When to Worry about Moral Hazard?

In three different, recent op-eds, I’ve read that only during boom times should we worry about moral hazard — the idea that some actor will engage in overly risky behavior because he believes that he’ll be bailed out if the risk goes bad. The most recent op-ed to say this is Charles Goodhart’s, in today’s FT

OK, I did worry about moral hazard in 1998 when stock prices peaked. And again in 2006 during the housing price boom. 

Question: Instead of worrying, when is it time to “do” something about moral hazard? 

It seems the answer is never. During boom times, no one asks for government to play Good Samaritan. And during a bust — like now — when there’s opportunity to tell negligent investors to “go swim in the lake,” we’re told, well, the time to worry about moral hazard is during boom times! 

That’s another reason to call moral hazard the ”Samaritan’s Dilemma.”

A Presumption of Liberty

In 2006, there was an initiative in the state of Washington to ban smoking in public places. The scope of the ban was controversial; when government officials said it applied to private establishments, the ban was challenged by a small shop, the American Legion Post #149. The Post has seven employees; six were smokers and the seventh had no objection to smoking on the premises. The state supreme court nevertheless upheld the ban.

A strong dissent was filed by Judge Richard Sanders. Sanders began his opinion by observing the way in which the state government was attempting to frame the question before the court. The state’s lawyers asserted that the smoking ban ought to be “presumed constitutional and such presumption may be overcome only by proof beyond a reasonable doubt.” Not so, wrote Sanders. ”If any presumption exists, it is a presumption of liberty, wherein the State must prove the necessity and propriety of its restrictions on liberty.” 

Sanders then referred readers to two works available from Cato’s Book Store, Randy Barnett’s Restoring the Lost Constitution: The Presumption of Liberty and The Dirty Dozen: How Twelve Supreme Court Cases Radically Expanded Government and Eroded FreedomSanders then analyzed the smoking ban more closely and concluded that it is unconstitutional. Read the whole thing.

Randy Barnett delivered the keynote address here at Cato on Constitution Day, where he elaborates on his approach to constitutional interpretation. Check it out.

HRW’s Deafening Denunciation of Hugo Chávez

Human Rights Watch cannot be accused of being a right-wing organization fostering Washington’s imperialist agenda. Thus, its recent report bluntly condemning Hugo Chávez for the erosion of democracy and the gross violation of civil liberties in Venezuela is creating shockwaves. The first reaction from the government in Caracas has been to expel HRW director José Miguel Vivanco.

In 236 pages, the report, titled “A Decade Under Chávez: Political Intolerance and Lost Opportunities for Advancing Human Rights in Venezuela,” details Chávez’s abuses against opposition groups, the media, organized labor, civil society, and his assault on the Courts. It’s a worthwhile read.

The United States of Permanent Receivership

Next year marks the 30th anniversary of the appearance of the second edition of Theodore J. Lowi’s The End of Liberalism, subtitled The Second Republic of the United States. The preface to the second edition ends, “I want to express a very belated thanks to Friedrich A. Hayek. His work had much more of an influence on me than I realized during the writing of the First Edition. I neither began nor ended as a Hayekist but instead found myself confirming, by process of elimination and discovery, many of his fears about the modern liberal state.”

Lowi argues that the Second Republic is marked by “the state of permanent receivership,” which is defined as “a state whose government maintains a steadfast position that any institution large enough to be a significant factor in the community may have its stability underwritten. It is a system of policies that sets a general floor under risk, either by attempting to eliminate risk or to reduce or share the costs of failure.” This state includes anticipatory receivership, which includes “businesses that are not actually on the brink of bankruptcy but are in a sector of the economy where bankruptcies or reorganizations are likely unless there is some kind of a preventive measure.”

Thirty years out, Ted Lowi looks pretty good this morning. Not much else looks good, but the second edition of The End of Liberalism shows that this dour morning has been coming for some time.

Read the book.

A Clarification

In a previous post, I wrote the following about friend and debate partner Sally Pipes:

And I’m now prepared to induct John Stossel into the Anti-Universal Coverage Club. Sally Pipes I’m still not sure about; you can judge for yourself when the IQ2 folks post the transcript of the debate here.

