Daily Policy Digest

Red Tape Record Breakers

23 May 2013 07:00:58 CDT

President Obama is opposing a bill passed by the House last week that would require the Securities and Exchange Commission to better measure the costs and benefits of new regulations. That's no surprise considering that the latest annual index of federal rules shows that Team Obama is now the red tape record holder, says the Wall Street Journal.

For two decades, Wayne Crews of the Competitive Enterprise Institute has tracked the growth of new federal regulations.
In the 20th anniversary edition, he reports that pages in the Code of Federal Regulations hit an all-time high of 174,545 in 2012, an increase of more than 21 percent during the last decade.
Relying largely on government data, Crews estimates that in 2012 the cost of federal rules exceeded $1.8 trillion, roughly equal to the gross domestic product of Canada.
Crews calculates these costs at $14,768 per household, meaning that red tape is now the second largest item in the typical family budget after housing.
Last year 4,062 regulations were at various stages of implementation inside the Beltway.
The government completed work on 1,172, an increase of 16 percent over the 1,010 that the feds imposed in 2011, which was a 40 percent increase over 722 in 2010.

Another way to measure the regulatory burden is by pages in the Federal Register, which includes new rules as well as proposed rules and supporting documents.

By that measure the Obama administration did not break the all-time record of 81,405 pages it set in 2010.
But the 78,961 pages it churned out in 2012 mean that the president has posted three of the four greatest paperwork years on record.

And to be fair, if Obama were ever to acknowledge that this is a problem, he could reasonably blame George W. Bush for setting a lousy example. Despite the Obama myth that the Bush years were an era of deregulation, the Bush administration routinely generated more than 70,000 pages a year in the Federal Register.

When it comes to "economically significant" rules, which are those estimated by the feds to cost at least $100 million each, Crews notes that the current administration is "in a class by itself."
The bureaucracy finished up 57 such rules in 2012 and another 167 are in the pipeline.

Source: "Red Tape Record Breakers," Wall Street Journal, May 19, 2013. "Ten Thousand Commandments: An Annual Snapshot of the Federal Regulatory State," Competitive Enterprise Institute, May 2013.

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U.S. Spending Crisis: Will It Be Remedied?

23 May 2013 07:00:57 CDT

Over the last decade, the United States has gone through numerous financial crises. The federal government has been inflating the dollar and bailing out companies that have failed. This has caused a substantial deficit and debt, which will create an enormous financial burden on future generations, says the Cato institute.

In 2009, the government created the American Recovery and Reinvestment Act, which cost U.S. taxpayer $831 billion dollars. This policy gave stimulus money to several large corporations that were on the verge of collapsing. This policy was put into place to stimulate the economy and increase spending in the economy. Andrew T. Young, associate professor of economics at West Virginia University, argues in an article he published, "Why in the World Are We All Keynesians Again? The Flimsy Case for Stimulus Spending," that:

Each dollar of stimulus increases total spending in the economy by less than one dollar, which means that the economic benefit associated with the stimulus is less than the stimulus itself.
The evidence suggesting significant even short-run benefits of stimulus spending are weak.
Even advocates of fiscal stimulus acknowledge that the long-run consequences for the national debt are often dire.

These types of policies have been increasing the U.S. national debt, which can cause enormous problems down the road. Jagadeesh Gokhale, a Cato Institute senior fellow and a member of the Social Security Advisory Board, claims in a study, "Spending Beyond Our Means: How We Are Bankrupting Future Generations":

Current federal policies would increase the fiscal imbalance to 9.0 percent of the present value of gross domestic product, or 19.7 percent of the present value of payrolls.
Today's middle-aged workers would receive such large federal transfers by way of Social Security and Medicare benefits that their prospective lifetime net tax burdens are almost completely eliminated.
Gokhale concludes that these problems could be solved by increases in taxes and spending reductions, but these are "precisely the policies that Congress is seeking to avoid in the short term."

Congress must act in order to save generations from the crushing burdens of debt, but the questions still remains: will they?

Source: "The Looming Fiscal Train Wreck," Cato Institute, May/June 2013.

