Archive for October, 2011
Crony Capitalism
From the General Motors bailout to subsidies for Solyndra, crony capitalism is as serious a threat to liberty, free markets and civil society as ever. Cato Institute Senior Fellow Tom G. Palmer recently discussed The Morality of Capitalism (free pdf), the financial crisis and cronyism at the John Locke Foundation.
The book is quick and rewarding read.
Wham-O! There Go ‘Patent False Marking’ Suits
It’s fun to be on the winning side of a fight, even if someone else gets to land the knockout punch. Yesterday the U.S. Court of Appeals for the Federal Circuit dismissed as moot the case of FLFMC, LLC, v. Wham-O, in which I and Cato’s Center for Constitutional Studies had entered an amicus brief on the side of toymaker defendant Wham-O. The Western District of Pennsylvania federal court had agreed with our position that the qui tam (bounty-hunter) provision of the false marking statute was unconstitutional; the Federal Circuit heard argument on the issue, but before it could rule the U.S. Congress resolved the controversy by wisely acting, as part of its patent reform bill, to do away with the whole cottage legal industry of bounty-hunting litigation over false patent marking.
For those who came in late, federal law had long provided that anyone could sue a manufacturer that wrongly claims patent protection for its product, and collect a minor award ($500) so as to help defray the cost of bringing the action. In a 2009 case, a federal court shocked the business world by ruling that the $500 bounty should be construed as per mismarked item sold — meaning that a company that had mismarked a million paper cups or mascara applicators might owe hundreds of millions of dollars. Entrepreneurial lawyers rushed to file more than a thousand lawsuits, most of them aimed at companies that had gone on selling products with a marking after a given patent had expired. (More background here, here, and generally here at my Overlawyered site.) The constitutional issue arose because the overall setup, like the unlamented “independent counsel” scheme, delegated to private attorneys too much of the government’s distinctive law enforcement authority, an authority that in this case is essentially criminal rather than civil in nature, given the Powerball penalties to be applied with no showing of harm to either consumers or competitors.
It would have been nice to get the Federal Circuit on record agreeing with this line of reasoning, which had persuaded a number of lower courts. But what happened instead was in its own way equally satisfying. Congress specified in its patent bill last month that wholly uninjured bystanders do not have standing to pursue false marking cases, and that expired markings, without more, are not “false.” It also explicitly applied these principles to pending cases, generally seen as a choice that is within its discretion to make in cases in which, as here, no one is suing over an privately vested property right.
Around the country, many a manufacturer can now heave a sigh of relief at not having to sign its future over to lawyers. And Cato can move on to more fights over classical liberal principle in its very successful amicus program, about which you can learn more here.
P.S. Almost forgot to thank the real heroes of the adventure, the ones who wrote and edited the Wham-O brief: Paul Wolfson and Pamela Bookman at Wilmer Hale, and Ilya Shapiro and Michael Wilt at Cato.
Advice to a Free Libya on Turning the Resource Curse Into a Blessing
Former Libyan dictator Moammar Qaddafi is dead. The Transitional National Council can now get on with the challenges ahead, including setting up elections for a future government deemed legitimate by Libyans.
At the heart of Libya’s many problems is the so-called natural resource curse. Libya’s economy is based heavily on oil and gas. Yet the abundance of natural resources like oil or minerals has often slowed growth, over-expanded the state’s role in society and strengthened authoritarianism in places as diverse Russia and Iraq. In developing countries with weak institutions, such resources tend to be channeled, if not monopolized, through government, which then becomes corrupted, less responsive to the desires of citizens, and less interested in advancing policies and institutions that create wealth.
But not all resource-rich countries suffer from the curse. Chile overcame the resource curse while Venezuela has not. A study by the Fraser Institute used measures of economic freedom, including rule of law measures, to find what set successful countries apart from the rest. The difference was the level of economic freedom or institutional quality. On a scale of 0-10, where 10 represents better institutional quality, the paper found a resource curse threshold of about 6.9—the level above which countries broke the so-called curse. More economic freedom turns the curse into a blessing.
