Archives: 04/2013

This Month at Cato Unbound: What Keeps Money Out of Politics?

It’s called the Tullock Paradox: if you run the numbers, the expected returns to lobbying commonly appear much larger than they ought to be. Bad behavior pays really well, and yet corporations and interest groups routinely pass on what would seem, from a coldly amoral stance, to be easy money. Rational economic actors ought to bid up the price of government favor—and thus bid down the rate of return—but real-world actors don’t do so.

Why don’t we see even more money in politics? That’s the question we ask in the April, 2013 issue of Cato Unbound.

To answer that question, we have invited Fred L. Smith, founder and chairman of the Competitive Enterprise Institute, a man who has spent much of his career pondering just this question, and who benefits from an insider’s view of political advocacy. His lead essay suggests that there is a widespread distaste for political activity among people who would otherwise turn to lobbying, and often that’s with good reason.

To discuss with him the potential pitfalls of public choice modeling, we have invited a panel of distinguished academics: Professors Stephen Ansolabehere of Harvard University, Francesco Parisi of the University of Minnesota School of Law, and Raymond J. La Raja of the University of Massachusetts at Amherst.

As always, Cato Unbound readers are encouraged to take up our themes and enter into the conversation on their own websites and blogs, or on other venues. We also welcome your letters. Send them to jkuznicki at cato dot org. Selections may be published at the editors’ option.

Question of the Week: What’s the Right Point on the Laffer Curve?

Back in 2010, I wrote a post entitled “What’s the Ideal Point on the Laffer Curve?

Except I didn’t answer my own question. I simply pointed out that revenue maximization was not the ideal outcome.

I explained that policy makers instead should seek to maximize prosperity, and that this implied a much lower tax rate.

But what is that tax rate, several people have inquired?

The simple answer is that the tax rate should be set to finance the legitimate functions of government.

But that leads to an obvious follow-up question. What are those legitimate functions?

According to my anarcho-capitalist friends, there’s no need for any public sector. Even national defense and courts can be shifted to the private sector.

In that case, the “right” tax rate obviously is zero.

But what if you’re a squishy, middle-of-the-road moderate like me, and you’re willing to go along with the limited central government envisioned by America’s Founding Fathers?

That system operated very well for about 150 years and the federal government consumed, on average, only about 3 percent of economic output. And even if you include state and local governments, overall government spending was still less than 10 percent of GDP.

Moreover, for much of that time, America prospered with no income tax.

But this doesn’t mean there was no tax burden. There were federal excise taxes and import taxes, so if the horizontal axis of the Laffer Curve measured “Taxes as a Share of GDP,” then you would be above zero.

Or you could envision a world where those taxes were eliminated and replaced by a flat tax or national sales tax with a very low rate. Perhaps about 5 percent.

So I’m going to pick that number as my “ideal” tax rate, even though I know that 5 percent is just a rough guess.

For more information about the growth-maximizing size of government, watch this video on the Rahn Curve.

There are two key things to understand about my discussion of the Rahn Curve.

First, I assume in the video that the private sector can’t provide core public goods, so the discussion beginning about 0:33 will irk the anarcho-capitalists. I realize I’m making a blunt assumption, but I try to keep my videos from getting too long and I didn’t want to distract people by getting into issues such as whether things like national defense can be privatized.

Second, you’ll notice around 3:20 of the video that I explain why I think the academic research overstates the growth-maximizing size of government. Practically speaking, this seems irrelevant since the burden of government spending in almost all nations is well above 20 percent-25 percent of GDP.

But I hold out hope that we’ll be able to reform entitlements and take other steps to reduce the size and scope of government. And if that means total government spending drops to 20 percent-25 percent of GDP, I don’t want that to be the stopping point.

At the very least, we should shrink the size of the state back to 10 percent of economic output.

And if we ever get that low, then we can have a fun discussion with the anarcho-capitalists on what else we can privatize.

P.S. If a nation obeys Mitchell’s Golden Rule for a long enough period of time, government spending as a share of GDP asymptotically will approach zero. So perhaps there comes a time where my rule can be relaxed and replaced with something akin to the Swiss debt brake, which allows for the possibility of government growing at the same rate as GDP.

What Is Public Health?

“If vitamin D does lower blood pressure in African-Americans, it can have a significant public health impact,” [nephrologist John] Forman says. [NPR]

No. It might have widespread impact on individuals’ health. But that’s not what “public health” should mean. 

The meaning of “public health” has sprawled out lazily over the decades. Once, it referred to the project of securing health benefits that were public: clean water, improved sanitation, and the control of epidemics through treatment, quarantine, and immunization. Public health officials worked to drain swamps that might breed mosquitoes and thus spread malaria. They strove to ensure that water supplies were not contaminated with cholera, typhoid, or other diseases. The U.S. Public Health Service began as the Marine Hospital Service, and one of its primary functions was ensuring that sailors didn’t expose domestic populations to new and virulent illnesses from overseas.

Those were legitimate public health issues because they involved consumption of a collective good (air or water) and/or the communication of disease to parties who had not consented to put themselves at risk. It is difficult for individuals to protect themselves against illnesses found in air, water, or food. A breeding ground for disease-carrying insects poses a risk to entire communities.

