AEI Economic Perspectives
December 18, 2012
AEI Economic Perspectives is a policy paper series published by the Economic Policy Studies department of the American Enterprise Institute. Papers in the series analyze public policy, examine current economic conditions, present insights within and across economics subject areas, and feature original research.
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PERSPECTIVES ARCHIVES
2023
2023-02 (March) The UK’s National Health Service at 75: What Are the Root Causes of the Current Discontent? | James C. Capretta
The UK National Health Service (NHS), now in its 75th year, has devoted supporters inside and outside the country who admire its egalitarian ethic and public-service orientation. However, the rapid deterioration of its performance in recent years, and especially after the COVID-19 pandemic, is too glaring and dangerous to overlook. A major challenge is the health service’s near-exclusive reliance on political and bureaucratic processes for resources and organizational direction. Free care at the point of service and publicly owned hospitals sustain the NHS’s popularity, but long waits for needed care, even when the services are “free,” harm patients. Neither major political party appears ready to explore systemic reform, but if political conditions create an opening, UK leaders might consider moving the NHS closer to the public-private models found in other European economies, as has been suggested at various points in its history and also recently. The lesson for other countries from the NHS’s ongoing crisis is that full governmental control of medical care brings risks, not just potential and often-overstated rewards.
2023-01 (January) Price Transparency 2.0: Helping Patients Identify and Select Providers of High-Value Medical Services | James C. Capretta and David N. Bernstein
Policymakers in the United States have an opportunity to convert bipartisan support for transparent health care prices into savings for patients and taxpayers. While significant new federal rules are forcing more disclosure of previously unseen fee schedules, they need refinement to help consumers play a more active role in the market. The current reliance on pricing tied to insurance billing codes instead of meaningful bundles of services is a major impediment. Four changes to the current suite of requirements would improve results: (1) pricing disclosure of standardized, consumer-focused bundles of services; (2) mandatory (and enforced) provider participation in the disclosure system with regularly scheduled updates; (3) guaranteed access to care for all consumers at the disclosed prices, irrespective of their insurance coverage; and (4) coordination of insurance payments with transparency efforts to ensure patients can benefit fully when choosing low-priced options.
2022
2022-05 (September) An Expanded and Updated Analysis of the Federal Debt’s Effect on Interest Rates | Mark J. Warshawsky and John Mantus
This report expands on a standard empirical estimation of the relationship between federal
deficits and debt and long-term interest rates. It follows closely a 2019 long blog post by Ernie Tedeschi, which is itself an update and extension of Francis Warnock and Veronica Cacdac Warnock (2009). Using data from September 1981 to May 2022, we find that a 1 percentage point increase in the federal debt-to-gross-domestic-product ratio is associated with an increase of nearly five basis points in the long-term interest rate. This is a larger effect than generally found in the literature and double what the Congressional Budget Office uses in its budget projections, which we attribute to our more complete specification of Federal Reserve policy.
2022-04 (September) Tight Product Markets, Not Tight Labor Markets, Are Pushing Up Inflation Around the World | Steven B. Kamin and John Kearns
Soaring job vacancies have been widely cited as an indication of overheated labor markets pushing up wages and inflation. But have tight labor markets and rising wage rates been the main drivers of the recent surge in inflation? The US evidence for this Phillips curve story is mixed at best. In this report, we examine the international evidence and ask: Have economies with larger increases in wage growth since the beginning of the pandemic experienced larger increases in core inflation? We find the answer is no. Although there is a strong correlation between job vacancies and core inflation across countries, there is only a tenuous correlation between nominal wage growth and core inflation. We conclude that rising job vacancies are proxies for rising aggregate demand, which has pushed up prices of intermediate inputs and markups over cost. Central banks may still need to tighten monetary policy to restrain inflation, but large increases in unemployment may not be necessary to bring inflation under control
2022-03 (August) Customized Care for Complex Conditions in Medicare Advantage | Brian J. Miller, Steven C. Zima, and Gail R. Wilensky
Medicare beneficiaries frequently select suboptimal Medicare Advantage plan products or elect traditional fee-for-service Medicare due to choice paralysis, cognitive impairments, and consumer health insurance illiteracy. Medicare Advantage Chronic Condition Special Needs Plans (C-SNPs) offer an opportunity to tie disease to both plan design and marketing, simplifying consumer choice architecture. This report explores additional refinement in the C-SNP program to help unlock this potential, examining programmatic regulatory requirements, qualifying diseases, and marketing rules with an aim to improving care for multi-morbid Medicare beneficiaries.
2022-02 (January) A Medicaid and Children’s Health Insurance Program primer and reform outline | James C. Capretta
Medicaid plays a larger role in US health care than was anticipated at its 1965 enactment. The country’s heavy reliance on voluntary, job-based insurance leaves gaps in protection for people who are unemployed or who have low earnings and cannot afford premium payments. Further, the disabled and frail elderly need social services in addition to traditional medical care. Medicaid and the Children’s Health Insurance Program (CHIP) have, by default, become the nation’s safety-net programs for these societal obligations. Medicaid’s joint federal-state architecture and open-ended matching system for program financing have facilitated rapid spending and enrollment growth, but they also complicate political accountability, budget and cost discipline, and consistent and fair national administration. Reform can strengthen Medicaid and CHIP by improving incentives for cost control while ensuring all Americans have a basic level of protection. Medicaid and CHIP can support market incentives by filling in gaps and reinforcing competitive pressures where possible.
2022-01 (January) Do drugmakers “revenue target”? Evidence from the differential timing of biosimilar entry across markets | Benedic N. Ippolito, Loren Adler, and Conrad Milhaupt
There is debate about whether regulating drug prices in Medicare will lead manufacturers to compensate by increasing revenues from the unregulated commercial market. We offer evidence on this question by considering how manufacturers responded in a related setting—when they lost revenues due to biosimilar entry in the European Union but maintained monopoly rights in the unregulated US market. We show that, despite sharp reductions to net revenues in the EU, there was not an offsetting increase in US net revenues even though drugmakers held the same theoretical ability to make up losses as they would under Medicare-specific rate regulation. These data are consistent with manufacturers already using their full market power in the US.
2021
2021-08 (October) Real-world assessments of COVID-19 vaccine efficacy | James C. Capretta, Scott Ganz, and Kieran Allsop
Over the past year, the global vaccination campaign to end the COVID-19 pandemic has progressed from tests of vaccine efficacy to over six billion (and counting) administered doses. Highly structured clinical trials facilitated strong statistical examinations of the vaccines because randomization accounts for unobserved confounders that could bias the analysis. Post-approval assessments have limitations because they rely on data from less structured, real-world settings. Several post-approval studies show the existing mRNA vaccines launched initially in the US effectively prevent, as predicted, the worst outcomes of COVID-19, while the vaccines many other countries use are less effective but still invaluable in fighting the pandemic. An observed erosion in vaccine efficacy this year, relative to the clinical trials of 2020, may be a function of the new variants of the virus, waning acquired immunity against infection over time, or other factors, such as the higher incidence of prior infections in the unvaccinated population and the tendency for random error (such as false-positive COVID-19 tests) to attenuate measured efficacy rates. Taken together, the studies make it plain that vaccinating the unvaccinated with any of the globally approved vaccines remains the most important step for lessening the pandemic’s severity.
