Category Archive: Politics & Policy

  1. Trump, Trade, and Great Power War

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    One of the signature features of President Donald Trump’s campaign was his hostility to free trade. Then-candidate Trump repeatedly denigrated various multilateral trade pacts as bad deals for the United States. Pulling out of the Trans-Pacific Partnership, appointing opponents of free trade—such as Steve Bannon and Peter Navarro—into key positions, and promises of tariffs that are likely to produce retaliatory measures, all demonstrated that Trump was planning on following through on his protectionist campaign rhetoric.

    While Trump’s attack on free trade has important implications for American and global economies, it will also have an impact on the likelihood of war between the great powers.

    As discussed here previously, President Trump sees the world in zero sum terms. Absent disproportionate economic gains for the United States, international agreements cannot be considered successful. However beneficial such arrangements prove to be for all involved, Trump’s mercantilist outlook sees them as a raw deal for Americans.

    It is not surprising therefore, that U.S. Treasury Secretary Steve Mnuchin nixed attempts to include language supporting free trade in a statement from a G-20 meeting in Baden-Baden, Germany. As CNN reported, while the statement included some positive words on trade, “conspicuous by its absence was the phrase ‘we will resist all forms of protectionism’ that was contained in the communiqué from the last meeting of the group in China, July 2016.” Mnuchin rejected the idea that the omission was meaningful, but the unwillingness to reaffirm American opposition to protectionism ignores that trade provides benefits beyond the global economy. Specifically, the expectation of future trade affects the likelihood of war and peace.

    The connection between trade and conflict has never been as simple as early liberal theorists suggested. The idea, wrongly attributed to the nineteenth century French economist Frederic Bastiat, that “when goods don’t cross borders, soldiers will” still offers a good summation of the longstanding position that trade has pacifying effects on international politics. The logic behind the argument is compelling: the greater the extent of commercial relations between states, the less likely there will be conflict because the economic cost of war (and the lost benefits of trade) will be too high. However, history has shown that states still sometimes go to war despite high levels of economic interdependence at the time of the conflict.

    In his book Economic Interdependence and War, political scientist Dale Copeland explained that it is not the current level of trade that is important to the likelihood of conflict. Rather, Copeland argues, it is the expectation of future trade that determines a state’s willingness to go to war. He writes,

    In a very real way, it does not matter in the least whether past and current levels of trade and investment have been low, as long as leaders have strongly positive expectations of for the future. It is their future orientation and expectations of a future stream of benefits that will likely make the leaders incline to peace. Likewise, it does not matter whether past and current levels of commerce have been high if leaders believe they are going to be cut off tomorrow or in the near future. It is their pessimism about the future that will probably drive these leaders to consider hard-line measures and even war to safeguard the long-term security of the state.

    Multilateral trade has been a feature of the liberal international order developed after World War II for a reason. Postwar policymakers feared a return to the closed economic blocs of the 1930s that helped drive the world to war. It is entirely possible that the norms in favor of free trade are robust enough to withstand the absence of routine language from a statement by a meeting of the world’s finance ministers. But groups like the G-20 help set expectations about the future. Given the connection between those expectations and conflict, failing to reaffirm America’s opposition to protectionism could put the world on a dangerous path.

    This piece was originally published at the Niskanen Center.

  2. Defense spending: Why we pay for the permanent war economy

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    Since 1996, the Pentagon has lost track of $8.5 trillion — it simply doesn’t know what the money was spent on. That doesn’t even include the billions lost to known waste and abuse.

    But despite that troubled budgetary record, the government is preparing this month to increase defense spending.

    On March 8, the U.S. House of Representatives passed the defense spending bill for fiscal year 2017, providing $516.1 billion in the “base budget” and $61.8 billion for “Overseas Contingency Operations” (OCO) — i.e., wars. While the budget must still pass the Senate, this represents an increase of $5.2 billion over the last fiscal year. Adding in the $5.8 billion in supplemental funding provided by December’s Continuing Resolution, the current budget comes to a total of $583.7 billion for the year. Still outstanding is a supplemental budget request that is expected to add $30 billion to the OCO, which would raise that number significantly.

    Though some members of the House have hailed the new bill as a pivot from defense spending cuts and a necessary step toward increasing national security, it is useful to put this budget in context. While the current bill does not bring military spending entirely up to its 20111 peak, much of the difference comes from a reduction in spending on the Iraq and Afghanistan wars, rather than from the Pentagon’s base budget.

    Despite the sequestration in 2013, the base budget has continued to rise once again, and though the active military engagements in Iraq and Afghanistan have been reduced, continued military action there and elsewhere has kept the OCO account open.

    The International Institute for Strategic Studies provides detailed calculations of total world defense spending that shed light on how the United States compares to the rest of the world. By the Institute’s calculations, the United States in 2016 spent 39 percent of total world defense spending, only 2 percent less than the next 15 countries — including China (10 percent) and Russia (4 percent) — combined.

    Source: The International Institute for Strategic Studies, The Military Balance 2017

    Those percentages are a function of other nations’ spending decisions, as well as those of the United States, but you might think that if security was the main driver of defense spending, spending as much as the next 15 nations combined should be enough to provide a reasonably secure environment. An increase in spending for 2017 may seem excessive.

    Troubled projects

    As Politico notes, the current House bill contains $6.8 billion more in additional procurement funding than even the original 2017 request from the Obama administration, including “$750 million for six additional Navy and Marine Corps F-35 Joint Strike Fighters and $495 million for five extra Air Force F-35s,” as well as adding “$433 million for the DDG-51 destroyer program, a third Littoral Combat Ship and $150 million in advance procurement for a new polar icebreaker.”

    Both the F-35 Joint Strike Fighter and the Littoral Combat Ship are produced by Lockheed Martin, and both have been plagued by cost overruns and technical problems. Yet even with the overruns and the verbal sparring regarding the continued budgetary issues surrounding the programs, the current bill still increases spending for these projects.

    Lest you think that Lockheed Martin is alone, it should be noted that these are only two programs in a general pattern of behavior within the defense sector.

    Consider the $31 to $60 billion lost due to waste in Iraq and Afghanistan or the potential misuse of the OCO “slush fund” since the conclusion of those wars.

    Or consider the known cases of waste and abuse, such as spending $1 billion to destroy $16 billion in ammunition, or $1 billion for shoddy airplane maintenance.2 And, of course, there is that missing $8.5 trillion.

    How does such behavior persist in the defense sector, and even seem to be rewarded with additional spending? The answer is straightforward: it may be that military spending, rather than being purely about security, has a political component as well.

    Political budgets

    The political nature of defense spending comes about in two interrelated ways.

    First, the nature of the budgetary process, financed through a system of generalized taxation, erodes the link between decision-making and those who bear the full cost of the decision. In fact, rather than being faced with the full cost of decisions, agencies in the defense sector face a perverse incentive. When a private firm makes budget errors, it risks losing shareholder value.

    However, if a defense agency does not spend its entire budget, that money will be cut and given somewhere else. Rather than being punished for overspending, agencies are punished for saving money. The Department of Defense does not have shareholders, and there is no real recourse for taxpayers to sanction egregious misuse of resources.

    Second, defense spending decisions are made through a political process that requires agreements between the Pentagon, the president, and Congress. The current defense bill has only passed through the House. It has to jump further political hurdles as it moves through the Senate. Firms that want to succeed in this process need someone politically connected and skilled at navigating the system on their payroll, and they need to use those skilled and connected people in lobbying to keep the defense budgets high.

    This year’s budget cycle is no different. To see how this works, return to Lockheed’s troubled F-35 program. According to the Center for Responsive Politics, in 2016 “70 representatives signed a letter to the leadership of the House Defense Appropriations subcommittee urging continued support for the program. In the 2016 cycle, those 70 lawmakers received nearly $3.5 million from the defense sector” and “collectively received a total of almost $578,000 from Lockheed Martin in the 2016 cycle, nearly 17 percent of their defense dollars.”

    It does not take much imagination to envision a relationship between campaign contributions, letters, and increases in spending for the program. Again, Lockheed is not the only player in this game. It is simply one illustration of the phenomenon.

    It is not difficult to see why these dynamics in national defense create what is sometimes referred to as the “permanent war economy.”

    While it may not be possible to completely remove politics from such decisions, these dynamics should not go unnoticed when the U.S. taxpayer and voter are offered the rationale of national strength and security as the primary reason for increased spending. That rationale is not the only incentive that policymakers face when engaging in public sector budget decisions.

    1This year and all those listed in the article are fiscal years.
    2For a full report of these numbers, see here.

