing property values affect who the ultimate beneficiaries will be. Where an externality causes a constant level of harm over time, the value of property in affected locations should be lower by the net present value of that harm (that is, all future harm discounted back to today). Indeed, in some situations economists actually use housing-price differentials as indicia of how much pollution costs. But like a property tax, the entire future burden of an externality will be borne by the owner of property at the moment the burden becomes known. Renters or future buyers pay less for their housing, so they should find themselves no worse off than had the externality never existed. Conversely, where the net externalities generated from an event — such as the opening of a plant — are positive, the entire benefit is captured immediately. Future residents will pay more to move into town.

The transmission of externalities through property values turns the concept of "environmental justice" on its head. Activists commonly claim that the distributional effects of regulation support their agenda, suggesting that low-income and minority communities suffer disproportionately from pollution and other externalities. But that reasoning should apply only to residents who owned property at the time externalities were introduced. A low-income family renting an apartment near the steel plant should pay lower rent than in the absence of the steel plant by precisely the amount of harm the steel plant causes them. Removing the steel plant's pollution would not benefit them, because the value of their apartment and thus the rent charged would increase accordingly. It should not be surprising if heavily polluting plants are found disproportionately in low-income communities; those residents are the ones most likely to live in the accordingly lower-cost housing. Without the presence of the pollution, they might very well be priced out.

Nor do indications point toward low-income communities viewing the marginal cost of pollution as exceeding the marginal benefit of additional industrial activity. To the contrary, as Politico reported perplexedly last September, "President Barack Obama's aggressive environmental agenda is running into a surprising source of opposition: Black elected leaders." The article quoted a letter to President Obama from Steve Benjamin, mayor of Columbia, South Carolina, and president of the African American Mayors Association, explaining that "mayors, county officials and governors still face the challenge of curtailing ozone while expanding the industrial production, construction, and infrastructure projects that create jobs and grow our tax base." In general, the widespread enthusiasm that accompanies the announcement of a new plant's construction, and the dismay that accompanies notice of an impending closure, suggest that current levels of environmental regulation are out of balance with society's needs."

Cities with more economic freedom have lower unemployment

See Why rich countries have poor cities By Nicholas Umashev, a policy research intern at the California Policy Center.

"As I avoided the potholes, ignored the sounds of guns, and walked past beggars throughout the streets of New Orleans, I could not help but be reminded of my travels in Phnom Penh, Cambodia. With their mass poverty and crumbling infrastructure, the two cities differ in one key area: Phnom Penh is in a developing country and New Orleans is in a developed country.

Throughout the United States, I frequently come across what I call “Third World cities in First World countries” – whether it is Detroit, Baltimore, or even my beloved New Orleans. These Third World cities all have one thing in common: an absence of free and open markets.

There is a wide consensus amongst economists that economic freedom largely determines the wealth of nations and metropolitan areas are no exception to this rule. As economist Dean Stansel states, in his paper “An Economic Freedom Index for U.S. Metropolitan Areas”, “higher levels of local economic freedom are found to be correlated with positive economic outcomes”.

One of the most profound insights from Stansel’s paper is that moving from the 5th (least free) to the 4th quintile causes a drop in unemployment by 0.9 per cent. Stansel’s index ranks Detroit number 345, Baltimore number 102, and New Orleans number 262 out of the 384 metropolitan areas examined.

Both Baltimore and Detroit make it into the top 5 cities with the highest tax burdens, according to the Office of Revenue Analysis. As for New Orleans, Louisianans face the third highest combined state and local sales taxes, as well as excessive levels of deficit spending. These three cities are also plagued by excessive and even bizarre occupational licensing laws. Louisiana licenses florists, Detroit licenses hair-braiders, and Maryland counties license fortune tellers. If only Maryland’s licensed fortune tellers could have predicted that big government would cause businesses to flee these cities.

As if these regulations and taxes weren’t enough, labor market restrictions have leftjob-seekers in Detroit and Maryland crippled. Both cities have unionization rates higher than the national average (10.7 per cent), alongside minimum wages exceeding the federal $7.25 level.

Not unexpected, this has significantly increased unemployment, with Detroit and Maryland having unemployment rates of 8.1 per cent and 6.1 per cent. Admittedly, this is one area where New Orleans has excelled with a union membership rate of only 4.2 per cent – although having the worst education rank in the nation has prevented wage growth.

Turning over to gun violence, the picture gets even worse. Per 100,000 people Detroit’s gun homicide rate (35.9) is just shy of El Salvador’s rate (39.9), Baltimore’s rate (29.7) nearly matches that of Guatemala (34.8), and if New Orleans were a country it would have the second highest homicide rate in the world (62.1) – behind Honduras (68.3) and well ahead of Venezuela (39.9). Incidentally, these three cities have some of the strictest gun laws in the country.

It comes as no surprise that Baltimore, Detroit, and New Orleans have poverty rates of 28.2 per cent, 48.1 per cent, and 29 per cent. Things ain’t easy in the big easy and there are wide wealth disparities between cities throughout the First World. The solution is simple: scrap the high-tax regime and regulated labour markets. We should not let big government leave these Third World cities in the dark."

What Else Did Al Gore Get Wrong?

By James Freeman of the WSJ Over time, the former vice president’s pronouncements on population may be more embarrassing than his climate predictions.

"Al Gore’s latest global warming movie will open in U.S. theaters on Friday. “An Inconvenient Sequel: Truth to Power” arrives eleven years after his award-winning “An Inconvenient Truth.” In the interim, conservatives like talk-radio host Rush Limbaugh haven’t let Mr. Gore forget his most dire and least accurate weather predictions. But the Gore analysis on another issue is being rejected by even some of his committed climate allies.
The good news for all of us is that Mr. Gore appears to have overstated the threat of eco-apocalypse, which he seems to implicitly acknowledge on his latest media tour.

Back in 2006, CBS News reported on Mr. Gore’s arrival at the Sundance Film Festival:

    The former vice president came to town for the premiere of “An Inconvenient Truth,” a documentary chronicling what has become his crusade since losing the 2000 presidential election: Educating the masses that global warming is about to toast our ecology and our way of life.

    ...Americans have been hearing it for decades, wavering between belief and skepticism that it all may just be a natural part of Earth’s cyclical warming and cooling phases.

    And politicians and corporations have been ignoring the issue for decades, to the point that unless drastic measures to reduce greenhouse gases are taken within the next 10 years, the world will reach a point of no return, Gore said.

Eleven years later, the mischief makers at the Climate Depot website asked him about the 10-year deadline at this year’s festival—just before he climbed into a large chauffeured sport-utility vehicle. He didn’t have much to say then, but in the absence of drastic global measures, it’s clear that Mr. Gore now believes that the end is not quite nigh. The tech website CNET describes an “optimistic” Mr. Gore with a “sunny outlook” discussing his latest cinematic venture with a crowd in San Francisco.

