September 14, 2020 3:53PM

The “China Shock” that Helped U.S. Higher Education

As discussed in my recent Policy Analysis on U.S.-China economic engagement, today’s critics of engagement often overstate the harms caused by Chinese goods imports in the years following China’s accession to the World Trade Organization (a.k.a. the “China Shock”) while ignoring trade liberalization’s many benefits during the same period. A new Working Paper from the Center for Global Development drills down on one such benefit: increased U.S. higher education exports to China (i.e., Chinese students attending U.S. colleges and universities). The paper’s abstract summarizes the authors’ findings (emphasis mine):

We highlight a lesser known consequence of China’s growth and integration into the world economy in relation to the United States: the rise of services trade. We demonstrate that the US’s trade deficit in goods cycle back as a surplus in exports of education services. Focusing on China’s accession to the World Trade Organization, we show that Chinese cities more exposed to this trade liberalization episode sent more students to US universities. Results indicate that growth in housing income/​wealth was an important channel that allowed Chinese families in the top of the income distribution to afford US tuition, consistent with large growth in the share of Chinese students who financed their studies using personal funds. Other mechanisms, such as changing returns to education or information flows, appear to play less of a role. We also inform distributional consequences for the US. Trade liberalization relatively induced increases in the shares of Chinese students studying non‐​STEM fields and attending less‐​selective US universities. Student inflows were similar in destinations with low and high levels of human capital, indicating that educational exports dampened regional inequalities. Our estimates suggest that recent trade wars could cost US universities around $1.15 bn in tuition revenue.

Put simply, many of the dollars that Americans sent to China for low‐​skill manufactures returned to the United States in the form of Chinese students’ “full‐​sticker price tuition payments” at colleges and universities around the country. This, in turn, benefited not only those institutions, but also their American students and surrounding communities. (Chinese students, of course, also benefited, as did the United States more broadly.)

Maybe someday the vocal critics of past U.S. engagement efforts might acknowledge these (and the many other) past gains, as well as the future harms of potentially “decoupling” the two economies, but I’m not holding my breath.

September 14, 2020 9:06AM

Another President, Another Unfortunate Innovation in Executive Power

A couple weeks ago, I blogged about “an unfortunate innovation in executive power” during the Obama administration, which I called “leverage policymaking.” In a nutshell, “leverage policymaking” entails regulatory agencies using individual transactions with large corporations—such as enforcement or licensing actions—to achieve broad policy results.

Last week, Cato publishedLegal Policy Bulletin about another unfortunate innovation in executive power, but this one was pioneered by the Trump administration. I call it the “ad hoc administrative state”; below, I’ve excerpted the short paper’s executive summary:

A hallmark of the Trump administration has been its creation of significant administrative programs on the fly, based on ambiguous or implied textual authorities, and without any public input. This paper discusses four such initiatives involving almost $40 billion in benefits and dispensations from more than $400 billion in tariffs. The programs discussed in this paper were launched after summary notices amounting to a total of 28 pages in the Federal Register. Rarely, if ever, has so much administrative policy been rendered in so few words. Far from reflecting the mere execution of the law, these programs instead take on the attributes of core congressional prerogatives—namely, the power to spend public funds and regulate international commerce. To date, Congress has acquiesced to these developments. If lawmakers remain passive, future presidents will build on Trump’s template, which reflects an unfortunate innovation in executive power.

Read the whole thing here.

September 12, 2020 2:15PM

The Abuse‐​Deterrent Folly

On September 11 a Food and Drug Administration Advisory Committee concluded Purdue Pharma’s abuse‐​deterrent formulation (ADF) of its drug OxyContin did not “meaningfully reduce” overall opioid abuse or have a substantial impact on overdose rates.

In the early part of this century law enforcement officials reported that many non‐​medical users of the diverted prescription drug OxyContin, a concentrated, slow‐​release formulation of oxycodone, would crush the pills and snort them, or dissolve them in liquid and inject them. In 2010, as its patent for OxyContin was about to expire and cheaper generic competitors were waiting in the wings, Purdue Pharma received FDA approval to release its reformulated ADF OxyContin. This reformulation made the pills harder to crush and unsuitable for injection when dissolved in liquid. The reformulation approval meant Purdue Pharma could extend its patent—and its monopoly—over the production and sale of OxyContin. Extending drug patents by reformulating drugs in a meaningful way—a process known as “evergreening”—is a common practice in the pharmaceutical industry.

In an ironic twist, the pharmaceutical company that was, by then, the opiophobia‐​driven scapegoat for the overdose crisis sought to profit from further stoking opiophobia. The FDA didn’t just approve the ADF of OxyContin–it encouraged drug makers to develop ADFs of all opioid pain relievers, with the ultimate goal being that all opioids available on the market would be abuse‐​deterrent formulations.