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Estonia: A Lesson for the U.S. Government

23 May 2013 07:00:56 CDT

The U.S. federal government has claimed that it is devoted to decreasing spending and creating a balanced budget so that America can start decreasing its national debt. While verbally U.S. politicians have promised changes, they have not acted on those promises. In regard to spending, there is an extreme lack of austerity in most Western nations, except for one that is often overlooked: Estonia. Estonia is outperforming all of its other European neighbors and likely will continue to do so in the future. Why? Because Estonia is one of the only countries in the Eurozone that has actually implemented spending cuts, tax reform and free market economic principles, says Matthew Melchiorre, a journalism fellow at the Competitive Enterprise Institute.

What benefits did Estonia reap from their tax reform, spending cuts and a hands-off approach to the economy? According to European Commission data:

In 2010, the country increased economic growth by 2.3 percent, while the rest of Europe was suffering economically.
In 2011, Estonia increased economic growth by 7.6 percent, which is an increase of 5.3 percent in economic growth in one year.

The United Kingdom (mirroring the Obama administration's proposed tax policies) is trying to increase taxes to gain more revenue when its economy is faltering. Estonia, by contrast, fixed its economy and then increased taxes slightly and decreased spending.

The Baltic state fixed its economy by adopting a hands off approach, and let the markets work out the inefficiencies that were causing economic decline.
It started to close the gap between labor productivity and wages by the second year after implementing its program.

U.S. policymakers could learn substantially from the actions of Estonia, as the country has been following a similar path as the United Kingdom of-late. This path includes engaging in massive monetary and fiscal stimulus with no sign of stopping and increased federal spending.

Instead of following the flawed example of the U.K.'s monetary and fiscal policies, the United States should embrace a new role model and follow Estonia's example.

Source: Matthew Melchiorre, "Separating European Austerity Fact from Fiction: A Lesson for the U.S. on Why Budget Cutting Works," Competitive Enterprise Institute, May 7, 2013.

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Young Men Will Pay More under ObamaCare

23 May 2013 07:00:55 CDT

The Obama administration says the Affordable Care Act will provide cheaper health insurance for millions of Americans. But some people, particularly young men who aren't insured through their employers, could see their premiums go up once coverage in the state-based insurance exchanges begins in January, says CNNMoney.

Here's what could affect a person's cost if they buy an individual plan through the exchanges.

Income:

Subsidies are available to those with incomes of up to 400 percent of the poverty line -- roughly $45,000 for an individual or $92,000 for a family of four.
Some 57 percent of enrollees will receive subsidies, and those subsidies will cover nearly two-thirds of the premium, on average, according to the Congressional Budget Office's estimates.

Age:

Older Americans, who tend to be sicker, will likely see their premiums go down, because they will now be mixed into a risk pool with younger, healthier people.
Also, ObamaCare limits the amount insurers can charge older enrollees to three times the amount charged for younger participants.

Gender:

Currently insurers can charge premiums based on gender. Men usually pay less than women, since they typically visit the doctor less frequently.
The Affordable Care Act, however, doesn't allow insurers to charge different rates to men and women.
Taken together, men ages 25 to 36 could see rate increases greater than 50 percent, but women of the same age will only see their premiums creep up 4 percent.
Meanwhile, men age 60 to 64 could see their premiums drop by 12 percent.

Coverage level:

The uninsured will see their coverage costs go up, of course, since they currently pay nothing.
And those who have high-deductible plans or catastrophic coverage, which only pays out in case of major illness or hospitalization, may see their premiums go up.

State of residence: Some states currently require some of the same protections as ObamaCare, which pushes up the cost of individual market coverage for residents today. Premiums could go down in those states, since more younger, healthier people are likely to join the market.

Source: Tami Luhby, "Who Will Pay More under ObamaCare? Young Men," CNNMoney, May 14, 2013.

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Free Market Has Real Solutions to Obesity Crisis

23 May 2013 07:00:54 CDT

Obesity is a public health time bomb. But is curbing it primarily the responsibility of the government? The food police think so, say Jeff Stier, a senior fellow at the National Center for Public Policy Research, and Henry I. Miller, the Robert Wesson Fellow in Scientific Philosophy and Public Policy at the Hoover Institution.

