Topic: Cato Publications

New at Cato Unbound: Alan Reynolds’ Income Distribution Heresies

In a speech yesterday, Federal Reserve Chairman Ben Bernanke worried that rising income inequality may make Joe and Joanne Lunchbox “less willing to accept the dynamism … so essential to economic progress,” which would be bad. ”Bernanke Warns of Economic Inequality,” Forbes’ headline tolls. 

Bernanke is evidently sold on what economists call the ”skill based technical change” hypothesis, which basically says that new technology has increased the productivity, and thus the wages, of high-skilled workers faster than it has for low-skilled workers. Bernanke sagely advises us not to look to globalization as the source of increasing inequality, and urges a broader diffusion of the kinds of skills that really pay off in today’s economy.

But is there actually something to be worried about? Is income inequality really widening at all? Are the incomes of the wealthiest increasing faster than those of the rest of us?

As it happens, those are the question of this month’s edition of Cato Unbound, “Interrogating Inequality,” which kicks off today!

It turns out these questions are a lot harder than they seem, and the answers turn on which set of government statistics — each with its own special biases — one consults. In this month’s lead essay, “Income Distribution Heresies,” Cato’s own Alan Reynolds — who set off a firestorm of controversy with a Wall Street Journal op-ed last month disputing the received wisdom about growing inequality — clarifies and refines his argument that massively increasing income inequality is an illusion. Replying to Reynolds, we’ll have the Brookings Institution’s Gary Burtless, University of Oregon economist and econ-blogger Mark Thoma, Cornell University inequality specialist Richard Burkhauser, and the Germano-Italian econo-duo Dirk Krueger and Fabrizio Perri, of the Universities of Pennsylvania and Minnesota (and the Minneapolis Fed), respectively.

So … is the specter of rising income inequality a statistical quirk or not? What’s really going on, income distribution-wise? Why not pay more attention to the wealth and consumption numbers, in any case? Only Cato Unbound readers will really be in the know.

Paduda Cuts (Closer) to the Heart of the Matter…

…when he responds to my post thus:

I think this is because libertarians don’t believe in health insurance as a means to help people with health conditions pay their bills.

I would put it this way:

Insurance is a voluntary arrangement where consumers agree to subsidize each other. By definition, sick people have higher medical expenses. Thus, some seek to charge healthy people more than they cost to insure, so that insurers can reduce the premiums they charge to the sick.

There are lots of reasons why healthy people may agree to that. They may be very risk-averse, and so they are willing to pay more than they cost to insure. They may be altruistic, deriving satisfaction from knowing that their higher premiums are making coverage more affordable for others. Or they may precommit to such subsidies before it is known who in the insurance pool will develop a chronic illness (read: guaranteed renewable insurance).

As a libertarian, I have no problem with the healthy subsidizing the sick via private health insurance — so long as the arrangement is voluntary. But problems arise when public policy tries to get healthy consumers to provide, shall we say, “extra-voluntary” subsidies:

  • The healthy people eventually figure out that they are being over-charged, and they bolt. That makes the risk pool less-healthy, premiums rise, and more healthy people leave. Lather, rinse, repeat, and you’ve got your very own adverse selection death spiral.
  • The insurers realize they can’t make money off the sick people, so they avoid diabetics and such as if they had the plague. 
  • And it doesn’t help the situation that forced subsidies lead to greater moral hazard among the very people who already use lots of medical care. That just fuels the first two responses.

So to tweak Paduda’s characterization, libertarians think private insurance is a wonderful vehicle for voluntary subsidies and a lousy vehicle for forced subsidies.

In a world without such forced subsidies, Paduda is correct that we would purchase a lot less health insurance. And I find this comment instructive:

[I]nsurance would not be available at any kind of affordable price for anyone who really needs it if Cannon’s prescription becomes reality” [emphasis in original].

Sick people don’t need insurance. Insurance doesn’t make sick people healthy. They need medical care. They may even need subsidies. So why not try to provide them those things, rather than wreck the markets for both health insurance and health care?