  3. Violent video games do not cause real-world aggression

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    In 1976, a small video game publisher, Exity, produced Death Race, a “vehicular combat” arcade game that allowed players to deliberately run over a “gremlin” that bore an uncomfortable, monochrome resemblance to a human stick figure.

    Maybe it was the fact that the game was originally called “Pedestrian,” or the fact that each successful impact was marked with a tombstone, but in the 70s, this was considered a violent video game.

    It was featured on 60 Minutes and in the National Enquirer. As national media attention grew, arcade owners became reluctant to feature the machine, and it faded out of national consciousness.

    As it turns out, Death Race would be the predecessor of a growing and increasingly realistic class of video games famous for their violence. The early ‘90s saw the introduction of games such as Wolfenstein 3D and Doom. Upon seeing a copy of the (now classic) fighting game Mortal Kombat, Senator Joe Lieberman announced his intention to introduce legislation that would prohibit the sale of such games to minors.

    Gaming GIF - Find & Share on GIPHY


    Regulation never materialized, and the game industry would eventually begin placing age recommendations on its products.

    The assumption embedded in this story was that violent video games — especially in the hands of children and adolescents — may cause aggression. This refrain tends to become particularly popular in the wake of any mass shooting (such as Columbine or Sandy Hook).

    But do violent video games actually cause violence in everyday life? Probably not.

    A close examination of the literature reveals that what the American Psychological Association (APA) once called “one of the most studied and best established” links known to psychology is tenuous at best, with no appreciable real-world consequence.

    Dispelling the Myth

    First, let us dispense with the myth that we can causally link violent video games to mass shootings: Yes, many mass shooters play violent games extensively. However, the number of people who commit mass shootings is so small that this data point is uninformative. Moreover, the vast majority of people who regularly play violent video games will refrain from engaging in any real physical violence — let alone commit mass murder.

    To understand why the relationship between video games and real-world aggression is so weak, it pays to closely examine the methods psychologists have used to study aggression in a wide variety of contexts. As it turns out, universities and grant agencies such as the National Institute of Health take a rather dim view of experimental research that results in actual acts of violence being inflicted on others. As such, researchers rely on proxy measures of aggression, such as the amount of hot sauce a person will put on the food of an adversary (for example, someone who wrote an essay critical of their worldview).

    Sriracha is literally violence. (Photo courtesy of Steven Depolo and Wikimedia Commons)

    In one of the most common methods, psychologists measure the amount of time subjects will spend blasting an adversary with a loud noise.

    In addition to being indirect — and therefore, highly susceptible to error — measures of aggression, the way these techniques are implemented and analyzed is highly variable. Malte Elson, a researcher at Ruhr University Bochum, has cataloged no fewer than 156 ways in which the noise paradigm has been employed.

    This kind of flexibility is a serious liability for the research that uses it, since it allows researchers to pick and choose the ways they analyze their data (and presumably go with the method that gives them the result they are looking for). Studies that fail to find a headline-grabbing link between video games and aggression are less likely to be published, so scholars have a significant incentive to analyze their data in a way that confirms this hypothesis.

    No Causation

    Advocates of a video game-aggression link point to meta-analyses as the strongest evidence for their view. A meta-analysis is a quantitative “study of studies:” researchers comb through databases looking for studies on a topic, standardize the findings, and statistically analyze the results. The APA’s most recent task force on gaming and aggression relied on this technique and concluded that there is, in fact, a link between gaming and aggression.

    But meta-analysis itself has come under scrutiny as of late. The problem is twofold: first, if you do an analysis of hundreds of poorly-designed studies, all you have is artfully-analyzed noise. It’s much akin to making a giant stew with rotten ingredients — simply adding more rotten ingredients doesn’t improve matters.

    Second, meta-analysis suffers from a phenomenon known as publication bias: because scientific papers that fail to find an anticipated result are almost never published, researchers usually file them away, never to see the light of day again. Therefore, these “null results” are often left out of meta-analyses.

    No Correlation, Either

    Setting all that aside, there is an additional, excellent reason to reject the video game-aggression hypothesis: over the last 30 years, video game sales have skyrocketed, and the games themselves have become both (a) more realistic, and (b) more violent.

    Gone are the days when simple monochrome graphics, cheesy music, and a silly premise about running over pedestrians was sufficient to produce controversy. The newest games allow for visceral simulation of all manner of violence, and do so with unparalleled realism.

    And yet, over the same period — in western countries, where games are widely available — violent crime has decreased substantially. In fact, when Death Race was introduced, the homicide rate in the U.S. was roughly twice what it is today. If one were to ignore warnings against inferring correlation from causation, one might be tempted to conclude that violent video games actually reduce aggression.

    Interpreting the data this way is not difficult: humans — particularly males — have aggressive tendencies that are reduced through the cathartic effect of acting out violence through gaming. (An important side note: I don’t believe this to be the case — it’s just important to recognize that the argument can go either way.)

    Thankfully, cooler heads have prevailed at the judicial level. In 2011, the U.S. Supreme Court ruled that video games qualify for 1st Amendment protection. In a 7-2 majority opinion, Justice Scalia recognized the flaws in the research on video games and violence, stating:

    The State’s evidence is not compelling.… These studies have been rejected by every court to consider them, and with good reason: They do not prove that violent video games cause minors to act aggressively (which would at least be a beginning).… They show at best some correlation between exposure to violent entertainment and minuscule real-world effects, such as children’s feeling more aggressive or making louder noises in the few minutes after playing a violent game than after playing a nonviolent game.”

    That the late Justice Scalia possessed a more cohesive understanding of the scientific literature than the American Psychological Association should serve as a wakeup call to social scientists attempting to influence policy: get your intellectual house in order before trying to restrict other people’s freedom to buy, sell, and do what they wish.

    Want to learn more about video games and violence? Watch here:

  4. Entitlement reform key to fixing America’s fiscal future

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    In his first address to Congress, President Trump lamented that “the past Administration has put on more new debt than nearly all other Presidents combined.” With federal debt approaching $20 trillion, he is right to be concerned about the rapid accumulation in recent years.

    However, the president did not  mention of Medicare and Social Security, two of the largest and fastest-growing federal programs, and he has previously stated that he sees no reason to reduce spending on these programs. Treasury Secretary Mnuchin reiterated last week, “We are not touching [entitlements] now, so don’t expect to see that as part of this budget.”

    Without substantive reform, it will be exceedingly difficult to address the country’s long-term fiscal problems, and it will only get harder if needed changes are delayed.

    Medicare and Social Security already account for roughly two-fifths of all federal outlays, and they will account for a growing share of the federal budget over the coming decade. Medicare, Social Security, and net interest payments on the debt will account for roughly 55 percent of federal outlays by 2027, an increase over their already significant share of 45 percent last year.

    Source: Congressional Budget Office, “10-Year Budget Projections, January 2017,” Tables 1-2 and 1-3.

    Entitlement spending growth is a major reason that budget deficits are projected to surge over the next decade. Although forecasting ten years in advance is notoriously difficult, the deficit is estimated to exceed $1.4 trillion by 2027 and accelerate further after that, with trillions added to the debt as a result. By 2045, debt held by the public will almost double, to 145 percent of GDP according to the Congressional Budget Office. It is practically inconceivable that politicians would not step in before this happened.  However, if left unaddressed. debt at these levels would severely hamper economic growth, reduce living standards, and put increasing amounts of pressure on net interest payments and other areas of the federal budget.

    Source: Congressional Budget Office, “Long Term Budget Projections, January 2017,” Supplemental Table 1. Annual Data Underlying Key Projections in CBO’s Extended Baseline.

    Efforts to root out waste, fraud, and abuse, or to increase government’s efficiency are certainly worth pursuing, but proposals that eschew any kind of entitlement reform will leave the main drivers of debt in the long-term untouched.

    Similarly, reducing regulatory barriers, improving the tax code, and generally developing a policy framework that allows the economy grow more rapidly are good ideas. To some extent, this could attenuate structural fiscal issues, but even higher rates of growth cannot make them go away.  According to one recent estimate, productivity growth would need to be twice projected levels just to stabilize the debt at slightly lower levels as a percent of GDP. Doubling productivity growth rates would be an impressive accomplishment, but there is a limit to how much it can help the country get out of its debt problem.

    This is why entitlement reform is key. The unsustainable nature of these programs face mean that some reforms will have to be implemented: the only questions are when and what kind of changes will be made. The longer these reforms are put off, the inevitable changes will by necessity be larger and more abrupt.

    For example, the Social Security Trustees estimate that an immediate and permanent benefit reduction of 16 percent for all beneficiaries would be enough to make the program solvent for the full 75-year projection. If nothing is done until the trust fund becomes insolvent in 2034, an immediate 21 percent reduction in benefits would be necessary.

