Thursday, March 5, 2015

King v. Burwell: How to Get Ready to Replace Obamacare

Yesterday, the Supreme Court heard the oral arguments of King v. Burwell, a case that could very well undo Obamacare subsidies. In section 36B of the Affordable Care Act (ACA), also known as Obamacare, it states that subsidies for health insurance under the ACA are acquirable "through an Exchange established by the State [own emphasis added] under section 1311 of the Patient Protection and Affordable Care Act." The unambiguous nature of these words could mean that the IRS overstepped its bounds by taxing individuals without congressional authorization, thereby making the federally-run exchanges for states that opted out running their own exchanges would be rendered unconstitutional. This would mean that about 6.5 million would lose the subsidies that allow for them to have health insurance, which would undoubtedly stymie Obamacare. (I would like to bring up as a side note is that mentioning the rate of those insured is a red herring because being insured is not the same thing as having readily-available access to high-quality health care) Although many are already speculating on the ruling, we won't know for about another three months how this will all play out. In the meantime, we have to consider the real possibility that many who are currently receiving health subsidies through the federally-run exchanges who would no longer be able to do so. Rather than let these individuals fall by the wayside, something should be enacted to replace what was technically illegal for the IRS to do in the first place, but what should that something be?

I'm no Republican, but the myth that there are no alternatives out there needs to stop being perpetuated. The Burr-Upton-Hatch plan was revealed only last month. There are also the Empowering Patients First Act and the American Health Care Reform Act, proposed in 2009 and 2013, respectively. Even Senator Ted Cruz proposed the Health Care Choice Act a couple of days ago. These plans could very well have their flaws, but we should stop buying into the idea that there are no alternatives to Obamacare.

And there certainly should be alternatives to Obamacare because it's only exacerbating problems that already exist in American healthcare. Writing a piece of legislation is outside of the scope of this blog entry, but I can tell you some of the facets that a "repeal and replace bill" should have:

  1. Affordability. Healthcare costs, specifically with premiums, have been increasing too much over the years, even when inflation is considered. Obamacare is only going to drive healthcare costs up over time. Cost containment needs to be an important factor, which brings me to my next point.....
  2. More individualized health care plans. Each person is different, has their own circumstances when it comes to their health, and should be able to choose a health care plan that best reflects those circumstances. Those who are healthier and/or younger do not need extensive coverage. Having plans that are excessively comprehensive cannot only be cost-prohibitive, but also inefficiently utilize scarce resources that could be diverted to those who could actually use them. Flexibility and choice should be offered to the individual. 
  3. Greater competition. Competition is one of the factors that leads to a vibrant marketplace because it provides lower costs for higher care. Constraining network choices, which is what Obamacare does, is not what people need to acquire something as vital as health care. One way to do that is allow for health insurance to be carried across states, but as I have mentioned before, it's quite tricky. If we've learned anything from Medicare Part D, it's that whatever Congress decides to enact, it needs to engender competition in the marketplace. 
  4. A lack of favoritism towards certain companies while creating portability. This is in reference to employer-based health insurance, a tax exemption that benefits companies who spend money on their employees' health insurance plans. Using this WWII relic of price control has been a major obstacle for bringing health care costs down. Plus, health insurance should not be something that is contingent upon having a certain job. I, or anybody else, should be able to have the portability to take the same health insurance plan from job to job. Any plan that does not consider the repeal of employer-based health insurance is, quite frankly, incomplete. 

I could go on and on, but the point remains: health care reform needs to be focused more on the patient and less on how the government intrudes on the lives of the individual with little to no value in return. There needs to be a focus on providing affordability while making sure that it maintains its accessibility. If the ruling is not in the government's favor, it would become a great opportunity for Congress to enact something that would create a healthy marketplace, something which is decidedly lacking with Obamacare.

Monday, March 2, 2015

How Bitter of a Pill is Medicare Part D to Swallow?

Although it's usually fun to write about the public policy topic du jour (e.g., Greece's economy, net neutrality), sometimes it's nice to go off into the more obscure aspects of public policy, such as the wonderful world of Medicare Part D. What even put me in this line of thinking in the first place was a working paper from the Federal Reserve Bank of San Francisco [FRBSF] (Dunn and Hale, 2015) that tries to show that between 19,000 and 27,000 lives were saved thanks to Medicare Part D.