2021-07 (September) The political economy of health reform: Price regulation vs. regulated competition | James C. Capretta
The US has mature health-sector institutions and long-standing insurance and care arrangements that limit the scope of potential future reforms. The realistic path is incrementalism one way or another: toward either tighter government regulation of prices paid for insurance and services (especially in private insurance) or a structured market that leads the sector’s suppliers of medical services to set competitive prices on their own. How each option would fare when implemented through the nation’s actual political and administrative processes is an important consideration. Medicare and Medicaid reveal that payment regulation can produce the desired reductions in spending but also lead to special-interest influence and rigidity. A structured market, with the right safeguards, can deliver strong results by self-correcting and being more resilient to outside manipulation. It will only be adopted, however, if consumers believe it will lead to financial benefits and no risks.
2021-06 (August) Should the Federal Reserve issue a central bank digital currency? | Paul H. Kupiec
During Federal Reserve Chairman Jerome Powell’s July 2021 congressional testimony, several elected members encouraged Powell to fast-track the issuance of a Federal Reserve digital currency. Chairman Powell indicated he is not convinced there is a need for a Fed digital currency. But he also indicated that Fed staff are actively studying the issue and that his opinion could change based on their findings and recommendations. In this report, I explain how a new Federal Reserve digital currency would interface with the existing payment system and review the policy issues associated with introducing a Fed digital currency.
2021-05 (July) Biden’s reforms to the tax treatment of US multinational corporations: The knowns and unknowns | Kyle Pomerleau
The Joe Biden administration has proposed significant changes to the tax treatment of US multinational corporations aimed at raising revenue and curbing profit shifting and base erosion. The proposals would move the US corporate income tax closer to a “worldwide” or residence-based tax and introduce new anti–base erosion protections. This report provides an overview of the tax treatment of multinational corporations under current law, the Biden administration’s proposals, and some implications of the administration’s approach.
2021-04 (July) Market-driven Medicare would set US health care on a better course | James C. Capretta
Medicare is the most decisive force in US health care. The program’s payment regulations heavily influence how hospitals, physician groups, and other providers organize themselves to maximize profits while delivering medical services to their patients (Medicare and non-Medicare alike). Advocates of government-enforced cost control favor using Medicare’s payment rules over private options and market incentives to discipline expenses. Market advocates must offer an alternative that builds on the program’s existing consumer-oriented features. Program changes should emphasize strengthened price competition, informed and structured coverage options, and better financial incentives for migration toward low-cost, high-value care. Further, the program’s trust funds and insurance benefit need to be updated to complement and reinforce market discipline and to limit the financial burden imposed on current and future taxpayers. Market reforms in Medicare would encourage conforming changes in the commercial sector, which is one reason they encounter stiff resistance from advocates of full governmental control.
2021-03 (May) Covering the uninsured in the United States’ multi-payer health system | James C. Capretta
Governments of advanced economies should ensure health coverage and ready access to needed medical care for their entire populations. Patients without insurance are at risk of experiencing avoidable health problems and higher mortality because they forgo care or get treatments later than is optimal. The US has moved, in halting steps, toward population-wide insurance enrollment but has not yet made spells without coverage an uncommon occurrence. The United States’ reliance on multiple, competing insurance plans to provide coverage is necessary for using market incentives, but it also allows breaks in protection to occur. Policymakers can close many existing coverage gaps and move the nation closer to continuous population-wide enrollment without wholesale change by focusing on three reforms: building a nationwide automatic enrollment system for non-group insurance, giving employers options to increase take-up by more workers, and compromising on Medicaid as the nation’s safety-net insurance plan. Immigration reform should address the large number of uninsured persons who reside in the US without proper authorization to do so
2021-02 (March) Structured markets: Disciplining medical care with regulated competition | James C. Capretta
Medical care cannot be delivered efficiently or equitably through an unregulated market. Patients prefer insurance to out-of-pocket expenses, and insurance severs consumption from point-of-service pricing. Patients rely on expert practitioners to guide them rather than their own judgments. Further, costs are concentrated in high-cost cases that are far in excess of typical insurance deductibles. Acknowledging these complications does not mean full governmental control is the only answer. A blend of regulation and private incentives—a structured market—can drive out waste and improve outcomes more reliably than episodic political interventions can. Two conceptions of market-driven medical care offer contrasting visions. One sees agents (i.e., health maintenance organizations) competing to manage costs on behalf of premium-sensitive enrollees. The other elevates price-sensitive consumers shopping directly for well-defined and common medical services. These are not incompatible conceptions. Both require strong financial incentives for consumers and standardization to take the complexity of insurance and medical care out of price comparisons.
2021-01 (February) Modeling protection from COVID-19 based on vaccine supply and administration rates| Kieran Allsop, James C. Capretta, and Scott Ganz
The US can emerge from the depths of the COVID-19 crisis in the coming months if the federal government leads and executes an effective vaccination campaign (and if, as appears to be the case, emerging SARS-CoV-2 variants do not fully evade vaccine-induced immunity). The limiting factors on the pace of population protection are the manufacturing capacity of the approved vaccines’ sponsors, the efficiency of administering available supply, and Americans’ willingness to take the shots. A system dynamics model of vaccine inventory and daily vaccinations is useful for estimating when important objectives might be met. Under a base case scenario, the US could reach a target of 75 percent of the population protected by the end of July, assuming three million shots per day can be sustained over several months and vaccine hesitancy recedes. The expected arrival of another approved vaccine (from Johnson & Johnson) and the possibility of a slower, or more rapid, pace of daily vaccinations would alter the outlook in different ways.
2020
2020-11 (December) Medicare Part D reforms: Who wins and who loses?| Joseph Antos, Kirsten Axelsen, and Sara Rogers
The Department of Health and Human Services recently finalized a regulation requiring drug manufacturers to offer rebates directly to consumers rather than paying rebates to insurers providing benefits under Medicare Part D. Both the current and incoming administrations support tying Medicare payments for drugs facing limited competition to prices paid in other developed countries. Such policies are likely to fall short in slowing cost growth and will do little to ease the financial burden faced by many Medicare beneficiaries with the greatest health needs. A more fundamental restructuring of Part D’s subsidies would provide insurance protection that is now missing from the program, eliminate incentives that promote higher prices for the most expensive drugs, and reinvigorate price competition in the market.
2020-10 (November) The future of employer-sponsored health insurance| James C. Capretta
Employer-sponsored insurance (ESI) has been a central part of US health care for the entirety of the postwar era and is valued by working-age Americans for its adaptability and the ready access to medical care it provides to its enrollees. It is not without flaws, however. Not all employers offer ESI to their workers, and even when they do, it can be insecure for employees at risk of losing their jobs. Most troubling, its rising costs are becoming a heavy financial burden and inhibit wage growth. These problems are systemic; they cannot be addressed by individual firms that must compete for qualified workers in part through the generosity of their health benefits. Congress should modernize ESI by reforming its tax treatment to control costs and entice more firms to offer plans, ensuring all workers have meaningful choices of coverage, and giving preferential status in the market to high-quality managed care plans and multi-firm private exchanges.
2020-09 (October) Awaiting the signal: Assessing the efficacy of COVID-19 vaccines | James C. Capretta and Scott Ganz
The global campaign to identify effective vaccines against COVID-19 has entered the final stage of testing for regulatory approval—Phase III trials—for several promising candidates. Evaluation will be guided by criteria established by the Food and Drug Administration and the World Health Organization. The minimum threshold for efficacy is observed reduction of disease incidence of at least 50 percent, with high statistical confidence of efficacy above a minimum of 30 percent. Full safety reviews of the vaccine candidates may take several months, to ensure any adverse events are given sufficient time to become evident and then studied. For efficacy, however, statistically valid determinations can be made after approximately 150 confirmed cases of COVID-19 among trial participants, which may occur relatively quickly given the prevalence of the virus in many communities. Consequently, on the question of whether a vaccine works to prevent progression from the virus to the disease, a clear signal is likely to occur in a few months after the trial begins rather than over the longer time frames that may be necessary for evaluation of their safety profiles.