Many equate insurance with subsidy. In fact, one is a subset of the other.

Aqua Teen Overreaction Force?

Boston officials investigating this week’s marketing campaign gone awry should be sure to include themselves in the scrutiny, asking if they overreacted to the incident.

A In case you missed the story, Cartoon Network, a division of Time Warner’s Turner Broadcasting, recently launched a “guerrilla marketing campaign” to promote its new adult-audience cartoon Aqua Teen Hunger Force. As part of the campaign, the network hired New York marketing firm Interference Inc. to place notepad-sized, electronically lit signs of the show’s “mooninite” characters in unusual locations around urban areas.

The campaign received little notice in New York, Los Angeles, Chicago, Atlanta, Seattle, Portland, San Francisco, Philadelphia, and Austin, Texas. But in Boston, public officials treated the signs as a possible terrorist threat, closing bridges, subway stations, roadways, and even part of the Charles River while bomb squads removed the signs.

Once the nature of the signs became known, Boston mayor Thomas Menino issued a press release blasting the campaign:

It is outrageous, in a post-9/11 world, that a company would use this type of marketing scheme. I am prepared to take any and all legal action against Turner Broadcasting and its affiliates for any and all expenses incurred during the response to today’s incidents.

Estimates for those expenses have already topped $1 million.

Boston officials’ initial concern is understandable and appropriate. Seeing an out-of-place object containing batteries, circuitry, and glowing lights is unsettling in these times and it should be investigated. But at what point should Boston officials have realized that the signs posed no threat, and called off the bomb squads?

This raises an issue that we often discuss here at Cato, and that has become especially important in the post-9/11 era: should we be more concerned about Type-1 errors (false positives) or Type-2 errors (false negatives)?

Detection systems, whether mechanical (burglar alarms, ultrasounds) or human (analysts, emergency services workers) are rarely error-free. Often, we have to decide whether we want a very sensitive detection system that likely will detect any real problem but also subjects us to Type-1 errors, or else a less sensitive system that likely won’t give us many false alarms but may also miss a real problem.

Boston officials’ bomb-squad response to the mooninite signs is a perfect example of a Type-1 error produced by a highly sensitive detection system. I suspect that government officials would defend the high sensitivity, saying “it’s better to be safe than sorry.”

But Type-1 errors can end up making us feel very sorry. The current Iraq War can be considered a Type-1 error resulting from the Bush administration’s high sensitivity to the threat posed by Saddam Hussein’s regime.

Or consider the 2002 Beltway sniper attacks, during which local schools publicized that they were in “lockdown mode” and keeping schoolchildren indoors — that is, they went into “better safe than sorry” mode. The snipers later told police that the schools’ pronouncements enticed the snipers to try to kill a child, and they ultimately wounded a 13-year-old as he arrived at his Bowie, Md., middle school.

For an excellent discussion of why 9/11 should not lead us to be too accepting of Type-1 errors, read Ohio State University national security professor John Mueller’s article “A False Sense of Insecurity?

The Libertarian Vote: New Returns Trickle In

Don’t miss the latest from David Kirby and me on the libertarian vote. In Cato Policy Report (pdf; less attractive HTML version here) we report the results of our Zogby International poll of 2006 voters.

In the Zogby survey, 15 percent of voters gave libertarian answers to our three questions. And those libertarian-leaning voters showed the same shift away from Republican candidates that we had identified in the 2004 election. Clearly, “two more years of war, wiretapping, and welfare-state social spending” had not brought back any of the wandering libertarians.

We did some new tests in the Zogby survey. We asked voters to identify themselves ideologically. Full results are in the article, but most respondents whom we identified as libertarian described themselves as “conservative” (41 percent) or “moderate” (31 percent). Only 9 percent called themselves “libertarian.”

But … when we asked half the respondents, “Would you describe yourself as fiscally conservative and socially liberal?” we were quite surprised that fully 59 percent said yes. And when we asked the other half of the sample, “Would you describe yourself as fiscally conservative and socially liberal, also known as libertarian?” we knew the number would go down. But it only went down to 44 percent. So 44 percent of American voters are willing to label themselves as “libertarian” if it’s defined as “fiscally conservative and socially liberal.”