Before even attempting to delve further, we should ask ourselves what Medicare Part D is. Medicare Part D, also known as Medicare Prescription Drug Coverage (enacted in 2003), is the United States federal government's way of subsidizing the costs of prescription drugs for Medicare beneficiaries.

How much does such a program cost the American people? Looking at the Medicare Trustees report, the most recent of which was released back in August, shows that about $70B was spent on Medicare Part D in 2013 (p. 101). This amount currently makes up 0.44 percent of overall GDP, and will increase to 1 percent of the overall GDP by 2050 (p. 115). By 2020, we are expected to pay $134.1B on Medicare Part D (p. 109).

One thing that has the potential to irk me about Part D is that Medicare fraud on the whole is a major issue. Medicare has been on the Government Accountability Office's (GAO) high risk list since 1990, and the GAO has finally given some attention to Part D in the context of fraud. The actual sticker price of Part D, the increased amount of cost-sharing since the implementation of Part D, and the money lost in fraud are one thing, but something else bothers me about the Federal Reserve study, and that's not addressing the idea of the crowding-out effect.

In economic theory, crowding out essentially means the government spends money that would have been otherwise spent in the private sector without government intervention. This is important because if the crowding out effect is high, the cost-benefit analysis (CBA) is altered significantly in terms of efficiency. Jonathan Gruber, the economist of Obamacare fame, actually co-authored a paper (Engelhardt and Gruber, 2010) and used a timeline with considerable overlap of the FRBSF paper. Their findings ended up being that the crowding-out effect was at 80 percent, which is to say that Part D extends prescription coverage to one senior citizen for the price of five.

Taking a look at Figure 1 from the FRBSF study (see above), there not only was there a downward trend in a decline of the cardiovascular mortality rate (which is an important distinction to make since half of Part D expenditures go to cardiovascular-related prescriptions), but it was actually a steeper decline prior to Part D being implemented in 2006. Looking at this correlation, not only do I question the FRBSF's theory, but one could argue that Part D actually slowed down the mortality rate decrease, i.e., crowding out at such a level overstates the benefits in the FRBSF paper.

Even in spite of Part D's flaws, what makes Part D more successful than the rest of Medicare is that it is a voluntary drug benefit program that delivers benefits through stand-alone drug prescription programs, and has come well under budget (see CBO report here). Even if the subsidies are coming from the government, Part D has done a better job of cost containment than the rest of Medicare. Why? In a word: competition. When you encourage competition, even with taxpayer dollars, it has this uncanny ability of making goods and services better.

Tampering with health care in such a manner is not as simple as fine-tuning an engine. Marketplaces work more like intertwined ecosystems. While I would like for a liberalized health care market to be implemented, I know that the government is not going to stop intervening anytime soon (we have Obamacare, remember?), which is why Part D is preferable to some of Medicare's more interventionist approaches. Heavy-handed price regulation is not the key to healthcare success; competition is (Howard and Feyman, 2013), and until there is enough of a societal change in which both the people and its politicians realize that a more liberalized health care market is a better-functioning health care market, competition in Medicare is a facet we should continue to strive for in United States health care policy.

Monday, February 23, 2015

Should America Be Learning Lessons from Finland's School System, and If So, Why Laud It?

When one talks about Finland in a public policy context, it's usually lumped together with "the Nordic countries." However, there is one topic that everyone seems to swoon over Finland, and that is their K-12 school system. Libby Nelson over at the Left-leaning Vox just wrote a piece on "9 reasons Finland's schools are so much better than America's." Not only do people idealize it, but they go as far as saying that America should learn some lessons from Finland's successes. I'm all for learning from other peoples' successes.

My first question, however, is can we import Finland's success to the United States. The trick with comparative politics is that no two countries are alike. Most cross-country comparisons, like that between the United States and Finland, are non-analogous. Nelson actually touches upon this at the end of her article. For one, Finland is more homogenous than the United States, whether that is in racial, cultural, or linguistic terms. What makes it easier for the government to implement such an education system is economies of scale. Finland is a small, homogenous country with 5.4 million people. The United States has over 300 million people with quite the diversity. There is simply a diseconomies of scale that such a larger country has to contend with that Finland would never have to deal with on its worst days.