But a health problem is not a public health problem just because it’s a widespread health problem. Obesity, riding a motorcyle without a helmet, and getting too little Vitamin D may be bad for an individual. But the individual who engages in these activities isn’t endangering me. It may well be a good idea for African-Americans – and others – to get more Vitamin D in order to reduce high blood pressure. But that’s health advice for individuals, not a public health issue.

“Everyone Will Have to Decide For Themselves”

Alessandro Acquisti is one of my favorite privacy researchers, and a quote he gave the New York Times about consumer privacy is all Acquisti, right down to the Italian-born locution.

“Should people be worried? I don’t know,” he said with a shrug in his office at Carnegie Mellon. “My role is not telling people what to do. My role is showing why we do certain things and what may be certain consequences. Everyone will have to decide for themselves.”

Alas, Times reporter Somini Sengupta did not report on Acquisti as neutrally as Acquisti reports on privacy.

We don’t always act in our own best interest, his research suggests. We can be easily manipulated by how we are asked for information. Even something as simple as a playfully designed site can nudge us to reveal more of ourselves than a serious-looking one.

It is just as plausible that people mouth a desire for privacy but then act more consistently with their self-interest when they reveal information that provides them fuller interaction, free Internet content, and broader commercial choices.

Read more of Acquisti on his Economics of Privacy page.

U.S. Cuts Welfare Payments to Portugal, Portuguese Unhappy

American alliances are systems that transfer wealth from U.S. taxpayers and their debtors to citizens in wealthy allies. With Uncle Sam paying for those countries’ defense, their governments are free to use their own revenues for welfare programs or other domestic priorities. This is a sucker’s bet from an American perspective, but pretty great from the perspective of the citizen of a rich country who benefits from this largesse.

The Wall Street Journal’s news section over the weekend showed this phenomenon in an article illustrating the wages of sequestration. In the course of trimming the U.S. troop presence in Europe from 74,000 to 67,000 over two years, the strategically vital hamlet of Praia da Vitória in the Azores will be particularly hard hit. You see, the U.S. military presence will be reduced there, possibly by more than 1,000, devastating the economic well-being of the village, population 22,000.

One sympathizes with the Portuguese citizens who, over three generations, have come to rely on U.S. taxpayer dollars for their well-being. They don’t really know a world without that economic nourishment, so it must be unnerving to think about what will happen without it.

The story reads like a bad breakup. One U.S. official quoted in the article charged with breaking the news that we’re just not that into them remarked that the Portuguese felt “we are no longer important to you and we have been your best friend. They took it personally.” Worse, they felt “strategically devalued.” Other unnamed officials rubbed salt in the wound, noting the danger that the removal of U.S. troops threatened to “diminish the continent’s value as a strategic partner,” implying that its strategic value is provided by Washington.

The article also noted that the Portuguese are already whispering about having their eye on another suitor:

Since word of possible cutbacks at the base surfaced a year ago, rumors began circulating that the Americans would leave [the base] entirely, and that China, which has growing economic ties with Portugal, would establish a naval base their to patrol the Atlantic.

An American conservative movement worthy of the name would realize the economic strain the country is under and wouldn’t be embracing situational Keynesianism and trying to insulate the bloated military budget from cuts. It would be pointing out that this system of transferring money from U.S. taxpayers to taxpayers in Japan, or Germany, or Portugal is bad for Americans, unconservative, and unnecessary.

Unfortunately, we don’t have that kind of conservative movement.

Roy: “The Arkansas-Obamacare Medicaid Deal: Far Less Than It First Appeared”

At Forbes.com’s Apothecary blog, the Manhattan Institute’s Avik Roy is cool to the idea of states implementing ObamaCare’s Medicaid expansion by putting those new enrollees in ObamaCare’s health insurance “exchanges”: 

When Arkansas Gov. Mike Beebe (D.) first announced that he had reached a deal with the Obama administration to use the Affordable Care Act’s private insurance exchanges to expand coverage to poor Arkansans, it seemed like an important, and potentially transformative, development. The myriad ways in which the traditional Medicaid program harms the poor have been well-documented, and it looked like Beebe had come up with an attractive—albeit expensive—way to provide the poor with higher-quality private insurance. A Good Friday memo from the U.S. Department of Health and Human Services, however, splashes cold water on that aspiration. It’s now clear that the Beebe-HHS deal applies a kind of private-sector window dressing on the dysfunctional Medicaid program, and it’s not obvious that the Arkansas legislature should go along.

The first reason states should not pursue the Beebe plan is that, like a straight Medicaid expansion, it would inhibit the pursuit of low-cost health care for the poor. 

The second reason is that it would cost even more than putting those new enrollees in the traditional Medicaid program. Economist Jagadeesh Gokhale, who advises the Social Security program on how to make these sorts of projections, estimates a straight Medicaid expansion would cost Florida, Illinois, and Texas about $20 billion in the first 10 years. And that’s in the wildly unrealistic event that the feds honor their committment to cover 90 percent of the cost. President Obama has already proposed abandoning that committment. Congressional Budget Office projections suggest the “Beebe plan” would increase the cost of the expansion by 50 percent. That too should be enough reason to reject the Beebe plan. Neither the state nor the federal government have the money to expand Medicaid at all. Volunteering to make the expansion even more expensive is lunacy. 