2020-08 (September) Should the modern corporation maximize shareholder value? | Sanjai Bhagat and R. Glenn Hubbard
Milton Friedman’s admonition 50 years ago that the modern corporation should maximize shareholder value remains controversial. We argue that under certain broad assumptions, the admonition remains a good place to start. To strengthen the prospects for success of long-term shareholder value maximization, we suggest steps to align shareholder wealth maximization with stakeholder interests. First, antitrust public policies should be vigorously enforced to maintain and enhance competition in product markets and labor markets. Second, management and board compensation should be reformed to focus on creating and sustaining long-term shareholder value. Finally, and more importantly, for many of society’s serious challenges, corporations do not represent the appropriate level of action. Climate change, for example, poses significant challenges for societies and businesses. But significant changes to combat climate change require public policy changes in the United States and abroad. Turning more to corporations because the political process seems broken will not do.
2020-07 (September) The COVID-19 pandemic and revenues of state and local governments: An update | Jeffrey Clemens and Stan Veuger
This report provides estimates of the revenue shortfalls state and local governments are likely to experience due to the COVID-19 pandemic. Our estimates apply to the 2021 fiscal year, which extends from the third quarter of 2020 through the second quarter of 2021 in most states. Nationally, we estimate that state governments’ sales and income taxes will fall short of January projections by roughly $105 billion. Combined shortfalls in all state and local government revenue streams are likely to be on the order of $240 billion for the current fiscal year.
2020-06 (July) COVID-19 and the Medicare trust funds | Joseph Antos and James C. Capretta
The 2020 Medicare trustees’ report released in April did not incorporate how the coronavirus pandemic would affect program finances. Even so, the trustees project that the Medicare Hospital Insurance (HI) trust fund will be unable to fully cover its obligations beginning in 2026. While the cost of treating patients with COVID-19 might be offset by a delay or reduction in patient use of other medical services, the deep recession now underway will erode payroll tax revenue and hasten the depletion of HI reserves. The Supplementary Medicare Insurance trust fund, which accounts for the cost of physician and other services and the drug benefit, adds an even larger burden on taxpayers. Congress and the administration should reform the entire program to lower long-term costs while protecting the quality of services provided to the nation’s elderly.
2020-05 (June) Fiscal policy and the major entitlements: An introduction | James C. Capretta
The US was facing a challenging fiscal outlook even before the coronavirus pandemic. The current crisis and the financial crash of just over a decade ago have made matters much worse. Both required aggressive policy responses and significant federal borrowing. Federal debt is now likely to escalate more rapidly than even pessimistic scenarios predicted a few years ago. Beyond the crises, the primary causes of fiscal pressure are population aging and rising health expenses. The large federal entitlement programs—Social Security, Medicare, and Medicaid—have grown rapidly over the past half century and are expected to continue doing so in coming decades. When the crisis recedes, Congress should enact reforms that lower the long-term costs of these programs. The emphasis should be on promoting longer working lives, more progressive benefits, and efficiency in the provision of health and long-term care services.
2020-04 (June) The economic cost and spatial diffusion of the opioid crisis, 2009-18 | Alex Brill and Scott Ganz
Recent data show a small decline in opioid-related mortality following a decade during which opioid-related mortality more than doubled to nearly 53,000 in 2018. However, the aggregate statistics mask important spatial and temporal trends in the data. This report estimates nationwide, regional, and county-level economic costs associated with the opioid crisis. The data show that, despite recent nationwide per capita opioid-related cost declines, the impact of the crisis continues to be felt across large swaths of the Northeast, Midwest, and South. We also find that opioid-related mortality tends to diffuse among nearby counties, with the local diffusion rate from illegal opioids—which are the primary cause in the current wave of the crisis—exceeding the rate from prescription opioids, which were the primary cause in earlier waves. The combination of lower aggregate mortality and faster diffusion among nearby counties points to a changed spatial distribution of economic costs as the opioid crisis evolves.
2020-03 (May) Changes to household retirement savings since 1989 | Andrew G. Biggs
This report uses two new data sources to provide insights on the evolution of retirement savings over the past three decades and how future retirees may fare. First, the Federal Reserve’s Survey of Consumer Finances and Distributional Financial Accounts (DFA) provide estimates of both household savings in retirement accounts and any benefits households accrued under a traditionally defined benefit pension. The DFA data show that, from 1989 through 2016, household retirement savings increased for every age, income, race, or educational group. This is true whether retirement savings are measured in inflation-adjusted dollars or as the ratio of retirement savings to their annual earnings. Second, I present previously unpublished projections from the Social Security Administration’s Model of Income in the Near Term (MINT). The MINT model projects that future retirees will have retirement incomes as a percentage of preretirement earnings similar to those of current retirees.
2020-02 (March) The cost of cargo preference for international food aid programs | Philip G. Hoxie, Stephanie Mercier, and Vincent H. Smith
The federal government annually appropriates funds for food aid programs that the US Agency for International Development manages to benefit some of the neediest individuals in the world. This report analyzes how one interest group, the US maritime industry, has managed to obtain rents from the Title II food aid program through cargo preference requirements in the name of national security. We find that removing cargo preference requirements would allow for between $36 and $64 million of already appropriated funds to go to feeding the hungry and would benefit US soft power globally.
2020-01 (March) Policies affecting the number of physicians in the US and a framework for reform | James C. Capretta
In the US, the federal government is supposed to defer to the states on matters not reserved for it by the Constitution, such as regulating the medical profession. State medical boards, created and empowered by state legislatures, establish the criteria that must be met before physicians are issued licenses and allowed to care for patients without supervision. Since the latter half of the 19th century, the medical profession has been effectively regulating itself through heavy influence over the licensing process and control of the organizations that certify educational and training institutions. The federal government participates in (but does not directly control) residency programs through partial funding provided mainly by Medicare. Further, it writes the laws that regulate the influx of foreign graduates of international medical schools. The federal government should encourage a more adaptive and flexible pipeline of physicians entering the US market by (1) shifting away from the excessively hospital-centric orientation of current funding for residency training and directing the aid to the residents themselves; (2) promoting new forms of institutional certification with fewer ties to the economic interests of existing practitioners and academic medical centers; (3) adjusting the Medicare fee schedule, which sets income expectations for physicians, based on the market prices revealed through transparency initiatives; (4) promoting and testing a shorter and less costly education option that merges a traditional undergraduate curriculum with medical school; and (5) enacting immigration policies that accommodate a larger influx of well-trained and talented foreign-born physicians.
