The Coming U.S. Government Default?

tir_18_4_210Social Security, Medicare, and the federal component of Medicaid are easily the leading sources of the U.S. government’s worsening fiscal nightmare. By 2037, the ongoing growth in spending for these programs will have pushed up total federal spending to 35.7 percent of GDP, according to the Congressional Budget Office. This share is about 75 percent larger than the average since the end of the Korean War.

But federal tax revenues can’t keep pace; it’s practically an “iron law” of our political culture that the U.S. government takes in approximately 17 percent to 20 percent of GDP, argue economists David R. Henderson and Jeffrey Rogers Hummel. In fact, you can count on one finger the number of years since 1950 that the feds took in more than 20 percent of GDP. (The year: 2000; the take: 20.4 percent.) Only during World War II did federal revenues get close to reaching as high as 22 percent of GDP.

Nor would a policy of high inflation solve the problem, Henderson and Hummel argue. One reason is that the public holds much more of its cash balances in the form of privately created bank deposits and money-market funds than in government-issued notes and coins; consequently, the potential income gain for government via monetary expansion is relatively small. This helps explain why, in recent decades, developed countries never generated revenue exceeding 1 percent or so of GDP from their inflationary policies. Only if the Federal Reserve were willing to sustain a policy of hyperinflation could the government hope to cover the fiscal shortfall exclusively via the expansion of money and credit, but it’s extremely unlikely that the Fed would invoke the “Zimbabwe option.”

Therefore, unless federal spending on “entitlements” and transfer payments slows down in the coming decades, the government will face the prospect of defaulting on the national debt.

“The default could range from outright repudiation to partial repudiation,” Henderson and Hummel write in an article for the Spring 2014 issue of The Independent Review. The worsening financial health of Medicare Part A and Social Security are among the potential triggers of default, they explain.


This Large Health Insurer Has Effectively Admitted Obamacare Is Failing

21323119_SPeople can be forgiven for being confused about the effects of Obamacare. For over a year now, there has been a lot of evidence that the upward trend of medical costs has tempered. Some have said that we have finally bent the cost curve.

Much of the declining rate of growth of medical spending is surely due to the recession. John Goodman and Peter Ferrara have made the case that the impressive rise of consumer-driven health plans, and Health Savings Accounts, have made patients more discriminating purchasers of health care.

And yet, premiums are going through the roof. Those who are profiting from Obamacare are loathe to criticize it too openly. And yet, WellPoint, a large insurer, has just announced that it expects to demand “double-digit plus” rate increases in the Obamacare exchanges in 2015.

WellPoint dominates the exchanges. This news is an admission that the exchanges are seeing applicants too old and sick to keep premiums in line with what was originally expected.

The Obama administration is crowing that it has dragged six million people across the finish line into the exchanges by March 31—or at least sort of. This, in itself, is no sign of success.

The fight over Obamacare exchanges has just begun. Whether the White House or the insurers win is hard to predict. Taxpayers will surely lose.

* * *

For the pivotal alternative to Obamacare, please see the Independent Institute’s widely acclaimed book: Priceless: Curing the Healthcare Crisis, by John C. Goodman.

“Pot” Holes?

14448260_SA recent story published on Fox News New York reports that New Jersey state senator Nicholas Scutari plans to introduce a bill to legalize the sale of marijuana there, tax purchases at the current sales tax rate of seven percent and deposit 70 percent of the proceeds into New Jersey’s highway trust fund.

Like most other states, New Jersey has created such a “trust fund,” financed more usually by imposing excise taxes on gasoline and other motor fuels at the pump, for the purpose of building and repairing roads and bridges.

Sen. Scutari’s proposal gives new meaning to the term “user fee”.

In the parlance of orthodox public finance, a user fee is supposed to align the benefits received by taxpayers (drivers, in this case) with the costs of consuming some public good or service, such as transportation infrastructure, the provision of which often is seen (erroneously) to be a proper function of state and local governments. (The error committed here, as history teaches, is that roads and bridges profitably could be built and maintained by private companies having exclusive rights to collect “user fees”, aka tolls; the Erie Canal is an apt example.)

Federal, state and local excise taxes on gasoline traditionally are justified on the theory that those who drive more miles per day, month or year and, consequently, consume more gasoline, impose more wear and tear on a state’s highways than people who drive less or commute via “public” buses and subways, transportation modes that also could be provided by the private sector (e.g., Denver, CO, or the Washington, DC, metro area, where bus services once operated under private ownership).

But, are marijuana users responsible for more potholes than people not driving under the influence of cannabis? I doubt it. Moreover, 20 percent of NJ’s pot tax revenues will be earmarked for financing state drug-law enforcement efforts and 10 percent for government initiatives targeting “women’s health”.

