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The Hidden Decline of Manufacturing Output

Robert Atkinson - May 27, 2015

Imagine a Fortune 500 company trying to plot its strategy based on significantly inflated sales figures. Do you think its CEO would be able to make sound decisions about what is working well and what needs to change? Of course not. Yet that is exactly the position President Obama and other federal policymakers are in when they look at U.S. manufacturing: They are seeing a picture that is far rosier than reality. That is because the Department of Commerce is using a badly flawed methodology to report manufacturing output. As a result, policymakers, pundits, and the media are falsely concluding that U.S. manufacturing is fundamentally healthy.

First, some background. In order to assess the health of U.S. manufacturing, the most important number you need to know is how much production is growing relative to the economy. To understand changes in manufacturing output, statisticians have to control for inflation, and they have to measure "value added," not gross production. As the term implies, value added is the value that manufacturers add to the inputs they buy. For example, in a car, the value added is the difference between the price of the vehicle and the amount that the manufacturer had to pay its suppliers for parts such as spark plugs and window glass. This way, we focus specifically on the output of U.S. manufacturers — counting the value of work that was done here by them, not by foreign manufacturers exporting parts to the U.S. or by domestic companies in other industries, like mining and electric utilities, providing inputs.

According to official government data, U.S. manufacturers produced the same amount of real value added in 2013 that they produced in 2006, even though manufacturing employment was down 15 percent. The lesson we are supposed to draw is that while times might be tough on manufacturing workers who have lost their jobs due to automation, U.S. manufacturing remains healthy.

But something is terribly wrong with that picture. Because of the way the Department of Commerce measures manufacturing output, especially in the computer and electronics sector, where rapid changes in technology regularly make computers more powerful, the official data significantly overstate output growth. This in turn makes it look like all the lost jobs and shuttered factories across America were simply the result of firms becoming more efficient — just like 100 years ago, when farmers got more productive and shed agricultural labor. But if you remove computer and electronics output (known in official tables as NAICS 334) from the picture, it turns out that real U.S. manufacturing output fell by 6 percent between 2006 and 2013, while the overall economy grew 8 percent. This is hardly a sign of health.

You might ask, so what? If the 92 percent of U.S. manufacturing (by employment) is producing less, but a boom in computers and electronics is making up the difference, that’s a wash, right? But we actually aren’t booming in computers. According to the Department of Commerce, real NAICS 334 output increased 52 percent from 2006 to 2013. But this is not measuring what you and I would think of as increases in output. Companies in America are not producing 52 percent more computers and electronics.

From 1990 to 2010, the real gross output for computers and electronic products grew by 570 percent, 20 times faster than the growth rate for the rest of manufacturing. But nominal shipments of computer and electronic products from U.S. factories — not just the "value added," but the full price of the products sold — grew just 24 percent between 1992 and 2011, while between 2000 and 2010 they actually fell by about 70 percent.

So what’s going on? In a word — well, two — Moore’s Law: the prediction by Intel co-founder Gordon Moore that the number of transistors on a chip would double every 24 months while the price would fall by half. This rapid growth in computing power (including processing and storage), which has been a boon to the digital economy and consumers, makes it seem as if the industry is producing much more than it really is. In other words, if a company sells a computer worth $500 one year and then two years later sells another for $500 but it has twice the processing power, the government reports the company output as having doubled, even though it is still selling only one computer. This is why the government reports that output for computers and electronics grew by 570 percent in 20 years, because computing power got exponentially better during this time. While the rapid quality improvement may indeed accurately represent the increased computing value that consumers experience, it falsely implies rapid expansion of industry output.

This dynamic creates the misleading impression that overall U.S. manufacturing output is growing when in fact, when NAICS 334 output is properly measured, it is clear that manufacturing output is falling, by more than 10 percent over the last 15 years.

So when policymakers look at the top-line numbers on manufacturing output change, they are not seeing the real picture. This is why so many commentators in the media have parroted the false claim that manufacturing output has grown at the same rate as GDP. Just this week the New York Times stated that manufacturing output has not gone down, and therefore trade has not had an impact on manufacturing job loss.

So, what’s wrong with all this? If policymakers are lulled into a sense of complacency that all is well with U.S. manufacturing, they are much less likely to push for the steps needed to restore U.S. manufacturing competitiveness, including a lower corporate tax rate and increased support for manufacturing-related government R&D. Thus, it's critical for Federal Reserve economists, congressional support agencies, pundits, and journalists not to accept federal manufacturing data at face value; we need to do the critical analysis necessary to get a real picture. Otherwise, Washington will continue believing a myth.

Robert Atkinson is president of the Information Technology and Innovation Foundation.

Drug War: Getting Our Priorities Straight

Randal John Meyer - May 27, 2015

Americans live in the last days of a hundred-year-long international drug war. Fifty-two percent of the country has come to the view that marijuana criminalization is outright wrong, and 67 percent believe that punitive criminalization is not the best way to address harder addictions.

But what is lost in this argument over criminalization is a sense of priorities. Even if one believes that drug laws should exist and be enforced, there is no rational course of action but to divert the vast majority of anti-drug funding to the enforcement of worse crimes, like human trafficking.

Human-trafficking statistics are notorious for varying widely, but according the Department of State, as many as 17,500 people may be trafficked into the U.S. annually. Including those trafficked within the country, the number is likely in the hundreds of thousands.

In fiscal year 2011, according to an analysis of State Department data from the Global Alliance Against Trafficking in Women, the U.S spent $77 million on programs to combat human trafficking domestically and internationally. Human-trafficking prevention also has been the victim of significant cuts over the budget battles during the Obama administration. By contrast, in 2010, the U.S. spent $15 billion on drug-trafficking enforcement programs.

The illegal drug and human trades are respectively worth about $300 billion and $150 billion. But few, if any, would argue that the natural consequences of human trafficking — at best labor exploitation (which is how about 17 percent of trafficked humans are exploited), and at worst sexual slavery (which is how 80 percent of trafficked humans are exploited) — outweigh the natural consequences of drug use. Indeed, as Johann Hari notes, the scientific evidence is quite clear that the vast majority of drug users do not become addicted, and that those who do can better lead productive lives through medically managed addiction than through judicially managed addiction.

Perhaps there is nothing more money could possibly improve in regards to human trafficking, while drug-war funding is well-spent — but that strains all credulity. By one estimate, only about 1 in 100 human-trafficking victims are recovered under present schemes, and the 2014 State Department Report on Human Trafficking recommends "increased screenings to identify trafficked persons," "efforts to strengthen coordination among justice systems," "enhanced training" on state and federal levels, and, tellingly, "increase[d] funding for relevant agencies." And the American people often get little in return for government drug-war efforts — according to a study by the Texas ACLU on drug interdiction, "up to 99% of traffic stops" performed by certain federally funded drug task forces "result in no citation."

