Topic: Cato Publications

Coming Monday: “9/11 Five Years After: Reassessing the Terrorist Threat and Homeland Security”

Monday is the fifth anniversary of the deadly terrorist attacks on the World Trade Center and the Pentagon, that precipitated the Global War on Terror internationally and the creation of the Department of Homeland Security domestically. While the Global War on Terror has received a vast amount of commentary, less has been said about the effectiveness of the government’s policies to guard against terrorist attacks on U.S. soil. Is there, in fact, enough of a terrorist threat to justify the astronomical sums spent securing landmarks in third-tier cities? Has domestic anti-terrorism policy actually made us any safer? Was the DHS even a good idea? How is it spending our tax money?

All these questions and more will be debated in the imminent September edition of Cato Unbound, “9/11 Five Years After: Reassessing the Terrorist Threat and Homeland Security.” Ohio State University political scientist John Mueller will kick off the conversation with “Some Reflections on What, If Anything, ‘Are We Safer?’ Might Mean.” Mueller will get feedback and pushback from: Clark Ervin, head of the Homeland Security Program at the Aspen Institute and the first inspector general of the United States Department of Homeland Security; Veronique de Rugy, a resident fellow at the American Enterprise Institute and expert on DHS budgeting priorities; and Timothy Naftali, soon-to-be director of the Richard Nixon Presidential Library and Museum and author of Blind Spot: The Secret History of American Counterterrorism.

Pork or Bags of Cash?

I’ve been noodling through a government reform thought experiment, but can’t seem to reach a conclusion. See what you think…

The reform would address that most nefarious dynamic: When the benefits of government spending are concentrated and the costs are dispersed, government will grow and spending will increase.

Mancur Olson described this dynamic more than 40 years ago in The Logic of Collective Action. Steve Slivinski, in his new book Buck Wild, summarizes Olson’s idea as follows:

Olson pointed out that the disparity in incentives between taxpayers and what we now call “special interests” results from an inherent disadvantage of the larger group (i.e., taxpayers) compared to the smaller group (i.e., recipients of public dollars) in its ability to organize to defend its interests. It is this inherent bias in favor of the small special interest groups that provides a very robust explanation of why we still have Big Government, even though many taxpayers would prefer smaller government. “It would be in the best interest of those groups who are organizing to increase their own gains by whatever means possible,” writes Olson. “This would include choosing policies that, though inefficient for the society as a whole, were advantageous for the organized groups because the costs of the policies fell disproportionately on the unorganized.”

To borrow an example from Steve’s book, the National Endowment for the Arts had a 2004 grant budget of $47.4 million — equal to about 0.01% of income taxes. The NEA awarded 1,970 grants that year, so the average grant amount was $24,000. Grant recipients would thus have considerably more financial incentive to lobby for continuing the NEA than individual taxpayers, who on average contribute less than a buck per year to the program, would have to lobby for discontinuing it.

This dynamic is made worse by the common belief that if a government program is cut, its money will be rerouted to some other program instead of returned to taxpayers. Consider, for instance, the lightly-trafficked regional airport in my hometown, which is using a forthcoming, large federal grant to finance a major expansion of its runway. When local residents complained that the expansion was a waste of taxpayers’ money, project defenders responded that the federal government would spend it in some wasteful fashion anyway, so why not do so locally?

The “organized group” that gains the most from Olson’s dynamic is politicians. Because they control the public fisc, they receive the entreaties and gratitude of special interests, and they parlay that gratitude into campaign contributions and electoral support. The result is that politicians and special interests mutually benefit from this dynamic while taxpayers are stuck with the bill.

Nor does the dynamic require bad actors. Special interests can act on the sincere belief that their causes benefit society, and politicians can share that belief or else be brought to embrace it by the quasi-Darwinian forces of elections. In short, Olson’s dynamic appears to be a natural part of the political system.

Unfortunately, it’s a very costly part, as Duke University’s Mike Munger described earlier this summer in an essay on econlib.org. (Will Wilkinson discusses Munger’s essay here, and Munger chats about it on Russ Roberts’ EconTalk here.) Special interests — whether units of government or private entities — will invest resources in lobbying and other efforts to gain the government money. Those investments, in aggregate, may pay off for the special interest (because the government money received offsets the cost of the successful and unsuccessful lobbying efforts), but significant resources are wasted from the perspective of society.