But let's argue that the United States and Finland are similar enough, partially because they're both Western democracies with low corruption and relatively stable currencies. Do we still want to be emulating the Finnish model? Well, that depends. On the latest rounds (2012) of the Programme for Student International Assessment (PISA), which is an international standardized test, Finland's ranking dropped from 2nd to 12th. Using a single standardized test in isolation as a sole proxy for educational success seemed odd, but maybe that's just me.

Some people might have objections to standardized testing as a proxy in the first place, which brings us to one of Finland's atypical features: no national standardized testing. It's beyond the scope of this blog entry to analyze the merits of standardized testing, but there are those who use Finland as a case study as to why America should not have standardize testing. I'd be willing to bet that teachers unions would buy into the "let's pay the teachers more to boost student performance" argument, but the problem with that is Finnish teachers are paid less than American teachers on average, even when adjusted for purchasing power parity. What I could glean from that is that teacher salary is not an important factor in teacher productivity, which is what the Finnish Minister of Education points out. For Finns, people become teachers for the career satisfaction and prestige that comes along with teaching. If United States teachers have some of the highest salaries in the world, yet cannot produce the desired results, it would be safe to assume that something else is in play. If you want to attribute it to greater spending on schools, that theory goes out the window because the Finnish government spends thirty percent less per student than in the United States, yet creates better results.

Perhaps it's the workload. When looking at teaching hours, Finnish teachers teach an average of 589 hours per year, which is 100 hours less than the OECD average, and teach four classes a day. There can be something said for teacher productivity, specifically with a declining marginal productivity when teachers become overworked, which arguably happens in the United States. There is also a matter of curriculum composition. Finland experienced an education reform overhaul in the 1970s, which included the abolishment of a 700-page national curriculum, devolution of schooling to local authorities, and creating a system in which all students were treated well. Teachers and principals are responsible for the accountability of the schools, not a Department of Education. Also, homework load is not strenuous in Finland--usually an hour a day. Finland also has a smaller average class size than in the United States, which means that the students can better receive more personalized attention from their teachers. And there's also the interesting fact that compulsory schooling doesn't even begin until age 7 for Finnish children.

There is also a cultural difference in terms of how teachers are viewed in Finnish society versus that in the United States. In terms of social prestige, Finnish teachers are right up there with medical doctors, and unfortunately, the same cannot be said for American teachers who teach K-12. Part of that has to do with the rigorous standards that come with becoming a teacher that simply exist in the United States. The social status of teachers decidedly makes a difference in terms of how unions interact with management. Both Finland and the United States have teacher's unions, but there is a qualitative difference. While 95 percent of Finnish teachers are members of a teacher union, their unionism is not compulsory like it is in the United States. I don't have a problem with voluntary unionism. It's when it becomes the belligerent, compulsory type of unionism in the United States that doesn't allow for teachers to be flexible and experimental in new pedagogical methodologies, like in Finland, that makes me wonder.

Some facets of Finnish education cannot be imported to the United States, but there are certainly facets previously outlined that can be applied to the United States to improve upon its less-than-spectacular performance on K-12 education. I hope that they are applied sooner rather than later so the United States can produce a more educated populace.

Thursday, February 19, 2015

Why I'm Really Not Worried About a Growing Chinese Military Presence

I don't write about subject matter related to the military all that often. Aside from how the military affects fiscal issues and has macro-effects on society, it really doesn't pique my interest. However, I came across a report from the Rand Corporation entitled China's Incomplete Military Transformation (Chase, Michael et al., 2015), and I was curious. Why the curiosity? Those who would like for the United States to have a more expansionary and interventionist military policy want to point out any potential threat to the United States, whether real or imaginary. Invoking territorial disputes in places like the South China Sea, China's double-digit increase in defense spending over the years, nuclear capabilitiesnaval modernization. These are all reasons that proponents of the military are saying we should be worried about China's increasing military presence and clout. However, going off the Rand Corporation report, as well as other points I can make, here is a list of why I am not particularly worried about China being a militaristic force majeure:

