Monday, January 13, 2020

Is the Grand Canyon Just a Ditch?

[Originally posted at economics21.org]
The myriad deregulatory actions of the Trump administration are generating considerable cost savings, savings that even conservative critics of regulatory overreach are underestimating. Like the Grand Canyon, the vast scale of these deregulatory efforts (and their results) is hard to fathom.
In just three years the administration has reversed hundreds of regulations, many of which drone on for hundreds of pages. And it’s done so without fear or favor. Many of the regulations reversed had been written and implemented at the behest of special interests, including large banks, trial lawyers, major health insurance companies, big tech companies, labor unions, and foreign drug manufacturers. 
Even officials within the administration underestimate what has been achieved because they tend to grasp only their specific part of the overall picture. Still, I’ve been surprised to see a group of conservatives confidently conclude that the Trump administration “has achieved little” on deregulation. This, sadly, is akin to a human being encountering the immensity of the Grand Canyon only to conclude that it is “just a ditch.”
The daily grind of repealing excessive regulation does not always grab headlines. I don’t blame commentators for being unaware of some, or even most, of the deregulation that has occurred. That is why the Council of Economic Advisers (CEA)—where, until recently, I served as chief economist—dedicated a great deal of manpower preparing a comprehensive and rigorous assessment of deregulation since 2017. That report, released in June, concluded that the past three years of deregulation is comparable to, and probably exceeds, any deregulatory episode in modern U.S. history. That includes the historic deregulations of airlines, trucking, railroads, and energy that were initiated during the Carter administration.
Argue with the CEA report, if you want. Or read David R. Henderson’s summary of the report. But don’t claim that the Grand Canyon is a just a ditch until you have a cursory look at the CEA’s map.
The CEA began with the surprisingly difficult task of identifying the deregulations that were reducing household and business costs the most. You would think that government numbers could be used to make this assessment, but they are notoriously inaccurate. A Competitive Enterprise Institute study of the 53,838 federal rules finalized between 2001 and 2014 found that only 246 of them (less than 1%) quantified regulatory costs. Lurking in the other 53,592 are some very costly regulations to be discovered by some other method.
Instead, the CEA selected the top 21 regulations based on measures of attention from the public, as expressed by actions in Congress or comments submitted to the regulatory agency during the regulatory process. The CEA then performed a rigorous economic analysis of the selected regulations to estimate their costs and benefits. The arithmetic motivating this procedure is that a sum of the hundreds of costs savings (the entire deregulatory portfolio) is made up largely by the elements of the sum of cost savings from the regulations with the largest costs.
The attention metric led to some interesting discoveries. Take the 2016 prohibition of “junk” health insurance plans (i.e., plans that families like and purchase, in large part because the plans are cheaper than the plans endorsed by bureaucrats) that the Trump administration reversed in 2018. Whereas the typical regulation receives zero comments, this one received thousands. At the same time, the regulators assessed no cost for the rule because the rule was (with a bit of circularity) designated to be “economically insignificant.” Such designation is not supposed to be used unless there is no material adverse effect on a sector of the economy. It is absurd to deny any material adverse effect from a prohibition of a product that two million people would be purchasing (as estimated by the nonpartisan Congressional Budget Office). The CEA estimated that the annual cost of this regulation was $13 billion, which is 130 times the monetary threshold for “economic significance.”
It’s hard to understand the intention of the regulators who designated the rule to be “economically insignificant.” Were they unaware that the rule was getting thousands of comments? Did they think that people bothered to comment on something insignificant? Was it a technical error? Or was it a deliberate attempt to jam through a regulation without revealing much about its costs? Regardless of which answer is correct, we have yet another reason to doubt the cost estimates provided by regulatory agencies.
A similar phenomenon is revealed in the chart below, reproduced from another CEA report on prescription drug prices. It shows something historically unusual happening to prescription drug prices, as measured by the Consumer Price Index calculated by the Bureau of Labor Statistics. Much of the change has to do with deregulation of the entry of generic drugs. The Food and Drug Administration had such a burdensome approval process for generic manufacturers that in some instances only one company was making a generic. A handful of lucky, or well connected, companies were able to sell a drug they did not invent at a price about as high as that charged when the inventor held the monopoly. President Trump’s FDA changed that.



Figure 1 CPI for Prescription Drugs, Jan 1970 to Sep 2019. Source: CEA October 2019.
A little arithmetic helps to assess orders of magnitude (CEA calculations are much more detailed). If prescription drug prices had continued to increase at 4% per year after 2016, that would put them 8% higher after two years. In fact, after deregulation, they fell about 2% over two years, and therefore were roughly 10% below the previous trend. With the average household spending about $2,700 annually on prescriptions—including the taxes they pay to support government programs purchasing prescriptions—that is an annual savings of $270 per household.
These examples, repealing the costly regulation of generic drugs and health insurance, are but two of many such efforts by the Trump administration since 2017. This paragraph, from the CEA report’s conclusion, gives a sense for the broad swath of deregulation:
Since 2017, consumers and small businesses have been able to live and work with more choice and less Federal government interference. They can purchase health insurance in groups or as individuals without paying for categories of coverage that they do not want or need. Small businesses can design compensation packages that meet the needs of their employees, enter into a genuine franchise relationship with a larger corporation, or seek confidential professional advice on the organization of their workplaces. Consumers have a variety of choices as to less expensive wireless and wired Internet access. Small banks are no longer treated as “too big to fail” (they never were) and subject to the costly regulatory scrutiny that goes with that designation.
All told, the CEA report estimates that over the next five to 10 years, the deregulatory efforts of the Trump administration will increase annual real incomes in the United States by $3,100 per household. 
That’s no ditch. 


