Government 101: Why Government Programs Never Seem to End

January 8, 2016 Leave a comment

Ronald Reagan once made a comment to the effect that government programs never seem to end. A recent story in the press indicates why Reagan was spot on with this comment.

A recent media report indicated that Senator Ted Cruz is campaigning in Iowa and he has criticized the ethanol programs imposed by the federal government. While Senator Cruz is not the only senator taking this position (for example, I have heard Senator John McCain enunciate an identical position in the past), what is remarkable is that Senator Cruz has made these critical remarks in a state containing residents, such as corn farmers, who benefit mightily from ethanol fuel mandates. The press report indicates that the ethanol industry is spending millions of dollars in an advertising campaign designed to prevent Senator Cruz from winning the Iowa caucuses.

This news report illustrates the truth of a comment that I heard the late Milton Friedman make many years ago explaining why government programs seem to last forever. The benefits of the ethanol program accrue to a small number of individuals who are fully aware of the manner in which they benefit. The costs of these programs are diffuse and spread across many individuals and are small, per individual, compared to the per-individual benefits that accrue to those who are made better off by the ethanol program. Indeed, those bearing the costs may not even be aware that they are made worse off by the ethanol mandates.

Econ 101 students can easily figure out the impact of ethanol fuel requirements. The demand for corn rises which raises the relative price of corn. Farmers rationally put more land into growing corn, an act which reduces the supply of crops other than corn, thus raising their relative prices. So we see that crops have their prices increased (and paid by consumers) in agricultural markets.

Second, talk to any automotive engineer as I have and they describe the ethanol mandates as absurd. They do little to reduce gasoline consumption and it is an inefficient fuel. As a friend once said, you could plant the entire United State with corn and you still could not run all of the cars in the U.S. Finally, there is now scientific evidence (I even saw this described on the evening television news many years ago) that ethanol production pollutes the environment more than the production of gasoline.

But corn farmers and those in the ethanol industry vote and use their votes partly to keep this environmentally-destructive subsidy to themselves in place. Welcome to the corruption of a democracy.

The 2008 Financial Crisis Revisited

January 8, 2016 Leave a comment

A movie (The Big Short) has recently appeared that attempts to portray the events leading to the financial crisis of 2008. While I have not seen the movie but plan to do so, I have seen statements that the movie does not describe the role of the federal government in this fiasco. Whether or not that is true, there is some information easily available which provides an account of the government’s role in this crisis.

Peter Wallison is on the staff of the American Enterprise Institute.  He has written extensively on the financial crisis and he has a recent blog post giving his views on risk-taking by financial firms that was induced by the federal government.

I have also written previously on the crisis (read those posts here and here).  All of the information referred to in this post points to the affordable housing goals adopted by the federal government as providing incentives for financial firms to take on riskier mortgages. This does not mean that the federal government was the only cause of the crisis but it was a big part of the forces causing this latest U.S. recession.

The Wisdom of a Balanced-Budget Amendment

December 4, 2015 2 comments

I read in the local newspaper today that there is some discussion going on in the Michigan state legislature regarding the federal government deficit. Specifically, there is a coalition of states that has begun to form that would force the federal government to convene a constitutional convention only concerned with the adoption of a balanced-budget requirement imposed on the federal government. Michigan is apparently discussing whether the state should be a part of that coalition. This development is a very good one for reasons that I will sketch below.

By allowing government deficits to exist, there has been a perversion of government policy that may well destroy our country in the future. It is all too often observed that government programs exist mainly to line the pockets of politically-connected groups, thereby enhancing the reelection prospects of the politicians handing out the subsidies. There is an enormous list of these programs. The Export-Import Bank, farm subsidies, ethanol programs, and many more (see a previous post for others) do nothing for the welfare of the country but the recipients of these programs benefit mightily. As the late Milton Friedman said many years ago, the benefits of these programs benefit a few who lobby furiously to get them, but the costs are diffuse, spreading across many people. And so the cost to each person is small and may not even be recognized by the individual bearing these costs. As a result, it is all too easy for the government to borrow to finance yet another vote-buying scheme. All it has to do is borrow to finance any new such spending program since raising tax rates may anger taxpayers.

The problem is that the United States is heading for an explosion of its entitlement costs that has been noted many times by economists (I wrote on this previously here). No economist that I know thinks that the U.S. can finance several trillion dollars in deficits and so, when these occur in the future, what is to be done?

Read more…

Obamacare Slowly Implodes (Updated)

November 30, 2015 2 comments

Readers of this blog know that I am a critic of the Affordable Care Act.  My view is that it was poorly designed and it has harmed millions of people who have lost access to their doctors and hospitals. (There are links at the end of this article to previous posts on this profoundly misguided law.) There is now accumulating evidence that the insurance exchanges are moving into what has been termed a “death” spiral, a process which can lead to the collapse of the insurance exchanges set up by the law.

