A story that $55 million in Union gold was lost during the Civil War has long been dismissed as a myth — but this week, a team of FBI agents joined the search in rural Pennsylvania.
Tariffs and their impacts explained
President Trump announced last week that he would seek tariffs on imported steel and aluminum. What will the impacts of these tariffs be, and do they constitute wise policy?A tariff is a tax imposed on items imported to the U.S. The proposed 25 and 10 percent tariffs on steel and aluminum will make imported metals more expensive, increasing domestic production of these metals. President Trump will impose the tariffs via executive order, since Congress decades ago gave the president relatively broad discretion to impose tariffs for national or economic security. The Commerce Department determined in February that steel and aluminum imports threaten security, allowing this action.
The president intends to boost domestic steel and aluminum production. The first element of good policy is accomplishing the intended goal. The tariffs do this.
Increased domestic production will come at a cost. Steel and aluminum are used to make consumer goods like cars, lawn mowers, and beverage cans. Furthermore, there are dozens of types and grades of steel. American companies are very good at making some types of steel, while foreign companies are quite good at making other types. No American companies currently make some types of steel.
Manufacturing is efficient when producers of cars, mowers, and cans can purchase the best product at the best price. The tariffs will increase the cost of manufacturing in the U.S., reducing output and employment in industries using these metals. Consumers will face higher prices as well.
The second and more significant element of wise policy is ensuring that the benefits exceed the costs. Is there a compelling reason to protect domestic metals production?
We might think that such protection could spur the labor market. Employment is currently less than 100,000 and 30,000 in aluminum. Based on current import penetration, eliminating all imports – which these tariffs will not do – might in time create 50,000 additional jobs. This total is modest relative to our economy’s 150 million total jobs and 60 million jobs filled annually, and would be at least partially offset by job losses in manufacturing. And January’s 4.1 percent unemployment rate signals a currently strong labor market.
President Trump has spoken often about economic dangers from China. China is only our 11th largest steel supplier; we import the most steel from Canada, South Korea, Brazil and Mexico. Regardless of whether trading less with China is desirable, these tariffs will not really achieve this goal.
The identity of our largest steel trading partners, I think, also allays national security fears. If we feared some security scenario requiring significantly greater domestic production, we could pay American companies to mothball recently closed plants. We do not need to punish automakers daily to prepare for a contingency which may never arise.
Competition from foreign producers receiving government assistance provides, I think, the strongest argument for ever protecting American industries. Government assistance violates the rules of the market, raising economic and justice concerns. Economic efficiency requires that the firms producing the best different steel and aluminum products win out. Export subsidies encourage production by firms which are not the most efficient. Plant closings devastate families and communities. This pain can be justified as like recuperation from surgery if the closings improve economic efficiency. Pain which does not improve the economy is hard to justify.
Are steel producers losing because of unfair trade? The World Trade Organization allows remedies in response to documented unfair trade practices. As of June 2017, American steelmakers had 149 remedies in place, including 24 against China. We had 18 remedies against South Korea (second most after China), yet only eight, six, and zero against Brazil, Mexico, and Canada. Competition in steel seems reasonably fair.
The response of our trading partners provides a final variable here. Our trading partners may impose tariffs against American products in retaliation. No one knows if President Trump’s tariffs will spark a trade war, but wars almost always injure many innocent parties.
Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University.
School Shootings: An Alabama economics professor’s take
The recent tragedy at Florida’s Marjory Stoneman Douglas High has sadly raised this question again. The failure to prevent the loss of young lives reflects both an unpleasant reality and some problems of politics.
Preventing school shootings is very hard in a nation with millions of guns. Once someone decides to do evil, they can usually get guns and pick the time and place for their act. Law enforcement can only react, and mass shootings typically last just minutes. If deterrence, discouragement, and intervention (if possible) fail, protecting 100,000 schools is nearly impossible.
The impossibility of preventing shootings does not justify doing nothing. Economics emphasizes that we make choices on the margin. Can measures prevent, or reduce the harm from, school shootings without unacceptably abridging citizens’ gun rights?
The occasional failures of agencies administering gun laws provide one component of this difficulty. Convictions that should have prevented the perpetrator of the Sutherland Springs, Texas, church shooting from legally purchasing weapons were never entered into a national database. The FBI and local police did not act on threats made by Florida suspect Nikolas Cruz. And the sheriff’s deputy assigned to Stoneman High failed to engage the shooter.
Several elements of politics make this already challenging task even harder. One is short political attention spans, or what public choice economists call rational ignorance. Our actions have little impact on outcomes in a large democracy: one vote almost never decides a Federal election. So voting against our interests because of not paying attention to politics is almost costless.
Rational ignorance helps politicians appear to act decisively against societal evils like school shootings. If some politicians claim that banning bump stocks (which allow semi-automatic rifles to fire at higher rates) will prevent mass shootings, who could object?
Clever politicians know that easy solutions have little chance of working, and that voters will not hold them accountable for ineffective policy.
Defenders of gun rights seemingly fear that even the most innocuous restrictions will contain provisions somehow restricting gun rights. Such lack of trust may be understandable. Laws are difficult to repeal, as Republicans have discovered with the Affordable Care Act. This difficulty can encourage deceit and subterfuge; trick people into supporting a law they will eventually oppose and policy can be altered for years. In markets, deceit and subterfuge typically provide only temporary benefit. Suppose that a home security company offers an armed response against intruders, which turns out to be calling 911. Disappointed customers will cancel their contracts, and the company’s reputation could be harmed permanently.
One final relevant element of politics is what economist Bryan Caplan has labeled rational irrationality. Voters face few personal and direct consequences from inconsistent or incorrect beliefs, helping these beliefs persist.
What’s the rational irrationality on gun control? If government is for the people, citizens must have a right to reign in an overreaching government. And because a tyrant may not surrender power if citizens ask nicely, “reigning in” must mean armed resistance. But does gun ownership preserve freedom in the United States today, or is this just a libertarian fantasy? And even if an armed populace checked tyranny, would a waiting period necessarily undermine this check?
These are hard and troubling questions for libertarians like me. In politics, we can join the NRA and vow no compromise. In other contexts, gun owners might make tradeoffs. A libertarian gun owner with young children might decide that guns locked safely away can still prevent tyranny.
Unions and management are often as skeptical of each other’s motives and intentions as the two sides on gun control. And yet strikes are rare, because their cost provides an incentive to get past rhetoric and negotiate a mutually acceptable agreement. Politics features few personal costs and consequently lots of bluster, deceit, and fantasy. Should we be surprised then that we make little progress on really hard problems?
Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University.
