A Rising Tide Lifts all Boats

Kennedy was right. Not Teddy Kennedy, of course, but his brother. President John F. Kennedy stated that a rising tide of economic growth generated benefits for all. A new study from the Congressional Budget Office looks at income trends for families with children and confirms JFK’s wisdom. The Wall Street Journal reviews the key findings:

A new study by the Congressional Budget Office says the poor have been getting less poor. On average, CBO found that low-wage households with children had incomes after inflation that were more than one-third higher in 2005 than in 1991. The CBO results don’t fit the prevailing media stereotype of the U.S. economy as a richer take all affair – which may explain why you haven’t read about them. … The poorest even had higher earnings growth than the richest 20%. The earnings of these poor households are about 80% higher today than in the early 1990s. … CBO says … earnings from work climbed sharply as the 1996 welfare reform pushed at least one family breadwinner into the job market. … earnings for low-income families have still nearly doubled in the years since welfare reform became law. Some two million welfare mothers have left the dole for jobs since the mid-1990s. Far from being a disaster for the poor, as most on the left claimed when it was debated, welfare reform has proven to be a boon. … The report also rebuts the claim, fashionable in some precincts on CNN, that the middle class is losing ground. … every class saw significant gains in income. … the CBO study found that, with the exception of chronically poor families who have no breadwinner, low-income job holders are climbing the income ladder. When CBO examined surveys of the same poor families over a two year period, 2001-2003, it found that “the average income for those households increased by nearly 45%.” That’s especially impressive considering that those were two of the weakest years for economic growth across the 15 years of the larger study.

Even Swiss Politicians Concoct Bad Tax Ideas

Proposals for global tax schemes normally emanate from places like Paris and Brussels. Swiss officials, by contrast, generally have a more sensible attitude – especially since they often are in a position of having to defend Switzerland’s fiscal sovereignty. But as Tax-news.com reports, one Swiss Minister wants a “tax on information” to fund global redistribution:

Swiss Communications Minister Moritz Leuenberger has suggested a ‘tax on information’ to help bridge the digital divide between wealthy countries with good communication infrastructure and poor countries where most of the population have no access to modern communications. Leuenberger revealed his proposal to a United Nations meeting convened to follow up on the World Summit on the Information Society (WSIS), held jointly in Geneva and Tunis in 2003 and 2005. … Leuenberger surmised that such a tax could be raised on information content which is paid for and computers.

Abortion Restrictions, Desperate Women, and Children Without Smiles

Moebius syndrome is a neurological disorder that causes facial paralysis, impaired speech, limb deformities such as club foot, difficulties eating, autism and an inability to smile. Moebius syndrome may have genetic roots but is also caused by misoprostol, a drug commonly used to induce abortions. In Brazil, where elective abortions are illegal, misoprostol is cheap and readily available. Moebius syndrome appears in 20% of children born after failed misoprostol abortions. Unfortunately, misoprostol abortions are also not very effective and 80% result in the pregnancy going to term. “Since the mid-1990s, dozens of cases of Moebius syndrome have been linked to misoprostol.” See the May 11, 2007 issue of Science [pdf].

A Positive Health Care Agenda for Free-Market Advocates

If you know any limited-government types who are looking for a positive health care agenda (off-hand, I can think of ten), be sure to let them know about a forum Cato is hosting on Thursday titled, “Health Savings Accounts: Not Entirely Consumer-Directed (Yet).”

HSAs are the most important step Congress has taken toward liberalizing America’s health care sector.   At this forum, I’ll be introducing a proposal that would let workers own every one of their health care dollars – not just the few thousand dollars that HSAs let them control.  Tentatively titled “large HSAs,” this proposal would:

  • Allow workers to control 100 percent of their health benefits dollars
  • Allow HSA holders to choose any type of health plan
  • Eliminate the tax code’s biases toward employer-sponsored insurance and excessive coverage
  • Cap the tax exclusion for employer-sponsored insurance and
  • Provide tax relief to those without employer-sponsored insurance, including the uninsurable.  

Joining me to comment on the proposal will be the CEA’s Katherine Baicker and Jason Furman of the Brookings Institution’s Hamilton Project. 

The forum will be held just two days from today, on Thursday, May 24, at 4pm EDT at the Cato Institute.  Click here to register or watch the event online.  Click here for directions and parking information. 

Patent Rent-Seeking

When I worked in Cato’s DC offices a couple of years ago, I always found it kind of depressing to go to lunch on K Street and see thousands of smart, attractive young men and women crowded around me, the vast majority of whom worked as lobbyists. They were people who otherwise might have been entrepreneurs, journalists, accountants, or doctors, creating wealth and improving society. But instead, they were enticed by the fat paychecks to come to Washington, where their talents are devoted to finding clever ways to enrich their clients at the expense of taxpayers and consumers.

I had a similar sinking feeling when i read this article (via Techdirt) about the flood of young scientists and engineers who are leaving the lab for careers as patent lawyers:

Demand for these specialists is being driven by an explosion in patent applications in recent years and a growing need for lawyers to protect old patents or challenge new ones. The U.S. Patent Office estimates 450,000 patent applications will be filed this year, up from about 350,000 five years ago.

