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The Dead Hand of Socialism: State Ownership in the Arab World

September 12, 2014 Comments off

The Dead Hand of Socialism: State Ownership in the Arab World
Source: Cato Institute

Extensive government ownership in the economy is a source of inefficiency and a barrier to economic development. Although precise measures of government ownership across the Middle East and North Africa (MENA) are hard to come by, the governments of Algeria, Egypt, Libya, Syria, and Yemen all operate sizeable segments of their economies—in some cases accounting for more than two-thirds of the GDP.

International experience suggests that private ownership tends to outperform public ownership. Yet MENA countries have made only modest progress toward reducing the share of government ownership in their economies and are seen as unlikely candidates for wholesale privatization in the near future.

MENA countries need to implement privatization in order to sustain their transitions toward more representative political systems and inclusive economic institutions. Three main lessons emerge from the experience of countries that have undergone large privatization programs in the past. First, the form of privatization matters for its economic outcomes and for popular acceptance of the reform. Transparent privatization, using open and competitive bidding, produces significantly better results than privatization by insiders, without public scrutiny. Second, private ownership and governance of the financial sector is crucial to the success of restructuring. Third, privatization needs to be a part of a broader reform package that would liberalize and open MENA economies to competition.

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Clicking on Heaven’s Door: The Effect of Immigrant Legalization on Crime

August 25, 2014 Comments off

Clicking on Heaven’s Door: The Effect of Immigrant Legalization on Crime
Source: Cato Institute

In the United States and Europe, illegal immigrants cannot work or start a new economic activity, at least officially. Such immigrants can work only in the informal economy, and thus receive lower earnings than legal immigrants (Kossoudji and Cobb-Clark, 2002, Kaushal, 2006, Amuedo-Dorantes et al., 2007, Accetturo and Infante, 2010, and Lozano and Sorensen, 2011). According to the Becker-Ehrlich model of crime, a lower income from legitimate activities means a higher propensity to participate in illicit activities.

The presence of large illegal populations therefore raises crime concerns in destination countries. According to an annual survey conducted in North American and European countries, approximately two-thirds of the people interviewed are concerned that illegal immigrants increase crime; only half express the same concern about legal immigrants (Transatlantic Trends, 2009). Moving from perceptions to statistics, illegals constitute 20–30 percent of all immigrants in Italy but represent 80 percent of those arrested for serious crimes (Italian Ministry of Interior, 2007).

The higher criminal propensity of illegals, however, may reflect differences between legal and illegal residents, as opposed to the (causal) effect of legal status. In particular, illegal immigrants are typically young, single, male, and less educated than legal immigrants (Cohn and Passel, 2009; Mastrobuoni and Pinotti, 2014; and Caponi and Plesca, 2013). More generally, the two groups could differ along other dimensions relevant to criminal behavior. For instance, individuals who are less risk averse or have a higher propensity to violate laws would be more likely to reside illegally in a country and to commit crime. It is thus difficult to identify the causal effect of legal status on crime committed by immigrants.

Who Pays for Public Employee Health Costs?

August 22, 2014 Comments off

Who Pays for Public Employee Health Costs?
Source: Cato Institute

e cost of health care for state and local government employees is increasing rapidly, as it is for workers across the economy. Since state and local governments are large employers — one in seven people work for state and local governments — these cost increases are materially important. Estimates suggest that state and local governments spent $70 billion on health insurance in 2001 (in 2012 dollars), and $117 billion in 2010. The real increase was roughly $2,400 per state and local government employee, or $150 per U.S. resident.

Adjusting to these cost increases is more difficult for state and local governments than for private businesses. One strategy that businesses use to address rising costs is to pass those costs back to workers in the form of increased cost sharing for health insurance, less generous coverage, lower contributions to employee benefits, or smaller wage increases (Summers, 1989; Gruber, 1994; Kolstad and Kowalski, 2012). However, in a setting where wages and benefits are covered by union contracts — as is the case with a good share of state and local employees — the ability to effect these adjustments may be limited. When wages and benefit packages cannot be adjusted, increases in health care spending are equivalent to an increase in input costs, much like a price increase for electricity would be. In private businesses, some of this cost increase would show up in higher prices. Prices are not as flexible in the public sector, however, since the price for state and local services is the tax rate. Tax increases may be directly constrained by institutions, as with property tax limits in California, or may be politically difficult. Debt issuance by state and local governments similarly faces institutional and political constraints. If limitations to adjustment of taxes and debt are binding, that leaves reductions in inputs, and with them the quality or amount of public service provision, as the possible responses to increased benefit costs.

The exact impact of rising benefit costs therefore depends on which aspects of public budgets are constrained and which are relatively flexible. When compensation schemes, revenue, and debt issuance are fixed, cost increases may reduce the quality of public services (e.g., worse schools and more crime). Loose deficit-financing restrictions may allow burdens to be shifted onto future taxpayers. Cross-government transfer arrangements (e.g., revenue sharing across school districts) may similarly loosen the revenue-raising constraints faced by local governments. Finally, the strength of public-sector unions may drive the extent to which benefit costs can be shifted back onto government employees. The question of which margins will yield is ultimately empirical. Our research therefore focuses on examining data that can help identify which are the most important margins in practice.