2019
2019-09 (September) Medicare reform can no longer be ignored: Warnings from the 2019 Medicare trustees report | Joseph Antos and Robert E. Moffit
The latest annual Medicare trustees report highlights the program’s growing fiscal challenge and reflects policymakers’ ongoing failure to prepare Medicare for the future. Program spending on a per-beneficiary basis rose sharply in 2018 and is anticipated to accelerate with the influx of baby boomers turning age 65 and rising health care costs. Medicare’s Hospital Insurance (or Part A) trust fund becomes insolvent in 2026, but the program is already in trouble from a budget perspective. More than $300 billion in general tax revenue was needed in 2018 to help fund $740 billion in Medicare spending. Bipartisan legislation will be needed to put the program on a sound basis for future generations. One starting point could be proposals advanced in the president’s budget and other reforms to improve the functioning of traditional fee-for-service Medicare. Adopting premium support, which converts the current uncapped subsidy to a defined contribution, would eliminate the fee-for-service incentives that drive up spending unnecessarily. Such a reform is controversial but less dramatic than many think.
2019-08 (June) Toward meaningful price transparency in health care | James C. Capretta
Advocates of consumer-directed care are disappointed that the steady shift toward higher-deductible insurance, now underway for more than a decade, has not led consumers to become more active shoppers when getting medical services. The lack of transparent pricing is one factor hindering progress, but there are other impediments too. For instance, consumers enrolled in high-deductible insurance usually have access to preferential pricing negotiated by their plans, which makes shopping less necessary, and patients needing high-cost care quickly satisfy their deductibles, after which they are price insensitive. In this environment, providers have weak incentives to disclose prices that invite comparisons with competitors. Numerous public and private efforts are now underway to make pricing more transparent and usable. While some of these efforts show promise, they are unlikely to boost patient price shopping significantly because of their limitations and because the overall market environment does not accommodate an active consumer role. The federal government is the only entity with power and regulatory reach to redirect how the market functions. It should take two steps. First, it should promulgate a required pricing list for a set of common and standardized services and interventions. Second, it should require insurance plans to provide reference-based payments, tied to in-network rates, for all the services on the federal list. Consumers selecting out-of-network providers with prices above the referenced amounts would pay the difference themselves, while those selecting low-cost providers would get to keep the savings. These changes would allow consumers to play a much more active role in the health system, although that role will remain circumscribed by factors that make consumer price shopping infeasible in important circumstances.
2019-07 (June) The Jones Act in historical context | Vincent H. Smith and Philip G. Hoxie
Critics and supporters of the Jones Act frequently overlook how the 1920 law fits into the history of US maritime policy. Since 1789, Congress has restricted access to coastwise trade—the movement of goods between US ports—to US merchant marine and shipbuilding companies, with preferred duties on US ships, shipbuilding and operating subsidies, and bans on foreign competition. We examine how Congress designed the Jones Act to address the circumstances of the shipping industry in 1920 and where the act fits into the history of US shipping and shipbuilding policy.
2019-06 (June) Reforming Medicare payments for Part B drugs | Joseph Antos and James C. Capretta
Bringing new, more effective pharmaceutical products to market is expensive, time-consuming, and risky. Intellectual property protections and regulatory requirements help promote that research, but they also give manufacturers a pricing advantage. Government price setting, which some policymakers support, could slow the growth of Medicare spending but is likely to favor short-term cost cutting over the longer-term societal benefits from clinical innovation. The Trump administration has proposed a test of a new Medicare Part B payment system for drugs administered in physician offices and hospital outpatient clinics. The International Pricing Index Model would use private vendors to negotiate prices with manufacturers for Part B–covered drugs. Vendors would be paid using a formula notionally based on prices paid in other high-income countries for the same products. The effect of this policy is an arbitrary payment cut. We propose an alternative market-based approach that would (1) fully empower competing private vendors to negotiate prices for Part B drugs and allow physicians and patients to share in the savings, (2) test a change in the current Part B reference pricing model to include international prices from the few countries that allow manufacturers flexibility in setting their own prices, and (3) use international and domestic clinical data evaluations to inform pricing for products for which there is no effective competition.
2019-04b (April) Are we winning the war against malaria? | Roger Bate
Malaria mortality rates have more than halved in the past 15 years due to major disease-control efforts. However, gains have slowed in the past few years, with a few large and badly governed nations showing little progress and malaria still killing hundreds of thousands of children every year. Some might argue that we should suspend efforts now that additional success is becoming more difficult to achieve, but sustaining the fight is important to keep the failures of the past from reemerging. Key challenges include insecticide and drug resistance, substandard drugs, procurement and distribution problems, product theft, and systemic corruption. If major donors including the President’s Malaria Initiative (PMI) and the Global Fund do not address these challenges head-on, then they might lose political support. President Donald Trump wants to cut PMI’s budget, but funding should be sustained and gradually increased as long as PMI and Global Fund show they are willing to overcome problems.
2019-04a (April) Will homebuilding finally evolve? Lessons from the American experience with factory-built housing | Lynn M. Fisher and Scott Ganz
In this report, we examine the history of attempts to disrupt site-built single-family housing in the US to learn about the potential for the homebuilding industry to increase housing affordability through innovation. We argue that greater reliance on mass production is unlikely to be a source of significant cost savings for the kinds of homes that most Americans live in today. We highlight the potential for factory-built housing to provide more significant cost savings if smaller-size and reasonable but lower-quality construction is permitted, as is the case with manufactured housing. While the entire home is rarely prefabricated in the US, we do find an increased reliance on prefabricated components in site-built housing over time, resulting in some cost savings and increases in construction quality. Finally, we argue that the history of homebuilding demonstrates that rapid adoption of prefabrication or more efficient production processes by homebuilders are more likely to be driven by market competition than by economies of scale within consolidated firms or by government intervention.
2019-03b (March) The US needs workers, not a wall | Pia M. Orrenius and Madeline Zavodny
Illegal immigration along the Southwest border has dropped to levels last seen during the 1970s, yet the focus on stopping it has reached unprecedented intensity, culminating in February in a national emergency declaration. Meanwhile, the unauthorized immigrant population has been falling for at least a decade, and Mexico is no longer the source of most unauthorized immigrants. Over half of new unauthorized immigrants are visa overstayers who entered legally. A historically high number of people attempting to enter along the Southwest border are asylum seekers—unaccompanied minors and families from Central America. Both of these groups are unlikely to be deterred by tougher border enforcement. Meanwhile, the number of unauthorized immigrant workers has been falling, leading to heightened employer interest in using the H-2A and H-2B visa programs to hire temporary foreign workers. However, those programs are unlikely to fully meet employer demand for less-skilled workers. This demand will only grow as the number of less-educated US-born workers falls. Instead of building a wall, the US needs to build programs that ensure enough workers are available.
2019-03a (March) Solving surprise medical billing | Benedic N. Ippolito and David Hyman
Surprise medical billing—cases in which patients are unexpectedly billed at highly inflated prices from providers who do not accept their insurance—has attracted policymakers’ attention. In this report, we outline the economic rationale for why markets have not eliminated this behavior and present policy solutions. We emphasize that much of this phenomenon can be solved via contract reforms that require health care providers to negotiate market prices among themselves. This strategy produces market outcomes and minimizes the risks associated with rate regulation. Targeted rate caps should be considered only in cases in which contractual reforms are not feasible.
2019-02 (February) The unanswered questions for Medicare for All | Charles Blahous
The single-payer health insurance proposal known widely as Medicare for All (M4A) cannot be enacted without first answering certain questions. Foremost among these is whether the public would support shifting more than $32 trillion in M4A’s first 10 years from private health spending, over which consumers retain some discretion, to federal health spending, over which consumers do not. A related open question is whether the federal government can adequately finance this amount of spending without triggering significant adverse economic effects. Other unanswered questions include M4A’s effects on health providers, the prescription drug market, and private health insurance. M4A would add further to national health cost growth unless provider reimbursements are cut more sharply than lawmakers have been willing to do historically. Yet the consequences of enacting such payment cuts simultaneously with a substantial increase in health service demand are unpredictable.
