By Vijay K. Mathur
Published in Standard-Examiner, March 24, 20010, Ogden, UT
Recently, Utah media reported that the state of Utah had a banner year in liquor sales, taxes and profits to the state general fund in 2009. The Utah Department of Alcoholic Beverage Control (UDABC) is very jubilant about its performance. Along with liquor monopoly, perhaps the state would consider monopoly in the gun market to protect its citizens from harm from guns.
The constitutional right to bear arms does not prohibit state monopoly in guns. We all have heard NRA's comment about gun control that guns do not kill people, people kill people. Could we apply the same logic to alcohol use? Alcohol use does not kill people but people who abuse alcohol kill people. Where is the logic behind state liquor monopoly?
Like the gun business, we should have a free market in the liquor business, with some degree of regulation for public safety. However, my intention in this article is to discuss state liquor monopoly in Utah and not gun control.
A competitive market, where there are many buyers and sellers of product, is the most efficient market structure. In a competitive market, sellers can not fix prices or quantities. The efficiency of perfect competition assures us lower prices than any other market structure, assuming no "market failure" due to, for example, spillover benefits and costs, barriers to entry, asymmetric information. When markets fail, it requires regulation. "Natural monopoly" is also deemed as a failure of competitive market, and hence it requires regulation.
Natural monopoly arises when, due to the product-technology, cost per unit of output falls as output increases. Decreasing per unit cost threatens competition, hence results in a monopoly. Therefore, such products require regulated monopolies, as in cable television, electricity production, and natural gas business.
Regulation is intended to lower prices and increase output at levels beneficial to society, as well as assure monopolies a fair return on investments. Liquor sales do not fit the natural monopoly model based upon cost structure.
Hence, there are some questions which need to be addressed.
Is private retail liquor monopoly inefficient? The answer is yes. A profit maximizing unregulated monopoly, where there is a single seller, controls prices or quantities, which thus control prices. This results in higher prices and lower quantities sold, causing what economists call "dead-weight loss" (DWL). DWL represents a net loss in social value of output to all (not captured as gain by any one) due to inefficiencies. Additional social loss occurs when monopoly spends resources to keep its monopoly power. Exercise of monopoly power is against antitrust laws.
Is state monopoly worse than private monopoly? The answer is yes. Private monopoly is always threatened by entry of new businesses to undermine the monopoly power of the incumbent when there are no or lower barriers to entry. Examples of barriers to entry are large upfront costs of entering into business, legal barriers, regulatory barriers, implicit threats by an incumbent to make the entry of potential entrants unprofitable. On the other hand, state liquor monopoly faces no threats of entry and hence the state has no incentive to lower its monopoly price.
Is the state monopoly guided by motives other than profits? Even though the official reason is that it is not guided by profits, UDABC always brags about how much profit it is generating for the state's general fund. In 2009 it generated $60 million to the fund, almost double the amount of 2000, in addition to state tax revenue and funds for the school lunch program.
What are other possible motives for state liquor monopoly? It is claimed that it is aimed at protecting young people from alcohol abuse and perhaps reducing violence, traffic fatalities and other costs to society due to alcohol abuse. First, there is no evidence that adverse consequences of alcohol abuse will be worse if there is a competitive private market with sensible regulations and enforcement. Second, Pacific Institute of Research and Evaluation reports that underage drinking "is widespread" in Utah. In fact, the percent of 12th graders reporting use of alcohol is greater than those using cigarettes (not a state monopoly). Third, MADD reports that underage drinking cost $324 million (most of it due to violence) to the citizens of Utah in 2007, almost six times the profit to the state's general fund. Fourth, alcohol related motor vehicle crashes resulting in injury and deaths increased almost 12 percent from 2001-2006, close to 2 percent per year.
If morality is the issue with liquor consumption, according to the "Word of Wisdom" of the LDS church, it makes more sense to privatize the market, like with tobacco, coffee and tea, and enforce some targeted common sense regulations to protect society from harmful effects of alcohol abuse; at the same time it will promote efficiency in the market for liquor. Thus the state will gain enough tax revenues with business growth to subsidize different programs.
Mathur is former chairman of the economics department and professor emeritus of economics at Cleveland State University, Cleveland, Ohio. He resides in Ogden, UT.
Thursday, March 25, 2010
Thursday, March 4, 2010
Wrong time for deficit reduction
By Vijay K. Mathur
Published in Standard-Examiner, Feb 21, 2010
Budget deficit increases have been ignored by politicians and policy wonks on both the right and left from the 1970s, with the exception of a brief period of surplus from 1998 to 2001. Budget surplus during 1998-2001 turned into budget deficit starting in 2002.
In terms of our capacity to pay determined by GDP (Gross Domestic Product) there was 354 percent increase in the proportion of budget deficit from 2001 to 2008. Now, when the country has just missed another great depression and is still not fully recovered, we hear a battle cry by some politicians and deficit hawks against budget deficits and public debt. We did not hear the same concern in peacetime, when the economy was humming in the latter part of the 1980s, and before the recent severe recession.
It seems that our political leaders are ignoring the bigger picture of deficits and public debt. They are either unwilling and /or unable to put the current deficit in historical context. According to Congressional Budget Office (CBO), actual deficit as a percentage of GDP was 4.9 percent in 2008 and after reaching the projected peak of 8.9 percent in 2009, it is expected to decline to 1.2 percent in 2015.
During the Great Depression, budget deficit at the start of Roosevelt's administration in 1933 was 4.6 percent of GDP and after peaking to 5.48 percent in 1934, it declined substantially until the start of the WWII build up in 1939. It should also be noted that in 1930's the Federal government was not saddled with enormous liability of mandatory spending as it is today.
According to CBO, mandatory spending (only on Social Security, Medicare and Medicaid) is expected to increase to 86 percent of total spending in 2015 from 79 percent in 2008. It leaves little room to cut spending, given the unwillingness of many conservative politicians and tea party-goers, to change current laws to modify these spending programs and taxes.
According to the study in November 2009, by economist Gary Richardson in the online journal The Economist Voice, "red" states "that typically support Republican presidential candidates -- and that send the bulk of Republican representatives and Senators to Washington, D.C. -- are the states that receive the most in expenditures relative to the taxes their citizens pay." These are the same states where we hear the loudest complaints against taxes and higher spending. Spending and tax policies are not right vs. left issues, because we all have a stake in a fiscally sound government and a health economy.
