Why the marked differences in population growth between Missouri’s two major cities and their surrounding areas? Undoubtedly, there are a number of factors involved, like housing prices, amenities, and school quality. But what about taxes? Specifically, what about the 1 percent earnings tax that both cities impose on everyone who works there and on everyone who lives there even if they work someplace else? A new study by Howard Wall, commissioned by the Show-Me Institute, suggests that the earnings tax could be impeding the population growth of both cities.

In 1947 the Missouri Legislature authorized cities with populations of 70,000 or more to levy an earnings tax, capped at 1 percent. Only Saint Louis and Kansas City chose to impose this tax. But earnings taxes are known to have bad economic side effects. A study by Dr. Joseph Haslag of the University of Missouri–Columbia found that Saint Louis and Kansas City’s earnings taxes help explain the decline in personal income in those cities relative to the surrounding non-taxed metro areas during the first part of the 2000s. Wall, the director of the Hammond Institute for Free Enterprise and the Center for Economics and the Environment at Lindenwood University, tackles a different question: Does the imposition of earnings taxes help explain differences in population growth across cities?

Wall conducted his investigation using population growth rates for 185 cities (population 25,000 or more) over the period 2000 through 2010. Seventy-nine of the cities included in his study levy an earnings tax. Nineteen Missouri cities are included, of which only Saint Louis and Kansas City have an earnings tax.

After controlling for other factors that might explain differences in population growth, Wall finds that having an earnings tax has a statistically significant, negative effect on population growth. And the impact is not small: A 1 percentage-point increase in the earnings tax is associated with about a 4 percentage-point reduction in population growth over a decade.

What does that mean for Saint Louis and Kansas City? Based on his results, Wall suggests that the earnings tax in Saint Louis accounts for about half of the population decline experienced over the decade. For Kansas City, the earnings tax may have cut its population growth in half.

The effects of the earnings tax apparently do not stop at city borders. Wall finds that there are negative metro-wide effects emanating from the central city’s earnings tax. The population loss of Saint Louis City dwarfs the population increase in its ring cities, yielding a net reduction in the metropolitan population. The effect is similar for Kansas City. There are substantially fewer residents living in the metro area than there would have been were it not for Kansas City’s earnings tax. Employing an earnings tax has adverse effects on population growth for the taxing city that spill over into surrounding communities.

Even though the earnings tax produces such negative effects, how would cities replace the lost revenue if they were removed? One option is to reorder tax priorities. Wall notes that, on average, property taxes account for about 17 times as much in revenue as income taxes in cities across the country. In sharp contrast, Saint Louis and Kansas City rely more heavily on taxing income. In Saint Louis, the earnings tax revenue is more than twice that from property taxes; in Kansas City it is a little over 1.5 times as big.

The evidence in Wall’s study and in previous research lends credence to the view that shifting priorities from taxing income to taxing property may be the answer to reversing the negative economic effects of the earnings tax on Missouri’s major cities.

R. W. Hafer is the distinguished research professor of economics and finance at Southern Illinois University Edwardsville and a research fellow at the Show-Me Institute.

The post Taxing a Population: Saint Louis and Kansas City’s Earnings Tax Draw People Away appeared first on Show-Me Institute.

The time for enrolling in health exchanges is now upon us. Recent polls show that the majority of Americans continue to disapprove of the health care law — the Affordable Care Act, commonly referred to as Obamacare — enacted in 2010. But how many of us really understand what we can expect and what we will pay for this “affordable” health program? The simple fact is that most of us are just plain bewildered, not knowing how the controversial law will affect us.

A September 2013 USA Today/Pew survey provides some evidence on this. Of those surveyed, only one-quarter believed that they had a very good understanding of what the law’s impact would be on them and their family. When asked what the impact of the law would be on them in the future, over 40 percent thought it would have a mostly negative effect. Only one-in four thought it would have a positive effect.

How the law affects us is becoming clearer, sort of.  The Kaiser Health News reported that Obamacare affects treatment choice for many patients in eastern Missouri. This is because policies offered by Anthem BlueCross BlueShield, made available through Missouri’s online insurance marketplace, would not include Barnes-Jewish Hospital, or St. Louis Children’s Hospital. As reported in this newspaper, subsequent reporting revealed that BJC Healthcare will be part of another insurer, Conventry. Even with that mystery solved, just which services will or will not be covered under the new plan remains uncertain.

There also are broader negative economic affects that will arise from implementing the new law. What are the tax consequences that the average individual will face? How will these tax changes affect decisions to work?

Answering such questions is the purpose of a recent study by University of Chicago economist Casey Mulligan. (Read Mulligan’s New York Times article, “Health care inflation and the arithmetic of labor taxes“) The basis for his research is the observed fact that policies that raise taxes on your income reduce your incentive to work more. You may need to work to pay the bills, but your incentive to work a second job or someone in your household to take on a part-time work is reduced at a higher tax rate. The after-tax income may simply not be enough to induce you to work.