2019-01c (January) Rent-seeking behavior in US international food aid programs | Stephanie Mercier
This study outlines the evolution and history of US food aid programs including the Food for Peace program and provisions in recent farm bills. Early in their existence, these programs provided rents to interest groups through cargo preference requirements and purchasing requirements for in-kind aid. These requirements, along with monetization, shift program dollars toward commodity producers, shipping companies, and nongovernmental organizations in the United States, raising program costs. The result is that these programs are not efficiently achieving their goals of increasing US soft power and alleviating global hunger.
2019-01b (January) Providing high-quality, cost-effective health coverage to retired federal employees age 65 and older | Joseph Antos, James C. Capretta, and Walton Francis
The Federal Employees Health Benefits Program (FEHBP) serves as primary coverage for early retirees and as secondary coverage when retirees become eligible for Medicare at age 65. Although the FEHBP and Medicare have coexisted for more than a half century, the government has never attempted to combine the resources of both programs into a sensibly designed and coordinated insurance program for former federal workers age 65 and older. The federal government should shift from passive oversight toward active management of the FEHBP’s retiree health benefit. Specifically, Congress should convert the benefit, on a prospective basis, into a program that gives each retiree one insurance plan instead of two. There are numerous ways to achieve this objective without shifting costs onto Medicare or the FEHBP. Indeed, an effective reform would reduce overall costs and thus allow both programs to spend less on retiree coverage. Some of the savings should be shared with future federal retirees in the form of deposits into health savings accounts.
2019-01a (January) Modern monetary theory and policy | Stan Veuger
Proponents of so-called Modern Monetary Theory emphasize that governments can always avoid defaulting on existing obligations denominated in a currency they themselves create. In many instances, they extrapolate from this correct observation to sweeping claims about the proper size of government and the role of monetary and fiscal policy. To the extent that these claims go beyond those of mainstream monetary doves, policymakers would be unwise to rely on them.
2018
2018-12 (December) Fentanyl and fatal overdoes: From chemical production in China to users in Pennsylvania | Roger Bate
Policies to restrict the use of prescription opioids, such as oxycodone, accelerated an already lively illicit opioid market. Fentanyl, a powerful opioid, treats real patients, but it and its new analogues have found their way into illicit markets. The tiny amounts required to provide a “high” to users and the resulting value are ideal for illicit traders, as hiding products, especially in transit, is useful to avoid discovery. As a result, there has been an explosion in the use of fentanyls in the past few years. Original research of online sellers in China and surveying drugs users and dealers in the Philadelphia area leads to the inevitable conclusion that fentanyl use has exploded over the past two years, and with it has come a significant increase in fatal overdoses.
2018-07b (July) Prescription Drug Pricing: An Overview of the Legal, Regulatory, and Market Environment| Joseph Antos and James C. Capretta
The Trump administration has announced its intention to pursue changes in various policies to bring down prices or to slow their growth. The protection of intellectual property is an important component of dynamic economic growth and medical progress in the US. However, it does create pricing power for the inventors of new therapies, which in turn makes it difficult for policymakers to ensure access to effective care is within reach for all patients and is affordable for tax-subsidized programs. The pricing of prescription drugs occurs in a market influenced by a complex web of public policies and private-sector conventions that were assembled over many years on an ad hoc basis. These policies secure somewhat lower prices for some purchasers but likely raise the prices for others. While there are no simple solutions, policymakers should study the existing arrangements carefully and consider what can be done to promote more supply competition (thus minimizing monopolistic pricing) in all drug categories. The policy goal is to strengthen countervailing pressure from purchasers to negotiate better prices for consumers, rather than provide preferential pricing for narrow segments of the market.
2018-07a (July) The 2018 Medicare Trustees Report: Fiscal and policy challenges | Joseph Antos and Robert E. Moffit
Medicare’s financial outlook has deteriorated in the past year, according to the latest annual report by the program’s trustees. The Medicare Hospital Insurance trust fund is projected to be depleted in 2026, three years earlier than estimated in last year’s report. That understates the policy challenge. Every year, the program relies more on general revenues to cover its costs. In total, Medicare will receive $324 billion in general revenues this year. That will more than double by 2026. Prompt action is needed to put Medicare on a sound financial footing.
2018-06 (June) Charitable Giving and the Tax Cuts and Jobs Act | Alex Brill and Derrick Choe
This paper investigates how the Tax Cuts and Jobs Act affects household charitable giving in the United States. We find that the law will reduce charitable giving by $17.2 billion (4.0 percent) in 2018 according to a static model and $16.3 billion assuming a modest boost to growth. Four-fifths of this decline is driven by an increase in the number of taxpayers who claim the standard deduction. We also investigate two policy options that could boost total giving above previous levels: an above-the-line deduction and a tax credit.
2018-05 (May) Effective Tax Rates on Business Investment Under the Tax Cuts and Jobs Act | Jason DeBacker and Roy Kasher
An important objective of Public Law 115-97, commonly called the Tax Cuts and Jobs Act, was a reduction in the tax burden on investment. We compute marginal effective tax rates under 2017 law and under the Tax Cuts and Jobs Act and find significantly lower marginal effective tax rates under the new law. In addition, the Tax Cuts and Jobs Act narrows disparities in the tax treatment of investment across asset types, organizational form, and type of financing. Finally, we find that the act sharply reduced effective average tax rates as well as marginal effective tax rates.
2018-03 (March) Automatic Adjustments Within Entitlement Programs: A look at the Swedish Pension Reform Model | James C. Capretta
The United States has significant fiscal challenges due to population aging. While the finances of all advanced economies are under pressure from similar demographic trends, some countries have responded more aggressively and creatively to the problem than have US political leaders. In 1998, Sweden enacted a reform of its public pension system that combines a defined-contribution approach with a traditional pay-as-you-go financing structure. The new system includes better work incentives and is more transparent to participants. It is also permanently solvent due to provisions that automatically adjust payouts based on shifting demographic and economic factors. No pension system is entirely problem-free or can be replicated easily in a different political context. Nonetheless, US policymakers should examine the Swedish model and consider what they could do to make Social Security more personalized and self-correcting, too.
2018-02 (February) The Congressional Budget Process: A Brief Primer | James C. Capretta
The executive and legislative branches of the federal government have separate budget processes, reflecting their coequal status in our constitutional structure. The Congressional Budget and Impoundment Control Act of 1974 established the institutions and procedures that guide budgetary decisions in Congress. The budget process has been amended in several important ways since 1974. The current process was written for a time when appropriations spending was dominant; it does not work as well with so much of the federal budget devoted to spending that occurs automatically on entitlement programs. Further, the current process does not facilitate executive-legislative agreement on budgetary aggregates, which is an important reason for instability and uncertainty in federal finances.
2018-01b (January) Strategic voting under proportional representation: A model with evidence from the Netherlands | Tim Ganser and Stan Veuger
The authors propose a model of voter decision-making in proportional representation systems: Strategic voters construct expectations of coalitions and policy outcomes based on expected seat distributions and vote to maximize their expected utility from the implemented policy. They examine the predictions of the model using data from the Netherlands and successfully predict the voting behavior of a significant number of voters.