Rapid Bus: A Low-Cost, High-Capacity Transit System for Major Urban Areas

August 7, 2014 Comments off

Rapid Bus: A Low-Cost, High-Capacity Transit System for Major Urban Areas
Source: Cato Institute

Prompted by federal funding, more than 30 American cities have built or are building new rail transit lines. These expensive lines have debatable value as they put transit agencies in debt and impose high maintenance costs, yet they carry few riders more than the buses they replace and produce minimal, if any, environmental benefits. As an alternative to rail transit, this paper proposes a “rapid bus” system that would offer fast, frequent, and comfortable transportation to most people in an urban area. This paper will estimate the annualized costs of such a system and compare it with the costs of a traditional system of rail supplemented by feeder buses. Based on these estimates, this paper finds that

  • While rail lines serve a limited number of corridors, for less money a rapid bus system can reach nearly everyone in an urban area.
  • A rapid bus system can offer more frequent service at faster average speeds and fewer transfers between transit vehicles, all at a lower cost than rail.
  • Rapid buses also offer more comfortable rides because two-thirds to three-fourths of bus riders can be seated, whereas more than half of rail riders must stand when the rail system is operating at capacity.
  • Rapid bus systems are scalable, with low incremental costs, as downtown employment centers grow from 40,000 to 500,000 jobs. In contrast, rail systems require huge expenditures to start up and expand.
  • While a four-line light-rail system can bring only about 36,000 people per hour into a downtown area, the rapid bus system described in this paper can bring as many as 140,000 people per hour into downtown.
  • While rapid buses cannot cost-effectively replace the long-established subways and commuter trains serving New York City, they could save taxpayers’ money by replacing aging rail transit systems in Boston, Chicago, Philadelphia, San Francisco, and Washington.
  • Urban areas with 40,000–200,000 downtown jobs should expand their transit systems using rapid buses rather than light rail or other rail systems.
  • Urban areas with fewer than 40,000 downtown jobs probably do not need any form of high-capacity rapid transit.

A Case against Child Labor Prohibitions

July 30, 2014 Comments off

A Case against Child Labor Prohibitions
Source: Cato Institute

In my recent book, Out of Poverty: Sweatshops in the Global Economy, I argue that much of what the anti-sweatshop movement agitates for would harm workers and that the process of economic development, in which sweatshops play an important role, is the best way to raise wages and improve working conditions. Child labor, although the most emotionally charged aspect of sweatshops, is not an exception to this analysis.

We should desire to see an end to child labor, but it has to come through a process that generates better opportunities for the children—not from legislative mandates that prevent children and their families from taking the best option available to them. Children work because their families are desperately poor, and the meager addition to the family income they can contribute is often necessary for survival. Banning child labor through trade regulations or governmental prohibitions often simply forces the children into less-desirable alternatives. When U.S. activists started pressuring Bangladesh into eliminating child labor, the results were disastrous.

Do Coastal Building Codes Make Stronger Houses?

July 22, 2014 Comments off

Do Coastal Building Codes Make Stronger Houses? (PDF)
Source: Cato Institute

The National Flood Insurance Program (NFIP), which provides federal flood insurance to property owners in participating communities, is currently $24 billion in debt. The shortfall has long been foreseen by policymakers because the insurance is underpriced, effectively subsidizing property owners of coastal properties. Congress attempted to curtail that subsidy with the 2012 Biggert–Waters Flood Insurance Reform Act, which was intended to put the burden of flood risk squarely on property owners rather than taxpayers. However, beneficiaries of the subsidies rallied against the legislation, and earlier this year both houses of Congress passed, and President Obama signed, legislation delaying the 2012 subsidy reform.

Communities that participate in the NFIP must adopt the program’s building code, which incorporates minimum building standards set forth by the Federal Emergency Management Agency (FEMA). Economists have theorized that building codes associated with the provision of subsidized insurance may create moral hazard by inducing risk taking. That is, the acquisition of insurance against some contingency is associated with a decreased incentive to avoid or prevent the insured loss because policyholders do not bear the full consequences of their actions. Independent of any insurance provision, moral hazard can also result from a false perception of safety if building codes are not effective.

This article examines the effectiveness of the NFIP’s building code in reducing damages to barrier island property in a hurricane. We determine whether similarly located properties fare better or worse in a hurricane based on the code regime under which they were constructed. We use data from Lee County, Fla., where 2004’s Hurricane Charley made landfall. Our findings raise questions about the optimal scale of code design, and about unintended consequences from building code changes.

Understanding Political Islam

June 30, 2014 Comments off

Understanding Political Islam
Source: Cato Institution

The tragic events in Iraq, where the Islamic State in Iraq and the Levant (ISIS) is currently mounting an offensive against the government of the Prime Minister Nouri al-Maliki, certainly appears to be consistent with Blair’s concern—namely that “the battles of this century … could easily be fought around the questions of cultural or religious difference.” But to what extent do Blair’s claims reflect the experience of political transitions throughout the Middle East and North Africa (MENA)?

The rise of political Islam into prominence poses important questions both for people in the MENA region and for policymakers in the West. Since 9/11, the thrust of Western foreign and security policy toward the MENA region has aimed at containing radical forms of Islam. In practice, that often meant cozying up to authoritarian regimes, as long as they were secular, since these were seen as superior to their theocratic alternatives. When the Egyptian military brought down President Mohamed Morsi in early July 2013, there was a sense of relief among many in Washington.

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