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Posts Tagged ‘Government intervention’

In pure socialist systems, governments own and operate companies (the “means of production“). Such an approach also requires central planning and price controls.

But you don’t need socialism to have government-controlled companies. There are plenty of “state-owned enterprises” that exist in supposedly market-oriented nations.

Including in the United States. The federal government, for instance, owns and operates the air traffic control system and the postal service, to cite two big examples.

So what happens when politicians are de facto shareholders?

Today, thanks to some new research from the Asian Development Bank Institute, we’re going to look at the economic consequences of such firms.

Throughout history, and especially since the end of World War II, state-owned enterprises (SOEs) have been created in much of the world… Although private companies play a dominant role in market-based societies, enterprises with government ownership are still key players in the global economy, making their performance important for economic growth and competitiveness… Thus, scholars and policymakers around the world have been left with a task of reassessing the efficiency of state ownership. …In this paper, we aim to investigate whether certain ownership types consistently show superior economic performance relative to others when controlling for other economic factors. …we aim to fill in this gap and report further empirical evidence on the relative efficiency of public and private companies.

According to the study, state-run companies play a very large role in some countries.

The authors consider some of the theoretical reasons why state-run firms might not be very efficient, including “public choice.”

Agency theory…states that in a corporation, managers (or agents) may follow a personal agenda rather than work on behalf of, and for the interest of, the principals who own the corporation. Within a SOE, in particular, …the managers of SOEs are those who are appointed by the government…and seek firm-specific rents, such as high pay, fringe benefits, and low effort levels. Unlike their peers who operate in private-owned enterprises and may face the risk of replacement and dismissal due to their firms’ low performance…, the chief executive officers (CEOs) of SOEs are put under little financial constraint, and their compensation is not necessarily linked to firm performance… Public choice theory…also provides a cornerstone conceptual framework on which SOEs’ underperformance can be explained. This framework assumes that…special interests affect…governments’ own objectives.

They put together a dataset of more than 25,000 companies, both government and private, and then looked at key performance metrics.

Not surprisingly, government-run firms are not very efficient compared to their private counterparts.

…we find significant evidence that SOEs are outperformed by their POEs counterparts. The findings are consistent over both simple univariate comparisons and multivariate regressions. Government firms appear to be less profitable than POEs. They are also more dependent on debt and financial support from outside sources rather than equity. Hence, we provide support for the view that public firms are less efficient than private firms… The cross-sectional comparisons also show that government firms tend to be more labor intensive and have higher labor costs than non-government ones. …The differences in profitability appear to be economically important. The average return on assets for private firms is 8.010, almost twice that for SOEs. …SOEs have a higher liabilities-to-assets ratio, meaning that they tend to rely more on debt than shareholder funds. … state-owned companies…generate smaller sales volumes and have a higher cost per one employee. In other words, firms owned by private sectors are more labor efficient than government ones. …our findings suggest that privatization could be considered as a driver for firm efficiency.

For those that like perusing quantitative results, here are the results of their statistical regressions.

I’ve highlighted the key difference.

As already noted, government-run firms accumulate more debt.

This is presumably because investors assume that government-run companies won’t default.

Not because they don’t lose money, but rather because the political pressures that led to their creation also will prevent their demise.

SOEs can enjoy a “soft” budget constraint since they are backed by the government for their funding… They have the advantage of borrowing funds at a lower rate rather than accessing the equity market to raise capital… Thus, the discipline that capital markets impose on state-held firms and the threat of financial distress for them is less important than their private counterparts. …it is worth noting that such “soft” budget constraints, to a certain extent, could also be a source of inefficiency in government firms.

In other words, the growth-enhancing process of “creative destruction” is blocked when governments are in charge of companies.

For what it’s worth, this is a big problem in nations such as China.

Though we also saw a version of this in the United States, with the big bailouts of Fannie Mae and Freddie Mac, both of which are government-sponsored enterprises (private ownership, but created by government and controlled by government).

And there are many other examples of bad results when the federal government has intervened in the business world.

The bottom line is that government should not be owning, operating, controlling, or directing private companies. These forms of intervention inevitably produce inefficiency, subsidies, cronyism, corruption, and waste.

And it means that people like you and me wind up with less income and lower living standards because politicians are misallocating labor and capital.

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I’m a big fan of Marco Rubio. The Florida Senator has been very good on some big issues and on some small issues. And he’s willing to fight important philosophical battles.

No politician is perfect (for instance, Rubio defends sugar subsidies), so I’ve always judged them by whether – on net – they’re on the side of more freedom or more statism.

Which is the ideal framework for today’s column.

Earlier this month, Rubio wrote a column for National Review asserting it is time for “common-good capitalism.”

Pope Leo XIII wrote that the ultimate goal for any society should be to “make men better” by providing people the opportunity to attain the dignity that comes from hard work, ownership, and raising a family. …What makes this society possible is the rights of both workers and businesses, but also their obligations to each other. …In the economy Pope Leo described, workers and businesses are not competitors for their share of limited resources, but partners in an effort that strengthens the entire nation. …This…doesn’t describe the economy we actually have today. Large corporations have become vehicles for shareholders and banks to assert claims to cash flows, rather than engines of productive innovation. Over the past 40 years, the financial sector’s share of corporate profits increased from about 10 to nearly 30 percent. The share of profits sent to shareholders increased by 300 percent. This occurred while investment of those profits back into the companies’ workers — and future — dropped 20 percent. …This is what it looks like when, as Pope Francis warned, “finance overwhelms the real economy.” …Diagnosing the problem is something we should be able to achieve… Ultimately, deciding what the government should do about it must be the core question of our politics. …What we need to do is restore common-good capitalism. …our nation does not exist to serve the interests of the market; the market exists to serve our nation.