2018-01a (January) A smarter approach to federal assistance with state-level criminal justice reform | John F. Pfaff
This brief explains how Congress and the president can best help reduce our country’s outsized reliance on imprisonment. Successful interventions will need to target issues that previous efforts have overlooked or ignored, and they will need to take better account of the haphazard ways that costs, benefits, and responsibilities are fractured across city, county, state, and federal governments. If designed properly, however, federal efforts could play an important role in pushing our criminal justice system to adopt more efficient, as well as more humane, approaches to managing and reducing crime.
2017
2017-12b (December) Territorial taxation: Choosing among imperfect options | Eric Toder
Both territorial and worldwide systems for taxing income of multinational companies are difficult to implement because the concepts of income source and corporate residence on which the systems are based have become less economically meaningful. Recent legislation enacted by the House and Senate would move the United States toward a territorial system for taxing US multinational corporations by eliminating taxation of dividends that foreign affiliates repatriate to their US parent companies.
2017-12a (December) Despite a temporary reprieve, the social security disability insurance program needs structural reform | James C. Capretta and Tejesh Pradhan
The Social Security disability program needs structural reform. There has been a long-term trend toward higher rates of disability among covered workers as the standards for assessing disability have accommodated larger numbers of applicants with musculoskeletal and mental health conditions. Congress should pass legislation soon to test far-reaching changes in the program, including providing temporary health and income support benefits to some applicants who might be able to return to work with proper medical care and job-placement assistance and experience-rating the payroll tax for employers to encourage them to take steps to prevent elevated rates of disability among their worker
2017-09 (September) Bringing Market Discipline to Health Care Is Complex, Difficult, and Necessary | Joseph Antos and James C. Capretta
The provision of medical care is inefficient, which makes health insurance needlessly expensive. Market discipline can eliminate waste, but only if consumers have an incentive to get their health services from cost-effective systems that deliver higher-quality care at a lower price. Policymakers must change the tax treatment of job-based insurance, reform Medicare, and adjust health savings account rules to ensure consumers can reduce their costs by opting to get their care through efficient managed care arrangements.
2017-04b (April) Toward a More Efficient Housing Safety Net | Kevin C. Corinth
Citing a housing affordability crisis, some have called for a federal entitlement to housing assistance by expanding the housing voucher program. I argue that this would be an inefficient way to help low-income Americans. Aside from their administrative costs, vouchers distort housing decisions and fail to serve as a platform for increasing opportunity. I argue for a more efficient housing safety net based on three objectives: preventing housing loss whenever possible, quickly rehousing people when literal homelessness occurs, and providing supportive housing for the most vulnerable. Additional resources freed up by generally phasing out other major low-income housing programs should be transferred as cash to low-income households, diverted to other programs that more effectively build human capital, or used in some combination of these two approaches.
2017-04a (April) CBO’s Forecast Shows Long-Term Deficit Reduction Should Be the Top Budget Priority | James C. Capretta
Achieving the Trump administration’s goal of eliminating annual federal budget deficits within 10 years will be difficult unless the administration adjusts some key commitments that President Donald Trump made during the campaign. The US economy does not need stimulus at this point. The US is already rushing toward a fiscal reckoning, driven by rising spending on entitlement programs. The administration should propose a major fiscal course correction, focused on long-term entitlement reform.
2017-02b (February) The Reach of the Cash-Based Safety Net for Poor Families with Children in America | Angela Rachidi and Shijie Jin
Even 20 years after major reforms to the social safety net in America, varying perspectives exist on how well the federal government provides for poor families with children. This paper explores the existing reach of government programs that provide cash income to poor families with children and how it has changed over time. Contrary to what some might think, the vast majority of poor families with children receive cash-based assistance, although today it is in a form very different than it was before the reforms of the late 1990s. Nonetheless, a small but notable share of poor families receive no cash assistance and no employment programming from the government, suggesting a need for further reforms aimed at increasing employment and reducing severe hardship.
2017-02a (February) Border Adjustment and the Dollar | Alan J. Auerbach
A key element of the destination-based cash-flow tax included in the House Blueprint is a border adjustment, which would relieve tax on exports and impose tax on imports and thereby shift the locus of US business taxation from where products are made to where they are consumed. There are strong tax policy arguments for a shift to destination-based taxation, but an important issue, especially during a transition to this new tax system, is the response of the dollar exchange rate to border adjustment. This paper explains the prediction that the dollar will rise significantly in reaction to border adjustment and reviews criticisms of this prediction.
2017-01 (January) Eight Market-Oriented Proposals That Reduce Income Inequality | Dean Baker
Debates over economic policy are often framed as conservatives supporting market-oriented policies, while progressives support government interventions. However, there are many market-oriented policies that can lead to more equality, an important goal for most progressives. This paper outlines eight policies that are likely to lead to greater equality through an increased reliance on the market.
2016
2016-11 (November) A closer look at health insurance coverage estimates | Joseph Antos and James C. Capretta
The main objective of the Affordable Care Act (ACA) was to increase enrollment in health insurance among those who were previously uninsured. Official estimates from the Census Bureau have consistently overstated the number of people who are uninsured. A major factor in the overestimate is the undercount of people in Medicaid. Also, millions of Americans have been officially uninsured despite their eligibility for public insurance or employer coverage. With the passage of the ACA, fewer than 10 percent of the remaining uninsured do not have a realistic path to securing health insurance. The future of the ACA is now uncertain, but any future policy changes will likely need to provide a sure path to insurance coverage for all Americans as well.
2016-10b (October) Tax reform: Ryan-Brady plan is a better way | Alex Brill
Earlier this year, Speaker of the House Paul Ryan and House Ways and Means Committee Chairman Kevin Brady released a tax reform framework titled, “A Better Way: A Pro-Growth Tax Plan for All Americans.” The new plan is a clear departure from the budget-busting proposals advanced by Republican presidential candidates over the past year and reflects a coherent approach to lowering statutory tax rates; maintaining a progressive income tax; and dramatically reducing the marginal tax rate on new investment, a reform likely to spur a substantial increase in new investment.
2016-10a (October) CBO on drugs: Will the Part B drug demonstration save money? | Joseph Antos
The administration’s controversial proposal to change the way drugs are paid for under Medicare Part B will save $1.145 billion, according to the Congressional Budget Office. But CBO assumes that such demonstration projects inevitably lead to program savings, even though the projects have not yet been clearly defined. Changes in CBO’s scoring procedure would provide a fairer basis for judging these projects.
2016-09 (September) Smoking out illicit trade: How some policies intended to limit smoking drive illegal trade | Roger Bate
The World Health Organization (WHO) states that smoking cigarettes is the largest cause of preventable premature death globally and as therefore enacted various protocols in attempts to lower the death toll. However, in many cases the attempts to lower smoking, such as raising taxes and introducing or expanding regulation on tobacco products, has resulted in the rise of illicit tobacco, whether counterfeits or legally produced smuggled products. Bate argues that free trade zones, rogue nations and attempts by governments to stop illicit trade are the main drivers of illicit tobacco.
2016-04b (April) The candidates in their own words: A textual analysis of 2016 president primary debates | Weifeng Zhong
In the 2016 election cycle, the two major parties held 20 primary debates, and the candidates spoke hundreds of thousands of words. In this paper, I turn them into “word data” and examine three characteristics of the candidates: (1) Where do the candidates stand on a spectrum of policy positions? (2) How negative are the candidates’ political sentiments? (3) How effectively do the candidates’ speeches deliver content? This word-data approach makes possible observations that are difficult to discover with conventional methods. For example, I find the political speeches of both Hillary Clinton and Donald Trump appear moderate in policy positions, positive in political sentiments, and effective in delivering content.