The graph below shows selected countries and regions with regard to the resource curse threshold.
For lack of reliable data, the Middle East and North Africa indicator does not include Libya and a number of countries in the region whose scores would surely bring the region’s average down notably. What is clear is that the region is below the point at which countries can take advantage of their riches to also make their people rich. Libya’s new leaders should pay heed to the central role of economic freedom in political and economic progress. After all, as our friends in the region remind us, the Arab spring began when Tunisian street vendor Muhammad Bouazizi set himself on fire after he was prevented from selling his goods, i.e., after being denied his economic freedom.
Cato Study: Malpractice Insurance Markets Promote Quality Care, Mandatory Damage Caps Could Undermine Same
Today, the Cato Institute releases a new study:
Could Mandatory Caps on Medical Malpractice Damages Harm Consumers?
Shirley Svorny is an adjunct scholar at the Cato Institute and professor of economics at California State University, Northridge.
Supporters of capping court awards for medical malpractice argue that caps will make health care more affordable. It may not be that simple. First, caps on awards may result in some patients not receiving adequate compensation for injuries they suffer as a result of physician negligence. Second, because caps limit physician liability, they can also mute incentives for physicians to reduce the risk of negligent injuries. Supporters of caps counter that this deterrent function of medical malpractice liability is not working anyway—that awards do not track actual damages, and medical malpractice insurance carriers do not translate the threat of liability into incentives that reward high-quality care or penalize errant physicians.
This paper reviews an existing body of work that shows that medical malpractice awards do track actual damages. Furthermore, this paper provides evidence that medical malpractice insurance carriers use various tools to reduce the risk of patient injury, including experience rating of physicians’ malpractice premiums. High-risk physicians face higher malpractice insurance premiums than their less-risky peers. In addition, carriers offer other incentives for physicians to reduce the risk of negligent care: they disseminate information to guide riskmanagement efforts, oversee high-risk practitioners, and monitor providers who offer new procedures where experience is not sufficient to assess risk. On rare occasions, carriers will even deny coverage, which cuts the physician off from an affiliation with most hospitals and health maintenance organizations, and precludes practice entirely in some states.
If the medical malpractice liability insurance industry does indeed protect consumers, then policies that reduce liability or shield physicians from oversight by carriers may harm consumers. In particular, caps on damages would reduce physicians’ and carriers’ incentives to keep track of and reduce practice risk. Laws that shield government- employed physicians from malpractice liability eliminate insurance company oversight of physicians working for government agencies. State-run insurance pools that insure risky practitioners at subsidized prices protect substandard physicians from the discipline that medical malpractice insurers otherwise would impose.
This study’s findings suggest that supporters of market-based health care reform should ditch their support of mandatory damage caps, and embrace better med mal reforms. It also suggests that government should abandon direct regulation of health care quality, such as through medical licensing.
State Legislators: Just Say No to Obamacare ‘Exchanges’
The American Legislative Exchange Council, a group of conservative state legislators, has approved a resolution encouraging all states to refuse to create a health insurance “exchange” and to end the Obamacare grants the federal government is sending to states for the purpose of creating Exchanges:
State-created PPACA exchanges put states in the position of ceding their resources and sovereignty to the service of the federal government, sacrificing their ability to flexibly serve their own citizens…
Twenty-six states are suing to have PPACA struck down partly due to the arguable unconstitutionality of the individual mandate, and briefs submitted by the federal government in Florida v. U.S. Department of Health and Human Services make clear that exchanges are a key part of the individual mandate…
[A]s states continue to plan exchanges in preparation for PPACA implementation…it [becomes] less likely the PPACA will ultimately be declared unconstitutional…
[T]hese exchanges would be completely artificial devices offering insurance products regulated in their essential characteristics by the federal government, making exchanges anything but free markets [that instead] will continue to be subject to the arbitrary whims of the federal bureaucracy…
There is no penalty for a state in allowing the federal government to implement an exchange…
NOW THEREFORE BE IT RESOLVED THAT…it is not in the best interest of [a] state for any state official to participate in planning or establishing health insurance exchanges as provided for in the federal Patient Protection and Affordable Care Act; and…Congress [should] defund planning grants to states for the establishment of PPACA health insurance exchanges by the states.
