Mises’s Bureaucracy, a Recap

My favorite two economists are Ludwig Von Mises and Milton Friedman. They might consider one another from very different schools of thought, though there is reason to think that they are not so different. As an undergraduate student, I liked them both, but I became more empirics-minded in graduate school and as a young assistant professor.

As I progressed through graduate school and conducted empirical research, my opinions and policy prescriptions changed and were refined from what they once were. In graduate school, I didn’t study Austrian Economics, though it was certainly in the water at George Mason University. Recently, as an assistant professor with a few years under my belt, I picked up Bureaucracy (1944) and read it as a matter of leisure.

One word:

Continue reading

Are Special Elections Special?

While the United States does have its problems with democracy, one area where we shine is direct democracy. Rare at the federal level, at the state and local level direct democracy is quite common in the US, much more so than most other democracies (Switzerland also stands out). Almost half the states have some form of citizen initiative or referendum process, and it is used frequently in most of those states. But even more direct democracy takes place at the local level.

And much of that direct democracy at the local level takes place through what are called special elections. I’m not talking about elections to fill unexpected vacancies in office — though of course those do happen. I’m talking about actual voting on issues. Many of these issues revolve around questions of public finance: whether to raise a local sales tax, to approve a property tax millage, or to issue bonds for a capital project.

One very relevant example for me is an upcoming special election in my city of Conway, Arkansas. Citizens are being asked to approve the issuing of bonds to construct a community center, pool, soccer fields, and some other amenities. The bonds would be secured by a tax on restaurants. The tax already exists — city councils can put these in place without a public vote. But to issue bonds, the citizens must be asked. I wrote an op-ed about it in my local paper (if that is gated, try this blog post).

The key is that this is a special election. There are no other issues on the ballot. It takes place on February 8th, not a date that probably stands out in voters minds as an election date. What will this special election mean for voter turnout? A lot of academic research, including a paper that I wrote (currently under review, but summarized here), finds clear evidence that voter turnout will be much lower. Will the result be different? Again, a lot of evidence suggests yes. For example, property tax elections in Louisiana were less likely to pass with higher turnout, and less likely to pass in a general election (my research finds a similar result for sales tax elections in Arkansas).

But why are tax increases less likely to pass in special elections? On this question there are many theories, but they are hard to test. Is it because different kinds of voters show up at special elections, representing a different sample of the population? Possibly, but evidence is hard to find.

A new paper just published in the American Political Science Review sheds some light on these questions.

Continue reading

South Carolina Certificate of Need Repeal

The South Carolina Senate just voted 35-6 to repeal its Certificate of Need laws, which required hospitals and many other health care providers to get the permission of a state board before opening or expanding. The bill still needs to make it through the house, and these sorts of legislative fights often turn into a years-long slog, but the vote count in the senate makes me wonder if it might simply pass this year. That would make South Carolina the first state in the Southeast to fully repeal their CON laws, although Florida dramatically shrunk their CON requirements in 2019.

Source: Mercatus Center at George Mason University

This seems like good news; here at EWED we’re previously written about some of the costs of CON. I’ve written several academic papers measuring the effects of CON, finding for instance that it leads to higher health care spending. I aimed to summarize the academic literature on CON in an accessible way in this article focused on CON in North Carolina.

CON makes for strange bedfellows. Generally the main supporter of CON is the state hospital association, while the laws are opposed by economists, libertarians, Federal antitrust regulators, doctors trying to grow their practices, and most normal people who actually know they exist. CON has persisted in most states because the hospitals are especially powerful in state politics and because CON is a bigger issue for them than for most groups that oppose it. But whenever the issue becomes salient, the widespread desire for change has a real chance to overcome one special interest group fighting for the status quo. Covid may have provided that spark, as people saw full hospitals and wondered why state governments were making it harder to add hospital beds.

Optimal Policy & Technological Contingency

A person’s optimal choice depends on what they know. To consume more ice cream? Or to consume more alcohol? It depends on what we know about the expected utility across time. If a person thinks that alcohol has few calories, then it is understandable that they would choose to drink rather than eat. The person might be totally wrong, but they are acting optimally contingent on their knowledge about the world. (FWIW, 4oz of ethanol has 262 calories and 4oz of typical ice cream has 228 calories.)

The case is analogous for good government policy. The best policy is contingent on accessing the distribution of knowledge that’s inside of multiple people’s heads. It’s not sensible to assert that a policy is suboptimal if the optimal policy requires knowledge that neither a single individual nor all people together have. Even if the sum of all knowledge does exist, it may not be possible to access it.