This death spiral refers to a situation where insurance companies lose money selling health insurance on the exchanges and thus stop selling insurance to avoid these losses. The exchanges can collapse if all insurers withdraw from the exchanges, leaving millions of Americans without coverage. The design of the Affordable Care Act raises the possibility of this collapse because it limits the ability of insurers to charge higher prices to riskier applicants and because the law requires guaranteed issue, meaning that insurers must sell a policy to anyone who applies. Thus insurers must treat everyone as if they are bad risks and charge correspondingly higher prices for insurance but, if the applicant pool of insurance buyers is dominated by bad risks, insurance companies may lose money on their policies. This latter situation is known as “adverse selection.” There is now accumulating evidence that adverse selection has occurred in these insurance exchanges.

Read more…

What Do the Children Know?

November 20, 2015 Leave a comment

As reported in the news media recently, there have been a series of student protests on university campuses. A number of grievances have been reported (although some of these are so vague that I have no idea what they really are) but one issue in particular caught my attention. That concerns student loans and there appear to be demands by some students that all student loans should be paid off by someone other than the students who borrowed the money. Specifically, there was an interview on one news outlet with a student “leader” where this student issued a demand that all students loans should be paid off by the rich, however defined.

This got me to thinking.  Does the student know the size of the stock of student loan debt and does he or she know if the incomes of the rich are large enough to pay off student loans? A little bit of data helps answer those questions. Read more…

More Fallout from Obamacare

November 11, 2015 Leave a comment

I recently saw a news item regarding the events at the University of Missouri resulting in the resignations of two senior university administrators.  That article suggested that the Affordable Care Act had a role in the student protests at the university. Turns out that this is indeed the case.

It appears that one of the student grievances, and also one reason for a hunger strike by a student, involves the loss of health insurance by the university’s graduate students. This loss of insurance was explicitly mandated by Obamacare as explained by a university post last August (you can read it here). That web site reports the following.

Due to changes in federal policy and IRS interpretation of that policy, general counsel has informed us that the University of Missouri no longer is allowed to pay for graduate students’ health insurance. (Previously, the university provided a subsidy to those students who opted in for insurance and were paid from a qualifying assistantship or fellowship). The IRS considers our student health insurance plan an “individual-market plan” rather than an “employer-sponsored plan,” such as our health plans for MU employees.

The Affordable Care Act prevents employers from giving employees money specifically so they can buy health insurance on the individual market. Graduate teaching and research assistants are classified as employees by the IRS, so they fall under this ruling.

So the university finds itself in violation of federal law if it pays for graduate student insurance. I wonder how many students realized this element of the university’s policy? I regard this as just another example of the Law of Unintended Consequences arising from central planning by the government. It also reveals that as the law continues to grow in complexity and in size, it is no wonder that it has been said that every day, each resident of the U.S. commits three felonies and has no idea that he or she has done so.

The Importance of Economic Growth

October 28, 2015 1 comment

The decline in economic growth in the United States is the most serious economic problem facing the country (see my previous post here on this subject) and it should be the top economic priority for the voters in the presidential election which is approaching. To see why, the following example is instructive.

Consider two economies. One grows at two percent per year (the slow-growth economy) and one grows at three percent per year (the fast-growth economy). Their growth rates “only” differ by 1 percent but this difference turns out to be very large when viewed over many years. The table below illustrates the relative sizes of each economy.  In the table, the entries are the extent to which the three-percent economy exceeds the two-percent economy in size over several time periods.

5 Years: 5.0%

10 Years: 10.25%

25 Years: 27.6%

50 Years: 62.87%

100 Years: 165.28%

So after five years, the fast-growth economy is 5% larger in size than the slow-growth economy.  After ten years, the difference is over ten percent, and at the end of a century, the fast-growing economy is over one and one half times as large as the slow-growing economy.  And remember – GDP is a measure of the size of aggregate incomes in the economy so what we are really seeing is how much lower incomes will be when the growth rate of an economy falls by one percent.  Simply put, the differences are staggering in size over long periods of time. The high-growth value of 3 percent was not chosen arbitrarily. This is the growth rate of the U.S. over the hundred-year period ending at the onset of the last U.S. recession.

The next election for President of the United States is a crucial one for the future welfare of U.S. residents. If nothing is done to restore economic growth to its historical average of three percent, there will be huge income losses in store for U.S. citizens.

Categories: Economic Growth
Economics One

A blog by John B. Taylor

The Grumpy Economist

One economist's views on economic policy.

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