CIAO DATE: 04/2014
Volume: 34, Issue: 1
Winter 2014
The Coasean Framework of the New York City Watershed Agreement (PDF)
Geoffrey Black, D. Allan Dalton, Samia Islam, Aaron Batteen
Over 50 years ago, in “The Problem of Social Cost,” Ronald Coase (1960) attempted to reorient the economics profession’s treatment of externalities. He wanted to draw economists’ attention away from the world of pure competition as a policy standard and investigate the consequences of transaction costs and property rights for the operation of markets. In 1991, he was awarded the Nobel prize in economics “for his discovery and clarification of the significance of transaction costs and property rights for the institutional structure and functioning of the economy” (Royal Swedish Academy of Sciences 1991). The Academy cited both his 1960 article and his 1937 article “The Nature of the Firm.”
Marginal Tax Rates and U.S. Growth: Flaws in the 2012 CRS Study (PDF)
Jason E. Taylor, Jerry L. Taylor
In September 2012, seven weeks before the presidential election— one in which top marginal tax rates were a major policy difference between the two major-party candidates—the Congressional Research Service (CRS) published a paper (Hungerford 2012) suggesting that there is no empirical evidence that top marginal tax rates impact U.S. economic growth. After all, top marginal tax rates were above 90 percent during the 1950s and early 1960s when the economy experienced rapid growth. Furthermore, marginal tax rate cuts in 2001 and 2003 were followed by the worst financial crisis since the Great Depression. The CRS study was widely reported in blogs, newspapers such as the New York Times, and The Atlantic magazine. It was portrayed as evidence refuting Republican candidate Mitt Romney’s position that cutting the top marginal tax rate from 35 to 28 percent would spur economic growth and supporting Democratic President Barack Obama’s position that top marginal tax rates could be raised to 39.6 percent with no cost to economic growth (Leonhart 2012, Thompson 2012).
State Fiscal Policies for Budget Stabilization and Economic Growth: A Dynamic Scoring Analysis (PDF)
John Merrifield, Barry W. Poulson
Economic downturns expose unsustainable fiscal practices. Widespread fiscal crises create opportunities to compare policy options that address especially adverse circumstances, especially progrowth fiscal constraints that can stabilize state budgets over the business cycle. Our policy option assessments depart from the normal practice of assessing rules and policies independently. Our premise is that the fiscal policy mix determines its outcomes. We include dynamic scoring to provide a richer view of the policy interactions.
The Medical Care Cost Ratchet (PDF)
Andrew Foy, Christopher Sciamanna, Mark Kozak, Edward J. Filippone
Since 1970, the annual growth in U.S. health care spending per capita has been more than double the real growth in GDP per capita: 4.3 percent versus 2 percent. Over that same time period countries belonging to the Organization for Economic Cooperation and Development (OECD) averaged an annual growth rate of 3.8 percent in health care spending per capita compared to only a 2.1 percent annual growth in GDP per capita. Eight of 20 countries had higher average annual growth rates in health care spending per capita than the United States (White 2007). In light of the pronounced institutional differences among these countries in medical financing arrangements, the similarity in the rate of health care spending growth is striking. Therefore, any explanation that seeks to account for the tremendous cost growth in health care over the last several decades must hold true across all OECD countries.
Forecast Bias of Government Agencies (PDF)
Robert Krol
Forecasts of future economic activity underlie any budget revenue projection. However, the forecasters in a government agency may face incentives or pressures that introduce forecast bias. For example, agency forecasters may be rewarded for a rosy growth forecast that allows politicians to avoid politically costly program cuts or tax increases. Similarly they may be penalized for underforecasting economic growth. Where a reward system is asymmetric, it would make sense to observe biased forecasts.
A Fresh Look at Climate Change (PDF)
Paul Ballonoff
Recently The Economist (2013a), a prominent journalistic advocate of strong policies to control CO2 emissions, expressed their puzzlement on the absence of warming over the last 15 years. They observed that this flat period of global average temperature occurred despite that CO2 emissions from human sources continued at an increased rate. The total human-produced CO2 emissions in that period of flat temperatures represent a quarter of all such emissions ever produced. The standard climate models, such as those used by the United Nation’s International Panel on Climate Change (UN IPCC), anticipated that such massive CO2 increases should have caused continuing increases in average global temperatures. The Economist noted that observed global average temperature is now at the lowest end of the predicted range, and that if the present trend continues, the actual temperatures will soon be below even the lowest forecasts. Most recently, Fyfe, Gillett, and Zwiers (2013) demonstrated that the current climate models have experienced a systematic failure—a finding very similar to Knappenberger and Michaels (2013).