To understand this, suppose a special interest spends L dollars a year on lobbying, and that lobbying yields G dollars in government money. If L < G, the special interest will continue its lobbying, because the cost is offset by the government money received. But the cost to society for the special interest obtaining G is G + L (because society ultimately funds the special interest) + various deadweight losses D from taxation.

 Hopefully, the benefit purchased by the grant will outweigh G + L + D. But there are many cases where that appears not to be the case — consider Ted Stevens’ $231 million “Bridge to Nowhere” for the 50 people of Gravina Island, Alaska. So, society is stuck with paying G + L + D for a benefit that sometimes isn’t even worth G.

Government spending, in theory, is supposed to be for public goods — goods for the benefit of the general public that are not sufficiently provided through private markets because they are neither rivalrous nor exclusive. (There are all sorts of fights over how to understand “sufficiently,” but we need not worry with that here.) However, projects like the Bridge to Nowhere and other instances of pork-barrel spending are better understood as either club goods (goods that are exclusive) or private goods (goods that are rivalrous and exclusive).Neither of those latter two categories of goods seems an appropriate candidate for government provision — or, at least, for federal government provision. Yet it is those two groups of goods for which special interests are willing to spend L in order to gain G.

Can we somehow break up this dynamic, reduce L, and increase the likelihood that public spending goes to true public goods instead of dubious club and private goods?

To do so, we would have to overcome Olson’s dynamic. That would require:

  1. assuring that the money saved from foregone spending is returned to taxpayers (or, at least, to the public),
  2. reshaping the budget system so that politicians are politically rewarded for the money they save, and
  3. aggregating special interest “pork” spending so that taxpayers will have greater incentive to organize.

Hence, my thought experiment: What if individual politicians were given the choice between spending the money allocated to pork barrel spending on actual projects, or handing that money directly to their constituents?

Think about this on the federal level. In essence, each congressional district has its own pork fund (funded in accordance with the congressman seniority, party affiliation, political favors, etc.) that it divvies up among local and national special interests. What would happen if each congressman were given the choice of, instead of simply funding pork, handing out some or all of the money to his constituents?

Public choice analysis asserts that the congressman would follow whichever course of action is most likely to get him reelected. If the politician’s laundry list includes some meritorious public goods that would benefit his community (and thus earn his constituents’ gratitude), he would direct some of the money to those goods. He may also continue to fund some of the club and private goods, if he believes enough voters have a strong-enough preference for them.

But, I suspect, the congressman would detect a strong voter preference for receiving bags of cash instead of dubious-value government goods and services. And that intense preference, I think, would reduce pork barrel spending. That, in turn, would reduce special interests’ incentives to pursue that money, which would reduce L.

But is my suspicion wrong? Would politicians prefer to hand out cash to large numbers of constituents or cut the ribbon for Bridges to Nowhere (after handing out cash to construction companies)?

Moreover, if I am right that handing out cash to constituents is more appealing, would the unintended consequences of this reform (e.g., politicians using the handouts to redistribute wealth to the median voter) be worse than its benefits?

Thoughts?

Federalism This Ain’t

According to Kaisernetwork.org:

Reps. Tom Price (R-Ga.) and Tammy Baldwin (D-Wis.) on Wednesday at a joint event by the Brookings Institution and Heritage Foundation encouraged lawmakers to back a bill (HR 5864) that would “allow states to act as laboratories where lawmakers could test methods to reduce the number of uninsured Americans,” CQ HealthBeat reports.

In an online debate with Stuart Butler of the Heritage Foundation (here, here, and here), I argued that this approach would favor government-expanding health care proposals.

Those in search of a free-market health care agenda should look elsewhere.

NHS: Let No Good Hospital Go Unpunished

This one’s about a month old, but still worth comment. In early August, Telegraph.co.uk reported that Britain’s National Health Service (NHS) is punishing hospitals that don’t make patients wait for care.