The latter two earmarks expose the real purpose of Sen. Scutari’s bill, which in public choice perspective, obviously is to generate more revenue that New Jersey’s legislature can spend so as to buy the votes that will enhance the reelection aims of its members, the prime imperative of any democratically elected politician.

Because the revenue from imposing new taxes or raising the rates on existing ones deliver revenue windfalls to the spending programs for which they are “earmarked”, self-interested politicians never will allow legislative “intent” to be fulfilled. Tax revenue is fungible and so some of New Jersey’s pot tax receipts rationally will be reallocated to budgetary line items from which the parochial political returns to spending are higher.

It is for that same reason that highway “trust funds” routinely are raided to plug holes in other line items of state budgets.

Just like state excise taxes on tobacco or the revenues raised by taxes on state-run lotteries, which are dedicated to financing public education or other seemingly worthy public causes, New Jersey’s pot tax will fill the state’s coffers with little or no impact on the condition of the state’s roads and bridges or its overall budget balance.

Universal Government Preschool: Nilla Wafer Wishes and Juice Box Dreams

9947688_SEarlier this month President Obama released his behemoth education budget, complete with $75 billion in mandatory funding over the next decade for universal government preschool programs.

This should come as no surprise. Obama has made universal preschool a cornerstone issue, and supporters in the press have been spilling lots of ink, largely because there’s scant evidence of long-term benefits.

Government preschool enthusiast Nicholas Kristof of The New York Times admits as much in a recent column, noting that “early education has always had an impact not through cognitive gains but through long-term improvements in life outcomes.”

Those of us not deluded by Nilla Wafer wishes and juice box dreams are probably wondering how a better life is possible without cognitive improvement.

Frankly, it isn’t—and that’s a big problem for high-profile backers of universal government-run preschool.

President Obama’s $100 billion Preschool for All initiative took center stage of his 2013 State of the Union. Democratic House Leader Nancy Pelosi also made universal preschool a top priority in her Economic Agenda for Women and Families released last summer.

For all the publicity, the pricey plans went nowhere fast in Congress. Scaled-back funding did make its way into the omnibus spending bill passed earlier this month, including some $250 million for states to expand preschool through the Race to the Top Early Learning Challenge, along with an additional $600 million for the country’s longest-running preschool program Head Start.

But those amounts were a far cry from the billions upon billions of dollars preschool supporters were hoping for. Even the president’s current funding request will be a tough sell.

One reason is that government-run preschool impacts quickly fade out once students enter elementary school according to official evaluations by the U.S. Department of Health and Human Services. Touted localized programs are also suspect in terms of real results.

Claimed impacts from the small-scale Perry Preschool and Abecedarian preschool programs from the 1960s and 1970s have never been replicated—a real red flag for policymakers looking for model programs. A subsequent federally supported program in Chicago during the 1980s offered in-home care, tutoring, and parent classes for low-income, at-risk participants—hardly a run-of-the-mill “preschool” program.

But what about other studies by Harvard and UCLA researchers cited by Kristof purportedly showing positive long-term outcomes for Head Start participants? Both studies note the well documented phenomenon of fade out. Yet researchers can only estimate the likelihood of better outcomes on participants because only short-term evaluations are conducted—even though Head Start began in 1965.

None of this has stopped Obama, Pelosi, Kristof, and others from linking any number of long-term benefits to government preschool, from more than 10 to 1 rates of return on taxpayer subsidized “investment,” to reduced incarceration rates, and higher college attendance rates.

In the real world, private investors demand proofs of concept before they invest their hard-earned dollars. We should hold government to the same standard with any program it seeks to implement or expand—especially when those programs affect children.

Kristof was right that preschool is one of the top public policy issues this year. But he’s wrong that those of us who question the results are off base and need schooling.

It’s high time for preschool boosters to make good on their promises of preschool-driven excellence to generations of children and taxpayers—now, not decades from now.

Lessons from a German Homeschooling Family about the Nanny State

WunderlichFamily-September2013-500px-500x373The saga of a German homeschooling family represents a needed refresher course about the true origins of our fundamental rights.

Uwe and Hannelore Romeike, along with their seven children, were on track to be deported from the United States. What was their high crime and misdemeanor? Drug trafficking? Gun running? Cybercrime?

No—it was homeschooling.

Homeschooling has been illegal in Germany for nearly a century, but the Romeikes opted to school their children at home for educational and religious reasons. Faced with an imminent fear of losing custody of their children, in addition to jail time and fines, Uwe and Hannelore Romeike fled to Tennessee in 2008 with their children and sought legal asylum, which they were granted in 2010 by U.S. Immigration Judge Lawrence Burman.

