Actuary Hands Gift to Pension Reformers

10752656_MThe actuarial firm Cheiron recently projected the future yearly pension costs for San Jose’s police and firefighter pension plan. Cheiron wrote:

In the worst scenarios, the City’s aggregate contribution rate can exceed 110 percent of payroll. In the best scenarios, the City’s Tier 1 rate can drop to 0 percent, leaving a relatively small Tier 2 rate for the City. The volatility of the asset allocation combined with the asset leverage ratio results in a very wide range of results. For the fiscal year ending 2021 (based on the 2019 valuation), the range from the 5th to 95th percentile for City’s aggregate contribution rate is from 2.5 percent of pay to 96.9 percent of pay. The Board may want to assess whether such a wide range of projected contribution rates that could develop over a relatively short period is affordable.

To put this in plain English, the city’s hand-picked actuary says it has no idea how much the city’s future pension costs will be: anywhere from 0 percent of payroll per year to 110 percent of payroll per year. At least San Jose got this colorful picture for its money.

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The actuary, however, highlighted a key problem with the current pension system: It is impossible for any city to plan and budget accurately if it has a defined-benefit pension plan because the associated pension costs are volatile and impossible to predict. When defined-benefit pension costs explode unexpectedly—as they often do because of political mismanagement of the funds—tax revenue is funneled into the pension plans and diverted away from fire, police, and other basic city services. Inadvertently, Cheiron made the case for pension reform.

If, instead, San Jose had a 401(k)-style plan for its government employees, the above actuary statement would simply read: “The City’s annual pension contribution will be 10 percent of payroll” (or whatever the contribution rate would be).

With 401(k)s, costs are transparent, easy to calculate, easy to project, and easy to control. And the city doesn’t have to waste taxpayers’ money on useless projections from a high-priced actuary. The mayor can produce accurate projections on the back of his business card.

Improved budgeting and restoration of basic services are strong arguments in favor of adopting 401(k)-style pensions in the public sector. More reform ideas are available in my new book California Dreaming: Lessons on How to Resolve America’s Public Pension Crisis.

Smith on Jones

One defining characteristic of early economists was their antipathy toward protectionism, because they realized that high tariffs and import restrictions harm a nation’s citizens by eliminating mutual benefits that voluntary exchange would have created. Adam Smith, history’s most famous economist, was among their number. However, there was the one case of protectionism he endorsed, a misrepresentation of which is still reflected in U.S. policy.

Smith’s “exception” involved England’s 1660 navigation law. All shipping between British ports was restricted to British-built and -owned ships, and at least three-quarters of the crew had to be British. While England’s mercantilist burdens stoked America’s revolution, the U.S. Congress’s inaugural session enacted similar restrictions on coastal shipping, later codified by the Jones Act of 1920, which still governs maritime commerce in U.S. waters.

In Wealth of Nations, Adam Smith argued that “The defense of Great Britain depends very much upon the number of its sailors and shipping.” Consequently, “The act of navigation, therefore, very properly endeavors to give the sailors and shipping of Great Britain the monopoly of the trade of their own country.” Smith saw that it would restrict trade and destroy wealth, but “As of much more importance than opulence, the act of navigation is, perhaps, the wisest of all the commercial regulations of England.”

Unfortunately, the circumstances justifying Smith’s endorsement do not apply to the Jones Act. Despite massive costs, it does not expand American shipping, sailors, or capabilities.

In an all-or-nothing choice between defense and opulence, defense, when threatened by aggression, is more important. But it is not all-or-nothing. At issue is how much value is added to readiness and at what cost.

Smith’s endorsement is sensible only when defense would be otherwise inadequate. If sufficient defensive capability existed, any added value would be small. Smith argued that it was the threat from the Dutch, Britain’s main naval rival, which justified the restrictions. In fact, the Navigation Acts aimed at “diminution of the naval power of Holland, the only naval power which could endanger the security of England,” as much as to stimulate British sea power.

Smith, therefore, endorsed shipping restrictions only when justified by a specific, very serious threat of war. He did not endorse them as a general principle. However, circumstances like those that led to Smith’s support have not applied to America for many years, yet Jones Act restrictions have been retained.

One might consider Chinese military sea power as a current analog. But restricting America’s coastal trade to American ships does not appreciably restrict Chinese sea power, military or commercial, as is clearly demonstrated by the tidal wave of goods China’s ships carry to America and around the world.

Beyond the question of the severity of the naval threats America faces, to be sensible the Jones Act would have to increase the number of American ships, sailors, and construction capabilities. But it does not.

U.S.-flagged ships fell from 43 percent of global shipping in 1950 to only about 1.5 percent of America’s foreign trade by 2009. Half of that tonnage capacity disappeared between 1975 and 2007.

Ships subject to the Jones Act fell from 193 in 2000 to 90 in 2014. 110 tankers shrank to 43. Almost five times as many American ships now fly other flags to escape Jones Act burdens, despite the fact that it disqualifies them from carrying cargo between U.S. ports.

The Jones Act would also have to provide services that would be hard to acquire during hostilities and emergencies. But it does not.