State officials who refuse to create Obamacare Exchanges and who send back related federal grants will now do so with the backing of both the Heritage Foundation and the nation’s largest organization of conservative state legislators.
As I explained in my testimony before the Missouri legislature, states should refuse to create any type of Exchange or similar government bureaucracy. But this is welcome progress.
Fannie Mae Loan Limits: The Empire Strikes Back
Perhaps it was naive of me to believe that the public good, the taxpayer, might actually win one over the special interests. As I’ve previously noted, on Oct 1st, the maximum loan size that Fannie Mae and Freddie Mac could purchase declined. But it seems the special interests in the real estate-industrial complex were not willing to let that go. Currently on the floor of the Senate is the annual appropriations bill for HUD. Pending to that bill is an amendment by Senator Menendez that would extend the existing loan limit until December 2013.
First lets start with some basic facts. The decline would impact at most 10 percent of the mortgage market, maybe around $140 billion in mortgages. Given that banks have about a trillion in cash on their balance sheets and would only need about $20 billion in capital to support this level of mortgage lending, it should be crystal clear that there is more than sufficient capacity in the banking industry to absorb this segment of the mortgage market.
While I am open to any suggestions to reduce the role of Fannie Mae and Freddie Mac, lowering the loan limits appears a reasonable start. The burden of that decline would fall on the rich and upper middle class, those most able to afford it. If we can’t start ending housing subsidies for those that are well-off, how can we ever expect to get the real estate-mortgage industry out of the pocket of the taxpayers? Haven’t we allowed the banks to pass enough of their risk onto the backs of the taxpayers?
Qaddafi’s Death Does Not Legitimize U.S. Intervention in Libya
The death of Muammar Qaddafi is good news in that it should enable the United States to immediately terminate all military operations in Libya, and to turn over responsibility for security in the country to the recognized leaders of the new government.
Qaddafi’s death does not validate the original decision to launch military operations without authorization from Congress. The Libyan operation did not advance a vital national security interest, a point that former secretary of defense Robert Gates stressed at the time. Qaddafi could have been brought down by the Libyan people, but the Obama administration’s decision to overthrow him may now implicate the United States in the behavior of the post-Qaddafi regime. That is unfair to the American people, and to the Libyan people who can and must be held responsible for fashioning a new political order.
As we ponder the welcome news of Qaddafi’s capture, we should also recall the lessons from Iraq, and as they have played out in Libya. The fall of Baghdad in April 2003 did not signal the end of the Iraq war; likewise, the capture of Tripoli by anti-Qaddafi forces in August 2011 didn’t end the fighting there. I worry, too, that just as the capture of Saddam Hussein in December 2003 didn’t end the Iraq War that pro-Qaddafi forces will continue to resist the new government there.
All Americans hope that that is not the case, that the fighting will cease immediately, and that the new leaders in Libya can quickly set about to reconcile the differences between the many Libyan factions, and U.S. military personnel can turn their attention to matters of vital concern to U.S. national security.
Finally, Some Scrutiny of Romney’s Culpability for ObamaCare
Just days after the other Republican presidential candidates finally started holding Mitt Romney’s feet to the fire for the ObamaCare 1.0 health care law he signed while governor of Massachusetts, the Wall Street Journal slams his health care record in not one but two opinion pieces.
