Topic: Cato Publications

Regulation News Pegs!!

In the public relations racket, they’re called “news pegs” — current events that can be used to promote your research. As editor of Regulation, I sometimes get the complaint that my publication is “interesting, but it doesn’t have a lot of news pegs.”

So how about this — two Regulation news pegs in one day!

Peg 1: Should we tax nonprofit hospitals?

Decades ago, Congress awarded tax-exempt status to private nonprofit hospitals in return for the hospitals agreeing to treat indigent patients who would otherwise rely on taxpayer-provided healthcare services. But this “grand bargain” is now under Capitol Hill scrutiny following the discovery that for-profit, non–tax exempt hospitals provide roughly the same amount of free medical care to the poor. Today’s NPR program Marketplace discusses the congressional hearings.

All of this should come as no surprise to readers of Regulation. In the summer issue, Guy David of Penn and Lorens Helmchen of Illinois-Chicago lay out this very problem and ask (pdf), why is the government giving one type of tax treatment to some hospitals and another type to others?

Peg 2: Soft Paternalism

For several years I’ve believed that one of the most important intellectual challenges to libertarian ideas is behavioral economics — the empirical field of study that suggests people often do not act rationally and thus markets do not maximize public welfare.

The current issue of the New Yorker contains an article by John Cassidy on behavioral and neuroeconomics that confirms my view. In the article, Cassidy writes that “most economists agree that, left alone, people will act in their own best interest, and that the market will coordinate their actions to produce outcomes beneficial to all.  Neuroeconomics potentially challenges both parts of this argument.”

The regulatory prescriptions that follow from this research are often described as “soft” or “libertarian” paternalism.  The basic notion is that government should require certain behaviors as a default rule (for example the purchase of health insurance or particpation in 401k saving plans) but allow people to opt out if they prefer.

But government actors appear to be no more rational than economic actors — and it is quite possible that soft paternalism could be more detrimental to public welfare than the private choices studied by behavioral economics. Harvard economics professor Ed Glaeser states this case (pdf) in the summer issue of Regulation.

New at Cato Unbound: Clark Ervin Replies to John Mueller on Terrorism

In today’s installment of Cato Unbound, Clark Kent Ervin, former Inspector General of the Department of Homeland Security and author of Open Target: Where America is Vulnerable to Attack, strongly disagrees with John Mueller’s provocative lead essay, “Some Reflections on What, if Anything, “Are We Safer” Might Mean,” in this month’s issue devoted to “9/11 Five Years After: Reassessing Homeland Security and the Terrorist Threat.”

New England Journal of Medicine Reviews Crisis of Abundance

Arnold Relman reviews the Cato Institute’s latest health policy book, Crisis of Abundance by adjunct scholar Arnold Kling, in the latest issue of the New England Journal of Medicine. Dr. Relman is a former editor of the NEJM and an advocate of socialized medicine. Nonetheless, he compares Kling favorably to other economists who write about health care:

[Kling] has done a much better job than most of his colleagues. His book is clear, concise, and eminently readable; he writes in straightforward English prose, not economic jargon; he is modest, posing questions more often than he answers them; and he considers alternatives to most of the policy options he discusses.

Many readers will know that I am a longstanding critic of the economic approach to health care policy, but I liked this little book and can recommend it highly…

I was attracted by a certain freshness and directness in much of Kling’s argument, and I found myself agreeing with many of his observations…

[Kling] intends only to “raise the level of understanding of the realities, issues, and tradeoffs pertaining to health care policy.” I think he succeeds pretty well at that, so I warmly recommend his book to general readers who want to understand what economics has to say about health care.

NEJM subscribers can click to the full review from here. We expect to be able to link to the full review soon from and

Crisis of Abundance is available for purchase here.

GAO Report on HSAs

I just received an e-mail notice from the GAO about a report issued last month on health savings accounts. From my cursory read, the report doesn’t seem to contain anything unpredictable or earth-shattering. Corroborating that impression is the fact that I cannot find where Sen. Max Baucus (D-MT) — a longtime HSA opponent who commissioned the study from the GAO — has released any statement on it. (The GAO doesn’t release its reports until a couple of weeks after it delivers them to the congress-critter who made the request. That lets congress-critters be the first to spin release any GAO report.)

In all, the report brings to mind an observation by the Congressional Research Service that I included in a recent paper on HSAs:

Some less healthy people may find HSA plans attractive because they enable them to circumvent the restrictions of managed care plans. Conversely, some healthy people may find them unattractive because they are very risk-averse; they would prefer to pay more for comprehensive insurance with low deductibles. Older people may find HSA plans attractive because of the tax advantages: being in higher tax brackets (since average earnings increase with age until people are in their 50s), their tax savings from contributions would be greater. People who are 55 but not yet 65 years of age would also be attracted by the additional catch-up contributions they may make. By the same token, younger people with low incomes may consider the HSA tax advantages inconsequential.

The GAO seemed to find that HSAs worked for some people, and not for others. In their current incarnation, HSAs may not be for everyone. But the GAO’s findings hardly tracked the fear-mongering of HSA opponents. Some quotes from the report:

  • “HSA-eligible plans constitute a small but growing share of the private health insurance market.”
  • “[A] 2005 national employer health benefits survey reported HSA-eligible plan premiums that were, on average, 35 percent less than traditional plan premiums for single coverage and 29 percent less for family coverage.”
  • “[A] 2005 national employer health benefits survey reported HSA-eligible plan premiums that were, on average, 35 percent less than traditional plan premiums for single coverage and 29 percent less for family coverage.”
  • “The HSA-eligible plans offered by the three employers we reviewed covered the same broad categories of health care services as did traditional plans in 2005, including preventive, diagnostic, maternity, surgical, and emergency services, and also used similar provider networks.”
  • “HSA-eligible plan enrollees generally had higher incomes than comparison groups, but data on age differences were inconclusive.”
  • “IRS data…suggest that the average age of tax filers who reported HSA contributions was about 9 years higher than the average age of all tax filers under age 65 in 2004…. In contrast, data from several employer groups indicate that the average age of HSA-eligible plan enrollees, excluding retirees, was 2 to 6 years lower than that of other groups of enrollees.”
  • “While focus group participants enrolled in HSA-eligible plans understood the key attributes of their plan, such as low premiums, high deductibles, and the mechanics of using the HSA, they were confused about certain other features. For example, many participants were unsure what medical expenses qualified for payment using their HSA.”
  • “Few participants researched the cost of hospital or physician services before obtaining care, although many participants researched the cost of prescription drugs.”
  • “Most participants reported satisfaction with their HSA-eligible plan, but said they would not recommend these plans to everyone. Participants said they would recommend HSA-eligible plans to healthy consumers, but not to people who use maintenance medication, have a chronic condition, have children, or may not have the funds to meet the high deductible.”

I have argued that requiring people to have a rigidly defined high-deductible health plan in order to qualify for an HSA is unnecessary, and probably does more than anything to make HSAs unattractive to many consumers. 

I have also recommended expanding HSAs to give workers control over every one of their health care dollars, and to allow workers to purchase any type of health insurance they wish.

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 (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?


Federalism This Ain’t

According to

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.