We point out to Republican strategists:

After the 2000 election Karl Rove was convinced that 4 million Christian evangelicals had stayed home, and he was determined to get them to the polls in 2004. By our calculations, Republicans carried the libertarian vote by 5.5 million votes in the off-year election of 2002 and by only 2.9 million votes in 2006. That’s a swing of 2.6 million libertarian voters. Remember, it takes two new base voters to replace one swing voter who switches from one party to the other. Rove and his colleagues should have been watching out for the libertarian vote as well.

Read the article.

But wait, there’s more!

Since that article was written, David Kirby (whose number-crunching skills prove that you can actually learn something useful at the Kennedy School of Government) has analyzed newly released data from the American National Election Studies, the gold standard of public opinion research. ANES’s 2006 survey once again found that 16 percent of voters held libertarian values. And David found the following shifts from the 2002 midterm elections:

How Libertarians Voted

House              2002                2006 
D candidate       23                     46 
R candidate       70                     54 

In other words, among libertarians, the margin for Republican House candidates dropped from 47 to 8 points, a 39-point swing. (Note: ANES asked the question a slightly different way, so that votes for third-party or independent candidates were not recorded in 2006. Libertarian voters seem to vote for alternative candidates at a higher rate than other voters.)

Turning to the upper chamber,

Senate             2002                2006 
D candidate       15                     48 
R candidate       74                     52 

Among libertarians, the margin for Republican Senate candidates dropped from 59 to 4 points, a 54-point swing.

As we noted in the Cato Policy Report article, “To put this in perspective, front-page stories since the election have reported the dramatic 7-point shift of white conservative evangelicals away from the Republicans. The libertarian vote is about the same size as the religious right vote measured in exit polls, and it is subject to swings more than three times as large.”

We reiterate our advice above to Karl Rove, and invite Democratic strategists to look carefully at the gift that Republicans are offering them.

Much Regulatory Ado about Nothing?

This story has all the makings of a Shakespearean comedy: a public watchdog asleep at the switch, a scorned woman, and the silliness of politics.

(OK, I’m hyping a post about regulation. But really, the other elements are in here and it’s a good tale. So keep reading.)

SLEEPING WATCHDOG   Last January 18, President Bush quietly approved major changes to the federal regulatory review process. Federal agencies will now be required to offer greater justification for new regulations, estimate those regulations’ costs and benefits, and the White House will have oversight of agencies’ quasi-regulatory “guidance documents,” which until now have been largely free from executive review.

The changes initially went unnoticed by the media — almost. Lauren Morello of the energy & environment trade publication Greenwire (subscription required) ran a good article the next day (full disclosure: I was one of her interviewees). But, unless I missed it, none of the major media reported the story.

None, that is, until this week. On Tuesday, Bloomberg Media’s Cindy Skrzycki dutifully reported the changes in her column “The Regulators.” The same day, the New York Times ran the story front-page, above-the-fold. But for more than a week, the major policy change went unnoticed by the press, other than Greenwire. And, I might add, Greenwire did by far the best job of explaining the new policy’s substance and controversy.

THE SCORNED WOMAN   The policy change has been attributed to new White House regulatory affairs adviser Susan Dudley. Dudley came to national attention last summer, when President Bush nominated her to head the Office of Information and Regulatory Affairs (OIRA), a small but very important part of the Office of Management and Budget. At the time, Dudley was directing the Regulatory Studies Program at George Mason University’s Mercatus Center, and she has contributed a number of articles to Cato’s Regulation Magazine. (For a fun read, see her short article “A Regulated Day in the Life” from the Summer 2004 issue.)

Dudley’s nomination was met with considerable controversy, and even nastiness, reminiscent of the earlier OIRA fight over Harvard professor John D. Graham. Graham was ultimately approved by the Senate, but Dudley’s nomination never received a committee vote.

