The Independent Institute


PC Cowards at Yale Rename Calhoun College

According to the BBC, Yale President Peter Salovey announced that Calhoun College would be renamed because John C. Calhoun’s legacy and principles are “at odds with the university’s values.” Calhoun served in the House of Representatives, in the Senate, as Defense Secretary, and as Vice President of the United States. He graduated Phi Beta Kappa from Yale College in 1804. So what were his principles? During the presidential campaign of 1843, Calhoun put forth these 7 points: “Free trade, low duties, no debt, separation from banks, economy, retrenchment, and a strict adherence to the Constitution.” I would imagine that most readers of this blog would likely support a majority of these points, if not all of them. Moreover, Calhoun’s Disquisition on Government was an original and masterful examination of the nature of man, government, and constitutionalism. It is one of the greatest works of American political theory.

It is doubtful that Salovey or any of the name-change agitators have ever read the Disquisition and are likely unaware of the seven principles mentioned above. What they do know is that Calhoun was pro-slavery, and in our race-obsessed society that’s all they want to know. No further examination or thought is needed. We are awash in a tide of presentism: an unthinking adherence to present-day attitudes with which we interpret past events. It’s a great thing we live in a country where we cannot even imagine owning another human being. But, dear reader, I would venture that both you and I, had we been born in 1782 in one of the thirteen states, we too would have accepted a world in which human bondage was a feature.

Take the example of Abraham Lincoln, who was born in 1809. He did not believe in the social or political equality of blacks and whites and opposed blacks serving on juries, voting, or marrying whites. In 1862, Lincoln drafted a constitutional amendment to preserve slavery in hopes of luring the CSA back into the Union. That same year, Lincoln hosted a delegation of freed slaves at the White House and asked them to support a plan for colonization in Central America. Given what he saw as the natural differences between the two races, Lincoln believed it would be better if blacks left North America and created a home elsewhere. Yes, Honest Abe was no liberal.

As I said before, it’s a good thing that we have a hard time understanding Calhoun’s and Lincoln’s views on race. But just because we have been raised in different times with different values does not give us a license to write either man off because, using the yardstick of 2017, both would be considered racists.

As an old and elite University, Yale should promote the study of history, efforts to learn from history, and a respect for history. Attempting to erase John C. Calhoun from the historical record is an act of intellectual cowardice. Yale, shame on you.

Filling the Federal Reserve Board Vacancies?

(See updates below, 2/13 and 2/24.)

Five of the most important appointments Donald Trump will make during his first year in office will be to fill three vacancies on the Federal Reserve Board, to reappoint or replace Janet Yellen as Federal Reserve Board Chair, and to designate one of the Board members as Vice Chair for Supervision.

Thanks to Senatorial foot-dragging during the last two years of the Obama administration, there are already two vacancies on the 7-member Federal Reserve Board of Governors. The Board has several important monetary and regulatory powers in its own right, and at full strength, constitutes an ex officio majority of the 12-member Federal Open Market Committee that sets key monetary policy instruments. The announcement yesterday by Governor Daniel Tarullo that he plans to step down effective April 5 will open a third seat, thereby guaranteeing Mr. Trump’s nominees a majority of the Board when a fourth seat opens up in 2020, if not before.

The obvious candidate for Chair is John B. Taylor, who is Raymond Professor of Economics at Stanford University, a Senior Fellow of the Hoover Institution, and namesake of the famous “Taylor Rule” for monetary policy. He is a prominent hawk on inflation and budget deficits, generally opposes the Bernanke-Yellen policy of Federal Reserve aggrandizement known as “Quantitative Easing,” and is wary of out-of-control “entitlement” spending. Taylor may come close to 99% name recognition among economists, and is highly respected even by those who disagree with his free-market policies.