Mulligan’s study finds that implementing Obamacare will create significant implicit and explicit tax increases that negatively affect the decision to work for many individuals. One avenue for these higher taxes is through employer tax penalties. It also comes through higher taxes on individuals. Mulligan estimates that, on net, “all provisions combined raise marginal tax rates in 2015 by 10 percentage points of total compensation” for about half of the nonelderly adult population.

In other words, under Obamacare a large portion of the working population will experience a significant increase in their effective tax rate. And this increase comes on top of existing tax rates. The disincentive to work is larger under Obamacare than currently exists.

Mulligan’s analysis explores the labor market effects of Obamacare by considering the new, higher implicit tax on full-time work. That is, many individuals currently working full time would find it economically advantageous to shift to part-time, given the provisions of the law. “Some middle-class workers,” Mulligan writes, “will find that they can work substantially less [fewer hours] without losing any disposable income.” That is not a recipe for improving prospects for greater economic growth.

Obamacare will disrupt markets for medical care, forcing individuals to choose hospitals and doctors that they would not have chosen otherwise. Obamacare also will create substantial negative incentives for many individuals to work.

As an increased proportion of the population moves into retirement, this puts increased pressure on government social programs such as Social Security, Medicare, and now health care.

The tax increases under Obamacare will reduce the labor force as people opt out of working by retiring or they chose to work fewer hours.  Either way, the growth of output slows and with it income.

Since income funds Social Security and Medicare and now Obamacare, to fund these programs at existing levels — and with even more individuals enrolled in retirement programs — it puts strains on those still working, which is a shrinking proportion of the population.

Unless you cut back on existing programs (coverage, services, etc.) and/or raise taxes on those employed, there simply is not enough inflow of funds in out years to pay for all of these programs at current levels of coverage.

The disincentives created by the Affordable Care Act decrease the likelihood that the economic growth will rebound any time soon.

Rik Hafer is a distinguished research professor in the Department of Economics and Finance at Southern Illinois University Edwardsville and a scholar at the Show-Me Institute.

The post Obamacare: Less Choice, Higher Taxes, Slower Economic Growth appeared first on Show-Me Institute.

This article first appeared in the St. Louis Beacon.

In the recent election, a surprising number of tax issues were passed by the voters. Perhaps the most discussed of these was Proposition A. Passage of Prop A raises sales taxes by a fraction of a dollar. Much of those new funds are earmarked to restore many public transportation services that were shut down because of budget shortfalls.

Reaction to the outcome was predictable. Tea Party sympathizers viewed the results with outrage, though they couldn’t seem to muster enough votes to defeat the proposition. Supporters claimed victory for the people, especially those who rely on subsidized public transportation for work or school. Both positions have some validity.

Public services like mass transit simply are not cost effective. If they were, a private firm would probably be offering the services. But that does not mean that they offer no public benefit. Numerous studies show that, for the poor, the disabled and the young public, transportation is a vital service for gainful employment. If there are few job opportunities in the inner city, how do those people get to the jobs in the county? At entry-level wages, making a 50-mile round trip by cab is prohibitively expensive.

The dialogue about Prop A revealed efforts at misinformation. One anti–Prop A pundit argued that if passage helps one family get to work but, because of the higher tax, five families are unable to meet their monthly mortgage payment, then on net it is harmful. That would be true if based on fact. While making a good sound bite, I seriously doubt that there is evidence to support such hyperbole.

Such exaggeration is not unique to this one tax issue. The ongoing debate over the Saint Louis city earnings tax is another example of an issue where misdirection should not guide policy.

Two analyses are being publicized in the swelling debate over the earnings tax. Several years ago, the Show-Me Institute published a study examining whether an earnings tax affects economic growth. The question asked was very specific: Does an earnings tax like that of Saint Louis city drive businesses to the surrounding area? In other words, does the tax diminish the economic growth of Saint Louis city relative to its neighboring cities and counties?

The analysis, conducted by Joseph Haslag, a professor of economics at the University of Missouri–Columbia, found that the answer is yes. His statistical analysis of more than 100 similar municipalities showed that having an earnings tax is likely to push businesses out of the taxed area into nearby untaxed municipalities. This finding helps explain the slow growth of Saint Louis city relative to the county.

But this conclusion was recently dismissed in a study conducted by Jack Strauss, director of the Simon Center for Regional Forecasting at Saint Louis University. Writing in the Kansas City Star, Strauss and his coauthor argue that earnings taxes have no negative effect on economic growth. Does this mean that cities like Saint Louis could increase the tax without limit and not face negative repercussions? That is absurd, but it is consistent with Strauss’ finding.

There is another, more subtle, reason to suspect the applicability of the Saint Louis University study as a foundation for tax policy by cities like Saint Louis. Strauss’ investigation essentially tests whether an earnings tax by a city located within a metropolitan area impacts the aggregate growth of the entire region. In other words, does the earnings tax in Saint Louis city affect the economic growth of the 15-county metropolitan area?

That is not the question addressed in the Show-Me Institute study.