  1. Corruption and organizational structure. China is well-known for its culture of corruption. The People's Liberation Army (PLA) is de jure a separate entity from the Chinese Communist Party (CCP), which means there is essentially no civilian oversight (Chase, Michael et al., p. 48), and essentially created a civil-military gap (p. 45). The PLA's budget is approved without any real discussion as to what the budget entails (p. 47), so it is no surprise that the PLA is going to be riddled with inefficiencies. Corruption is effectively an indirect tax because it decreases the efficiency of spending. China's significantly higher level of corruption means that it would need to spend a lot more money on the military than the United States to even become close to outpacing the United States military. Looking at the proceeding points, I find that to be highly improbable. 
  2. Estimating military size. Because of its corruption, China lacks the transparency needed for good governance. This is evident in trying to estimate the size of China's military because China's government estimates are infamously unreliable. In spite of whatever grandstanding the Chinese government might be doing, they could very well be overestimating their numbers.
  3. Basic military strategy and geography. But let's assume that the high range of the military's budget of $132B is accurate, a figure that is less than a third of what the United States' expenditures on military spending. China is still at a disadvantage. Why? 
    • For one, the United States has much more actual experience in military operations. By extension, the United States has military posts throughout the world, and is able to be much more responsive with its extensive military network. This also means that China does not have the same military network to deploy troops and carry out operations that would greatly expand its military clout.
    • Even if China were to go on the offensive, it means that China would most probably be attacking a coastline (e.g., Taiwan, Japan). Defending a coastline is much easier than attacking it, and given that the coastline is going to have U.S. military force, it would be all more difficult for the PLA to succeed. 
    • Nuclear deterrence can be a wonderful thing, which is something the United States has. Whether or not China has second-strike capabilities, the fear of mutually assured destruction (MAD) can be adequate to make sure China doesn't agitate the United States.
    • Under the neorealist school of thought in international relations, balance of power theory states that national security is enhanced when one state is not so powerful that it dominates all the others. I don't subscribe to this school of thought in its entirety, but if we're so worried about balance of power, there are plenty of countries who have been historic rivals that would want to contain China's growing influence on a regional level. To name a few: India, Japan, Russia, and Pakistan. Russia's concern is going to be contingent upon its relationship with the United States, but it's safe to say that China is going to have to contend with other countries in the region that would rather not see China become too powerful. 
    • While we're talking about borders, China borders three of some of the most unstable countries in the world: Afghanistan, North Korea, and Pakistan. China is surrounded by potential enemies and instability. The United States has two large oceans distancing it from any other country that could be remotely considered a world power.
    • In spite of qualms that some might have about the United States and its military reach, it still has a lot more military allies than China does. China's main military ally is Russia, and even that has historically been tenuous.
  4. Insufficient education, training, and technology. China's military is stymied by undertrained and inexperienced officers (p. 141) who are compensated with an amount less than those in the civilian economy (p. 49). The military exercises are also counterproductive because they do not provide real opportunities for Chinese soldiers to learn from their mistakes (p. 50). China also does not have the military technology to outflank United States submarines or aircraft. Just because China is spending more money doesn't mean its spending is as well-targeted. China is woefully behind the United States on developing its military technology. For China to catch up, it would require a steep investment in new weapons and platforms, all of which are capital-intensive. 
  5. Military size. The overall size of the PLA is about 2.3 million individuals. This is not only an issue from a budgetary standpoint. Economies of scale makes it difficult to manage an army of such a size because it takes such logistical and administrative oversight (p. 53). China is also dealing with a rapidly aging populace, which means that it cannot maintain the size of its military because it will have to increase its government expenditures on social welfare programs. This also assumes that manpower is the only prime factor in warfare. However, in modern-day warfare, you also need the equipment to carry out missions. 
  6. Potential game changers. China's overall trajectory has been quite difficult to predict, but we cannot assume that the status quo will remain in perpetuity. Most notably, China's GDP cannot expand the way it has indefinitely, and is going to experience an economic slowdown at some point. If the slowdown is more abrupt, the Chinese government is going to have to make some major trade-offs with its military spending (p. 21). China also has some major potential for domestic instability. Although the CCP has been able to quash a good amount of social unrest, there is a real possibility that this might no longer be the case, which means the Chinese government would have to divert its resources elsewhere (p. 22). Also, China might antagonize its neighbors into military conflict. But China could also forge military alliances, which would reduce its propensity to expand upon its military.