His 2012 book, First Principles: Five Keys to Restoring America’s Prosperity, is “fundamentally about rules vs. discretion, commitment vs. shooting from the hip, and more deeply about whether our economy and our society should be governed by rules, laws and institutions vs. trusting in the wisdom of men and women, given great power to run affairs as they see fit,” according to the glowing review by “Grumpy Economist” John Cochrane here.

Ninth Circuit and the Immigration Order: One Thing Missing

The Ninth Circuit Court of Appeals has refused to reinstate the travel ban imposed by President Trump. The New York Times has this story on the litigation, and the Court’s opinion can be found here. The case is likely headed to the Supreme Court. Of course, if he’s not hankering for a fight, President Trump could simply rewrite the order and accomplish much of what he wanted. It seems that the order covers noncitizens outside the United States, noncitizens already here, and Legal Permanent Residents. If Trump rewrote the order so that it applies only to noncitizens outside the United States, who by law have no due process rights, then a court would likely have no choice but to uphold it.

Notably absent from the Court’s decision is any discussion of 8 U.S.C. 1182(f). This statute is a part of the Immigration and Nationality Act. It provides, in pertinent part,

Whenever the President finds that the entry of any aliens or of any class of aliens into the United States would be detrimental to the interests of the United States, he may by proclamation, and for such period as he shall deem necessary, suspend the entry of all aliens or any class of aliens as immigrants or nonimmigrants, or impose on the entry of aliens any restrictions he may deem to be appropriate.

One can easily dislike or disagree with this statute for giving a president too much power; however, it is on the books and seems to clearly govern Mr. Trump’s travel ban. Yet, there is no discussion of this in the Court’s opinion. This is sloppy on the part of the Ninth Circuit. If the matter does reach the Supreme Court, hopefully the Justices will address the congressional statute that actually governs the heart of the issue.

Capping Federal Medicaid Funding Would Save $110 Billion to $150 Billion in 5 Years

Arguably more important than repealing and replacing Obamacare, a longstanding Republican proposal to change how Congress finances Medicaid would reduce the burden on taxpayers by $110 billion to $150 billion over five years, according to a new analysis by consultants at Avalere.

Currently, state spending on Medicaid is out of control because Medicaid’s traditional funding formula incentivizes the political class to overspend. For every dollar a state politician spends on Medicaid, the federal government pitches in at least one dollar via the Federal Medical Assistance Percentage (FMAP).

This funding match actually rewards states for making more residents dependent on Medicaid. Before Obamacare, FMAPs ranged from 50 percent (which means the federal government adds one dollar to every state dollar) to 74.63 percent (which means the federal government adds $2.94 to every state dollar). Obamacare expanded Medicaid eligibility to higher-income residents, at an FMAP originally set at 100 percent, now at 95 percent and dropping to 90 percent in 2020. So, for every dollar the state spends on the higher-income residents made eligible through the Obamacare expansion, the federal government adds $19 this year!

This creates a horrible prisoner’s dilemma for states. They pretty much cannot stop themselves from increasing Medicaid spending. According to the Kaiser Family Foundation, Medicaid accounted for over 28 percent of total state spending for all items in the state budget, but under 19 percent of all state general fund spending in 2015. Medicaid is the largest single source of federal funds for states, accounting for almost 57 percent of all federal transfers.

I’m Not a Pessimist. I’m an Economist.

I’ve been lucky, in my time as a graduate student and now as a professor, to give talks on a variety of subjects to many different groups. From business owners, to my undergraduate students, to MBA students, to high school students and more, I never get tired of talking about what I love.

Unfortunately for me, many topics I discuss tend to rain on people’s parades. Informing my undergraduate freshman, for example, that things like a $15 minimum wage and free college would hurt them and others, is not something they like to hear. (They usually acknowledge, begrudgingly, that the economics makes sense.) In a similar way, explaining how arming “moderate” rebels will likely end in disaster, and that foreign aid may do more harm than good, tends to fly in the face of a lot of “conventional wisdom.”