    Phasing in a gradual increase in the retirement age indexed to increases with longevity, or using the chained CPI for cost of living adjustments are measures that could go some way to making the program sustainable without sudden, significant benefits or tax increases. Kicking the can down the road will only increase the magnitude of eventual disruption, when changes will have to be concentrated in fewer years and the burden will fall on fewer people.

    Part of the political difficulty stems from the public. People are wary of reforms that could affect their benefits, and they lack understanding regarding which programs are the drivers of the country’s debt. In a recent poll, 46 percent of respondents said they thought foreign aid, which accounts for roughly one percent of the federal budget, contributes “a great deal” to the national debt, a higher proportion than for any of the other programs polled. It is laudable to take a hard look at spending at all agencies and to excise inefficient or wasteful spending, this alone will not be enough to improve the overall fiscal picture.

    Without real reform, the important task of placing entitlement programs back on a sustainable trajectory will be left for later generations—at which point the country will be farther down this unsustainable path.

    Charles Hughes is a policy analyst at the Manhattan Institute. Follow him on twitter @CharlesHHughes.

    This piece was originally published at Economics21.

  5. The House GOP leadership’s health care bill is ObamaCare-Lite — or worse

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    During the presidential campaign, Donald Trump promised legislation that “fully repeals ObamaCare.” Monday night, the Republican leadership of the House of Representatives released legislation it claims would repeal and replace ObamaCare. Tuesday afternoon, Vice President Mike Pence will travel to Capitol Hill to pressure members of Congress to support the bill. On Wednesday, two House Committees will begin to mark-up the legislation. House and Senate leaders are hoping for quick consideration and a signing ceremony, maybe by May, so they can move on to other things, like tax reform and confirming Supreme Court nominee Judge Neil Gorsuch.

    Everyone needs to take a step back. This bill is a train wreck waiting to happen.

    The House leadership bill isn’t even a repeal bill. Not by a long shot. It would repeal far less of ObamaCare than the bill Republicans sent to President Obama one year ago. The ObamaCare regulations it retains are already causing insurance markets to collapse. It would allow that collapse to continue, and even accelerate the collapse. Republicans would then own whatever damage ObamaCare causes, such as when the law leaves seriously ill patients with no coverage at all. Congress would have to revisit ObamaCare again and again to address problems they failed to fix the first time around. ObamaCare would consume the rest of Congress’ and President Trump’s agenda. Delaying or dooming other priorities like tax reform, infrastructure spending, and Gorsuch. The fallout could dog Republicans all the way into 2018 and 2020, when it could lead to a Democratic wave election like the one we saw in 2008. Only then, Democrats won’t have ObamaCare on their mind but single-payer.

    First, let’s look at how the main features of this bill fall short of repeal.

    Medicaid Expansion

    ObamaCare expanded Medicaid to able-bodied adults below 138 percent of the federal poverty level. The federal government covers a much larger share of the cost of covering Medicaid-expansion enrollees than enrollees in the “old” Medicaid program—currently 95 percent, bottoming out at 90 percent in 2020. So far, 31 states have chosen to implement the Medicaid expansion; 19 have declined.

    The House leadership’s bill would not even start to repeal ObamaCare’s Medicaid expansion until 2020, more than two and a half years from now, and even then would repeal it only one enrollee at a time. In 2020, states could no longer enroll new able-bodied adults into the Medicaid expansion. Yet the federal government would continue to pay for each and every continuously covered able-bodied adult who enrolled in the expansion before then. And it would do so at the enhanced ObamaCare matching rate, in perpetuity, until an enrollee leaves the program. If the House leadership has its way, we may be decades away from full repeal of the Medicaid expansion.

    For the two-plus years between enactment and 2020, the House leadership bill would continue to allow states both to opt into the expansion and to go on an enrollment binge, for which the federal government could be paying for decades. It is likely that the number of states participating, and the number of people enrolled in the Medicaid expansion will be higher after “repeal” than before.

    Which means the Medicaid expansion may never disappear at all. By 2020, the constituency for preserving the Medicaid expansion would be much larger than it is now. More states, more voters, and more special interests will resist repealing the expansion than do today. As I discuss below, Congress will likely be more Democratic than it is today.

    When eventually we see a Congressional Budget Office score of the bill (House leadership has numbers, but they’re not sharing them), it may show a reduction in federal spending on the Medicaid expansion after 2020. I would not bet on that happening.

    Medicaid Reform

    Currently, Congress matches states’ spending on their Medicaid programs. When a state spends $1 on its program, Congress contributes between $1 and $3. This creates a pay-for-dependence incentive. It encourages states to expand both enrollment and benefits far beyond what they would if states bore the full marginal cost.

    The House leadership bill would reform the Medicaid program by converting it to a system of “per capita block grants.” It would give each state a fixed amount of money per enrollee, with the amount varying by the type of enrollee (aged, blind, disabled, children, non-expansion adults, and expansion adults).

    A per-capita block grant would therefore resemble ObamaCare’s Medicaid expansion. States would get additional federal dollars for each additional person they enroll in their programs. But states would face the full marginal cost of providing new or existing benefits to enrollees. Just as ObamaCare’s Medicaid expansion creates incentives for states to expand their programs to able-bodied adults, while reducing access to care for the aged, blind, disabled, children, and pregnant women, the House leadership bill would create (or preserve) an incentive to expand enrollment to less vulnerable populations while cutting benefits for more vulnerable populations.

    Private-Insurance Overhaul

    Economists describe the basic architecture of ObamaCare’s overhaul of private health insurance as a three-legged stool. The three legs of the stool are (1) “community rating” price controls that force insurers to charge healthy and sick people of a given age the same premium, and only allow premiums to vary from older to younger enrollees by a ratio of 3 to one, (2) an individual mandate that penalizes taxpayers who do not purchase a government-designed health plan, and (3) subsidies to help low-income people purchase that compulsory, overpriced health insurance. The House leadership plan retains all three legs of the stool, as well as many other ObamaCare provisions designed to mitigate the damage done by the community-rating price controls.

    The first thing the House leadership’s bill does is expand ObamaCare by appropriating funds for the law’s so-called “cost-sharing” subsidies, something no previous Congress has ever done.

    The House leadership bill retains the very ObamaCare regulations that are threatening to destroy health insurance markets and leave millions with no coverage at all. ObamaCare’s community-rating price controls literally penalize insurers who offer quality coverage to patients with expensive conditions, creating a race to the bottom in insurance quality. Even worse, they have sparked a death spiral that has caused insurers to flee ObamaCare’s Exchanges nationwide, including driving all insurance companies from the market in 16 counties in eastern Tennessee. As of next year, 43,000 Tennesseans in those counties could have no way to obtain coverage. Nearly 3 million Exchange enrollees are just one more carrier exit from the same fate.

    The leadership bill would modify ObamaCare’s community-rating price controls by expanding the age-rating bands (from 3:1 to 5:1) and allowing insurers to charge enrollees who wait until they are sick to purchase coverage an extra 30 percent (but only for one year). Even with these changes, however, premiums would remain high, ObamaCare would continue to make it easier for people to wait until they are sick to purchase coverage, and the law would continue to penalize high-quality coverage for the sick. In fact, the House leadership’s decision to leave ObamaCare’s community-rating price controls in place while relaxing its “essential health benefits” requirements would cause coverage for sick to deteriorate even faster than ObamaCare does.

    It is because the House leadership would retain the community-rating price controls that they also end up retaining many other features of the law. Observers have started to notice that successive iterations of the bill look increasingly like ObamaCare.

    For example, the House leadership bill retains and modifies another leg from the three-legged stool: ObamaCare’s advanceable, refundable, and means-tested tax credits for health insurance. Though they sound like tax cuts, ObamaCare’s tax credits are actually 94 percent government outlays and only 6 percent tax reduction. The House leadership’s tax credits are likely to be similarly lopsided.

    House leaders are retaining all that government spending—again, we don’t yet know how much ObamaCare spending the bill retains—largely because retaining community rating drives premiums unnecessarily high. Ironically, due to congressional budget rules, the fact that there are tax credits in the bill makes it impossible for Republicans to repeal ObamaCare’s community-rating price controls and other regulations. The CBO reportedly has projected that if the bill repealed those regulations, the price of insurance would fall so much that many more people would take advantage of the tax credits, and the bill would run afoul of budget rules by increasing federal deficits. Republicans evidently cannot repeal ObamaCare’s regulations if they hold on to health-insurance tax credits.

    The tax credits could create a very thorny problem for both House and Senate Republicans. The House leadership bill prohibits the use of its tax credits for health plans that cover abortion. Due to an arcane Senate rule, Democrats likely can and will strip any such restrictions from the bill before final passage. This means that if the House bill ever makes its way to President Trump’s desk, it could subsidize abortion even more than ObamaCare does.