Some of this rhetoric rubs me the wrong way (and citing an economic illiterate like Pope Francis is appalling), but what really matters is whether Rubio is proposing more power for government or less power for government.

That’s hard to say because he doesn’t offer much in terms of policy.

Though I’m not overly impressed by the handful of ideas that were mentioned.

I don’t pretend to know anything about rare-earth minerals, but it’s laughable to think the Small Business Administration is a wellspring of innovation, and there’s plenty of evidence that paid parental leave is bad policy (child tax credits aren’t bad, but there are other tax policies that are far better for families).

On the other hand, Rubio also has been making the case for “full expensing,” which is a very good policy.

Since we don’t have any additional details, I don’t know whether his new agenda is a net plus or a net negative.

Kevin Williamson of National Review, by contrast, is definitely not a fan of Rubio’s approach. Here’s some of what he wrote last week.

Senator Rubio…joins the ranks of those who propose to reinvent capitalism — “common-good capitalism,” he calls it. …Senator Rubio, working from remarks originally delivered in a speech at Catholic University, references a series of popes — Leo XIII, mostly, but also Benedict and Francis — to describe (whether the senator understands this or not) the familiar moral basis of fascist economic thinking… I write this as a fellow Catholic: God defend us from these backward, primitive-minded Catholic social reformers. …power is what is at issue. Men such as Senator Rubio desire for themselves the power to overrule markets — to limit trade and property rights, enterprise and exchange — in the service of what Senator Rubio describes as the “common good.” The problems with that are…Senator Rubio does not know what the common good is and has no way of knowing. …What we need from men in government is not the quasi-metaphysical project of reinventing capitalism in the name of the “common good.” …This is not a brief for anarchism. …We need stability and predictability from a government that secures our liberty and our property in the least obtrusive way that can be managed.

And he followed up two days later with another critical column, even equating Rubio’s agenda to Elizabeth Warren’s loony proposal.

From Senator Marco Rubio and his “common-good capitalism” to Senator Elizabeth Warren and her “accountable capitalism,” politicians right and left who want politicians to have more power over private economic decisions assume a dilemma in which something called “capitalism” must be balanced against or made subordinate to something called the “common good.” This is the great forgetful stupidity of our time. …Capitalism, meaning security in one’s own property and in the right to work and to trade, is the common good… What is contemplated by Senator Rubio and Senator Warren — along with a few batty adherents of the primitive nonidea known in Catholic circles as “integralism” and everywhere else more forthrightly as “totalitarianism” — is to invert the purpose of the U.S. government. …We’re supposed to give up our property rights so that these two and their ilk can use corporate welfare to fortify their own political interests? …The “stakeholder” thesis put forward by Rubio and Warren would strip shareholders of control of their own property and use that property in the service of interests of other parties, who are not its rightful owners. …the great prosperity currently enjoyed by North Americans and Western Europeans — and, increasingly, by the rest of the world — is a product…of capitalism… It wasn’t magic. It wasn’t the cleverness of Senator Rubio or Senator Warren. It wasn’t the big ideas of Pope Francis, to the modest extent that he has any economic ideas worth identifying as such.

Oren Cass argues that Williamson is both unfair and wrong about Rubio.

Williamson believes that Rubio wants to “be . . . the bandit, taking control of other people’s property”; “strip shareholders of control of their own property,” which “is robbery”; “redefine away the property rights of millions of Americans”; “limit . . . property rights”; and “run Apple or Facebook or Ford.” …I’ve read the Rubio speech carefully and can find none of this. …Rubio’s project is to explore the vast gray expanse between the white of liberty and the black of property theft. …This is the terrain on which many of American history’s great public deliberations have unfolded, yielding policies from Hamilton’s Report on Manufactures to the “internal improvements” of the early 1800s, the tariff debates between McKinley and Bryan, Teddy Roosevelt’s trust-busting, Franklin Roosevelt’s New Deal, Kennedy’s space race, and Reagan’s import quotas. Property theft all of it, at gunpoint no less, if I understand Williamson correctly. …Someone will have to make a value judgment as to what “goods” are in fact “good” and thus worthy of providing publicly.

Cass is right that there’s a lot of space between pure capitalism and awful statism. I’ve made the same point.

But it does worry me that he favorably cites a bunch of historical policy mistakes, such as protectionism, antitrust laws, and the New Deal.

Jonah Goldberg makes the should-be-obvious point that the United States is hardly a laissez-faire paradise.

For as long as I can remember, people on the left have complained about “unfettered capitalism.” …Senator Bernie Sanders said earlier this year that “we have to talk about democratic socialism as an alternative to unfettered capitalism.” …Recently, the concern with capitalism’s unfetteredness has become bipartisan. Senators Josh Hawley and Marco Rubio have taken up the cause in a series of speeches and policy proposals. Conservative intellectuals such as Patrick Deneen and Yoram Hazony have taken dead aim at unrestrained capitalism. J. D. Vance, the author of Hillbilly Elegy, and Tucker Carlson of Fox News have suggested that economic policy is run by . . . libertarians. My response to this dismaying development is: What on earth are these people talking about? …If you think there are no restraints on the market or on economic activity, why on earth do we have the Department of Labor, HHS, HUD, FDA, EPA, OSHA, or IRS? The United States has one of the most progressive tax systems in the world (i.e., the share of taxes paid by the rich versus everyone else). If you take into account all social-welfare spending, we spend more on entitlements than plenty of rich countries. Now, if you think we don’t spend, regulate, or tax enough, fine. Make your case. If you think we should spend and tax differently, I’m right there with you. But the notion that the United States is a libertarian fantasyland is itself a fantasy.