Bitcoin and bubbles explained
Bitcoin has been on a wild ride, rocketing from $1,000 to nearly $20,000 last year. A recent slide to $7,300 brought claims that Bitcoin was a bubble. What exactly is a financial bubble, and does Bitcoin have a future?
Most commonly described as a cryptocurrency, Bitcoin joins together several innovations. It is first and foremost an electronic payment system, not unlike credit cards or mobile banking, using its own currency instead of dollars. Accounts and transactions are recorded on the Blockchain, contained on all the network computers worldwide. Instead of Visa or a bank keeping accounts, the Blockchain ledger is kept by everyone. Bitcoin owners use an electronic key to carry out transactions.
The Blockchain represents a major innovation itself, but that’s a topic for another day. There are now dozens of other cryptocurrencies. Ethereum and Litecoin appreciated by a factor of 100 in 2017.
What determines the value of Bitcoin? The market, meaning everyone willing to buy or sell Bitcoin. Why would anyone trade real money for electronic numbers?
One reason is for purchases, as mentioned. Bitcoin costs merchants less than the three percent credit cards charge and presents less risk of fraud as buyers cannot readily dispute charges for items they purchased. And cryptocurrencies provide millions of people access to global markets for the first time.
A second reason: Some people now use Bitcoin to hold wealth, like gold. For hundreds of years, gold has preserved wealth through wars, inflation, and financial crises. Should banks fail again like in the 1930s, many people believe gold will be safe. Increasingly people feel similarly about Bitcoin.
But gold is real, whereas Bitcoin is computer code. Couldn’t the operators create millions of Bitcoins with a few keystrokes, rendering those bought for thousands of dollars worthless? No, because the Blockchain governs the creation of new Bitcoin and caps the number at 21 million. Only a majority of users can modify the Blockchain, limiting the supply, as with gold.
A third reason to buy Bitcoin is to make a profit. The value of Bitcoin depends on how much people will pay for it. People will pay $10,000 Bitcoin if they think prices will hit $20,000, and $20,000 if it is going to $30,000! In 2017, many investors boarded the Bitcoin train.
When lots of investors buy an asset, the price will rise, making a boom a self-fulfilling prophecy. Prices can rise astronomically, but not forever; eventually, investors can’t afford even higher prices. Shattering the expectation of rising prices can set off an equally rapid price collapse. An asset price bubble is like a roller coaster.
Bubbles challenge economists like myself who think that markets work well. Why? We argue that market prices must guide businesses, investors, and consumers. If so, rising home prices before 2006 indicated a demand for more investment. But if rising prices were just a bubble, we built unneeded houses. Las Vegas’s newly built, never occupied houses and townhomes were wasted investments.
Frequent bubbles render market price signals as noisy as a third-grade class at recess. Some free market economists try to deny bubbles, but Nobel Prize-winning economist Vernon Smith, one of the most thoughtful market economists, believes differently. Professor Smith pioneered the use of experimental methods to test economic theories. He found that bubbles commonly occurred in financial assets experiments; indeed, he had to basically rig an experiment to prevent them. Pricing assets like stocks, gold, and now cryptocurrency involves projecting the future, and excessive optimism contributes to bubbles.
Do bubbles prevent markets from working? Market economies emerged about three hundred years ago, and over this period, standards of living have increased dramatically. Economic history clearly demonstrates that markets, even when occasionally beset by bubbles, produce prosperity. Markets limit the waste from bubbles because investors can sit out during a perceived bubble if they choose, or invest to profit when the bubble bursts.
Is Bitcoin a bubble? Perhaps, but cryptocurrencies offer significant potential. Bitcoin is creating value in the economy, and either it or some successor currency is likely to have a future.
Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University.
Should government be run like a business?
I recently wrote about some of the problems with civil asset forfeiture, under which our governments seize money or assets allegedly involved in criminal activity without securing a conviction. An Institute for Justice report detailing forfeiture abuses, “Policing for Profit,” suggests that there is an inconsistency between proper policing and profit. And yet politicians from Al Gore to Donald Trump have wanted to make government more business-like.
Is there a conflict between good government and profit?
The profit motive is enormously important in our economy. Profits are a residual, or what is left over after paying all the costs, and the owners get to keep any profit. Businesses typically must incur costs before selling and are never guaranteed a profit. Agriculture illustrates this: Farmers must buy or lease land and purchase seeds, fertilizer and tractors to grow a crop. If the crop is large enough and market prices high enough, revenue will exceed cost. The farmer keeps any residual, and bears the losses.
Business owners get to make decisions and keep the profit, so they should try to control costs. This marriage of decision-making authority and financial incentive drives the efficiency of business. The pursuit of profit does not mean keeping costs as low as possible, since building luxury cars and mansions can both be profitable. Car makers, though, should avoid waste in building both economy and luxury cars.
No one in government can earn profits. We lose a powerful incentive. But why would, say, policing for profit, lead to problems? For asset forfeiture, we probably only want criminals deprived of their ill-gotten gains. We are not authorizing forfeiture against innocent people (including ourselves). A profit motive might lead to the targeting of innocent people (the poor, minorities) unable to legally defend their assets.
Furthermore, we cannot easily tell when the police pursue forfeiture against an innocent person. The person who has $10,000 or more in cash seized from them might have just won a casino jackpot or sold a car for cash, or may be involved in the drug trade. The lack of clarity prevents us from holding the district attorney, mayor, or offending police officers accountable.
Consider some other potential instances where government could make profits. Illegally parked cars should sometimes be towed, but the danger should ideally be balanced against the owner’s cost and inconvenience. The pursuit of profit makes such balancing less likely. Speed traps and red-light cameras might be used to issue tickets for marginal violations or excessive fines. Private, for-profit prisons might cut spending on food and medical care, creating cruel and unusual conditions for inmates.
The lack of clarity is a common theme. Just how long was that car illegally parked? Did a prisoner given aspirin truly need surgery? We cannot tell when the lure of profit leads to excessive corner cutting.
Yet many business interactions also lack clarity. A delayed flight might be due to unexpected mechanical problems, or a lack of reasonable preparations. An unforeseen design flaw or intentional disregard of safety could both be responsible for auto accidents and safety recalls.
Why is profit-seeking by government a bigger problem? The answer, I think, is that our dealings with any business are voluntary, while our dealings with government are compelled. If I get sick after eating at a restaurant, I can choose never to eat there again. Voluntariness also enables competition, disciplining businesses in the pursuit of profit. Businesses can find shortchanging customers on quality and service very costly.
People cannot typically walk away from dealings with government, as is literally true for the person carrying cash stopped by law enforcement. Prisoners cannot boycott a private prison which they believe does not offer a humane level of care. The state officials administering a contract with a private prison are not “customers,” and may be more tolerant of poor conditions than if they were customers.