    To the extent the bill’s modified tax credits are tax reduction, however, they are the functional equivalent of ObamaCare’s individual mandate. The flip side of tax credits that are available solely to those who purchase health insurance is that those who do not purchase insurance must pay more to the IRS than those who do. Just like a mandate. And since the effective penalty is just an increase in the taxpayer’s income-tax liability, tax credits for health insurance are actually more coercive than ObamaCare’s individual mandate, because the IRS has many more tools it can use to collect the penalty.

    Conservatives deny any similarities between an individual mandate and a tax credit for health insurance. But consider the following. ObamaCare’s individual mandate penalty for single adults is $695 or 2.5 percent of income, whichever is greater. Suppose that instead, Congress had simply enacted a tax with those features, and then come back and provided an equivalent tax credit for anyone who purchases health insurance. The end result would be identical to ObamaCare’s individual mandate. But which would it be, a tax credit or a mandate?

    Like ObamaCare’s tax credits, the House leadership’s tax credits would involve burdensome projection and verification of the taxpayer’s income (taxpayers above a certain threshold are ineligible for credits) as well as whether the taxpayer has an offer of qualified health insurance from an employer (taxpayers with an offer of coverage from an employer are ineligible).

    Finally, the House leadership creates a new program of matching grants to states to fund things like Exchange subsidies, insurer bailouts, high-risk pools, and perhaps a “public option,” even after Republicans spent years railing against many of these things. If states don’t use the money, the federal Centers for Medicare & Medicaid Services can use the funds for insurer bailouts. The funding formula for this new grant program appears to reward high-cost states.


    The House bill zeroes out the individual and employer mandates and outright repeals all manner of ObamaCare taxes, including: the tax on over-the-counter medications; the additional 10-percent tax on non-medical HSA withdrawals; the limits on health flexible spending arrangement contributions; the medical device tax; the tax on poor and/or sick patients (the AGI threshold for the medical-expenses deduction reverts from 10 percent to 7.5 percent); the “Medicare” “payroll” tax; the net-investment tax; the tanning tax; the tax on insurance-executive compensation; the health-insurance tax; and the pharmaceutical-manufacturers tax.

    In a pretty crass budget gimmick, the bill retains the “Cadillac tax” on high-cost health plans but delays its onset until 2025.

    Swallowing the Republicans’ Agenda

    Republicans don’t seem to have any concept of the quagmire they are about to enter with this bill.

    ObamaCare’s Exchanges are already on the brink of collapse. Since this bill does not repeal the community-rating price controls, repeals the individual mandate, shifts the benefits from ObamaCare’s tax credits up the income scale, and tasks states with devising new bailout schemes of uncertain timing and efficacy, the threat of death spirals will remain. Even where the individual market does not collapse, the coverage will get increasingly worse for the sick. If the tax credits (read: subsidies) for low-income Americans are less than under ObamaCare, many more low-income patients will lose coverage. Premiums will continue to rise. Republicans will take the blame for all of it, because they will have failed to repeal ObamaCare, or learn its lessons, when they had the chance.

    The leadership bill therefore creates the potential, if not the certainty, of a series of crises that Congress will need address, and that will crowd out other GOP priorities, in late 2017 before the 2018 plan year begins, and again leading up to the 2018 elections. If Congress gets health reform wrong on its first try, health reform could consume most of President Trump’s first term. Pressure from Democrats, the media, and constituents could prevent Republicans from moving on to tax reform, infrastructure spending, or even Supreme Court nominees.

    Partial Repeal Is the Road to Single Payer

    Flubbing ObamaCare would at once united and embolden Democrats while dividing the GOP base, driving the former to the polls in 2018 and 2020 while causing the latter to stay home. If ObamaCare is not doing well, and Republicans take the blame, it will create the potential for the sort of wave election Democrats experienced in 2008, when they captured not just the House and the presidency, but a filibuster-proof, 60-vote supermajority in the Senate. If that happens, and ObamaCare is not doing well, Democrats will be less interested in rescuing ObamaCare than repealing and replacing it themselves—with a single-payer system.

    ObamaCare opponents often muse that supporters designed the law to fail because it would give them the excuse to enact a single-payer system. Republicans have a choice. They can either prevent that future from unfolding, or they can help it along.


    Widespread voter dissatisfaction with ObamaCare produced Republican gains in 2010 and 2014, and a GOP sweep in 2016. President Trump and congressional Republicans pledged full repeal of the law, and to replace it with free-market reforms. The parts of the country that stood the most to gain from ObamaCare swung the most to President Trump. That looks suspiciously like a mandate. The good kind.

    obamacare repeal, obamacare repeal and replace, repeal and replace obamacare

    If Republicans care about covering people with expensive medical conditions, they should stick to that promise. Making health care better, more affordable, and more secure requires first repealing all of ObamaCare’s regulations, mandates, subsidies, and taxes. Next, Congress should block-grant the Medicaid program, giving each state a fixed sum of money that does not change from year to year, combined with full flexibility to target those funds to the truly needy. (If states want to cover less-needy populations, like able-bodied adults, they can pay 100 percent of the marginal cost of that coverage.)

    Finally, and crucially, Congress needs to enact reforms that make health care more affordable, rather than just subsidize unaffordable care. To make health insurance more affordable, Congress should free consumers and employers to purchase health insurance licensed by states other than their own. To drive down health care prices, Congress should expand existing tax-free health savings accounts into “large” HSAs. Large HSAs would be a larger effective tax cut than the Reagan and Bush tax cuts combined, adding $13,000 to the wages of a typical worker with family coverage. Large HSAs would drive down prices by making consumers cost-conscious at every margin, and would reduce the problem of preexisting conditions by freeing consumers to buy portable coverage that stays with them between jobs. Sen. Jeff Flake (R-AZ) and Rep. Dave Brat (R-VA) have introduced legislation to create Large HSAs.

    The House Republican leadership bill does not replace ObamaCare. It merely applies a new coat of paint to a building that Republicans themselves have already condemned. Since the most important asset health reformers have is unified Republican opposition to ObamaCare, at least in theory, it would set the cause of affordable health care back a decade or more if Republicans end up coalescing around this bill and putting a Republican imprimatur on ObamaCare’s core features. If this is the choice, it would be better if Congress simply did nothing.

    But this can’t be the only choice. Right?

    This piece was originally published at Cato at Liberty.

  6. Won’t someone think about the disemployed steel workers?

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    Joe works in a Pennsylvania steel mill.  Many of Joe’s fellow Americans start buying more imported steel and, hence, less American-made steel.  Because of this change in trade patterns, Joe – a good, hard-working, honest, play-by-the-rules, middle-aged family man who toiled in the steel mill all of his adult life – loses his job.  Joe is devastated.

    How can we help Joe transition to another job or to otherwise cope with his job loss?  This question is frequently asked.  Crafting clever answers to it is a favorite task of policy wonks.  And those of us who support free trade yet who spend no time endorsing (or even pondering) various options for the government to help workers adjust to changing trade patterns are thought to have hearts of stone or, at the very least, to be impractical dreamers who want the benefits of free trade but without the responsibility of sharing the costs of free trade.

    Regular readers of Cafe Hayek know that I deal with this issue frequently.  I’ll do so again in this post.

    Responses to the question “How can we help workers adjust to changing trade patterns?” are several.  Here are four.

    – By “we” is meant the government.  But why assume that any such assistance (such as unemployment insurance, job retraining, job-search help, and philanthropy) must be supplied by the state?  Do not many individuals have the wealth, wisdom, and wherewithal to create, fund, and administer private responses?

    – Changes in trade patterns that destroy particular businesses and jobs are not confined to changes in international trade or to technological innovations.  Any time consumers change their patterns of economic activity – change their diets, change their work-leisure preferences, change their fashion preferences (How many hat-makers are there today compared to 100 years ago?), change their consumption-saving preferences, become more healthy by exercising more – some particular business and jobs are destroyed while other particular businesses and jobs are created.  Should we help with worker-transition in all such cases?  Why should a worker who loses a job to an import or to a technological innovation be “privileged” with government assistance relative to a worker who loses a job to a change in consumers’ diets or fashion sensibilities?

    – Discussions of helping workers transition too seldom, on my reading, feature proposals to make business creation and expansion easier.  Getting rid of, or at least reducing, occupational licensing will certainly help laid-off workers transition to new jobs.  Ditto for reducing taxes, regulations, and zoning restrictions – many of which discourage entrepreneurs from starting new firms and from expanding existing ones.  While much ‘worker transitioning’ involves workers moving to where jobs are, much of it also involves – and could involve even more – businesses and jobs moving to where available workers are.  (Here’s one of my favorite real-world examples.)