Simply stated, there are better things Americans could be spending their tax dollars on than an effort to stop than the import and export of drugs, such as an effort to stop the import and export of people, and it's time the federal budget reflected that.

Randal John Meyer is a Young Voices Advocate and a legal research fellow living in New York City. Twitter: @randaljohnmeyer

The Rise of Executive Federalism

Michael S. Greve - May 26, 2015

Consider, if you will, the administration's controversial initiatives on immigration, marijuana legalization, the No Child Left Behind Act (NCLB) and Common Core academic standards, climate change and "clean power," and the implementation of Medicaid expansion and the Affordable Care Act (ACA): What do they all have in common?

First, they are federalism initiatives that affect states in very significant ways (for their ostensible benefit, or to their demonstrable detriment). Second, Congress has nothing to do with any of this beyond writing checks and issuing press releases. Third, the programs operate at the absolute outer bounds of statutory law, and sometimes outside those bounds.

To an extent, that reflects the present administration's latitudinarian approach to the law. But there's a larger, structural point: Our federalism is practically guaranteed to produce chaotic government. Generalized appeals to the rule of law cannot alone fix that problem. We have to make our federalism less "cooperative."

With very few exceptions (such as tax collection, Social Security, and Medicare), virtually all federal domestic programs are administered by state and local governments, often under one of over 1,100 federal funding statutes (such as Medicaid or NCLB). Since its inception under the New Deal, this "cooperative" federalism has proven stupendously successful in doing what it was supposed to do: expand government at all levels. However, its stability rested on peculiar conditions: private and public affluence, tolerably homogeneous states, and a functioning Congress. Those conditions have all ceased to operate to some extent. This predicament explains the rise of an executive and often extra-legal federalism — a federalism that is run through waivers, edicts, and transfers payments that are barely distinguishable from bribes.

The End of Affluence
The point of jointly funded federal conditional spending programs (such as Medicaid) is to increase the demand for government, by lowering the perceived tax price of public programs both at the federal and the state level. The programs are built to demand ever-increasing cash infusions. When that can no longer be done or be taken for granted, the federal-state bargain comes apart. And so it has.

The ACA promised states a 100 percent reimbursement for expanding Medicaid. Two dozen states litigated against that largess, and to this day some 20 states refuse to take the money. While ideological resistance to "Obamacare" has contributed to this unprecedented display of resistance, it is also the case that states no longer trust the federal government's promises, for the excellent reason that Medicaid's expansion at the federal level is purely debt-financed. Besides, Medicaid is ruinous to state finances with or without its expansion under the ACA. It is now the single largest state expenditure, eclipsing even spending on education, and it is projected to double again within a decade or so. That will not happen, because it cannot happen.

All the while, the states' costs of matching federal transfers with their own revenue dollars keep rising, chiefly because budget cuts would entail a loss of federal transfers. Unable to raise those revenues, states have responded by racking up debt in off-budget places — foremost, pension and other post-employment benefit accounts. Those debts exceed $5 trillion. They will not be paid, because they cannot be paid. That problem cannot be solved through yet more generous federal transfers. In short, the "cooperative" fiscal game is just about up.

(Un)willing States
Cooperative federalism requires willing states — not a few willing states, but well-nigh all of them. Without that, national objectives would go unmet. Thus, federal-state bargains are structured to produce uniform cooperation through some combination of carrots and sticks, coupled with an assurance of state "flexibility" — that is to say, statutorily guaranteed authority to shirk. But that does not work under conditions of severe state heterogeneity. In fact, ideological divisions among states have become sufficiently severe to make large numbers of states defect from existing arrangements and resist any effort to extend them. The ACA is the most obvious example, but there are others — foremost, energy-producing states' resolute resistance to the administration's climate-change programs. And increasingly, the dissident states are acting and litigating as a bloc and a coalition. There again goes "cooperative" federalism.

"Cooperative" federalism is supposed to come from Congress and federal statutes. However, practically nothing comes from Congress these days. The legislature is notoriously divided. It lacks the financial resources to rope recalcitrant states in new federalism bargains (witness the ACA), and it cannot even revisit the bargains embedded in old statutes (such as education programs or the Clean Air Act). Thus, to make federal programs "work" under current conditions, agencies rewrite statutes, issue expansive waivers, and negotiate deals with individual states on a one-off basis. That is how the ACA is being "administered." That is how Secretary of Health and Human Services Sylvia Burwell is trying to expand Medicaid. That is how No Child Left Behind is run. And that is how Environmental Protection Agency is trying to impose its Clean Power Plan: "stakeholder meetings" and assurances of regulatory forbearance for cooperating states; unveiled threats against holdout states. This brand of federalism knows neither statutory compliance nor even administrative regularity. It is executive federalism.

The rise of executive federalism is propelled by very potent forces, and it is robust to partisan politics. Expansive administrative waivers, for example, were pioneered by the Reagan administration (under what was then Aid to Families with Dependent Children); the practice has since spread under Democratic and Republican administrations alike. For now, complaints over lawless executive behavior are the stuff of conservative agitation. However, a Republican president would be under enormous pressure to improvise federalism solutions under unworkable, obsolete, and profligate statutes. The fronts might change quite quickly, even as executive federalism continues its ascent. Further along that path lies the fate of Argentina, which practices an advanced form of executive federalism: corrupt, ruinous, unstable.

What can be done about it? A crucial first step is to stop fighting yesterday's federalism battles over "states' rights" or "block grants" — the latter a convenient and supposedly conservative prescription that is in reality a debt-financed, full-scale waiver policy that allows the executive to exercise yet greater authority and states to spend yet more money they haven't raised. Instead, the time has come to fight today's federalism battles over executive federalism and to prepare for tomorrow's — for example, the sure-to-come question of federal bailouts for major cities and entire states. Could the Federal Reserve recapitalize the state of Illinois? A TARP for states: Would that be constitutional? If so, who would enforce the repayment obligations or promises of fiscal discipline, and how?

Obviously (to my mind), we should resist such novel forms of federal-state "cooperation." We have to make our federalism less ruinous and more lawful. And to that end, we have to make it less cooperative, one program at a time.

Michael S. Greve is a professor at the George Mason University School of Law and the author of "Federalism and the Constitution: Competition Versus Cartels" published by the Mercatus Center at George Mason University.

Does President Obama Support Renewable Fuels?

Joe Jobe - May 26, 2015

After more than two years of delays, the EPA announced recently that it will soon set revised standards determining how much renewable fuel is blended into our gasoline and diesel supplies in the coming years.

The decisions the EPA makes — under a policy called the Renewable Fuel Standard (RFS) — will set a critical precedent for the nation's energy policy, with the potential to shape the way we power our cars and trucks for the foreseeable future. In short, the EPA's proposal will show whether the Obama administration is truly committed to diversifying the fuels we use, or if "reducing our dependence on oil" is more of a political slogan.