Basic economic theory predicts that if the city significantly raised its earnings tax, businesses would likely move to nearby cities or counties within the metro area. If this is true, Saint Louis city loses economically — Haslag’s finding. But this scenario also explains Strauss’ findings: The economic impact of the city’s tax increase simply washes out across the region.

Simply put, Strauss’ study focuses on the wrong geographical area. Even so, his analysis will provide those who favor the city’s earnings tax with false support.

If the policy discussion is how to improve Saint Louis city’s future economic condition, let’s first get the facts straight. As we witnessed in the debate over Prop A, unfortunately facts lose to exaggeration when the topic is taxes.

Rik W. Hafer is distinguished research professor and chair of the Department of Economics and Finance at Southern Illinois University Edwardsville and a scholar at the Show-Me Institute.

The post Lesson From the Election: Examine Claims on Both Sides of Tax Issues appeared first on Show-Me Institute.

Not a week after the health care bill’s passage, the Congressional Budget Office announced that Social Security would reach an ominous milestone: This year, Social Security will pay out more in benefits than it takes in from payroll taxes. Originally predicted to occur in 2016, the economic events of the past several years have hastened the crossing of this accounting Rubicon.

What does this imply? For one, the fund’s deficit will increase faster and be much greater than earlier projections. A few years ago, the CBO projected that the fund would run a deficit of about $50 billion in 2019. The new numbers push that estimate closer to $60 billion. The bottom line is that unless revenues are increased or payments are cut, Social Security will become insolvent earlier than the 2037 projection made several years ago. And, given the demographic characteristics of the population, that day is more likely to come even sooner.

What does Social Security have to do with health care? When we see that Social Security will become a larger budget burden in the future, it presages what we can expect from the move to socialize medicine in the United States. The problems arise from the fact that those who pass such legislation do not have the time horizon required to plan for long-term consequences.

In its rush to pass the first national medical plan Medicare and its companion Medicaid Congress sought the kind of political deals that get legislation passed but may ignore long-term economic consequences. Witness the financing difficulties that these programs face today. Some have argued that it is because of these programs that the delivery of health care has become so expensive: If the government is paying for it, why not run redundant tests?

How many times in the recent health care debate was it mentioned that failure to pass the bill (and vice versa) would have dire consequences for this fall’s election? If your time horizon is two years, should we expect someone to worry about consequences that may take decades to happen?

For those who believe that increased government involvement in their lives is a good thing, look to Great Britain. The government accounts for more than 50 percent of the economy’s gross domestic product. The economic crisis of the last few years has exposed the weaknesses of its extensive welfare system. Recipients of government services and those who administer them see no reason that services should be cut or taxes raised. As reported by the New York Times, Britain’s Chancellor of the Exchequer Alistair Darling said that “cuts in [government] spending would be wrong and dangerous.” Union leaders have averred that they will accept no cuts in pay. How, then, will increased deficits and a burgeoning government debt be financed? With weak economic recovery a likely scenario, it must be through higher taxes.

The United States is not Great Britain. Unfortunately, it does not appear that we are learning from their mistakes.

The shift to increasing the government’s presence in our daily lives seems inexorable. What makes this questionable is the revealed ineptitude of those who “run the business.” In good times, politicians spend money to curry political favor without due regard to potential risks. The multiple news stories depicting the plight of local school districts and state university systems facing shortfalls in state appropriations should give pause before we eagerly assign additional duties to the state.

The United States has long enjoyed a broad-based commonality with the British. Too bad that this will now extend to a decline in our economic freedom.

Rik W. Hafer is distinguished research professor and chair of the Department of Economics and Finance at Southern Illinois University Edwardsville and a scholar at the Show-Me Institute.

The post Health Care Reform Another Step in Decline of Our Economic Freedom appeared first on Show-Me Institute.

This article first appeared in the St. Louis Beacon.

Many believe that Missouri, and Saint Louis in particular, has been slow to catch up to modern times. The Board of Police Commissioners for the Saint Louis Metropolitan Police Department reflects that conviction all too well.

The recent flap over the questionable actions of the police commissioner seems, to an outsider, like a tempest in a teapot. He probably should not have made that now-infamous call, but he did. As a result, he has given up his claim to the title of colonel. The incident should raise concern, however, over how the board is chosen and to whom it answers.

The police board of Saint Louis was established in 1861. Conflicting sentiments of the state and city governments over the slavery issue led to the creation of a state agency — the board of commissioners — to oversee the Saint Louis (and Kansas City) police force. Because Saint Louis had a huge arsenal and was an important hub for transportation and a potentially important military location, the pro-Southern state government wanted to ensure control over the police force in a more pro-union city.

Such statutes were not uncommon across the country — similar laws were passed in New York and Maryland, for example. But only Missouri retained this model of oversight for cities the size of Saint Louis. Why?

Members of the board are appointed by the governor to serve four-year terms. Supporters of the status quo argue that this selection process creates checks and balances. Because they are not beholden to the local political machine, the board is, in theory, better able to make decisions for the benefit of Saint Louis residents.