We are all interested in reducing deficits because they may pose problems when the economy is growing and both private consumption and investment spending are growing robustly. For example, in a growth economy close to full employment, persistent deficits may aggravate inflation and may dampen economic growth by crowding out private investment. The decrease in capital stock due to the reduction in private investment also increases income inequality as it decreases productivity of labor and thus wages. Since national saving must balance investment and net exports, budget deficits may reduce national saving and hence investment and/or net exports. The decline in net exports implies sale of assets to foreign countries and thus leakage of investment returns. Deficits also transfer income from domestic wage earners to Treasury bond holders, domestic as well as foreign.
CBO projects decline in gross public debt as a percentage of GDP from 85% in 2010 to 78% by 2015. Despite this hopeful sign, once the economic recovery is assured with jobs our political leadership must be willing to raise some taxes and significantly reduce growth in mandatory and discretionary spending, to put the economy on the long term path of fiscal balance. Persistence in accumulated deficits, even during robust and stable economic growth, put us on a risky path and may make the fiscal policy impotent during the next economic crisis.
There are two ways to reduce public debt. First is to reduce budget deficits. Second, the economy has to grow faster than the interest rate we have to pay on the debt. CBO projections give us some hope on the growth front.
Projections show that during 2011-14 inflation adjusted GDP growth rate will be slightly higher than the interest rate on 10-year Treasury notes. But growth rate projections will not materialize if we cut spending programs to promote new investments at this time.
The recovery is fragile, and private markets are plagued with uncertainty of recovery. The call for deficit reduction and cuts in spending at this time, specially meant to promote investment, invites either very slow recovery or outright decline in growth rate and thus deprives our children and grandchildren of wealth and good life in the future.
Mathur is former chairmen of the economics department and professor emeritus of economics at Cleveland State University, Cleveland, Ohio. He resides in Ogden.
Published in Standard-Examiner, Feb 21, 2010
Budget deficit increases have been ignored by politicians and policy wonks on both the right and left from the 1970s, with the exception of a brief period of surplus from 1998 to 2001. Budget surplus during 1998-2001 turned into budget deficit starting in 2002.
In terms of our capacity to pay determined by GDP (Gross Domestic Product) there was 354 percent increase in the proportion of budget deficit from 2001 to 2008. Now, when the country has just missed another great depression and is still not fully recovered, we hear a battle cry by some politicians and deficit hawks against budget deficits and public debt. We did not hear the same concern in peacetime, when the economy was humming in the latter part of the 1980s, and before the recent severe recession.
It seems that our political leaders are ignoring the bigger picture of deficits and public debt. They are either unwilling and /or unable to put the current deficit in historical context. According to Congressional Budget Office (CBO), actual deficit as a percentage of GDP was 4.9 percent in 2008 and after reaching the projected peak of 8.9 percent in 2009, it is expected to decline to 1.2 percent in 2015.
During the Great Depression, budget deficit at the start of Roosevelt's administration in 1933 was 4.6 percent of GDP and after peaking to 5.48 percent in 1934, it declined substantially until the start of the WWII build up in 1939. It should also be noted that in 1930's the Federal government was not saddled with enormous liability of mandatory spending as it is today.
According to CBO, mandatory spending (only on Social Security, Medicare and Medicaid) is expected to increase to 86 percent of total spending in 2015 from 79 percent in 2008. It leaves little room to cut spending, given the unwillingness of many conservative politicians and tea party-goers, to change current laws to modify these spending programs and taxes.
According to the study in November 2009, by economist Gary Richardson in the online journal The Economist Voice, "red" states "that typically support Republican presidential candidates -- and that send the bulk of Republican representatives and Senators to Washington, D.C. -- are the states that receive the most in expenditures relative to the taxes their citizens pay." These are the same states where we hear the loudest complaints against taxes and higher spending. Spending and tax policies are not right vs. left issues, because we all have a stake in a fiscally sound government and a health economy.
We are all interested in reducing deficits because they may pose problems when the economy is growing and both private consumption and investment spending are growing robustly. For example, in a growth economy close to full employment, persistent deficits may aggravate inflation and may dampen economic growth by crowding out private investment. The decrease in capital stock due to the reduction in private investment also increases income inequality as it decreases productivity of labor and thus wages. Since national saving must balance investment and net exports, budget deficits may reduce national saving and hence investment and/or net exports. The decline in net exports implies sale of assets to foreign countries and thus leakage of investment returns. Deficits also transfer income from domestic wage earners to Treasury bond holders, domestic as well as foreign.
CBO projects decline in gross public debt as a percentage of GDP from 85% in 2010 to 78% by 2015. Despite this hopeful sign, once the economic recovery is assured with jobs our political leadership must be willing to raise some taxes and significantly reduce growth in mandatory and discretionary spending, to put the economy on the long term path of fiscal balance. Persistence in accumulated deficits, even during robust and stable economic growth, put us on a risky path and may make the fiscal policy impotent during the next economic crisis.
There are two ways to reduce public debt. First is to reduce budget deficits. Second, the economy has to grow faster than the interest rate we have to pay on the debt. CBO projections give us some hope on the growth front.
Projections show that during 2011-14 inflation adjusted GDP growth rate will be slightly higher than the interest rate on 10-year Treasury notes. But growth rate projections will not materialize if we cut spending programs to promote new investments at this time.
The recovery is fragile, and private markets are plagued with uncertainty of recovery. The call for deficit reduction and cuts in spending at this time, specially meant to promote investment, invites either very slow recovery or outright decline in growth rate and thus deprives our children and grandchildren of wealth and good life in the future.
Mathur is former chairmen of the economics department and professor emeritus of economics at Cleveland State University, Cleveland, Ohio. He resides in Ogden.
Sunday, January 24, 2010
CEOs' compensation needs overhaul
By Vijay K. Mathur
Published in Standard-Examiner, Ogden, Utah, Jan 9, 2010
Most people are aware of complaints by politicians and general public about corporate CEOs' outrageous compensation, especially in large corporations. Economist Arantxa Jarque reports in his paper in the Richmond Fed's Economic Quarterly, Summer, 2008, that the average compensation of CEOs in the top 500 corporations in the U.S. was $15 million in 2007. That was 300 times the average pay of workers. Even the severest recession in recent memory and the dismal managerial performance in the financial sector have not prevented companies from awarding large bonuses to executives.
There are no standard benchmarks which can be used to evaluate the performance of executives. The concern is with compensation (salary, bonus with stock options, stock grants, retirement benefits, severance payments and other deferred payments) for executives in large companies. According to a study by C. Frydman and R. Saks, median CEO pay rose 54 percent from 1970-79 to 1980-89, but it jumped to 125 percent from 1990-99 to 2000-2005.