The RFS is the most successful policy we have for shifting away from petroleum in the transportation sector, which accounts for more than one-fourth of U.S. greenhouse-gas emissions. Since it was created in 2005 by a bipartisan Congress and President George W. Bush, it has delivered remarkable results. We now get about 10 percent of our gasoline supplies from conventional corn ethanol, and the next phase of the program is written to ensure we make similar progress with advanced biofuels like biodiesel and cellulosic ethanol.

In both of his campaigns for the White House, President Obama vowed to strongly support renewable fuels, particularly advanced biofuels, which by the EPA's definition reduce greenhouse-gas emissions by at least 50 percent compared with petroleum fuels. In 2008, he visited biorefineries across the country and told workers he was committed to making the U.S. No. 1 in the world in renewables. More recently, EPA officials have apologized for damaging delays in implementing the RFS over the past two years, and EPA administrator Gina McCarthy has said repeatedly that the administration is committed to getting the program back on track and growing America's renewable-fuels production.

These assurances are positive, and the EPA's announcement that it will propose several years of standards by June 1 is a step in the right direction. However, the only true measure of the Obama administration's commitment to renewable fuels will be in the volumes that are proposed. As the old proverb goes, the proof of the pudding will be in the eating.

Will the EPA pave the way for growth that gives producers and investors the confidence they need to expand operations and that encourages the development of new technologies, as candidate Obama said? Or will the administration retreat to a weakened policy that perpetuates the status quo, with continued dependence on petroleum — much of it coming from dangerous parts of the world or from increasingly carbon-intensive and environmentally questionable sources?

The answer is critical. We have the demonstrated technology and the energy policy that finally has shown great progress toward moving our nation away from the dangerous addiction to a singular transportation fuel.

Biodiesel is a prime example of the success of the RFS. Over the last five years, biodiesel has grown from a niche fuel with a small but enthusiastic following to a commercial-scale industry that has plants in almost every state in the country. Before the administration effectively put the RFS on hold two years ago, the industry produced a record of more than 1.8 billion gallons in 2013 — or nearly 5 percent of the on-road diesel pool.

The industry did this using an increasingly diverse and abundant mix of raw materials, including recycled cooking oil, plant oils such as soybean oil, and animal fats. According to the EPA, biodiesel emits 57 percent to 86 percent less greenhouse gas than petroleum diesel. And the industry supports more than 62,000 jobs.

This is a success story, and after two years of deliberation over what to do next, the answer should be obvious. The RFS requires that advanced biofuels be sustainably grown each year, and it clearly intended growth in all categories of advanced biofuel. To do otherwise would further undermine the investors, entrepreneurs, and employees who responded to the law by building this new American energy industry. On June 1, we hope to see President Obama's commitment to renewable fuels realized with clear, sensible policy that delivers a more diverse and sustainable energy future.

Joe Jobe is CEO of the National Biodiesel Board, the U.S. trade association for the biodiesel industry.

How Occupational Licensing Harms the Young

Jared Meyer - May 22, 2015

The following is adapted from Disinherited: How Washington Is Betraying America's Young (Encounter Books; May 12, 2015).

Occupational licensing, the requirement that people pass tests to gain government permission to work, is making it harder for young people to begin their careers. By keeping young people out of certain industries, or by making it prohibitively expensive and time-consuming for them to work, occupational licensing increases costs for all Americans and limit opportunity for those looking to enter the field of their choice.

Melony Armstrong, featured in the documentary Locked Out: A Mississippi Success Story, experienced the harms of occupational licensing laws firsthand. When she wanted to open an African hair-braiding salon, she had no idea that a long, hard battle against the State Board of Cosmetology lay ahead. Before her salon, Naturally Speaking, the hair-braiding salon closest to her hometown was in Memphis, Tennessee. Melony saw a business opportunity that would allow her to pursue her passion. From the time Melony decided she wanted to open a hair-braiding salon, it took her four years to realize her dream.

African hair braiding is a natural process that does not use any chemicals. For this reason, Melony saw no point in spending $10,000 and several years in a cosmetology school that would not teach her any of the skills she needed to braid hair. After the first of her many fights with the state government, she was able instead to earn a wigology license, which "only" required 300 hours of coursework — but not a single hour of braiding instruction.

As Melony's business expanded, she wanted to hire younger workers and train them so she could better manage the overwhelming demand for her services. In order to do that, however, she would have needed to complete another 3,200 hours of classes and apply for a cosmetology-school license. None of these hours in the classroom would have helped her learn how to braid hair, or how to teach braiding hair. In that time, Melony could have become licensed for all of the following occupations: EMT, police office, firefighter, paramedic, real estate appraiser, hunting education instructor, and ambulance driver. And she would still have had 600 hours to spare.

Experiences similar to Melony's are by no means rare. Results of's annual "Small Business Friendliness Survey," published in partnership with the Kauffman Foundation, show that small business owners care almost twice as much about licensing regulations as they do about taxes when rating the business-friendliness of their state or local government. This comprehensive survey collects data from more than 12,000 diverse small-businesses and provides a clear picture of how policies directly affect entrepreneurs.

Entrepreneurs such as Melony are mainly focused on bringing their ideas and skills to market, and they want to use as much of their available, and often limited, resources to do so. Seeking government approval to go into business is a waste of their valuable time and money. This is why the burden of professional licensing regulations was found to be the only statistically significant non-demographic variable for predicting states' business environments.

We asked Melony how these ridiculous requirements weighed on her, especially when she had to turn down young women who needed a chance to work. "When I first learned that I was not free to pursue my passion, I felt like I had hit a brick wall," she recalled. "I wondered whether I had made a mistake and if my effort, time, energy, and money invested were all for nothing. This was very similar to what I felt when I was legally prohibited from hiring the help I needed. ...All I was trying to do was braid hair and grow my business in a way that would afford my family financial freedom."

By protecting established, older workers, the government's occupational licensing requirements make it hard for the young to enter the workforce as entrepreneurs — leaving them with fewer job opportunities.

We asked Melony if she thought occupational licensing laws disproportionately harmed young people. "Yes, because most people seeking to enter the cosmetology field are going to be young people," she replied. "And if these kinds of laws are in place, after a while, these same young people who have a dream of entering this field, just to be shut out, will eventually let their dream die."

The decline in entrepreneurship is leading to the aging of American businesses, say economists Ian Hathaway and Robert Litan. In 1992, 23 percent of firms had existed for 16 years. By 2011, this percentage had increased to 34 percent. When there are fewer entrepreneurs and new market entrants, economist John Dearie argues, innovation lags and existing companies face lower pressure to improve quality or lower prices. This is because new businesses are the main drivers of "disruptive" innovation that is, as Dearie puts it, "the sort of radical, rock-the-establishment innovation that re-makes the economic landscape, propels productivity and economic growth, and creates opportunity, wealth, and jobs for millions."