The new movie will likely spark more discussion about the accuracy of various Gore environmental predictions. The left-leaning Politifact has flagged several “half-truths” from the former vice president.

But now Mr. Gore seems to have a separate argument on his hands even with people inclined to buy his climate predictions. In an excerpt from his new book accompanying the new film, Mr. Gore writes on another topic popular with global doomsayers: population growth. According to Mr. Gore:

    Population growth is slowly stabilizing as girls are educated, women are empowered, fertility management is made widely available and child mortality continues to decline. This aspect of our relationship to the Earth is, in spite of the great challenges growing populations will pose in some regions, a success story unfolding in slow motion.

But Gore pal and fellow warmist Elon Musk says this is no success story. He recently warned on Twitter of a global population “collapse, but few seem to notice or care.” Mr. Musk, the founder of Tesla and SpaceX, among other ventures, pointed to an article in the British journal New Scientist, which asked last year:

    Could the population bomb be about to go off in the most unexpected way? Rather than a Malthusian meltdown, could we instead be on the verge of a demographic implosion?

    To find out how and why, go to Japan, where a recent survey found that people are giving up on sex. Despite a life expectancy of 85 and rising, the number of Japanese is falling thanks to a fertility rate of just 1.4 children per woman...

    Half the world’s nations have fertility rates below the replacement level of just over two children per woman. Countries across Europe and the Far East are teetering on a demographic cliff, with rates below 1.5. On recent trends, Germany and Italy could see their populations halve within the next 60 years.

    The world has hit peak child, says Hans Rosling at the Karolinska Institute in Stockholm, Sweden. Peak person cannot be far behind.

    For now, the world’s population continues to rise. From today’s 7.4 billion people, we might reach 9 billion or so, mostly because of high fertility in Africa. The UN predicts a continuing upward trend, with population reaching around 11.2 billion in 2100. But this seems unlikely. After hitting the demographic doldrums, no country yet has seen its fertility recover. Many demographers expect a global crash to be under way by 2076.

Glenn Stanton at the Federalist points out that Mr. Musk has been concerned about this topic for some time. In 2015 the SpaceX founder explained to CNN the potential catastrophe of societies without enough young people. To watch the interview one has to first suffer through CNN’s edited video package warning about how “there are so many of us” before hearing Mr. Musk’s warning that in fact there may not be enough of us. He describes the difficulty of fewer workers supporting more and more retirees in developed nations and observes that “the social safety net will not hold.”

Now there’s an inconvenient truth. Perhaps Mr. Gore will consider the subject for his next film, but this column isn’t betting on it."

The Effect of Licensing and Liability Laws on the Supply of Nurse Practitioners and Physician Assistants

See Beyond Physicians by Benjamin J. McMichael of Mercatus.

"An important aspect of the healthcare debate in the United States is government policies that restrict the supply of healthcare providers. Occupational licensing and the increased liability risk to healthcare providers resulting from high and unpredictable noneconomic damages awards (e.g., for pain and suffering) are two state-level policies that may be partially to blame for a decreased supply of healthcare providers.

Benjamin J. McMichael examines these two state policies and concludes that states should relax licensing laws and enact tort reforms, including noneconomic damages caps, which will reduce the liability of nurse practitioners and physician assistants for nonquantifiable injuries such as pain and suffering. These reforms would increase access to healthcare, especially in underserved areas.

Background

Nurse practitioners (NPs) and physician assistants (PAs) are trained to provide many of the services that traditionally only a doctor could provide. Historically, state governments have imposed additional costs and restrictions on nurse practitioners and physician assistants. States may require

• That NP and PA practice be supervised by doctors, 
• That NPs and PAs be limited in their ability to prescribe medication, and 
• That NPs and PAs maintain malpractice insurance. NPs and PAs bear a higher risk in some states than in others of being held liable for medical malpractice.

Many studies have examined the effect of tort reforms on physicians, but this study is the first to empirically analyze the effects of malpractice reforms on NPs and PAs. It is also the first to examine the effect of occupational licensing laws on the supply of practicing NPs and PAs across all 50 states over time.

Key Findings

• Eliminating the occupational licensing laws requiring physician supervision of NPs can help states increase their supply of NPs in areas with the fewest number of practicing physicians—that is, areas most in need of more healthcare professionals. This increase in NP supply does not occur in areas with large supplies of physicians, suggesting that physician supervision requirements tether NPs to physicians and do not allow NPs to practice in areas where they are most needed or would most prefer to practice. 
• Changes in NP supply in areas with few practicing physicians actually result in increased access to care. When physician supervision requirements are relaxed, counties with few physicians are less likely to contain a healthcare provider shortage area, suggesting that the increased supply of NPs actually reduces pressure on the existing physician supply and increases access to care. 
• Tort reform, specifically a noneconomic damages cap, reduces the legal liability of NPs and PAs, increasing the supply of both professionals in areas with few physicians. Though the effect of tort reform on physician supply has been debated for decades, the examination of its effects on NPs and PAs is new. When a noneconomic damages cap is enacted, the supply of both NPs and PAs in areas with few practicing physicians increases. Tort reform thus increases access to care in areas that lack access. 

Policy Recommendations

To improve access to healthcare, states should consider the following reforms:

• Eliminate, or at least relax, the legal requirement that physicians supervise NPs. This change could substantially increase the number of practicing NPs in areas of the country with few practicing physicians. 
• Enact noneconomic damages caps. Limiting the potential liability for NPs and PAs in malpractice lawsuits will increase the supply of both NPs and PAs in areas with few practicing physicians."

Government Workers Don't Magically Become Altruists

By David Gordon. A review of the book Unequivocal Justice by Christopher Freiman. David Gordon is Senior Fellow at the Mises Institute.

"Christopher Freiman has in this brilliant book uncovered a flaw at the heart of much contemporary political philosophy, especially the sort of ideal theory influenced by John Rawls. Freiman wishes “to examine the version of ideal theory that focuses on institutions. More specifically, I’ll investigate the idealizing assumption that institutions function under conditions that exhibit ‘strict compliance’ with justice: that is, conditions in which everyone accepts and abides by the principles of justice.” (p.5)

The objection that Freiman raises to ideal theory is that its advocates face a dilemma. If everyone behaves with perfect justice, the state has no role to play. People will voluntarily comply with the requirements of justice and no coercive agency is necessary. If, as Rawls and his followers assume, people will in the free market act with at most “limited altruism”, then why do they imagine those who control the state will act with perfect justice? (Objectivists and others would raise difficulties here about the connection between justice and altruism; but I will not pursue these worries here.)

An example will clarify Freiman’s argument. A common criticism of the free market is that it fails to produce “public goods” In sufficient quantity. In Freeman’s example, a town is threatened by a flood, Building a levee would benefit the townspeople, but people have an incentive not to contribute to building it. A person who fails to contribute can free ride on those who do. His failure to contribute will make almost no difference, but he cannot be excluded from the benefits of the levee.

