Taxing the Future

Today’s New York Times reports that Illinois is seriously considering selling off its state lottery and converting the future cash flow into a current lump sum plus a smaller cash flow over the next 75 years.  Gambling, of course is not an economic development strategy.  Excess profits exist only because the state restricts entry.  Like the mercantile regimes of old, the state is raising cash by selling off its monopoly.

Given the numbers in the Times, I conducted some present value calculations.  The sale is projected to result in a cash flow of $200 million per year for 75 years to the state (current profits are $430 billion).  The remaining cash flow goes to the winning bidder.  The reported estimated bid for this franchise is approximately $1 billion.  That suggests a return on investment of 20% per year compounded over 75 years.  Seems rather steep to me.  A 5% return would result in a much higher bid of $3.9 billion.

If the $1 billion is an accurate reflection of what an auction would yield, then the market is telling us that there is large risk to investing in a business whose only asset is state restrictions on entry.  This is particularly true because of the possibility not only of actual physical entry in Illinois, which is less likely, but entry through the internet.

Gambling markets are not the only markets whose source of profits is state enforced entry restriction.  Some years ago Richard Sansing and I studied the difference between the lease prices and sale values of taxi medallions in New York City (Journal of Policy Analysis and Management volume 13 issue 3 (1994) pp. 565-570).  We found that the market acted as if there was a 5% chance of deregulation in any year (i.e. the market was pricing the asset as if its cash flow would be zero in year 21).

Why are states selling assets for their cash flows?  Spending a billion dollars now rather than $630 million every year (the current profits of the lottery) allows today’s politicians to appear generous.  But my suspicion is that they are taxing the only thing left to tax i.e. people in the future.  My colleague Jagadeesh Gokhale’s work in entitlement reform argues that Social Security and Medicare are policies that redistribute from all future generations to current and past generations.  Politicians do this because the future is the last unorganized group in society.  I think some of the same politics are behind the Illinois lottery financial proposal.  But ironically the inability of the political system to credibly commit to future policies reduces the value of the sale to the current era because the market includes political risk in its valuation.         

Trade Showdown Looks Inevitable

Yesterday I argued that Congress’s unflinching devotion to the antidumping law poses a real threat to the world trading system.  As the WTO dispute settlement mechanism renders more decisions against U.S. antidumping actions and procedures, Congress will grow more inclined to question the efficacy and legitimacy of the WTO in public.  And that is a slippery slope.

I wrote:

To Congress, trade remedy laws are not the problem.  Dumping and subsidization are.  And the latest Appellate Body decision against zeroing makes it that much harder to combat “unfair” trade.

Accordingly, Congress is highly unlikely to go quietly into the night after the WTO’s latest indictment of zeroing. Thus, confrontation–perhaps intractable confrontation–between the United States and the WTO dispute settlement system may be in the cards later this year.

Well, judging from this news release and letter, written by the two highest ranking legislators on trade issues, “later this year” is here.  Stay tuned.

Bush Health Care Proposal Mirrors Cato Scholars’ Proposal

I’ve returned from my first pre-State of the Union briefing of the day by the Bush administration.  (I’ve got another at 4:30).  What I heard about the president’s health care proposal has me even more heartened.

In part, that’s because the president’s proposal mirrors the proposal for “large HSAs” that I introduced here and here, and that Mike Tanner and I explain in Healthy Competition: What’s Holding Back Health Care and How to Free It.

Tonight, the president will propose setting a very high limit on existing distortionary tax breaks for health insurance.  The Large HSAs proposal would do the same.  He also will propose extending the revamped tax break to all individuals, ending the tax code’s discrimination against those who don’t have access to employer-sponsored insurance.  Ditto Large HSAs.

However, the president’s proposal does not incorporate an important third element of the Large HSAs idea: giving workers ownership of the part of their compensation that purchases their health benefits. 

Here’s why that’s important.  If your employer currently spends $10,000 on your health benefits, that part of your compensation is untaxed.  The president’s proposal would let you keep that tax break if you choose to purchase coverage someplace else.  But it does nothing to make sure that you get to keep the $10,000 that your employer spends on your health benefits.  That money is not a gift – it is part of your compensation.  But if you choose to leave your employer’s health plan, the employer is under no obligation to give you the money that he otherwise would spend on your health benefits.  In fact, your employer would face strong incentives not to “cash you out.”  Being free to choose where to purchase your health insurance means less if you have to take a pay cut to excerise that freedom.

Large HSAs would give workers ownership of that part of their compensation.  The proposal would convert the current tax break for employer-sponsored coverage into a tax break only on HSA contributions.  The contribution limits on HSAs would be raised, so that most workers could put all of their health benefits dollars into the account.  They could then use those funds to purchase coverage tax free from their employer, or any other source.  Importantly, with Large HSAs, the worker would control that $10,000 from day one.

Even though the president’s proposal doesn’t give workers ownership over that portion of their compensation, it is still a step in the right direction.