Does this mean we can never beneficially make government function more like a business? No, but we must proceed very cautiously. The profit motive is a great force for efficiency when constrained by choice and competition.
Has Amazon improved our lives? 3 types of Gov’t help make it hard to tell
Shopping with Amazon Prime has made my life better. But has Amazon improved the U.S. economy? Several forms of government help may account for Amazon’s success. Ensuring that success constitutes progress becomes challenging when government and business are entangled.
Online retailing has clearly benefitted residents of America’s small towns and rural areas. Our shopping options now rival those of urbanites, which historically is unprecedented. And yet three types of government help render an assessment of Amazon’s contribution to progress for the economy problematic.
First, customers long avoided paying sales taxes. Online retailers were exempted from collecting sales taxes in states where they lacked a physical presence. Sales taxes typically run between 8 and 10 percent and are the largest revenue source for state and local governments.
Amazon now collects sales tax for most states. But how many customers were lured online initially to avoid sales tax? Economists have measured the impact as Amazon started collecting sales taxes. One study estimated that their sales fell almost 10 percent and brick-and-mortar retailers’ sales increased in states where Amazon began collecting taxes in 2013.
U. S. Postal Service shipping rates have further helped Amazon. The help here is via a cross-subsidy that may be as much as $1.46 per package. Regulated businesses and government enterprises typically charge some customers a price above cost and use these “profits” to subsidize sales below cost. Economists believe that the Postal Service uses its first class mail monopoly to cross-subsidize other activities. The $1.46 per box figure relies on many assumptions and may be too large. Whatever the exact figure, packages likely get favorable rates.
Finally, Amazon has received economic development incentives from numerous governments, including sales and property tax exemptions, business tax credits, and government-paid employee training and road improvements. Data from the subsidy watchdog group Good Jobs First shows that Amazon received over $600 million in incentives over a decade for building large warehouses, and another $240 million since 2015 to build order fulfillment centers. Amazon is currently choosing a location for a second headquarters, or HQ2, with twenty finalist cities offering up incentives in pursuit of the projected 50,000 new jobs. Maryland has offered a $5 billion package and still trails New Jersey’s $7 billion offer.
Government assistance raises both fairness and economic concerns. Traditional retailers have struggled to meet the challenge of online retailing. While we might observe that competition is often demanding, the rigors are often bearable because everyone plays by the same rules. Brick-and-mortar retailers’ complaints of unfair advantages for online retailers due to sales tax avoidance have merit.
The economic concern involves success. Successful businesses in the market must provide value to customers. Amazon’s free two-day shipping on thousands of items for Prime members requires a sophisticated inventory and delivery system. Amazon’s warehouses, fulfillment centers, and delivery vans are part of that system. Amazon is now experimenting with drone delivery, and hopes to offer same day delivery in major cities.
Such efforts serve customers but are also costly. Only a market test reveals if Prime membership creates value for the economy: Will people pay enough to make Amazon willing to offer the membership? We learn that e-commerce constitutes progress for our economy when it succeeds in competition with brick-and-mortar stores. Let everyone try their best, and let customers decide.
And yet if one competitor has the government pay some of their costs, they can succeed and not create value. Government assistance severs the link between success in the market and economic progress. Economists can then try to guess. For instance, the government incentives pale in comparison with Amazon’s 2017 sales of nearly $180 billion. But modest help may make all the difference given retail’s razor-thin margins. The market is far more reliable than economists’ guesses.
America’s economy has changed radically over the decades. We benefit, however, from progress and not just change. We need our governments to stop helping Amazon and other businesses so that we know that success means progress.
Civil asset forfeiture: ‘We all probably deserve some blame’ for the disgraceful practice
Civil asset forfeiture involves the government taking assets allegedly used in or the proceeds of criminal activity. The practice has long angered libertarians and produced many injustices. A reform bill has been introduced in the state legislature this session.
First a little history. Civil asset forfeiture in the U.S. dates to the early 1800s, when our nation battled the Barbary pirates and privateers. Privateers were privately funded, equipped, and staffed ships commissioned by nations to raid enemy commercial shipping during conflict. Investors funded privateers in exchange for the captured bounty.
Property belonging to a pirate might be captured without the owner (technically the foreign nation for privateers) being apprehended. The government brought a civil case to seize the property, which the U.S. Supreme Court affirmed in an 1827 decision. This decision is notable because John Marshall was then Chief Justice. Justice Marshall took the Constitution’s strict limits on government seriously, having innovated judicial review to strike down unconstitutional government actions. The Marshall Court’s ruling suggests that forfeiture is consistent with even limited government.
The Federal and state governments revived and expanded civil forfeiture in the 1980s to prosecute the War on Drugs. Modern forfeiture has two notable features. First, the burden of proof is lower than the familiar guilt beyond a reasonable doubt criminal standard, and civil forfeiture does not require a conviction or even the filing of criminal charges. Second, laws passed in the 1980s allowed the Department of Justice and police departments to keep seized assets.
Not surprisingly, law enforcement dramatically expanded its use of civil forfeiture. And troubling stories of abuse soon began to emerge. In one notorious instance, police in Tenaha, Texas, stopped out-of-town motorists, and if they were carrying cash, threatened them with money laundering charges if they did not agree to forfeiture. At least 140 people were shaken down over a two-year span. Criminal charges were never filed against the motorists, who were disproportionately African-American.
A new report from the Alabama Appleseed and Southern Poverty Law Centers, “Forfeiting Your Rights,” offers details on civil forfeiture in Alabama. The researchers meticulously scoured court records from 2015, as reporting of civil asset forfeiture is not required. In 25 percent of cases, the accused faced no criminal charges. Half of the seizures involved less than $1,400, hardly the riches of drug kingpins. The state “won” half of the cases because the accused made no attempt to defend his or her property. Even if the accused could afford a lawyer, legal fees could easily exceed the amount at stake.
One might want to blame all this on greedy police departments and prosecutors. News stories hint at a different dynamic. A first seizure might have allowed the purchase of some valuable equipment which local government could not afford. Then seizures might have protected the police budget when local tax revenues fell. Pretty soon, local government would begin counting on the revenue, creating pressure for continued seizures, especially small seizures likely to go unchallenged.
We all probably deserve some blame. We do not like to pay taxes, yet still want the police to have the resources they need. Asset forfeiture allows this; all we have to do is tell ourselves that only criminals face forfeiture and ignore evidence to the contrary. The “Forfeiting Your Rights” report demonstrates the cost of funding police through asset seizures in Alabama.