The question therefore is what determines the compensation of CEOs in large corporations? Various determinants have been investigated to explain CEOs' compensation, for example, sizes of the corporations, rates of return on stocks (dividends and change in stock prices as a percent of stock prices), market values of the companies (values of assets and stocks), and competition companies face in the market. But, aside from measurement problems, there is no unambiguous agreement on uniform standards of performance to base compensations.
CEOs are principal agents (hired managers) who represent shareholders' (owners') interests. Therefore, part of their compensation is for managerial and organizational abilities. However, there is one problem. CEOs, possessing critical information, may have different interests than the interests of shareholders. Hence they may not disclose complete and accurate information to shareholders in order for them to make important decisions good for the health of the corporations. Hence the problem shareholders face is to design a compensation package which provides the incentive to CEOs to maximize shareholders' value.
In the current system there is conflict of interest when CEOs are involved in recommending members to the board of directors, consultants to the compensation committees who decide CEOs' compensation. The Wall Street Journal reported on Dec. 15,2009, that in addition to the widening salary gap, the gap is also widening in pension plans of executives and employees.
The claim that bonuses and stock options are meant to compensate CEOs for the risk they take in maximizing shareholders value has not produced desired results. In fact, we have recently witnessed awards of large bonuses despite the financial meltdown in the banking and financial sector and enormous losses suffered by employees and shareholders. Stock option grants, where CEOs benefit from the spread between the granting price of the stock and market price, have been manipulated and misused.
Shareholders must take an active interest in the decision making process of corporations. In Europe stock holders are already taking an active role in many of the decisions of corporations, especially mergers and acquisitions -- one of the strategies CEOs use to maximize their own compensation and power.
However, most mergers fail and/or are unprofitable. Professor Dennis Mueller found in his major study on profits in 1980s that the more diversified a company, greater is the difference between "actual and potential recorded profits."
Thus the question arises, what is the best standard for CEOs' compensation? Professor Henry Mintzberg of McGill University argues in his opinion piece in WSJ of Nov. 30, 2009, that CEOs should not be paid bonuses in the form of stocks and options. They should get competitive salaries and be entitled to the same benefits, commensurate with their salaries, as other employees.
I propose the following:
* (1) CEOs' compensation should be based upon competition for talent in the international market place, because large corporations compete globally and the average worker in those corporations is subjected to international competition. At present American CEOs' compensation on average is way above the compensation of CEOs in other advanced countries.
* (2) Stock grants, vested in five years, should be a greater proportion of total compensation and be redeemable at prevailing market prices.
* (3) Retirement plans should be the same for all employees and no golden parachutes for CEOs.
* (4) CEOs should have no role in the choice of directors and/or consultants which determine their compensation.
* (5) Boards of directors, who are supposed to monitor CEOs' performance for shareholders, must also be stakeholders in the corporations they serve.
* (6) Shareholders must have a limited role in the decisions on CEOs' compensation.
Legislation will not solve this problem. Ultimately, corporate structure's survival and success depends upon the emergence of responsible corporate leaders who look beyond their narrow self-interest and work for the interest of their shareholders and employees.
As Professor Mintzberg states, "all this compensation madness is not about markets or talents or incentives, but rather about insiders hijacking established institutions for their personal benefit."
Mathur is former chairman of the economics department and professor emeritus of economics at Cleveland State University, Cleveland, Ohio. He is also adjunct professor of economics at Weber State University. He resides in Ogden.
Published in Standard-Examiner, Ogden, Utah, Jan 9, 2010
Most people are aware of complaints by politicians and general public about corporate CEOs' outrageous compensation, especially in large corporations. Economist Arantxa Jarque reports in his paper in the Richmond Fed's Economic Quarterly, Summer, 2008, that the average compensation of CEOs in the top 500 corporations in the U.S. was $15 million in 2007. That was 300 times the average pay of workers. Even the severest recession in recent memory and the dismal managerial performance in the financial sector have not prevented companies from awarding large bonuses to executives.
There are no standard benchmarks which can be used to evaluate the performance of executives. The concern is with compensation (salary, bonus with stock options, stock grants, retirement benefits, severance payments and other deferred payments) for executives in large companies. According to a study by C. Frydman and R. Saks, median CEO pay rose 54 percent from 1970-79 to 1980-89, but it jumped to 125 percent from 1990-99 to 2000-2005.
The question therefore is what determines the compensation of CEOs in large corporations? Various determinants have been investigated to explain CEOs' compensation, for example, sizes of the corporations, rates of return on stocks (dividends and change in stock prices as a percent of stock prices), market values of the companies (values of assets and stocks), and competition companies face in the market. But, aside from measurement problems, there is no unambiguous agreement on uniform standards of performance to base compensations.
CEOs are principal agents (hired managers) who represent shareholders' (owners') interests. Therefore, part of their compensation is for managerial and organizational abilities. However, there is one problem. CEOs, possessing critical information, may have different interests than the interests of shareholders. Hence they may not disclose complete and accurate information to shareholders in order for them to make important decisions good for the health of the corporations. Hence the problem shareholders face is to design a compensation package which provides the incentive to CEOs to maximize shareholders' value.
In the current system there is conflict of interest when CEOs are involved in recommending members to the board of directors, consultants to the compensation committees who decide CEOs' compensation. The Wall Street Journal reported on Dec. 15,2009, that in addition to the widening salary gap, the gap is also widening in pension plans of executives and employees.
The claim that bonuses and stock options are meant to compensate CEOs for the risk they take in maximizing shareholders value has not produced desired results. In fact, we have recently witnessed awards of large bonuses despite the financial meltdown in the banking and financial sector and enormous losses suffered by employees and shareholders. Stock option grants, where CEOs benefit from the spread between the granting price of the stock and market price, have been manipulated and misused.
Shareholders must take an active interest in the decision making process of corporations. In Europe stock holders are already taking an active role in many of the decisions of corporations, especially mergers and acquisitions -- one of the strategies CEOs use to maximize their own compensation and power.
However, most mergers fail and/or are unprofitable. Professor Dennis Mueller found in his major study on profits in 1980s that the more diversified a company, greater is the difference between "actual and potential recorded profits."
Thus the question arises, what is the best standard for CEOs' compensation? Professor Henry Mintzberg of McGill University argues in his opinion piece in WSJ of Nov. 30, 2009, that CEOs should not be paid bonuses in the form of stocks and options. They should get competitive salaries and be entitled to the same benefits, commensurate with their salaries, as other employees.
I propose the following:
* (1) CEOs' compensation should be based upon competition for talent in the international market place, because large corporations compete globally and the average worker in those corporations is subjected to international competition. At present American CEOs' compensation on average is way above the compensation of CEOs in other advanced countries.
* (2) Stock grants, vested in five years, should be a greater proportion of total compensation and be redeemable at prevailing market prices.