Economists think about such organizational structures. In the realm of corporate governance, the “principal-agent” problem has been used to explain why some corporate boards are able to engage in questionable, sometimes illegal, activity. In a corporation, management is the agent for the principal — in this case the owners of the firm, usually its stockholders. The large modern corporation often is run by a management team whose decisions are largely immune from shareholder interference. Unless they can effectively concentrate their power, shareholders exert little control.

The events of the past decade have showcased the problems that arise when there is separation of ownership and control. Executive decisions made at Enron, Tyco, and more recently Lehman Brothers and General Motors highlight the potential damage wrought by such lack of oversight.

Who is the principal when it comes to local police activity? The citizens of Saint Louis. And the agent? The agent is the board, but they are separated from the citizens because they answer only to the governor. In other words, unless city residents can collectively sway the governor, the police board can operate in a manner that is immune to their wishes and concerns.

Do I think that the board is deaf to local concerns? No. But the current structure gives rise to potential problems, problems that have arisen in corporations when ownership and control are separated.

Some argue that putting the police board under the control of city hall will increase its politicization, make it part of the local political machine.

Two observations: First, its current organization does not shelter it from political pressure; it merely lengthens the physical distance between the principals and the agent. Second, making the police board answerable to local elected officials reduces the separation of ownership and control. When something goes wrong, there is a local individual, ultimately the mayor, who must bear the brunt of blame. The mayor faces a referendum on his management in every election, so the public’s voice is heard.

Let Saint Louis enter the 20th century: Return control of the police board to the citizens of the city.

Rik W. Hafer is distinguished research professor and chair of the Department of Economics and Finance at Southern Illinois University Edwardsville and a scholar at the Show-Me Institute.

The post The Economic Case for Citizen Oversight of the Board of Police Commissioners appeared first on Show-Me Institute.

This article first appeared in the St. Louis Beacon.

Determining when business cycles start and end is a tricky call. Recently released GDP data indicated that the economy expanded during the second quarter of this year at a healthy 3.5-percent rate. This is quite a turnaround from the 6.4-percent decline in GDP during the first quarter. And, as expected, optimism in our economy is being restored, even if gingerly. Before all the champagne bottles get uncorked, let’s raise a few cautionary flags.

First, how much of last quarter’s expansion was fueled by one-time gimmicks? GDP is driven by sales. The cash-for-clunkers program, for example, rearranged the timing of car purchases. Purchases that may have occurred over six months were accelerated into the program’s window of opportunity. Without that government-backed program, GDP growth would have been slower than reported.

Second, the government’s subsidization of new home purchases also provided a boost to the recent GDP figure. The housing market appears to have righted itself. But, going forward, the question is whether it has legs. Will there be sustained recovery in housing?

Third, the success of the federal government’s stimulus package is getting partisan scrutiny. Those in the administration and their supporters aver that the government’s open checkbook approach has saved or even created hundreds of thousands of jobs. An analysis conducted by the New York Times, however, suggests that such claims are wide of the mark.

That analysis also indicates that the jobs “saved” are predominantly in the public, not private, sector. As I have written before, this is predictable: Government jobs tend to be more secure than those in the private sector. Why not use stimulus money to protect your own and expand the pro-government electoral base?

These items are not meant to say that government intervention did nothing. Quite the contrary. But it does raise an important question: When the government’s dole ends, will the economy be able to stand on its own two feet?

There are some who argue that it won’t. The Federal Reserve’s policymaking arm, the FOMC, announced earlier this month that it intends to keep short-term interest rates close to zero. This clearly reveals their outlook.

Paul Krugman, the liberal economist and columnist, continually complains that the original $787 billion stimulus package (not counting the bailouts) was insufficient. His solution is the same as many in Congress: Spend more taxpayer money, enlarge government programs and create more dependency on the government’s largess.

What evidence will be brought to bear on the question of whether this expansion is viable? Any slip in the growth of GDP will be taken as a sign to increase government intervention. This is a false premise. Economic recoveries are uneven and unpredictable. Following the bottom of the 1981–82 recession, the economy roared back, growing at nearly an 8-percent rate over the next year. In contrast, in the year following the 1990–91 recession, economic growth limped along with growth rates of less than 2 percent.

Recessions are unique in character, and this one is no different. Real economic growth may be choppy, consumer spending will rise in fits and starts, and the unemployment rate will bump up before it recedes. We must resist the temptation to use such uncertain economic signals to justify increased refutation of the economic system upon which our economic growth has been built.

Further centralizing economic decision-making with the government will have adverse, long-run effects on our productivity and well being. The economic expansion that lasted for most of the 1982–2000 era was not based on increased governmental intervention. Just the opposite. And, if one needs reminding of how well bureaucracies operate, think Fannie and Freddie, FEMA, Sarbanes-Oxley, the SEC and Bernie Madoff, and the state of our educational system, just to name a few.

Rik W. Hafer is distinguished research professor and chair of the Department of Economics and Finance at Southern Illinois University Edwardsville and a scholar at the Show-Me Institute.