Other topics I discuss are downright depressing. In presenting talks on things like police militarization, torture, and the surveillance state, people often ask me, “What can be done to fix the problem?” I attempt to craft an answer, but ultimately admit I have no step-by-step solution. In a world where politicians, teachers, and others freely offer their supposed solutions as gospel, my inability and unwillingness to offer prescriptions for the world’s problems often leaves people feeling as though I’m holding something back.

Review: The Founder and the Questionable Ethics of Business

Those looking for an inspiring story of entrepreneurship won’t find one in The Founder, the new biopic depicting Ray Kroc’s dogged pursuit of building the McDonald’s Corp into an iconic brand and food-industry juggernaut. According to the screenwriter and story told on the big screen, little joy comes from the Golden Arches as Kroc reneges on deals and stabs his partners (business and family) in the back to seize control of the conglomerate in a quest for greatness.

The biopic chronicles how Midwestern salesman Ray Kroc (Michael Keaton, Beetlejuice, Birdman) stumbled onto a rough gem in the fast-food business in the L.A. backwater of San Bernardino in the 1950s. Richard McDonald (Nick Offerman, Parks and Recreation) and Maurice “Mac” McDonald (John Carroll Lynch, Fargo, Drew Carey Show) discovered an untapped niche in the fast-food fad of the 1940s and 1950s: quick, reliable, high-quality alternatives for families on a budget who want to bypass the disorderly, dirty, and teenager-infested drive-in restaurants. The McDonald brothers had tried several different food businesses, none successful, until Dick McDonald re-engineered the kitchen to provide a high-quality hamburger quickly with a limited menu. Both brothers were committed to high standards for their food and their establishment. And families flocked to their stores.

Kroc, depicted in the film as a ne’er-do-well traveling salesman, was inspired by the staggering flow of customers outside their store, plus the savvy marketing ideas encapsulated in images of the then unknown but now world-famous Golden Arches. He saw the potential to build McDonald’s into a global brand that emphasizes high-quality food, a relentless focus on order and cleanliness, and a family-friendly atmosphere. The only problem was that the brothers had already tried to franchise their store and pulled the plug because they couldn’t control quality. Nevertheless, Kroc convinces them it’s worth another shot, essentially giving the brothers complete control over the design of the stores and the quality of the food produced. Kroc would handle the financing and national franchising.

Kroc, however, finds that franchising is a lot harder than he had hoped. He convinces his rich country-club friends to invest, but they are absentee store owners and fail to maintain the exacting standards for store and food quality. He then recruits husband-wife teams, betting correctly that they would buy into the image and brand of McDonald’s as a family-oriented business and keep their stores clean and friendly as on-site owners. He finds, however, that he has signed away too much control over to the McDonald brothers. In fact, Kroc finds that his payments to the McDonald brothers essentially eliminate any profit, jeopardizing the company’s financial success. The brothers refuse to change their contract, and Kroc starts searching for workarounds. He meets Harry Sonneborn (B.J. Novak, The Office), who advises him to invest in land, rather than stores, a move that breaks the spirit if not the letter of his contract with the brothers, but drives the tremendous financial success of the corporation.

Many viewers will come away from the film believing that Ray Kroc was a double-dealing, ruthless businessman even though screenwriter Robert D. Siegel (also editor of the satirical news site The Onion) reportedly wrote the screenplay based on Kroc’s autobiography and another unauthorized biography. Viewers may also come away with the impression that Kroc’s brutal approach to business was inevitable; Kroc couldn’t have been successful without exploiting the McDonald brothers, who are portrayed as sympathetic innovators whose name and ideas were stolen from them.

Yet, the McDonald brothers were as uncompromising in their approach to business as Kroc was to his vision for expansion. The story unfolds as a conflict between two unbending forces: the McDonald brothers’ intent on preserving their vision of their business—even if it meant staying in one store—and Kroc’s vision for disrupting the entire food industry. Each side was iconoclastic in its own ways. Kroc ended up as the more agile entrepreneur, pivoting his business model in a way to successfully scale the enterprise and monetize his vision by building a global brand. Kroc, rather than the McDonald brothers, ended up becoming the “disrupter” of this generation.