Since the NHS is bleeding money, the bureaucracy wants hospitals to observe minimum waiting times for non-emergency care (e.g., 122 days) as a way of limiting expenditures. Hospitals that do not impose those minimum waits – i.e., that treat each patient as soon as they can – lose funding. According to the Telegraph, “One gynæcologist said that he spent more time doing sudoku puzzles than treating patients because of the measures.” One hospital was penalized £2.4 million for eliminating their waiting lists. All this is happening while the Labor government has promised to reduce waiting times.

It’s not that the minimum-wait policy is so outrageous – given the task of the NHS. It’s that the task itself is outrageous and guaranteed to produce such perverse results. As the Telegraph editorialized:

This bizarre situation arises from the Government’s pseudo-market system, which creates conflicting objectives for “purchasers” (PCTs) and “providers” (hospitals).

In a real competitive market, increased demand can allow prices to rise, thus increasing profits, which allow the market to grow. Efficient producers can then reduce their unit costs and their prices, and so give a better deal to the consumer. The prevailing logic is that the more customers who are served - or products that are sold - in a given period of time, the better the business does.

But PCTs have budgets that are predetermined by Whitehall spending limits, and there is no way for them to conjure extra revenue out of the air or to grow their market. As a result, the hospitals that are most successful in providing prompt treatment are running through the finite resources of their PCTs at an unacceptably rapid rate.

So the NHS is faced with a perverse outcome: hospitals providing precisely the kind of immediate access to treatment that patients want and that Government ministers profess to demand, are punished financially by another arm of the Whitehall machine. Any government that wants to reform NHS funding will have to address this conundrum that lies at the heart of a tax-funded monopoly healthcare system.

Britons are lucky that they can opt out of such a perverse system – but that’s only if, as Jacques Chaoulli observes, they are lucky enough to be able to pay twice.

Much Ado about Crisis of Abundance

The American Prospect’s Ezra Klein and Berkeley’s Brad DeLong have each weighed in on Cato’s book forum for Arnold Kling’s new health policy book, Crisis of Abundance (Cato Institute, 2006). 

Kling notes that we had invited The New York TimesPaul Krugman to speak. I was disappointed that Krugman had to decline. I would have loved to see that matchup, as I have for some time thought of Kling as The Anti-Krugman.

Now comes word that Harvard’s Greg Mankiw recommends the webcast of the book forum.

All Snark, No Substance

Brad DeLong endorses Ezra Klein’s comments (see my earlier post) about Cato’s recent forum for my book Crisis of Abundance. The event was really a health care symposium, with New York University’s Jason Furman offering comments and the Washington Post’s Sebastian Mallaby offering comments on the book.

Concerning the latter commenter, DeLong offers the following:

I challenge the classification of Sebastian Mallaby as a “professional domestic policy thinker.” It would seem to me that it would be more accurate to call him a lazy hack journamalist [sic].

Memo to Cato: putting Sebastian Mallaby on a panel as a health care “expert” gains you brownie points among the journamalists [sic] of the Washington Post. It doesn’t boost your reputation among the reality-based community.

Memo to DeLong: I’ll debate anyone of your choice. I understand that Cato tried really hard to get Krugman, and I am willing to travel to Princeton.  At least Jason Furman (or is he just another hack?) and Sebastian Mallaby were willing to engage.

The main criticism of Mallaby is that he argued against insurance coverage for wigs. Actually, if you think about it, there is much to be said for Mallaby’s point. Just because wigs go to cancer patients, and we feel sorry for cancer patients, does not mean that insurance should cover wigs. Wigs are neither necessary nor sufficient for curing cancer.

If a critic wants to “score points with the reality-based community,” I suppose he should use snark. But snark can be the refuge for someone who is having difficulty with substance.

When Generous People Stop Kidding Themselves

Over at Tapped, Ezra Klein is wrestling with my interpretation of the new estimates of poverty and health insurance coverage released yesterday by the Census Bureau. I observed that after the 1996 welfare reforms made federal cash assistance less “generous,” poverty went down. In contrast, federal health care spending grew ever more “generous,” and the number of uninsured went up. I humbly submitted that perhaps Congress should stop being so “generous” with health care.