Law professors say they’re seeing more students with strong science backgrounds make the leap to law, where recruiters are snapping them up.

For at least some students who might otherwise gravitate toward a science career, the promise of much bigger paydays is a powerful lure. Others say the opportunities in academia are not as certain as they once were.

“It’s an exciting area of legal practice right now,” said University of Pennsylvania law professor R. Polk Wagner. “Every year I see more and more people coming into law school with technical backgrounds.”

“It almost scares me,” said Wagner, whose proteges include Weathers. “Who’s left in the lab?”

Who indeed?

Now, I believe that some degree of patent protection is beneficial, especially for capital-intensive fields like pharmaceuticals. But we are now far past the point where the marginal patent, or patent lawyer, spurs economic growth. Quite the contrary, in recent years, the patent office has lowered patent standards so much that for the most part, obtaining and litigating over patents has become little more than a form of rent-seeking. A company obtains a patent that covers a broad category of innovation and then uses it to blackmail other companies that have succeeded in the marketplace.How else do we explain a company with no products winning a $612 million settlement from the company that pioneered wireless email? Or the company that pioneered Internet telephony fighting for its life against Verizon, a company that’s not exactly known for its innovative Internet applications? I could bore you to tears with examples of attempts to extort money from productive companies using the patent system. Every single one of those controversies was carried out by bright, ambitious individuals like those in the USA Today article, being paid six-figure salaries to find ways to obtain advantages in the courtroom where they weren’t able to prevail in the marketplace.

The Supreme Court’s recent Teleflex decision should reduce this problem somewhat by raising the bar for patent obviousness. But more fundamental reforms are needed as well. For a start, we should be asking whether certain categories of innovation require patent protection at all. Software and business methods are two obvious choices. Neither category was eligible for patent protection before the late 1980s, and there was certainly no shortage of innovative new software or business models during that time period.

New Study: School Districts Spend As Much as They Can

The Mackinac Center for Public Policy has just released a study I conducted for them on the relationship between school district size and spending. But a funny thing happened on the way to the findings – I discovered something vastly more intriguing than what I set out to investigate.

When trying to statistically isolate the effects of district size on per-pupil spending, you have to control for other factors that might affect expenditures. One thing that economists like to control for is the public’s demand for educational services. If local residents expect more (or less), then district officials may choose to spend more (or less) to meet their demands. This is the traditional “selfless public servant” view of bureaucratic behavior.

But there is an alternative theory of bureaucratic behavior, called “public choice.” Public choice theory says that everyone, including bureaucrats, voters, and elected public officials, is motivated significantly by self-interest. We try to do what is best for ourselves and our families. According to this view, public officials generally endeavor to spend as much as they can, because that is the route to professional growth in the public sector.

As a “Pepsi Challenge” of economic theory, I included control variables for both views of bureaucratic behavior in my model. The result? Public choice theory explains about 15 times as much of the variation in spending between districts as does the selfless public official theory. In other words, public school districts spend as much as they can, regardless of local public demand for their services.

That means the incentive structure of our state-run school monopolies is broken. It encourages profligacy. Is it any wonder that real public school per pupil spending has doubled in the past 30 odd years, without any commensurate improvement in the skills of high-school seniors?

State legislatures wanting to rein in spending thus have only one real hope: introduce new incentives for educators to maximize quality while controlling costs. How do you do that? Competition, parental choice, private ownership of schools, deregulation, and, as much as possible, direct parental funding of schools. The same market structure that has driven rising quality and efficiency in almost every other field for centuries. Throw in a good education tax credit policy and you’ve got universal access to a free education marketplace.

More Special-Interest Favors for Fannie and Freddie

Created by politicians and bolstered by aggressive lobbying, Fannie Mae and Freddie Mac are quasi-private companies with special access to funds and special regulatory exemptions. With the playing field dramatically tilted in their direction, these morgage-industry behemoths are accumulating ever-larger portfolios. In a genuinely unfettered market, this would be just fine, but this is not the case. Because of their special access to the Treasury, Fannie and Freddie create a heads-they-win-tails-we-lose situation for taxpayers. If Fannie and Freddie prosper, it is the consequence of government favoritism that results in the economy’s capital being misallocated. If they fail, there almost surely would be a bailout reminiscent of the S&L fiasco. There has been an effort to slightly curtail the risks caused by the Fannie and Freddie subsidies, but the Wall Street Journal notes that the one decent provision of the bill was removed. Not surprisingly, there is widespread expectation that the White House will approve a bill that actually makes a bad situation even worse:

Their amendment to Mr. Frank’s bill, which passed by voice vote Thursday night, guts the one provision that made it worth the effort. What’s left is a regulator who would lack the authority to limit the risk that Fannie and Freddie’s $1.4 trillion mortgage-backed securities portfolios pose to the financial system, plus a $500 million a year boondoggle that goes by the euphemism “affordable housing fund.” …That leaves the White House and Treasury with some decisions. Administration officials were cautious about the Bean-Neugebauer amendment when first proposed, but Fannie and Freddie’s friends are betting the Administration wants a deal enough to accept even a bad one. However, a “reform” that does nothing to reduce the problem of putting so much housing risk into two companies, and which also includes an annual $500 million donation to “housing” activists such as Acorn is worse than the status quo.