Although the future is uncertain, if an educated guess had to be made, the best one is that China will have just enough muscle to make sure that the United States does not intervene in East Asia along China's border. Yes, China's military is growing, but to say that China's military is going to be on par with the United States military is just another reason to increase defense spending in America. I hope the powers that be can see that China's weaknesses are very real, and can pursue constructive relations with China instead of worrying about a bogeyman of worst-case scenario whose probability is next to nil.

Monday, February 16, 2015

By How Much Does Mass Incarceration Reduce Violent Crime, and Should It Be Barred as Public Policy?

Violent crime levels are at their lowest in nearly four decades, which is celebratory indeed. The question of why the rates have been on the decline is a more complicated debate. Part of it is because crime is a multi-causal element in society, and teasing out the most prevalent factors is arduous. Theories are abound, and they range from phasing out lead to abortion to improved policing to laxer gun laws. The Brennan Center for Justice, which is a law and policy institute at the NYU School of Law, recently came out with a report (Roeder et al., 2015) analyzing 14 such theories using the most empirical evidence available, an amount that was unavailable in previous years. The first theory covered in the report is that of increased incarceration.

The intuition behind the incarceration theory goes something like this: "If criminals are locked up, they cannot be out on the streets committing more crimes. Plus, once they get out of prison, they'll think twice before committing another crime." Sounds simple, yet intuitive at face value. Economist Steven Levitt wrote a paper in 2004 examining the crime rate decrease, and found that up to 58 percent of the decrease in crime rates since the early 1990s could be attributed to incarceration. However, Levitt has even conceded (Stemen, 2007, p. 8) that focusing on drug offenders instead of hardening criminals has a crowding out effect that minimizes prison's efficacy. The other issue is that Levitt's data set ends at 1993, which is when the crime rates just started to precipitously decrease. With that, let's take a look at the relation between incarceration and crime rates, like the Brennan Center did [below] (Roeder et al., p. 16).

Even if we were to assume the unlikelihood that incarceration was the sole factor in reduced crime rates, looking at the correlation suggests that the effect started to wear off by 1997. However, this is a very simplistic way of looking at it because correlation is not the same thing as causation. As the report points out, the crime rates didn't decrease as soon as the incarceration rates increased (p. 25). If increased incarceration was so vital, why did it take well over a decade after the "tough on crime" policy for it to kick in? Questions like these is probably why the report's findings were even less generous than one would have anticipated:

"Since 2000, the effect of increasing incarceration on the crime rate has been essentially zero. Increased incarceration accounted for approximately 6 percent of the reduction in property crime in the 1990s, and accounted for less than 1 percent of the decline in property crime this century. Increased incarceration has had no effect on the drop in violent crime in the past 24 years. In fact, large states such as California, Michigan, New Jersey, New York, and Texas have all reduced their prison populations while crime has continued to fall (p. 15)."

If the main benefit of mass incarceration is supposed to be a reduced crime rate, then this is a pretty damning statement of the criminal system. Why? Looking at the U.S. prison rates with a state-by-state breakdown, and then comparing that to other countries, is not flattering. How did we get to a point where our incarceration rate is so high that it shadows that of China, which is a massive human rights abuser known for incarcerating political dissidents? There's also the matter of the price of incarceration. Crime doesn't necessarily pay, but the taxpayer is paying a pretty penny for higher incarceration rates. According to the Brookings Institution's 2014 study on incarceration, we went from paying $17B in 1980 to $80B in 2010 in 2010 real dollars. That is more than quadruple the amount at the beginning of the 1980s! The fact that incarceration typically makes it on the Top Three list for largest expenditures on state budgets doesn't help any, either.