Weighing in from the Left are regulation-obsessed activists like Dr. Yoni Freedhoff of the University of Ottawa. He blames obesity on the failure of public health officials and lawmakers to "legislate change" -- not enough statutes, regulations, public monies spent or taxes on foods that he thinks are bad.
In addition, while First Lady Michelle Obama's "Let's Move" campaign recognizes personal responsibility, she has also advocated using the heavy hand of government to achieve "desirable" social goals. She championed a 2010 child nutrition law that let bureaucrats decide what foods may be sold on school grounds.
National Action Against Obesity founder MeMe Roth is less subtle in evoking thoughts of child molestation by referring to food advertising to children as "predatory" and arguing that we shouldn't let food company executives have a "relationship with our kids."

In their zeal to advance an agenda, however, it's the food police who have become the creeps. There is a role for government policymaking, but it's not intrusive, punitive, arbitrary regulation: It's allowing market forces to stimulate the production of fresh fruits and vegetables and to make them cheaper and more available to more people.

Major obstacles to that strategy are policies that prevent the kind of innovation that could give us higher farm yields, fewer inputs and lower prices.
These policies include subsidy-driven incentives to grow commodity grains instead of vegetables, and restrictions on agricultural technologies that raise yields.

And in recent years, federal officials have pushed organic and other inefficient practices that may make consumers feel good about the foods they buy but which in reality are not better for them or the environment.

Source: Jeff Stier and Henry I. Miller, "Free Market Has Real Solutions to Obesity Crisis," Washington Examiner, May 20, 2013.

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Homeownership and the American Dream

22 May 2013 07:00:53 CDT

A new Political Report from the American Enterprise Institute explores the relationship between homeownership and the American Dream. The two may not be as intertwined as they once were, but many still aspire to own their own homes. The report also examines the new culture wars, pressures facing families, personal economic outlooks and more, say Karlyn Bowman, Andrew Rugg and Jennifer K. Marsico of the American Enterprise Institute.

Seventy-two percent of non-homeowners aspire to homeownership. Forty-five percent of renters say they rent because they can't afford to buy.
Fifty-five percent of Americans believe owning a home is a very important part of the American Dream. But 61 percent say renters can be just as successful as homeowners in achieving the American Dream.
Forty-four percent think the government should promote traditional values in our society. Fifty-two percent think government should not favor any particular set of values. In the past, a majority favored promoting traditional values.
Sixty-eight percent of Americans say economic pressures to make ends meet is a very serious problem facing families today. The problem ranked highest among 16 possible problems facing families.
Immigration and gun control rank low on a list of issues for the president and Congress "to work on right now." Forty-two percent chose the economy and jobs, 4 percent choose immigration, and 5 percent guns.

Source: Karlyn Bowman, Andrew Rugg and Jennifer K. Marsico, "Homeownership and the American Dream," American Enterprise Institute, May 2013.

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California: Can Oil Revive Its Economy?

22 May 2013 07:00:52 CDT

California is known in the majority of the business world as a regulatory disaster. They have unbalanced labor and employment laws, a high minimum wage, stringent zoning regulations, loose worker compensation requirements, and burdensome licensing requirements across professions and trades. These problems have led to a disturbing increase in emigration from California to other states, but a recent discovery of up to 15 billion barrels of oil in the Monterey Shale formation could cause the economic growth needed to help California get back on its feet, says Michael M. Rosen in The American.

William Ruger and Jason Sorens of the Mercatus Center at George Mason University conducted a study of freedom in all 50 states and found that in California:

1.5 million people departed for other states between 2000 and 2010.
This amounted to roughly 4 percent of the state's population.
Ruger and Sorens rated California 49th in terms of overall freedom.

Citizens fleeing from California to other states are causing more fiscal problems for California's government.

In March, the state auditor found California's net worth to be negative $127.2 billion.
The Hoover Institution calculates that only 144,000 Golden State households "accounted for about 50 percent of the aggregate state-income-tax revenue -- and personal income taxes usually account for about 50 to 60 percent of all state revenues."
Even if only a small fraction of those 144,000 depart for a warmer business climate, California's already-shaky finances will fall even further out of order.