I have read some of Dudley’s work, and I’ve found it to be well reasoned and illustrative of issues of legitimate concern — even though I’ve sometimes disagreed with her conclusions. OIRA’s job, as I interpret it, is to scrutinize regulatory agencies’ proposals and require the agencies to justify why they would restrict people’s interactions and impose costs. Such scrutiny is, after all, part of deliberative policymaking. Perhaps Dudley’s scrutiny would have been unreasonably difficult, but a good OIRA chief would certainly ask the tough questions that Dudley’s analyses raise.

THE NEW POLICY   Technically, what President Bush did on Jan. 18 was issue Executive Order 13422, amending President Bill Clinton’s Executive Order 12866. EO 12866 pushes federal regulatory agencies to consider the costs of the various regulations they propose, and to examine alternative regulations that could accomplish the same goals at lower costs. EO 12866 also places several transparency and openness requirements on the regulatory process. Finally, EO 12866 gives OIRA a regulatory review role — albeit a less muscular one than what OIRA had under President Ronald Reagan’s Executive Order 12291. (For more on OIRA and EO 12866, read Dudley’s “Bush’s Rejuvenated OIRA” from the Winter 2001 Regulation.)

The new Bush amendments make four important changes to EO 12866:

  1. Regulatory agencies will have to identify what “market failure” a proposed regulation is intended to address. In other words, an agency will have to explain why the “problem” addressed by the proposed regulation cannot be solved through private action.
  2. Agencies must give some estimate of the aggregate costs and benefits of their regulations.
  3. Guidance documents, which give informal direction for how to comply with various federal regulations, will have to undergo OIRA review if they are considered “significant.”
  4. A political appointee in each agency will have oversight of that agency’s regulatory process.

The first amendment should be unobjectionable, at least on a theoretical level. ”Market failure” is the fundamental justification for government regulation (e.g., pollution should be regulated because no one “owns” the environment), so requiring a regulating agency to cite the relevant market failure when proposing a new regulation seems an appropriate requirement. Indeed, this requirement was part of the original EO 12866 and of President Ronal Reagan’s previous EO12291, but compliance with the requirement has been weak. That is unfortunate, because clearly identifying the market failure should help agencies to formulate effective and efficient regulations.

Likewise, the second amendment seems unobjectionable, at least in theory. Most citizens assume (incorrectly, it turns out) that government regulations undergo and pass a cost-benefit test. Requiring an estimation of the aggregate costs and benefits of regulation would help to ensure that regulation produces a net gain in public welfare — which, I take it, is the ultimate goal of regulation.

The third amendment involves guidances, a broad category of agency-issued documents that try to explain the application of various statutes and regulations. Guidances lack the force of law and also are not subject to the sort of rigorous review process that regulations are. Guidances are thus subject to a number of complaints, including that agencies do not adequately identify the documents as “advisory” and thus not having the force of law, and that agencies improperly use guidances as a way to expand government’s regulatory reach while avoiding the scrutiny of regulatory review. Those concerns are supposed to be addressed by the amendment’s subjecting “significant guidances” to OIRA scrutiny.

Finally, the fourth amendment is intended to put the regulatory process more under the control of the President. A justification for this change is that the public is better served if greater regulatory responsibility is taken by the appointees of an elected official than by career civil servants.

SILLY POLITICS   But is this shift in regulatory responsibility such a good thing? And, indeed, don’t each of the amendments put regulation more under the control of politicians? A good cost-benefit analysis or thoughtful consideration of market failure would certainly improve the regulatory process, but if politicians are in charge of the analysis (whether a President Bush or, say, a President Al Gore), could we trust the analysis they produce?

To be honest, I’m not sure whether we’d be better served by having the politicians, or the bureaucrats, lead the regulatory state. And I’m also not sure that the fight over EO 12866 matters.

In the Fall 2006 Regulation, New York Law School professor and environmental lawyer David Schoenbrod tells the disturbing story of the Environmental Protection Agency’s Faustian bargain. Schoenbrod claims that Congress created the EPA to be a whipping boy, making the difficult decisions and absorbing the abuse that Capitol Hill’s politicians want to avoid. Congress gets the accolades for voting to “save the environment”; the EPA gets the nightmare of figuring out how to do it, how much of it to save, and who absorbs the cost. And the EPA suffers the wrath of angered environmentalists and industrialists.