* (3) Retirement plans should be the same for all employees and no golden parachutes for CEOs.
* (4) CEOs should have no role in the choice of directors and/or consultants which determine their compensation.
* (5) Boards of directors, who are supposed to monitor CEOs' performance for shareholders, must also be stakeholders in the corporations they serve.
* (6) Shareholders must have a limited role in the decisions on CEOs' compensation.
Legislation will not solve this problem. Ultimately, corporate structure's survival and success depends upon the emergence of responsible corporate leaders who look beyond their narrow self-interest and work for the interest of their shareholders and employees.
As Professor Mintzberg states, "all this compensation madness is not about markets or talents or incentives, but rather about insiders hijacking established institutions for their personal benefit."
Mathur is former chairman of the economics department and professor emeritus of economics at Cleveland State University, Cleveland, Ohio. He is also adjunct professor of economics at Weber State University. He resides in Ogden.
Thursday, November 19, 2009
All mandates are not alike
Published in Standard-Examiner, Ogden, Utah, November 12, 2009.
By Vijay K. Mathur
The health insurance industry is regulated primarily by states. Over the last two decades, mandates of benefits, providers and covered persons in health insurance have proliferated. In 2008 there were 1,961 total state mandates, while Utah had only 12 mandated benefits. Mandated benefits, according to the Council for Affordable Insurance, are partly responsible for increasing the cost of basic health coverage "from a little less than 20 percent to more than 50 percent, depending on the state and its mandates." But a detailed literature review of various actuarial and statistical studies by the Rutgers Center for State Health Policy for the state of New Jersey found no clear cut evidence for an adverse effect of mandates.
Even though the evidence is murky, insurance companies have responded to cost increases of state mandates, for example, by increasing insurance premiums, deductibles, co-pays, and denying insurance for pre-existing conditions. The House bill, passed recently, contains federal-mandated benefits as well.
Aside from insurance companies and providers, most people do not raise objections against mandated benefits, providers and covered persons. To alleviate asymmetric information problems, when patients have limited information about medical procedures and quality of treatments, the states mandate benefits and quality of care. Also, certain minimum benefits and quality requirements are deemed important, because a healthy society is in the public interest.
In 1986 Congress passed the Emergency Medical Treatment and Active Labor Act (EMTALA), as part of the Omnibus Budget Reconciliation Act. It mandated that participating hospitals and ambulance services provide emergency health care to anyone needing the services. Those who accept payment from the Department of Health and Human Services, Centers of Medicare and Medicaid Services, are considered participating hospitals. Exceptions are Shriners hospitals, Veterans Affairs hospitals and Native American health service. Besides increasing cost to providers of emergency care, this mandate by EMTALA provides the incentive to people not to buy health insurance. Hence,those who are uninsured and do not have Medicare or Medicaid, and can afford to buy insurance, impose cost on others when they get sick and show up in emergency clinics. This is the "free-rider problem." The difference between this mandate and mandated benefits in health coverage, as pointed out above, is that free choice in insurance in light of EMTALA imposes cost of health care of noninsured on those who do buy health insurance.
The right of freedom of choice does not come with the right of freedom to impose cost on others of one's personal decisions. That is the reason why the House of Representatives proposed in their bill that most people have to buy health insurance. It is supported by incentives of penalties for those who do not comply and subsidies to those who cannot afford insurance as based upon the income test.
According to the Centers for Medicare and Medicaid Services (CMMS), 55 percent of emergency care is uncompensated. Kaiser Commission on Medicare and Medicaid found that in 2004 the cost of uncompensated care was $40.7 billion in community hospitals. Current Population Report (CPR) data shows that almost 75 percent of the uninsured in 2008 are within the age group of 18 to 44. If most in this younger age group were part of insurance pools, it would lower health risk factors and hence insurance premiums.
According to CPR, 38 percent of uninsured had household income of $50,000 or more in 2008. CMMS data shows that in 2006 private health insurance expenditure in the U.S. was 6.65 percent of personal income. It would be preferable that everyone must buy affordable insurance, with penalties equivalent to the annual cost of insurance -- to put some teeth in the mandate. No one should be allowed to game the system. In Switzerland cash subsidies are provided to people when insurance expenditure is more than 8 percent of personal income, but the health care system produces better health outcomes with lower per capita expenditure than the U.S. To implement the subsidy cut off point in the U.S., the Swiss model could be used as a benchmark for personal spending on health insurance by all earning Americans, including the uninsured.
The contemplated Senate bill provides an option for states to opt out of the national public health insurance plan. Differences in state plans will result in inequities in insurance coverage. The cost to taxpayers will increase due to the duplication of insurance plans at the federal and state levels. Moreover, differences in state plans will make them less portable across state lines. Lack of portability deters mobility of labor and hence disrupts efficient functioning of labor markets. The mandated federal public option will be more cost effective and equitable.
It is hoped that the legislators are paying attention to the best features of the Swiss and Dutch models and design an efficient and equitable health care system which elicits responsible behavior from Americans.
Mathur is former chair of the economics department and professor emeritus of economics at Cleveland State University, Cleveland, Ohio. He is also adjunct professor of economics at Weber State University. He resides in Ogden.
By Vijay K. Mathur
The health insurance industry is regulated primarily by states. Over the last two decades, mandates of benefits, providers and covered persons in health insurance have proliferated. In 2008 there were 1,961 total state mandates, while Utah had only 12 mandated benefits. Mandated benefits, according to the Council for Affordable Insurance, are partly responsible for increasing the cost of basic health coverage "from a little less than 20 percent to more than 50 percent, depending on the state and its mandates." But a detailed literature review of various actuarial and statistical studies by the Rutgers Center for State Health Policy for the state of New Jersey found no clear cut evidence for an adverse effect of mandates.
Even though the evidence is murky, insurance companies have responded to cost increases of state mandates, for example, by increasing insurance premiums, deductibles, co-pays, and denying insurance for pre-existing conditions. The House bill, passed recently, contains federal-mandated benefits as well.
Aside from insurance companies and providers, most people do not raise objections against mandated benefits, providers and covered persons. To alleviate asymmetric information problems, when patients have limited information about medical procedures and quality of treatments, the states mandate benefits and quality of care. Also, certain minimum benefits and quality requirements are deemed important, because a healthy society is in the public interest.