The post Don’t Overreact to Bumps in the Economic Recovery appeared first on Show-Me Institute.

A shorter version of this article first appeared in the St. Louis Business Journal.

Commentators in the current health care debate often look to Canada’s and Britain’s public health care systems for hints as to what our future may resemble. These countries’ experiences should provide insights into the future impact of proposed reforms with respect to rationing, queues, quality, and cost of a public health care option. Most discussions ignore the fact that these two systems are decidedly different, both philosophically and operationally.

The overarching goal in each of Canada’s provincial health plans is that every Canadian should have equal access to medically necessary physician and hospital services, “on uniform terms and conditions.” However, inefficiencies in the Canadian system are made manifest by the number of Canadian citizens who travel to the United States, willing to pay cash for immediate hip replacements, MRIs, and so forth.

The British system, in contrast, recognizes that patients with sufficient resources will find ways to pay for services beyond those offered by the public medical plan. Rather than forcing private payers seeking better medical care to travel across international borders, the British have taken a much more common-sense approach. The National Health Service coexists with an expanding private health care insurance system, which has garnered a popularity that is reflected by the vast number of health care providers — dentists, surgeons, hospitals, and health care clinics — who rarely accept National Health Service patients.

Millions of Britons have private medical insurance that allows them to access specialists and hospitals without the wait times generally associated with the National Health System. And the current swine flu scare is pushing even more people toward private insurance, given the National Health Service’s severe shortage of hospital beds should an epidemic occur. Employer-based private group medical insurance has also grown substantially during the past decade, partly because companies may deduct the full cost of premiums from their corporation tax levies. In other words, the British government has encouraged a second, higher tier of medical services to evolve, if only to reduce the financial pressure on its National Health Service.

Will future health care in the United States look more like Canada’s or Britain’s system? To answer this question, let’s consider the most prominent public health insurance option that exists today: Medicare.

Medicare has been held up as a laudatory model for health care reform. This publicly financed medical insurance plan for the elderly allows subscribers to choose their hospitals and doctors, and generally permits them to self-refer to specialists. However, Medicare offers only one benefit package at the same premium rate for all enrollees. As such, Medicare resembles the Canadian model, not the British.

Some argue that a “one-price, one-package for all” program is desirable. It isn’t. Medicare subscribers, for example, cannot opt for a bare-bones catastrophic plan and self-insure their risk of future hospitalization. A little-known feature of the Medicare plan is that it forces subscribers to accept “benefit equality.” Mirroring the Canadian system, Medicare bans “balance billing.”

To explain this prohibition, consider the following example: Your father’s cardiac surgeon wants to use a newly developed “drug eluting” coronary stent to treat your father’s angina. This new type of stent costs three times as much as the standard stent that is covered by Medicare. What if you call the surgeon and offer to pay the costs of the new stent over and above whatever Medicare’s payout would be for the standard stent? Under Medicare, this is illegal. Medicare prohibits the surgeon from “balance billing,” wherein you pay the difference between the amount Medicare covers and the price of the services you are requesting. If your loved one is covered by Medicare, that patient cannot receive more than Medicare’s dictated level of benefits, even if the patient is willing to pay the difference!

Given this predicament, suppose you tell the surgeon that you will privately contract with him to pay for your father’s care. As long as the doctor is a Medicare provider for any patient, however, he cannot let your father opt out of the Medicare system for his cardiac surgery. Either a Medicare provider accepts the Medicare payment as payment in full for all services rendered, or he must opt out of the Medicare system altogether.

A patient covered by private insurance, however, can negotiate with a doctor for add-on services that are not covered by the insurer. If your child breaks his wrist and wants a waterproof cast so he can swim, you have the option to pay, over and above what the insurer covers, the additional charge for this special cast. If the wrist is covered by Medicare, that choice simply is not available.

Is this restrictive type of coverage offered by Medicare the level of choice that we are willing to accept in exchange for giving up the private insurance system that currently exists for the non-Medicare population? This question is not hyperbole. Embedded in the current federal health insurance reform proposals are strong incentives for employers (especially small businesses) to discontinue their employee coverage and substitute the public plan for an annual fee. This substitution of public for private workplace coverage is exactly what has happened to retirees after the introduction of Medicare Part C, the public insurance program covering drugs for seniors.

Extending a plan like Medicare (or the similar Canadian model) to a vast number of additional citizens would break the bank. Political pressure has mounted lately to provide senior citizens with the benefit of new but costly technologies that can potentially improve their quality of life, such as drug-coated stents, accommodating lens implants, and new forms of chemotherapy infusion. The list of new technologies will grow as they are discovered. Because of Medicare’s balance-billing prohibition, however, physicians will never offer these more costly technologies or services unless Medicare officials first agree to include them in the plan’s covered benefits. There is no other way to recoup the costs for these services from Medicare patients — even one who is willing to pay out of pocket.