As I explained in my 2018 policy analysis, non‐​medical users of OxyContin can still swallow the ADF OxyContin to get the desired effect. And if the non‐​medical users preferred the effect of snorting or injecting the drug, they can readily shift to cheaper and more available heroin (and now also fentanyl). In fact, the evidence shows that is exactly what happened. The ADF formulation had the unintended consequence of driving non‐​medical users to more dangerous opioids easily obtainable in the black market. If anything, ADFs grow the overdose rate this way. It took until September of 2020 for an FDA advisory committee to reach a similar conclusion.

Unfortunately, policymakers are still addicted to the idea that the overdose crisis is the result of physicians “overprescribing” opioids to their patients in pain and turning them into addicts—despite the fact that government data show there is no correlation between prescription volume and non‐​medical use of opioids, or opioid use disorder, in persons over age 12. There is also no clearly established understanding of just what constitutes “overprescribing.”

The overdose death rate has been on a steady, exponential increase since at least the late 1970s, and will continue along that path until policymakers finally conclude that its ultimate cause is drug prohibition. The continuing focus on prescription pain killers is not just a fool’s errand. It is killing people.

September 11, 2020 9:58PM

The Smokey View from the Northwest

There are no clouds in the central Oregon sky today, but we are nonetheless living in dim times. With active wildfires on all sides of my home, we have some of the worst air pollution in the world.

It’s hard not to feel apocalyptic right now. In just four days, around 3 percent of western Oregon has burned, destroying hundreds of homes and other structures and forcing 80,000 people to evacuate. The good news is that it was not 500,000 people as reported in the media, but still, 80,000 is a lot, and many no longer have homes to return to.

I’ve been monitoring wildland fire policy for more than two decades, and this is the worst I have lived through. Still, this is far from a record year: though there have been lots of fires in the Northwest and northern California, fires are below average in southern California and much of the rest of the country.

One reason why we have seen bigger fires in recent years is that the Forest Service and other agencies have changed their firefighting tactics. For example, the Beachie Creek Fire near us was started by lightning on August 16. Located in a steep, inaccessible part of the Willamette National Forest, it smoldered on about 10 acres for ten days or so, then slowly increased over the following ten days to around 775 acres, then blew up, burning 132,000 acres in one ten‐​hour period–meaning it torched three acres per second–destroying hundreds of homes and killing at least two people.

A few decades ago, the Forest Service would have dropped smokejumpers by parachute on August 16 or 17 and had them directly attack the fire. But too many burnovers killing entire crews has rightly made the agency more protective of the lives of on‐​the‐​ground firefighters. Instead, it risks the lives of helicopter and air tanker pilots, five of whom have already died this year, having them dump water and fire retardant on the fires. During three weeks, they spent well over a million dollars doing this on the Beachie Creek Fire with dubious results.

Even when fires don’t escape, the tactics today emphasize indirect attack, meaning backfires, instead of direct attack. The result is that far more acres are burned, many of them lit by the firefighters themselves. Thus, based on acres burned, we can’t really draw conclusions about whether climate change or other factors beyond our control is resulting in more fires.

There are several major schools of thought about fire policy. One is that climate change has made fires worse and so we need to stop using fossil fuels and completely change our lifestyles to reverse this. I don’t buy this, as both the historic and prehistoric record (using things like soil profiles and tree ring analysis) indicate that an average of about 1 percent of the West has burned every year for thousands of years. After accounting for changes in firefighting tactics, I don’t see any indication that more acres are burning today because of climate change.

(On the other hand, and contrary to many climate‐​skeptic web sites, we can’t use the historic fire record to conclude that climate change isn’t happening either. The record shows that far more acres burned in the 1930s and 1940s than in the last few decades. What the record doesn’t say is that, in those years, the Forest Service opposed prescribed burning, which was widely practiced in the South, so it spitefully counted all acres of prescribed burning as wildfires.)

A second school of thought is that the 75 percent reduction in federal land timber sales between 1990 and 2000 is the problem, and if only we could increase timber cutting the forests would be healthier. The difficulty with this view is that timber cutting actually leaves forests more vulnerable to fire as it removes the big wood that isn’t very flammable and brings the fine wood and needles down from high in the air to the ground, where it is very flammable.

A third school of thought is that more than a century of fire suppression has allowed fuels to build up in the forests, making them more vulnerable to fire. This school calls for widespread fuel treatments, either physically removing the brush and small trees or burning them in place. In fact, wildland firefighting was never successful enough to have a significant impact on forest fuels. A Forest Service report several years ago concluded that the vast majority of western forests have not been ecologically changed by fire suppression.