Economists like to tell their undergraduate classes that it doesn’t matter who you tax. But that’s contingent on 1) identical compliance costs among buyers and sellers and 2) identical relevant information. If a tax comes as a surprise to the buyer or the seller, then it absolutely matters who is taxed.

When I was in 1st grade in North Carolina, my class went on a field trip to a Christmas tree farm. We learned a bunch about maintaining the farm and we got to choose a pumpkin to take home. At the end of our visit we took turns perusing the gift shop. My mother had generously given me a dollar to spend  and I was eager to spend it (I rarely had money to spend). Unfortunately, even in the early mid-90s, most of the things in the shop cost more than $1. So, I settled on purchasing some beef jerky that cost 99 cents.

Continue reading

The Justice Dividend

While I was listening to The New Bazaar and enjoying an episode with Tim Harford, I was reminded that economists don’t just have the job of understanding the world. We have a responsibility to our fellow man of keeping fallacy and economic misunderstanding at bay (a Sisyphean task).  That doesn’t mean that we just teach economic theory. We can and should advocate for good economic policy ideas and try to think up some policy alternatives that fit our political climate.

Here I was sitting, being grumpy at the US Federal deficit, when an idea came to me. I am full of ideas. Especially unpopular ones. So, I especially like ideas that make political sense to me given that the political parties care about their policy values and re-election. Asserting that people in congress actually care about policy apart from re-election is kind of a pie-in-the-sky assertion. But, here we go none the less.

Mancur Olson liked to emphasize the role of concentrated benefits and diffused costs in political decision making. Economists point to it and explain the billion-dollar federal subsidies that go to interest groups. A favorite example is Sugar subsidies. As of 2018 there were $4 billion in subsidies and sugar growers earned $200k on average. The typical family of four pays about $50 more in subsidies each year as a result. The additional tax burden of higher sugar prices is also relatively small. Therefore, says the economist, the few sugar beet and sugar cane farmers have a large incentive to ensure the subsidy’s survival while others pay a relatively small cost to maintain it. That small cost means that there is little money saved and little gain for any individual who might try to fight the applicable legislation.

That’s the standard story. But it’s so much worse than a story of concentrated benefits and diffused costs. The laity don’t know how the world works in two important ways. First, many people will simply say that they are happy to protect American producers for an additional $50 per year. That’s a small price to pay for ensuring the employment and production of our fellow Americans, they say. An economist might reply, in a manner that so automatic that it appears smug, that that $50 would instead go to producers of other goods and that our economy would be more productive if the sugar-producing resources were diverted elsewhere. This is Bastiat’s seen and unseen. Honestly, I suspect that neither economists nor non-economists can adopt the idea without a little bit of faith.

Secondly, people don’t know what causes a particular price to change. Hayek painted this characteristic as a feature of the price system. We are able to communicate information about value and scarcity without evaluating the values of others or the actual quantity of an available resource. However, lacking causal knowledge of prices makes for some bad policies. Say that the subsidies and protections subsided and the price of US sugar declined. The consumer would likely not know anything about the subsidies in the first place, much less that they were rescinded. Further, the world is a complicated place and people are apt to thank/blame irrelevant causes otherwise (corporate greed, anyone?).

When economists blame concentrated benefits and diffused costs, they often assume that there is perfect information. THERE ISN’T. People don’t know how the world works well enough to predict with confidence what will happen in an alternate version of reality without subsidies. Nor do they understand the particular determinants of prices in our current world. Half the battle is a lack of knowledge about the functioning of the world – not just that the costs and benefits fail to provide a strong enough incentive for legislative change.

Continue reading

Hospital Merger Update

The panel on the proposed merger of Rhode Islands two largest hospital systems I mentioned last week happened yesterday, I’ll post some reactions here, there was a lot I didn’t get to say since my section only had 45 minutes split across 4 panelists and Senator Whitehouse naturally got more of the time.

The Lifespan and Care New England CEOs trying to merge their systems opened with what to me seemed like their weakest argument, a general appeal to togetherness. They said that if the Patriots offense and defense had to be kept as separate teams, they wouldn’t be very good. To me the right metaphor is that if you merged all the NFL teams into one super team, they wouldn’t try very hard.