Ironically, the Canadian Supreme Court ruled only a few years ago that then-current prohibitions against private insurance and private contracting for medical services were unconstitutional. The Chief Justice wrote that “access to a waiting list is not access to health care … the prohibition on obtaining private health insurance is not constitutional where the public system fails to deliver reasonable services.”

Just as Medicare subscribers are currently unable to legally negotiate for a higher or lower level of coverage, current health care proposals would likewise not permit young people to opt for more bare-bones catastrophic coverage and use savings for minor bumps and bruises. If young people are not heavy demanders of the health care system, shouldn’t they be given the chance to opt for decreased insurance coverage?

From a government planner’s perspective, the answer is simple: No. If young people were enrolled in the same comprehensive insurance programs as the elderly, they would effectively subsidize the older generation’s growing demand for medical care. The young would be saddled with premiums that far exceed their actuarial risk. The federal government now uses a similar scheme to fund Social Security; will officials straight-facedly use the same rationale to sell a nationally mandated health insurance program? More importantly, will the voting population agree?

Reforming the current system by creating a Medicare-like program would entail adopting a plan more like Canada’s and less like Britain’s. Doing so would mean that we reduce choice among medical options for many patients. Everyone deserves a medical safety net, but isn’t choice in medical options a patient’s right?

Adopting a Canadian-style health care model would also mean that many U.S. citizens inevitably find themselves in the same quandary as those Canadians who must cross the border in order to access the latest innovative medical technologies that were not contemplated when the government last established its fee structure. If that happens, the question becomes: To which country will we go?

Susan K. Feigenbaum is a professor of economics at the University of Missouri–St. Louis. Rik W. Hafer is distinguished research professor and chair of the Department of Economics and Finance at Southern Illinois University Edwardsville and a scholar at the Show-Me Institute.

The post Will Future Health Care Look Like Canada’s or Britain’s? appeared first on Show-Me Institute.

Will our future health care look more like Canada’s or Britain’s system? The answer depends on whether the system adopted simply expands the Medicare approach. […]

Hafer and Feigenbaum explain that, although each country has a health system that is government-run, many differences exist between them. For example, the Canadians and Britons have responded differently to problems relating to patient access and financing. Whereas Canada has discouraged the expansion of private medical insurance, Britain has encouraged it.

For more information about the negative consequences of government involvement in health care, check out the Show-Me Institute’s study by Arduin, Laffer & Moore Econometrics, “The Prognosis for National Health Insurance: A Missouri Perspective.”

The post What Will Future Health Care Look Like? appeared first on Show-Me Institute.

This article first appeared in the St. Louis Beacon.

With all the talk about polarizing politics and the fracturing of our democratic institutions, I have found the one topic upon which everyone can agree. Oh, and can disagree. That is protectionism.

On Sept. 11, President Barack Obama imposed a whopping 35-percent tariff on imported Chinese tires. Right-wing free-traders raised a hue and cry about his action. On the left, the New York Times editorial page observed that Mr. Obama “acted unwisely” in erecting this newest barrier to trade.

In response to critics, Mr. Obama should simply claim right of office. History shows that protectionism knows no party affiliation.

Ronald Reagan, the great advocate of free trade, slapped a 100-percent tariff on Japanese electronics in the late 1980s. His administration also pressured Japanese automakers into a “voluntary” restraint on their exports to the United States.

Bill Clinton championed the North American Free Trade Agreement and imposed punitive tariffs on imported steel. One Clinton official anonymously justified the move to the New York Times by noting that “The U.S. has a right to safeguard its industries and to impose temporary relief to address serious injury.” (By the way, much of the tariff fell on the kind of wire rod used to make clothes hangers.)

There are other examples: Lyndon Johnson threatened the French that the United States would not lower its tariffs on manufactured goods imported from their country unless they lowered the tariffs on our agricultural goods. George W. Bush followed Clinton’s lead by imposing stiff tariffs on steel, in an effort to protect the domestic steel industry.

Presidents of all political stripes seem disposed to impose tariffs, but is there an economic justification?

A tariff acts as a tax on an imported good. Like any tax, a tariff distorts the market’s equilibrium price and quantity for the good. And, like any tax, the government prospers. In this case, however, so do domestic producers. Because the imported good is now more expensive, U.S. producers are able to continue operating. And therein lies the true reason for tariffs: They supposedly save jobs.

In the case of Clinton’s steel wire tariff, the domestic wire industry employed at most an estimated 4,000 workers. For the modern tire industry, however, the number of “protected” jobs is much higher. But tariffs may not even save domestic jobs. Economist Thomas Prusa of Rutgers University estimates that Obama’s tariff could actually result in a net loss of 25,000 U.S. jobs over time. Moreover, he calculates that the annual cost of each job saved in the short term is upward of $300,000.

The big losers from a tariff are consumers. The price of tires, on average, will be higher after the most recent tariff. Using data from the International Trade Commission, Daniel Ikenson of the Cato Institute estimates that the average tire price for a post-tariff Chinese import will be about $60, significantly higher than its current average price of about $39. That raises the import price much closer to the average U.S. price, which is around $68. But the average post-tariff price of a tire — imported and domestic — has increased from $53 to $64. On average, consumers pay more for tires. Period.