Amen.

And this brings me to my modest contribution to this discussion.

I’ve already admitted that Rubio hasn’t provided enough details to assess whether he wants more liberty or more statism.

That being said, I’m skeptical of “common-good capitalism” in the same way I’m suspicious about “nationalist conservatism” and “reform conservatism” (and we know for a fact that “kinder-and-gentler conservatism” and “compassionate conservatism” meant more statism).

So here’s my challenge to Rubio and Cass (as well as everyone else who proposes an alternative to Reagan-style small-government conservatism). Please specifically identify how much government you want. Yes, there is a “vast gray expanse” between pure laissez-faire and pure statism, as Cass noted. But he didn’t say where in that expanse he wants America to be.

To help people respond to this challenge, here’s a chart, based on the data from Economic Freedom of the World. In that “vast gray expanse” between pure capitalism and pure statism, should policy makers try to shift America in the direction of Hong Kong? Or in the direction of Sweden, or even Greece?

The bottom line is that we need to climb the scale (i.e., have more overall economic liberty) if we want more prosperity.

That’s what will help facilitate all the things, such as good jobs and strong communities, that Senator Rubio wants for America.

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As part of National Education Week, I’ve looked at the deterioration of K-12 government schools and also explained why a market-based choice system would be a better alternative.

The good news is that we have a choice system for higher education. Students can choose from thousands of colleges and universities.

The bad news is that federal subsidies are making that system increasingly expensive and bureaucratic.

That’s today’s topic.

The underlying problem is “third-party payer,” which is a wonky term to describe what happens when students are buying education with money from somebody else. When this happens, they tend to not care about the price, which then makes it possible for colleges and universities to increase tuition so they become the real beneficiaries of the subsidies.

So nobody should be surprised that college costs are skyrocketing upwards, both in absolute terms and relative terms.

It’s a bubble, but one that probably won’t pop because of the ongoing stream of subsidies.

Jon Miltimore has a very good summary of the perverse incentives created by government.

Federal loans have made tuition far more expensive. Universities get paid up front—so whether students graduate, drop out, or default on the loan doesn’t matter. Departing students are easily replaced. Confident that students have access to cheap money (which can be expensive in the long run), colleges have no incentive to control or cut back the prices of housing, tuition, fees, and meals. …The best solution is to get the federal government out of the loan business altogether. If universities themselves offered loans, incentives would push them toward controlling costs and maximizing student success after graduation. Another option is income share agreements, which allow potential employers or independent organizations to pay tuition in exchange for a percentage of the students’ future earnings. …When markets seem to falter—recent, painful examples include the student loan bubble and housing crisis—the culprit is often government intervening in a way that warps incentives.

In a study for the Mercatus Center, Veronique de Rugy and Jack Salmon compile numbers and analyze studies.

The evidence broadly suggests that institutions of higher education are capturing need-based federal aid and responding to increased federal aid generosity by reducing institutional aid. …federal and state student aid funding expanding significantly over time, from just under $3 billion in 1970 to just under $160 billion in 2017. …Increased eligibility over time has led to a large and growing proportion of college students who receive federal financial aid. …there is a growing strand of economic literature examining the relationship between federal aid and tuition prices. …A study by Bradley Curs and Luciana Dar…finds that…institutions actually raise tuition levels and reduce their institutional aid when the state increases need-based awards. …A study by Stephanie Cellini and Claudia Goldin…finds that for comparable full-time nondegree programs in the same field over 2005–2009, institutions that are eligible for federal aid raised tuition by about 78 percent more than institutions that are ineligible. …Grey Gordon and Aaron Hedlund…develop a quantitative model for higher education to test explanations for the steep rise in college tuition between 1987 and 2010. …These results reveal that increased federal aid is responsible for more than doubling the cost of tuition over a 23-year period.

Here’s a chart from the study showing the explosion of federal subsidies.

By the way, Paul Krugman actually thinks taxpayers have been “starving” higher education.

Let’s get back to exploring the analysis of more sensible economists. Professor Antony Davies and James Harrigan make two key points in their FEE column.

First, subsidies are producing consumers who don’t make sensible education purchases.

…total student debt in the United States passed the $1.5 trillion mark. …the total has been growing at around $80 billion per year. …Around 11 percent of student debt is either delinquent or in default, which is more than four times the delinquency rates for credit cards and residential mortgages. …the problem with making college “free…” that a student must repay a college loan gives him tremendous incentive to at least consider what jobs he could obtain with the college education he must pay for after graduation. A student who is unencumbered by the need to repay a college loan faces little cost when choosing to major in something with little to no future value. …It’s well worth taking out tens of thousands of dollars in loans to pay for a degree that increases a student’s expected lifetime earnings by millions of dollars. But taking out tens of thousands in loans to pay for a degree that increases a student’s expected lifetime earnings by the same tens of thousands or less is, financially, a terrible investment.

Here’s a chart from their article, which looks at the value of various majors.

Second, the problems are caused by bad government policy.

We are in the midst of a college loan bubble for almost all of the same reasons that, a decade ago, we found ourselves in the midst of a housing loan bubble. …In both bubbles, the government interfered in markets in two critical ways. First, the government stepped in as a lender. Second, it shielded private lenders from the consequences of making bad loans. …Making college “free” will simply double-down on the very problem we already face. With “free” college, not only will colleges not have to care whether students can repay their loans, but the students themselves will also not have to care. Meanwhile, taxpayers will be on the hook for the numerous imprudent decisions by both colleges and students. It will bring about the worst of all possible worlds.