Once Mississippi finally updated its laws, Melony began hiring workers and expanding her business. One young worker she hired, Ebony Starks, was only 16. A few months after she began working, her father passed away. It was summer and Ebony was able to work full time and help her family financially cope with the loss. Ebony is 24 today, and she continues to braid hair at Naturally Speaking. She worked at the salon all through college breaks and now has a young daughter of her own.

Prior to the reforms in 2005, Ebony's life might have been a lot more difficult, and for what? For the sake of protecting older, established salon owners? Many states have failed to follow Mississippi's lead and continue to require time consuming, expensive cosmetology licenses for African hair braiders, including neighboring Arkansas. Melony sees embracing entrepreneurship as the way to prepare young people for our rapidly changing, 21st-century economy. The easiest way to do this, she says, is to get out of their way and allow them to apply their gifts and talents while they realize their dreams. We could not agree more.

Occupational licensing was originally intended to protect the public from unqualified lawyers and doctors. It has now morphed into a network of ubiquitous barriers that affect nearly 40 percent of American workers, up from less than 5 percent in the 1950s. This is what happens when special interests — such as state boards of cosmetologists — manage to convince legislators that they deserve preferred treatment. America's economy is being damaged by occupational licensing, but the prospects of young people such as Ebony are being damaged most of all.

Diana Furchtgott-Roth is director of Economics21 at the Manhattan Institute and Jared Meyer is a fellow at the Manhattan Institute. They are the coauthors of "Disinherited: How Washington Is Betraying America's Young," out this month from Encounter Books. Follow Diana on Twitter @FurchtgottRoth, and Jared @JaredMeyer10.

Saving the Bees vs. Pork Barrel Spending

Angela Logomasini - May 21, 2015

The Obama administration has finally released its "National Strategy to Promote the Health of Honey Bees and Other Pollinators." It's the federal government's answer to all the hype found in the news related to the health of the nation's honeybee hives. While it's not clear what it will achieve for the bees, we can be sure it comes with lots of pork-barrel spending, government handouts, and shortsighted pesticide polices that undermine food production.

I have documented why much of the hype on this issue is misinformed and why solutions will only come from private collaboration between various parties — primarily beekeepers and farmers. The federal government is the last entity that will be able to "save" the honeybee.

Nonetheless, the report outlines several goals for its program, some of which border on the ridiculous. For example one key goal is: "Reduce honey bee colony losses during winter (overwintering mortality) to no more than 15% within 10 years."

Seriously? Federal officials are going to determine how many beehives should survive each year and what survival rate is sufficient? This is dumb and only sets the stage for news hype every year losses exceed this government set arbitrary number. In fact, many surveys of beekeepers have indicated that a much higher rate is acceptable, closer to 20 percent a year. Moreover, survival rates will ebb and flow based on myriad factors over which government, and even beekeepers, have no control, such as weather and the emergence of new and old diseases.

The federal government has also decided how many butterflies we should have. Among its goals is to increase the Monarch butterfly population to 225 million butterflies that live on 15 acres in Mexico over the winter, and they will achieve that through "international collaboration." In addition, the feds promise to improve 7 million acres of land to make it more pollinator-friendly.

The report lists out a host of action items to achieve these goals, including spending more than $80 million on education and habitat development for pollinators. Education will mean more government posters and Smithsonian programs, all paid for with your tax dollars. Some of it may contain good information, some probably will amount to no more than anti-pesticide propaganda, and much of it may include just the right amount of alarmism to ensure bigger and bigger allocations of your tax dollars to address this "crisis."

In addition, part of the funds may go to government gardening, such as the much touted "White House Pollinator Garden," and funding for "People's Gardens" around the nation that include only politically correct "native" plants. Never mind that honeybees are not native to the United States; perhaps all these native flowers will also help bees and butterflies. While it's great for first-family photo-ops, it's not clear why this is a linchpin in federal pollinator strategy.

That said, I can't say I am upset that the government will plant pollinator-friendly flowers on current government lands. But why can't they shift funds from existing landscape budgets to do that? Perhaps they need so much money because they'd also like to expand government land holdings. Specifically, the report says: "FWS will acquire more than 46,000 acres of land in the Midwest and Mountain Prairie Regions, which, although primarily aimed at protecting priority bird habitats, will have secondary benefits for monarchs and other pollinators." This surely isn't good, given the fact that the government already owns an estimated one-third of the nation if not more and federal land management is poor.

There will be lots of pork-barrel in this spending strategy as well. For example, the strategy includes providing "emergency" financial assistance to beekeepers who experience hive losses that are "in excess of normal mortality" over the winter because of "Colony Collapse Disorder or other natural causes." Now that the strategy defines normal hive losses as 15 percent, there may be a whole lot of beekeepers who qualify for these government handouts. Since "emergency" spending always seems to go beyond existing budgets, these handouts may increase the program's cost beyond the $80 million. And ironically, this spending may well reward the beekeepers who do the worst job managing their hives, since funds will to flow to beekeepers with the highest losses.

But the biggest defect with this strategy is that it directs EPA to hold off on registering new uses of a class of pesticides called neonicotinoids, and EPA may also use bees as an excuse to limit existing uses. There is no good evidence that these products have any impact on honeybees in real-life settings, and there is considerable evidence that neonicotinoids have both agricultural and environmental benefits. Since these chemicals are applied to seeds and don't require spraying, neonicotinoids are among the least environmentally damaging pesticides on the market.

And if farmers are forced, they will resort to potentially more damaging pesticides, unless EPA regulates those products out of existence as well. If federal policy limits pesticide use enough to undermine agricultural productivity, farmers will need to plant more land to produce food, leaving less land available for pollinators and other species. This anti-technology approach is a no-win for humans or wildlife.

Finally, there is something that the strategy could have done that it completely neglects to consider: reforming federal policies that undermine wildlife habitat. In particular, federal ethanol subsidies and mandates encourage over-planting of corn, which has little value to pollinators and means there is less land for other crops and for wildlife.

Cleaning up the federal government's act should have been priority No. 1, but of course, that's not as much fun as spending $80 million on everything from a White House Pollinator Garden to fancy Smithsonian events and programs to government handouts for beekeepers who are the ones who should be ultimately responsible for their own hives.

Angela Logomasini is a senior fellow in environmental risk, regulation, and consumer freedom at the Competitive Enterprise Institute. This piece originally appeared on CEI's blog.