Although California's future looks dim, there is a spark of hope. As many as 15 billion barrels of oil were found in the Monterey Shale, which constitutes 64 percent of all shale oil reserves in the United States, and four times as much as North Dakota's Bakken formation.

The University of Southern California conducted a study that concludes:

These oil reserves could generate 500,000 jobs.
They could generate up to $4.5 billion in tax revenue for the state by 2015.
They could add another 2.3 million jobs and another $20-plus billion by 2020.

There is skepticism about the benefit of the oil to California, because of the alleged effects fracking has on the environment -- California is known as an environmentally friendly state. Even so, Governor Edmund G. Brown, Jr., has come out and praised the amount of oil as incredible and claimed that the oil creates massive potential for the California economy.

Source: Michael M. Rosen, "Could California Make a Comeback?" The American, May 15, 2013.

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Federal Small Business Loans Harm Taxpayer

22 May 2013 07:00:51 CDT

The United States of America was founded upon the ingenuity and hard work of small businesses. However, Small Business Administration (SBA) loans, while supposed to help small businesses, have instead become a form of corporate welfare for some of America's largest banks, says Douglas French, president of the Ludwig von Mises Institute.

Policymakers have been touting SBA loans as a stimulus for small businesses to grow the economy, but to the contrary, it has only been increasing the profits of banks while taxpayers cover the losses. Since the financial crash in 2008, it has been hard to attain loans from private banks, but SBA loans had record years in 2011 and 2012.

The most booming portion of the program's loans is the 7(a) program that funds business loans.

More than $15 billion in SBA 7(a) loans was disbursed in 2010.
The two years after matched the booms of 2004 through 2007.
Per SBA guidelines, these loans were used to "to establish a new business or to assist in the operation, acquisition, or expansion of an existing business."

The question that one must ask after these statistics is: Why was there a rapid increase in only the 7(a) loans program? The answer: It has boomed because Congress has strong interest in the program.

This interest has been gained because small businesses might be prevented from accessing sufficient capital to enable them to assist in the economic recovery.
President Obama argued that the SBA should be provided additional resources to assist small businesses in acquiring capital necessary to start, continue or expand operations.
Congress and the president expect that by stimulating these small businesses, it will create jobs.

In addition to congressional support, the program boomed because of the government's guarantees on SBA loans.

The Small Business Act of 1953 created the 7(a) loan guarantee wherein 85 percent of a loan's principal up to $150,000 is guaranteed by the government.
The guarantee drops to 75 percent for loans more than $150,000.
During 2010 and 2011, the guarantee was bumped up to 90 percent.

The government's increase in the guarantee led to a massive increase in loan applications. This created an opportunity for companies to take out excessively high loans and not have the responsibility to pay them back, which leaves the U.S. taxpayer to pay for the business when they default on their loan.

Source: Douglas French, "Politically Correct Lending," Foundation for Economic Education, May 17, 2013.

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ObamaCare Mandates Dramatically Expand the Internal Revenue Service's Power

22 May 2013 07:00:50 CDT

Much of the talk in the news this week regards the appalling scandal involving IRS targeting of conservative non-profit groups. So it's worth noting that ObamaCare dramatically expands the authority and the scope of the Internal Revenue Service. Two provisions in particular will require thousands of new IRS agents, and billions in funding, to enforce: the law's individual mandate, forcing most Americans to buy government-approved health insurance; and its employer mandate, forcing most employers to take money out of workers' paychecks to purchase costly health insurance on their behalf. Here's why these two provisions are so intrusive, and why the only solution to the problems they create is to repeal them, says Avik Roy, a senior fellow with the Manhattan Institute.

Many People Are Exempt from the Individual Mandate.

It turns out that many people are exempt from the mandate, and so the IRS has to know a lot about you in order to decide whether you are in compliance with it.
To enforce the individual mandate, the IRS needs to know whether or not you have purchased insurance this year.
It will also need to know the specific insurance policy you have, in order to ensure that it meets ObamaCare's "minimum essential coverage" requirement.

The Employer Mandate Incentivizes "Unaffordable" Coverage.