To their credit though, overall the hospital CEOs and President Paxson of Brown University were surprisingly honest about the risks, basically acknowledging that hospital mergers are often just a way to gain market power at everyone else’s expense, but arguing that for various reasons this one is different. They seem to realize that if you define the relevant market area as the state of Rhode Island (as e.g. the Dartmouth Atlas does in their “Hospital Referral Regions”) then the merged entity would have a nearly 80% market share and be challenged by the FTC as an obvious monopoly. So they argue that the relevant market should include Boston and much of Connecticut. They argue that it won’t just be an excuse to raise prices because they are non-profits and the state has rate regulations.

They identified two potential true efficiencies, integrating the electronic medical records of the two systems and being able to easily conduct research across both systems (both systems have many employees who are faculty at Brown Med School, including my wife). In a reasonable world these efficiencies could be gained without merging, though I suspect HIPAA prevents this, meaning one of its many perverse unintended consequences would be incentivizing mergers.

Their biggest admission against interest was that “the primary benefit [of the merger] comes from scale” and that “scale matters for purchasing supplies and staffing”. To me this implies “don’t worry, we won’t use our monopoly power against consumers, we’ll just use it against suppliers and staff”. But the FTC just repealed their consumer welfare standard, and so I think these statements could come back to haunt the merging parties.

Eliminate the National Debt: Mint Trillion-Dollar Platinum Coins

The American patriots funded their Revolution largely by printing paper money, since they had no gold with which to buy supplies or pay troops. That got the immediate job done, but ended in disastrous inflation. Thus, when the U.S. Constitution was drafted a few years later, the states were explicitly forbidden to print paper money, and the federal government was deliberately not granted that authority.

Currently, printing of paper money is done by the Federal Reserve, which is essential a private bank on steroids, though under a certain amount of government oversight. What the U.S. Treasury (a part of the executive branch of the federal government) can do to cover its expenditures is to collect taxes, issue bonds and other debt, and also mint metal coins. 

These coins are considered legal tender. The size and value of most of these coins is spelled out in31 U.S. Code § 5112 – Denominations, specifications, and design of coins . For instance, gold coins can be struck in certain denominations between $5 and $50. Sharp legal eyes have noticed, however, that the value of platinum coins is left unspecified. The definition of such coins is left up to the discretion of the Treasury Secretary. 31 U.S.C. 5112(k) reads:

The Secretary may mint and issue bullion and proof platinum coins in accordance with such specifications, designs, varieties, quantities, denominations, and inscriptions as the Secretary, in the Secretary’s discretion, may prescribe from time to time.

Thus, in theory at least,  Treasury Secretary Janet Yellen could authorize the U.S. Mint to stamp 5 platinum coins, each bearing the words “One Trillion Dollars”. She could then (under heavy armed escort) walk these coins over to the Federal Reserve, and exchange them for nearly all of the $5.4 trillion in federal debt held by the Fed. These coins are by definition “legal tender”, which means that any creditor (bond-holder) must accept them to settle the debt represented by the bond.

Poof, the government would have another five trillion dollars to spend as it wished. No more bothering with issuing bonds to fund deficit spending, and no more pesky debt ceiling. This is a proposal which arises every few years, whenever the debt ceiling becomes an issue.

The Mint could even go ahead, pump out a total of 29 such coins, and retire the whole federal debt. No more interest to be paid on the national debt, no more hand-wringing over “can we afford it”. We can afford anything. Build it back better, tear it all down, and build it again even better. Jobs for all! And if people won’t work, send them money anyway. This puts us in a Modern Monetary Theory paradise.

Cooler heads have so far prevailed when the trillion-dollar coin ploy is proposed. Most parties agree it would be a violation of the spirit, if not the letter of the laws and customs of the land for the government to outright mint such quantities of fiat money. Arguably the purchase by the Fed of government debt  effectively amounts to the same thing, since the Fed conjures money out of thin air with which to buy these bonds. (Furthermore, the Fed remits to Treasury the vast majority of the interest that Treasury pays on those bonds, so the Fed purchase of these bonds really is free money for the government). However, the interposition of the overall bond market in the process and having the Fed as a quasi-independent counterparty maintain at least the semblance of traditional government funding via public debt.

Also, as Cullen Roche has pointed out, the trillions of dollars of secure, interest-bearing government debt floating around the financial markets serve a number of very useful purposes to keep those markets lubricated and functioning. Such bonds also provide a seemingly safe place for citizens and pension funds to park their funds. To redeem all these bonds with platinum coins and thus to yank them off the markets and out of millions of brokerage accounts would be a major upset. Not to mention the raging inflation that would surely follow such naked, unconstrained money printing. But this all makes for entertaining financial theater.