The Mortgage Deduction Isn't a Subsidy

Curtis Dubay - May 21, 2015

Interest deductions have gotten some bad press lately. A few weeks ago over at The Weekly Standard, for example, Ike Brannon savaged the mortgage-interest deduction (MID). He argued that the MID is a subsidy for home buying and overwhelmingly benefits higher income taxpayers. More recently, The Economist embraced the same argument in a cover story — extending it to business-loan interest deductibility as well.

Accept the first part of this argument — that interest deductions are subsidies — and the second part, that they disproportionately benefit the rich, is sure to provoke outrage. Happily, the first part is wrong.

The truth is that, as long as lenders pay taxes on the interest they receive, interest deductions subsidize nothing. They simply prevent a distortion in the market that would harm the economy profoundly. The absence of a penalty is not a subsidy.

The key to understanding how deductions work is to remember that lenders raise the interest rates they charge to cover the cost of their tax bill. In other words, their tax liabilities are baked in the cake of their interest rates. If they did not do this, the return on the loan would not be sufficient to compensate them for the risk of making it and they would be unwilling to lend the money.

If you doubt that lenders incorporate the tax liabilities into the interest rates they offer, just look at the difference between similarly risk-rated corporate bonds and municipal bonds with identical maturities. Interest on corporate bonds is taxable to lenders; interest on municipal bonds is not. The spread between the two rates is almost exactly equal to the tax levied on lenders to corporations.

Interest deductions for borrowers create symmetry, rendering the lending-borrowing decision tax neutral. Where the tax rate of lenders and borrowers is equal, the value of the interest deduction equals the extra amount of interest borrowers pay to cover the lenders’ tax liability. This leaves borrowers paying the net amount of interest they would have paid had income tax never been levied on their lender — and leaves them equally willing to take the loan as they would in a non-tax world.

For a more detailed explanation of how the numbers work out, see this paper. (I can also furnish a mathematical proof if you require one, or if you are having trouble sleeping.)

Where lenders’ interest income is taxable, interest deductions are necessary to keep the tax code from interfering in the lending-borrowing decision. Thus, interest deductions are not subsidies, and policies like the MID should not be considered tax expenditures.

This also means that concern over the MID’s distributional impacts (the second part of Brannon’s argument) is pointless. When a policy serves only to keep the tax code from creating a costly distortion, who receives how much of it is irrelevant. It is simply protecting those who receive it from being unfairly penalized.

Unfortunately, bad press for interest deductions seems destined to continue. The misconception that the MID is a no-good giveaway to the rich, and that businesses’ interest deductions are akin to corporate welfare, have been around so long that they are firmly ingrained in the psyche of many tax-policy pundits.

But good tax policy demands a thorough understanding of the economics that underlie the principles of taxation. That’s why defenders of sound policy — like interest deductions — need to remain ever vigilant, lest Washington begin to believe the myth as well.

Curtis Dubay is a research fellow specializing in tax and economic policy at the Heritage Foundation’s Roe Institute for Economic Policy Studies.

Paving the Way for Sustainable Highway Financing

Marc Goldwein - May 21, 2015

Congress faces yet another deadline, and yet again is set to stall. This time, there literally could be a bumpy road ahead.

The current legislation authorizing highway and mass-transit spending is scheduled to expire at the end of the month. Not long after that, the Highway Trust Fund (HTF) will run out of reserves, which will cause road-improvement projects across the country to grind to a halt. Legislative action is required to avoid delaying critical infrastructure projects and the jobs they produce.

A two-month extension of highway funding has already been passed by the House and is likely to be enacted soon. Lawmakers should use the extra time to end the cycle of temporary fixes and produce a long-term solution that is free of gimmicks and is fiscally responsible.

Another short-term extension is in keeping with Washington's recent track record in dealing with similar circumstances. Time after time, deadlines have been nearly missed or even outright disregarded when it comes to important budget and fiscal matters. Lawmakers have often kicked the can down the road with short-term patches, only to be forced to address the same issue again and again. Steering haphazardly over these "fiscal speed bumps" has imperiled the nation's finances and caused voters to question the ability of Congress to function.

In the relatively few instances when an issue was actually resolved, it was done in a way that worsened the already unsustainable long-term national debt outlook. This was the case with the recent "doc fix" that permanently replaced the Sustainable Growth Rate (SGR) formula for Medicare payments to physicians. By our calculations, the "fix" will add over $500 billion to the long-term debt.

Now, Congress faces a highway-funding shortfall of about $175 billion over the next decade. That's the equivalent of a 14-cent-per-gallon gas-tax increase, or more than a 35 percent cut in future spending.

After multiple temporary patches, lawmakers want to kick the can yet again, this time in the hopes that tax reform can be enacted later this year and can provide revenue for the Highway Trust Fund.

With our infrastructure spending underfunded and our tax code badly in need of reform, marrying tax and highway policy offers a rare two-for. But passing tax reform is also very hard — which is why it hasn't happened in almost 30 years — and counting on its passage to fund current highway projects puts those and future projects at risk.

Legislators must come up with a plan that charts a course for stable highway funding while avoiding potholes and wrong turns without driving up the debt.

My colleagues at the Committee for a Responsible Federal Budget and I have written a new paper, "The Road to Sustainable Highway Spending," that lays out such a plan — one that would encourage the passage of tax reform to fund highway spending, but not count on it to keep the program solvent.

The proposal has three components:

1. Get the trust fund up to speed by paying off $25 billion of "legacy costs" from past highway commitments by reducing unnecessary farm subsidies and extending certain spending cuts from the Ryan-Murray budget deal.

2. Bridge the financing gap by ensuring that revenue and spending remain closely in line through a default policy that schedules a 9-cent gas-tax increase one year in the future and limits annual highway spending to revenue collection and interest income.

3. Create a fast lane to tax and transportation reform that uses a special process to give Congress the opportunity to utilize tax reform to find alternative revenue to replace some or all of the scheduled gas-tax increase, pay for higher infrastructure spending, or both.

The plan described above gives Congress both the power and the responsibility to decide how we should finance our infrastructure spending and how large the federal investment should be. But it ensures that every dollar of highway spending is fully paid for, and puts an end to the process of temporary gimmick-ridden patches that pave over the real problem.

We face a rocky road for highway funding because policymakers refuse to work together and make the decisions necessary to move forward. There are lots of options available; Congress must build on those ideas. In "The Road to Sustainable Highway Spending," we illustrate one potential route.

We can't afford any more "my way or the highway" attitude from lawmakers. We need collaboration and leadership. It's time to get to work.

Marc Goldwein is the senior vice president of the Committee for a Responsible Federal Budget, a nonpartisan organization committed to educating the public about issues that have significant fiscal-policy impact.

Yes, Right-to-Work Is Good for the Economy

D. Dowd Muska - May 20, 2015

Earlier this month, University of New Mexico sociologist Tamara Kay wrote a lengthy article largely devoted to attacking our organization and its research on right-to-work (RTW) laws. The piece is riddled with specious charges; here, we respond to the three most egregious ones.