My intention was not to disparage Pipes. The Anti-Universal Coverage Club exists to challenge the idea that government should pursue a policy of universal health insurance coverage. Some free-marketers believe that’s a fine goal, so long as government goes about it using market mechanisms. At our recent Intelligence Squared debate, Pipes remarked:

By supporting universal choice in health care, and empowering consumers, we will achieve universal coverage.

Pipes is one of the leading opponents of government-run health care. When I heard that remark, though, I thought perhaps Pipes might fall into that aforementioned group of free-marketers. So I didn’t want to induct her into the Anti-Universal Coverage Club if that’s not her thing.

Colleagues of Pipes objected to my blog post. In an email to me, Pipes writes:

I support allowing the market to work resulting in more choice for consumers. The government should not be involved.

I did not mean to suggest anything to the contrary, but I can see why they would think I had. I apologize to Pipes and her colleagues.

How the IPCC Portrayed a Net Positive Impact of Climate Change as a Negative

And it was done without uttering an untruth!

Arguably the most influential graphic from the latest IPCC report is Figure SPM.2 from the IPCC WG 2’s Summary for Policy Makers (on the impacts, vulnerability and adaptation to climate change). This figure, titled “Key impacts as a function of increasing global average temperature change”, also appears as Figure SPM.7 and Figure 3.6 of the IPCC Synthesis Report (available at http://www.ipcc.ch/pdf/assessment-report/ar4/syr/ar4_syr.pdf). Versions also appear as Table 20.8 of the WG 2 report, and Table TS.3 in the WG 2 Technical Summary. Yet other versions are also available from the IPCC WG2’s Graphics Presentations & Speeches, as well as in the WG 2’s “official” Power Point presentations, e.g., the presentation at the UNFCCC in Bonn, May 2007 (available at http://www.ipcc.ch/graphics/pr-ar4-2007-05-briefing-bonn.htm).

Notably the SPMs, Technical Summary, Synthesis Report, and the versions made available as presentations are primarily for consumption by policy makers and other intelligent lay persons. As such, they are meant to be jargon-free, easy to understand, and should be designed to shed light rather than to mislead even as they stay faithful to the science.

Let’s focus on what Figure SPM.2 tells us about the impacts of climate change on water.

The third statement in the panel devoted to water impacts states, “Hundreds of millions of people exposed to increased water stress.” If one traces from whence this statement came, one is led to Arnell (2004). [Figure SPM.2 misidentifies one of the sources as Table 3.3 of the IPCC WG 2 report. It ought to be Table 3.2. ]

What is evident is that while this third statement is correct, Figure SPM.2 neglects to inform us that water stress could be reduced for many hundreds of millions more — see Table 10 from the original reference, Arnell (2004). As a result, the net global population at risk of water stress might actually be reduced. And, that is precisely what Table 9 from Arnell (2004) shows. In fact, by the 2080s the net global population at risk declines by up to 2.1 billion people (depending on which scenario one wants to emphasize)!

And that is how a net positive impact of climate change is portrayed in Figure SPM.2 as a large negative impact. The recipe: provide numbers for the negative impact, but stay silent on the positive impact. That way no untruths are uttered, and only someone who has studied the original studies in depth will know what the true story is. It also reminds us as to why prior to testifying in court one swears to “tell the truth, the whole truth and nothing but the truth.”

Figure SPM.2 fails to tell us the whole truth.

Hints of the whole truth, however, are buried in the body of the IPCC WG 2 Report as evidenced by the following quote from Section 3.5.1, p. 194, of that report. Note that Arnell (2004b) and Arnell (2004) are identical.

