Archives: 10/2014

The Pension Burden on State Budgets

Cato’s “Fiscal Policy Report Card on America’s Governors” focuses on short-term tax and spending decisions made by governors. But governors and legislatures also make important decisions that will affect state budgets over the longer term.

As Chris Edwards and I discuss in the Report Card, one area of particular concern is compensation for state workers, particularly retirement benefits.

Total wages and benefits for state and local workers was $1.3 trillion in 2013, which accounted for 53 percent of all state and local spending. That is a huge cost that could rise substantially in coming years, particularly in those states that have large funding gaps in their retirement plans. Governments have promised their workers generous pension and retirement health benefits, but most states have not put enough money aside to fund them.

In recent years, many states have modestly trimmed benefits and increased worker contributions for retirement plans. However, more reforms are needed, as recent studies have shown. A study by the Center for Retirement Research (CRR) at Boston College found that the average funding level—the ratio of assets to liabilities—for public employee pensions was just 72 percent in 2013 after declining substantially over the past decade. Based on the usual accounting for these plans, the unfunded liabilities in state and local pensions total $1.1 trillion, according to CRR.

Those numbers understate the size of the problem. Most financial economists think that the discount rate used in official valuations of government pension liabilities is too high, or too optimistic. When CRR used a lower discount rate of 4 percent instead of the average official rate of 7.7 percent, the value of unfunded state and local pension liabilities skyrocketed to $3.8 trillion. Our Cato colleague, Jagadeesh Gokhale, argues even that is too conservative as it only includes currently accrued pension costs. He estimates that the funding gap for accrued benefits plus future accruals under today’s generous pension rules is about $10 trillion.

Many states have made modest reforms to pensions in recent years, but larger reforms are needed. Without reforms, state budgets will be put under increasing stress and part of the burden of pension benefits will land on future taxpayers.

Should Intellectual Property Be in Trade Agreements?

After I complained recently that arguments for including intellectual property (IP) in trade agreements needed to specify what level of protection is desirable, Tom Giovanetti responded by asking for my view on a more basic question: Should IP—regardless of the level of protection—be in trade agreements at all? My colleague Bill Watson has previously set out a political argument for removing it, which is that achieving free trade is becoming very difficult when IP issues get inserted into trade negotiations. Let me add to his argument the following: If IP is in, then there is really no boundary to what can be in, and the result is trade agreements that look like “global governance” agreements.

Returning to Tom’s question, I should say at the outset that Tom doesn’t really say explicitly why IP should be in trade agreements. He doesn’t explain how IP rules fit within the general concept of trade liberalization, or what scope he sees for trade agreements. What are his limits for what should be covered in trade agreements? I’m really not sure. Instead, the main focus of Tom’s argument for including IP in trade agreements seems to be that the United States exports lots of IP-related goods, and therefore it is in the nation’s interest to have IP rules in there.

With this argument, it seems to me that Tom is trying to portray strong IP protection as something that helps U.S. industry at the expense of its foreign competition. This doesn’t have a very trade-liberalizing feel. Moreover, looking at the bigger picture, what stronger IP protection does is help U.S. industry at the expense of consumers (U.S. and foreign). In terms of appropriate IP policy, it seems to me, the focus should be on giving incentives to innovate, but not to the detriment of consumers. Some argue that stronger IP protection promotes innovation, but others contest this.

Turning back to trade agreements, Tom’s argument misses a fundamental point: What is the purpose of trade agreements? For decades, this purpose was fairly clear: to provide a framework of mutual restraints on protectonist trade barriers, such as tariffs, quotas, and discriminatory laws and regulations.

Public Oversight of Congress, One Click at a Time

In mid-August, using Cato Deepbills data, the Legal Information Institute at Cornell University started alerting visitors to its U.S. Code pages that the laws these visitors care about may be amended by Congress.

The most visited bills are an interesting smattering of issues.

Getting top clicks is H.R. 570, the American Heroes COLA Act. Would it surprise you to learn that beneficiaries of Social Security’s Old Age, Survivors and Disability Insurance program are looking to see if veterans’ disability compensation will get the same cost-of-living increases? The relevant section of the Social Security Act on the Cornell site points to the bill that would grow veterans’ benefits in tandem with Social Security recipients’.