First, Kay cites a flawed four-year-old study by the union-funded Economic Policy Institute to claim that "right-to-work laws have no impact on economic growth." The study says no such thing. Its subject is exclusively the alleged higher pay and benefits of forced-unionism states.

Kay compounds her mistake by blindly accepting EPI's finding that, in the professor's words, "right-to-work laws result in lower wages." Serious scholars examine the data themselves. When James Sherk, a research fellow at the Heritage Foundation, looked at EPI's methodology, he found "two major mistakes: it included improper control variables and did not account for measurement error in ... [cost-of-living] variables. These mistakes drive [EPI's] results. Correcting these mistakes shows that private-sector wages have no statistically detectable correlation with RTW laws."

Other approaches to the question lead to the same conclusion. For example, in April 2014, the U.S. Department of Commerce's Bureau of Economic Analysis released, for the first time, "a comprehensive and consistent measure of differences in the cost of living … nationwide." Lyman Stone, an economist with the Tax Foundation, calculated state disposable personal income, per capita, using the BEA adjustments. When, drawing on Stone's data, we averaged incomes in RTW and non-RTW states, incomes were again equal.

The Missouri Economic Research and Information Center computes its own cost-of-living index, derived from surveys taken by the Council for Community & Economic Research. Using the center's findings, we calculated that disposable personal income, per capita, in RTW states is 8.5 percent higher.

In addition, neither EPI nor Kay acknowledges that union dues depress "organized" workers' take-home pay.

The second key flaw in Kay's argument lies in her assessment of Oklahoma's impressive economic performance since passing a right-to-work law in 2001. Here, she continues her pattern of making vague assertions rather than supplying original research. She writes that the state "was benefiting from rising prices for oil and natural gas -- and more recently from higher levels of production -- factors that would make a significant contribution to growth." If Oklahoma's success was contingent upon hydrocarbons, why didn't New Mexico's economy, which is even more dependent on oil and natural gas, quickly grow out of the Great Recession?

Kay's focus on Oklahoma's falling manufacturing employment as a metric of right-to-work's effectiveness is similarly misleading. For decades, factories have accounted for a shrinking share of American jobs. A better measure is total private-sector job creation, which is far higher in RTW states. It's true, as Kay writes, that a simple comparison of job creation like this is not conclusive -- although the disparity has been so large for so long that the difference is highly suggestive.

In addition, the Rio Grande Foundation is conducting an ongoing analysis of job-creation announcements listed by the magazine Area Development. We are finding a consistent trend of non-RTW-state-based companies moving operations, and breaking ground on new facilities, in RTW states. Some recent examples:

• T&B Tube is moving a facility from Illinois to Indiana.
• Mercedes-Benz USA is relocating its headquarters from New Jersey to Georgia.
• Minnesota-based Polaris is building a new factory in Alabama.
• Adecco Group North America is moving its headquarters from New York to Florida.
• Brad Penn Lubricants is moving production from Pennsylvania to Indiana.
• Superior Industries International is moving its global headquarters from California to Michigan.
• American Stair Corporation is moving its operations from Illinois to Indiana.
• California-based Kaiser Permanente is building an IT campus in Georgia.
• Bechtel Corporation is moving a facility from Maryland to Virginia.
• Brad Penn Lubricants is relocating production from Pennsylvania to Indiana.

So far, we have discovered just one shift from a RTW state to a non-RTW state: a relocation of three workers from Wisconsin to Minnesota. We will publish a paper with six months of data this summer, but four months into the research, it's clear that RTW states are substantially besting their non-RTW competitors.

Kay's third major mistake is her endorsement of what's come to be known as the "blue-state model." She recommends "equipping our schools and teachers with resources." But states that are making vast public investments in education are not seeing much success. Economist Richard Vedder, who has done extensive research on the subject, can find "no positive relationship between state higher-education appropriations and economic growth."

Kay's call for "seeking out emerging and innovative industries that offer better and more permanent jobs," meanwhile, is clearly a recommendation of Robert Reich-style industrial policy -- or as we in the free-market community call it, corporate welfare. In New Mexico, the most visible (and probably most expensive) effort at "economic development" has been the attempt to cultivate a film industry. According to a 2014 study requested by the state legislature, between 2010 and 2014, taxpayers doled out $251 million in incentives, with $103.6 million in state and local tax dollars generated. So New Mexico's film subsidies generated 41 cents of tax revenue for every dollar spent.

Our organization has never claimed that a RTW law, by itself, will revive New Mexico's moribund economy. We believe it should be an item in a longer list of reforms, such as tax simplification/relief, deregulation, privatization, and school choice. It's unfortunate that Kay, a professor who claims to be committed to "good quantitative data," continues to make shaky allegations about RTW's obvious benefits, and refuses to address the Rio Grande Foundation's numerous critiques of her taxpayer-funded advocacy.

Paul Gessing is president of, and D. Dowd Muska is research director for, the Rio Grande Foundation, an independent, nonpartisan, tax-exempt research and educational organization dedicated to promoting prosperity for New Mexico based on principles of limited government, economic freedom, and individual responsibility.

Rising Resistance to EPA's Clean Power Plan

Thomas K. Lindsay - May 20, 2015

Those alarmed over growing federal encroachment on the states and their citizens found a plethora of reasons to condemn Chief Justice John Roberts's 2012 opinion upholding Obamacare. Less noticed was Roberts's practical roadmap for future state resistance to federal overreach. Roberts wrote, "In the typical case we look to the States to defend their prerogatives by adopting ‘the simple expedient of not yielding' to the federal blandishments when they do not want to embrace the federal policies as their own. The States are separate and independent sovereigns. Sometimes they have to act like it."

Three years later, states appear to be getting Roberts's message. Three weeks ago, Governor Mary Fallin (R., Okla.) issued Executive Order 2015-22, regarding Oklahoma's compliance with the EPA's Clean Power Plan (CPP), which would limit carbon-dioxide emissions from existing fossil-fuel-fired power plants. Fallin labels the CPP a set of regulations that seeks "to go beyond" the EPA's "traditional authority and regulate all aspects of state energy systems." Arguing that "the EPA has exceeded its authority under the Clean Air Act" (the 1970 federal law from which EPA claims authority for the CPP), the executive order prohibits Oklahoma's Department of Environmental Quality from participating in any manner with the development of plans to implement CPP regulations in the state.

Fallin goes further. Under the proposed CPP, states are asked to submit State Implementation Plans (SIPs) "to ensure full compliance with the new federal mandates." If the CPP is adopted this summer, as is anticipated, Fallin pledges in the executive order that she "will not submit" a SIP "to ensure Oklahoma's compliance with such a clear overreach of federal authority."