That should have ended the matter, but apparently granting a homeschooling family asylum in the United States constitutes a threat of the highest order, at least according to the U.S. Department of Homeland Security’s Immigration and Customs Enforcement (ICE), which challenged the Romeikes’ asylum ruling.

Recall, ICE is an entity that claims its Homeland Security Investigations (HSI) directorate is “critical” and:

...responsible for investigating a wide range of domestic and international activities arising from the illegal movement of people and goods into, within and out of the United States. HSI investigates immigration crime, human rights violations and human smuggling, smuggling of narcotics, weapons and other types of contraband, financial crimes, cybercrime and export enforcement issues. ICE special agents conduct investigations aimed at protecting critical infrastructure industries that are vulnerable to sabotage, attack or exploitation.

Apparently, ICE believes when homeschoolers are detected we should dial our terror-alert color wheel all the way up to red—and head straight for the Board of Immigration Appeals, which revoked the Romeikes’ asylum in 2012 on the basis that having your children taken away by the state for educating them at home isn’t a serious threat.

But clearly homeschooling is a big threat to the Obama administration.

Last March the Home School Legal Defense Fund (HSLDF), the organization defending the Romeikes, created a White House petition asking President Obama to protect the family’s asylum. Obama declined to respond, but his Department of Justice sure went on the offensive.

In its June 26, 2013, brief to the U.S. Sixth Circuit Court of Appeals, Obama’s DOJ essentially argued that the German government is right to take children away from their parents and force them into government schools because “[t]eaching tolerance to children of all backgrounds helps to develop the ability to interact as a fully functioning citizen of Germany” (p. 8).

So according to the Obama administration’s handbook on functional citizenship intolerance from government somehow fosters toleration among schoolchildren. Got it.

The Romeikes lost their asylum appeal last year, and earlier this month the U.S. Supreme Court declined to hear their case. Just one day later, the Department of Homeland Security suddenly reversed its opposition and informed the Romeikes they could remain in the United States indefinitely.

The DHS’ change of heart may seem like welcome news for the Romeikes this time, but it should be little consolation to lovers of liberty.

We are endowed by our Creator—not government—with certain unalienable rights, including the right of parents to educate their children as they see fit. If we forget the true origin of our rights and allow our government to defend or attack them willy-nilly, where on earth will we go for asylum?


Outside Money in Politics

15414388_SOne complaint about political campaigns is that they are increasingly funded by “outside money” that comes from outside the jurisdictions in which the elections are held.

In a recent special election in Florida to fill a seat in the US House of Representatives, $9 million in outside money was spent to influence that election. The headline in this article says that outside money bought that election. The article suggests that people outside the district, because of their spending on political ads, are determining who will represent the voters in that district. It is, the article says, “The death of the local campaign.”

Is that outside money inappropriate? Should there be limits on outside money in politics?

Here is another viewpoint. This article says that same congressional race had national implications. The Democratic candidate, Alex Sink, is a well-known figure in Florida politics, having been elected to the office of Florida’s Chief Financial Officer in 2006 and having been the Democratic candidate for Governor in 2010. The Republican candidate, who won, is a former lobbyist with little name recognition.

The article says, “Republicans say that if their first-time candidate defeats a seasoned veteran, it will demonstrate just how toxic the health-care law will be for Democrats this fall.” And goes on to say, “The race is particularly important for Pelosi’s Democrats, who have battled the perception that they have no chance of winning the close to 20 seats they need to claim the majority in November.”

If the race has national implications, why shouldn’t people outside the district have a say in its outcome? They don’t get to vote, but shouldn’t they be able to engage in political speech to try to influence those who do vote?

Every race for the US Senate and House of Representatives has national implications, because both parties want to elect more members to tilt the balance of power their way. Voters in congressional races are not just electing their representatives, they are electing people who will tilt the national balance of power, and it seems completely appropriate that because of the national implications for those local races, people throughout the nation should participate in those campaigns.

Indeed, the only reason outside money comes in is because the elections have effects that go beyond their local districts. People outside the district are affected by the outcome of the election, so there is good reason for them to try to influence the outcome.

Can Obamacare Be Fixed?

priceless_180x270It’s a 2,700 page bill. There are 20,000 pages of regulations. Major provisions seem to change every other week. And despite Nancy Pelosi’s promise, four years after it passed most of us still aren’t sure about everything that’s in it.

How can something like that possibly be fixed?

