The Independent Institute


Political and Governmental Corruption Is a Feature, Not a Bug

47288952 - giving a bribe, hands of businessmen or politiciansPeople do not oppose corruption in politics and government. They oppose only the corruption that does not steer loot and social domination to them. After all, the entire process of so-called democratic government is nothing but corruption writ large and backed by the threat of violent force.

Political partisans in particular are utterly unprincipled in regard to the corruption of the political process. If the Republicans are exposed as receiving unlawful campaign contributions or perpetrating political dirty tricks, the Democrats howl to high heaven, and vice versa. Of course, neither major party has a lock on corruption. In Washington, the state capitals, and the county and city councils, corruption is an equal-opportunity practice. Indeed, it’s why the massive federal, state, and local governments exist in the first place. If governments confined themselves to protecting people’s natural rights, à la John Locke, they could operate with a tiny fraction of the money and personnel they now command.

So why is anyone shocked or even surprised when corruption is revealed? Is it not entirely to be expected that the chiefs and functionaries in a system should act in a way that the system is designed to facilitate and encourage? If a society has a governmental system in which the operatives are endowed with great power over people’s lives, liberties, and property and also allowed to sell their specific exertion of this power (or lack thereof) to the highest bidder—indirectly if not directly, legally if not illegally—then such sales will take place. If the money, power, and sadism were removed from politics and government, there would be nothing left but hollow promises and childish make-believe.

One man’s patriot is another man’s traitor. One man’s crook is another man’s dedicated public servant. The number of people who prefer that a strict standard of honesty and upright behavior be enforced across the political board is so small that it might as well be zero. People who wouldn’t consider stealing a nickel from their neighbor’s loose-change jar will support politicians who bankrupt entire countries while enriching and empowering their political supporters and pals.

Are Obamacare Plans Cheaper than Private Coverage?

52016000 - wallet.Scholars at the Urban Institute, staunch defenders of Obamacare, have previously struggled to find ways to report Obamacare’s good news by pointing out “there is no meaningful national average” of premium hikes. More recently, they have concluded that Obamacare coverage is 10 percent less expensive than employer-based coverage.

Comparing average employer-based premiums to the second-lowest cost Silver benchmark Obamacare plans, the Urban Institute scholars found lower Obamacare premiums in 38 states plus Washington, DC. These are the unsubsidized Obamacare premiums, adjusted for age, actuarial value, and utilization associated with actuarial value.

“Actuarial value” and “utilization” refer to Obamacare plans indemnifying fewer costs than employer-based plans. They have higher premiums, co-insurance, and co-pays. Premiums will be lower for such plans because a higher share of costs is paid directly by patients and not third-party insurers. Further, those with higher direct spending will consume fewer health resources, are more likely to seek less expensive services, et cetera. So, the Urban Institute scholars grossed up Obamacare premiums by 18 percent to adjust for these effects.

After this adjustment, Obamacare premiums were 10 percent less expensive. Before praising the study, let me quibble with two issues. First, there needs to be another adjustment, because comparing unsubsidized Obamacare premiums to actual employer-based premiums misses the fact that 85 percent of Obamacare beneficiaries receive tax credits subsidizing coverage, whereas 100 percent of beneficiaries of employer-based plans pay premiums with pre-tax dollars, excluded from their household taxable income. These are two very different tax treatments. Net premiums after including these effects are more interesting than the gross premiums before the tax benefits. However, such a comparison would be dauntingly hard to estimate.

Second (and related), there is an income effect that invites adjustment. The tax shield of employer-based benefits is biased towards high-earning employees with high marginal income tax rates. So, many lower-earning employees have more health benefits than they would prefer. They would rather take home higher wages. However, the employer-based system denies them this choice.

Although Americans are right to criticize Obamacare, the Urban Institute’s latest study raises an important question about the status quo: Why do we allow employers to make our choice of health plan, which results in higher premiums?

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For the pivotal alternative to Obamacare, see Priceless: Curing the Healthcare Crisis and A Better Choice: Healthcare Solutions for America, by John C. Goodman, published by Independent Institute.

The Return of Protectionism

36760755 - merchant container shipThere are different ways to gauge the rise of protectionism. An obvious one is to count, as Global Trade Alert does, the number of measures adopted by various countries affecting competition from outside. Some 4,000 new barriers to trade have been adopted worldwide since 2008.