The Department of Defense concluded that “very few commercial ships with high military utility have been constructed in U.S. shipyards in the past 20 years. Consequently...nearly all [charter] offers are for foreign-built ships.” Further, after both Hurricanes Katrina and Sandy, Jones Act restrictions had to be suspended because they hindered emergency responses.

The Jones Act’s costs are also substantial.

Jones Act–eligible ships can cost triple or quadruple what Korean- or Japanese-built ships cost. Crew expenses are similarly inflated, as are maintenance and repair costs. Consequently, foreign tankers can transport oil for one-third the cost of American tankers.

The Jones Act doesn’t add naval or defense capabilities, voiding Adam Smith’s endorsement. American-flagged ships and trade carried have plummeted. The Act hinders emergency operations. The military services it supposedly enables are already provided more efficiently by foreign ships. And the costs are large. It deserves burial at sea.

The Gender Wage Gap–A Myth that (Still) Just Won’t Die

equalityEarlier this week, the Governor of California signed a bill intended to help women. Supported by the Chamber of Commerce, the new law looks to eliminate the “gender wage gap,” or the supposed discrepancy between the pay of men and women.

The bill received immense support in both houses of the California state legislature and will “ensure that women are paid equally for work that is substantially similar to the work of their male colleagues.”

While California policymakers may be well intentioned, as an economist, this makes me want to bang my head against a wall. I’ve discussed this very issue on this blog before. But, alas, here we are again.


FDA Driving Drug Prices into Stratosphere

19610566_MBloombergBusiness has another story of a jaw-dropping price hike for a very old medical. In this case,

Colchicine, a gout remedy so old that the ancient Greeks knew about its effects, used to cost about 25 cents per pill in the U.S. Then in 2010 its price suddenly jumped 2,000 percent.

How did this happen? Colchicine is one of a small number of drugs that were marketed in the United States before 1938. That year, Congress passed the Food, Drug, and Cosmetic Act to require new drugs to be approved for “safety” as well as be “pure” (that is, not adulterated or misbranded, as had been required since 1906).

When the Act was amended in 1962 to require “efficacy,” drugs approved since 1938 had to be approved again. However, pre-1938 drugs have never had to be approved. In today’s parlance, they were “grandfathered.”

Or, at least they were grandfathered until 2006, when the Food and Drug Administration decided to cause the makers of those drugs to apply for approval under the 1962 standards of both safety and efficacy. This is called the Marketed, Unapproved Drugs Initiative and Compliance Policy Guide.

Winning approval requires very expensive clinical trials. Pre-1938 drugs are no longer patented. However, forcing them to go through the FDA regulatory gauntlet effectively gives their manufacturers’ exclusivity similar to patents. The FDA asserts the unapproved drugs were unsafe, citing a few examples. Nevertheless, it looks like the cure has serious side effects, suggesting the FDA has overstepped reasonable boundaries by requiring drugs used for almost a century to submit to regulation.

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Is the Food and Drug Administration safe and effective? Find out at

Safe, Legal, and Rare, Part 3: Rare

Opportunity Beats Abortion

Opportunity Beats Abortion

We have been looking at the record of the actual practice of abortion in the 40 years since Roe v. Wade, the proponents for which promised that legalizing abortion federally would result in abortion becoming “safe, legal, and rare.”

We previously examined Safe and Legal, and today examine Rare:

First, a clarification. Commenters on my previous posts are apparently so caught up in the pro/con binary that they incorrectly assume that since I am against abortion, I want to criminalize it.

As with all Independent Institute proposals, mine is a quest to educate, not legislate.


Health Jobs Dominate Terrible Jobs Report

No good words were used to describe last week’s Employment Situation Summary: “Every aspect of the September jobs report was disappointing,” wrote Michelle Girard, chief U.S. economist at RBS (quoted in Forbes). This is largely a repeat of the August jobs report, although those and previous months’ figures were also revised downwards.

One-quarter of September’s new jobs were in health services: 34,000 of 142,000 added to nonfarm payrolls. Of those 34,000 health jobs, 37 percent were in ambulatory facilities, and 45 percent in hospitals. This is a change from the past few months. Because of a long-term shift in the location of care, there are now almost seven million people working in ambulatory settings, versus just under five million working in hospitals.

We should hope September’s disproportionately high hospital jobs growth is idiosyncratic, and the trend to faster growth in ambulatory facilities is restored. Hospitals are very expensive facilities and have very concentrated lobbying power that they bring to bear to keep their payments higher than they would be otherwise. One of their most successful talking points is that hospitals are the largest employers in a community, which obviously attracts the support of politicians. As the health services workforce shifts to ambulatory settings, this talking point will lose its power.

Significant revisions to previous months’ reports are reflected in the longer term change (See Table II). Over the past twelve months, employment in ambulatory settings has somewhat faster (4.06 percent) than hospital employment (3.04 percent). The health services workforce overall has grown faster (3.17 percent) than the non-health workforce (1.83 percent).