    – Too many discussions of worker-transition issues proceed not only as if workers, once laid off, are far more passive than most workers are likely to be in reality, but also as if workers are unnaturally passive when making employment decisions in the first place.  That is, not only do most workers, once laid off, actively seek new employment opportunities (especially if they have no charity or unemployment insurance to rely upon), but most workers when considering jobs prospectively take into account some estimated risks of job loss versus pay.

    Put yet a different way, too many discussions of worker-transition issues treat worker lay-offs as if these events come as complete surprises to workers – workers who are thought to have not, and who had no rational reason to have, anticipated some probability of being laid off.

    But this treatment of worker-transition issues is naive.  While workers (being human) are neither omniscient nor immune to error, they aren’t as passive, uninformed, myopic, and naive as the typical treatment of worker-transition issues assumes them to be.  How many are the workers who truly believe that, once they land good jobs, their chances of being laid off are so close to zero that these chances can be safely ignored?  Surely not many.  (If you answer “many,” then you have a far too pessimistic opinion of your fellow human beings.)  Workers can save in anticipation of possible lay-offs.  (If you answer that workers aren’t paid enough to save, I respond that for whatever jobs this claim might be accurate in reality are jobs that are not worth protecting from foreign competition to begin with.)

    But in addition to the possibility of saving in anticipation of possible lay-offs (that is, for a stretch of those “rainy days” that we’ve heard of since childhood), most workers today have a range of choices of jobs, with these jobs differing in the prospects they contain for their holders being laid off because of foreign competition or technological advances.  And even if not all workers are aware that, say, job X has become more likely to be destroyed by trade or innovation than is otherwise-equivalent job Y, if only some workers are aware of this fact – or suspect it with sufficient seriousness – the supply of labor for Y will rise relative to the supply of labor for job X.  A result will be that the wage rate for job X will rise relative to that for job Y.  This higher wage rate for job X compensates for the X-workers’ greater likelihood, compared to that of Y-workers, of losing their jobs to imports or to innovation.

    In short, the market has a built-in adjustment mechanism that at least partially compensates workers ahead of time for holding jobs that are at high risk of being destroyed during the times that these jobs are held by specific workers.  To the extent that this ‘compensating differential’ operates in labor markets, to then offer special assistance to workers who are laid off because of imports or innovation results in these workers being overcompensated over time.  Such special assistance also, therefore, attracts into these ‘at risk’ jobs more workers than would otherwise be attracted to those jobs.  As a consequence, the wage rates for these jobs falls, wiping out the compensating differentials in the wage rates and imposing – “externalizing” – on taxpayers (if this special assistance is supplied by government), and off of employers, part of the cost of operating in industries in which jobs are at high risks of being destroyed by imports or innovation.

    To sum up this last point: too much of the discussion about job destruction and worker transition rests on the questionable assumption that all actors in markets, including workers, are either myopic or quite unintelligent (or both).  Neither of these assumptions is realistic.

    This piece was originally published at Cafe Hayek.

  7. The revised “travel ban” is much better legally

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    If this new executive order had been what was was signed initially—combined with the normal interagency process and briefing of border officials as to how to implement it—President Trump wouldn’t have provoked the type of political response he did or the legal quagmire he entered. This order is much more narrowly tailored, providing exemptions not just to those with green cards and other valid visas, but also people with significant contacts to United States, students, children, urgent medical cases, and other special circumstances—and Iraq is necessarily treated as a special case—as well as spelling out reasons for the remaining restrictions.

    As it stands now, the tweaks in the new executive order would normally put these actions firmly within the executive’s authority under the relevant immigration laws: presidents have broad discretion over refugee programs and to suspend entry of certain classes of foreigners on national security grounds. But, in large part due to the botched development and implementation of the previous order, this isn’t the normal case and courts will likely be less deferential to assertions of executive power here than they would otherwise be.

    And then there are the atmospherics of what so many people consider to be a “Muslim ban.” Just because a presidential candidate uses hyperbolic language during a campaign—or his surrogates use similarly inartful language on national TV—doesn’t mean that any policy in that area is constitutionally suspect, but some judges will surely see it that way.

    Finally, all that’s before getting into the wisdom of this policy. Refugees generally aren’t a security threat, for example, and it’s unclear whether vetting or visa-issuing procedures in the six remaining targeted countries represent the biggest weakness in our border defenses or ability to prevent terrorism on American soil.

    This piece was originally published at Cato at Liberty.

  8. The business case for supersonic overland

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    Imagine flying from New York City to Los Angeles in two hours, and for the price of a normal business class ticket. It should be possible with today’s technology, and yet a 1973 ban on civil supersonic flight overland has prevented it from becoming a reality.

    To understand the importance of the overland market to supersonic transport we have to take a step back and relearn some lessons from history. The conventional wisdom, ever since the Concorde’s retirement in 2003, has been that supersonic transport simply isn’t commercially viable. After all, the Concorde sustained enormous losses over its 27 years in service, and required constant injections of subsidies by the French and British governments just to break even.

    And yet the particular failings of the Concorde are well understood—and have nothing to do with the viability of supersonic more generally. With a max takeoff weight of over 400,000 lbs, the Concorde was a fuel hog that required the wasteful use of afterburners to get up to its Mach 2 cruising speed. Only 14 ever made it into service, and its design was never iterated on to incorporate new technology.

    Who could be surprised? The Concorde was designed by government committees, with little to no attention paid to what we would today call “product-market fit.” Its 100 person capacity was chosen due to laudable, but arbitrary, democratic aspirations, and with such a high ticket price (up to $20,000 in today’s dollars) it struggled to fill half the cabin on many routes. Coming to market amid the 1973 oil crisis certainly certainly didn’t help, either.

    The U.S. had its own government-led supersonic project, the Boeing 2707. Not to be outdone by Europe or the Soviets, President Kennedy pushed for an even bigger and faster plane: Mach 3 instead of Mach 2, and 300 passengers instead of 100. But after pouring billions of dollars into research and development, the program went bust in the early 1970s, a couple years before the FAA banned supersonic flight overland and just after the Concorde’s milestone first flight.

    Climbing the learning curve

    These episodes from history do more to indict government boondoggles—”Boomdoggles” as they’re known in the aviation community—than supersonic transport, per se. They reveal the fatal conceit of trying to design a new product from scratch with little to no market feedback.

    The aircraft industry is notorious for having steep industry learning-curves—indeed, it’s where the economic theory of learning curves originates. It’s also why allowing supersonic overland is so important to its long-run success and affordability.

    As my co-author Eli Dourado and I detail in our paper Make America Boom Again and on the website, there have been at least seven in-depth market analyses indicating a large demand for supersonic business jets—as many as 450 units over 10 years. Business and regional jets are the natural entry point for supersonic on the industry learning-curve. A smaller supersonic business jet doing more frequent trips is better suited to meeting early consumer demand without being as vulnerable to losses. Only after learning which routes are most popular would passenger capacities increase, working up to full size passenger jets that would bring truly democratized supersonic transport to the masses.

    Early technological adoption among a luxury or business class of consumers is a recurrent phenomenon in the spread of innovation. As Everett M. Rogers showed in his seminal work, Diffusion of Innovations, early adopters are often willing to pay a high initial price for a new product due to greater resources and the pursuit of social status. From there, firms reinvest profits in product design and use the benefits of volume and scale to introduce subsequent product versions with more and more mass market appeal. This is how cell phones went from being a luxury used by Wall Street’s Gordon Gecko to being in the pockets of poor farmers in Africa. It’s also the strategy Tesla Motors is using to mainstream affordable electric vehicles.

    But there’s a catch. According to an analysis by Gulfstream, ending the prohibition on supersonic overland is “required” for the success of supersonic business jets given that only 25% of small aircraft operations occur over water. The 2001 National Research Council committee on Commercial Supersonic Technology agrees, stating that “supersonic flight over land is essential for [business jets].”

    It makes sense. Roughly half of all passenger flights in the world occur over the continental United States. Banning supersonic overland thus imposes a severe cap on supersonic transport’s potential market size.

    Progress in the air

    But what about noise? Wouldn’t a fleet of supersonic aircraft overland create intolerable sonic booms that would rattle windows and scare livestock?

    This would plausibly be a problem for the Concorde, but that was 1960s technology. Today, thanks to modern aircraft engines, lightweight carbon fiber materials, and powerful computer simulation techniques, aircraft designers have created a whole new class of “low-boom” supersonic aircraft designs. A lower mass and optimized shape can make the boom from supersonic jets sound less like an explosion in the sky, and more like a quick thump.