Unfortunately, everyone will reason in like fashion; and, as a result, the levee will not be built, to the general disadvantage. (Freiman does not discuss difficulties with the concept of public goods of the sort raised, e.g., by Murray Rothbard)

For this reason, Rawls argues, the state must be brought in, to ensure that everyone contributes to the public good. Here Freiman’s challenge arises. Why should one assume that those in control of the state would act in a way more in accord with justice than would actors on the private market? Would they not be at least equally as motivated to act in a self-interested way? If one assumes that the state would act justly, why wouldn’t individuals voluntarily produce the public good? Freiman objects to the failure to observe what he calls, following Geoffrey Brennan and James Buchanan, “behavioral symmetry.” This concept “involves consistently applying your behavioral models across different institutions.” (p.26)

Freiman has made a cogent point; but, in order for this to count as a challenge to ideal theory, we must add the premise, “Justice requires that public goods be produced.” [Of course, this is just a first approximation, but details do not for our purposes matter here] Neoclassical economics would call failures to produce public goods inefficient; but more seems required to show them unjust.

Further, we should distinguish two separate problems for the state and public goods. One is the problem just raised: why assume that, if people on the market act in a self-interested fashion, those in control of the state would not? The other is that to bring into existence democratically a state that follows the principles of justice raises a public goods problem. To do this requires that people vote after careful study of the candidates and issues; but this is costly. Will there not be an incentive to free ride on other voters to do this? To call in the state to solve the public goods problem thus brings in another public goods problem.

This is an ingenious argument, but it applies only to democratic states. But because Rawls himself accepts democracy, he could not evade this argument by appealing to a non-democratic state. (Such states would of course be subject to the earlier argument raised against the state.) Further, Freiman’s argument is valuable for showing that the paradox of voting is stronger than often assumed. In the usual account, the minute chance of determining the outcome in an election with many voters is compared with the costs of voting. It is then concluded that it is irrational to vote. Against this, the costs of voting normally are not high either: so the irrationality, if it exists, is a minor matter. But if Freiman’s point about intelligent voting is taken into account, the costs are much greater.

Freiman applies his fundamental insight to a number of areas stressed by Rawls and his disciples. If, for example, justice requires that everyone have a sufficient amount of certain economic goods, then perfectly just people would voluntarily provide these goods to those who did not have them. The state would have no need to coerce them to do so. If it is countered that the state is needed because people would act from self-interest, not justice, why assume that those in charge of the state would have different motives? Freiman once more decries the double standard used by Rawls and other proponents of ideal theory. He applies his point to other vital areas of Rawlsian justice, including political liberty, fair opportunity, and social equality, to devastating effect; but I will not examine these separately.

At one place in Freiman’s argument, Rawls may have a counter; but the fundamental point raised by Freiman escapes unscathed. Rawls assumes that people have ‘limited altruism.” ”Rawls permits economic inequalities as a means of coaxing more production from the rich because he’s worried about the substitution effect [of leisure for labor] caused by excessive taxation.” (p.57). To this, G.A. Cohen objected that perfectly just people would not be motivated by selfish desires to have more than others.

Freiman thinks that Rawls. by his appeal to limited altruism , has adopted “less stringent idealization” than Cohen, but this is not so. Rawls thinks that justice does not require more from people than he sets forward. He is not, by his lights, offering a compromise between the demands of justice and the exigencies of self-interest. He is rather defending an alternative conception of justice to the one favored by Cohen. But if that is so, Freiman’s basic argument still holds. Ideally just people would voluntarily comply with the demands of justice, as Rawls sees them. There is no need to bring in the state.

Given Freiman’s onslaught, does any role remain for ideal theory? One that suggests itself is to determine the requirements of a just society. Freiman’s argument does not make that inquiry unnecessary.

Unequivocal Justice is not only a book of outstanding merit; it is very well-written as well."

Al Gore’s Climate Sequel Misses a Few Inconvenient Facts

Eleven years after his first climate-change film, he’s still trying to scare you into saving the world.

By Bjorn Lomborg in The WSJ. Excerpts:

"Over the past 11 years Mr. Gore has suggested that global warming had caused an increase in tornadoes, that Mount Kilimanjaro’s glacier would disappear by 2016, and that the Arctic summers could be ice-free as soon as 2014. These predictions and claims all proved wrong."

"The Intergovernmental Panel on Climate Change—in its Fifth Assessment Report, published in 2013—found “low confidence” of increased hurricane activity to date because of global warming. Storms are causing more damage, but primarily because more wealthy people choose to live on the coast, not because of rising temperatures."

"hurricane damage now costs 0.04% of global gross domestic product. If climate change makes hurricanes stronger, absolute costs will double by 2100. But the world will also be much wealthier and less vulnerable, so the total damage is estimated at only 0.02% of global GDP."

"He claims the answer to warming lies in agreements to cut carbon that would cost trillions of dollars. That would not have stopped Sandy. What New York really needs is better infrastructure: sea walls, storm doors for the subway, porous pavement. These fixes could cost around $100 million a year, a bargain compared with the price of international climate treaties."

"the Kyoto Protocol. It did nothing to reduce emissions (and therefore to rein in temperatures), according to a March 2017 article in the Journal of Environmental Economics and Management."

"By 2030 the Paris climate accord will cost the world up to $2 trillion a year, mostly in lost economic growth, according to the best peer-reviewed energy-economic models. It will remain that expensive for the rest of the century."

"if every country fulfills every promised Paris carbon cut between 2016 and 2030, carbon dioxide emissions will drop by only 60 gigatons over that time frame. To keep the temperature rise below 2 degrees Celsius, the world must reduce such emissions nearly 6,000 gigatons over this century"

"0.6% of the world’s energy is supplied by solar and wind. Even with the Paris accord fully implemented, that number would rise only to 3% in a quarter-century."

Deregulation and Market Forces Can Lower Pharmaceutical Prices

The pharmaceutical market is anything but free at present

By Marc Joffe. Excerpt:

"Drugs in the U.S. often cost more than twice as much as they do in other developed countries. A 28-day supply of Humira costs a whopping $2669 on average here, according to the International Federation of Health Plans. The same supply costs $822 in Switzerland, $1253 in Spain, and $1362 in the United Kingdom.

In a free market, such price differences are normally arbitraged, but the pharmaceutical market is anything but free. Federal law generally prohibits drug importation, so there is no legal way to ameliorate the international price gap. The pharmaceutical lobby (no surprise) opposes congressional efforts to legalize drug importation.