We could alternatively rely on criminal forfeiture, which requires a criminal conviction. As the Marshall Court recognized in 1827, civil forfeiture is appropriate only when the accused cannot be prosecuted. That is not true in the vast majority of cases today. Proving criminals’ guilt beyond a reasonable doubt in a trial before a jury of one’s peers has proved crucial in making government serve the governed, not the rulers. We discard this wisdom at our own peril.
Nobody likes paying taxes. Proponents of limited government, however, should be willing to fund the tasks we ask of government. We should adequately fund law enforcement through taxes and end the disgrace of civil asset forfeiture.
The invisible economic cost that affects your life — do you know what it is?
Nineteenth Century poet Christina Rossetti asked, “Who has seen the wind?” Neither you nor I have, but we know that the wind can blow down trees and buildings. Transaction costs in economics are similarly invisible and probably impact our lives even more than the wind.
Transaction costs are the costs of making and carrying out deals and trades. They include transportation costs, the time required for shopping, the cost of writing contracts, and the potential for people to take advantage of other parties. The time needed to read and understand the fine print for everything we buy would be a transaction cost.
As economist Ronald Coase first understood, transaction costs explain the existence and size of businesses. They help answer questions like: Why do businesses contract for cleaning and lawn mowing? Why do rental car damage waivers cost so much? And, why are law firms organized as partnerships?
Lowering transaction costs increases prosperity. Lower transportation costs make global businesses possible, and telecommunications helps manage these enterprises. eBay and Amazon Marketplace allow used items to be sold for much more than garage sale prices. New ways to organize businesses, like the traditional corporation and the benefit corporation, also reduce transaction costs. Economic historian Douglas North attributed much of modern prosperity to transaction cost reductions enabled by the institutions of the market economy.
Still, many economists overlook transaction costs in spite of the work of Nobel Prize winners Coase, North, and Oliver Williamson. The core economic models generally ignore transaction costs, which are sometimes viewed as no more than friction. Frictionless pulleys and tables make physics problems much easier. The frictionless world of physics homework, though, still teaches students a lot about the real world.
In economics, transaction costs significantly affect how we interpret the world. How so? A couple of years ago, my flight back to Atlanta was delayed because a flight attendant fell prior to boarding, hit her head, and likely suffered a concussion. Fortunately, an off-duty flight attendant was on the next flight arriving from Atlanta; if he agreed, he could work our flight for overtime pay. Tension was high as we awaited his arrival.
Professor Coase in “The Problem of Social Cost,” one of the most important economics papers of the 20th Century, explained what we passengers should have done: take up a collection to offer the flight attendant a bonus. One passenger indeed asked a gate agent if we could each give $1 as an extra incentive. The agent responded that an extra $150 would certainly make her more likely to work overtime!
We did not take up a collection, and the flight attendant decided to work our flight for the overtime pay. Our failure to offer a payment could have produced inefficiency if the flight attendant was unwilling to work for just overtime but would have for a bonus. We would have valued getting on with our trips enough to make it worth happening, and yet have remained in Oklahoma City.
The cost of organizing a group of strangers in an airport to make a payment, however, may be quite high. The other passengers might have dismissed a solicitation by a fellow passenger, or presumed that the organizer would just pocket the money. Our value of traveling may not have been enough to cover the bonus and the cost of organizing, making it efficient that we stay in Oklahoma overnight.
My travel dilemma resembles the challenge of public policy: Is the market or government more efficient? We could try using voluntary contributions to pay for, say, national defense. The cost of organizing 320 million people to raise nearly a trillion dollars a year for defense seems impossibly high. Having government to tax us and spend on our behalf may be a better option.
Yet representative democracy is also imperfect, due in part to – transaction costs. Disagreements about the role of government often turn on whether transaction costs are higher in politics or in markets. Given that we cannot see transaction costs (or the wind), disagreement among economists about government policy seems unavoidable.
Are you aware this is where our taxes go?
Nobody likes paying taxes. Accepting inevitability can make paying less painful; Benjamin Franklin observed that only death and taxes were certain in life. Or perhaps Oliver Wendell Holmes’ observation that taxes are the price we pay for civilization might console us. But the handing of sales tax revenue back to retailers may rekindle anger over taxes.
Rebating revenue compensates retailers for the cost of serving as the tax collector and goes back to the 1930s, when states first imposed sales taxes. Collection costs were significant, especially before computerized cash registers. Not all states compensated retailers, and some allowed only a modest annual rebate.
Sales tax refunds have now become one of the incentives state and local governments use for economic development. Governments for years have offered tax exemptions, regulatory relief, and targeted spending to businesses relocating or expanding in their jurisdiction. Just last week, Toyota and Mazda announced they would build an assembly plant in Huntsville, while gun maker Kimber announced a plant in Troy. Incentives factored in both deals.
Other taxes get diverted to business interests. The city of Troy in 2017 considered a surcharge on movie tickets that would be refunded to theater operators; other cities already do this. Property tax revenues can be exclusively used to benefit a selected neighborhood through a tax increment financing district.
I do not wish to debate development incentives today. Rather, I wish to consider the subterfuge involved with tax diversions.
How much sales tax revenue gets diverted? The only systematic study appears to be a 2008 report by government business incentives watchdog Good Jobs First. “Skimming the Sales Tax” estimated diversion of $1 billion annually, with over $70 million of this total going to Wal-Mart. With the use of incentives increasing, the number is almost certainly bigger today.
Compensating for collection costs seems reasonable but debatable, since businesses do not get compensation for collecting payroll taxes. Refunds as incentives are more problematic, for two reasons.
First, deception undermines the legitimacy of taxes. Libertarians like to say that taxation is theft, and there is a resemblance. Theft involves armed people forcibly taking money or property from people. Ultimately taxes rely on tax evaders facing arrest or seizure of their property.
The consent of citizens distinguishes taxation from theft. We agree to pay sales (and other) taxes to provide government the resources to do what we ask. The sales tax funding of a new jail here in Pike County provides a perfect example. Of course our elected representatives make the decisions for us and representation is imperfect, but in principle we approve taxes. Do you approve of turning over sales tax revenues to retailers?
Second, using tax rebates as a stimulus encourages excessive use of incentives for businesses. There are reasons for and against offering inducements to businesses, and people will disagree about how these balance out. Democracy is about citizens deliberating, and decisions which reflect our judgments.
Obscuring part of the cost through tax rebates increases the difficulty for citizens in accurately assessing incentives’ net value. We easily see the benefit from a new retail store, but may fail to process the lost tax revenue from rebates. We consequently think that inducements offer better value than they do, and then provide them too often.
Confusion over tax diversion can make local governments appear ineffective. Suppose that a local government is funded by a 5 percent local sales tax, which we think should adequately fund its services. Yet if half of the revenue gets refunded, the local government might not have enough money to patch potholes. We hit a pothole and accuse government of wasting our money, instead of recognizing the pothole as a cost of development incentives.