2016-04a (April) Understanding middle-class tax cuts | Alex Brill
Middle-class tax relief has widespread support across the political spectrum, but the consequences of different strategies for achieving this goal are not well understood. Using a new modeling suite incubated by AEI’s Open Source Policy Center, this paper evaluates stylized versions of middle-class tax relief options with respect to the average effective marginal tax rate (EMTR) on labor income, the number of taxpayers claiming the standard deduction, the number of taxpayers receiving tax relief, and the macroeconomic effects. The analysis finds that either doubling the standard deduction or expanding the brackets for the 10 or 15 percent tax rates results in lower EMTRs for taxpayers in the middle class, but that these policies have quite different effects both within the middle class and across the aggregate economy.
2015
2015-12 (December) Isn’t it ironic? The outlook for Federal Reserve policy | Vincent R. Reinhart
Fed Chair Janet Yellen is widely viewed as a dovish central banker, but she is about to lead her institution into a prolonged campaign of raising the policy interest rate. Starting now is a tactical decision on Yellen’s part to achieve her longer-run strategic aim. Hiking the funds rate, even as economic growth disappoints and inflation remains subdued, buys Yellen the credibility with her colleagues and market participants to subsequently tighten slowly. Thus, US monetary policy will remain accommodative for a considerable period.
2015-09b (September) America’s transportation challenges: Proposals for reform | R. Richard Geddes
Politicians and civil engineers alike often refer to America’s immense surface transportation system as “our nation’s crumbling infrastructure.” Major segments of the system are in need of renovation, and its problems are exacerbated by deferred maintenance and unstable, inadequate revenue sources. New approaches to funding, financing, operating, and maintaining the US transportation system are necessary. Policymakers should adhere to three main principles: infrastructure should be paid for by those who use it, ideally through user fees; public-private partnerships should be used to streamline financing, operations, and maintenance; and public policy should complement emerging transportation technologies, especially those related to vehicle autonomy.
2015-09a (September) The state of public pension funding: Are government employee plans back on track? | Andrew G. Biggs
The public-sector pension industry is claiming a comeback from losses suffered during the Great Recession. But this recovery is greatly exaggerated: even years past the end of the recession, most pension sponsors are unable to make their full annual contributions, and pensions are taking as much investment risk as ever. The first step to effective pension reforms is an honest, accurate view of the costs and risks that public plans impose on government budgets and taxpayers.
2015-08 (August) What should we do about homeless families? Comments on the Family Options Study | Kevin C. Corinth
The recently released Family Options Study offers new, groundbreaking evidence about what works best for homeless families. In this paper, I review the study’s design and findings and evaluate the policy conclusions drawn in the report. I propose alternative policy responses, including (1) broadening the goals of the homeless system beyond ending homelessness—to not only provide a housing safety net but also provide effective avenues for self-sufficiency; (2) supplementing rapid re-housing with customized case management, work incentives, and flexible assistance for home-sharing arrangements; and (3) identifying and expanding transitional housing programs that effectively build self-sufficiency. Additional resources needed to fund these policies should be diverted from other federal rental-assistance programs.
2015-06c (June) Street homelessness: A disappearing act? | Kevin C. Corinth
The number of homeless individuals sleeping on the streets in the United States has been declining rapidly, according to annual counts conducted since 2007. This has caused some to celebrate that policies geared toward ending homelessness are working. However, this paper shows that drastic changes in street counts in particular communities account for the majority of the national reduction, suggesting that miscounting may be playing a major role. An alternative explanation for large count changes is that increasing homeless criminalization measures are leading more of the homeless to stay out of sight. Another red flag is that sheltered homeless counts, which are much more reliable than street counts, have been remaining steady. This is true not just among families—who rarely sleep on the streets—but also among individuals—who are more likely to transition between the streets and shelters. Meanwhile, substantial expansion of permanent supportive housing appears to play only a minor role in the national street count reduction, although the possibility that altered homeless migration patterns are partially masking its effect cannot be ruled out. Ultimately, the evidence suggests that it is too soon to declare that we know what works in ending homelessness.
2015-06b (June) A contingency plan for King v. Burwell and related cases | Joseph Antos et al.
If the Supreme Court sides with the plaintiffs in King v. Burwell and related cases, and thus invalidates the payment of premium subsidies in states that have relied on the federal government to build and run the Affordable Care Act (ACA) insurance exchange, Congress will come under great pressure to enact a remedy to stabilize insurance markets and coverage. Congress should enact such a remedy, including a temporary extension of the existing subsidy program. But it should also allow states to opt into an alternative reform structure, with a simplified tax credit plan and elimination of the ACA’s federal insurance rules. In this alternative, there would be no individual or employer mandate, but individuals who stayed continuously insured would be protected from higher premiums or restricted coverage based on their health status.
2015-06a (June) On the Wells report | Kevin A. Hassett, Stan Veuger, and Joseph W. Sullivan
In the current “Deflategate” controversy, the New England Patriots have been accused of illicitly deflating footballs before the start of their 2015 American Football Conference championship game against the Indianapolis Colts. The National Football League and the lawyers it hired have produced a report — commonly known as the “Wells report” — that has been used to justify penalties against the Patriots and quarterback Tom Brady. Although the Wells report finds that the Patriots footballs declined in pressure significantly more than the Colts balls in the first half of the game, our replication of the report’s analysis finds that it relies on an unorthodox statistical procedure at odds with the methodology the report describes. It also fails to investigate all relevant scenarios. In addition, it focuses only on the difference between the Colts and Patriots pressure drops. Such a difference, however, can be caused either by the pressure in the Patriots balls dropping below their expected value or by the pressure in the Colts balls rising above their expected value. The second of these two scenarios seems more likely based on the absolute pressure measurements. Logistically, the greater change in pressure in the Patriots footballs can be explained by the fact that sufficient time may have passed between halftime testing of the two teams’ balls for the Colts balls to warm significantly, effectively inflating them.
2015-05c (May) Rational rollout of new medicines for diseases of poverty | Roger Bate
Increasing access to medicines for diseases that primarily affect the poor, such as malaria and tuberculosis (TB), involves a complex interplay of private- and public-sector efforts—some of which are often ignored in public debates over how to best improve access. Producing new medicines is a necessary first step, and companies can be given incentives to do so through a variety of mechanisms. But production is only part of the story. Government policies largely determine how or whether effective new medicines are provided to the people most in need, and government requirements for local clinical trials, filing dossiers, and registering new drugs can create high costs and sometimes barriers to access. Governments with high disease burdens must optimize their policies to ensure safe and timely access to new medicines. Western nations could encourage such action at the 2015 World Health Assembly; this is the humanitarian thing to do, but Western self-interest should also drive such an effort. Escalating drug resistance does not respect national boundaries, and extremely drug-resistant variations of some diseases of poverty ultimately threaten the poor and the wealthy alike.
2015-05b (May) Tax and spending reform for fiscal stability and economic growth | Joseph Antos, Andrew G. Biggs, Alex Brill, and Alan D. Viard
Recognizing the unsustainable fiscal outlook facing the United States, the authors present a plan to constrain the growth of federal spending and reform the tax system to promote economic growth. The plan replaces the income tax system with a progressive consumption tax, eliminating the bias against savings and investment. The plan revamps Social Security to provide a flat, universal benefit that would virtually eliminate poverty in old age, making the program more effective in protecting low earners, more conducive to saving and longer work lives, and better aligned with the work and retirement conditions that will prevail in the coming decades. Additionally, the plan adopts health reforms that are intended to slow the growth of spending while maintaining access to high-quality health services, by shifting away from the defined-benefit approach that characterizes Medicare and Medicaid today to a defined-contribution philosophy. The plan also brings federal spending and revenue into closer alignment, sparing future generations from the explosive growth of federal debt.