To enforce the employer mandate, the IRS needs the same information from employers in terms of the specific policies employers purchase for their workers, and also the hours worked by every part-time employee.
In addition, your employer will need to know what your household income is, in order to ensure that the coverage it offers you is "affordable" to you by the law's definition.

The only viable solution to this problem is to repeal the employer mandate altogether, and to replace the individual mandate with something else, like a limited open enrollment period, that does not require expanding the power and the authority of the IRS.

Repealing the employer mandate will give employers additional incentive to dump workers onto ObamaCare's exchanges. But, says Roy, this is on balance a good thing, because it will mean that individuals can shop for insurance themselves, something that economists of all stripes support.

Source: Avik Roy, "Two ObamaCare Mandates that Dramatically Expand the Internal Revenue Service's Power," Forbes, May 17, 2013.

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Housing Recovery Still Has Room to Run

22 May 2013 07:00:49 CDT

The roof is not caving in on the housing sector. While the 16.5 percent plunge in April housing starts last week was stunningly large, the details of the data indicated the housing recovery will continue for the rest of this year, says the Wall Street Journal.

First, the drop in April starts was mainly in multiunit projects, which tend to be volatile. The 37.8 percent drop in apartment starts last month followed a 22.5 percent gain in March and a 12.5 percent advance in February.
Second, the dearth of building in past years means a tight supply in new single-family homes. According to Commerce Department data, only 153,000 homes were on the market in March, an inventory that would last only 4.4 months under current sales activity. (Housing starts data cover not only new homes put up for sale but also projects contracted by owners or built by the owners themselves.)
Finally, builders are no longer price-takers, as was the case during the Great Recession when cash-strapped developers had to slash prices to move new homes that were competing with cheaper, almost-new foreclosed houses.

Demand for housing has recovered, thanks to better job prospects and ultra-cheap mortgage rates. While it is not as frothy as during the housing boom, the market is healthy enough to boost home prices, enabling more builders to make a profit and finance new projects.

The most closely watched gauges of home prices show the increases were strengthening back in February. Economists at Credit Suisse point to a proxy for home values within the producer price index (PPI) report that indicates the price recovery continued through April.

According to Credit Suisse's director of U.S. economics, Jonathan Basile, the PPI covering fees and commissions received by real estate agents and brokers was up 9.1 percent from year-ago levels, the largest yearly increase since 2005.
The index tracks the trend in the more visible Case-Shiller home price index and "suggests positive news on house prices should continue," says Mr. Basile.

Source: Kathleen Madigan, "Housing Recovery Still Has Room to Run," Wall Street Journal, May 20, 2013.

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Navigating the ObamaCare Maze

21 May 2013 07:00:48 CDT

On October 1, millions of Americans are supposed to be able to go online and acquire health insurance on electronic exchanges in the states where they live. But here is a question that is being increasingly asked by people in the insurance industry: What happens if the exchanges aren't ready on time, says John C. Goodman, president and CEO of the National Center for Policy Analysis.

The only states that have functioning exchanges at the moment are Massachusetts and Utah.
Both developed their exchanges independently of the Affordable Care Act, and they may not be able to do everything the federal government requires.
Fifteen other states are trying to develop their own exchanges with varying degrees of success.
The other 33 states have either completely ceded responsibility to the federal government or have entered a partnership that gives the federal government responsibility.

One problem is that too little money was budgeted for creating the exchanges.

The Congressional Budget Office originally estimated that setting up the exchanges would cost between $5 billion and $10 billion.
California alone is spending more than $900 million, yet the health reform law allocated only $1 billion for the country as a whole.
The Obama administration has been cannibalizing other federal health budgets in a mad rush to find more for the exchanges.

A second problem is complexity.

The Obama administration wants something the federal government has never done: a computer system that connects Health and Human Services, the Internal Revenue Service, the Social Security Administration, Homeland Security and perhaps other departments.
This is a herculean task with unclear benefits.
Meanwhile, has anyone asked why we need to link all these agencies in order to operate an exchange?

A third and much bigger problem is competency. The federal government is probably the worst entity possible to design an exchange. One of the worst mistakes the federal government makes is the tendency to try to reinvent systems the private sector has already invented. The government has been true to form under the health reform law, completely ignoring private exchanges that are up and running.