Victor Davis Hanson of the Hoover Institution used to be a Classics Professor at California State University. So he’s well positioned to provide a then-now comparison.

Here’s what he experienced in his early years.

Overwhelmingly liberal and often hippish in appearance, American faculty of the early 1970s still only rarely indoctrinated students or bullied them to mimic their own progressivism. Rather, in both the humanities and sciences, students were taught the inductive method of evaluating evidence… As an undergraduate and graduate student at hotbeds of prior 1960s protests at UC Santa Cruz and Stanford, I don’t think I had a single conservative professor. Yet there were few faculty members, in Western Civilization, history, classics, or mandatory general education science and math classes, who either sought to indoctrinate us with their liberal world view or punished us for remaining conservative. …Administrators in the 1960s and 1970s were relatively few. Most faculty saw administration as a temporary if necessary evil that took precious time away from teaching and research and so were admired for putting up with it. …Professors taught large loads—four or five classes a semester for California State University faculty. …The result was that both college tuition and room and board stayed relatively inexpensive.

And here’s what it’s become.

What went wrong? …Politics increasingly infected courses as competence eroded—logical for faculty and students since the former required far less of the latter. Across the curriculum, race, class, and gender studies found their way into art, music, literature, philosophy and history classes. Deduction now replaced the old empiricism. Grades inflated… Universities emulated the ethos of loan sharks and shake-down businesses. The con was as simple as it was insidiously brilliant. Academic lobbyists pressed the government for billions in guaranteed student loans… The federal government-backed student loans. That guarantee greenlighted cash-flush universities to pay inter alia for diversity czars, assistant provosts of “inclusion,” and armies of woke aides and facilitators, to reduce teaching loads, and to open more race/class/gender “centers” on campus—by jacking up college costs higher than the rate of inflation. Student debt soared. …A new generation owes $1.5 trillion in student debt… One’s 20s are now redefined as the lost decade, as marriage, child-rearing, and home buying are put off, to the extent they still occur, into one’s 30s. …The result was reduced teaching, a bonanza of release time, administrative bloat, Club Med dorms, gyms, and student unions, and epidemics of highly paid but non-teaching careerist advisors, and counselors.

So what’s his solution?

Universities should be held responsible for repaying a large percentage of the loans they issued and yet in advance knew well could not and would not be repaid. The government should get out of the campus loan insurance business.

Amen.

As I said at the end of this recent TV interview, colleges and universities need to have some skin in the game.

Daniel Kowalski explains for FEE that government policy is causing ever-higher costs.

Student loans did not exist in their present form until the federal government passed the Higher Education Act of 1965, which had taxpayers guaranteeing loans made by private lenders to students. While the program might have had good intentions, it has had unforeseen harmful consequences. …Secured financing of student loans resulted in a surge of students applying for college. This increase in demand was, in turn, met with an increase in price because university administrators would charge more if people were willing to pay it… According to Forbes, the average price of tuition has increased eight times faster than wages since the 1980s. …The government’s backing of student loans has caused the price of higher education to artificially rise…the current system of student loan financing needs to be reformed. Schools should not be given a blank check, and the government-guaranteed loans should only cover a partial amount of tuition. Schools should also be responsible for directly lending a portion of student loans so that it’s in their financial interest to make sure graduates enter the job market with the skills and requirements needed to get a well-paying job. If a student fails to pay back their loan, then the college or university should also share in the taxpayer’s loss.

All this government-fueled debt has real consequences. Three economists from the Federal Reserve found it hinders home ownership.

To estimate the effect of the increased student loan debt on homeownership, we tracked student loan and mortgage borrowing for individuals who were between 24 and 32 years old in 2005. Using these data, we constructed a model to estimate the impact of increased student loan borrowing on the likelihood of students becoming homeowners during this period of their lives. We found that a $1,000 increase in student loan debt (accumulated during the prime college-going years and measured in 2014 dollars) causes a 1 to 2 percentage point drop in the homeownership rate for student loan borrowers during their late 20s and early 30s. …According to our calculations, the increase in student loan debt between 2005 and 2014 reduced the homeownership rate among young adults by 2 percentage points. The homeownership rate for this group fell 9 percentage points over this period (figure 2), implying that a little over 20 percent of the overall decline in homeownership among the young can be attributed to the rise in student loan debt.

For those interested, here are some of their empirical findings.

By the way, I discussed the negative interaction of student debt and housing in the second half of this TV interview.

Professor Richard Vedder explains for the Wall Street Journal that this subsidized system has resulted in an environment in which neither students nor faculty work very hard.

One reason college is so costly and so little real learning occurs is that collegiate resources are vastly underused. Students don’t study much, professors teach little, few people read most of the obscure papers the professors write, and even the buildings are empty most of the time. …Surveys of student work habits find that the average amount of time spent in class and otherwise studying is about 27 hours a week. The typical student takes classes only 32 weeks a year, so he spends fewer than 900 hours annually on academics—less time than a typical eighth-grader… As economists Philip Babcock and Mindy Marks have demonstrated, students in the middle of the 20th century spent nearly 50% more time—around 40 hours weekly—studying. They now lack incentives to work very hard, since the average grade today—a B or B-plus—is much higher than in 1960… Sociologists Richard Arum and Josipa Roksa have demonstrated, using the Collegiate Learning Assessment, that the typical college senior has only marginally better critical reasoning and writing skills than a freshman. Federal Adult Literacy Survey data, admittedly somewhat outdated, shows declining literacy among college grads in the late 20th and early 21st centuries. …the typical professor is in class around one-third fewer hours than his 1965 counterpart. …The litany of underused resources goes on. In 1970 at a typical university there were perhaps two professors for each administrator. Today, there are usually more nonteaching administrators than professors.