The Oklahoma governor's bold action did not take place in a vacuum. Far from it. Nine days after Fallin issued her executive order, Texas governor Greg Abbott flew to Washington to meet with Senate Majority Leader Mitch McConnell and Texas senators John Cornyn and Ted Cruz to discuss Abbott's forecast of the CPP's "grave consequences for the State of Texas." Abbott's press advisory states that "The EPA's newest suite of rules, led by the Clean Power Plan, seeks unprecedented control over the State's energy mix that will certainly result in higher energy prices for Texans ... killing jobs and stagnating Texas' unprecedented economic growth."

While Abbott was in Washington, lawmakers in the Texas House of Representatives were considering HB 3590, a bill that would require Texas, like Oklahoma, to "just say no" to EPA's request that it submit a SIP for the CPP. The rationale for state resistance is summarized by my Texas Public Policy Foundation colleague Kathleen Hartnett White: "The EPA's attempt to commandeer state governments to mandate what the EPA itself has no authority to mandate should be resisted as soon as possible on every level. Hopefully, federal courts will stop the clock on the EPA's impossible timelines until full judicial review is complete."

Texas and Oklahoma are not alone. According to one survey, there are today 32 states "in which elected officials (e.g., legislatures, governors, and/or attorneys general) have expressed firm opposition" to the CPP.

This flurry of state activity supports Majority Leader McConnell's March 19 letter to the National Governor's Association, about which I have written here. The most toxic effect of the CPP, according to McConnell, is the precedent that SIPs would establish, "allowing the EPA to wrest control of a state's energy policy if they or any other federal agency become dissatisfied" with a state's progress in cutting emissions. The EPA, McConnell concludes, will view state submission of a SIP as providing the agency with "broad new authority to control the state's energy future."

These uprisings in the states are having their effect on the national legislature. Just last Wednesday, several U.S. senators proposed legislation to combat the EPA's latest attempt to reduce greenhouse gases at existing power plants. Senator Shelley Moore Capito (R., W.V.), who heads the Senate Environment and Public Works Committee's Clean Air and Nuclear Safety Subcommittee, along with six other senators, introduced the Affordable Reliable Energy Now Act (ARENA). In a press advisory, Capito writes, "President Obama's misguided ‘Clean Power Plan' threatens to drastically reduce coal-related jobs, increase energy prices and reduce reliability. After carefully considering the economic and legal implications of this unprecedented proposal, the need for action is clear."

ARENA would extend the CPP's compliance deadlines, including SIP deadlines, pending review by federal courts. It would ensure that no state could be forced to implement a SIP or a Federal Implementation Plan if that state's governor concludes that so doing would harm the state's economy, lessen the reliability of the state's electricity system, or raise consumers' electricity bills. It also would prohibit the EPA from withholding federal highway funds from states found not to be in compliance with the CPP. Finally, and perhaps most importantly, the proposed bill would mandate that the EPA report to Congress the amount of greenhouse-gas emissions that the CPP is forecast to reduce as well as the methodology grounding the EPA's conclusions. This last provision offers a desperately needed reality check: As McConnell states in his letter to the governors, "the EPA admits that the 'climate' benefits of the CPP cannot be quantified." Moreover, the EPA has "refused to estimate the impact [the CPP] would have on global temperatures or sea levels."

One can only wonder at Chief Justice Roberts's reaction to these state efforts to "act like" the "separate and independent sovereigns" that the Constitution intends them to be. One can also wonder whether Roberts's counsel to states was sparked by what Founding Father John Dickinson observed in 1788: "The government of each state is, and is to be, sovereign and supreme in all matters that relate to each state only. It is to be subordinate barely in those matters that relate to the whole; and it will be their own faults, if the several states suffer the federal sovereignty to interfere in the things of their respective jurisdictions" (emphasis supplied).

These recent state efforts suggest that the EPA's unconstitutional encroachments on the states and their citizens will not prevail through the states' "own faults." Across the country, a storm is rising in opposition to federal overreach. This opposition will succeed if states continue to once again "act like" states, taking it upon themselves to reclaim our Constitution and, with it, our liberties.

Thomas K. Lindsay directs the Centers for Tenth Amendment Action and Higher Education at the Texas Public Policy Foundation and is editor of He was deputy chairman of the National Endowment for the Humanities under George W. Bush.

State Higher Ed Cuts Hurt Students, the Economy

Michael Mitchell - May 19, 2015

As students don caps and gowns for college graduations across the country this month, it's a good time to take stock of state higher-education systems — and unfortunately, the news isn't all good.

If we're to build the skilled workforce we need to attract businesses and compete for the jobs of the future, it's critical that public colleges and universities are both high-quality and affordable. Yet recent state funding cuts have driven up tuition and, in some cases, lowered the quality of education that students receive at our public colleges and universities.

A new report that I co-authored shows that the average state has cut per-student spending by 20 percent since 2008, at the onset of the Great Recession. That's a cut of about $1,800 per student.

Many states made modest progress this year in restoring the cuts they made during and after the recession. But those increases were slight, averaging just 3.9 percent nationally. That's not nearly enough to rebuild from the deep cuts that followed the recession.

Even worse, 13 states made further cuts to higher education. And three of those states — Kentucky, Oklahoma, and West Virginia — cut their per-student higher-education funding for both of the last two years.

In the face of these cuts, colleges and universities across the states have had to make tough decisions. Many have been forced to raise tuition, cut spending, or both.

Many of these cuts have come at the expense of the schools' central mission. Schools have eliminated faculty positions, cut courses or increased class sizes, and in some cases consolidated or eliminated whole programs or departments.

State higher-education cuts have also hit families in their pocketbooks. Annual published tuition (the so-called "sticker price") at four-year public colleges has risen by $2,068, or 29 percent, since the 2007-08 school year.

Higher tuition exacerbates inequality and puts college out of reach for many hard-working kids from low- and modest-income families. Research shows that rising tuition may deter low-income students from enrolling in college and pushes high-achieving, low-income students toward less selective institutions, diminishing their future earning potential.

These dramatic increases in the college sticker price have also contributed to rising student-debt burdens, which make it hard for many graduates to get ahead after college. Student debt equals $1.16 trillion — well above what households currently hold in either credit-card debt or in car loans. Payment on that borrowing can be a crushing burden that forces graduates to put off investments like taking out a mortgage for a home, saving for retirement, or even starting a business.

Those trends should warn policymakers of the long-term repercussions that these funding cuts may have. High-quality colleges and universities produce the highly skilled and well-educated workers that businesses need to thrive and grow. Shortchanging education now will make states — and our country — less competitive in the future.

Some states have opted to enact costly tax breaks for the wealthy or large corporations rather than boost their investments in higher education. These tax cuts are often sold as a recipe for economic growth. But tax cuts can prevent investments in higher education that increase access to college, improve graduation rates, and reduce student debt, causing the economy to suffer in the long run.

