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Does Financing Spur Small Business Productivity?

December 19, 2014 Comments off

Does Financing Spur Small Business Productivity?
Source: Cato Institute

cess to adequate financing is an important issue for firms, particularly younger and smaller ones. Given the role these firms play in the process of creative destruction, alleviating financial constraints for start-ups and small businesses is an important concern around the world. More recently, the financial crisis of 2008 demonstrated the critical role of bank financing, at both the firm and economy wide levels. While prior studies have examined how financing affects entrepreneurial firm starts and closures (e.g., Black and Strahan, 2002; Kerr and Nanda, 2009), no study has directly analyzed the link between bank financing and firm productivity, particularly for smaller firms where access to financing is critical. This is important given that most start-ups appear to rely on bankdebt financing (Robb and Robinson, 2013).

Determining the relation between bank financing and firm productivity is difficult because of the possibility of reverse causality. A positive correlation between bank financing and productivity might mean that more productive firms seek additional bank financing, or that increased access to bank financing enhances productivity. Yet another possibility is that unobserved factors affect both access to financing and productivity.

Our research addresses reverse causality by exploiting an exogenous shift in firms’ access to bank financing due to deregulation of interstate bank branching. During the 1990s, states began allowing out-of-state banks to set up and acquire local branches. This increased interstate banking and thus allowed greater access to financing for firms. Consistent with prior literature, we show that deregulations were not driven by prior productivity of firms. The key question is whether this increased access to cheaper financing is dissipated by firms taking on unproductive or less productive pet projects or whether it increases firms’ ability to undertake additional productive projects.

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The Federal Emergency Management Agency: Floods, Failures, and Federalism

December 8, 2014 Comments off

The Federal Emergency Management Agency: Floods, Failures, and Federalism
Source: Cato Institute

The Federal Emergency Management Agency (FEMA) is the lead federal agency for disaster preparedness, response, and relief. FEMA’s budget fluctuates from year to year, but spending has trended sharply upwards in recent decades. The agency spent $22 billion in fiscal 2013 and $10 billion in fiscal 2014. The main activity of FEMA is distributing aid to individuals and state and local governments after natural disasters, such as hurricanes, floods, and earthquakes. In addition, the agency provides ongoing grants to the states for disaster preparedness, and it operates the National Flood Insurance Program (NFIP).

FEMA’s response to some major disasters has been slow, disorganized, and profligate. The agency’s actions have sometimes been harmful, such as when it has blocked the relief efforts of other organizations. FEMA’s dismal response to Hurricane Katrina in 2005 dramatized the agency’s bureaucratic dysfunction. FEMA’s grants for disaster preparedness are known for wastefulness. As for the NFIP, its insurance subsidies are spurring development in flood-prone areas, which in turn is increasing the damage caused by floods. The NFIP also encourages an expansion of federal regulatory control over local land-use planning.

Federalism is supposed to undergird America’s system of handling disasters, particularly natural disasters. State, local, and private organizations should play the dominant role. Looking at American history, many disasters have generated large outpourings of aid by individuals, businesses, and charitable groups.

Today, however, growing federal intervention is undermining the role of private institutions and the states in handling disasters. Policymakers should reverse course and begin cutting FEMA. Ultimately, the agency should be closed down by ending aid programs for disaster preparedness and relief and privatizing flood insurance.

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.

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.

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