See also this pertinent Cato video:
GAO Throws Water on Postal Bailout
The Government Accountability Office has weighed in on the controversy over whether the federal government “owes” the U.S. Postal Service approximately $50-$75 billion in alleged pension “overpayments” made by the USPS to the government’s retirement system. In short, the GAO concluded that the USPS is not owed the money.
The controversy is interesting because it pits government agencies against each other. The USPS, the USPS inspector general, and the Postal Regulatory Commission say money is owed. The Office of Personnel Management, which administers the government’s retirement system, and the OPM inspector general say that money isn’t owed. The GAO is the most neutral party so its findings should carry more weight with members of Congress. Let’s hope as a transfer from the federal government to the USPS would amount to a taxpayer bailout.
The GAO explains:
Any assets that are transferred from the nonpostal to the postal subaccount of CSRS [Civil Service Retirement System] would increase the federal government’s nonpostal CSRS unfunded liability, which must then be paid by the federal government through tax revenue, borrowing, or both. For example, adoption of the recommendation in the PRC report would result in an asset transfer of about $50 billion to $55 billion, which would then need to be repaid by the federal government and taxpayers.
The GAO also notes that a bailout wouldn’t solve the USPS’s long-term problems:
Any change in the USPS’s share of responsibility for CSRS benefits would provide some temporary relief from the pressures USPS faces because of declining volume, revenue, and inflexible costs, but would not by itself address USPS’s long-term financial outlook. Such a transfer of CSRS funds would not be sufficient to repay all of USPS’s debt and address current and future operating deficits related to USPS’s inability to cut costs quickly enough to match declining mail volume and revenue.
See this Cato essay for more on the USPS’s problems and why it should ultimately be privatized.
American Government Spending: 41% of GDP
My good friend Kathy Ruffing at CBPP takes me to task for testifying that government spending in the United States is 41 percent of GDP, which in my view is a very high and harmful level.
Kathy says that recent U.S. spending data is “exaggerated” because of the recession, and indeed, spending has soared not only here, but in most major countries because of the unfortunate popularity of Keynesian pump-priming theories. My point was that the American smaller-government advantage eroded both during the Bush growth years and during the Obama recession years, as seen in Figure 2 of my testimony.
Kathy noted that the OECD data I used are different than U.S. national income accounts data published by the Bureau of Economic Analysis. Well, that’s right. Every country has quirks in the way they do their national income data. The advantage of using OECD data is that the economists at the OECD adjust for these quirks and create spending data that is comparable across countries. If Kathy has more accurate international comparisons, I’d love to see them.
Finally, Kathy says that just because American government spending divided by GDP is about 40 percent, that “doesn’t mean that government controls about 40 percent of the U.S.economy.” I don’t agree. She means that government does not produce 40 percent of gross domestic product, which is true. The broader figure of 40 or 41 percent includes not just government production but government transfers. And transfers do entail government control over resources because both the taxing and spending activities involved in transfer programs distort private sector behavior. Thus, the government misallocates resources both when it “produces” useless solar power activities in its own labs and when it subsidizes failed private solar companies.
Anyway, thanks to Kathy for raising the important issue of the overall size of government because it is something that the policy community should focus more attention on. For data geeks, the OECD has all kinds of cross-country comparison data here. Government spending is Table 25.
Splitting Hairs on the Cadaver
With the introduction of major Senate bills to reauthorize the Elementary and Secondary Education Act – aka, No Child Left Behind – the race is on to dissect the legislation and declare a winner. To my mind, however, both significant efforts are improvements over NCLB, ending many of its more absurd components. And the debates the bills are fomenting — more or less compulsion on teacher evals, firm progress goals or looser, and so on – are ultimately splitting hairs on a cadaver. The last nearly fifty years have shown that any federal involvement is doomed to failure, and the only rational response to that is to end Washington’s meddling.