S. 1859, the Tax Extenders Act of 2013, is the second bill with the most referrals from Cornell. People looking into federal regulation of health insurance—or myriad other statutes—are finding their way to this complex piece of legislation. We know visitors to the Cornell site are legally sophisticated. They just might be able to follow what S. 1859 does.

Immigration is a hot-button issue, and Deepbills links at Cornell such as the code section dealing with reimbursement for detaining aliens are sending people to S. 744, the Border Security, Economic Opportunity, and Immigration Modernization Act.

Another hot-button issue and top source of clicks from Cornell’s site: federal gun control. People looking at gun control law are following links to Senator Dianne Feinstein’s (D-CA) bill to ban assault weapons.

As of Thursday morning, 674 people had clicked 855 times on links to the bills in Congress that affect the laws they’re interested in. Those numbers aren’t going to instantaneously revive public oversight of the government. But usage of these links is rising, and Tom Bruce at Cornell says he plans changes that may increase clicks by 3 to 5 times. He guesses that people see Cato’s sponsorship of the data they can access 20,000 times a day. (“I should have asked you for a penny per impression ;),” he says. Funny guy.)

A lot more people are aware of work Cato is doing to increase government transparency, but, more importantly, a small but growing cadre of people are being made aware of what Congress is doing. This positions them to do something about it. Public oversight of Congress is increasing one click at a time.

At a Minimum, Transatlantic Trade Negotiations Should Ditch Investor-State Provisions

Some exaggeration notwithstanding, Harold Meyerson, with whom the occasion to agree is rare, does a reasonably good job describing some of the pitfalls of the so-called Investor-State Dispute Settlement mechanism in his Washington Post column yesterday.  ISDS has become a source of growing controversy, which threatens to derail the Transatlantic Trade and Investment Partnership negotiations, which are reported to be floundering during the seventh “round” of talks taking place this week in Chevy Chase, Maryland.

“Under ISDS,” Meyerson writes, “foreign investors can sue a nation with which their own country has such treaty arrangements over any rules, regulations or changes in policy that they say harm their financial interests.”  That is more or less correct, but the implication that the threshold for bringing a suit is simple harm to a foreign investor’s financial interests is misleading.  What is being disciplined under ISDS is not harm to financial interests of foreign investors, but harm that comes from discriminatory treatment of foreign investors.  Thus, ISDS avails foreign investors (i.e., U.S. companies invested abroad, foreign companies invested in the U.S.) of access to third-party arbitration tribunals as venues for determining whether and to what extent the plaintiff suffered economic damages on account of host-government actions or policies that fail to meet certain minimum standards of treatment.

Meyerson suggests that ISDS provisions be purged from the TTIP negotiations because they subordinate U.S. courts to unaccountable tribunals, which “invites a massive end-run around national regulations.” Though I firmly believe the U.S. economy is racked with superfluous and otherwise unnecessary regulations, I do believe that a successful foreign challenge of U.S. laws, regulations, or actions in a third-party arbitration tribunal (none has occurred, yet) would subvert accountability, democracy, and the rule of law.  For those and several other reasons, I’m on board with Meyerson’s suggestion to purge ISDS from TTIP, and would extend the purge to all trade agreements.  In fact, I developed eight reasons for purging ISDS from the trade negotiations in this paper earlier this year.

Grading America’s Governors

This morning, Cato released the 12th edition of the “Fiscal Policy Report Card on America’s Governors.” The report card uses statistical data to grade the governors on their tax and spending performance from a limited-government perspective. The governors who cut taxes and spending the most receive an “A,” while the governors who increase taxes and spending the most receive an “F.”

Four governors were awarded an “A” on this report card: Pat McCrory of North Carolina, Sam Brownback of Kansas, Paul LePage of Maine, and Mike Pence of Indiana.

The common theme among these Republican governors is fiscal restraint. All four proposed or signed into law large tax cut packages in their state while also holding the down the growth of state spending.