2015-05a (May) US biofuels policy, global food prices, and international trade obligations | Colin A. Carter and K. Aleks Schaefer
The Renewable Fuels Standard created under the 2007 Energy Independence and Security Act establishes minimum biofuels blending mandates in the United States. The regulation raises world food prices by diverting a substantial portion of US corn and soybeans away from global markets and into the production of ethanol and biodiesel. Despite these distortionary effects and opposition to the policy worldwide, the global community likely has no recourse to challenge this policy under existing international agreements. To make any meaningful reductions in government intervention in agriculture, trade negotiations must expand beyond trimming farm payments to curtail broader policy instruments that affect food prices.
2015-03 (March) Why Americans don’t face a retirement crisis | Andrew G. Biggs and Sylvester J. Schieber
There is no question that many Americans face challenges in preparing for retirement. Social Security is substantially underfunded, its long-term shortfalls are increasing, and policymakers have not made reform a priority. Nonetheless, analysts’ claims that Americans face a “retirement crisis” overstate what households will need in retirement, fail to account for how the presence of children in a household affects the need to save, and incorrectly point to households’ declining wealth-to-income ratios as a sign of deteriorating retirement saving. A careful review of data and retirement studies reveals that the state of retirement preparedness is in fact a more modest, manageable issue. A false sense of crisis risks enacting policies that could have significant costs for government budgets and ordinary Americans’ retirement security. In particular, government-run pension programs are the most poorly funded element of overall retirement saving. Policies that would make American more dependent on these programs could put their retirement income security at risk.
2014
2014-07 (July) Measuring inequality: One size doesn’t fit all | Sita Nataraj Slavov and Benjamin Ho
Statistics focusing on annual household-level income indicate that inequality has increased in the United States in recent decades. Are these measures accurate? Inequality has traditionally been calculated in the United States in terms of annual cash income alone, but other, more comprehensive points of measurement should be considered. For maximum accuracy, income should include the value of in-kind benefits and be measured over a lifetime rather than a year. But even this adjusted number is inadequate to assess fairness, which requires looking at a broader picture of overall well-being that includes income mobility, access to education, consumption, leisure, and health. Additionally, we must develop better measures of opportunity, which is a more accurate indicator of well-being than income distribution. Broadening the definition of and approach to inequality would help build more opportunity and result in more useful policy.
2014-03 (March) Not so modest: Pension benefits for full-career state government employees | Andrew G. Biggs
City and state governments around the country are pursuing reforms to address the rising costs of public employee pension plans. In response, public employee unions and pension plans themselves often portray these benefits as “modest.” In reality, public pension plans offer long-term government workers benefits that make them among the best-off retirees in the country. Indeed, the average full-career government worker in eight states retires as a “pension millionaire,” with 23 states paying $750,000 or more in lifetime retirement benefits. Drastic benefit reductions for current retirees would be unfair, but reforms that make public- and private-sector pensions more comparable should be on the table.
2013
2013-12 (December) The multiplying risks of public employee pensions to state and local government budgets | Andrew G. Biggs
State and local government pensions tout their ability to couple generous, guaranteed benefits for public employees with low and stable contributions from taxpayers. In reality, the risks that public pensions pose to taxpayers and government budgets have multiplied by a factor of 10 over the past four decades. While elected officials—including a number of Democratic mayors—are pushing for reforms, even they may not be aware of how much pension risk government budgets are truly bearing.
2013-11 (November) Global effects of unorthodox monetary policies | Desmond Lachman
In the aftermath of the Great Recession, major central banks have scrambled to support economic recovery and to avoid deflation through highly accommodative and unorthodox monetary policy stances. Although relatively successful in the short term, these policies have given rise to incipient asset- and credit-market bubbles and to spillover effects on the emerging-market economies, which could threaten the longer-run world economic outlook. Going forward, these central banks need to be very much more mindful than they have been to date of the longer-term unintended consequences of their policy actions.
2013-07 (July) Capital income taxation: Reframing the debate | Alan D. Viard
Although capital income taxes penalize saving and slow long-run growth, the federal tax system imposes multiple such taxes. Seven increases in capital income taxes took effect at the beginning of 2013, and President Obama’s 2014 budget plan proposes further increases. In upcoming decades, rising revenue needs fueled by entitlement growth will create pressure to further expand capital income taxation despite its negative economic effects. Opponents of capital income taxation must reframe the policy debate by explaining the economic disadvantages of capital income taxes and proposing alternative budgetary measures that maintain tax fairness.
2013-06 (June) Israeli corporate tax policy: A pro-growth system at risk | Alex Brill
Globally, corporate tax rates have been declining for over two decades (except in the United States), and one consequence has been an increase in investment, a boost in workers’ wages, and little or no loss of tax revenue. But a troubling tax policy trend is emerging in Israel, where once-aggressive efforts toward a competitive corporate tax are being reversed. Proposals to raise the headline Israeli corporate tax rate for a second year and, in particular, to raise taxes on highly mobile, export-oriented production represent the wrong approach and will harm economic prosperity. The consequences of this reversal in a small and open economy like Israel’s are potentially dire and could extend to investors in the Israeli economy from the United States and other foreign countries.
2013-05 (May) The tax treatment of the family | Aspen Gorry and Sita Nataraj Slavov
In two recent cases, the US Supreme Court considered constitutional challenges to the federal Defense of Marriage Act—which denies federal recognition of same-sex marriage—and to California’s Proposition 8, a constitutional amendment banning same-sex marriage. Regardless of the outcomes of these two cases, the controversy over same-sex marriage highlights an important tax policy question: should the US tax code treat people as families, as it currently does, or as individuals? This paper considers the costs and benefits of switching to a tax system based on individual, rather than family, income.
2012
2012-12 (December) Financing entitlements and promoting work: Does policy encourage early retirement? | Aspen Gorry and Sita Nataraj Slavov
Entitlement spending is projected to put a great deal of strain on the federal budget in coming years. A key factor underlying the growth of entitlement spending is the deteriorating ratio of workers to retirees. This problem is exacerbated by various policies that create disincentives for work at older ages. One way to reduce the fiscal burden of entitlement programs is to encourage longer working lives by minimizing these disincentives. This paper documents the recent trends in employment among older workers, summarizes the evidence on how policies influence retirement decisions, and describes several reforms that have the potential to increase employment among older workers.
2012-11 (November) Lessons from the euro crisis for the United States | Desmond Lachman
As the European economy slides ever deeper into recession, it is time for the United States to draw cautionary lessons from Europe’s painful budget adjustment experience, especially as the dismal state of America’s public finances now bears an uncomfortably striking resemblance to that of some of Europe’s more troubled economies. Among the more important lessons is that the United States should not be lulled into a false sense of budget complacency by the very-low interest rates at which its government can presently fund itself. Rather, the United States should embark upon a serious program of medium-term budget adjustment if it is to avoid going further down the path to fiscal ruin. The European experience also suggests that medium-term fiscal consolidation is best effected through public spending cuts rather than tax increases, and that such an adjustment effort should be supported by accommodative monetary policy action.