Taxation is not theft as long as we decide how much we pay and what we pay for. Refunding sales taxes to retailers as an incentive may be good policy for state and local governments. But it should be policy only if we make a fully informed decision.
Lessons about happiness from lottery jackpots
Did you win the recent Mega Millions or Powerball $400 million jackpots? If not, perhaps you are lucky, since big jackpots often make people miserable. The “lottery curse” and related research findings suggest that perhaps we should rethink our economic priorities.
We all know what we would buy with some extra money, so a big jackpot presumably would be much better. Furthermore, the rich and famous look to be having lots of fun. So winning millions should be great, right?
And yet many lottery winners end up destitute, in prison, or dead. Although the murders are tragic, I am more interested in the personal or financial wounds lottery winners experience. Cases like Mr. Jack Whittaker, who won $315 million in a West Virginia lottery in 2002. Four years later, Mr. Whittaker was bankrupt, and his daughter and granddaughter died of drug overdoses. In an interview, Mr. Whittaker said that he wished he had thrown the winning ticket away.
Additional sad stories abound. Yet with lottery jackpots every week, there are thousands of winners. Dozens of sad stories do not demonstrate a pattern. Research on lottery winners reveals some interesting results.
For example, many lottery winners do not go on wild spending sprees. Winners most commonly purchase houses and cars, and give significant amounts to their children and churches. Half or more of winners keep working, although this depends on the winner’s job. Winners with low paying, low skilled jobs are more likely to quit, while professionals with rewarding jobs frequently keep working.
Surprisingly, however, lottery winners are not significantly happier than control groups. In happiness research, people answer a question of the form, “Overall, how happy are you in life?” on a numerical scale. Lottery riches do not raise these scores.
Cross-country happiness research additionally finds that the richest nations are not the happiest. Prosperity and happiness are correlated, but at a reasonably high level of wealth, more money does not increase happiness.
These findings suggest that perhaps economic growth should no longer be an important goal for our economy. To appreciate the current importance of growth, the lack of a year with three percent growth under President Obama has caused great concern. And the recent Republican tax reforms were sold as potentially spurring growth.
Deemphasizing growth could have numerous implications for policy. High marginal income taxes on top earners are currently viewed as reducing work effort and slowing growth. But if some people pursue raises at the expense of life balance and happiness, the high tax rate could increase happiness by making raises less rewarding.
The “lottery curse” and happiness research do not, I think, justify a rethinking of economic policy. Psychologists recognize that people adjust their baseline after improvements. We quickly take smart phones and flat screen TVs for granted. We often fixate on that next thing we want. Answers to happiness surveys likely reflect the frustrations without adequate contemplation of the values. And even if new products quickly get taken for granted, going back to old ways may be quite unpleasant.
Most of us recognize that money is just a means to an end, and that having more money does not automatically make us happier. Money cannot tell us what will make us happy. And we appreciate the numerous tradeoffs between money and happiness. High paying jobs often involve lots of time, travel, and stress, which can impact an entire family. Many people pass up a high salary for a job or a lifestyle of their choosing.
A free economy and society enables human happiness. Economic freedom allows us to make decisions about things that matter. It is the freedom to earn a living in whatever field we choose, to start a business, live where we want, and even make less money.
It is not a coincidence that the Declaration of Independence included the “pursuit of happiness” among our fundamental liberties. No one or thing can give us happiness, even Powerball. Perhaps lottery jackpots, though, can help us relearn a lesson America’s Founders knew long ago.
How Alabama ranks in economic freedom … and whether prosperity, fairness and happiness correlate
We frequently wish for a happy and prosperous New Year. As an economist, I know more about prosperity than happiness. Because economic freedom is closely related to prosperity, 2017 closed with some good news for Alabama.
The Economic Freedom of North America report, published by Canada’s Fraser Institute, measures the freedom of markets in U.S., Canadian, and Mexican states and provinces. Alabama’s state freedom score in this December’s report increased slightly, from 6.9 to 7.0. Scores range from zero to ten, with larger numbers representing more freedom. Alabama ranks 24th among the states, right at the national average score.
Economic freedom scores estimate how closely states or nations approximate the ideal of a free, unregulated market economy. The scores have allowed statistical testing of claims about markets, government, and prosperity. If free market economists are correct, then nations or states with more economic freedom should be more prosperous, controlling for other relevant factors.
Many studies have now confirmed this relationship. Consequently, Alabama’s increase in economic freedom could boost growth. But the small increase reflects deviations in measured freedom, not the policies which state freedom scores track. Furthermore, the increase occurred in 2015, since data availability results in a two year lag.
Prosperity, however, is not the only thing we care about, and is probably most important at the subsistence level. For thousands of years, human society persisted at this level, with everyone engaged in growing or gathering food for survival, and famine never far away. The developed nations long ago moved past the subsistence level. So now perhaps we should place greater emphasis on dignity, fairness, and happiness than a somewhat higher standard of living.
Prosperity allows individuals to be treated with more dignity. In tribes that followed the animals they hunted, the old or infirm might have to be turned out. This cruelty was born of economic necessity: tribes struggling to survive could not afford to be slowed down or feed people unable to contribute.
Economic freedom might boost prosperity, but what about fairness and happiness? Freedom also correlates with these values.
Fairness means different things to different people, but one factor is whether the least well-off benefit from prosperity. Purchasing power parity adjusted measures of income provide the best international comparison of standards of living by adjusting for what income buys and not just exchange rates.
The evidence is clear: the poorest are far better off in nations with more economic freedom. The Fraser Institute’s Economic Freedom of the World report sorts countries into quartiles based on their national economic freedom. The incomes of the bottom 10 percent of households are ten times higher in the freest nations than the bottom quartile, and more than double the incomes of the bottom ten percent in the second freest quartile of nations.
Inequality has become a contentious issue in the U.S. Whether the distribution of income or wealth should be equal is a challenging question, but the comparisons of the nations’ poorest households demonstrate that poverty in the U.S. and other developed nations is relative, not absolute. Perhaps income should be more equally distributed, but America’s poor enjoy a very decent standard of living from an international perspective.
Can happiness be measured? I am skeptical, but survey questions developed by psychologists seem to elicit happiness levels reasonably well. The United Nations has been measuring happiness worldwide since 2012. And the quartile of countries with the most economic freedom has significantly higher reported happiness than the other quartiles of nations.
A link between economic freedom and happiness makes sense. Freedom allows people to shape the course of their lives. Although freedom does not guarantee good choices, being forced to do something you do not like seriously reduces happiness.
So perhaps economists have something to say about happiness after all. Still, I do not plan to start giving out life advice. But I will wish everyone a happy and prosperous 2018!