Another way is to look at the trend in political discourse in developed countries—and the response of the electorate. The effect that Bernie Sanders has had on Hillary Clinton’s views on trade in the current U.S. presidential campaign, and the fact that the most protectionist candidate, Donald Trump, obtained some fourteen million votes and 45 percent of the popular vote in the Republican primaries, tell us much about the shifting views on trade. Not to speak of the strength of the anti-globalizers in Europe, from Podemos, Syriza, and the 5-Star Movement in the south to the National Front in France, the People’s Party in Switzerland, and the True Finns in the north.

As usual when protectionism makes a come back, fabrications and myths displace facts. As AEI blogger James Pethokoukis explained in a recent post using data from The Economist magazine, the poor are the overwhelming losers of the protectionism advocated by the champions of the poor.

There have been three great protectionist moments in the past century. One was the 1930s, when the political paranoia of the Great Depression and the difficulties faced by countries that had returned to the gold standard at unrealistic pre-WWI prices created an environment conducive to economic nationalism.

The second was the 1970s, when stagflation caused by interventionism pushed the world towards protectionism of the non-tariff kind.

The third is now. It is more subtle in terms of the state measures being taken (mostly regulation in the case of the banking and information technology sectors, combined with subsidies focused on agriculture, financial entities, and even the car industry). But today’s protectionist spirit is very potent in terms of political discourse and could lead to a more frontal attack on trade than prevailed in the 1970s.

One reason is probably the fact that “managed trade” has been the preferred approach to international commerce since the end of WWII. As Logan Albright explains at Conservative Review, “managed trade” of the kind embodied by so-called Free Trade Agreements is very distant from real free trade, even though such accords often improve on the prevailing situation because tariffs tend to come down, sometimes dramatically. But the point is that the international architecture built in the past several decades has helped ingrain in people that notion that free trade is a political negotiation, a sort of peace treaty, rather than the absence of impediments to the voluntary exchanges between peoples. Furthermore, the fact that behind every FTA stands an army of lobbyists seeking influence, and that each accord involves conditional concessions, exceptions, and limitations has helped entrench the notion that commerce has little to do with the people’s choices and everything to do with nationalist pride represented by state power.

The world first attempted to build the architecture of global trade through the General Agreement on Tariffs and Trade, a precursor to the World Trade Organization. (Remember those famous GATT “Rounds”—Kennedy in the 1960s, Tokyo in the 1970s, Uruguay in the 1990s, etc.?) Member countries got nowhere trying to produce worldwide agreements, so they opted (thanks in part to Article 24 of GATT) for the formation of trading blocs and bilateral agreements. It would be unfair to deny that, given the suffocating tariffs that weighed on many economies, those agreements often unleashed a significant commercial dynamic in many parts of the world. But that trade model also sent people the wrong signals about what free trade really is, and it added to the confusion generated by politicians who blame problems on deals negotiated between governments—deals that in fact have little to do with the freedom to exchange.

Perhaps the new protectionist era is a good occasion to remake the case for free trade as a bottom-up, mutually rewarding spontaneous activity between consenting peoples, rather than a deliberate, bottom-down framework of political exchanges between governments seeking to gain at each other’s expense.

Deepwater Horizon Shows Dangers of Hubris, Not Capitalist Greed

DeepwaterHorizonlargeI was braced for Deepwater Horizon, the big-budget disaster movie about the real world oil-rig disaster, to be an anti-capitalist and anti-oil diatribe. After all, the oil spill became the biggest environmental disaster in history. But instead of a tirade, I found a complex saga weaved into a story of heroism triggered by hubris and reckless disregard for the consequences of poor judgement. While Hollywood and mainstream media might call this blunder “greed,” I think the film is more a universal cautionary tale of the tragedy that can result from human error.

Deepwater Horizon is directed by Peter Berg of Friday Night Lights and Lone Survivor fame (and others), and the big screen swallows up viewers through well-executed special effects depicting nature’s unwillingness to be tamed, aided and abetted by cutting-edge man-made technology. The violence is carefully scripted to fit the narrative (and the New York Times article on which it is based), and every explosion, burst of flame, and collapsing piece of metal serves the purpose of moving the story and the arc of the characters forward. All the major characters are tested and transformed as they are thrust into dealing with the tragic consequences of the improbable.