At the other end of the fiscal spectrum, eight Democrat governors were awarded an “F.” These governors substantially increased taxes and spending within their states. They were: Mark Dayton of Minnesota, John Kitzhaber of Oregon, Jack Markell of Delaware, Jay Inslee of Washington, Pat Quinn of Illinois, Deval Patrick of Massachusetts, John Hickenlooper of Colorado, and Jerry Brown of California.

Over the years, the data-driven Cato report cards have shown that Republican governors are more fiscally conservative, on average, than Democrats. However, there are some Democratic centrists who have recently made important tax reforms, including Andrew Cuomo of New York and Lincoln Chafee of Rhode Island, who both earned a “B.”

Fiscal decisions made by governors matter to state economies. Much attention is paid to the uncompetitive federal corporate income tax, which collected $274 billion in 2013. But state and local taxes cost businesses $671 billion in 2013. The largest state taxes on businesses are property taxes of $242 billion and sales taxes on business inputs of $140 billion. The good news is that some governors are working hard to reduce these job-killing burdens.

The airwaves are full with pundits making observations about the political situation of various governors. The Cato report card allows you to sidestep the noise and see what the data shows about whether a governor is growing or restraining government.

Curious how your governor scored? Check out the full rankings.

Cargill v. Syngenta: Biotechnology and Trade

On September 12, Cargill, a major commodity trading and processing firm, filed a lawsuit in a Louisiana state court against Syngenta Seeds for selling genetically engineered MIR 162 (also known as “Agrisure Viptera®”) seed corn to farmers. China has not yet approved importation of corn containing MIR 162, so U.S. exports to that country of corn and corn products have come to a halt. Demand for U.S. corn has fallen. Cargill believes its losses exceed $90 million. 

Syngenta’s view?  “Syngenta believes that the lawsuit is without merit and strongly upholds the right of growers to have access to approved new technologies …”. The company’s position is that it has been legally selling seeds containing MIR 162, a trait that provides useful insect resistance, to U.S. farmers since 2010.  Other major corn importers – including Japan, South Korea, Mexico, Colombia and the European Union – have approved importation of corn with the MIR 162 trait. Syngenta has been seeking approval in China since March 2010. MIR 162 has not raised any health or environmental safety issues. 

Cargill’s view is that Syngenta has rendered U.S. corn supplies ineligible for export to China. Corn containing MIR 162 has spread throughout the U.S. marketing system to the extent that it would be expected to be present in any ocean vessel loaded for export:

Little Evidence Supports the FDA’s Proposed Food Label Rules

In the upcoming issue of Regulation magazine, Robert Scharff, associate professor in the Department of Consumer Sciences at the Ohio State University, and Sherzod Abdukadirov, research fellow in the Regulatory Studies Program at the Mercatus Center at George Mason University, argue that the FDA’s two proposed rules on food nutrition labeling are supported by little evidence and should be scrapped.

The food labeling rule would, as Scharff and Abdukadirov explain, result in a number of changes “involving both formatting and content changes to labels, increases in recordkeeping, and new analytic requirements.” The second rule, the serving size rule, would affect packages that contain a small number of servings. 

The FDA claims that implementing both of these rules will help Americans make healthier food choices. However, as Scharff and Abdukadirov point out, the FDA does not cite any work that supports the underlying assumption that consumers will change their short-sighted behavior if changes are made to food labels. In fact, an FDA-commissioned study found that increasing the font size for calorie information on food labels had no effect on consumer behavior. In addition, the FDA has provided little evidence that inserting a separate line on labels for “added sugars” will result in health benefits.

Aside from the lack of evidence cited by the FDA, Scharff and Abdukadirov explain that the study on the effects of regulations written to comply with the Nutrition Labeling and Education Act of 1990, which is used by the FDA to make the benefits calculations of its proposed rules, is flawed. Not only is the study unpublished and yet to be peer reviewed, its sample is limited to women aged between 19 and 50 years old, which artificially inflates the effects of nutrition labels on behavior because women are more likely to view nutrition panels than men.    

If the two proposed rules are implemented they will add billions of dollars in costs for consumers. Such an expensive change in regulations should have to be justified with good empirical data. Scharff and Abdukadirov show that the FDA’s proposed rules are justified mostly by good intentions, not data.