In the 2050s, differences in the population projections of the four SRES scenarios would have a greater impact on the number of people living in water-stressed river basins (defined as basins with per capita water resources of less than 1,000 m3/year) than the differences in the emissions scenarios (Arnell, 2004b). The number of people living in severely stressed river basins would increase significantly (Table 3.2). The population at risk of increasing water stress for the full range of SRES scenarios is projected to be: 0.4 to 1.7 billion, 1.0 to 2.0 billion, and 1.1 to 3.2 billion, in the 2020s, 2050s, and 2080s, respectively (Arnell, 2004b). In the 2050s (SRES A2 scenario), 262-983 million people would move into the water stressed category (Arnell, 2004b). However, using the per capita water availability indicator, climate change would appear to reduce global water stress. This is because increases in runoff are heavily concentrated in the most populous parts of the world, mainly in East and South-East Asia, and mainly occur during high flow seasons (Arnell, 2004b). Therefore, they may not alleviate dry season problems if the extra water is not stored and would not ease water stress in other regions of the world. [Emphasis added]

But even this acknowledgment seems grudging, and leaves a misleading impression, as can be seen by the following annotated version of the above quote. [My annotations are indicated within the quote in square brackets and are in bold.]

In the 2050s, differences in the population projections of the four SRES scenarios would have a greater impact on the number of people living in water-stressed river basins (defined as basins with per capita water resources of less than 1,000 m3/year) than the differences in the emissions scenarios (Arnell, 2004b). The number of people living in severely stressed river basins would increase significantly (Table 3.2). The population at risk of increasing water stress for the full range of SRES scenarios is projected to be: 0.4 to 1.7 billion, 1.0 to 2.0 billion, and 1.1 to 3.2 billion, in the 2020s, 2050s, and 2080s, respectively (Arnell, 2004b). [COMMENT: note that the IPCC text fails to mention that the reductions in populations at risk of water stress due to climate change are projected to be substantially higher — 0.6 to 2.4 billion, 1.8 to 4.3 billion, and 1.7 to 6.0 billion in the 2020s, 2050s and 2080s, respectively. See Table 10 from the original source.] In the 2050s (SRES A2 scenario), 262-983 million people would move into the water stressed category (Arnell, 2004b). [COMMENT: The corresponding figures for the population moving out of water stress category are 191 to 1,493 million. See Table 9 from the original source.] However, using the per capita water availability indicator, climate change would appear to reduce global water stress. This is because increases in runoff are heavily concentrated in the most populous parts of the world, mainly in East and South-East Asia, and mainly occur during high flow seasons (Arnell, 2004b). Therefore, they may not alleviate dry season problems if the extra water is not stored and would not ease water stress in other regions of the world. [COMMENT: One should expect that societies would take action to store water if that’s what is necessary to avoid water stress. Such actions are not rocket science; they are probably as old as humanity itself, and have a successful track record going back for millennia. Moreover, if the IPCC’s emission scenarios, and the economic growth rates they assume are to be believed, these societies would be much wealthier in the future and should, therefore, have access to more capital to help adapt to such problems. See here (pp. 1034-1036, Tables 1 and 10).]

[Note that the Arnell paper is discussed in some detail here (pp. 1034-1036; Table 4), among other places.]

To summarize, with respect to water resources, Figure SPM.2 — and its clones — don’t make any false statements, but by withholding information that might place climate change in a positive light, they have perpetrated a fraud on the readers.

Does Government Licensing Improve Health Care?

In a study released today by the Cato Institute, economist and Cato adjunct scholar Shirley Svorny says no:

In the United States, the authority to regulate medical professionals lies with the states. To practice within a state, clinicians must obtain a license from that state’s government. State statutes dictate standards for licensing and disciplining medical professionals. They also list tasks clinicians are allowed to perform. One view is that state licensing of medical professionals assures quality.

In contrast, I argue here that licensure not only fails to protect consumers from incompetent physicians, but, by raising barriers to entry, makes health care more expensive and less accessible. Institutional oversight and a sophisticated network of private accrediting and certification organizations, all motivated by the need to protect reputations and avoid legal liability, offer whatever consumer protections exist today.

Consumers would benefit were states to eliminate professional licensing in medicine and leave education, credentialing, and scope-of-practice decisions entirely to the private sector and the courts.

If eliminating licensing is politically infeasible, some preliminary steps might be generally acceptable. States could increase workforce mobility by recognizing licenses issued by other states. For mid-level clinicians, eliminating education requirements beyond an initial degree would allow employers and consumers to select the appropriate level of expertise. At the very least, state legislators should be alert to the self-interest of medical professional organizations that may lie behind the licensing proposals brought to the legislature for approval.

Svorny’s study is titled, “Medical Licensing: An Obstacle to Affordable, Quality Care.”