Wednesday, November 6, 2019

"They desperately tried to prevent the truth..."

"They desperately tried to prevent the truth about the Famine from reaching the ears of the higher ups."
Raleigh, Helen. Confucius Never Said (p. 25).


Raleigh and others have described the problems in Mao's China and Stalin's USSR with communication up the political hierarchy.  But of course for Americans that history is hardly relevant.  In the USA, truth reaches the higher ups because we have democracy, a free press, and modern technology.  And we don't have famines.

But we do have an opioid epidemic.  Below we see how it took almost 20 years for the U.S. government to pay attention, as measured by word frequencies ("opioid" or "opioids") in the Federal Register.



Only in 2017 did the opioid epidemic get as much attention as climate change.

Alternatively, we could look at the Congressional record, where the words "opioid" or "opioids" appeared exactly zero times as recently as 2014 (a year in which "climate change" appeared over 300 times).


Monday, October 28, 2019

Trump's economists will be missed

When the day comes (year 2029?) that a "progressive" Democrat occupies the White House, we can look with nostalgia on the good old days 2017ff when White House economists literally followed the textbook.

Surely the economists working for that new President will be no smarter than UC Berkeley's Emmanuel Saez.  In his primary defense of Medicare for All, Mr. Saez now writes that payments to private health insurance are "just like taxes."

Saez understands that those brainwashed by old school economics will be thinking "health insurance premiums [cannot be] a tax [because] people have some choice."  Their mistake, he says, is that unlike "spending on food and clothes," premiums for employer HI are "mandatory." (The equivalence of premium and tax is also a central premise of their new book, especially Chapter 5).

Mr. Saez is showing his ignorance about American law, and that he is too lazy to take even a cursory look at the data.

Regarding the law, no one is required to purchase health insurance.  Yes the Affordable Care Act requires either purchasing or paying a penalty, but the PENALTY IS ZERO and furthermore there are many loopholes built into the law.

As an empirical matter, more than half of American workers are NOT having health insurance taken out of their paycheck.  Even the Saez article admits that cash wages are higher compared to having HI taken taking out.  So those workers who pay health insurance through their paycheck have chosen not to have one of those tens of millions of jobs with higher cash pay but no health benefit.

Let's put this another way: Would Candidate Warren promise that American workers can have the same alternatives to paying payroll and income taxes that they currently have for having HI premiums taken out of their paychecks?  I didn't think so.

[There are many other problems with Saez' assertion, e.g., how a payroll tax as compared with HI premiums would vary with employment, income, hours, etc., but the above is enough to show how he is wrong on his own terms.]

Friday, October 25, 2019

Tragic consequences of cheap "meth": more meth consumption and more meth overdoses

The illegal drug meth has been getting a lot cheaper, due to technological "progress" in manufacturing.  I have been telling people this for a while and that the tragic consequence will be more overdoses, but most people are under the (false) impression that drug overdose reflect only deaths of despair rather than a movement along a stable meth-demand curve as a result of increased supply.




Now the evidence of additional meth-involved overdoses is coming in.

See also the 2019 CEA report on the role of prices in drug overdoses.

A Wealth of Reading about Wealth Taxes

courtesy of Torksten Slok.  See also Chapter 18 of Chicago Price Theory.

Wealth Taxation and Wealth Accumulation: Theory and Evidence from Denmark

Behavioral Responses to Wealth Taxes: Evidence from Sweden

Make your own Tax plan

How would a progressive wealth tax work? Evidence from the economics literature

Global Wealth Inequality

Progressive wealth taxation

Estimating the economic impact of a wealth tax

The Top 1 Percent in International and Historical Perspective

Should the Rich Be Taxed More? The Fiscal Inequality Coefficient

Ending Special Tax Treatment for the Very Wealthy

Wealth taxation: An introduction to net worth taxes and how one might work in the United States

Use It Or Lose It: Efficiency Gains from Wealth Taxation

Pareto and Piketty: The Macroeconomics of Top Income and Wealth Inequality

U.S. Taxes are Progressive: Comment on “Progressive Wealth Taxation”

Distributional effects of public law

Wealth inequality in the United States since 1913: evidence from capitalized income tax data

The missing profits of Nations

Can Wealth Taxation Work in Developing Countries? Quasi-Experimental Evidence from Colombia

Tax Evasion and Inequality

Top Wealth in the United States: New Estimates and Implications for Taxing the Rich

The Other America: Inequality, Taxes, and the Very Rich

IMF: Tackling Tax Havens

Taxing Wealth and Capital Income

Rethinking capital and wealth taxation

The Elephant Curve of Global Inequality and Growth

Global inequality dynamics: new findings from wid.world

Exploding wealth inequality in the United States

Capital accumulation, private property and rising inequality

The evolution of wealth inequality over half a century: The role of taxes, transfers and technology

The Research Agenda Post-“Capital in the 21st Century”

Shifting tax burden to top income earners: what is the best way to reduce inequality?

Why Market Imperatives Invigorate Economic Inequality? Cobb-Douglas Utility Remodelled

Improving the Measure of the Distribution of Personal Income