    That’s why we have called upon the FAA to replace its ban with a simple noise standard, one consistent with noises we already find reasonable in daily life. The Concorde’s sonic boom was 110 decibels, while today NASA is planning to demonstrate a supersonic jet with a boom below 80 decibels. Because decibels are logarithmic, that represents a 1000x reduction in loudness. Think car door slamming, or a truck passing by, but over in half a second. It’s time for the private sector to be let in on the game.

    It will be up to the FAA to decide exactly what noise standard makes sense. But the longer it delays the deeper we set into complacency with the current state of aviation innovation—an area which, in terms of speed, has been stagnant or regressing for over forty years.

    This piece was originally published at the Niskanen Center.

  9. Exports only matter because they let us import

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    Among economics data watchers, a country’s exports enjoy a hallowed status. The ability of producers in country A to sell goods and services to people in other countries is taken as a sign of A’s economic strength, although the underlying metric for economic strength goes unmentioned. In addition, job counters across the spectrum constantly count the number of jobs associated with exports. The more export-related jobs, the better. In a nutshell, exports are intrinsically beneficial—no questions asked.

    The problem is that virtually no one, except perhaps for a workaholic, runs their personal economic affairs like this. Let’s consider an example.

    Soybean Exports

    Countries export those products that, were it not for the exports, would obtain a lower price domestically than they would in the international marketplace. For example, suppose the United States banned the export of soybeans. If the world price of soybeans were, say, $10 per bushel, the U.S. export ban leads to a lower U.S. price, say, $5 per bushel, and an annual production level of, say, 50 million bushels.

    Lifting the U.S. ban on soybean exports would cause the U.S. price to rise to the $10 world price. U.S. farmers would increase their soybean production as production deemed uneconomic at $5 becomes economic at $10. In addition, soybean related consumption in the United States would fall as consumption choices that are economic $5 per bushel become uneconomic at $10. Suppose soybean production rises to 60 million bushels and consumption falls to 45 million bushels. The difference between the higher level of production and lower level of consumption, 15 million bushels, would become U.S. soybean exports sold to foreigners at $10 per bushel.

    So, is the additional production of soybeans sold to foreigners intrinsically beneficial to the United States? Hardly. After all, additional production of soybeans is not costless. It means other agricultural products are not being produced; say it’s tomatoes. If the average cost of the additional soybean production in terms of tomatoes is, say, $7.00 per bushel, then the cost of the additional soybeans measured in foregone tomatoes would be $70 million. So Americans have fewer tomatoes worth $70 million as a consequence of soybeans going to foreigners. Where’s the gain?

    Second, the 5 million bushel reduction in Americans’ soybean related consumption also imposes a cost on Americans. If the average consumption value of these foregone soybeans is, say, $7.00 per bushel, this means Americans incur a soybean consumption cost of $35 million. Again, where’s the gain?

    It follows that exporting the 15 million bushels of soybeans imposes a cost on Americans equal to $105 million in terms of foregone tomatoes and foregone soybean consumption satisfaction. The idea that exports are intrinsically beneficial is bogus, regardless of who espouses it. Indeed, taken by themselves the soybean exports reduce the size of the U.S. economic pie!

    Why We Export

    Then how can we claim that the exported soybeans do in fact increase the U.S. economic pie? IT’S BECAUSE EXPORTS ENABLE AMERICANS TO IMPORT!!! Note the soybeans are sold to foreigners for $10 per bushel. That means Americans earn the ability to buy foreign goods (imports!) equal to $150 million. This means giving up soybean related consumption and tomatoes worth $105 million to Americans enables them to buy foreign goods worth $150 million. That’s a gain of $45 million for Americans!

    That the gains associated with exports ultimately trace to imports is no doubt a bitter pill for many to swallow! Nevertheless, virtually all of us organize our own economic lives consistent with this idea. In the marketplace we produce goods and services which we sell (export) to buyers. This is the source of our incomes which we use to buy goods and services from others—that is, import. The more imports, the better.

    People who choose to export while importing as little as possible will find themselves ill-clad, ill-housed, ill-fed, and possibly dead in short order. How can it be that what is economic wisdom for the individual not apply to a nation? Hint: it can’t!

    This piece was originally published at the Foundation for Economic Education.

  10. Refugees, immigration, and the trolley problem

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    During the presidential campaign Donald Trump’s son, Eric Trump, tweeted a picture of a bowl of Skittles candies along with the caption: “If I had a bowl of skittles and I told you just three would kill you. Would you take handful? That’s our Syrian refugee problem.”

    Trump’s tweet generated backlash from many corners but the general logic of this vivid metaphor continues to resonate for many, despite research that demonstrates that the risk of an American dying in a terrorist attack carried out by refugees and immigrants in the United States is astonishingly low. For many Americans, the prospect of just one bad skittle overwhelms a more rational calculation embracing both immigration’s costs and benefits.

    But perhaps a different vivid mental picture can help people see the immigration question in a new light.

    The trolley problem is a famous thought experiment in ethics. The general form of the problem (quoted here from Wikipedia) is this:

    There is a runaway trolley barreling down the railway tracks. Ahead, on the tracks, there are five people tied up and unable to move. The trolley is headed straight for them. You are standing some distance off in the train yard, next to a lever. If you pull this lever, the trolley will switch to a different set of tracks. However, you notice that there is one person on the sidetrack. You have two options:

    1. Do nothing, and the trolley kills the five people on the main track.
    2. Pull the lever, diverting the trolley onto the sidetrack where it will kill one person.

    This is a tough scenario for sure. Do you believe that pulling the lever is the best option? What is your justification for that choice?

    Surveys have shown that around 90% would make the difficult decision to pull the lever to save the five people. The justification for most people is straightforward: saving five lives is better than saving one life. But studies also show that it matters a great deal who that one person is. For example, if the person happens to be the respondent’s relative or loved one, a respondent is far less likely to indicate he or she would pull the lever.

    When thinking about President Trump’s proposed crackdown on travel, immigration, and refugees, we might revise the standard version of the problem to read like this:

    There is a runaway trolley barreling down the railway tracks. Ahead, on the tracks, there are five refugees and immigrants tied up and unable to move. The trolley is headed straight for them. You are standing some distance off in the train yard, next to a lever. If you pull this lever, the trolley will switch to a different set of tracks. However, you notice that there is one American citizen on the sidetrack. You have two options:

    1. Do nothing, and the trolley kills the five refugees and immigrants on the main track.
    2. Pull the lever, diverting the trolley onto the sidetrack where it will kill one American citizen.

    Now how do you answer the trolley problem? Does your justification differ from the justification of your response to the original version of trolley problem?

    This second version is, of course, very similar to the refugee and immigration policy problem confronting the United States today, except that in this case pulling the lever (i.e. allowing refugees and immigrants into the U.S.) will help or save millions of people, not just five, for every American that might get hurt. In fact, according to a Cato study, despite the United States welcoming a million immigrants each year and over three million refugees since 1975, refugees and immigrants combined to kill just eleven Americans in terrorist acts between 1975 and 2015. That’s about 41 million immigrants and 3 million refugees “saved” against eleven Americans who died. In other words, the real life trolley problem has 11 million refugees and immigrants on one track and a single American on the other track.

    If you believe that the right answer in the first version is to pull the lever, then you either need to pull it in the second version or you need a new justification that privileges American lives over foreign lives in a very powerful way. Nationalists like President Trump do so by simply declaring “America First” and arguing that no Americans should die in order to save any number of foreign nationals.

    But that perspective is troubling to many others. The majority of Americans support sending troops to help prevent genocide or major humanitarian disasters. And despite the risks most Americans support sending help in cases of natural disasters like the 2010 earthquake in Haiti. Thus for most, though the risk to American lives is certainly a critical consideration, so is the opportunity – even the obligation – to save other people’s lives when possible.

    Few people are used to thinking about public policy in such blunt terms, but in the end Americans must decide whether or not they are willing to live with a very modest increase in risk to American lives in order to save and improve the lives of millions of refugees and immigrants. Most Americans, in the end, choose to save the lives of the five people when confronted with the trolley problem. Hopefully a majority will eventually apply the same thinking to the debate on refugees and immigration.

    This piece was published at Cato at Liberty.

  11. The key questions any Obamacare replacement must answer

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    Republicans do not yet have a full replacement for the Affordable Care Act (ACA or “Obamacare”), but the outlines of one are emerging. The Policy Brief on Repeal and Replace issued by House Republicans on February 16 points the way toward a three-tier system. It promises to provide  “coverage protections and peace of mind for all Americans—regardless of age, income, medical conditions, or circumstances,” while ensuring “more choices, lower costs, and greater control over your health care.”