Source: John C. Goodman, "Navigating the ObamaCare Maze," Wall Street Journal, May 19, 2013.

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The Market for Medical Care Should Work Like Cosmetic Surgery

21 May 2013 07:00:47 CDT

Cosmetic surgery is one of the few types of medical care for which consumers pay almost exclusively out of pocket. In health markets without third-party payers, doctors and clinics use price competition, package prices, convenience and other amenities in order to attract patients willing to purchase their services. When patients pay their own medical bills, they become prudent consumers. Thus, the real (inflation-adjusted) price of cosmetic surgery fell over the past two decades -- despite a huge increase in demand and considerable innovation, says Devon M. Herrick, a senior fellow with the National Center for Policy Analysis.

Since 1992:

The price of medical care has increased an average of 118 percent.
The price of physician services rose by 92 percent.
All goods, as measured by the inflation rate, increased by 64 percent.
Cosmetic surgery prices only rose only about 30 percent.

Cosmetic services have become competitive for a variety of reasons, including the fact that surgeons generally adjust their fees to stay competitive and quote package prices.

Wherever there is price competition, quality competition tends to follow. Consider corrective eye surgery.

From 1999 through 2011, the price of conventional Lasik fell about one-fourth due to intense competition.
Eye surgeons who wanted to charge more had to provide more advanced Lasik technology, such as Custom Wavefront and IntraLase (a laser-created flap).
By 2011, the average price per eye for doctors performing Wavefront Lasik was about what conventional Lasik had been more than a decade ago; but the quality is far better.
In inflation-adjusted terms, this represents a huge price decline.

By contrast, the market for medical care does not work like other markets. In most markets, prices and quality indicators are transparent -- clear and readily available to consumers. Health care is different: Prices are difficult to obtain and often meaningless when they are disclosed. Most patients never learn the true cost of their care.

Source: Devon M. Herrick, "The Market for Medical Care Should Work Like Cosmetic Surgery," National Center for Policy Analysis, May 2013.

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Subsidizing Failure

21 May 2013 07:00:46 CDT

There is at least one place with huge potential for ending wasteful higher education spending: to stop subsidizing students who do not graduate and put their education to good use, say Jenna Ashley Robinson and Jay Schalin of the Pope Center for Higher Education.

According to a forthcoming study by Harry Stille, the director of the Higher Education Research/Policy Center in Greenville, South Carolina, the key is admissions policy -- the more qualified the students, the more likely (and sooner) they are to graduate. Stille's data show that the relationship between admissions criteria and graduation rates is extremely strong.

The 10 state university systems that have the most difficult admissions criteria were all in the top 20 systems for graduation rates.
Conversely, of the 10 state systems with the easiest admissions criteria, only two -- New Hampshire (6) and Rhode Island (15) -- ranked higher than 37th best for graduation rates.

Stille attempts to compute the cost to the state from students dropping out by multiplying the number of students who start but fail to complete college ("non-completers") at a school (or system) by the amount that the state subsidizes students at that school. Arizona State University is the most wasteful, with an annual cost-of-non-completion of roughly $26 million because it is a large school with a low graduation rate. The University of Virginia is at the other extreme, wasting less than a quarter of a million dollars per year due to drop-outs.

Stille indicates that the average amount of time it takes for students to graduate from public institutions is 5.5 years. This is costly. For example, look at East Carolina University's most recent cohort for which extended graduation statistics are available, the 3,792 students starting in the fall of 2006.

Of these students, 32.7 percent graduated after four years, and 58.2 percent graduated after six.
That means that 25.5 percent of the class (the difference between those who graduated in four and six years, or 967 students) needed at least one extra semester to finish their education.
The state of North Carolina appropriates $5,660 per student per semester, so that, in the fall of 2010, taxpayers were charged $5.5 million extra for students who took extra time to graduate, from just one cohort.

Much of that $5.5 million was waste from taking too long to complete school. Multiplied by several cohorts over many semesters, the cost becomes enormous.

Source: Jenna Ashley Robinson and Jay Schalin, "Subsidizing Failure," Pope Center for Higher Education, May 12, 2013.