If we all pay more for tires or steel or electronics after a president imposes a tariff, how can they get away with it? Consumers who pay more for tires or coat hangers or electronics are politically diverse. We do not have a strong lobby in Washington, D.C. The workers who face stiffer competition and may lose their jobs are much better organized. So are their lobbyists.

Presidential tariffs are as common as admonishing welfare cheats and overpaid CEOs. Leaving good economics behind, Obama is only channeling his predecessors. Too bad: I thought he was the president of change.

Rik W. Hafer is distinguished research professor and chair of the Department of Economics and Finance at Southern Illinois University Edwardsville and a scholar at the Show-Me Institute.

The post Tariffs Punish Consumers, but Remain Politically Popular appeared first on Show-Me Institute.

This article first appeared in the St. Louis Beacon.

In this limited space, it is impossible to deal with all of the issues, real and imagined, that currently swirl around the health care debate. As President Barack Obama learned, it also is impossible to meaningfully reform the industry without substantial debate and fact checking.

Because I am not an expert in this field, I sought opinions and insights by asking the following question to a list-serve for economists: Is there any evidence that the current health insurance market is non-competitive?

I asked this question, which seems fairly relevant to the current discussion, because of recent claims that consumers face few choices when it comes to buying health insurance. Here’s a sample of what I learned.

First, it is not true that there is no competition. As reported in the New York Times, the evidence on insurance competition is mixed. Health insurance in nine states is dominated by a single company. For example, in Alabama one company provides 83 percent of the health insurance coverage.

A notable characteristic of these nine states is that they tend to have small populations. Add together the populations of three of them — Maine, Montana, and Wyoming — and you get 2.7 million, or the population of the Saint Louis metro area. With such small and dispersed populations, it makes sense that only with a single provider can they achieve the scale economies necessary to provide coverage.

What about the other 41 states? In three of the most populous states (California, Florida, and New York) the dominant company covers at most 30 percent of the population. In other states, single-firm dominance is less than 50 percent. In addition, it appears that in the largest metropolitan areas, multiple companies provide coverage. In other words, there is competition.

Second, if competition is lacking, why? Trade barriers. Most consumers cannot buy insurance out of state. This restriction came about in 1945 when Congress passed the McCarran-Ferguson Act in response to states’ concerns that they had lost authority to regulate the insurance industry following the Supreme Court’s ruling in United States vs. South-Eastern Underwriters. Politics and protection of regulatory turf trumped good economics.

Third, market imperfections (exacerbated by government interference) often lead to bloated costs. A study issued by the Commonwealth Fund in July 2009 reported that private insurance administrative costs represented about 12 percent of spending on health services and supplies. This is larger than, say, the administrative costs of government-run programs, such as Medicare. Hence, the notion that adding a government option would increase competition and lower the cost of providing insurance to more individuals.

As I was reminded by one colleague, the charge that private insurance administrative costs are comparatively high reflects the fact that administration is about all insurers do. Private companies administer claims and provide policy oversight for a vast number of employers who self-insure. Instead of layering on a Medicare-like bureaucracy, why not explore the effect that dropping of cross-border barriers might have on lowering the cost of providing coverage?

Fourth, health care providers use the availability of Medicare fee schedules to set reimbursement rates to health care providers. That is, private insurance companies tacitly collude with the government to reduce their reimbursements to that established by Medicare. If Medicare decides that it will pay your ophthalmologist $100 for that new cataract lens when the provider’s cost-covering price is $150, the private insurer will follow Medicare. Health care providers may thus be faced with a “this or nothing” scenario. Price ceilings below the market-determined price, in the end, simply reduce availability of options.

Before overhauling the current system and imposing more government mandates, here’s a modest proposal: Let’s consider whether reducing the government’s interference would increase competition in the health care industry.

Rik W. Hafer is distinguished research professor and chair of the Department of Economics and Finance at Southern Illinois University Edwardsville and a scholar at the Show-Me Institute.

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This article first appeared in the St. Louis Beacon.

The Missouri House recently took an ambitious step toward improving the state’s economic competitiveness. House Joint Resolution 36 calls for a popular vote in 2010 to repeal the state’s income, corporate, and estate taxes. This amendment of the state constitution would, as a number of studies show, improve Missourians’ economic well-being.

H.J.R. 36 would replace the revenue lost from eliminating these taxes primarily through raising existing sales taxes. The resolution would ask voters to raise the state’s sales tax to 5.11 percent from its current rate of 4.225 percent. The new sales tax would cover more services and goods than the existing sales tax.

Vocal opponents of the resolution are quick to point out that sales taxes are more regressive than income taxes. That is true.

But this undesirable outcome can be circumvented as the tax plans are developed in switching from income tax to sales tax revenue. One method is to means-test the sales tax. Individuals below a certain income level would pay no sales taxes on purchases up to some established amount. Of course, means testing is straightforward for someone filing an income tax form. For those who do not, it is more difficult, but not insurmountable.