Unfortunately, many politicians respond to these government-caused problems by proposing even more government.

That’s what Hillary Clinton did in 2016 and it’s what politicians – most notably Elizabeth Warren and Bernie Sanders – are doing for 2020.

But that will make a bad situation even worse.

Paul Boyce, writing for FEE, explains that free college will lower standards and make college degrees relatively meaningless.

…college enrollment rates reached more than 40 percent in 2017. Of those, nearly one in three (31 percent) drop out entirely. Why should the average taxpayer subsidize this? …If college is free, it is likely that this rate will increase further. Students won’t have any skin in the game because they won’t be picking the tab up at the end. This effects efficient decisionmaking. In France, for example, the dropout rate is as high as 50 percent. …Government has a track record of underfunding. …This is demonstrated in France, which runs a “free” system. Its universities are heavily underfunded and unable to satisfy student enrollment. …As college enrollment has increased, standards have fallen to accommodate for this. …it defeats the goal of creating a well-educated workforce. …it dilutes the importance and value of a degree. …Undergraduate degrees will become the norm, and the financial return will become negligible.

And the experience of other nations isn’t a cause for optimism.

Andrew Hammel, an American who taught for many years at a German university, is not overly impressed by that nation’s free-tuition regime.

…in their early teen years, the brightest German students are sent to the most prestigious form of German high school, the Gymnasium. Currently, over 50 percent of German students earn this privilege (this number has jumped in the last 30 years, prompting charges of grade inflation). Gymnasium graduates with reasonable grades are guaranteed a place in a German university; there is no entrance exam. 95 percent of German students attend public universities, where they are charged fees, but not formal tuition. All professors at public universities are civil servants. …Supporters of the tuition-free system note that 65 percent of Germans say university should be tuition-free, “even if this means the quality of education is slightly worse.” …The system also gives students extra freedom: you can study art history or sociology, knowing that you won’t be hounded by creditors if you later find only spotty employment. …one-third of all students who enroll in German universities never finish. A recent OECD study found that only 28.6 percent of Germans aged between 25 and 64 had a tertiary education degree… German universities punch below their weight in international rankings… Gather any group of German professors, and talk will immediately turn to the burgeoning bureaucracy which distracts them from teaching and research. …Americans who teach ordinary classes in Germany find average German students somewhat less motivated than their dues-paying American counterparts. The top third of motivated students would succeed anywhere, and the bottom third, as we have seen, drop out.

I’ll close with an observation about inefficiency in higher education.

Here’s a chart I shared a few years ago. I’m sure the problem is even worse today.

The bottom line is that student debt, administrative bloat, and expensive tuition are all predictable consequences of federal subsidies.

P.S. If you’re worried about political correctness in higher education (and you have the appropriate subscriptions), I recommend this column in the Wall Street Journal and this George Will column in the Washington Post.

P.P.S. Here’s a video interview with Richard Vedder about high costs and inefficiency in higher education. And I also recommend this video explanation by Professor Daniel Lin.

P.P.P.S. It also turns that all these subsidies have a negative correlation with private-sector employment.

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The World Bank has released its annual report on the Ease of Doing Business.

Unsurprisingly, the top spots are dominated by market-oriented jurisdictions, with New Zealand, Singapore, and Hong Kong (at least for now!) winning the gold, silver, and bronze. The United States does reasonably well, finishing in sixth place.

It’s also worth noting that Nordic nations do quite well. Denmark even beats the United States, and Norway and Sweden are both in the top 10.

Georgia gets a very good score, as does Taiwan. And I’m sure Pope Francis will be irked to see that Mauritius ranks highly.

I’m surprised, though, to see Russia at #28 and China at #31. That’s better than France!

And I’m even more surprised that normally laissez-faire Switzerland is down at #36.

What economic lessons can we learn from the report? First, the authors remind us that less red tape means more prosperity.

Research demonstrates a causal relationship between economic freedom and gross domestic product (GDP) growth, where freedom regarding wages and prices, property rights, and licensing requirements leads to economic development. … The ease of doing business score serves as the basis for ranking economies on their business environment: the ranking is obtained by sorting the economies by their scores. The ease of doing business score shows an economy’s absolute position relative to the best regulatory performance, whereas the ease of doing business ranking is an indication of an economy’s position relative to that of other economies.

By the way, here’s a simple depiction of the World Bank’s methodology.

It’s also worth noting that less intervention means less corruption.

There are ample opportunities for corruption in economies where excessive red tape and extensive interactions between private sector actors and regulatory agencies are necessary to get things done. The 20 worst-scoring economies on Transparency International’s Corruption Perceptions Index average 8 procedures to start a business and 15 to obtain a building permit. Conversely, the 20 best-performing economies complete the same formalities with 4 and 11 steps, respectively. Moreover, economies that have adopted electronic means of compliance with regulatory requirements—such as obtaining licenses and paying taxes—experience a lower incidence of bribery.

Poor countries, not surprisingly, have more red tape.

An entrepreneur in a low-income economy typically spends around 50 percent of the country’s per-capita income to launch a company, compared with just 4.2 percent for an entrepreneur in a high-income economy. It takes nearly six times as long on average to start a business in the economies ranked in the bottom 50 as in the top 20. There’s ample room for developing economies to catch up with developed countries on most of the Doing Business indicators. Performance in the area of legal rights, for example, remains weakest among low- and middle-income economies.

Africa and Latin America are especially bad.