Nevertheless, the producers and screenwriter of The Founder have crafted a story that illustrates fundamental differences between entrepreneurship and invention, and the implications for wealth creation. Wealth is created when an invention is scaled and monetized through the market. Consumers monetize the value of the product (or service) by validating its value through payments in the marketplace—the win-win of trade. Invention is not enough to create social value and capital. Scaling inventions so that society can access their benefits is what disrupts the marketplace and generates industry-wide (as well as social) change. The McDonald brothers were the inventors, and profited from their invention at their first store and the ones they tried to franchise. But their skills and talents were not in building a brand or in franchising their concept in a scalable form.

In Competition & Entrepreneurship (chapter 2), economist Israel Kirzner discusses the difference between a businessman and an entrepreneur. The businessman (or woman) is focused solely on making profits, while the entrepreneur is looking for new opportunities and invests capital in products or services that are different from what the economy already provides. Entrepreneurs use tacit knowledge—unarticulated knowledge from experience, intuition, etc.—to identify these opportunities. The Founder provides an excellent cinematic example of how these concepts differentiate entrepreneurs from conventional businessmen, as well as variations in talents among entrepreneurs. (See also Randall G. Holcombe’s excellent survey in Entrepreneurship and Economic Progress.)

The Founder, however, is not just another anti-capitalist film. The storyline is actually conflicting, and substantial evidence suggests that Kroc was ruthless in enforcing his contracts (even as he stretched the ones with the McDonald brothers). But McDonald’s under Kroc also fulfilled much of the McDonald brothers’ vision. The company is known for its strict adherence to quality and health standards (at least at their stores). Their employee- and management-training program is known for its rigor and upward mobility. (Notably, the company has one of the best records of recruiting and advancing minorities and woman as store franchisees and managers.)

The Founder is Michael Keaton’s movie, likely intended as a vehicle to the Oscars. Keaton does a fine job of conveying Kroc’s vision and the pressures to compromise on business ethics while staying true to a larger vision of higher quality. At one point, for example, Kroc wants to cut down on refrigeration costs by adding a powder substitute for liquid milk in the milkshakes. The McDonald brothers refuse. This propels Kroc to find ways to exploit weaknesses in the contract and ultimately strong-arm the brothers into relinquishing ownership and control. Other actors provide excellent portrayals of the McDonald brothers (Offerman and Lynch), Kroc’s first wife Ethel (Laura Dern), Kroc’s second wife (third in real life) Joan (Linda Cardellini), and a series of advisers to Kroc as he navigates the challenging world of franchise fast food.

The Founder is a solid movie, but it falls short of a great one. Director John L. Hancock (The Rookie, The Blind Side) keeps the pace moving by steadily ramping up the tension between the McDonald brothers and Kroc, while Seigels screenplay effectively shows the subtle corruption implied in the films title, as Kroc eventually fully co-opts the title of Founder of McDonald’s.

American Health Insurance Is Upside Down

Writing in The Week, Ryan Cooper shares a chilling story about an Obamacare Gold-level health insurance policy that let its beneficiary down when he needed it most:

Stewart is 29 years old, and was pursuing his Ph.D in American history at Texas Christian University until ill health forced him to withdraw. He lives in Ft. Worth, Texas, with his wife of six years, who is a junior high school teacher in a low-income district. They own their home. Before he came down with complications from cirrhosis caused by autoimmune hepatitis, he says he led a scrupulously healthy lifestyle—he does not drink or do any other non-medical drugs, he says, and was a devoted hiker before disaster struck. And he was insured—indeed, he had a gold plan from the ObamaCare exchanges, the second-best level of plan that you can get.

But now he faces imminent bankruptcy and possibly death.

(Ryan Cooper, “This is How American Health Care Kills People,” The Week, January 14, 2017.)