Contingent Liability, Capital Requirements, and Financial Reform (PDF)
Joshua R. Hendrickson
A bank is considered insolvent when its liabilities (deposits) exceed the value of its assets (reserves, loans, and securities). If assets exceed liabilities, any losses experienced on the asset side of the bank balance sheet result in a corresponding loss in the bank’s capital. Insolvency occurs only in the event of losses exceeding the value of capital. All else equal, a bank with more capital is at lower risk of insolvency because the value of the bank’s capital fluctuates with the value of assets.
The Explicit Costs of Government Deposit Insurance (PDF)
Thomas L. Hogan, William J. Luther
The Diamond-Dybvig (DD) model is often cited as a theoretical justification for government deposit insurance. In the model, rational agents find it in their interest to withdraw their bank deposits if they suspect other depositors plan to do likewise. When a sufficient number of agents are expected to liquidate their accounts, a bank run ensues. Guaranteeing deposits through a system of governmentadministered deposit insurance removes the temptation to run on the bank and thereby precludes the need to ever use the deposit insurance. As Thomas Sargent makes clear, deposit insurance enters the model as a costless solution:
Pathological Altruism and Pathological Regulation (PDF)
Paul H. Rubin
A concept recently developed by scholars in psychology and biology is “pathological altruism.” (Oakley 2013, Oakley et al. 2012). A pathological altruist is defined as “a person who sincerely engages in what he or she intends to be altruistic acts, but who harms the very person or group he or she is trying to help, often in unanticipated fashion; or harms others; or irrationally becomes a victim of his or her own altruistic actions.” (Oakley, Knafo, and McGrath 2012: 4). We may relate this concept to Buchanan’s Samaritan’s dilemma: Buchanan’s Samaritan is the altruist, and the pathology is that the recipient will be in the “no work” cell, so that the Samaritan becomes a victim of his own altruistic actions (Buchanan 1975).
Free Market Revolution: How Ayn Rand's Ideas Can End Big Government (PDF)
Trevor Burrus
In Free Market Revolution: How Ayn Rand’s Ideas Can End Big Government, Yaron Brook, executive director of the Ayn Rand Institute (ARI), and Don Watkins, a fellow at ARI, give a fullthroated and spirited defense of Rand’s arguments for freedom, selfactualization, and the just society. The book is a clear explanation of objectivism that weaves in timely and accurate policy discussions
Political Bubbles: Financial Crises and the Failure of American Democracy (PDF)
Mark A. Calabria
The majority of books on the recent financial crisis tend to be written either by economics/finance experts or by journalists. While the journalistic accounts occasionally focus on political actors, it is usually in the manner of “bad people doing bad things” rather than with a theoretical framework. The economic accounts, with some exception, rarely incorporate the politics of finance. It is this vacuum that Political Bubbles attempts to fill.
The Bet: Paul Ehrlich, Julian Simon, and Our Gamble over Earth's Future (PDF)
Patrick J. Michaels
Yale historian Paul Sabin’s The Bet: Paul Ehrlich, Julian Simon, and Our Gamble over Earth’s Future is worth a read because of its detailed tour through the world of environmental doomsaying. Yet, in the end, I was profoundly disappointed, consigning this book to my very large Cassandra File because Sabin endorses that doomsaying as expressed by dreaded global warming.
The Great Rent Wars: New York 1917-1929 (PDF)
Peter Van Doren
Economic shocks in an unregulated textbook world are managed through the price system. During gluts, prices fall and the least efficient firms lose wealth and exit the market. The result is that supply falls and demand increases. Eventually a new equilibrium is reached in which prices increase toward marginal cost and risk-adjusted returns to firms equal the cost of capital. During shortages, prices rise, existing firms receive rents, and new firms enter the market. The result is that supply increases and demand falls. Eventually a new equilibrium is reached in which prices decrease toward marginal cost and risk-adjusted returns to firms fall to equal the cost of capital.