    Those are lofty aspirations, but reformers will have to address many difficult questions before they can be met. To find realistic answers, they will have to overcome divisions within the party, ideological constraints, outside pressures, and some hard realities of healthcare economics.

    Conceptual Framework

    The new policy brief, and similar plans put forward by Rand Paul, Mark Sanford, Paul Ryan, and others, include many common elements. Together, they point to a three-tier system that, in broad outline, would look like this:

    Central tier, for individuals and households with incomes well above the poverty line in which no member suffers from a serious chronic health condition. Such people account for roughly 70 percent of the population and roughly 25 percent of personal healthcare spending. Members of this tier would be served by conventional commercial health insurance. The cost of premiums would be covered by a combination of individual payments, advanceable healthcare tax credits (HCTCs), and employer contributions. Premiums and HCTCs could rise with age, but insurers would not be allowed to charge differential premiums based on pre-existing conditions or to refuse coverage. High-deductible policies would be encouraged by using health savings accounts (HSAs) for covering out-of-pocket costs.

    Low-income tier, for individuals and households with incomes close to or below the official poverty line in which no individual suffers from a serious chronic health condition. Such people account for roughly 20 percent of the population and roughly 10 percent of all personal healthcare spending. Their coverage would be funded entirely, or almost entirely, from government sources. Some proposals use Medicaid block grants as the model for this tier.

    High-risk tier, for individuals in the 10 percent of the population with chronic health conditions who account for roughly 65 percent of all personal healthcare spending. Average healthcare costs for this group exceed median household income. Their conditions are uninsurable due to the high cost of care and the chronic nature of their conditions.  They would receive coverage from Medicare or some kind of high-risk pool, funded entirely, or at least in large part, from government sources.

    In principle, such a system could ensure that 100 percent of the population had access to quality healthcare at an affordable cost—the aspirational goal set, but not fully achieved, by the ACA. However, the devil is in the details. Unless each element of the three-tier system is well thought out and adequately funded, and unless the parts fit together seamlessly, a Republican replacement could easily end up costing families more than the ACA and leaving a greater number of people without coverage.

    Here are some questions that need answers before it will be possible to assess the workability of a Republican replacement for the ACA.

    Questions for the central tier

    How to control adverse selection? Conventional health insurance is affordable only if healthy people participate in the insurance pool. If people can easily buy into coverage after they become sick and drop out at will when they recover, the average cost of claims rises and premiums become unaffordable. This is the notorious “death spiral,” known to economists as the problem of adverse selection.

    One way to control adverse selection is to make coverage mandatory. The ACA included a step in the direction of mandatory coverage in the form of tax penalties for healthy people who did not obtain coverage. However, that proved to be one of the least politically popular aspects of the ACA, especially among Republicans.

    Another way to control adverse selection would be to refuse care to people who do not have insurance. However, absolute refusal would defeat the goal of making healthcare universally accessible. No one wants to see people who have been turned away by doctors and hospitals dying on the streets.

    A possible compromise would be to require that providers serve people without insurance coverage, but to make aggressive retroactive efforts to collect full payment from them for services rendered. Those efforts would include mechanisms such as asset forfeiture, garnishing wages, and personal bankruptcy. A sufficiently severe financial threat would probably be enough to induce most healthy members of the middle-class to purchase insurance—catastrophic coverage, at least—thereby avoiding the worst effects of adverse selection. If expenses from a serious illness drove an uninsured person or household into bankruptcy, they would become eligible for coverage either under the low-income or the high-risk tiers.

    How to deal with temporary, cyclical, and unexpected loss of coverage? In addition to dealing with people who voluntarily accept the financial risks of foregoing insurance, any plan should have some provision for dealing with people who lose coverage through no fault of their own. Examples include cyclical job loss, plant closings, death of a covered parent or spouse, and divorce. Measures to deal with such contingencies might include emergency premium support for affected individuals. They might also require temporary federal help to state-administered programs in cases of economic downturns that affect regions unevenly—say, a Florida real-estate collapse or an Oklahoma energy bust.

    What role for employer-provided insurance? Historically, a large portion of people eligible for the central tier of the three-tier system have received coverage through their employers. However, employer-provided coverage has a number of disadvantages. Among others, it is a burden on the employers themselves—one that, according to economists, is passed through at least in part to workers in the form of lower wages. It works less well for small and medium businesses than for large corporations. Also, it tends to decrease labor mobility through “job lock,” since moving to a new job will  most likely mean loss of coverage.

    One option would be to follow the lead of the ACA and leave the current employer-provided system in place. Doing so would perhaps have the political advantage of reducing the apparent budgetary cost of subsidies to individual insurance companies within the central tier. However, those savings are largely illusory, since existing tax preferences for employer-provided insurance are a drain on the budget, too.

    Another option would be to let employer-provided insurance gradually die. It is, in fact, already gradually dying. Some GOP proposals would accelerate the demise of employer-provided insurance by repealing the employer mandates of the ACA. It would also be possible to speed the phase-out of employer-provided insurance by withdrawing tax preferences, as some Congressional Republicans are reportedly considering.

    What conditions should be set for transition into the high-risk tier? Premiums would remain affordable for people in the central tier only if the sickest patients—the 10 percent of the population who account for two-thirds of all personal healthcare spending—were covered by the high-risk tier. To make that work, there would have to be an orderly transition mechanism to move people who develop costly chronic conditions from one tier to the next.

    One way to do that would be to allow insurers in the central tier to place annual or lifetime caps on claims. The ACA does not allow such caps, although they were previously common. If access to the high-risk tier were automatic for all people whose expenses exceeded the caps, it would be possible to maintain the goals of universal coverage and affordable premiums for the central tier.

    Questions for the low-income tier

    How to ensure full funding? There is much discussion within the GOP about providing coverage for the lowest tier through Medicare block grants to individual states. What mechanisms would ensure that states actually provided universal coverage and quality care to people in this tier? At present, states vary enormously in the degree to which they achieve these goals and in their political willingness even to try to do so.

    A further question concerns the growth of funding over time. There has been some discussion of pegging the size of block grants to increases in the consumer price index, but the rate of growth of healthcare costs, in the past, has regularly exceeded the growth of the CPI. Pegging grants to the CPI, then, would mean progressively tightening healthcare budgets of the states.

    How to maintain work incentives during transition into the central tier? In order to achieve universal coverage, participation in the low-income tier would have to be a universal entitlement for all people meeting the income criteria. Furthermore, the upper bound of eligibility would have to be set high enough so that people would not leave the low-income tier until they were financially able to participate in the central tier. The terms of transition from the low tier to the central one will require careful thought.

    In particular, it is important to make sure that healthcare subsidies to not degrade work incentives for low-income individuals. For example, a simple income cutoff, say 150 percent of the poverty line, would create a “healthcare cliff,” beyond which earning a few dollars of extra income would cost a household thousands of dollars in medical benefits. One way to avoid a cliff would be to gradually taper low-income healthcare benefits as income rose. However, the healthcare benefit reduction rate for people in the transition range would add to the effective marginal tax rate faced by affected workers. Its disincentive effects would be compounded by that of other social programs, such as the earned income tax credit.  The problem of high effective marginal tax rates for households close to and just above the poverty line is already severe. (See here for a more detailed discussion.) Ideally, healthcare reform should alleviate the problem, not intensify it.

    How to ensure interstate mobility? For a variety of reasons, interstate mobility in the U.S. labor market has significantly decreased in recent years. Decreased mobility makes it harder for the economy to adjust to trade shocks, technological change, and occupational shifts. If low-income healthcare coverage is to be provided on a state-by-state basis, as many Republican plans propose, what assurances will there be that coverage will remain portable from state to state, without waiting periods or major changes in coverage? The question is especially important since workers who lose their jobs due to trade or technology shocks are likely to drop into the low-income tier temporarily while seeking new employment. Their chances of finding new jobs would be greatly reduced if they had to remain within their home state to receive continuous health coverage.

    Questions for the high-risk tier

    Who provides coverage? The healthcare needs of people in the high-risk tier are uninsurable by traditional standards because of high costs and a high probability that claims will continue year after year. Except, perhaps, for the very wealthy, the healthcare needs of people with expensive chronic conditions will require heavy subsidies.

    The existing Medicare program would be one way to finance care for the chronically ill. Forty percent of people in the top 5 percent by health care spending are over 65. They could remain on Medicare, reducing the number of people who would need another financing mechanism. Simpler still would be to extend Medicare to everyone in the high-risk tier, regardless of age.