The Beebe administration is trying to make its plan seem no more expensive than a straight Medicaid expansion. How? By simply assuming state officials would voluntarily make a straight Medicaid expansion so expensive that the Beebe plan wouldn’t cost a penny extra. The illogic goes like this. If Arkansas were to expand traditional Medicaid, the state would likely need to increase Medicaid payments to doctors and hospitals in order to secure adequate access to care for new enrollees. That would make a straight Medicaid expansion so expensive that the Beebe plan would be no more costly, and might even cost less. 

It’s true, states that implement ObamaCare’s Medicaid expansion would have to increase provider payments to give new eligibles decent access to care. The problem is that Medicaid never does that. Medicaid is notorious for paying providers so little that it access to care is lousy. Medicaid does so year after year, even if people sometimes die as a result. The Beebe administration simply assumed that state officials would magically change such behavior, increase Medicaid’s provider payments to the same levels private insurers pay, and thereby volunteer to make an already-expensive Medicaid expansion even more unaffordable. In that fantasy world, the Beebe plan would be no more expensive. As an indication of how implausible that assumption is, no one had been talking about combining a straight Medicaid expansion with higher provider payments until the Beebe administration needed to make the governor’s plan seem slightly less unaffordable. 

Roy has soured on Beebe-style plans since reading some of the terms and conditions the Obama administration issued on Friday. Yet he still imagines there might be free-market-friendly ways to implement a massive expansion of the entitlement state. Thus he counsels states only to expand Medicaid in exchange for real reforms. We’ve heard that song and dance before. Republicans said the State Children’s Health Insurance Program and Medicare Part D – two Republican initiatives – would lead to Medicaid and Medicare reform. Instead, government got bigger and reform went nowhere. Lucy is going to pull the football here, too. If it is Medicaid reform you seek, the only free-market Medicaid reforms are Medicaid cuts. Roy’s criticisms of the Beebe plan are welcome, though it’s odd to find him to the left of officials in the 15 or more states that are flatly rejecting the expansion.

Tiered Guest Workers – Preliminary Details & Observations

Union and business negotiators have supposedly reached a deal on the major aspects of the guest worker visa program.  The details have not been released yet and the utility of such a proposal will rest there, but here are some brief observations on the broad strokes released:

  1. Tiered visa program.  The plan appears to create a tiered guest workers visa program based on the state of the economy.  Under the first tier, firms will be allowed to hire 20,000 visas in 2015 that would ratchet up to 75,000 in 2019.  The second tier could then kick in if the economy is growing quickly and unemployment is below a preset threshold, going up to an annual cap of 200,000 per year.  Under a third tier, employers sound like they would be able to hire a large number of guest workers if they are willing to “pay significantly higher wages.”  According to the Mexican Migration Monitor, almost 700,000 unauthorized immigrants entered in 2006, up from 500,000 in 2005.  If the regulations, fees, and wage controls for the third-tier are minimal, this tiered program could reduce unauthorized immigration significantly if the sectors of the economy that employ unauthorized immigrants can apply for them.
  2. Sector limitations.  The construction industry would be limited to no more than 15,000 visas annually.  As I wrote here, housing starts provided a huge incentive for unauthorized immigrants to enter to work in construction or other housing-related sectors of the economy.  Unauthorized immigration collapsed beginning in mid-2006 as housing starts declined precipitously, reducing demand for construction workers.  But with housing starts picking up, unauthorized immigration will increase again too.  15,000 total annual visas is not enough to siphon most unauthorized immigrants seeking construction employment into the legal market.  However, details in the tiered visa system could allow for some wiggle room there.       
  3. Wage controls.  It appears that guest worker wages will be determined from complex formula that considers actual wages paid by employer to similar U.S. workers, industry wage scales, and regional variations in compensation.  Current guest worker visas are similarly regulated with disastrous and expensive results that encourage illegal hiring.  Replacing all of these regulations with a fee is a much simpler, cheaper, and effective way of incentivizing employers to hire Americans first.  Stacking the regulatory deck too much in favor of hiring Americans, even in industries for which there are very few American workers, will just incentivize employers to look in the black market – defeating the purpose of immigration reform.  More enforcement (code for bureaucracy) will either fail to halt that behavior or halt it by destroying large sectors of the economy through regulatory micromanagement.   
  4. Worker mobility.  An unambiguously positive development is that guest workers would be allowed to switch jobs very easily.  Tying guest workers to employers was always a bad policy, one that could lead to employer abuse and justified numerous bureaucrats to intrusively inspect working conditions.  By allowing labor mobility, guest workers can look out for their own conditions and switch jobs when appropriate – obviating expensive bureaucratic oversight of employers and guest workers. 

These preliminary observations are based on broad policy outlines in numerous news stories rather than actual legislation.  I will update these observations as more details are released or the actual plan is published.