First, a very quick history of federal involvement: In 1965 Washington enacted the ESEA, with the goal of equalizing resources between rich and poor students. For about twenty years the feds mainly just spent money, but that seemed to produce no significant educational benefits. In roughly the mid-eighties people started to get fed up with that, and slowly pressure grew to hold schools and states “accountable” for their use of federal dough. The pinnacle of that was NCLB, which was festooned in rhetoric about “annual progress,” “proficiency,” and “leaving no child behind,” but mainly appeared to produce bureaucratic demands and name-only proficiency.
Bottom line: There’s little evidence that either spending money or “accountability” has worked. Why the futility? Because federal policy is ultimately driven by what makes politicians look best, which at first was spending dough to show they cared, then making unrealistic, inevitably gamed demands to show that they cared in kind of a tough-guy way. And whether any of these things eventually translated into academic success has meant nothing for the politicians who voted for them because few voters connect failure to individual pols.
The good news is that in light of the NCLB debacle there seems to be pretty bipartisan agreement that it’s time to reduce the federal footprint. Nonetheless, there are still lots of assertions grounded in neither strong logic nor principle being made about what Washington should be doing.
To illustrate this I’m going to pick on AEI’s Rick Hess a bit. Rick, by the way, is overall very clear-headed and skeptical about federal policies, more so than most edu-analysts. He just happens to have published a blog post recently that offers a few, relatively constrained, examples of what I’m talking about, providing a target of opportunity. I quote from the end of his piece, where after comparing and contrasting the major ESEA-reauthorization plans he offers three things he thinks the feds should do:
First, it’s appropriate and helpful for the feds to insist upon transparency and clean reporting of performance and spending data as a condition for federal dollars. This entails special attention to the information regarding vulnerable populations and communities, including bright line guidelines regarding regularity of reporting, what gets reported, and so forth.
Second, the feds can offer support for leaders who choose to step out front, without trying to dictate just what those policies should look like. Hence, better to award Title 2 funds to states pursuing ambitious plans for teacher evaluation than to lay out a particular system of evaluation or mandate its adoption. Providing competitive funds for those state and district leaders willing to tackle the tough task of upending century-old routines focuses those dollars in useful ways and makes it more possible for those leaders (and the union chiefs with whom they’re working) to present efforts to rethink tenure, pay, evaluation, and the rest to affected teachers as a potential win-win.
Third, basic research is a public good, and one that demands an active federal role. In principle, I’m supportive of Senator Bennet’s proposed amendment to create an ARPA-ED. That said, the focus must be on cultivating new tools and technologies that will fuel problem-solving. If it’s designed to focus on “reforms” and implementation-dependent strategies, then I’m going to jump off the bandwagon real quick.
So, point 1: transparency. It is in vogue these days to condemn NCLB, but quickly add that the law deserves huge credit for forcing districts and states to disaggregate testing results to reveal how various student subgroups are performing. Presumably, we knew nothing about these kids before NCLB.
Accepting for a moment that we really did know nothing – an assumption belied by decades of education civil rights actions before NCLB — did all this new attention do any good?
Cain 9-9-9: Huge Tax Haul from VAT
The Herman Cain campaign released details of the revenue expected to be collected from his 9-9-9 tax plan. Here are the estimates for 2010:
- $701 billion from the 9 percent personal income tax.
- $753 billion from the 9 percent retail sales tax.
- $863 billion from the 9 percent business VAT.
Yikes! By far the largest tax haul under the Cain plan would be from the business VAT—a tax which would be hidden from most voters.
By the way, the Cain business tax is not a tax on “corporate income,” as some media stories are identifying it. The new revenue data makes it clear that it is a tax on all value added by all businesses in the nation—corporate, partnership, and proprietorship.
Sorry Mr. Cain, I think your tax plan gives the federal government far too much room to grow in coming decades as entitlement cost pressures increase. I’d suggest dropping 9-9-9 and going with my 15-15-15 tax plan. After that, you could move on to proposing a detailed plan for spending cuts, as candidate Ron Paul has delivered.
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