But the special effects are not the story in this film. Rather, it’s the tale of everyday workers forced to come to grips with their worst on-the-job nightmare, a literal and metaphoric Hell that can’t be understood unless it is lived.

Berg’s masterful use of foreshadowing sets in motion dual personal and professional tensions that build until the first violent appearance of uncontrolled crude gushing through the rig’s pipeline, about halfway through the movie. Mark Wahlberg, as electronic technician Mike Williams, and Kurt Russell, as rig boss Jimmy “Mr. Jimmy” Harrell, may well earn best-actor nods based on their exceptional performances. John Malkovich, playing BP executive Donald Vidrine, turns in an understated performance that pivots the story in an unusual but important way (as I will discuss below).

Even though we know the story’s ending—about 5 billion barrels of oil spilled into the Gulf of Mexico, 11 people dead, and cleanup estimated to cost about $54 billion dollars—the story unfolds in a human context. As Mike Williams (Walhberg) sets out from home, his distance from his wife (played by Kate Hudson) and daughter is as heartfelt as it is necessary for keeping the steady paychecks coming (reinforcing the film’s everyday working man theme). Mr. Jimmy’s (Russell) disdain for BP oil executives and middle managers is clear from the beginning, as professional and class distinctions are established early—blue-collar rig operators versus corporate suits. The division is important and intentional, and Berg establishes these divisions with an authenticity that serves the story well. Berg has championed Lionsgate, the film’s producer and distributor, for its willingness to make “a film about something—about the oil industry, about corporate greed.”

Berg isn’t quite on point here, although it fits the Hollywood narrative. This might also be the film’s saving grace, giving it staying power in filmography as well as contemporary commentary on environmental policy.

Without a doubt, BP is the film’s villain. The real-world disaster, however, had three main villains: BP, the obvious one, as well as the rig operator (Transocean), and global oil services company Halliburton. In the actual lawsuit and settlement, BP was assigned to 67 percent of the liability, 30 percent to Transocean, and 3 percent to Haliburton. BP was cited for “gross negligence” and “willful misconduct,” reckless behavior. Transocean and Halliburton were “negligent.”

The difference in culpability underpins a big part of the film’s plot and story. When Mr. Jimmy and Williams board the rig, they are told that BP has inexplicably transferred maintenance crew to another site, before they had conducted a required final test on the Deepwater Horizon’s wellhead. Controversy and tensions mount as the rig operators repeatedly question the wisdom of the transfer while the executives dismiss the dangers, citing vague probabilities of a blowout really happening. The result is a story of Transocean’s employees trying to do the right thing—follow best practices and run the right tests, the right way, before moving on—all while BP’s determination to get the rig back on schedule leads to reckless disregard for the likelihood of disaster (a blowout). At the end of the day, however, Mr. Jimmy has to make the final call, and, weighing the risks based on the information he has available, he makes the wrong one. By my estimate, Berg’s narrative seems to elevate BP’s role in the disaster to 90 percent responsibility and reduce Transocean’s to 10 percent. Halliburton is nowhere to be seen.

Ironically, the story of corporate greed breaks down, despite the director’s apparent intentions. In a pivotal scene, BP executive Vidrine (Malkovich) seeks out Mike Williams to get his honest and candid assessment of the state of Deepwater Horizon’s equipment. Williams tells him it’s like landing a plane on “empty tanks,” and that “you don’t want to land a plane on empty tanks.” Vidrine doesn’t push back, but he does process the information and reflect on it. His fault is a failure to take leadership when confronted with this sobering information.

The inevitability of the disaster becomes apparent to the audience as they are privileged with information on the impending blowout about which the crew can only guess. Finally, the fateful decision is made, and the blowout fuels an explosive rain of fire, debris, and death on the crew, fomenting chaos, further indecision, and even more poor judgement. Importantly, the Deepwater Horizon was known for having one of the best trained and most experienced crews in the industry, doubling down on the film’s theme that “fail safe” does not exist when tampering with the power of Mother Earth. (In fact, as in the movie, BP officials in real life were on the rig to announce an award for productivity and safety.)