The Forest Service currently spends $430 million a year on fuel treatments and Department of Interior and state agencies spend even more. Yet all the fuel treatments in the world aren’t going to save your house if firebrands from a lightning‐​caused fire seven miles away are blown by 50 mile‐​an‐​hour winds to your cedar‐​shake roof, which is what happened to many homes in Oregon last Monday.

My own view is that people in the West have to recognize that we live in a fire zone where roughly 1 percent of the natural landscape is going to burn each year no matter what we do. Instead of blaming these fires on public or private forest managers, we need to take responsibility to protect our own property and not rely on the Forest Service or other adjacent landowners to protect us.

That means the roofs and other parts of our our homes and other structures must be made of fireproof materials such as asphalt shingles, not cedar shakes. The walls can be wood, but our landscaping needs to follow defensible space or firewise principles so that, if it catches fire, it won’t generate enough heat to light structures on fire. The homes themselves should be at least 100 and preferably 150 feet apart so that, if one catches fire, the radiant heat from that fire doesn’t light up its neighbors.

Research by Forest Service fire scientist Jack Cohen has shown that such defensible space is both necessary and sufficient to protect structures from wildfire. It’s necessary because all the prescribed burning in the world won’t save your home if a burning ember from a lightning‐​caused fire 8 miles away lands on your lovely cedar‐​shake roof. It’s sufficient because it will protect your home even if neighboring forest landowners don’t do any prescribed burning or other fuel treatments at all.

This also means changing land‐​use policies adopted in California and other western states that promote dense housing. Urban‐​growth boundaries and zoning codes that mandate numerous homes on each acre even on urban fringes are asking for those homes to burn in wildfires. Cities need a buffer of low‐​density homes on one‐​acre lots to protect them from wildfires, and the lack of such a buffer is one reason why so many homes in Napa and other northern California counties have burned in the last few years.

If all homes and other structures in the wildland‐​urban interface met defensible‐​space standards, much of the $430 million that the Forest Service spends each year on hazardous fuels would not be needed, nor would much of the $2.5 billion or more that it spends on fire suppression.

Incidentally, the evacuation of 80,000 Oregonians should also alert transportation planners of the importance of having a good road network. Too many states and cities are trying to reduce road capacities. It’s called a “road diet” and it makes key evacuation routes unnecessarily congested. In 2018, a road diet in Paradise, California was blamed for the deaths of several people who were burned in their cars when they were stuck in traffic.

Before the Beachie Creek Fire blew up, the Forest Service posted a photo of two agency employees watching helicopters ineffectually dump water on the fire. The photo was titled “A Teachable Moment.” I hope the lesson we learned is that we need to take care of our own property and not depend on the government to protect us from natural wildfires that are beyond anyone’s control.

September 11, 2020 12:47PM

Is the Fed Getting Warmer?

Relax: the Fed isn't about to catch fire or melt. This isn't about that sort of warming. It's about a different, more benign sort of Fed warming that my pals at the Mercatus Center claim to have discerned. Still, I don't believe them. Call me a Fed warming skeptic if you like, but so far as I'm concerned, it's all fake news.

Since Jay Powell announced the Fed's new average inflation targeting (AIT) strategy last week, both Scott Sumner and David Beckworth have welcomed it as a step, albeit only a tenuous one, toward their own (and my) preferred policy of NGDP level targeting. Scott calls "average inflation targeting…a tiny step forward," though one that will allow the Fed more discretion than a move to price-level targeting would. David likewise observes that, although it isn't quite an NGDP level target, AIT "is a step in that direction."

Read the rest of this post »
September 10, 2020 5:18PM

State Policy Favoritism and Corruption

California leaders are in the news for passing a misguided law that requires most independent contractors to be treated as employees, and then realizing how harmful that is and passing another law exempting dozens of politically important industries from the mandate. Lee Ohanian describes the law’s damage here.

Last year, “Assembly Bill 5 included exemptions for many politically‐​connected occupations like real estate agents and doctors, but ensnared many others, drawing particular criticism from musicians, independent truck drivers, franchise business owners and freelance writers.” Then in response to the public backlash, the California legislature passed Assembly Bill 2257, which exempts “many occupations in media, music and other industries from AB 5’s requirements.

Unneeded laws, such as this, that impose unequal justice generate endless lobbying, litigation, campaign contributions, and corruption as companies and labor unions jockey for special treatment from politicians.

State tax policy is rife with similar favoritism. Politicians impose ill‐​conceived and damaging taxes that induce affected businesses to howl in protest and lobby for relief, and then the politicians pass an array of “exemptions,” “incentives,” “abatements,” and “credits” for the lucky few. Politicians also use state tax codes to flex their central‐​planning impulses, passing breaks for sexy and high‐​profile industries such as solar power, data centers, and filmmaking.