It’s easier than you might suppose. Previously, I recommended four simple ideas:

  1. Replace all the Obamacare mandates and subsidies with a universal tax credit that is the same for everyone.
  2. Replace all the medical savings accounts with a Roth Health Savings Account (after-tax deposits and tax free withdrawals).
  3. Allow Medicaid to compete with private insurance, with everyone having the right to buy in or get out.
  4. Denationalize and deregulate the exchanges and require them to institute change of health status insurance.

Clearly much more needs to be changed. But you could keep an awful lot of Obamacare and still have a workable health care system by making these changes and these changes alone.

In this post, I will describe all of the mechanical problems that would be solved with these four changes. In a subsequent post, I will show that these changes would also get all the important economic incentives right.


The Independent Review—Spring 2014 Issue Now Available

tir_18_4_210The Spring 2014 issue of The Independent Review, the Independent Institute’s quarterly journal, has just been printed and is en route to subscribers. Here’s a quick look at the contents:

  • Is the near extermination of the North American bison a clear example of “the tragedy of the commons”? No, not if, like Peter J. Hill, you keep in mind one crucial fact that nearly everyone has ignored. (Read a summary.)
  • American higher education before the Civil War was not free of government intervention. Daniel L. Bennett shows why many writers misunderstand the problems that have long plagued academia. (
Read a summary.)
  • How has a private, for-profit school chain managed to serve the poor and vulnerable in 15 countries on four continents? Kevin Currie-Knight reviews James Tooley’s book on the challenges, pedagogy, and business model of the SABIS school network. (Read the book review.)

Please be sure to take advantage of our special offer of your choice of a FREE book, such as The Terrible 10 by Burton Abrams, when you renew or order a new subscription online.

[This post first appeared in the March 25, 2014, issue of The Lighthouse. To subscribe to this weekly email newsletter and other bulletins from the Independent Institute, enter your email address here.]

Obamacare’s Risk Corridor “Bailout” Just Got Bigger—Much Bigger

9209401_SLast Friday, the Obama administration quietly released 280 pages of rules that, among other things, increases Obamacare’s risk corridors (a.k.a. insurers’ bailout):

We propose to implement an adjustment to the risk corridors formula..... Such an adjustment could increase a QHP issuer’s risk corridors ratio if administrative expenses are unexpectedly high or claims costs are unexpectedly low, thereby increasing risk corridors payments or decreasing risk corridors charges. We propose to raise the administrative cost ceiling by 2 percentage points, from 20 percent to 22 percent. We also propose to increase the profit margin floor in the risk corridors formula (currently set at 3 percent, plus the adjustment percentage, of after-tax premiums). Such an adjustment could increase a QHP issuer’s risk corridors ratio if claims costs are unexpectedly high, thereby increasing risk corridors payments or decreasing risk corridors charges. We propose to raise the profit margin floor by 2 percentage points, from 3 percent to 5 percent. (p. 56)

An example reveals how much this change increases the “bailout.” The table below shows an insurance plan with $10 million cost target versus $11 million of allowable costs. Actual medical claims are $8.8 million. Using the formula for calculating its payout from the risk corridor, allowing 20 percent of administrative costs, the plan gets a $410,000 “bailout” (panel A). If it can add administrative costs up to 22 percent of allowable costs, the payout increases to $635,641—an increase of 55 percent (panel B).

Health insurers continue to win with Obamacare. READ MORE

New Faculty for 2014 Challenge of Liberty Student Seminars

NewFacultyEvery year, the Independent Institute’s Challenge of Liberty Student Seminars become a forum for students to learn the foundations of a free and prosperous society. These seminars are inspiring, challenging, and fun—in large part because the speakers we invite are exceptionally devoted to teaching and mentoring students.

In 2014, three new speakers will join our already excellent faculty list.

  • Christopher Coyne is professor of economics at George Mason University and co-editor of The Independent Review. Chris planned a career in finance before he took an economics class that inspired him to become an academic. His research interests are humanitarian aid, economic development, and Austrian economics.
  • Michael Thomas teaches at Utah State University, where he specializes in economic history and public choice. He studies the unintended consequences of government regulations and how they affect consumer choices in the marketplace. John Stossel once interviewed Michael on the subject of “sin taxes,” a topic he examined in a paper co-authored with Adam Hoffer and Independent Institute Research Director Bill Shughart.
  • Abigail Hall is completing her Ph.D. in economics at George Mason University, where she is also a research fellow at the Mercatus Center. Abby’s research interests focus on foreign aid and national defense. She is co-author with Chris Coyne of an important article on the militarization of U.S. domestic policing, which ran in the Spring 2013 issue of The Independent Review.

The deadline to apply to the Independent Institute’s 2014 Challenge of Liberty Student Seminars is March 31.