Redesigning Unemployment Insurance

How does unemployment insurance work?

From the worker’s perspective, unemployment insurance isn’t detectable unless the worker loses their job. Once that’s happened, the person can apply for benefits – a check that you can cash or deposit into your bank account. These benefits vary by state, with the composition of your family, and your income prior to separation. The most generous maximum benefit is provided by Massachusetts at $823 per week for an individual and the least generous is provided by Mississippi at $235 per week. States also vary by the length of time for which a person can collect benefits. Montana is the most generous at 28 weeks and North Carolina ties with Florida for the least generous at 12 weeks. If you find a job and become employed before the maximum benefit duration, then you stop receiving payments.

From the employer’s perspective, unemployment insurance is the premium that you pay per employee each year. The premium is not optional – so it’s a tax. Employers pay it for the privilege employing workers. There are two components of the tax: a state and federal portion. The federal portion is more or less constant per employee. The state portion changes with the incidence of unemployment claims and payments that a state makes in the prior year. When a lot of people get fired, state unemployment taxes rise as a policy response.

Why provide UI benefits?

There are two typical reasons for governments to provide unemployment benefits – and a 3rd not-so-typical reason. The first is as a matter of relief. People often lose a job through no fault of their own, and we don’t want those people to become destitute or to forego the bare essentials that money can afford. The second reason to provide benefits is as a matter of macroeconomic spending stimulus. Contrary to popular belief, this stimulus is not about encouraging greater production through greater sales. The stimulus is meant to encourage total spending in the economy to be higher than it would have been otherwise (See Irving Fisher on debt deflation and Scott Sumner on NGDP targeting). The 3rd and not so typical reason for governments to provide unemployment insurance is to keep people from going to work (See Tyler Cowen for why this might be desirable during a pandemic).

Incentives Matter

The 3rd reason above hints at a problem. People lose benefits when they become employed again. It is exactly because benefits provide relief that they reduce the incentive to find a job. Importantly, this is not a judgment of propriety or moral chastisement. It simply is the case that UI payments make being unemployed a little more tolerable. The tenacity with which people search for a job becomes a little less urgent. Anyone well acquainted with human nature (outside of a textbook) will tell you that it is good for humans to work. There are economic, social, and psychological benefits – not to mention the material benefits enjoyed by society. So, longer periods of unemployment are a problem.

Not only does the receiving UI benefits cause longer unemployment spells, losing benefits when you find a job acts as a penalty to finding a labor market match. It’s not happenstance that people who lose their UI benefits tend to become employed shortly thereafter. In terms of economic activity and gains from trade, society is materially better off when people find jobs more quickly (probably socially better off too). If you can get people to acknowledge the above logic, then there is plenty of room for people to disagree on the propriety of the UI benefits system.

Remove Disincentives – Keep the Relief

As Thomas Sowell is known for saying “There are no solutions – only trade-offs.”  That’s true. It’s also true that there is also no such thing as a free lunch. But some things are a lot more like a free lunch than others.

Wouldn’t it be nice if we could just help unemployed people and not disincentivize them from finding a job? In part it’s impossible. The UI payments do both and there is no separating them. But, the disincentive provided by removing payments when a job is found can be addressed. Why not just permit UI benefits even after someone has found a job?

An Outlay Neutral Prescription

What does the social program designer consider? Simply, the policy maker considers government outlays, government revenues, and economic impact. All else constant, policy makers like small outlays, high revenues, and good economic impacts.

I propose that states adopt the following policy. First, eliminate variables benefits. This part of the policy is not essential, but it clarifies the exposition. Now, it doesn’t matter whether you were an executive at a bank or a janitor at the bank – both receive the same weekly UI payment if they lose their job. What should the benefit be? For the purposes of outlay neutrality, the new benefit is the same as the average benefit was last year. The average benefit and total outlay across all claimants is unchanged.

When a person finds a job under the current system they are paying an implicit tax when their benefits get pulled. Let’s eliminate the employment disqualification. That’s right. When a person finds a job, they just continue to receive benefits. They don’t receive UI benefits indefinitely, however. In order to maintain outlay neutrality, the duration of UI benefit payments will be equal to the average duration last year.

Say what?!