Unfortunately, Deepwater Horizon will be relying on foreign film revenues to cover its production budget of $110 million. This film deserves a much wider viewing, although perhaps not for the reasons that environmentalists and many sympathetic reviewers would prefer. Its depiction of “greed” is a shallow version that fits the Hollywood fantasy narrative that natural resources don’t have to be exploited and, when they are, the costs of using them can and should be ignored. Scarcity in this narrative is applied only to natural resources, not to the other resources that keep the lights on, the air conditioners blowing, the furnaces warming us, or the trains and cars moving.

The real power of Deepwater Horizon is in showing the consequences of poor decisions and a failure to follow best practices, and the depiction of the environmental and human tragedies that result. This is a worthy message for environmentalists of all types and stripes. Berg has said as much, despite the quote above, writing in The Guardian (October 4, 2016):

Nobody thought the cement pour would have led to what it did. [BP executives] Vidrine and Kaluza were wrong, but there was no criminal intent there. We are clear on that. BP behaved as a company for profit, which it is – but we all participate in capitalist society. Every time we drive a car or fly in an airplane, we are all complicit in this relationship. BP isn’t some great devil forcing us to live these lifestyles. BP had many problems drilling that well that certainly weren’t all BP’s fault – that was why it was called “the well from hell”. I think we made BP look reasonable in its reactions to events. That’s not to say its two guys weren’t on the rig; they were in charge, and made some big mistakes. If anyone had really understood that something this bad was going to happen, they would have stopped it for sure; no one realised what the price could be for the shortcuts. I’ll bet you BP are not going to be so quick to cut corners in future.

The Never-Ending Contest in Politico-Economic Life

44507860_MLA contest is under way in the world between the forces of creation, improvement, and progress and the forces of destruction, spoliation, and retrogression. This contest has been going on for thousands of years, and except during brief interludes the negative forces always kept the positive forces firmly in check. Roughly 200 to 300 years ago in Western Europe and some of its overseas offshoots, however, the positive forces began to outpace the negative ones, and economic progress slowly became more or less the long-term norm, eventually propelling first Europeans and ultimately most populations in the world to much higher levels of living and economic well-being. Scholars continue to debate precisely what brought about this Great Enrichment.

We know for certain, however, that the negative forces did not disappear. They were merely outpaced or circumvented most of the time in more and more places. The efforts of private inventors, innovators, investors, and workers created the process of normally positive economic growth. But government officials, regulators, influential busybodies, and misguided ideologues always tried to put obstacles in the positive path—always, of course, for what struck them as the best of reasons. They even fancied—at least in public—that they were making a positive contribution to the process, although owing to their lack of understanding of sound economics, they usually did nothing of the sort even when they really were trying.

In any event, a great variety of special interests always understood that if they could capture the powers of government to back their schemes of enrichment and empowerment, they could make themselves better off at the expense of everyone else. So with the spread of “democracy,” the plunder that had previously been confined to a much narrower set of plunderers was made much more comprehensive, giving rise to the real war of all against all. Of course, this ceaseless political war-making wreaks havoc with the creative forces that private individuals and organizations are exerting, and sometimes it overwhelms them completely, as during serious business contractions and great wars.

Cubs Fans Swing and Miss on Understanding Basic Economics

48265965_MLCubs fans, rejoice! This may be the year you can finally stop blaming a goat for all your problems and win a World Series.

Without a doubt, sports are a goldmine of economic topics. With the popularity of books and movies like Moneyball: The Art of Winning and Unfair Game, many people have been exposed to how the logic and mathematical tools of economics are readily applied to sports. In my honors principles classes, I ask my students to write op-eds of their choosing, with the condition that they apply the economic way of thinking to their topics. Without fail, at least one paper turned in will be about baseball, basketball, soccer, or football.

The most recent World Series is bringing up a different type of economic problem, however. It’s reported that bars near Wrigley Field are charging some $250 per person just to get inside to watch the Cubs play in the World Series. These prices include drinks and a buffet, but not a seat. A chair is an additional charge.