    Alternatively, the nonelderly chronically ill could be covered by high-risk pools, as was done in some states before the advent of the ACA. The pools could be run either at the federal level, or at the state level with federal subsidies. If they were run at the state level, they would raise the same questions of interstate mobility as would state-by-state coverage for the low-income tier. Even though many seniors are no longer in the labor market, interstate moves to be closer to relatives, or necessitated by relatives’ job changes, would create problems if high-risk coverage were not fully portable.

    How to ensure full funding? The past record of state high-risk pools is decidedly mixed. Inadequate funding often led to waiting periods, denials of eligibility, or other limits on coverage. There is no getting around the fact that the high-risk tier, although small in terms of the number of people it includes, represents by far the largest single slice of healthcare spending.

    If the top 5 percent of spending units ended up in the high-risk tier, they would absorb approximately half of all spending. If it were 10 percent, they would account for two-thirds of all spending. Reducing the funding needs of the high-risk tier by reducing the number of people covered would mean leaving more people with costly chronic conditions in the central tier. That would push up premiums in that tier, increasing its subsidy needs.

    The funding requirement of a high-risk pool that maintained open access and quality care would vastly exceed the costs of subsidies for the low-income tier. Imposing them entirely on state budgets would be unrealistic, especially given the large income disparities among states. Most of the money would have to come from the federal government in one way or another, and the amount would have to increase with actual healthcare costs, not just the CPI, in order to avoid the re-emergence of waiting periods or other coverage limits. Also, it would need to be protected from periodic waves of austerity and sequestration arising from business cycles and generally imprudent fiscal policy.

    Questions for all tiers

    Some questions cut across all tiers of coverage, from low to high incomes and from the completely healthy to the chronically ill. GOP healthcare policy reformers will have to address these questions, too.

    How to ensure that “accessible” means “affordable”? The GOP policy brief uses the words “accessible” and “affordable” almost interchangeably, but they are not necessarily the same thing. Suppose you take the “Members  Only” sign off the door of an exclusive country club, and replace it with one that says, “Open to the Public. Greens Fees $250.” That makes the club accessible but it is still not affordable.

    One of the chief criticisms of the ACA is that in some cases, premiums and out-of-pocket costs for insurance purchased on exchanges are so high that the covered parties cannot actually afford to use the services. Without adequate funding for all three tiers, at both the federal and state level, the GOP plan would be no better. If budget hawks gain control of Congress or statehouses, it could turn out worse. But adequate funding is only half the story of making “accessible” and “affordable” truly synonymous. Our next item, cost control, is equally important.

    How to control underlying healthcare costs? Healthcare policy is not just a matter of how to distribute the burden of costs—it also has to deal with their magnitude. The United States currently spends far more per capita on healthcare than any other OECD country—16.9 percent of GDP compared to just 11.8 percent for the second highest spender, the Netherlands, and far above the OECD average of 9.3 percent. Although about half of all U.S. healthcare dollars now come from private sources (a far higher percentage than in any other OECD country), the government share of U.S. healthcare spending alone is higher than the average government share for the OECD. In fact, U.S. government healthcare spending is higher in relation to GDP than total public and private healthcare spending in Korea and Israel.

    Clearly, cost control has to be a priority in any healthcare reform. The growth of healthcare spending has slowed somewhat under the ACA, but it has not been reversed and may accelerate again with full recovery from the Great Recession. GOP reformers offer a number of promising cost-control measures, including stronger bargaining over drug prices, greater vigilance against fraud and abuse, more interstate competition in the insurance market, and reform of medical malpractice. Many of these are good ideas, and there are more good ideas on the Democratic side of the aisle. However, the implementation of cost controls faces a major obstacle: every dollar of healthcare cost savings means a dollar less of revenue for some healthcare providers. Providers, whether pharmaceutical companies, doctors, hospitals, or insurance companies, have considerable influence in Congress. “Watch what they do, not what they say,” must be the rule in judging the seriousness of would-be healthcare cost cutters.

    How to ensure participation by providers? Healthcare coverage for patients is worthless unless providers are willing to accept that coverage. There are already many providers who opt not to accept patients covered by Medicaid, Medicare, or narrow-network private plans. Encouraging participation by a broad spectrum of providers would be especially important for the low-income and high-risk tiers. Reform proposals to date have not always been clear on how they would maintain adequate levels of participation by doctors, hospitals, pharmaceutical companies, and other providers.

    What services to cover? Another problem that reformers have not always adequately addressed is that of what services should be covered in any given tier. There seems to be a general preference among GOP reformers to minimize mandates and allow consumers free choice of plans with broader or narrower coverage, especially in the central tier. However, that could lead to problems. Women who opt for plans without coverage for pregnancy might accidentally become pregnant. People who opt out of coverage for mental health or addiction services, thinking “It can’t happen to me,” might nonetheless find themselves in need of those services. Problems could also arise if a person making the transition from a central-tier plan with broad coverage found themselves unable to use their regular doctor, hospital, or medications if circumstances forced them into the low-income or high risk tiers.

    Will GOP reforms match international best practices? Contrary to what one often hears, the high level of U.S. healthcare spending does not buy the world’s best health care. A survey of the healthcare systems of eleven wealthy countries by the Commonwealth Foundation ranked the U.S. dead last in terms of overall efficiency and effectiveness. Despite the popular belief that the U.S. system provides timely care while the single-payer systems of other wealthy countries impose long waiting times, the U.S. ranked only fifth among the eleven in terms of timeliness. In practice, though, the U.S. healthcare system uses rationing by cost more than by waiting. In terms of cost-related problems of access, such as inability to afford insurance or to pay for needed services or medications, the U.S. ranked eleventh out of the eleven countries.

    Creating a system that performs better than the ACA should not be hard. The various pieces of the ACA do not fit together smoothly. The system as a whole fails to adequately address many of the questions raised above regarding Republican alternatives—gaps in coverage, perverse disincentives, and difficulties in moving from one part of the system to another. Conceptually, if all of our earlier questions receive satisfactory answers, a three-tier system like the one that seems to be emerging from GOP reform efforts could more fully meet the goal of universal and affordable access to quality healthcare services than does the ACA.

    But just beating the ACA is a low bar. The real question that Republican reformers should ask is whether their proposed multi-tier mechanism would outperform the best single-payer systems of countries like Switzerland, Sweden, Germany, and New Zealand. Achieving that level of performance within the limits of self-imposed ideological constraints and outside pressures from providers who profit from the status quo will be extremely challenging.

    This piece was originally posted at the Niskanen Center.

  12. Trump’s bad economic reasoning on infrastructure

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    Tuesday night’s address to Congress by President Trump was devoid of detail on infrastructure investment. But in justifying his desire to harness $1 trillion of public and private funds for “new roads, bridges, tunnels, airports and railways”, the President used two lines of bad economic reasoning sadly all too prevalent in public debate on this issue.

    First was to invoke the building of the interstate highway system. “The time has come,” Trump declared, “for a new program of national rebuilding.” The implication: the interstate highway system was good for the economy, so we should invest more in roads today – a common rhetorical technique, but one which confuses average with marginal.

    Previous economic research has indeed found that the construction of the interstate highway system substantially boosted productivity for industries associated with road use. But the same research finds those benefits to be largely one-offs, meaning this analysis does nothing to inform us about new decisions. In fact, more recent work has found that too many new highways have been built between 1983 and 2003, and that marginal extensions to the highway system tend not to increase social welfare, because the cost savings of reducing travel times are small relative to incomes and prices.

    In other words, building a highway system can boost growth. Building a second highway system? Not so much. Rather than appealing to grand projects based on historical experience, all new government projects should stand up on their own merits – ideally having high benefit to cost ratios and being things that would not be undertaken by the private sector.

    The second mistake was to highlight “creating millions of new jobs” as an aim or positive of any infrastructure spending. When the government is investing to build something, it should aim to do so most efficiently. “Jobs” in this sense are a cost, not a benefit, and ones “created” only come through the diversion of resources and opportunities in other parts of the economy.

    Upon visiting an Asian country in the 1960s, Milton Friedman is frequently quoted as reacting to the absence of heavy machinery in a canal build by asking why the project was being undertaken by men with shovels. Upon being told it was a “jobs program,” he is said to have remarked: “Oh, I see. I thought you were trying to build a canal. If you really want to create jobs, then by all means give these men spoons, not shovels.”

    If one is concerned with improving the economic growth potential of the economy, then you would base both the selection of projects and the means of undertaking them according to that objective. Sadly, when governments are involved, other ambitions (be it stimulating particular regions, appeasing certain interests, obtaining political prestige or facilitating observable jobs) tend to interfere with the stated aim. The constant talk of the benefits of wise, productive investment is an ambition, rather than something we should expect.

    This piece was originally published at Cato at Liberty and has been slightly edited.