Although incarceration helps when we lock up the hardened criminals, it decidedly has a diminished effect when we lock up non-violent offenders, most notably drug offenders who mostly likely were busted for marijuana possession. This is why the Brennan report points out the effect of diminishing returns. When you lock up those who are not a real threat to society, the marginal crime-reduction gains drop substantially, which is precisely what has happened in the case of incarceration in the United States (p. 17, 19, 22). Aside from the overuse of incarceration, there is also the issue of lousy prison conditions that might actually harden prisoners even more (p. 24), which brings me to my next point.

Recidivism, which is the rate at which criminals reoffend, is still a concern because in 2005, the National Institute of Justice found that three-quarters of prisoners were rearrested within three years. Using the recidivism rate from this time period (as opposed to the current recidivism rate) is better because it will capture some of the more hardened criminals from the 1990s, which is when the crime rates really started to drop. It also doesn't help that being in prison creates stigma and social barriers that make it more difficult for former prisoners to find a new job and start a new life (Visher et al., 2010). And let's not even get into how this affects communities and families, and disproportionately so for those who are poor and uneducated (Subramanian, Ram et al., 2015).

The moral of the story here is that incarceration beyond America's worst criminals is bad policy because it does little to nothing to improve public safety (McCrary and Sanga, 2012). Canada had a similar drop in the crime rate in the 1990s to the United States, but Canada's incarceration rate actually decreased. America should be ashamed that it houses nearly a quarter of the world's prisoners while only making up for less than five percent of the world's population. If the Right-leaning Heritage Foundation thinks that we have reached a point that criminalization has gone too far, then there there has to be something do with regards to sentencing reform, or better yet, abandon the War on Drugs and the "tough of crime" mentality, both of which have been abject failures. Mass incarceration is an ineffective policy that creates all sorts of fiscal and social costs. I hope politicians can get out of the "tough on crime" mentality for long enough to realize that crime reduction policy needs to be much better targeted than what we have right now. That way, they can stop ruining lives while simultaneously passing the costs onto the taxpayer.

Thursday, February 12, 2015

The Folly & Futility of Classifying Internet as a Utility Under Title II

The Federal Communications Commission (FCC) recently confirmed that it was going to vote on net neutrality rules later this month on February 26. The chairman of the FCC wants to use Title II of the Communications Act of 1934 to protect the Internet. For clarification's sake, Title II classification is not the same thing as net neutrality. As I had explained a few months ago, net neutrality is the idea that all data, platforms, and sites be treated equally by the government and Internet service providers (ISPs). This is about as close as a consensus definition to which one can reach. Title II classification, I'm afraid, is much more overreaching than that. Title II classification would categorize the Internet as  a telecommunication service provider instead of a broadband service provider. Aside from using a 81-year old piece of legislation initially intended for the telephone industry to regulate something as non-analogous as the Internet, why do I have an issue with Title II classification?

If I had to summarize up my annoyance, it would be that the Internet is not public utility, nor should it be treated as such. A public utility is based on the idea that a certain good falls under a natural monopoly. A natural monopoly is when it makes more economic sense, at least in terms of long-term cost, to have one company managing a certain market than it is to have a competitive market structure. Although there are some economists who think that natural monopoly theory is bunk,  it is a general economic consensus that there are at least a few industries that fall under this categorization. Since the capital costs are gigantic, like we see in water or electricity, it makes more sense for those goods to act as a natural monopoly.

However, we see no such issue in broadband Internet because there is competition in the market. Neither the scope of the market nor the economies of scale result in this market being a natural monopoly. Wireless networks have lower capital costs over time. As opposed to water or gas, broadband service can be delivered in a variety of ways, whether it's with metal wires, optic cables, or wireless connection. Many physical mediums and technologies can be used interchangeably to deliver the service, whereas utilities are based on single-use-facility economics. Plus, the vast majority of Americans have choices in providers, services, speeds, and other features on their Internet service, which is more than can be said for water or electricity.

It makes zero sense to regulate the Internet as a natural monopoly when there is still a competitive market by economic definition. Looking at the economics behind a natural monopoly, it's a good thing that it's not a natural monopoly. I went back to my public policy textbook, Policy Analysis by David Weimer and Aidan Vining (p. 98), and I actually found that it's considered a market failure because it creates allocative inefficiency (e.g., see diagram below).