Klein thinks that’s “crazy,” but he misfires on poverty rates:

  1. He suggests that economic growth of the late 1990s and the expansion of the Earned Income Tax Credit were responsible for the post-1996 reductions in poverty. (The EITC does not directly affect the poverty rate, but it does affect the decision to earn other income that does.) Certainly each played a part. But prior economic booms did not have as dramatic an effect on the poverty rate even when the EITC was present, and scholars like June O’Neill have estimated that welfare reform had larger effects than did the economy. Moreover, although the EITC encourages some people to work more, it reduces work overall by encouraging others – those in the phase-out range – to work less. That might lift some out of poverty, but it traps them and others on the lower rungs of the economic ladder.
  2. He notes that poverty has increased every year from 2000 to 2004. True, but he is being selective in order to avoid the larger point that poverty remains lower now than at any point in the 17 years leading up to welfare reform. (Also, FWIW, poverty dropped slightly in 2005.)
  3. He confuses the poverty rate for families (9.9 in 2005) with the overall poverty rate (12.6 percent in 2005).
  4. Finally, he notes that the family poverty rate was lower in 2005 than in 1996. Yet he somehow believes this to be evidence that federal cash assistance does not contribute to poverty.

The political Left has had a really hard time dealing with welfare reform. When Congress pared back cash assistance, the Left assumed that bad things would happen (increased poverty, starvation, etc.). Instead, good things happened. But that evidence doesn’t fit in the Left’s model. They just don’t know where to put it.

Klein is as confused about the health care side of the comparison.

  1. Klein writes: “I don’t know any health care wonks who think medical cost inflation is a product of government spending…” He should get out more. He should start by hanging out with Maryland’s Mark Duggan and Yale’s Fiona Scott Morton, who estimate that prescription drugs are 13 percent more expensive in the private sector thanks to Medicaid. He should read up on crowd-out of private health insurance, which isn’t likely to make private insurance markets any more robust. Many people think that cost-shifting from Medicaid increases the cost of private coverage. Personally, I’d call that crowd-out of another sort, but the effect is the same. Klein should read about how MIT’s Amy Finkelstein speculates that Medicare led to increased medical expenditures in the private sector as well. All of which affects insurance premiums.
  2. Klein dismisses the idea of reforming Medicaid as Congress reformed welfare – by cutting back assistance. But that’s exactly what Congress did when it cut off Medicaid for non-citizen immigrants in 1996. Do I need to tell you what the Left predicted? Do I need to tell you what actually happened? Klein should add to his reading list Harvard’s George Borjas, who found that coverage levels for non-citizen immigrants increased after they were cut from the Medicaid rolls – a result that, Borjas argues, cannot be explained by the robust economy.
  3. Finally, Klein writes that yours truly “[doesn’t] want Big Government to start pummeling the medical-industrial complex.” But as I argue elsewhere, so long as the government controls the money, the medical-industrial complex will never get the beating it deserves because producers will always have a disproportionate influence over political decisions that effect their incomes. We will not discipline the medical-industrial complex until we have patients on the side of restraining spending, and that will not happen until patients own the money that’s being spent. Libertarians would love to pummel the medical-industrial complex. It would be (marginally) easier to do so were Klein to get out of the way.

Klein’s post reminds me of the passage Charles Murray used to close his seminal work Losing Ground:

Most of us want to help. It makes us feel bad to think of neglected children and rat-infested slums, and we are happy to pay for the thought that people who are good at taking care of such things are out there. If the numbers of neglected children and the numbers of rats seem to be going up instead of down, it is understandable that we choose to focus on how much we put into the effort instead of what comes out. The tax checks we write buy us, for relatively little money and no effort at all, a quieted conscience. The more we pay, the more certain we can be that we have done our part, and it is essential that we feel that way regardless of what we accomplish…

To this extent, the barrier to radical reform of social policy is not the pain it would cause the intended beneficiaries of the present system, but the pain it would cause the donors. The real contest about the direction of social policy is not between people who want to cut budgets and people who want to help. When reforms finally do occur, they will happen not because stingy people have won, but because generous people have stopped kidding themselves.