Republicans’ antagonism toward higher education is understandable … and will have consequences
Republicans’ and Democrats’ attitudes toward higher education are seemingly diverging. Increasingly critical Republican attitudes will likely in time have policy consequences.
An annual Pew Center survey found in 2015 that 54 percent of Republicans thought that higher education’s impact on the country was positive, versus 37 percent negative. This year these numbers flipped to 58 negative – 36 positive, with 65 percent negative among conservative Republicans. Democrats this year were at 72 percent positive, 19 percent negative.
Republicans and Democrats further disagree on the value of college degrees. A recent Wall Street Journal poll found that Democrats agreed, 52 to 43 percent, that a four-year degree is worth the cost. By contrast, Republicans disagreed, 53 to 43 percent.
Republican attitudes may already be affecting policy. The U.S. House recently proposed taxing the largest university endowments, treating graduate student tuition waivers as taxable income, and denying tax deductions for athletics seat licenses. The final tax bill is more favorable to universities, but the proposals represent a warning shot.
Republicans’ antagonism toward my industry makes sense: They are mad at the preponderance of liberals among college professors, and at the liberal policy initiatives from universities. The domination of faculty positions by liberals and Democrats has been documented by numerous methods.
The causes and consequences of this imbalance, however, are less clear. It is unclear, for example, if conservatives are simply less likely to want to be professors or face discrimination because of their views. We know from testimonials that conservatives sometimes face verbal abuse, and yet many liberal professors respect (although they might challenge) conservative students’ views. Whether biased readings or attempts at indoctrination change students’ views is uncertain.
A liberal world view inevitably affects professors’ research. This is not an indictment, or excuse to ignore research you don’t agree with, but rather an observation on the research process. Social science research requires premises about the nature of human society. Here’s one concrete example. Economists typically judge economic performance against the satisfaction of market demand – do consumers get what they want? Yet other social scientists believe that continual advertising and our consumer culture manufacture these demands. Whether demand should be treated seriously affects our research.
Can anything be done about the liberal dominance of college faculties, if it is indeed a problem? Donors and alumni can always attempt to place conditions on gifts, which administrators may or may not accept. As a matter of policy, the University of Colorado brings a conservative professor to campus each year to organize lectures and other activities to provide balance. The Iowa legislature considered a bill mandating using voter registration in faculty hiring. If the sociology department, for instance, had too many registered Democrats, they could only hire registered Republicans. I doubt that this would accomplish much, as some liberal sociologists would surely register as Republicans to secure set-aside positions.
Instead of “affirmative action for conservatives,” perhaps we should embrace a range of intentionally ideological curricula. Economist John Merrifield argues that the primary goal of K-12 education reform should be a diverse menu of options for parents and students. I agree, but why not extend this diversity to programs or even universities embodying conservative and liberal values and approaches?
For example, scholars bitterly debate whether the core curriculum should cover the Great Books or “Western Canon.” Regardless of who is correct, many conservatives regard the Canon as fundamental. Some schools, mostly private colleges, still teach the Great Books.
Alabama’s fourteen public four-year universities already offer a wide range of programs; the University of Montevallo, for example, is a public liberal arts college. Why not have one university dedicated to a conservative educational experience, and another dedicated to a liberal curriculum? While neither might provide balance within their programs, they would increase the range of options available at in-state tuition rates, while truthful disclosure should prevent enrollment by unsuspecting students.
President Trump has attacked the liberal media bias and fake news. The recent House tax proposals, I think, provide warning that higher education may soon face similar attacks. Perhaps embracing and ensuring a range of ideological options will more effectively defuse the growing discontent.
What work will be like when artificial intelligence and robots replace many of our jobs
A recent study from Dell Technologies contends that 85 percent of the jobs that will be around in 2030 do not yet exist. My son should graduate from high school in 2030, so what type of job market will he face? A very different one than I graduated into in Detroit.
Will there be jobs in the future? Yes, because we live in a world of scarcity, and so we will always want more than we can produce. Our skills and talents will allow us to produce goods and services even in a world with robots and artificial intelligence. Work will hopefully not be as long or hard as in the past.
The Dell study suggests that by 2030 the gig economy, which is just emerging now, will be the norm. They foresee businesses having independent contractors bid on narrowly defined tasks, a model loosely based on the TV series, “Shipping Wars.”
Whether gigs replace jobs, I strongly doubt that industry will ever again provide employment for hundreds of thousands over decades. This is what the auto industry provided in Detroit. Multiple generations of a family worked for the auto makers, and young people could expect to join them after graduating high school. The jobs paid very well too.
Other industries provided similarly, including steel plants and tire companies in the Midwest, and coal mines in Appalachia. Elsewhere oil fields, oil refineries, textile mills, and furniture factories provided the lifeblood of communities. Agriculture sustained rural communities. Railroads, trucking and teaching provided jobs across the nation.
Nature has always required humans to work hard to survive. For thousands of years, almost everyone had to hunt, fish, or farm. Progress now allows one percent of workers to feed America. The Industrial Revolution harnessed steam power to launch manufacturing and created factory jobs for erstwhile farmers. Textile mills, railroads, and auto plants employed steadily for decades.
Consequently, most people have never had to look too hard to find work. Although an intrepid youth could always leave the farm, mine or factory and blaze new trails, the less intrepid still had plenty of jobs.
We are almost surely at the end of mass employment in stable job categories. Robots and artificial intelligence will automate routine physical and mental jobs, especially jobs needed in large numbers. Never again will so many people work on assembly lines for so long.
This will radically change the world for people who previously slid into readily available jobs. There will be more churn in employment, and few well-worn paths into jobs and careers. Constantly emerging and disappearing jobs will challenge high school guidance counselors.
Will people find or make new jobs for themselves? The early returns are not encouraging. The U.S. economy has experienced a sharp labor force participation decline – largely among working age men – over the past decade. And we have witnessed a horrendous epidemic of opiod abuse. Both have been worst in Appalachia and the Midwest. It appears that automation of coal and manufacturing jobs has produced despair, not excitement over unimaginable new opportunities.
What must change? A recent study argues that people need to learn how to harness their passions within the work world. This, I think, is totally on the mark. People are already turning their passions into remuneration, through craft production, providing special services, or jobs which align perfectly with their passions.
In the longer term, I am quite optimistic. Technology automates many jobs, but allows people to quickly learn – through blogs, podcasts, YouTube videos – about new ways to make a living. And business schools increasingly teach entrepreneurship. Creativity and innovation are the essence of entrepreneurship, and this mindset should help future job seekers devise new ways to make a living from their passions and interests.