In reviewing state budgets for Cato’s upcoming Fiscal Report Card on America’s Governors, I came across a 30‐​page summary of tax favoritism in the State of Nevada’s budget, which starts on pdf page 18 here. Starbucks received special grants from the state’s Catalyst Fund, which “incentivizes the expansion or relocation of businesses that will quickly result in the creation of high‐​quality, primary jobs in Nevada.”

Here is my interpretation of the various breaks:

  • Nevada mistakenly imposes sales tax on capital goods (rather than just on final consumption), and then it provides two‐​year abatements for chosen firms. Why two years? Perhaps to maximize campaign contributions and support from business lobbyists.
  • Nevada imposes a “Modified Business Tax” and then provides breaks to companies that jump through political hoops on hiring and expansion. The MBT lands on a portion of business payroll. Why not just impose a simpler across‐​the‐​board flat tax explicitly on employee wages? Because politicians want to create the illusion that businesses are paying for the cost of government, not workers.
  • Nevada’s local governments impose property tax on “business personal property,” such as machinery and equipment. That damages investment, so the state provides “abatements” to certain favored companies. But states should not impose property tax on business equipment at all, just as they do not impose it on washing machines and fridges in homes. Property tax should apply evenly to residential and business real property. Why do states impose property tax on business equipment? To hide tax burdens from the view of voters.
  • Nevada politicians act as central planners in providing complex sales and property tax breaks to favored activities such as recycling, aviation, data centers, workforce innovations, renewable energy, green buildings, and film productions such as the erotic thriller “Frank and Lola.” The state also provides abatements to large companies with more than $1 billion in investments, thus favoring them over small companies.

Nevada’s complex system of tax favoritism is misguided. State policymakers should apply property tax at a single flat rate to residential, commercial, and industrial real property, but not business personal property (machinery and equipment). They should repeal special business taxes (including the “Commerce Tax” and “Modified Business Tax”), which hide government tax burdens from voters. Finally, policymakers should impose Nevada’s general sales tax at a single rate on final consumption, not on intermediate goods and capital equipment.

Policymakers in every state should impose taxes that are simple, visible, equal, and neutral across economic activities. To grow, states do not need “economic development” bureaucracies such as Nevada’s that hand out narrow breaks, they just need lean governments and low, flat tax systems.

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September 10, 2020 3:14PM

Resurrected Schools, and More COVID-19 Private Ed News

Bad news grabs a lot more attention than good, and Cato’s COVID-19 Permanent Private School Closures tracker mainly communicates bad – private schools going out of business, leaving thousands of children educationally homeless. But today we offer some good news, coupled with some news of less clear character.

The good news is that 3 schools have been removed from the tracker, bringing closures down from 118 to 115.

Permanent Private School COVID Closures by Date 91020

On September 1 it was announced that the Crotched Mountain School in New Hampshire, which serves students with disabilities, was revived after being acquired by an organization called Gersh Autism. After hearing that news we reviewed the tracker and found two more schools had been saved. At the end of August it was reported that Saint Joseph High School in New Jersey was rescued by a fundraising effort of families, alumni, and others, though it will re‐​open under a slightly different name: Saint Joseph Academy. We also discovered that in May Seneca Academy in Maryland was saved by parent fundraising and a partnership with Georgetown Hill, which runs several schools.

Reopenings, and a dearth of closures throughout much of July and August, suggest that private schools are faring much better than many feared as lockdowns prevailed in March and April. It is even possible private schools are gaining students as parents seek options, especially in‐​person instruction, that many public schools are not providing. Or maybe not.

As discussed recently, estimates of private school enrollment under COVID vary widely. Yesterday new data came out, pointing toward small but negative enrollment movement. Based on questions asked in mid‐​August – yes, a virtual lifetime ago given rapidly changing schooling decisions – EdChoice found that 21 percent of children attended private schools right before COVID-19, but only 19 percent will do so this school year. Most of the movement is toward homeschooling. Indeed, homeschooling appears to be the big winner in the survey, moving from 11 percent of students to 14 percent, while traditional public schools and private schools drop and charters stay steady.

EdChoice enrollment movement by K-12 sector

Some provisos are in order. First, it is reasonable to suspect that some kids may be getting institutional schooling online but their parents have reported it as homeschooling. Second, home, private, and charter schoolers appear over‐​represented, and traditional publics under, compared to federal data, raising questions about the sample. Finally, the parent sample is relatively small, creating an appreciable margin for error.

All‐​in‐​all, the private school health situation remains hazy. But the latest news offers reason for optimism, and points more toward small changes than major, transformative impacts of COVID-19.