This is exactly the type of catastrophic illness for which insurance should pay. Why does it not? Liver failure is not usually associated with people who live healthy lifestyles – quite the opposite. However, other than a small variation in premium for tobacco use, insurers are forbidden from “discriminating” against those who abuse drugs or alcohol in favor of those who are struck with liver disease for other reasons. (Although not described in the article, this may be a genetic predisposition.)

So, insurers do the best they can to limit benefits for liver disease, despite legal and regulatory attempts to prevent them from doing so. Why are laws and regulations not very effective at addressing this perverse outcome?

The proportion of people in circumstances like Stewart’s is very small, not really a powerful political constituency. Instead of allowing a market for health insurance that indemnifies beneficiaries from financially catastrophic costs, politicians prefer to promise citizens “free” benefits which most citizens expect to use relatively constantly. Instead of hard data on health outcomes for expensive and deadly diseases, research produced in support of the health benefits of Medicaid tends to report increased access to dentists and vaccinations, which is self-reported by dependents in telephone surveys.

As long as we allow politicians to design health insurance, the sickest patients will suffer most.

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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 Neil Gorsuch Nomination: Does a Protestant Seat Matter?

There has not been a Protestant on the Supreme Court since Justice John Paul Stevens retired in 2010. There has not been a Protestant nominated since 1990 when George W. Bush called upon David Souter. Right now there are five Roman Catholics and three Jews. Neil Gorsuch, according to the Washington Post, belongs to St. John’s Episcopal Church in Boulder, Colorado. I skimmed though the website and it appears to be typical liberal mainline Protestant Church. (It took me almost five minutes and multiple searches before I found the name “Jesus” even mentioned, but the main web page is filled with “social justice” stuff and ways members of the congregation can become involved with gun control initiatives. Very sad.) Just to put all my cards on the table, I am a Protestant, a member of the Presbyterian Church in America. Here’s my church home.

So does a Protestant seat matter? Jurisprudentially, no. The Roman Catholic jurists such as Thomas and the late Antonin Scalia have been wonderful in carrying the standard for judicial modesty and an approach to legal interpretation focused on the text and original intent of the ratifiers. Because the Court is not (or should not) be a policy-making body, I don’t buy the argument that “diverse” perspectives are needed and thus we must have a Protestant seat, or a woman’s seat, or a black seat, etc. What we need are intelligent individuals committed to putting aside personal views in order to interpret rather than make law. Give me Roman Catholic Thomases every day of the week over Protestant Souters.

As a Protestant and one involved in various national, conservative legal organizations, I am astounded at how Roman Catholics predominate in groups such as The Federalist Society. When discussing the matter with my Catholic friends I often hear the answer that the Catholic Church has a well-thought out theology (see the Catechism of the Catholic Church) that is appealing to the same sort of mind that is attracted to originalism and textualism in jurisprudence.

Unfortunately, liberalism so infected mainline Protestant churches in the early 1900s that what is left focuses on gun control and other secular matters (as exemplified by the St. John’s website linked to above) rather than the purpose and work of Jesus Christ coupled with a systematic theology grounded in Scripture. There are exceptions such as the Reformed parts of the Protestant Church that follow the intellectually rigorous Westminster Confession and the Heidelberg Catechism, but these are in the minority.

All too often I hear from liberal Protestants that we need to eschew theology and just focus on Christ. I am all for focusing on Christ, but who He is is a deep theological question (“theology” after all means the study of God). Is he just a gifted moral teacher whose example we should follow, or is he the Son on God who paid the penalty for the sins of His people? The anti-intellectualism that runs through liberal Protestantism and the triumph of liberalism are discouraging. This twin-headed monster is an important part of the explanation of why it is news that a conservative, non-Catholic has been nominated to the Supreme Court.