Few people in human history have figured out a way to make a living. Not surprisingly, our schools have largely prepared young people for readily available jobs. I think we will adjust to a future where jobs are plentiful, but fleeting.
Dr. Daniel Sutter: Who actually pays the corporate income tax?
The Senate passed a tax bill last weekend. The details must be ironed out in conference negotiations with the House, but the plan includes a corporate income tax overhaul. This was a campaign promise of President Trump, and is long overdue.
The corporate income tax does not apply to all businesses, only those organized as corporations, which include most recognizable national businesses. Washington currently taxes corporate income above a modest threshold at 35 percent, the highest rate of any developed nation. The top rate will fall to 20 percent, in line with other countries. Our rate is high now in part because we are one of three developed nations not to have cut corporate taxes since 2000.
The U.S. also currently taxes profits earned by the international subsidiaries of American firms, as opposed to just domestic earnings. The 35 percent rate, less any taxes paid to another nation, essentially applies to all earnings everywhere. The Senate bill would end worldwide taxation.
The corporate income tax affects many business decisions. The tax has fueled corporate inversions, which is when an American company reincorporates in another nation. Burger King and Fruit of the Loom, for instance, have renounced their American corporate citizenship.
Inversions are for tax purposes and do not move all operations or even the headquarters overseas, but are still troubling.
American companies also keep significant earnings overseas, perhaps as much as $2.6 trillion, to avoid our taxes. The Senate bill allows repatriation of these profits with payment of a 14 percent tax. Lowering our top rate and ending worldwide taxation should end this problem.
Few companies, though, pay the full corporate tax. The Government Accountability Office found that around 70 percent of all corporations – and 20 percent of the most profitable – pay no corporate tax in a typical year, due to tax breaks. The corporate tax has raised about 10 percent of Federal tax revenue since the 1980s, versus 30 percent in the early 1950s. We do not really rely on the corporate income tax to fund Washington.
Modest revenue generation does not imply no harm to our economy. The tax particularly impacts companies unable to secure breaks from Congress. And when CEOs focus on avoiding corporate taxes, they are less likely to improve their products and services or lower costs. A focus on avoiding taxes slows economic growth.
Many Americans, I think, still like the idea of making rich corporations pay. Only the corporate tax does not ensure this. Taxes often get shifted, meaning that the people sending a check to the government may not really pay the taxes. Consider the example of gas taxes, which gas stations “pay.” Higher taxes generally increase the pump price, effectively passing on some of the tax to drivers. The potential for tax shifting makes the analysis of who really pays taxes relevant and challenging.
Appearances can be deceiving, and politicians count on this with corporate taxes. As Nobel Prize winning economist Joseph Stiglitz writes in a textbook, “Politicians like to give the impression to voters that someone else pays the corporate tax. But the reality is that households, workers, consumers, and investors pay the tax, just as they pay any other tax.”
Economists are unsure who really pays the corporate tax, partly because the answer depends on many factors. Candidates include a corporation’s customers, its workers, and investors across the economy. Even if the owners pay, which is likely at least in part, not all stockholders are rich. Many Americans own stocks through pension plans.
I personally believe that we should keep taxes and spending low. When we tax ourselves, I think that we should use taxes with clearly understood incidence. This makes the burden of government transparent, encouraging informed decisions by citizens.
The corporate income tax fares poorly in this regard. The tax today is like a con game, one riddled with exemptions for privileged firms. Reform is long overdue.
Dr. Daniel Sutter on limitations of economists’ deduction elimination argument in tax reform debate
The current debate in Congress over tax reform highlights a favorite argument of economists: that we should eliminate loopholes, like the deductions for mortgage interest or state and local taxes, and use the savings to lower tax rates. The argument illustrates both core economic principles and the limitations of a purely economic analysis.
Government needs resources to purchase military equipment, pay for medical care, or build new prisons. If the government spends $1 million, we citizens must pay $1 million in taxes.
But taxes also affect peoples’ choices, meaning that $1 million in revenue for the government will cost the economy more than $1 million. We can see this by considering the mortgage interest deduction. When you pay $1,000 on a mortgage, the interest paid reduces the income tax you owe. Factoring in the taxes avoided, the mortgage payment might only cost $800. Paying $1,000 in rent costs the full $1,000. This makes buying a home more attractive relative to renting, and so some people who would prefer to rent instead of buy at these prices will buy for the tax deduction.
Exemptions and deductions leave us with a smaller tax base and so tax rates must be higher to raise a given amount of revenue. The Federal income tax collected $1.5 trillion in 2015, when national income was about $15 trillion. A flat tax rate of 10 percent on all national income would raise this sum. If deductions excluded $5 trillion from the base, we would need a 15 percent flat rate to raise the same $1.5 trillion.
As the tax rate is pushed higher, potential deductions become more valuable. Consequently, more decisions are made for tax purposes and the full cost of taxes increases; the extra cost increases faster than the tax rate. Furthermore, because income taxes distort work choices, lower tax rates should also spur economic growth.
President Reagan’s 1986 tax reform closed many loopholes and reduced the top income tax rate from 50 percent to 28 percent. Because the lower rates were applied to a broader base and thanks to economic growth, income tax revenues actually increased.
The economics of taxation, however, arguably ignores politics. This omission is especially troubling if you believe that government is too big and out of control. George Will recently said of a current proposal to tax university endowments: “Once the understanding that until now has protected endowments is shredded, there will be no limiting principle to constrain governments … in their unsleeping search for revenues to expand their power. Public appetites are limitless, as is the political class’s desire to satisfy them.”
Nobel-prize winning economist James Buchanan demonstrated how a government trying to raise as much revenue as possible invalidates economists’ tax recommendations. Base broadening could become a clever way to increase our taxes. The deductions protecting our income get eliminated – permanently – in exchange for temporary tax cuts. Indeed, the top Federal income tax rate has increased to almost 40 percent after 1986.
This becomes even more relevant because we can partially constrain government. The public response to President Trump’s promise to drain the swamp reflects, I think, a widespread feeling that Washington is out of control. Yet elected officials clearly recognize the unpopularity of tax hikes. We do not really understand why some constraints, like the mortgage interest deduction, have constrained Congress.
A tax deduction would be causing extensive losses before I would recommend its elimination. The exemption for employer-provided health insurance is one example. This exemption ties health insurance to employment for most Americans, which both creates a need for Medicare and Medicaid and massively distorts spending.
We must pay taxes to fund government, and the full cost of taxes depends on how many decisions households and businesses make solely to reduce the taxes they pay. Consequently, economists generally recommend lowering tax rates and paying for this by eliminating deductions. But some of our deductions have successfully kept politicians from taxing more of our money, and should not be discarded lightly.