I would extend Schoenbrod’s analysis to all regulatory agencies: Congress is supposed to oversee the laws and consider the difficult tradeoffs implicit in regulation. But, because Congress has abdicated its duty, regulatory analysis has fallen to the White House and/or the federal bureaucracy — a situation that serves no one particularly well.

And what is more, it may not really matter whether the White House mandates additional regulatory analysis or who carries it out. As Rutgers University’s Stuart Shapiro argues in the Summer 2006 Regulation, the findings of regulatory analysis have surprisingly little effect on a proposed regulation; what seems to matter is the White House’s position on the regulation. If the White House likes the regulation, the regulation usually gets adopted regardless of the analysis; if the White House dislikes the regulation, it usually gets abandoned regardless of the analysis.

Despite the immense blood-feud over it, regulatory analysis seems to have neither produced the rational, low-cost regulatory paradise that proponents envisioned, nor the misery-plagued wasteland that opponents decried. Instead, as Cato chairman Bill Niskanen has cynically observed, regulatory analysts produce a bunch of lonely numbers that the politicians usually ignore. I suspect Bush’s EO 12866 amendments will produce more of the same — which is to say, the current brouhaha is much ado about nothing.

[Hat tip to Dr. Richard Belzer for correcting my description of EO 13422’s second amendment. You can read Dr. Belzer’s thoughts on EO 13422 at www.neutralsource.org.]

Fighting Government-Run Health Care (Some Exceptions May Apply)

I receive the occasional email from Sarah Berk in her official capacity as the executive director of a group called Health Care America.  (Disclosure: Sarah and I used to work for the same U.S. Senator.)  Typically, these emails riff on the theme:

“Health Care America promotes common-sense policies that limit government control … in the U.S. health care system.”

A recent example is an email informing me that “Health Care America has recently released two op-eds that explain why increased government-control over our health care system reduces consumer choice, quality and innovation.”

So I’m always amused to find an example of government control that Health Care America thinks is just hunky-dory.  And then another.  And another.  And yet another.

For example, Health Care America supports:

  1. Socialized drug coverage for seniors.
  2. Government barriers to trade that prevent Americans from purchasing prescription drugs from abroad. 
  3. State laws that require people to purchase health coverage and that regulate health insurance in a manner reminiscent of HillaryCare: “The recent success of Massachusetts Gov. Mitt Romney in creating a universal system using the private sector demonstrates that it is possible to reach bipartisan agreement on positive changes.”
  4. Government control over charity care in general: “Health Care America believes in the social safety net that is funded by government.”
  5. The nightmarish Medicaid program in particular: “the U.S. rightfully invests significant resources in the program.”
  6. Expanding the State Children’s Health Insurance Program.  According to Health Care America’s ad campaign: ”SCHIP is a notable health care success story…Expanding SCHIP to allow states to cover custodial adults is one easy way to get more children covered by the program.”

How does an organization come to adopt such a sharp yet selective distaste for government control?  And with so many types of government control that it supports, why the strident anti-government rhetoric?

One Reason Why RomneyCare Costs So Much

According to the Boston Globe:

Employees of the new state agency established to provide health insurance to the state’s low-income residents have been hired at an average salary of $111,000 a year, with 12 of the 22 staff members making more than $100,000 and six earning more than Governor Deval Patrick and his Cabinet secretaries…

Eventually the Commonwealth Health Insurance Connector’s administrative costs will be funded by insurance companies through a surcharge . . . of 4 to 5 percent on the premiums they collect as a result of the program. Some have raised concerns that insurers will pass along the cost to consumers in higher premiums.

According to the article, the salaries are so high because the “Connector” is a species of quasi-independent state bureaucracy with the power to set its own salaries.  Former Gov. Mitt Romney once “railed against [such agencies] for their overly generous compensation packages” – that is, until he created one.