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Fiscal Policy Report Card on America’s Governors 2014

November 17, 2014 Comments off

Fiscal Policy Report Card on America’s Governors 2014
Source: Cato Institute

The recession of 2007–2009 knocked the wind out of state government budgets, but revenues and spending have grown steadily in recent years. As revenues have risen, some governors have pursued reforms to reduce tax burdens on families and make their states more competitive. Other governors have used rising revenues to expand programs.

That is the backdrop to this year’s 12th biennial fiscal report card on the governors, which examines state budget actions since 2012. It uses statistical data to grade the governors on their taxing and spending records—governors who have cut taxes and spending the most receive the highest grades, while those who have increased taxes and spending the most receive the lowest grades.

Four governors were awarded an “A” on this report card: Pat McCrory of North Carolina, Sam Brownback of Kansas, Paul LePage of Maine, and Mike Pence of Indiana. Eight governors were awarded an “F”: Mark Dayton of Minnesota, John Kitzhaber of Oregon, Jack Markell of Delaware, Jay Inslee of Washington, Pat Quinn of Illinois, Deval Patrick of Massachusetts, John Hickenlooper of Colorado, and Jerry Brown of California.

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The Evidence on Universal Preschool

November 14, 2014 Comments off

The Evidence on Universal Preschool
Source: Cato Institute

Calls for universal preschool programs have become commonplace, reinforced by President Obama’s call for “high-quality preschool for all” in 2013. Any program that could cost state and federal taxpayers $50 billion per year warrants a closer look at the evidence on its effectiveness.

This report reviews the major evaluations of preschool programs, including both traditional programs such as Head Start and those designated as “high quality.” These evaluations do not paint a generally positive picture. The most methodologically rigorous evaluations find that the academic benefits of preschool programs are quite modest, and these gains fade after children enter elementary school.

Categories: Cato Institute, education

Do Doctors Practice Defensive Medicine? Revisited

November 14, 2014 Comments off

Do Doctors Practice Defensive Medicine? Revisited
Source: Cato Institute

Tort reform that limits medical malpractice (“med mal”) suits can affect healthcare spending in two distinct ways. Tort reform can directly lower health care spending by lowering the cost of med mal insurance, which covers indemnity payouts on claims plus defense costs. However, these direct costs account for only about 0.3 percent of healthcare spending. Thus, any decline in med mal premiums will have a minor impact on overall spending.

Tort reform can also affect healthcare spending indirectly, by changing providers’ incentives. In particular, if med mal risk falls, providers might engage in less “defensive medicine” — the practice of ordering tests and other procedures that do not benefit patients (or lack sufficient benefit to justify their costs), to reduce the risk of a med mal lawsuit. If tort reform leads to fewer lawsuits, it may also lead to less defensive medicine. Policymakers have long seen the elimination of defensive medicine as a source of major savings in healthcare costs (e.g., more than a hundred billion dollars).

SSDI Reform: Promoting Gainful Employment while Preserving Economic Security

October 23, 2014 Comments off

SSDI Reform: Promoting Gainful Employment while Preserving Economic Security
Source: Cato Institute

The Social Security Disability Insurance (SSDI) program faces imminent insolvency. Annual expenditures totaled $143 billion in 2013, but program receipts amounted to $111 billion—a shortfall that is projected to continue indefinitely. According to the Social Security Trustees, the program’s trust fund will be fully depleted in 2016, compelling either a large benefit cut or a large tax hike—neither option being politically popular. Regardless of the program’s insolvency, SSDI creates substantial work disincentives, causing many with medical impairments who could work to withdraw from the labor force and apply for SSDI. That undesirable outcome arises from the complicated rules and procedures that SSDI uses to establish benefit eligibility. But rectifying SSDI’s processes is a monumental task, unlikely to be accomplished in the short term.

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.

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.

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