In 1986 Congress passed the Emergency Medical Treatment and Active Labor Act (EMTALA), as part of the Omnibus Budget Reconciliation Act. It mandated that participating hospitals and ambulance services provide emergency health care to anyone needing the services. Those who accept payment from the Department of Health and Human Services, Centers of Medicare and Medicaid Services, are considered participating hospitals. Exceptions are Shriners hospitals, Veterans Affairs hospitals and Native American health service. Besides increasing cost to providers of emergency care, this mandate by EMTALA provides the incentive to people not to buy health insurance. Hence,those who are uninsured and do not have Medicare or Medicaid, and can afford to buy insurance, impose cost on others when they get sick and show up in emergency clinics. This is the "free-rider problem." The difference between this mandate and mandated benefits in health coverage, as pointed out above, is that free choice in insurance in light of EMTALA imposes cost of health care of noninsured on those who do buy health insurance.
The right of freedom of choice does not come with the right of freedom to impose cost on others of one's personal decisions. That is the reason why the House of Representatives proposed in their bill that most people have to buy health insurance. It is supported by incentives of penalties for those who do not comply and subsidies to those who cannot afford insurance as based upon the income test.
According to the Centers for Medicare and Medicaid Services (CMMS), 55 percent of emergency care is uncompensated. Kaiser Commission on Medicare and Medicaid found that in 2004 the cost of uncompensated care was $40.7 billion in community hospitals. Current Population Report (CPR) data shows that almost 75 percent of the uninsured in 2008 are within the age group of 18 to 44. If most in this younger age group were part of insurance pools, it would lower health risk factors and hence insurance premiums.
According to CPR, 38 percent of uninsured had household income of $50,000 or more in 2008. CMMS data shows that in 2006 private health insurance expenditure in the U.S. was 6.65 percent of personal income. It would be preferable that everyone must buy affordable insurance, with penalties equivalent to the annual cost of insurance -- to put some teeth in the mandate. No one should be allowed to game the system. In Switzerland cash subsidies are provided to people when insurance expenditure is more than 8 percent of personal income, but the health care system produces better health outcomes with lower per capita expenditure than the U.S. To implement the subsidy cut off point in the U.S., the Swiss model could be used as a benchmark for personal spending on health insurance by all earning Americans, including the uninsured.
The contemplated Senate bill provides an option for states to opt out of the national public health insurance plan. Differences in state plans will result in inequities in insurance coverage. The cost to taxpayers will increase due to the duplication of insurance plans at the federal and state levels. Moreover, differences in state plans will make them less portable across state lines. Lack of portability deters mobility of labor and hence disrupts efficient functioning of labor markets. The mandated federal public option will be more cost effective and equitable.
It is hoped that the legislators are paying attention to the best features of the Swiss and Dutch models and design an efficient and equitable health care system which elicits responsible behavior from Americans.
Mathur is former chair of the economics department and professor emeritus of economics at Cleveland State University, Cleveland, Ohio. He is also adjunct professor of economics at Weber State University. He resides in Ogden.
Thursday, October 22, 2009
Spending priorities to build a solid economic foundation
Published in Standard-Examiner, Ogden, Utah, October 17, 2009
By Vijay K. Mathur
It is disturbing to watch the news media and see our leaders make false and illogical statements on many of the policy issues facing the country. The economy is undergoing some fundamental economic changes. Unless we implement a strategy which builds our shattered financial and industrial base, our future will not be merciful on our standard of living. Disagreement over policies to stimulate growth and employment is expected in a democracy. However, abusive slogans, name-calling, and racial slurs only dissuade us from making sound decisions to solve problems collectively.
The U.S. faces the near-term problems of anemic economic growth and high unemployment rate and the long-term problems of depletion of human capital stock due to neglect in funding for education and diminished industrial base.
In the near term we face anemic and slow recovery. However, even if the economy's growth picks up at 2 percent to 3 percent in 2010 or 2011, according to some forecasts, the unemployment problem -- especially for young adults -- will be with us for some time to come. Federal Reserve Bank of Cleveland reports that in the Blue Chip survey 80 percent of the respondents predict that unemployment rate, which is close to 9.8 percent (not counting discouraged workers who dropped out of the labor market), "will not fall back below 7 percent until the second half of 2012 ...."
Government may have to address the problem of unemployment by implementing policies like investment tax credit and generous depreciation allowance to businesses (provided they promote investment in the U.S.), a payroll tax holiday (as recommended by former labor secretary Robert Reich) to small- and medium-size businesses, two-tier system of minimum wages, and permanent reduction in personal income tax rates for the middle class.
The service sector usually responds to the growth in manufacturing sector. From the long-run perspective, we have not made the required significant investments in new industries of the future to replace traditional manufacturing capacity. Therefore, outsourcing of manufacturing capacity would also lead to outsourcing of business and technical services over time.
If we wish to create an industrial base which carves out comparative advantage in order to compete in the world markets and solve the long term structural unemployment problem, our future lies in developing technologies, products and services in the fields of renewable energy, environment, information technologies, bio technologies, education and health care. And none of the innovations in the above areas will materialize without investment in the educational system to build human capital stock.
Many conservatives contend that the Obama administration is spearheading too many new initiatives: health care, education, cap and trade to limit CO2 emissions, renewable and alternative energy other than oil. But if one rationally examines the current economic situation facing the country, one would conclude that neglect of these issues now will haunt us in the future. Fiscal conservatives who are worried about the burden on future generations should support initiatives for long term investments now, so that we leave a prosperous economy for generations to come. Note, that besides the amount, efficient allocation of investment also matters for economic growth.
Fiscal conservatism is a virtue when the macro economy is growing and those who want to work have satisfying jobs. But when the economy is in shambles and we as a nation are determined to fight others' wars, fiscal balance is the main casualty. Fiscal stimulus to finance investment rather than current consumption is precisely the right medicine at this point in the economy, even with the rise in deficits, because the economic consequences of postponing such investment could be disastrous. The benefit-payoff of investments, especially in new technologies and new products' development and in education, has a long lead time. Hence, it requires patience and sacrifice of current consumption.
We are still enjoying the benefits of the innovation of electricity in 1880, investment in highway network in the 50s, public investment in Internet technology in 1969. Due to high risks involved in investments like basic science and technologies, education, renewable energy, power network, transportation systems, environment and health care, it will require a private-public partnership. In addition, a concerted effort has to be made by the private sector in partnership with the public sector to facilitate commercialization of technologies to build the industrial base.
I hope that our political leaders provide accurate information to the voters about the perils our economy faces and sacrifices they have to make to build a strong economic foundation that can support sustainable economic growth. Growth with prosperity shared by all Americans in the near term and in the future, will assure us economic, social and political stability. In addition, as Professor Benjamin Friedman of Harvard would argue, an added advantage of shared prosperity due to economic growth is that it makes a society more tolerant.
Mathur is former chair of the economics department and professor emeritus of economics at Cleveland State University, Cleveland, Ohio. He is also adjunct professor of economics at Weber State University, Ogden, Utah. He resides in Ogden.