Sub-Saharan Africa remains one of the weak-performing regions on the ease of doing business with an average score of 51.8, well below the OECD high-income economy average of 78.4 and the global average of 63.0. …Latin America and the Caribbean also lags in terms of reform implementation and impact. …not a single economy in Latin America and the Caribbean ranks among the top 50 on the ease of doing business.

I’m disappointed, by the way, that Chile is only ranked #59.

Now let’s shift to some very important graphs about the relationship between economic freedom and national prosperity.

We’ll start with a look at the relationship between employment regulation and per-capita income. Not surprisingly, countries that make it hard to hire workers and fire workers have lower levels of prosperity.

Here’s a chart showing the relationship between employment regulation and the underground economy.

The moral of the story is that lots of red tape drives employers and employees to the black market.

Perhaps most important, there’s a very clear link between good regulatory policy and overall entrepreneurship.

Here’s a bit of good news.

Developing nations have reduced the burden of red tape in some areas, in part because Ease of Doing Business puts pressure on governments.

We can see the results in this chart.

I’ll close with a look at the regulatory burden in the United States, which also can be considered good news.

Here’s the annual score for the past five years (a higher number is better).

I’m frequently critical of this White House, but I also believe in giving credit when it’s deserved. The bottom line is that Trump’s policies have been a net plus for businesses.

In other words, lower tax rates and less red tape have more than offset the pain of protectionism.

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For a multitude of reasons, I wasn’t a fan of Mitt Romney’s candidacy in 2012. But when supporters of Barack Obama accused him of somehow being responsible for a woman who died from cancer, I jumped to his defense by pointing out the link between unnecessary deaths and bad economic policy.

Simply stated, market-friendly policies produce more prosperity and wealthier societies enjoy longer lifespans. Indeed, even one of Obama’s top appointees openly acknowledged that wealthier is healthier.

Which is why folks on the left are failing to do proper cost-benefit analysis when they assert that we need redistribution and intervention to help people live longer.

This issue was hot in 2017 when Republicans briefly toyed with the idea of fulfilling a campaign promise and repealing Obamacare.

Defenders of the law said repeal would cause needless deaths.

In a column for National Review, Oren Cass debunked those assertions.

If you are going to claim that someone’s policy will cause upward of 200,000 deaths, I feel that you should have relevant supporting evidence. Maybe I’m just old-fashioned that way. Certainly, no such standards seem to hamper the editors at Vox. Instead, they’ve just published “208,500 additional deaths could occur by 2026 under the Senate health plan,” in which Ann Crawford-Roberts et al. assure readers that they are using “solid estimates firmly rooted in scientific evidence — unlike the dubious claim that the ACA has saved ‘zero’ lives.” Except here’s the thing: That claim about zero lives saved is supported by multiple independent lines of analysis. …There are the numerous studies showing that patients on Medicaid achieve worse health outcomes than those without any insurance. There is the “gold-standard” randomized controlled trial in Oregon that found no significant improvement in physical health from Medicaid coverage. …There is a paper from Yale researchers that found states achieve better health outcomes when they allocate less of their social spending toward health care. And now we even have data from the ACA itself. …the nation’s mortality rate stopped decreasing and actually increased when the ACA was implemented, and matters were worst in the states that accepted the ACA’s Medicaid expansion. …None of that makes Medicaid worthless. It does not mean that Medicaid, or the ACA generally, is killing people (though the evidence for that proposition looks as good as the evidence for the idea that it is saving many lives).

Max Bloom also wrote that year about the controversy for National Review.

Repealing Obamacare will kill 24,000 people a year! No, 36,000! No, 43,000! The tax cuts are blood money! There is more than a little hyperbole about the overhaul of Obamacare proposed by the House and the Senate, and the rhetoric about tens of thousands of deaths is not a bad example. …The only thing better than a natural experiment is a random experiment, in which people are randomly distributed into groups that, in this case, either receive health insurance or don’t. Exactly this happened in Oregon in 2008, when the state randomly selected 30,000 from a waiting list of 90,000 low-income adults to participate in a limited expansion of Medicaid. In theory, this should have produced a perfect test of the effects of insurance on health-care outcomes — indeed, as Peter Suderman notes, a bevy of liberal writers touted an early analysis of the experiment as a conclusive vindication of the effects of health insurance. Until they saw the final data, that is. The Oregon study found that “Medicaid coverage generated no significant improvements in measured physical health outcomes in the first two years.” …In short, the only problem with the estimate that Obamacare repeal will kill tens of thousands is that it cherry-picks one study out of several, ignores the limitations of that study, assumes that private insurance and Medicaid are equivalent, assumes that losing health insurance and gaining health insurance are precisely symmetric, uses implausible estimates of coverage loss, and relies on an idiosyncratic definition of the word “kill.” Otherwise, it’s fine.

By the way, these two articles didn’t even consider the “cost” side of cost-benefit analysis.

The columns simply noted that there’s no evidence for the notion that Obamacare-type subsidies help people live longer. In other words, the “benefit” side of cost-benefit equation is empty.

So imagine what we would discover about health outcomes if various Obamacare costs (job losses, tax increases, lower income, etc) were added to the analysis.

A similar debate is happening on the other side of the ocean.

In a column for CapX, Guy Dampier addresses the silly claim that spending restraint kills people.