Drug companies argue high prices offset the high costs of developing new drugs. A 2014 Tuft's study estimated the average cost to bring a new drug to market at $2.6 billion, much of it devoted to complying with the FDA's labyrinthine clinical trial process. Since 1962, when Congress empowered the agency to evaluate efficacy as well as safety, the FDA's trial regime has steadily become more onerous.

The Bush Administration and Congress accelerated pharmaceutical price inflation by adding prescription drug coverage to Medicare in 2003. Legislation that added the costly new benefit included a "noninterference clause" that banned Medicare from negotiating prices with pharmaceutical companies.

This places the government at a serious disadvantage with foreign governments that negotiate, putting a lid on their expenditures. Empowering the government to do anything is frightening for free market advocates, but consider this: when drug companies are selling to Medicare beneficiaries, they are essentially acting in the role of government contractors. It is in the taxpayers' best interest to allow the government to secure lower prices for the goods and services it purchases.

In a normal market, consumers can act to limit prices by foregoing consumption or choosing less costly substitutes (like generic drugs or over-the-counter medicines). But since most prescription drug costs are covered either by the government or private insurance companies, consumers don't have much of an incentive to exercise these options.

In this system of third party payment, drug consumers are insulated from the true cost of the pharmaceuticals they buy and those costs supported by taxpayers. This cost shifting can be reduced by increasing drug copayments and making them a percentage of a drug's retail price.

Another way to lower drug costs is to increase competition. Right now, pharmaceutical companies are shielded from competition by patents and exclusivity periods. Even when drugs lose FDA monopoly protection, the FDA continues to effectively limit competition by delaying approval for generic alternatives, as Reason's Ronald Bailey recently reported.

Patents are normally defended as a necessary incentive for drug price innovation, but if FDA approval costs were lower, this incentive could be reduced – by, for example, shortening the life of pharmaceutical patents.

Further, many pharmaceutical patents are dubious at best, conferring monopoly privileges to "me too" products that aren't legitimate innovations. AstraZeneca's patent for Nexium is a classic example of this abuse.

After making a fortune on its initial acid reflux drug, Prilosec, in the 1990s AstraZeneca reacted to its patent expiration in 2001 by patenting a slightly modified molecule with the same active ingredient in Prilosec. The marginally better Nexium generated $6 billion of revenue, selling for more than ten times the price of off-patent Prilosec.

Patients might have bought the cheaper Prilosec, but AstraZeneca got approval to sell it over-the-counter, in many instances making it ineligible for insurance coverage. Patients paid the same or less for prescription Nexium; with taxpayers and insurers made up the difference. With insurance, there was no incentive to buy the cheaper alternative while physicians, who in the current system receive all sorts of perks from pharmaceutical companies, had no incentive to suggest the over-the-counter option.

This raises the question of why so many drugs are sold by prescription in the first place. Prescription drugs must be dispensed by a pharmacist. Eliminating this generously compensated middleman would reduce their cost. Prescriptions might enhance safety, but that can't possibly explain Nexium and Prilosec. Indeed, many dangerous products – like hydrochloric acid – are sold without a prescription."

Humanity has much more to gain in terms of physical heath from rising, as opposed to falling, temperatures

By Craig D. Idso and Patrick J. Michaels.

"The impact of global warming on temperature-induced human mortality has long been a concern, where it has been hypothesized that rising temperatures will lead to an increase in the number of deaths due to an increase in the frequency and intensity of heat waves. Others claim that rising temperatures will also reduce the number of deaths at the cold end of the temperature spectrum (fewer and less severe cold spells), resulting in possibly no net change or even fewer total temperature-related deaths in the future.

The largest study—by far—on temperature-related mortality was published by Gasparrini et al. in the journal Lancet in 2015. They examined over 74 million (!) deaths worldwide from 1985 to 2012 and found that the ratio of cold-related to heat-related deaths was a whopping 17 to 1. Moreover, the temperature percentile for minimum mortality was around the 60^th in the tropics and “80–90^th” in the temperate zones. Based upon real-world data, it is obvious that global warming is going to directly prevent a large number of deaths.

One of us (Michaels) co-authored a peer-reviewed literature article showing that as heat waves become more frequent, heat-related deaths decrease because of adaptation. Given that our cities are heating up on their own—without needing a push from greenhouse gases—under our hypothesis, heat-related mortality should be dropping, which it is.

But what about morbidity (sickness), as opposed to mortality? For that, we should be looking at emergency room visits, where people go because they are really feeling crummy or have a physical injury. Turns out everyone has been looking at death, but few at debilitation.

Now comes a new paper from Zhao et al. (2017). They examined the association between daily mean ambient temperature and emergency department visits in twelve Chinese cities over the period 2011–2014. Two were in the cool north, six from the central region and four in the hot and humid south.

As represented by the pooled national data as shown in the figure below, the relative risk of emergency department visits increases as temperatures become both warm and cold. However, the risk is far greater for cold temperatures, where the cumulative relative risk is 1.80 (nearly twice as likely compared to average temperatures) versus a much smaller 1.15 (a 15% increase in prevalence) that was associated with hot temperatures. Additionally, Zhao et al. determined that the effects of cold spells on emergency department visits were much more persistent, lasting a full 30 days compared to the more acute, but short lived, effects of warm spells that lasted a mere three days, or one-tenth of the time.

 

Figure 1. Pooled national level cumulative association between temperature and emergency department visits over a lag of 0–32 days during 2011–2014. Adapted from Zhao et al. (2017).

Other important findings included the observation that the temperature percentile associated with the least amount of emergency department visits was 64. Given that the average climate in China varies from tropical to pretty darned cold, it’s probably somewhat more tropical than temperate. Their optimum temperature is very consistent with what was found in the Gasparrini et al. study. At 14 percentage points higher than 50, this fact (along with Gasparrini et al.) suggests that humans are much better adapted to warmer temperatures than cold. Zhao et al. also found that the temperature effect on emergency department visits varied by latitude; the effect of extreme cold was higher in the southern cities and declined northward, whereas the effect of extreme heat was higher in the northern cities and declined southward, which suggests a form of regional adaptation to temperature, similar to what we (Michaels) found for U.S. cities in our work on urban heat-related mortality.

In stratifying their analysis by gender and age, the thirteen researchers report that the temperature/emergency department visit relationship was unaffected by gender but was attenuated with increasing age, which contradicts other, more speculative work on Chinese urban heat-related mortality. At the national level, the relative risk of emergency department visits due to cold declined from 2.27 for the youngest age group (0–14 years) to 2.17 for ages 15–34, 1.60 for ages 35–64 and 1.41 for the elderly aged 65 and older. Similarly, the risk of emergency department visits due to hot temperatures also declined from 1.51 for 0–14 years to 1.19 from ages 15–34, 1.14 for ages 35–64 and 1.08 for those over age 65. Children of ages 0–14 were the most vulnerable to cold spells and heat waves over the period of study.