By Vijay K. Mathur
It is disturbing to watch the news media and see our leaders make false and illogical statements on many of the policy issues facing the country. The economy is undergoing some fundamental economic changes. Unless we implement a strategy which builds our shattered financial and industrial base, our future will not be merciful on our standard of living. Disagreement over policies to stimulate growth and employment is expected in a democracy. However, abusive slogans, name-calling, and racial slurs only dissuade us from making sound decisions to solve problems collectively.
The U.S. faces the near-term problems of anemic economic growth and high unemployment rate and the long-term problems of depletion of human capital stock due to neglect in funding for education and diminished industrial base.
In the near term we face anemic and slow recovery. However, even if the economy's growth picks up at 2 percent to 3 percent in 2010 or 2011, according to some forecasts, the unemployment problem -- especially for young adults -- will be with us for some time to come. Federal Reserve Bank of Cleveland reports that in the Blue Chip survey 80 percent of the respondents predict that unemployment rate, which is close to 9.8 percent (not counting discouraged workers who dropped out of the labor market), "will not fall back below 7 percent until the second half of 2012 ...."
Government may have to address the problem of unemployment by implementing policies like investment tax credit and generous depreciation allowance to businesses (provided they promote investment in the U.S.), a payroll tax holiday (as recommended by former labor secretary Robert Reich) to small- and medium-size businesses, two-tier system of minimum wages, and permanent reduction in personal income tax rates for the middle class.
The service sector usually responds to the growth in manufacturing sector. From the long-run perspective, we have not made the required significant investments in new industries of the future to replace traditional manufacturing capacity. Therefore, outsourcing of manufacturing capacity would also lead to outsourcing of business and technical services over time.
If we wish to create an industrial base which carves out comparative advantage in order to compete in the world markets and solve the long term structural unemployment problem, our future lies in developing technologies, products and services in the fields of renewable energy, environment, information technologies, bio technologies, education and health care. And none of the innovations in the above areas will materialize without investment in the educational system to build human capital stock.
Many conservatives contend that the Obama administration is spearheading too many new initiatives: health care, education, cap and trade to limit CO2 emissions, renewable and alternative energy other than oil. But if one rationally examines the current economic situation facing the country, one would conclude that neglect of these issues now will haunt us in the future. Fiscal conservatives who are worried about the burden on future generations should support initiatives for long term investments now, so that we leave a prosperous economy for generations to come. Note, that besides the amount, efficient allocation of investment also matters for economic growth.
Fiscal conservatism is a virtue when the macro economy is growing and those who want to work have satisfying jobs. But when the economy is in shambles and we as a nation are determined to fight others' wars, fiscal balance is the main casualty. Fiscal stimulus to finance investment rather than current consumption is precisely the right medicine at this point in the economy, even with the rise in deficits, because the economic consequences of postponing such investment could be disastrous. The benefit-payoff of investments, especially in new technologies and new products' development and in education, has a long lead time. Hence, it requires patience and sacrifice of current consumption.
We are still enjoying the benefits of the innovation of electricity in 1880, investment in highway network in the 50s, public investment in Internet technology in 1969. Due to high risks involved in investments like basic science and technologies, education, renewable energy, power network, transportation systems, environment and health care, it will require a private-public partnership. In addition, a concerted effort has to be made by the private sector in partnership with the public sector to facilitate commercialization of technologies to build the industrial base.
I hope that our political leaders provide accurate information to the voters about the perils our economy faces and sacrifices they have to make to build a strong economic foundation that can support sustainable economic growth. Growth with prosperity shared by all Americans in the near term and in the future, will assure us economic, social and political stability. In addition, as Professor Benjamin Friedman of Harvard would argue, an added advantage of shared prosperity due to economic growth is that it makes a society more tolerant.
Mathur is former chair of the economics department and professor emeritus of economics at Cleveland State University, Cleveland, Ohio. He is also adjunct professor of economics at Weber State University, Ogden, Utah. He resides in Ogden.
Sunday, October 4, 2009
Impact negligible from malpractice cap
Published in Standard-Examiner, Ogden, Utah, October,3,2009
By Vijay K. Mathur
In the current debate on health care reform some people are critical of the Congress and the President for not paying much attention to medical malpractice tort liability reform. Some claim that we have reached a crisis in medical tort liability. Even though others dispute the crisis claim, there is no denying the fact that medical malpractice tort liability reform should be an essential part of health care reform. It must also be recognized that national caps on non-economic damage awards will neither remedy frequency of malpractice law suits nor will it solve the overall problems in health care.
Tort liability law is mainly a civil law and is based upon common law tort system. If the patient is harmed by the negligent behavior of a physician or other medical care provider, the victim is entitled to recover for all losses, both financial and for pain and suffering. Financial losses include medical and household expenses and lost earnings. Pain and suffering include loss of enjoyment of life of the patient and the family due to disability. The most heated debate is on the magnitude of claims for pain and suffering. The current law is tort-fault liability law, as opposed to no-fault liability (strict liability) law (as in New Zealand) and a very limited no-fault law applicable to infants in the states of Virginia and Florida.
Many Republican politicians, including Senator Hatch of Utah, and many physician groups argue that huge damage awards are driving the insurance cost of health care providers and the cost of health care due to the practice of defensive medicine. Therefore, to deal with this problem they are proposing a federal cap on damage awards, especially for pain and suffering, to a maximum of $250,000. California was the first to cap such damage awards to $250,000 in 1972 and now 30 other states have such caps.
Using data from National Practitioners Data Bank, the study by A. Chandra, S. Nundy and S. Seabury in the journal Health Affairs, May 31, 2005, finds that the inflation adjusted average payment amount (court judgments and out of court settlements) increased from $173,018 to $263,101 (average growth of 3.55 percent per year), and the average payment amount for top 10 percent of all payments increased from $867,792 to $1,155,031 (average growth of 2.41 percent per year) from 1991 to 2003. These estimates are not indicative of a crisis requiring Federal intervention.
Estimates also show that defensive medicine accounts for only 5 percent to 9 percent of total health care cost. This wide range indicates that it is hard to measure defensive medicine. There is a great deal of variation in procedures and medical tests among physicians, states, and regions of states and partly because of widespread variation in medical practice guidelines. Perhaps national uniformity in up-to-date guidelines would help mitigate this problem. Moreover, emphasis on diagnostic techniques based upon new but expansive technologies has substituted diagnostic skills of physicians. Emphasis on diagnostic skills in medical schools would curtail the use of tests and cost of health care.