…a November 2017 paper in the British Medical Journal…found a link between restrictions on health and social care spending – austerity – and 120,000 additional deaths between 2010 and 2017. The paper’s authors..reached this by extrapolating from an estimated 45,000 “higher than expected” number of deaths between 2011 and 2014 and then projecting that to cover 2010 to 2017. …although even they had to admit they had only captured association and not discovered causation. …The medical community responded to the BMJ paper with scepticism. …Others pointed out the many issues in the methodology. …the IPPR, a think tank with close links to Labour, published a report in June this year with a similar claim: that if trends in mortality between 1990 and 2012 had continued there “could have been 130,000 deaths averted between 2012 and 2017”. …When pressed the IPPR admitted that the apparent spike in mortality had started two years before austerity began… The years of austerity have been tough for many people, without doubt. But these issues show that neither claim – of 120,000 or 130,000 deaths – stands up to scrutiny.

Once again, the left’s numbers only look at one side of the equation.

There’s no attempt to measure the health benefits of a faster-growing, less-encumbered economy.

Yet even using incomplete analysis, they don’t have any persuasive evidence for bigger government.

Let’s now close by looking at a global example.

Last year, the Washington Post published a fascinating article on pollution and life expectancy, and it included analysis on which parts of the world are getting cleaner and dirtier.

University of Chicago researchers wanted to make air quality measurements less abstract and more relatable — and what is more relatable than years of life? The pollution most responsible for shortening lives consists of the tiniest airborne particles, called PM2.5. They are small enough to penetrate deep into the lungs and bloodstream, causing breathing and cardiovascular problems, cancer and possibly even dementia. They’re bad for healthy people and terrible for young children, the elderly and anyone who already has heart or respiratory problems. …The Chicago team started with satellite data that mapped the annual PM2.5 concentration in air all over the world, from 1998 to 2016. …Then they calculated how much longer people would live if the air they breathe had fewer — or none — of these particles. The result of the project is the Air Quality Life Index.

Here’s the accompanying map, which shows good news for most parts of the world other than China, India, and Indonesia.

The obvious takeaway from this article is that nations should strive mightily to reduce this type of air pollution. Especially in Asia.

And maybe that’s actually true.

But let’s consider both sides of the equation. These Asian nations are in the process of industrialization, which means they are getting much richer and therefore have the ability to enjoy much better levels of food, housing, and health care.

We also know that life expectancy has significantly improved in China. So the bad impact of pollution obviously is being offset by something.

And the article notes that China is now working to curtail pollution, which makes sense since nations become more environmentally conscious as incomes increase.

By the way, I’m not trying to identify the right tradeoff between pollution and growth. Or the ideal tradeoff between redistribution and growth.

Instead, I’m simply pointing out that tradeoffs exist, even if some of my friends on the left like to pretend otherwise.

If you’ve been diligent enough to get to this point, you deserve to enjoy this very topical Remy video.

Rather appropriate that Elizabeth Warren plays a starring role.

P.S. You can enjoy more Remy videos by clicking here, hereherehere, and here.

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The 2008 financial crisis was largely the result of bad government policy, including subsidies for the housing sector from Fannie Mae and Freddie Mac.

This video is 10 years old, but it does a great job of explaining the damaging role of those two government-created entities.

The financial crisis led to many decisions in Washington, most notably “moral hazard” and the corrupt TARP bailout.

But the silver lining to that dark cloud is that Fannie and Freddie were placed in “conservatorship,” which basically has curtailed their actions over the past 10 years.

Indeed, some people even hoped that the Trump Administration would take advantage of their weakened status to unwind Fannie and Freddie and allow the free market to determine the future of housing finance.

Those hopes have been dashed.

Cronyists in the Treasury Department unveiled a plan earlier this year that will resuscitate Fannie and Freddie and recreate the bad incentives that led to the mess last decade.

This proposal may be even further to the left than proposals from the Obama Administration. And, as Peter Wallison and Edward Pinto of the American Enterprise Institute explained in the Wall Street Journal earlier this year, this won’t end well.

…the president’s Memorandum on Housing Finance Reform…is a major disappointment. It will keep taxpayers on the hook for more than $7 trillion in mortgage debt. And it is likely to induce another housing-market bust, for which President Trump will take the blame.The memo directs the Treasury to produce a government housing-finance system that roughly replicates what existed before 2008: government backing for the obligations of the government-sponsored enterprises Fannie Mae and Freddie Mac , and affordable-housing mandates requiring the GSEs to encourage and engage in risky mortgage lending. …Most of the U.S. economy is open to the innovation and competition of the private sector. Yet for no discernible reason, the housing market—one-sixth of the U.S. economy—is and has been controlled by the government to a far greater extent than in any other developed country. …The resulting policies produced a highly volatile U.S. housing market, subject to enormous booms and busts. Its culmination was the 2008 financial crisis, in which a massive housing-price boom—driven by the credit leverage associated with low down payments—led to millions of mortgage defaults when housing prices regressed to the long-term mean.

Wallison also authored an article that was published this past week by National Review.

He warns again that the Trump Administration is making a grave mistake by choosing government over free enterprise.

Treasury’s plan for releasing Fannie Mae and Freddie Mac from their conservatorships is missing only one thing: a good reason for doing it. The dangers the two companies will create for the U.S. economy will far outweigh whatever benefits Treasury sees. Under the plan, Fannie and Freddie will be fully recapitalized… The Treasury says the purpose of their recapitalization is to protect the taxpayers in the event that the two firms fail again. But that makes little sense. The taxpayers would not have to be protected if the companies were adequately capitalized and operated without government backing. Indeed, it should have been clear by now that government backing for private profit-seeking firms is a clear and present danger to the stability of the U.S. financial system. Government support enables companies to raise virtually unlimited debt while taking financial risks that the market would routinely deny to firms that operate without it. …their government support will allow them to earn significant profits in a different way — by taking on the risks of subprime and other high-cost mortgage loans. That business would make effective use of their government backing and — at least for a while — earn the profits that their shareholders will demand. …This is an open invitation to create another financial crisis. If we learned anything from the 2008 mortgage market collapse, it is that once a government-backed entity begins to accept mortgages with low down payments and high debt-to-income ratios, the entire market begins to shift in that direction. …why is the Treasury proposing this plan? There is no obvious need for a government-backed profit-making firm in today’s housing finance market. FHA could assume the important role of helping low- and moderate-income families buy their first home. …Why this hasn’t already happened in a conservative administration remains an enduring mystery.