In considering all of the above findings, plus those reported in numerous other studies of the subject, it is clear that the impact of cold weather on human health is much more severe and longer lasting than that caused by heat waves. The truth be told, as shown by real-world numbers, humanity has much more to gain in terms of physical heath from rising, as opposed to falling, temperatures."

References

Gasparrini, A., et al. (2015) “Mortality risk attributable to high and low ambient temperature: a multicountry observational study.” The Lancet 386 (9991): 369–375.
Davis, R.E., Knappenberger, P.C., Michaels, P.J. and W. Novicoff (2003) “Changing heat-related mortality in the United States.” Environmental Health Perspectives 111 (14): 1712–1718.
Zhao, Q., Zhang, Y., Zhang, W., Li, S., Chen, G., Wu, Y., Qui, C., Ying, K., Tang, H., Huang, J., Williams, G., Huxley, R. and Guo, Y. (2017) “Ambient temperature and emergency department visits: Time-series analysis in 12 Chinese cities.” Environmental Pollution 224: 310–316.

Some Blue State Are Having Budget Problems Despite Tax Increases

See Blue State Budget Breakdowns: Public union politics hits the wall in New Jersey, Illinois and Connecticut. WSJ editorial. Excerpts:

"Pensions will consume about a quarter of Illinois’s general fund this year. Nearly 40% of state education dollars go toward teacher pensions, and the state paid nearly as much into the State Universities Retirement System last year as it spent on higher education. 

Anemic revenue and economic growth can’t keep up with entitlement spending. The state’s GDP has ticked up by a mere 0.8% annually over the last four years compared to 2% nationwide and 1.4% in the Great Lakes region. Since 2010 more than 520,000 Illinois residents on net have fled to other states.

Democrats held veto-proof super majorities in the legislature during Mr. Rauner’s first two years. But House Speaker Michael Madigan wants to force the Governor to repudiate his campaign promise not to raise taxes and make Republicans share political responsibility for the state’s economic failures. Amid deteriorating public services, Mr. Madigan persuaded 15 House Republicans to back Mr. Rauner’s tax hike a la carte, which spared 11 Democrats in conservative districts from having to take a tough vote. The state Senate followed Monday."

"Connecticut’s former Republican Governor Jodi Rell who in 2009 raised the state’s top rate to 6.5% from 5% while doing little to rationalize spending or fix the state’s bankrupt political culture. See how well that turned out.

Democrats have since raised the Nutmeg State’s top rate to 6.99%. Revenue and economic growth have slumped as high-earning residents have decamped for lower-tax climes. Hedge-fund managers are struggling to sell their palaces in Greenwich. The legislature’s Office of Fiscal Analysis downgraded income-tax revenues this year by $1.1 billion, and sales and corporate taxes are projected to fall by $450 million.

Meanwhile, pension contributions have doubled since 2010 and along with retiree health care—most pay no deductible and a maximum $15 co-pay—make up 20% of the budget."

"The tax bill on a $300,000 home in Hartford is $22,287." 

Don’t Fear the Robots

Smart machines will replace some jobs, but they will create many more by generating new wealth and higher demand for products and services

By Jerry Kaplan in The WSJ. He is an adjunct professor at Stanford University, where he teaches about artificial intelligence. See also The Myth of Technological Unemployment by Deirdre McCloskey. Excerpts:

"But robots aren’t mechanical people. They are a new wave of automation, and like previous waves, they reduce the need for human labor. In doing so, they make the remaining workers more productive and their companies more profitable. These profits then find their way into the pockets of employees, stockholders and consumers (through lower prices).

This newfound wealth, in turn, increases demand for products and services, compensating for lost jobs by employing even more people."

"country-level employment generally grows as aggregate productivity rises."

"despite centuries of progress in automation and recurrent warnings of a jobless future, total employment has continued to increase relentlessly, even with bumps along the way."

"today’s most dire projections of jobs lost to automation fall short of historical norms."

"57% of the jobs that workers did in 1960 no longer exist today (adjusted for the size of the workforce)."

"Who is old enough to remember bowling alley pin-setters? Elevator operators? Gas jockeys? When was the last time you heard a manager say, “Take a memo”?"

"The crux of their argument is that the coming wave of artificially intelligent computers and robots can do virtually any job that a human can do, so everyone’s job is on the chopping block."

"won’t it soon be capable of doing just about anything a person can?

Not by a long shot. What all of these tasks have in common is that they involve finding subtle patterns in very large collections of data, a process that goes by the name of machine learning. The kinds of data vary, of course. It might be pixels in cat photos, bytes streaming from a dashboard camera, millions of computer-generated games of Go, digital X-rays or volumes of human-translated documents.

But it is misleading to characterize all of this as some extraordinary leap toward duplicating human intelligence. The selfie app in your phone that places bunny ears on your head doesn’t “know” anything about you."

"These programs present no more of a threat to human primacy than did automatic looms, phonographs and calculators"

"consumers are likely to allocate an increasing share of their income to premium services. This is precisely the segment of the economy where personal care, face-to-face interaction and demonstrations of skill are critical to the value delivered.

"Luxury hotels are not prized because they are more efficient but because their staff is more attentive. People pay more to watch a barista brew their latte than for a comparable product from a vending machine"

"Many consumers are likely to conclude in the next decade or so that they no longer need to have a car of their own. What’s called “transportation as a service” (autonomous taxis, on-demand vehicles and ride sharing) will save the typical American family more than $5,000 a year, according to think tank RethinkX."

"What will we do with that extra money? Spend it, of course—on vacations, clothes, restaurant dinners, concert tickets, spa days and more. That means increased demand for flight attendants, hospitality workers, tour guides, bartenders, dog walkers, tailors, chefs, ushers"

The Trouble with Keynesian Stimulus Spending

By Tony Caporale. He is Professor and Chairman, University of Dayton Department of Economics & Finance.

"For  more  than  70  years,  a  strand  of  Keynesian  economic  thought—the  belief  that  economic  growth  can  be achieved through  increased,  short-term  government  spending—has  maintained  that  the  cure  for  economic depressions is a matter of simple arithmetic. Economist Paul Krugman argues that the government can use a multiplier  formula  to  calculate  the  amount  by  which  to  increase  spending.  Moreover,  Keynesians  assert  that  even wasteful government spending can be desirable, since any spending is better than nothing.

In “The Trouble with Keynesian Stimulus Spending,” Tony Caporale and Marc Poitras disagree with this assertion. This  simple  Keynesian  approach  fails  to  account  for  several  significant  sources  of  cost.  Besides  the  cost  of  waste inherent  in  government  spending,  financing  the  spending  requires  taxation,  which  entails  an  excess  burden,  the reduction in output resulting from workers’ reduced incentive to work. Furthermore, the employment of even previously idle resources involves lost opportunities to invest in alternative uses of these resources.