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For lessons regarding the role of the Supreme Court in American Government, please see Chapter 13 of the Independent Institute’s widely acclaimed book: Crossroads for Liberty: Recovering the Anti-Federalist Values of America’s First Constitution, by William J. Watkins, Jr.

Fixed-Dollar Tax Credits Would Reduce Individual Health Insurance Premiums

Sonia Jaffe and Mark Shepard of the National Bureau of Economic Research (NBER) have written a new paper, which compares the effects of fixed-dollar subsidies for health insurance to subsidies that are linked to premiums. They conclude that fixed-dollar subsidies reduce taxpayers’ costs and improve access. Unfortunately, the structure of subsidies in U.S. health insurance has moved in the other direction.

Tax credits that subsidize health insurance offered in Obamacare’s exchanges are based on the second-lower cost Silver-level plan in a region. Intuitively, this implies insurers will not compete too much because that would drive down subsidies. As long as subsidies chase insurance premiums, premiums will be higher than otherwise.

Jaffe and Shepard look at evidence from Massachusetts’ health reform (“Romneycare”), which dates to 2006. Its costs are still spiraling, and they estimate one factor is its design of subsidies, which is similar to Obamacare’s:

Across several simulation years and assumptions, we find a non-trivial upward distortion in the price of the cheapest plan (to which Massachusetts’ subsidies are linked) of $4-26 per month, or 1-6% of baseline prices. Although modest, these effects imply meaningful increases in government costs. For instance, the $24/month subsidy distortion (in our simulations for 2011) would translate into $46 million in annual subsidy costs for Massachusetts, and over $3 billion if extrapolated nationally to the ACA. We show that absent uncertainty, shifting to fixed subsidies could let the government achieve the same coverage at 6.1% lower taxpayer cost, or 1.3% greater coverage at the same cost.

(Sonja P. Jaffe and Mark Shepard, Price-Linked Subsidies and Health Insurance Markups, Cambridge, MA: National Bureau of Economic Research, Working Paper 23104, January 2017)

The paper is a heavy read, full of PhD-level economic theory and modelling. Nevertheless, it demonstrates that replacing Obamacare’s tax credits with a fixed-dollar tax credit to subsidize health coverage is as close to a free lunch as is possible in health reform.

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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.

Review: Hidden Figures Exposes Social Cost of Prejudice

hidden-figures-posterEconomists have long argued that prejudice exacts penalties and costs on people who discriminate. A powerful example of this effect is found front and center in the justifiably acclaimed movie Hidden Figures. The film depicts the struggles and eventual triumph of women serving as “computers” for the National Aeronautic and Space Administration (NASA) in the early 1960s, when segregation still ruled in law and racial prejudice was the cultural norm, particularly the South. As the nation raced to put an American into orbit, NASA employed dozens of the nation’s top white engineers to play catch up with the Soviet Union. But did NASA really have the nation’s top minds?

The answer is transparently “no,” and that’s what makes Hidden Figures a compelling story and intriguing film. In fact, viewers may well be left bewildered that this story wasn’t told sooner. Fortunately, the film, which is based on the book of the same name, is as compelling as the underlying story, a tribute to director Theodore Melfi.

Political and cultural discrimination in Virginia, circa 1962, made it virtually impossible for African-Americans to advance professionally in white society, government, and industry. Their ability to even acquire skills was compromised by laws, as one sequence makes abundantly clear. African-American Section Head Dorothy Vaughn (Octavia Spencer, The Help, Fruitvale Station, Insurgent) anticipates the potential of IBM mainframe computers to replace the human computers she supervises in the “colored wing,” and she recognizes the importance of learning computer programming to keep their jobs at NASA. She goes to the colored library but can’t find a book on Fortran, the emergent computer language at the time. So, she goes to the white library and finds the book, but is kicked out because she is black. She takes the book anyway, an act of theft, justifying her actions based the taxes she pays to support the entire system. Legal segregation and cultural prejudice deprived her of the ability to invest in her own skills and what economists call “human capital” to remain economically competitive and productive.