Put yourself in the shoes of the person looking for a job under the current system. Say that your UI benefit is $800 per week and that you job-search for 10 hours each week. Say that you find a job that pays $1,000 per week. If you take the job, then you will go from working 10 hours per week to working 40 hours per week. And, you go from having an income of $800 per week to having an income of $1,000 per week. In other words, you get to work 30 more hours per week for $200 more income. The unemployed person is making the decision to take the job at $25 per hour, or stay home at $80 per hour ($1,000/40 Vs $800/10).

But what’s the perspective under the outlay neutral proposal in which the benefits continue even after employment? The decision is substantially different.  The unemployed person is making the decision to take the job at an average of $45 per hour, or stay home at $80 per hour ($1,800/40 Vs $800/10).

Of course, staying home still might look attractive. But it looks relatively less attractive than it did under the standard system of work-disqualifying benefits. If a person has 4 weeks of remaining benefits when they find the job, then continuing to receive UI benefits would mean that the total income over that month would be $7,200, versus $3,200 from staying home, or $4,000 under the standard system. Again putting yourself in the shoes of the unemployed, doesn’t this decision look different? Might you feel enticed to accept the job?

Under the proposed policy, government outlays are constant – there is no change in expenditures. Revenues increase because more employed workers means more employer-paid UI tax payments (not to mention other tax payments). Economic performance improves because greater employment increases total output. Let’s go ahead and throw in the additional social benefits too.

People Have Feelings

…And they’re complicated. Part of the sympathetic idea of unemployment insurance benefits is to provide relief. As a matter of gut instinct, this is why many people favor the UI transfer program over others. They can imagine themselves in such a circumstance through no wrong-doing of their own. But once we say that benefits will continue – even after someone finds their job – the UI program becomes less obviously a matter of sympathy-inducing relief. There is a political problem.

I say: put your feelings aside. Let’s get people employed again. Let’s increase tax revenues and increase economic activity. Let’s address the problem of unemployment in a better way – and spend not a dime more doing it.

Government Elimination of Perceived Vices

My post yesterday was about video games, prompted by the CCP legal restriction on video games for children. To enforce this rule, the government is making a list. Any adult playing these online video games will have to register with their real name. Is this a regulation of an addictive substance for minors, like we have for cigarettes, or is it progress toward managing the leisure time of males?

Before the Communists came to power (and before video games existed), previous Chinese government administrations had tried to ban another addictive form of recreation: smoking opium. The British famously did not help with this endeavor, but the British imports of opium ended years before the CCP crackdown. Where others had failed, the CCP practically eliminated opium from China in about 3 years. For my information, I’m drawing partly from a honors thesis on this topic.

The CCP started the relentless march toward eliminating opium in a clever way. They gathered information before announcing how ambitious the program would be. It started with making a list.

There had been previous attempts to send soldiers to destroy poppy fields (hello, 21st century?) but never in a coordinated enough way to stamp out supply. Police had raided opium dens in the cities, but nothing ever worked. Addicts were going to buy the stuff as long as it was being produced, and producers were going to grow the stuff as long as it was profitable. The CCP pulled off a coordinated attack on both producers and consumers in the entire country at the same time.

After a period of record-keeping, the CCP started forcefully addressing opium both in the rural areas where it was both produced and in the cities. There were different strategies for all the unique regions of China.

Those who did not cooperate knew that prison or immediate execution could result. The CCP, along with civilian volunteers, provided rehabilitation for some addicts who were willing to register themselves as offenders. It was acknowledged that kicking an opium addiction is hard. When possible, the government manipulated taxes and subsidies in such as way that farmers would choose to switch away from cultivating opium. The use of force was a reason for the success of the campaign, but people who were willing to cooperate often could find a way to transition away from their old habits.

The Communists did not just write laws and send soldiers. They held rallies that sound to me a lot like religious revival meetings. They galvanized millions of people to not just distain addictive drugs but to become volunteers for the cause. I would assume that many Chinese parents didn’t like opium in 1949 but were not yet so fervent as to become police informants. That changed in 1950. Everyone wants to have a moral cause. For some people today, it’s global warming. For millions in 1950’s China, it was eliminating opium distribution and addiction.

In one of my posts on Afghanistan I speculated that it is self-defeating for Americans to purchase illicit opium as consumers and also task our military with stamping out its production by force. This week when I read about the opium campaign, I found that a related message was used in 1950. The CCP presented opium abstinence as a way to defeat America in the Korean War.

I will be curious to watch developments concerning screen time and China. There is much to be determined. As Vice reported this week, ‘It’s unclear how the government will define “sissy pants”…’