Spin Doctors Left and Right

Never say the Republicans don’t learn from their adversaries. On NPR, historian Timothy Naftali discusses responses to State of the Union speeches. He notes a tough response by House Republican leader Robert Michel to President Clinton in 1993, in which Michel complains about the way the “Clinton spin doctors” are changing the meaning of words. In particular, he grumbles, “Patriotism now means agreeing with the Clinton program.” That’s certainly a definition that (with the change of one word) the Bush spin doctors and their conservative supporters have endorsed wholeheartedly.

How Public Schools Cause Social Conflict

For many Americans, it is an article of faith that public schooling is the key the nation’s unity. However, in a new study, “Why We Fight: How Public Schools Cause Social Conflict,” Cato scholar Neal McCluskey demonstrates that far from uniting diverse peoples, public schooling forces them into constant conflict over schools for which they all must pay, but only the most politically powerful can control. “To end the fighting caused by state-run schooling, we should transform our system from one in which government establishes and controls schools, to one in which individual parents are empowered to select schools that share their moral values and educational goals for their children,” says McCluskey.

Supreme Court Sentencing Ruling

As usual, NYT Supreme Court reporter, Linda Greenhouse, has a good report about yesterday’s sentencing decision from the Supreme Court. 

Excerpt:

The Supreme Court invalidated California’s criminal sentencing law on Monday, ruling that the 30-year-old statute gave judges authority that the Constitution places with juries.

The 6-to-3 decision will require the California courts to reconsider thousands of sentences as the Legislature contemplates its options for amending the statute to meet the justices’ objections.

While no other state is directly affected, Justice Ruth Bader Ginsburg’s forcefully worded majority opinion demonstrated that the Roberts court is committed to carrying out the full implications of the revolution in criminal sentencing that the court began seven years ago in Apprendi v. New Jersey.

In fact, with Chief Justice John G. Roberts Jr. joining the majority, the court planted its stake more firmly than ever in what criminal law scholars and practitioners have taken to referring to as Apprendi-land.

Round-up of coverage here.

Ruling here.

I have argued that this legal trend is a positive development [.pdf] and the ruling will indeed impact the sentences of thousands of prisoners in California.  Still, some of the “revolutionary” rhetoric is overblown.  For more Cato work on sentencing, go here.

The State of the State of the Union

It’s time once again for the State of the Union, that annual ritual of outsized promises and insincere, if thunderous, applause. As I recount here, thanks to a custom initiated by President Jefferson, for 112 years presidents delivered their annual messages to Congress in writing. With each passing year, that custom looks better and better. Would that they’d go back to mailing it in.

As the presidency has grown more powerful over the course of American history, the content and style of the State of the Union has changed accordingly, as Elvin T. Lim documents in “Five Trends in Presidential Rhetoric,” a very interesting article [.pdf] in the journal Presidential Studies Quarterly.

Over time, presidential rhetoric has become less humble, more assertive, less intellectual, less republican (in the small-‘r’ sense of the word) and more populist. And the promises have grown ever grander and less credible. In his half-dozen SOTUs, for example, President Bush has promised, among other things to teach our children well, heal the sick, defend the sanctity of marriage, and bring democracy to the world. Last year the president pledged that, with fedgov’s help, we would “change how we power our automobiles.” (“Wood chips, stalks,” and “switch grass” may be the answer.) And this year, he’ll confirm once again that, as he put it last year, “we are on the offensive in Iraq, with a clear plan for victory.”

Here are a couple of neat SOTU-related links that you can use to track changes in presidential rhetoric over time.

First is the “US Presidential Speeches Tag Cloud,” which “shows the popularity, frequency, and trends in the usages of words within speeches, official documents, declarations, and letters written by the Presidents of the US between 1776 - 2006.” Click and drag through the ages and watch as the word “Constitution” becomes less and less prevalent.

Second is this site, which “provides access to the corpus of all the State of the Union addresses from 1790 to 2006, [and]…. allows you to explore how specific words gain and lose prominence over time, and to link to information on the historical context for their use.” (Via Julian Sanchez).

If you’ve ever thought to yourself, “man, that speech gets dumber every year,” you’re not wrong. The latter site analyzes the SOTUs using something called the “Flesch-Kincaid score,” “which is meant to suggest the grade level in an American school for which the text is comprehensible.” That score’s declining steadily.

Similarly, Lim notes that the quality of argument and the language used in the speeches are becoming more simplistic:

Thus, whereas William Henry Harrison likened liberty to ‘the sovereign balm for every injury which our institutions may receive’ in his inaugural address, George [H.W.] Bush simply likened it to a kite: ‘Freedom is like a beautiful kite that can go higher and higher in the breeze.’

Of course, complexity of language isn’t necessarily a virtue, and the fact that the SOTU’s becoming more comprehensible shouldn’t necessarily be taken as evidence of a national slide toward Idiocracy.

But some of the other trends Lim tracks are discomforting for supporters of limited, republican government, such as the increasing focus on “the children” with “Presidents Carter, Reagan, Bush, and Clinton [making] 260 of the 508 references to children in the entire speech database, invoking the government’s responsibility to and concern for children in practically every public policy area.” Nothing against the cute little buggers, but a properly limited federal government would spend less time talking about them and designed policies that focus on them.

In any event, if you get bored during Tuesday’s speech, use the links above to see how the speech has changed. Or, if not, there’s always the State of the Union drinking game.