The current tort liability system has not deterred the medical error rate. The Institute of Medicine's 2000 report found 44,000 to 98,000 hospital deaths per year due to medical errors. The consensus evidence is that medical malpractice problem is driven partly by extreme claims cost, insurance premiums driven by poor returns on investment of insurance premiums, and by poor pricing strategies of insurance companies. A cap on non-economic damage awards will not significantly reduce the cost of malpractice insurance for certain medical specialties and thus health care cost.
There are a few other issues which must also be considered. First, medical malpractice problem is concentrated in a few states; 50 percent of total paid claims in the U.S. were concentrated in 8 States in 2007. Second, the problem varies among specialties. It is more severe, for example, in surgery and obstetrics-gynecology, where insurance premiums have skyrocketed since 1960's. Third, The New York Times reported in 2005 that the study of 22 states for the years 1992, 1996 and 2001 by Professor Catherine Sharkey, Columbia Law School, found no significant difference in average damage awards among states with or without caps -- perhaps a result of change in tactics by plaintiff lawyers. Fourth, a cap on non-economic damages may discriminate against stay-at-home mothers or fathers, who have no work history, lower income people and/ or poor. In fact, lawyers may not even take legitimate malpractice cases for such people. Finally, a national cap would violate state control of tort law, thus breaking historical tradition.
States primarily regulate malpractice insurance and implement rules governing tort liability law. Therefore, a call for a national cap is unwarranted. Rather, federal guidance and help to states in handling malpractice issues would be more productive. Successful outcomes of ongoing experiments in states may show us the path to an efficient solution to this problem without national legislation on caps.
Mathur is former chair of the economics department and professor emeritus of economics at Cleveland State University, Cleveland, Ohio. He is also adjunct professor of economics at Weber State University, Ogden. He resides in Ogden. His articles also appear at vijaykmathur.blogspot.com
By Vijay K. Mathur
In the current debate on health care reform some people are critical of the Congress and the President for not paying much attention to medical malpractice tort liability reform. Some claim that we have reached a crisis in medical tort liability. Even though others dispute the crisis claim, there is no denying the fact that medical malpractice tort liability reform should be an essential part of health care reform. It must also be recognized that national caps on non-economic damage awards will neither remedy frequency of malpractice law suits nor will it solve the overall problems in health care.
Tort liability law is mainly a civil law and is based upon common law tort system. If the patient is harmed by the negligent behavior of a physician or other medical care provider, the victim is entitled to recover for all losses, both financial and for pain and suffering. Financial losses include medical and household expenses and lost earnings. Pain and suffering include loss of enjoyment of life of the patient and the family due to disability. The most heated debate is on the magnitude of claims for pain and suffering. The current law is tort-fault liability law, as opposed to no-fault liability (strict liability) law (as in New Zealand) and a very limited no-fault law applicable to infants in the states of Virginia and Florida.
Many Republican politicians, including Senator Hatch of Utah, and many physician groups argue that huge damage awards are driving the insurance cost of health care providers and the cost of health care due to the practice of defensive medicine. Therefore, to deal with this problem they are proposing a federal cap on damage awards, especially for pain and suffering, to a maximum of $250,000. California was the first to cap such damage awards to $250,000 in 1972 and now 30 other states have such caps.
Using data from National Practitioners Data Bank, the study by A. Chandra, S. Nundy and S. Seabury in the journal Health Affairs, May 31, 2005, finds that the inflation adjusted average payment amount (court judgments and out of court settlements) increased from $173,018 to $263,101 (average growth of 3.55 percent per year), and the average payment amount for top 10 percent of all payments increased from $867,792 to $1,155,031 (average growth of 2.41 percent per year) from 1991 to 2003. These estimates are not indicative of a crisis requiring Federal intervention.
Estimates also show that defensive medicine accounts for only 5 percent to 9 percent of total health care cost. This wide range indicates that it is hard to measure defensive medicine. There is a great deal of variation in procedures and medical tests among physicians, states, and regions of states and partly because of widespread variation in medical practice guidelines. Perhaps national uniformity in up-to-date guidelines would help mitigate this problem. Moreover, emphasis on diagnostic techniques based upon new but expansive technologies has substituted diagnostic skills of physicians. Emphasis on diagnostic skills in medical schools would curtail the use of tests and cost of health care.
The current tort liability system has not deterred the medical error rate. The Institute of Medicine's 2000 report found 44,000 to 98,000 hospital deaths per year due to medical errors. The consensus evidence is that medical malpractice problem is driven partly by extreme claims cost, insurance premiums driven by poor returns on investment of insurance premiums, and by poor pricing strategies of insurance companies. A cap on non-economic damage awards will not significantly reduce the cost of malpractice insurance for certain medical specialties and thus health care cost.
There are a few other issues which must also be considered. First, medical malpractice problem is concentrated in a few states; 50 percent of total paid claims in the U.S. were concentrated in 8 States in 2007. Second, the problem varies among specialties. It is more severe, for example, in surgery and obstetrics-gynecology, where insurance premiums have skyrocketed since 1960's. Third, The New York Times reported in 2005 that the study of 22 states for the years 1992, 1996 and 2001 by Professor Catherine Sharkey, Columbia Law School, found no significant difference in average damage awards among states with or without caps -- perhaps a result of change in tactics by plaintiff lawyers. Fourth, a cap on non-economic damages may discriminate against stay-at-home mothers or fathers, who have no work history, lower income people and/ or poor. In fact, lawyers may not even take legitimate malpractice cases for such people. Finally, a national cap would violate state control of tort law, thus breaking historical tradition.
States primarily regulate malpractice insurance and implement rules governing tort liability law. Therefore, a call for a national cap is unwarranted. Rather, federal guidance and help to states in handling malpractice issues would be more productive. Successful outcomes of ongoing experiments in states may show us the path to an efficient solution to this problem without national legislation on caps.
Mathur is former chair of the economics department and professor emeritus of economics at Cleveland State University, Cleveland, Ohio. He is also adjunct professor of economics at Weber State University, Ogden. He resides in Ogden. His articles also appear at vijaykmathur.blogspot.com
Saturday, August 1, 2009
Cap and trade a sound market principle
Published in Standard-Examiner, July, 16, 2009
VIJAY K. MATHUR
The U.S. House of Representatives just passed cap and trade legislation limiting CO2 emissions. Opposition to this legislation misses the fundamental economic reason for cap and trade.
First, those who object to any kind of government regulation oppose the legislation because restrictions on CO2 emissions of industries using fossil fuels will impose significant cost on all of us. Second, those who are skeptics of climate change oppose it because they suspect that the legislation will not have much effect on global warming, especially when other large CO2-emitting countries like China, Russia and India will continue using fossil fuels in the foreseeable future to meet their energy needs.