BACKGROUND

Economist Kevin Murphy made one of the first attempts to challenge this Keynesian way of thinking using a formal benefit-cost analysis. Murphy identified three main sources of costs:

•The inefficiency of government: the possibility that the public receives less than full value for each dollar spent by the government.
•The relative value of idle resources: the sacrifices associated with employing resources that could have been employed differently.
•The excess burden of taxation required to pay for the spending.

On  the  basis  of  his  analysis,  Murphy  concluded  that  stimulus  purchases  by  the  government  are  unlikely  to  add value to the economy.

A  similar  but  more  detailed  benefit-cost  analysis  subsequently  suggested  that  government  purchases,  at  least during  a  deep  recession,  could  create  positive  value.  The  problem  with  this  analysis  was  that  the  only  costs  the model considered were the negative effects of taxation.

STUDY DESIGN

Caporale  and  Poitras’s  study  subjects  the  Keynesian  stimulus  spending  method  to  a  benefit-cost  test  that expands  on  Murphy’s  model:  it  accounts  for  waste, the  value  of  workers’  time,  wear  and  tear  on  capital,  and the deadweight loss of taxation. It relaxes Murphy’s constraint that the multiplier can be no greater than one.

This  model  was  calibrated  by  surveying  the  published  estimates  of  key  parameters,  including  the  Keynesian fiscal multiplier.

RESULTS

The benefit-cost test yields two important insights into Keynesian spending programs:

•Waste and other costs can negate the benefits of stimulus spending, even in an ideal Keynesian situation (a deep recession with 0 percent interest rates). Even for an efficient spending package that is free of waste, the net wealth created amounts to only about one-quarter of the measured increase in GDP.
•Pressuring the government to perform while “the economy is reeling” will result in the government not spending wisely. To generate wealth from spending packages, the government must limit waste and provide services that the public values. This means the government would need to invest a lot of time coming up with an efficient plan, by which point the economy could already be on the rebound.

CONCLUSION FOR POLICYMAKERS

It  is  wrong  to  say  that  “spending  is  spending”  or  that  any  spending  is  better  than  nothing.  How  the  government spends stimulus money does matter. The government should spend taxpayer money carefully on projects that offer real value to the public. There is no justification for spending for spending’s sake, even during a deep recession."

Mortgage Interest Tax Break Has ‘No Effect’ on Homeownership, Study Finds

By Richard Rubin of The WSJ. Excerpt:

"Letting taxpayers deduct mortgage interest encourages them to buy bigger homes and more expensive homes – but it doesn’t change that fundamental decision about whether to buy in the first place.

“Over multiple time periods, and considering multiple empirical strategies, we find no effect of the tax policy change on whether households own or rent,” wrote the authors, Jonathan Gruber of the Massachusetts Institute of Technology, Henrik Kleven of Princeton University and Amalie Jensen of the University of Copenhagen.

The paper uses data from Denmark in the 1980s, where the combination of a tax policy change and available housing data allowed the authors to observe a sort of natural experiment. Denmark isn’t the U.S., and there may be cultural or economic differences that make the comparison inapt. Still, the findings confirm what economists had already thought about the U.S. deduction, Mr. Gruber said in an interview Monday. Past cross-country studies have found little difference in homeownership rates between places that allow a deduction and others that don’t.

“I really view this as putting a nail in the coffin of the idea that this tax break affects homeownership,” he said in an interview Monday. If policy makers wanted a tax break to promote homeownership, a tax credit for first-time homebuyers or a deduction capped in line with median regional home prices would be more effective than the current rules, he said.

The paper’s finding lands with a thud in the current political debate, right as lawmakers are considering the biggest revamp of the tax system since 1986. The mortgage interest deduction – only available to the roughly 30% of households that itemize their deductions – will reduce government tax collections by $72.4 billion in fiscal 2018, according to the congressional Joint Committee on Taxation."

Obamacare's Big Win: It Helps Some People Be a Little Less Poor

The U.S. spends $100 billion on this program, so Medicaid recipients can save $5.5 billion.

From Megan McArdle. Excerpts:

"Does Medicaid make people better off?"

"Medicaid may also make people financially better off. It is possible that most people manage to get medical care somehow, when they really need it (and are willing to comply with often onerous regimens). But those people will be left with debts, or have to cheat other priorities in order to ensure that the doctor gets paid. For the poor and near-poor, especially, this is a heavy burden: They have fewer resources to pay the bills, and for a variety of reasons, 1 are more likely to be sick in the first place.

And here, we have considerably better evidence for a benefit. A randomized controlled study of Medicaid access in Oregon, which ultimately failed to find any statistically significant improvement in objective health markers, unequivocally found that the people who got Medicaid experienced less financial distress than those who didn’t. Over at Mother Jones, Kevin Drum points to another recent study showing the same result, from the Consumer Financial Protection Bureau. It suggests that in the states that accepted Obamacare's Medicaid expansion, medical debt dropped dramatically compared to the states that declined the expansion. “So: Does Medicaid work?” writes Drum. “Yes indeed. It has moderate but positive effects on health, and very large effects on medical debt.”"

"While the CFPB does show that states that expanded Medicaid saw significant declines in the overall level of medical debt, it also shows that there’s basically no decline in bankruptcies. One would have expected at least a small noticeable effect on the rate of bankruptcy."

"It is also possible, of course, that the “classic medical bankruptcy” is more often found in the imagination than in reality. That’s not to say that sickness doesn’t drive people into bankruptcy, because it’s quite clear that it does. But it’s less clear how often medical bills play the driving role in those bankruptcies. Many people pay doctors with credit cards, so researchers can’t even reliably determine what percentage of consumer debt is medical. And families with catastrophic illnesses often also experience significant income loss, making all their other debts impossible to pay: even in Canada, which has a single-payer system, a significant number of people cite illness as the primary reason for their bankruptcy."

"When Obamacare was passing, its supporters were pretty clear about what the program was supposed to do: save thousands of lives every year, reduce health-care costs, lower premiums, and save thousands of families from the trauma, and stigma, of bankruptcy.

Have mortality rates dropped? No, they rose. Are premiums lower? No. Have bankruptcies dropped? Yes, but only dubiously related to Obamacare. The only outcome for which we have really strong evidence is a modest reduction in the financial stress of illness. According to the CFPB, we have reduced medical debt by about $5.5 billion, or roughly $10 per consumer."

"But we’re spending more than $100 billion a year on Obamacare. That is a lousy way to save people $5.5 billion in medical debt."

"1. The more affluent and successful you are, the less likely you are to have poor health, even in countries with universal health-care systems that -- in theory at least -- offer everyone the same level of care. Indeed, the seminal result on this comes from British civil servants, who were all getting their care from the National Health Service. There are a variety of mechanisms that could cause this: high-level civil servants may be able to get better doctors and hospitals; they may be the driven, exacting sort of people who are more likely to comply with treatment regimes; and they may simply experience less chronic stress. On the other side of the equation, being of poor health can make you poorer, as you find it harder to work."