Dr. Sutter: Give thanks for American prosperity, rooted in property rights
This is the time to give thanks, and I hope that your family has much to be thankful for this year. Thanksgiving offers a time to reflect on the prosperity we enjoy. Most humans throughout history have lived at the subsistence level, usually only one poor harvest away from facing famine.
Just as with the Pilgrims, our prosperity today has a basis in property rights. The Pilgrims enjoyed bountiful harvests after moving from collective to private farms, while today secure property rights allow the market economy to flourish. We have an additional reason to be thankful this year, as America’s economic freedom increased in the most recent Economic Freedom of the World report.
Many economists starting with Adam Smith have recognized property rights and markets as creating the “Wealth of Nations.” Without a comprehensive measure of economic freedom, the link between markets and prosperity was difficult to establish. The Cold War offered the example of free and prosperous West Berlin next to poor communist East Berlin, but we would prefer more systematic evidence.
In the 1990s, Canada’s Fraser Institute, on the suggestion of Milton Friedman, started measuring how closely a nation approaches the ideal of free markets. Index scores go from 0, the least freedom, to 10, the most. Hong Kong remains the freest nation (at 8.97), while Venezuela is least free (at 2.92). Dozens of studies have now shown that more economic freedom produces prosperity, faster economic growth, lower inequality, longer life expectancy, and higher environmental quality.
Economic freedom in the U.S. rose from 7.81 to 7.94 in 2015, the latest year for which data are available, moving us from 13th freeist nation to the 11th. The Index rates nations on government spending, taxes, the legal system and property rights, monetary policy, international trade, and regulation. Our biggest improvement in 2015 was in monetary policy, due to lower inflation.
The Fraser Institute always seeks to improve the freedom index. A major new improvement debuting this year is an adjustment for the economic freedom of women.
The case for adjusting the Index for discrimination against women is overwhelming. All people have the right to apply their skills and talents in whatever peaceful endeavors they choose. As TCU economist Rosemarie Fike writes in this year’s report, “All human beings have a right to be free, to make their own decisions, and ends of their own life course.” Further, our economy will be more prosperous if the talents and abilities of everyone can be employed.
The challenge has been obtaining data on the economic status of women in enough countries and back to 1970, the first year for which we have economic freedom scores. The World Bank’s Women, Business, and the Law project has made this data available. The legal system and property rights component of the freedom score is adjusted using a Gender Disparity Index based on legal restrictions on women’s ability to own property or enter into contracts. Discrimination against women most affects economic freedom in Middle Eastern nations like Saudi Arabia, the United Arab Emirates, Kuwait, and Jordan.
The World Bank does not measure cultural restrictions on women’s achievements. Stereotypes and criticism can hold people back as surely as the law. The economic freedom index more broadly, however, focuses on formal, legal limits.
Two interesting gender disparity patterns emerge. First, the average level of legal discrimination against women has been falling over time. This is encouraging, although it would be great if equality were achievable today. Second, countries with more economic freedom, apart from the gender adjustment, discriminate less against women. I think that the driving force is recognition that ordinary people (as opposed to just rulers) matter. Once we recognize that people matter, the conclusion that everyone matters, including women and minorities, naturally follows.
Property rights helped make the first Thanksgiving possible back in the Plymouth colony. We should give thanks for living in a time and place where economic freedom has made prosperity possible. And this year in the U.S., we have a little more economic freedom to celebrate. So please pass the turkey!
Dr. Daniel Sutter on autism therapy mandates and the cost of kindness
Last spring Alabama’s legislature mandated coverage of autism therapy by health insurance plans. Such mandates provide benefits to people without spending our tax dollars, but threaten the viability of health insurance.
The main issue for autism coverage was Applied Behavioral Analysis (ABA), an intensive therapy program with demonstrated benefits for patients. Helping persons with disabilities lead fulfilling lives is a worthwhile goal.
We should celebrate a therapy helping persons with autism. But the therapy is expensive. Few families can afford the $15,000 (or more) a year cost out-of-pocket. Mandating insurance coverage spreads the cost across all patients.
We decided to help autistic children receive ABA regardless of their parents’ incomes. Although some business and insurance groups opposed the mandate, the legislature still decided to help. But similar issues are sure to arise in the years to come.
I think that state lawmakers should have provided this benefit out of tax dollars. Mandates contribute to the slow death of health insurance, which may lead to more extensive government involvement with health care in the future.
How this plays out
Insurance mandates allow lawmakers to provide benefits to people without spending tax dollars. Spending state funds, by contrast, would require either increasing taxes or cutting other spending. An insurance mandate spreads out the cost; coverage might only cost a few more dollars per policy per year. Furthermore, the link between the mandate and cost increases for policyholders will be indirect.
This process gets repeated over and over.
States have enacted around 2,000 mandates for 70 different services over the past thirty years, about 40 per state. In each case, the coverage likely represents a “good” cause and benefits some families, like with autism therapy.
The accumulation of mandates forces employers to reduce salaries or increase deductibles and co-pays. Many employees never use most of the mandated coverage. Eventually employers stop providing health insurance as a benefit, increasing the ranks of the uninsured and the constituency for further government intervention.
When we decide to help autistic children receive ABA, we are spending somebody’s money. Ultimately government money is our money. Taxes are how we should pay for things that we direct government to do.
Insurance mandates act like a tax, but the hidden element leads to poor decisions. Suppose that autism therapy will cost $30 million a year. If lawmakers raised taxes, citizens would see the full cost. The weak link between mandates and higher costs for policyholders makes mandates less visible; perhaps they have a perceived impact equal to $10 million in taxes. Suppose we decide that helping autistic children is worth $20 million per year. If we think that the cost is $10 million because of the mandates, this looks like a good deal.
But in reality the benefits are less than the cost.
A different way
Another option which might be even better is philanthropy to assist families unable to pay the full price. Charities, I think, do a much better job than government verifying need and controlling cost.
Insurance creates a third party payment problem: neither the patient nor provider pays the bills, and so neither worries about cost. We can always spend more on any service. For example, Board Certified Behavioral Analysts (most expensive), Board Certified Assistant Behavioral Analysts, or registered behavioral technicians (least expensive) can provide ABA. If we ignore the cost, making greater use of Board Certified Behavioral Analysts is always attractive. We could also extend the therapy and provide it to more children.
Mandates make insurance companies even less likely to contain costs since employers cannot drop mandated coverage due to expense. Government also seems unlikely to wisely control costs.
Americans believe strongly in the equality of opportunity. We are willing to help children to make this a reality, by paying for things like autism therapy.
When we choose to help, we should be willing to bear the cost.
Insurance mandates only appear to lower the cost, and contribute to the slow implosion of the health insurance market.
Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University.