Most Americans also would not be very enthusiastic about this legislation if they themselves do not see direct benefits from it. Many Americans do not realize that cap and trade policy is in their self-interest, is based upon market principles, and would directly benefit them more than the cost of such legislation.
Let me first discuss why government has to intervene by legislating CO2 emissions. There are two types of goods which we consume: private goods and public goods. Private goods benefit those who pay the price for those goods, for example, cars, food, and clothing. There is no leakage of consumption benefits to others who do not pay the price for private goods. Therefore, people who pay the price have property rights to those goods and their benefits. When property rights emerge and are enforced, markets will arise for those goods.
Private property rights can not be defined and enforced for public goods, since benefits of public goods can not be completely appropriated by persons who may be willing to pay the price. If goods are provided, it would also benefit those who do not pay for the goods. Therefore, there is no incentive for individuals to buy the goods and hence there will not be any supply of the goods. Private markets for the goods will not emerge. Hence, public goods have to be provided collectively; it implies that government has to be assigned the property rights, and it is the government that enforces and allocates those rights for all of us. For example, national defense is provided by the government because it is a public good, and our taxes support its provision.
Clean air is a public good and air pollution is a "public bad." Since government has the property right to the resource clean air on behalf of Americans, it can allow the use of that resource either by direct regulation of CO2 emissions (quantity control), or a tax-price per unit of CO2 emissions, or a combination of quantity control and a tax- price, or capping the quantity of emission rights and creating a market to regulate the allocation of rights (cap and trade). Self-interest of Americans demands that we all breathe clean air because our life depends upon it. Therefore, all of us must be willing to pay the price to obtain clean air.
Cap and trade policy is meant to create a market for CO2 emissions, where given emission rights are traded at a positive price. It is better than outright quantity control and better in many ways than a tax, because it removes uncertainty about the level of CO2 emissions, allows the market and its price mechanism to allocate rights, and as Paul Krugman argues, it is effective in achieving international cooperation. Also in a democracy, changing tax levels is time consuming if quantity goals are not met. Businesses that object to paying for emission rights want to be free riders. The public is paying for their use of the resource by tolerating depletion of air quality, property damages, and adverse health affects.
Monitoring and management costs will be minimized if this policy applies to major polluting industries. Cap and trade will cause prices of private goods to increase, but not by the full amount of the price of emission rights.
Competition in the private goods' markets will determine the extent of shifting the cost of emission rights to consumers. Substitutes emerge in the market to reduce price shifting. For example, the evidence in the case of gasoline shows that demand is very sensitive to price change in the long run, hence there is less shifting on consumers of any price increase.
Air quality is too precious a resource to waste. Utahns are frequently reminded of the scarcity of this resource with air pollution alerts. It is in the self interest of Americans to support cap and trade policy to obtain cleaner air and maintain healthy life styles.
Mathur is professor emeritus of economics at Cleveland State University, Cleveland, OH and adjunct professor of economics at Weber State University, Ogden, UT. His articles can be read at vijaykmathur.blogspot.com. He resides in Ogden.
VIJAY K. MATHUR
The U.S. House of Representatives just passed cap and trade legislation limiting CO2 emissions. Opposition to this legislation misses the fundamental economic reason for cap and trade.
First, those who object to any kind of government regulation oppose the legislation because restrictions on CO2 emissions of industries using fossil fuels will impose significant cost on all of us. Second, those who are skeptics of climate change oppose it because they suspect that the legislation will not have much effect on global warming, especially when other large CO2-emitting countries like China, Russia and India will continue using fossil fuels in the foreseeable future to meet their energy needs.
Most Americans also would not be very enthusiastic about this legislation if they themselves do not see direct benefits from it. Many Americans do not realize that cap and trade policy is in their self-interest, is based upon market principles, and would directly benefit them more than the cost of such legislation.
Let me first discuss why government has to intervene by legislating CO2 emissions. There are two types of goods which we consume: private goods and public goods. Private goods benefit those who pay the price for those goods, for example, cars, food, and clothing. There is no leakage of consumption benefits to others who do not pay the price for private goods. Therefore, people who pay the price have property rights to those goods and their benefits. When property rights emerge and are enforced, markets will arise for those goods.
Private property rights can not be defined and enforced for public goods, since benefits of public goods can not be completely appropriated by persons who may be willing to pay the price. If goods are provided, it would also benefit those who do not pay for the goods. Therefore, there is no incentive for individuals to buy the goods and hence there will not be any supply of the goods. Private markets for the goods will not emerge. Hence, public goods have to be provided collectively; it implies that government has to be assigned the property rights, and it is the government that enforces and allocates those rights for all of us. For example, national defense is provided by the government because it is a public good, and our taxes support its provision.
Clean air is a public good and air pollution is a "public bad." Since government has the property right to the resource clean air on behalf of Americans, it can allow the use of that resource either by direct regulation of CO2 emissions (quantity control), or a tax-price per unit of CO2 emissions, or a combination of quantity control and a tax- price, or capping the quantity of emission rights and creating a market to regulate the allocation of rights (cap and trade). Self-interest of Americans demands that we all breathe clean air because our life depends upon it. Therefore, all of us must be willing to pay the price to obtain clean air.
Cap and trade policy is meant to create a market for CO2 emissions, where given emission rights are traded at a positive price. It is better than outright quantity control and better in many ways than a tax, because it removes uncertainty about the level of CO2 emissions, allows the market and its price mechanism to allocate rights, and as Paul Krugman argues, it is effective in achieving international cooperation. Also in a democracy, changing tax levels is time consuming if quantity goals are not met. Businesses that object to paying for emission rights want to be free riders. The public is paying for their use of the resource by tolerating depletion of air quality, property damages, and adverse health affects.
Monitoring and management costs will be minimized if this policy applies to major polluting industries. Cap and trade will cause prices of private goods to increase, but not by the full amount of the price of emission rights.
Competition in the private goods' markets will determine the extent of shifting the cost of emission rights to consumers. Substitutes emerge in the market to reduce price shifting. For example, the evidence in the case of gasoline shows that demand is very sensitive to price change in the long run, hence there is less shifting on consumers of any price increase.
Air quality is too precious a resource to waste. Utahns are frequently reminded of the scarcity of this resource with air pollution alerts. It is in the self interest of Americans to support cap and trade policy to obtain cleaner air and maintain healthy life styles.
Mathur is professor emeritus of economics at Cleveland State University, Cleveland, OH and adjunct professor of economics at Weber State University, Ogden, UT. His articles can be read at vijaykmathur.blogspot.com. He resides in Ogden.
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