Another approach is to exclude certain items or services — such as food, medicine, or medical services — from the sales tax.

Arguing that repealing the income tax would put the tax burden on the backs of the poor is simply a scare tactic that diverts reasoned debate.

Opponents also argue that if the proposed change is revenue neutral — meaning the state would receive the same amount of tax revenues after the switch as it does before — why bother?

Isn’t a dollar in taxes the same regardless of its origin? The answer is no.

According to standard economics, imposing a tax on income, whether a tax on individuals’ labor or on corporations’ earnings, diminishes those activities generating taxable income.

Think of it this way: In a world with no taxation, employers and workers settle on some market clearing wage that is beneficial to each. With an income tax, a worker’s take-home income must go down for the same hours worked. Unless firms raise wages to make up the difference, rational workers supply less after the tax is imposed. The tax reduces the amount of work, which reduces the goods and services available to consume.

Proponents argue that eliminating the existing income tax will be economically beneficial. Economic theory says the change should lead to more work, more goods and services being produced. And that equals an overall increase in economic well-being. Is there hard evidence to support this notion?

An oft-cited study conducted by the Federal Reserve Bank of Atlanta found that — after holding constant the effects of many different factors explaining state economic growth — a state’s marginal tax rate has a significant and negative affect on its relative growth rate. The higher a state’s marginal income tax rate, the lower is its rate of economic growth compared with low marginal income tax states.

This important finding has been replicated many times across states (and countries). The weight of the evidence is that low-tax states economically outperform high-tax states. On average, low-tax states have higher comparative growth rates in personal income and in employment.

Why should voters in Missouri seriously consider this proposed change?

Missouri ranks in the lower third of states when it comes to economic improvement. Using data from 2006, on a per-capita basis, Missouri ranked 37th in real output growth, 31st in personal income growth, and 36th in the growth of wage and salary income.

Missouri did rank high in one category: It was 6th in firm termination. Not an enviable economic track record.

I am not Pollyannaish enough to think that eliminating the state’s individual and corporate income tax would vault Missouri to the upper echelon of high-growth states. But doesn’t that possibility beg for open and informative dialogue on the issue?

Rik Hafer is distinguished research professor and chair of the Department of Economics and Finance at Southern Illinois University Edwardsville and a scholar at the Show-Me Institute.

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Have you ever tried to get through downtown Saint Louis during rush hour? How about before or after a Cards game? If you have, you know it can take quite some time to get from one side of the Mississippi to the other. A stalled car or accident snarls traffic for miles. This type of experience may have you agreeing with proposals to spend hundreds of millions of taxpayer dollars on a new bridge connecting Missouri and Illinois. Before committing taxpayer funds, however, we should rethink the situation. Do we really need that new bridge?

A basic idea in economics is that individuals respond to incentives. If the price of strawberries rises, people buy fewer of them. This same insight applies to commuters. Right now, some people avoid commuting in congested areas because of the time and hassle. If we reduce congestion by building a new bridge, that might just cause more people to take to the roadways.

Reducing the time it takes to commute in and out of Saint Louis could induce those currently using mass transit or ride-share programs to start driving again. Solving the current mess could have the unintended consequence of inducing more traffic entering and leaving St. Louis. And this might just further jam up the connecting roadways. Would building the bridge create a need to further widen I-55 and I-70?

It wouldn’t be the first time. Current traffic flows on the Poplar Street Bridge are significantly greater than engineers estimated when the bridge was constructed. We know that because if they had gotten it right, we wouldn’t need the new bridge. Do we know that their projections this time are any more accurate?

It might be worthwhile to turn the current bridge debate on its head: Instead of finding ways to increase capacity, what if we looked for ways to decrease congestion by reducing the number of cars on the road? Rising gasoline prices are significantly increasing commuting costs. Add to that the cost of sitting in a traffic jam and commuters might begin to alter their behavior. Just think: If rush hour commuters simply doubled the average number of passengers in a car—from one to two—the number of vehicles crossing the bridge would be sliced in half. Commuters create congestion for other drivers on the bridge because they do not bear the full costs of their commuting decisions. The bottom line is that rush hour drivers use up too much scarce bridge space because they don’t pay the real cost.

One way to bring supply in line with demand is to charge commuters for the valuable rush-hour capacity they use. Charging a user fee (a toll) on commuters who use the bridge during rush hour is one way to efficiently price the use of limited space on roads and bridges. And a toll system is fair: Heavy users pay the higher price. To those who argue that toll booths would create more traffic problems, available easy-pass systems can significantly reduce the hassles associated with paying tolls.

Increasing commuting costs by charging congestion fees might lead cost-conscious drivers to take other, less congested routes or travel at non-peak times. Think of it. Carpooling might become more popular.

Establishing a system of user fees is the best means available to efficiently price commuting. If a price system works for movie tickets, electricity, and seats at Busch Stadium, why not for space on the bridge during rush hour?

R.W. Hafer is the chairman of the Department of Economics and Finance at Southern Illinois University Edwardsville.

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