The Federal Budget in Plain English

According to the President’s Office of Management and Budget, the 2016 federal budget looks like this (p. 115):

The 2016 Federal Budget  
National debt held by the public $14,129,000,000,000
Total national debt $19,765,000,000,000

Now let’s pretend this is a household budget by removing eight zeros:

The Family Budget 
Annual family income$33,360
Annual family spending$39,510
New debt on the credit card$6,150
Outstanding balance on the credit card$141,290
Money owed to credit card and relatives$197,650

Clearly, this family is financially irresponsible, as rising debt and debt-service costs consume the family budget. To continue the analogy with the federal government, a large portion of the credit-card debt is from charging current consumption to the card, including groceries. This is reckless financially and changes need to happen immediately. The same is true for the federal government.

In a recent New York Times commentary titled “Ignoring the Debt Problem,” Paul A. Volcker, former chairman of the Federal Reserve, and Peter G. Peterson, former secretary of commerce, said:

Delaying action now will make the needed changes only more painful and difficult later on, while also increasing the risk of financial crisis before the reforms are even made. That is why the real debate should begin immediately.

Yet at the final presidential debate, both candidates missed the opportunity to clearly lay out their visions for a fiscally responsible, long-term future for our country. There’s still time to solve this problem. But our next president needs to show leadership in the first months.

At our age, neither of us will personally suffer from a failure to act. It is those with long lives ahead—grandchildren and great-grandchildren—who deserve the benefit of prospering in a nation with sound finances.

Take some advice from two observers who have been around for a while: The long term gets here before you know it.

Say What?! Global Charity Rejects Free Vaccines

42685883 - vaccination, syringe, medicine.Doctors Without Borders /Médecins Sans Frontières (MSF) has decided to reject a donation of one million doses of pneumonia vaccine from Pfizer, Inc. The global health charity’s convoluted reasoning goes like this:

There is No Such Thing as “Free” Vaccines

Pneumonia claims the lives of nearly one million kids each year, making it the world’s deadliest disease among children. Although there’s a vaccine to prevent this disease, it’s too expensive for many developing countries and humanitarian organizations, such as ours, to afford.

Free is not always better. Donations often involve numerous conditions and strings attached, including restrictions on which patient populations and what geographic areas are allowed to receive the benefits.

Critically, donation offers can disappear as quickly as they come. The donor has ultimate control over when and how they choose to give their products away, risking interruption of programs should the company decide it’s no longer to their advantage.

This remarkable document goes on to praise GSK, a competitor of Pfizer’s, for having declined to offer pneumonia vaccines for free, but instead offer them for $3.05 per dose to all humanitarian organizations. I don’t know about you, but I will take free over three bucks any day.

Obamacare Premiums to Increase 25 Percent

55162849 - health insurance assurnace medical risk safety conceptEven I did not think it would be this bad: The Obama administration has confessed that the average 2017 Obamacare premium hike for the benchmark (second-lowest-cost) Silver plan will be 25 percent. (Back in June, it looked like the hike would be 16 percent.)

Don’t worry, says the administration, tax credits will ensure that beneficiaries pay only a fraction of their premiums. It is true that very few people would buy Obamacare plans without the tax credits, the administration cheers. In reality, however, that is not a sign the plans are “affordable”; it’s only a sign that taxpayers are bearing more of the burden.

When the Affordable Care Act was passed in 2010, the Congressional Budget Office estimated that 23 million people would get coverage from the exchanges in 2017, subsidized by $75 billion of tax credits. That’s an average tax credit of about $3,260 per person (including those who receive no tax credit).

Trump and Clinton Are Both (Partly) Right on Economics

Neither of the major party presidential candidates is a font of economic wisdom. However, if you look hard enough, you can find a glimmer of truth in some of their rhetoric. In this post I’ll analyze two of the issues raised by the candidates, showing how each contained some truth but also confusion.

Economic Growth

At one point during the third presidential debate, Trump said he just left “some high representatives in India,” and that that country was growing at 8 percent, while China was growing at 7 percent, which for them (he claimed) was “a catastrophically low number.” In contrast, the United States economy has only been growing at “around the 1 percent level.”

Now on Twitter and other online forums, economists roundly mocked Trump for being unaware of the concept of economic “convergence,” in which standard models predict that poorer countries grow faster than rich countries. The economists’ critique is valid as far as it goes: Trump seemed to be claiming that India and China are growing faster than America merely because they enjoy better government policies, and not because they are starting from a lower level of per capita real income.