Locking Up Kingpins Causes Violence

By Jeffrey Miron of Cato.

"This story from the WSJ claims that

the extradition of Joaquín “El Chapo” Guzmán, Mexico’s long-dominant drug lord, has led to an explosion of violence in his home state of Sinaloa, the birthplace of the country’s narcotics industry.
Rival factions are fighting over Mr. Guzmán’s billion-dollar empire as he awaits trial in solitary confinement inside a high-security prison in New York. He was extradited to the U.S. in January on drug-trafficking and murder charges.

This explanation for increased violence in Mexico is exactly what one would predict from this Cato Research Brief, by economists Jason Lindo and Maria Padilla-Romo:

We find that the capture of a [Drug Trafficking Organization] (DTO) leader in a municipality increases its homicide rate by 80 percent, and this effect persists for at least 12 months. Consistent with the notion that the kingpin strategy destabilizes an organization, we also find that these captures significantly increase homicides in other municipalities with the same DTO presence. In particular, we find that homicide rates in neighboring municipalities with the same DTO presence rise 30 percent in the six months after a kingpin capture before returning to expected levels. Further, kingpin captures cause homicide rates to grow over time (to 18 percent above expected levels 12 or more months after a capture) for more-distant municipalities with the same DTO presence. We find little evidence of increased homicide in neighboring municipalities where the captured leader’s DTO did not have a presence.

Disputes between rival suppliers occur in all industries; but in legal ones, the disputes take the form of advertising wars and lawsuits, not violence. See also this old paper of mine on the same subject."

People Are Moving To States With Responsible Governments

By Adam Millsap of Mercatus.

"One of the great things about America is its diversity—diverse people, climates, cultures, geography and, at the state and local level, government policies. All of this diversity means that we can each pick a place to live and work that suits us. Economists have found—perhaps unsurprisingly—that many people are attracted to locations with sunny days and mild winters, stronger economies and lower taxes. New research from my colleagues at the Mercatus Center also provides some evidence that government policies impact migration.

Some of America’s diversity is readily apparent, such as climate and geography. Other types of diversity, like state government policies, are less clear. The Mercatus Center’s annual state fiscal rankings reveal some of the differences among state policies, including differences in pension funding, long-term liabilities and budget deficits.

Mercatus’s fiscal rankings also include a metric called service-level solvency. Service-level solvency is a measure of how much fiscal “slack” a state has to increase spending and taxes.

Each state’s service-level solvency score is constructed from three ratios: total taxes, state expenses and state revenues as a share total state personal income. Higher ratios mean that a state is closer to its tax/spending/revenue limit and may have problems raising additional revenue.

To get an idea of the variation across states, in the newest rankings government expenses are 31% of state personal income in Alaska, compared to only 9% in Florida. In North Dakota, total taxes are 13% of state personal income but only 7% in Maine. The complete data set for all states is here.

With these data we can examine the relationship between each state’s fiscal “slack” and migration. The figure below is a scatter plot of each state’s service-level solvency score and net migration rate per 1,000 people. A higher service-level solvency score means more fiscal “slack” and relatively smaller government.



As shown in the figure, there is a positive relationship between service-level solvency scores and net migration rates—in other words, states with better service-level scores tended to gain more residents.

Connecticut and Illinois are two states in well-known financial trouble that are losing people. They also have middling service-level scores, meaning they are already taxing and spending quite a bit of their residents’ income. This will make it difficult for them to raise additional revenue to shore up their finances.

New Jersey is in a similar position. Many high-income residents have left the state for lower-tax jurisdictions—particularly Florida—over the past 25 years.

West Virginia and Mississippi are also low-scoring states that people are leaving and both have weak economies. For example, over 20% of each state’s males between the ages of 25 and 54 are out of the labor force. Reforms that reduce taxes and simplify their tax codes—some of which are already being examined—should make them more economically competitive and may stabilize their populations.

Meanwhile, states such as Florida, Nevada, New Hampshire, Colorado and others are experiencing increases in population and are in relatively good shape when it comes to taxes and spending relative to total personal income. If these states need to raise taxes in the future to fund their public pensions or deal with some unexpected event, they have some wiggle room.

Migration can also impact businesses. People with bachelor’s degrees or more are more likely to move across state lines than less educated people, and they are also important employees and customers due to their skills and higher income. Government policies that push them away erode an area’s customer base and make it difficult for businesses to attract workers.

Despite the falling rate of interstate migration in America over the last 40 years, many people still move, and often to states that tax and spend less. Officials in states that are losing residents need to take a hard look at their policies and do what they can to make their states more attractive. If they don’t, their fiscal situations will only get worse."

Can't Afford a Vacation? Blame the State!

By Veronique de Rugy at Reason.

"Your sweet summer getaway is just around the corner—if you can afford one.

But however you get to and from your favorite vacation spot, the government is there to take a cut. If you're a road tripper, you'll pay a tax on gasoline that accounts for almost 19 percent of the price of refilling your tank. Even more annoyingly, a quarter of that money is diverted from relevant tasks like highway maintenance to other projects, including turtle bridges and bike lanes. Repaving the roads is low on the priority list, but at least you can experience first-hand what driving in the Soviet Union must have been like.

If you fly, Washington will get you too. A ticket from New York to Paris in September on the French airline XL costs a total of $541. Some $401, or 74 percent, goes to taxes and fees. These can include a passenger facility charge (up to $18 per passage), a federal excise tax (7.5 percent of your airfare), $5.60 per one-way trip for the "September 11 security fee," up to $200 in U.S. and international departure and arrival fees, and more.

If you're flying domestically you'll pay fewer fees (yay), but your ticket will be more expensive than it could be (boo) because of protectionist laws banning foreign airlines from accommodating travel within the United States. According to the Mercatus Center's travel guru, Gary Leff, "The largest domestic airlines are lobbying aggressively to stop foreign airlines like Emirates, Etihad, and Qatar from expanding their U.S. flights, and from being allowed to charge low prices."

The rationale for government intervention here is that it "protects American jobs." Of course, that ignores the new jobs that could be created if these foreign companies were allowed to set up shop in the United States—not to mention the benefits that flow to American consumers when they get to choose from more carriers and price points.

Getting where you're going can take longer than it should, thanks to long security lines and an antiquated government-managed air traffic control system that stacks delays on top of delays. Other countries have privatized their systems and seen spectacular results, but not us.

The Federal Aviation Administration (FAA) has also made it harder for most of us to adjust our plans in the face of such delays. For decades, the only way to catch a lift on a private jet with open seats was to check for postings to a physical billboard. Not surprisingly, this limited the number of people with access to that option considerably. But when the company Flytenow put this data on an online platform, the FAA showed its gratitude for the money it could save passengers and pilots alike by shutting Flytenow down.