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Optimism in an Era of Growing Inequality and Economic Difficulty

21 May 2013 07:00:45 CDT

The Great Recession of 2007-2009 has profoundly affected the American people. Personal economic stress levels are high, and insecurity about jobs, housing, education and retirement is up among nearly all segments of the public, with many families reorganizing their lives to adjust for declining wealth and real income, as well as poor job prospects. At the national level, Americans are expressing record levels of frustration with what they see as a dysfunctional political system in Washington. Yet despite the American people's struggles with this extended period of economic difficulty, their core values and beliefs about economic opportunity, and the nation's economic outlook, remain largely optimistic, say Pew pollsters Andrew Kohut and Michael Dimock in a new report for the Council on Foreign Relations.

By modern historical standards, these have been tough times for the American public.

Though the United States enjoyed rising prosperity each decade after World War II, that stretch of economic growth came to an end in 2000.
Median household income was lower in the past decade than in the 1990s, and the net worth of the average family declined by 35 percent over the same period.

The American public has noticed this change.

During the past five years, an average of less than 40 percent of people rated their finances as excellent or good, compared to 48 percent earlier in the decade and in the mid-to-late 1990s.
However, in a display of characteristic optimism over this difficult period, nearly six in 10 Americans expected their finances to improve in the coming year.
Despite a prolonged recession, levels of optimism about better times one year ahead are comparable to what they have been over the past two decades.

This resilience suggests that while economists may debate whether the fundamentals of the American economy are in decline, the public's mood, so far, can be better interpreted as that of retrenchment, not defeat.

There is also little evidence that economic class is becoming a greater factor in shaping American values than in the past. Americans are certain that the nation can solve its problems, that hard work ultimately pays off, and that income divides are an acceptable part of a healthy economy. But they increasingly see a lack of fairness in public policies that are failing to promote economic opportunity.

Source: Andrew Kohut and Michael Dimock, "Resilient American Values: Optimism in an Era of Growing Inequality and Economic Difficulty," Council on Foreign Relations, May 2013.

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The Federal Reserve's Unsound Policies

21 May 2013 07:00:44 CDT

The Federal Reserve is increasing the long-term risk in our financial system through both its monetary and regulatory policies, says John A. Allison, president and CEO of the Cato Institute.

From 1914 until 2007 the Fed's balance sheet grew to $900 billion.
Since 2007 the balance sheet has exploded to $3.2 trillion and is growing $80 billion per month.
The Fed's capital ratio is currently 1.3 percent, while the average capital ratio of the largest banks is 8.0 percent.

The Fed's balance sheet has been radically expanded to hold down interest rates by buying Treasury and Freddie/Fannie bonds, significantly expanding the lending capacity of banks.

Since the U.S. dollar is the world's reserve currency, these actions have created a global currency trade war, causing misallocation of capital and lowering the global standard of living. The only reason the U.S. dollar has held its relative value is its status as the reserve currency. This allows the Fed and Congress to get away with printing money and incurring massive debt that the market would not otherwise permit.

Current Fed regulatory policy is also increasing the risk in the banking system.

All large banks are being forced to use the same regulatory-driven mathematical risk management models.
This means that all the major banks will have a strong incentive to take the same type of risk, which significantly increases the overall risk in the financial system.

In addition, by holding interest rates below what the market would create, the Fed is punishing moderate-income savers, especially older individuals.

Retired individuals with low to moderate net worth should not be making risky investments.
However, the Fed has forced down interest rates so that low-risk investments have negative real returns.
This means that many older individuals who hoped to live on their interest income have to consume their principle, which threatens their standard of living.
On the other hand the extra liquidity created by the Fed is driving higher returns in risky investments, typically owned by high-net-worth individuals.

The primary beneficiary of the Fed's low interest rate strategy is the U.S. federal government, the world's largest debtor. The federal government's annual deficit is at least $250 billion less than it would be if interest rates were normalized. It appears that the real purpose of the Fed is to obtain favorable financing for the U.S. government, at the expense of private savers.

Source: John A. Allison, "The Federal Reserve's Unsound Policies," Cato Institute, May/June 2013.

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