Labor costs comprise a large share of health spending, which is less productive than spending in other parts of the economy. Unfortunately, continuing high growth in health jobs likely contributes to slow economic growth today and Obamacare’s failure to slow the rate of health spending.

20151005 Health Workforce TI

20151005 Health Workforce TII

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For the pivotal alternative to Obamacare, please see the Independent Institute’s new book, A Better Choice: Healthcare Solutions for America, by John C. Goodman.

Is Seeing Believing in Planned Parenthood Videos?

Undercover manFew have the stomach for watching the Planned Parenthood videos—among others, Nancy Pelosi refuses to watch them (though I suspect this has more to do with politics than stomach).

So how to get to the truth of the claim by Planned Parenthood head Cecile Richards that the videos were “heavily doctored”?

Certainly watching the videos, it’s hard to see how “doctoring” could have created out of whole cloth the video footage of lab technicians poking through clearly identifiable tiny body parts, nor the video of a conversation revealing that labs receiving parts such as arms and legs prefer the hands and feet to be removed so they look less like what they are. (“It’s almost as if they don’t want to know where it comes from. Where they’re like ‘We need limbs, but no hands or feet need to be attached. ...Make it so we don’t know what it is.’” Later she jokes that when shipping “intact cases,” i.e., entire bodies, you must warn the lab in advance, or else a lab tech will open the package and scream “Oh my god!”)

In support of its “doctored” claim, Planned Parenthood commissioned a report* from a firm otherwise known for politically-motivated smear campaigns, Fusion GPS, a “commercial research firm,” for which I could find no online information beyond a static home page with text.


Health Construction Spending Picks Up in August

After a few months lagging behind other construction, health facilities construction starts finally showed some life in August (See Table I). Although on a twelve-month basis it is still running slower than the booming construction market overall, health construction grew by 1.9 percent from July. Other construction grew by only 0.7 percent.

When looking only at private construction, health facilities and other building starts are at about the same rate of growth for the twelve-month period. However, health facilities construction grew three times faster—2.1 percent versus 0.7 percent—than other building starts over one month.

Even public health construction, which had lagged massively in previous months, grew twice as fast as other public construction from July to June—1.0 percent versus 0.5 percent. This increase is dramatic because public health facilities construction had actually declined in previous months, which remains apparent in the twelve-month negative rate of growth.

If this reflects a pick-up in building Veterans Health Administration hospitals, that is a problem, because the VHA remains racked with scandal and problems. As for private health facilities: Hospitals are often the least efficient location of care. Building more of them foretells increasing health costs.

20151002 Construction

College Campuses Are Not Gun-Free Zones

collegeWishing for something to be true does not make it true. Declaring an area to be gun-free is wishful thinking. We know campuses are not gun-free zones from the news reports of campus shootings.

Declaring an area to be a gun-free zone discourages law-abiding citizens from carrying guns there, but it encourages people who intend to commit crimes with firearms because it gives them some assurance they will not meet with armed resistance from law-abiding citizens.

Even the most dim-witted among us can surely see that such a declaration invites criminals to engage in firearm-related crimes in an area where they know law-abiding citizens will not shoot back. This could be mass shootings, robberies, rape, or any crime in which an armed criminal wants more assurance of having the upper hand. Criminals, by definition, do not obey the law.

Declaring an area to be a gun-free zone makes it more likely that a gun crime will occur there.

The argument in favor of declaring an area a gun-free zone is that despite the news reports, mass shootings and other gun crimes are relatively rare, and there is a bigger risk of accidental harm from the actions of law abiding citizens than from criminals. The benefit from preventing accidents by law-abiding citizens outweighs the increased risk of gun crimes that gun-free zones encourage.

The only reasonable argument in favor of gun-free zones is that the threat from armed law-abiding citizens is greater than from armed criminals.

Taxation and Wealth Redistribution as Lowbrow Morality

Peter is a wealthy man and has $1,000 in his wallet. He plans to use it for a variety of things—some groceries, taking his wife out to dinner, and buying some new golf clubs he’s been admiring.

Enter Paul. Paul thinks that Peter’s money could be put to better use, like helping low-income families get healthcare and putting children into preschool, among other things. As a result of his beliefs, Paul threatens Peter. Peter can “voluntarily donate” to these programs, but if he refuses, or doesn’t offer “enough” of his income, Paul will take Peter’s money anyway and hold him in captivity.

Would you consider this to be fair? Probably not. Just because Paul wants Peter to spend his money on certain honorable causes doesn’t mean that Paul has the right to take Peter’s money. Paul is stealing from Peter. He is violating Peter’s rights by stealing his property.

Most people would take issue with the above scenario. However, many people advocate this kind of activity everyday. Instead of just Paul and Peter, however, it’s Peter, Paul, and the government. Paul thinks Peter should spend his money in some particular way and Peter disagrees. Since Paul is not powerful enough to compel Peter to fork over his money for certain causes, he lobbies the government and votes to raise Peter’s tax rate.

“Peter is rich,” Paul says. “He’s in the top 20 percent of income earners! He should do his part to help his fellow man.”