The fun continues even after you've arrived, since many state and local governments are also running interference. Don't expect to be able to grab an Uber or a Lyft in places such as Atlanta and Boston, which ban ride-sharing companies from picking up passengers. While some of these laws are only loosely enforced, many airports now spend a great deal of effort punishing rogue ride givers. According to The Wall Street Journal, "Miami airport police issued 4,000 citations to ride-sharing drivers over the past several years, each with a $1,010 fine."

Home-sharing services, too, are being targeted. Last year, Democratic New York Gov. Andrew Cuomo signed a law to impose fines in the state of up to $7,500 "per advertisement of an 'illegal unit' on home sharing sites like Airbnb, which is likely to mean a fine for anyone who advertises short-term accommodations," Leff wrote at View from the Wing. The result, of course, is higher costs for visitors. Unfortunately, cities such as San Diego and San Francisco are considering doing the same.

The governmental meddling doesn't end when you reach your destination. Some places won't let you drink or dance anywhere near a beach. Others ban food trucks, gambling, the consumption of soda from oversized cups, and/or smoking in public spaces. The bottom line is that you could vacation more and better, with lots of additional cash at your disposal, if government just got out of the way."

Tyler Cowen's Review of Naomi Klein's "The Shock Doctrine: The Rise of Disaster Capitalism" (from 2007)

In the NY Sun.

"Naomi Klein's "The Shock Doctrine: The Rise of Disaster Capitalism" (Metropolitan Books, 446 pages, $28), the  latest anti-capitalist best seller, tries in vain to discredit the economic system that brought about modern America, the Industrial Revolution, and high standards of living around the world.

The energy of the book is real and there is no doubt it will mobilize most of its readers to higher levels of outrage and action. It's probably the most effective brand of emotional nonfiction to be published this year. But when it comes to the underlying message, and the standards of evidence used to support it, "The Shock Doctrine" is a true economics disaster.

Ms. Klein's core thesis is not without merit. She argues that the policy recommendations of free market economists, such as Milton Friedman, are simply not very popular. Of course Friedman would have been the first to admit as much himself. Ms. Klein goes further and argues that a right-wing conspiracy deliberately courts or looks for disaster, so it can impose unpopular free market ideas on an unwilling populace. For instance, Hurricane Katrina (supposedly) led to the privatization of New Orleans and was (supposedly) welcomed for this reason. Yet there's not much evidence for active conspiracies, apart from a vague 1962 statement by Friedman: "Only a crisis produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around."

Most of the book is a button-pressing, emotionally laden, whirlwind tour of global events over the last 30 years: Katrina, the invasion of Iraq, torture in Chile, the massacre in Tiananmen Square, the collapse of the Soviet Union, and the September 11, 2001, terrorist attacks. The book offers not so much an argument but rather a Dadaesque juxtaposition of themes and supposedly parallel developments in the global market. Above the excited recitation stands Milton Friedman as the überdemon of the march toward global tyranny and squalor.

Ms. Klein's rhetoric is ridiculous. For instance, she attaches import to the fact that the word "tank" appears in the label "think tank." In her book, free market advocates are tarred with the brush of torture, because free market advocates often support unpopular policies, and torture also often supports unpopular policies. Clearly, by her tactic of freewheeling association, free market advocates must support torture. Often Ms. Klein's proffered connections are so impressionistic and so reliant on a smarmy wink to the knowing that it is impossible to present them, much less critique them, in the short space of a book review.

Rarely are the simplest facts, many of which complicate Ms. Klein's presentation, given their proper due. First, the reach of government has been growing in virtually every developed nation in the world, including in America, and it hardly seems that a far-reaching free market conspiracy controls much of anything in the wealthy nations. Second, Friedman and most other free market economists have consistently called for limits on state power, including the power to torture. Third, the reach of government has been shrinking in India and China, to the indisputable benefit of billions. Fourth, it is the New Deal — the greatest restriction on capitalism in 20th century America and presumably beloved by Ms. Klein — that was imposed in a time of crisis. Fifth, many of the crises of the 20th century resulted from anti-capitalistic policies, rather than from capitalism: China was falling apart because of the murderous and tyrannical policies of Chairman Mao, which then led to bottom-up demands for capitalistic reforms; New Zealand and Chile abandoned socialistic policies for freer markets because the former weren't working well and induced economic crises.

But the reader will search in vain for an intelligent discussion of any of these points. What the reader will find is a series of fabricated claims, such as the suggestion that Margaret Thatcher created the Falkland Islands crisis to crush the unions and foist unfettered capitalism upon an unwilling British public.

The simplest response to Ms. Klein's polemic is to invoke old school conservatism. This approach, most prominently represented by classical liberal Friedrich Hayek, rejected the idea of throwing out or revising all social institutions at once. Indeed the long history of conservative thought stands behind moderation in most matters of social and economic policy. That tradition does advise a scaling down of free market ambitions, no matter how good they may sound in theory, and is probably our best hedge against disasters of our own making. Such a simple — indeed sensible — point would not have produced a best-selling screed, however. And so we return to charging Friedman as an enabler of torture. The clash between democratic preferences and policy prescriptions is, if anything, a problem for Ms. Klein herself. Ms. Klein's previous book, "No Logo" (2000), called for rebellion against advertising and multinational corporations, two institutions which have proved remarkably popular with ordinary democratic citizens. Starbucks is ubiquitous because of pressure from the bottom, not because of a top-down decision to force capitalism upon the suffering workers in a time of crisis.

If nothing else, Ms. Klein's book provides an interesting litmus test as to who is willing to condemn its shoddy reasoning. In the New York Times, Nobel Laureate Joseph Stiglitz defended the book: "Klein is not an academic and cannot be judged as one." So nonacademics get a pass on sloppy thinking, false "facts," and emotional appeals? In making economic claims, Ms. Klein demands to be judged by economists' standards — or at the very least, standards of simple truth or falsehood. Mr. Stiglitz continued: "There are many places in her book where she oversimplifies. But Friedman and the other shock therapists were also guilty of oversimplification." Have we come to citing the failures of one point of view to excuse the mistakes of another?

With "The Shock Doctrine," Ms. Klein has become the kind of brand she lamented in "No Logo." Brands offer a simplification of image and presentation, rather than stressing the complexity, the details, and the inevitable trade-offs of a particular product. Recently, Ms. Klein told the Financial Times, "I stopped talking about [the campaign against brands] about two weeks after ‘No Logo' was published." She admitted that brands were never her real target, rather they were a convenient means of attacking the capitalist system more generally. In the same interview, Ms. Klein also tellingly remarked, "I believe people believe their own bulls---. Ideology can be a great enabler for greed."

When it comes to the best-selling "Shock Doctrine," that is perhaps the bottom line on what Klein herself has been up to."