From an economic welfare standpoint, deadweight loss is bad, especially for the consumer. Rather than pay the price at the equilibrium point under a competitive market (Pc), consumers now pay a higher cost at Pm. The economic theory makes sense. Back in December, the Progressive Policy Institute released a study saying that Title II classification would increase federal fees per household by $17 per annum, and that doesn't even include $67 in state fees or $72 in local fees per annum. Although that might not sound like much, when it all adds up, it will cost America over $15B per annum. If you need to think about it further, just think about how poorly actual utilities are handled, and ask if you want that low quality for your Internet. After all, are public utilities well known for quality customer service, upgrades, or technological innovation?

Let's not get into how Title II regulation wouldn't prevent paid prioritization or some of the other finer points that would translate into further government overreach. Broadband Internet does not possess the most basic characteristics of a public utility, and there is no reason to treat it as such. It is a variable service (unlike an actual utility), a constantly changing technology, and needs to be [relatively] free of regulation if it is to continue proliferating. The cry for net neutrality dates back to the 1990s, yet we haven't seen the Internet die. If anything, we went from stationary dial-up to the wide array of satellite, cable, mobile, and WiFi products with greater speed and less cost in less than two decades because the government has by and large stayed out of the way. As a result, America has enjoyed better broadband quality than its European counterparts (Yoo, 2014). It's Moore's Law at its finest! If you want to have some sort of regulation, use antitrust and consumer protection laws that are common in many other markets. Otherwise, remove the red tape, deregulate the local bureaucracy, and watch the market expand even further.

Wednesday, February 4, 2015

Does "Audit the Fed" Make for Good Monetary Oversight?

It looks like those Republicans are at it again. Yes, they are looking to "audit the Fed" (see proposed bill here). As the argument goes, the Federal Reserve is not under enough scrutiny because of the exemptions they receive from being audited by the Government Accountability Office (GAO). The intuition behind it seems sound enough. The purpose of an audit is to determine whether the information presented in a certain financial report reflects the entity's actual state of financial affairs. If the Federal Reserve is going to pass overarching monetary such as quantitative easing, shouldn't the American people have a right to know how money is being generated or allocated?

The catch here is that the Fed is already being audited. The GAO has done it, and consulting firm Deloitte audited the Federal Reserve Bank of New York (FRBNY) in 2012. The Fed also releases its minutes from its Federal Open Market Committee meetings. In spite of what is nominally done, I have to wonder just how thorough the audits actually are. If the current audits are already adequate, then the "Audit the Fed" bill that Rand Paul is trying to pass would be superfluous at best. However, Federal Reserve Chair Janet Yellen doesn't want the bill passed.

The issue is not that it's a standard audit, but if you look at the proposed bill itself, it also includes greater oversight and, even more importantly, program evaluation. As the Cato Institute brings up in its recent analysis on the matter, the Fed has enough exemptions from he the GAO in terms of more thorough auditing, something which the "Audit the Fed" bill seeks to rectify.

One of the arguments that Yellen makes is that it would kill Federal Reserve independence. Do you honestly think the Federal Reserve acts independently when the President of the United States is the one who selects the seven members on the Board of Governors, amongst whom the President selects a Chair of the Federal Reserve? Not only is there not a true sense of independence, but there are a small select group of people who have immense influence over the purchasing power of the dollar.

Release of aggregate data would help determine taxpayer exposure risk, as well as how well the Fed is handling its job. Information on specific transactions would even provide insight into who is receiving favoritism from the Fed (read: rent-seeking). The Congressional Research Service (CRS) points out that greater transparency would not only help market actors make better decisions, but that more transparency would make for more effective monetary policy (CRS, p. 11). Critics of "Audit the Fed" really think that this would hamper Fed efficacy, but this goes on the erroneous assumption that the Fed does a good job at managing monetary policy. It would be nice to know things such as how Federal Reserve policies have either helped or harmed the economy (e.g., Did quantitative easing work? Did the Fed contribute to the housing bubble, and if so, how badly?). I think that the Fed has too much overarching power, which is another topic for another time. But if one is going to at least argue that the Fed is going to have such power, wouldn't it make sense to hold them accountable via greater oversight and make sure they're doing a good job? Is that really too much to ask?