I’ll conclude by sharing some academic research that debunks the notion that housing would suffer in the absence of Fannie and Freddie.

A working paper by two economists at the Federal Reserve finds that Fannie and Freddie have not increased homeownership.

The U.S. government guarantees a majority of mortgages, which is often justified as a means to promote homeownership. In this paper, we estimate the effect by using a difference-in-differences design, with detailed property-level data, that exploits changes of the conforming loan limits (CLLs) along county borders. We find a sizable effect of CLLs on government guarantees but no robust effect on homeownership. Thus, government guarantees could be considerably reduced,with very modest effects on the homeownership rate. Our finding is particularly relevant for recent housing finance reform plans that propose to gradually reduce the government’s involvement in the mortgage market by reducing the CLLs.

For those who care about the wonky details, here’s the most relevant set of charts, which led the Fed economists to conclude that, “There appears to be no positive effect of the CLL increases in 2008 and no negative effect of the CLL reductions in 2011.”

And let’s not forget that other academic research has shown that government favoritism for the housing sector harms overall economic growth by diverting capital from business investment.

The bottom line is that Fannie and Freddie are cronyist institutions that hurt the economy and create financial instability, while providing no benefit except to a handful of insiders.

As I suggested many years ago, they should be dumped in the Potomac River. Unfortunately, the Trump Administration is choosing Obama-style interventionism over fairness and free markets.

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The great French economist from the 1800s, Frederic Bastiat, famously explained that good economists are aware that government policies have indirect effects (the “unseen”).

Bad economists, by contrast, only consider direct effects (the “seen”).

Let’s look at the debate over stadium subsidies. Tim Carney of the American Enterprise Institute narrates a video showing how the “unseen” costs of government favoritism are greater than the “seen” benefits.

Unfortunately, stadium subsidies are just the tip of the cronyism iceberg.

In a column for the Dallas Morning News, Dean Stansel of Southern Methodist University discussed some of his research on the topic.

While state and local economic development incentives may seem to help the local economy, the offsetting costs are usually ignored, so the overall effect is unclear. Furthermore, from the perspective of the nation as a whole, these policies are clearly a net loss. …In a new research paper, my colleague, Meg Tuszynski, and I examined whether there is any relationship between economic development incentive programs and five measures of entrepreneurial activity. Like the previous literature in this area, we found virtually no evidence of a positive relationship. In fact, we found a negative relationship with patent activity, a key measure of new innovation. …A recent study by the Mercatus Center found that 12 states could reduce their corporate income tax by more than 20 percent if incentive programs were eliminated. That includes a 24 percent cut in Texas’ business franchise tax. In six states, it could either be completely eliminated or reduced by more than 90 percent. These are big savings that would provide substantial tax relief to all businesses, both big and small, not just those with political influence. …That would provide a more level playing field in which all businesses can thrive.

And here’s a Wall Street Journal editorial from earlier the year.

Amazon left New York at the altar, turning down a dowry of $3 billion in subsidies. Foxconn’s promised new factory in Wisconsin, enticed with $4 billion in incentives, has fallen into doubt. …Now add General Electric , which announced…it will renege on its plan to build a glassy, 12-story headquarters on Boston’s waterfront. …The company reportedly…pledged to bring 800 jobs to Boston. In exchange, the city and state offered $145 million in incentives, including tax breaks and infrastructure funds. GE’s boss at the time, Jeff Immelt, said not to worry: For every public dollar spent, “you will get back one thousand fold, take my word for it.” …two CEOs later, a beleaguered GE won’t be building that fancy tower at all. There won’t even be 800 jobs. …GE will lease back enough space in two existing brick buildings for 250 employees. …what a failure of corporate welfare.

Let’s wrap this up with a look at some additional scholarly research.

Economists for the World Bank investigated government favoritism in Egypt and found that cronyism rewards politically connected companies at the expense of the overall economy.

This paper presents new evidence that cronyism reduces long-term economic growth by discouraging firms’ innovation activities. …The analysis finds that the probability that firms invest in products new to the firm increases from under 1 percent for politically connected firms to over 7 percent for unconnected firms. The results are robust across different innovation measures. Despite innovating less, politically connected firms are more capital intensive, as they face lower marginal cost of capital due to the generous policy privileges they receive, including exclusive access to input subsidies, public procurement contracts, favorable exchange rates, and financing from politically connected banks. …The findings suggest that connected firms out-rival their competitors by lobbying for privileges instead of innovating. In the aggregate, these policy privileges reduce…long-term growth potential by diverting resources away from innovation to the inefficient capital accumulation of a few large, connected firms.

For economics wonks, here’s Table 2 from the study, showing how subsidies are associated with less innovation.

The World Bank also found awful results because of cronyism in Ukraine.

But this isn’t a problem only in developing nations.

There’s some depressing research about the growing prevalence of cronyism in the United States (ethanol handouts, the Export-Import Bankprotectionismtax favoritismbailoutssubsidies, and green energy are just a few examples of how the friends of politicians get unearned wealth).

Cronyism is bad under Democrats and it’s bad under Republicans. Time for separation of business and state!

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