It's time now to renew investment in higher education to promote college affordability and quality. Strengthening state investment in higher education will require policymakers to make the right tax and budget choices over the coming years. Doing so is critical for the futures of students, graduates, and their families.

Michael Mitchell is a policy analyst with the Center on Budget and Policy Priorities' State Fiscal Policy division.

Robert VerBruggen - May 18, 2015

Texas has a special place in the prison-reform debate. It's often brought out as an example of how deep-red states can have success in reducing incarceration. See, most recently, this piece from Ken Cuccinelli.

It's certainly true that both incarceration and crime have fallen in Texas in recent years. It also seems that policy efforts starting in 2007 managed to reduce recidivism and save money. But to get a more nuanced picture, I downloaded an assortment of numbers from the Justice Department.

Specifically, I grabbed incarceration, violent crime, property crime, and murder rates for both Texas and the U.S. as a whole. Then, I divided the Texas rates by the national rates — this gives us a sense of what happened in Texas that was not happening in the country overall. Here are the results:

Bear in mind that the numbers here are ratios. For example, Texas's incarceration rate actually increased somewhat during the 1980s, but the nationwide rate rose much faster, so it shows up here as a decline. Regardless of how you measure, though, Texas's incarceration explosion in the early-to-mid 1990s is nothing short of astounding. In just a few years, it changed from a state with relatively low incarceration despite high crime, into a state with extremely high incarceration and reduced crime. (Some of us may see a connection there.)

A few more interesting tidbits. First of all, Texas's incarceration rate actually began to fall at the turn of the century, well before the state's recidivism initiative (which no doubt helped to sustain the decline). Second, at this point, Texas was extraordinary even in a country with high incarceration rates all over: In 2000, it had an incarceration rate 62 percent above the national average, despite crime rates that were nowhere near that high. And third, Texas actually remained exceptional in this regard. In 2012, its incarceration rate was 28 percent above the national average, although its violent- and property-crime rates were less high and its murder rate had been below the national average for two years.

Texas is definitely showing how a state with very high incarceration can back off a bit without paying the price in crime. That's incredibly valuable. But it's less clear what the Lone Star State's experience means for more, dare I say it, normal states.

Robert VerBruggen is editor of RealClearPolicy. Twitter: @RAVerBruggen

FDA to Seniors: Food or Blindness?

Craig H. Kliger - May 18, 2015

In his famous novel Catch-22, Joseph Heller (spoiler alert) concocted a rule that appeared to allow combat pilots of questionable sanity to be grounded. However, because the rule also required pilots to ask for that reprieve, they in reality couldn't escape their duties, because making such a request would suggest presence of mind.

Apparently borrowing a page from Heller's book, the Food and Drug Administration has issued proposed rules that continue to allow the "repackaging" of pharmaceuticals, yet make it nearly impossible to use key repackaged drugs. Put simply, FDA's proposed "beyond use dates" (time from preparation to expiration) are unworkable for some important medications.

"Repackaging" is dividing a drug into smaller doses under sterile conditions — which are vitally important for, say, something injected into an eye, because eyes can be lost if contamination exists. Of particular interest here, the drug Avastin, originally approved to treat cancer, comes in large doses and requires repackaging to be used in treating the blinding disease wet macular degeneration (typically in seniors) as an alternative to more expensive drugs called Lucentis and Eylea.

We are not talking a trivial price difference. Avastin runs $50 a dose and Lucentis and Eyelea around $2,000. So under Medicare, a patient's 20 percent out-of-pocket expense is $10 or $400 respectively. Furthermore, such amounts represent just one of a series of 6 to 12 doses given monthly or every other month. Ignoring the huge potential fiscal impact on the Medicare program itself (which pays the remaining 80 percent), that difference could mean making a choice between buying food or going blind for those with limited incomes.

The FDA's rules would make it much more difficult to use Avastin. In the best case scenario (that is not even guaranteed under the wording), the proposed "beyond use date" is five days, and this starts when the compounding pharmacy (called an "outsourcing facility") opens the manufacturer's vial. Preparation is not instantaneous. Shipping, particularly to more rural areas, eats even more of this time. Long story short, this just won't result in a usable supply of the drug.

The rules stem from the 2013 "Drug Quality and Security Act," a response to a 2012 tragedy where a Massachusetts-based compounding pharmacy allegedly distributed contaminated medications that resulted in numerous cases of fungal meningitis and many deaths. As I wrote just before it passed, others and I feared the law did not sufficiently protect repackaged drugs — a fear that has apparently come to pass.

Key to the 2013 law is a provision requiring that drug compounding comply with the standards of the United States Pharmacopoeia (USP). For those who don't follow the esoterica of compounding, the pertinent chapter is affectionately known as "USP 797" in pharmacy circles. I link to it so you know it exists (access requires payment), but in general, it says "don't do stupid things" and explains what those might be.

It is fairly well accepted that contaminations are almost always traceable to breaches of USP 797 (see, for example, a case from 2011 involving Avastin). So it isn't rocket science to conclude that following its standards is likely our best hope to prevent future disasters, rather than layering on additional rules, and the FDA's proposal seems to ignore a vast body of existing experience with Avastin regarding safety and efficacy.

First off, contamination events have been extraordinarily rare even without the proposed regulations' "beyond use dates." According to the 2012 Medicare data I wrote about earlier, and using the reasonable assumption that 50 percent of eye injections were Avastin, approximately 1.3 million such doses were given under that program, the vast majority of which were compounded. A chart from the Pew Charitable Trust, meanwhile, shows a range of 5-45 eye complications traceable to compounding in most years from 2009-2013 (one episode had an unknown number). Yes, the number should be zero, and it may be higher than the chart suggests because of underreporting — but the fact it would require going to at least the fifth decimal place to record the percentage seems strong evidence of how uncommon problems have been. Furthermore, we might expect the numbers to be even lower in the future, since the FDA has limited repackaging to special "outsourcing facilites" created by the new law that will be subject to direct FDA regulation.

In addition, some have argued longer storage times are correlated with drug degradation. However, clinicians have found adequate clinical responses with Avastin under existing protocols, undermining that concern.

Lastly, no ophthalmologist would intentionally use a drug he or she thought would harm a patient. Working with an outsourcing facility that one trusts based on reputation and other factors is an ethical imperative.

So why might the FDA go this route? Consider that it works far more with drug manufacturers than with consumers and has a vested interest in the perceived value of one of its major functions: approving uses of drugs.

Unique here is the somewhat inside-baseball fact that the makers of Avastin once considered using it for eye treatment, but concluded it was too large a molecule. So they successfully put a small part of that molecule (its "active" fragment) through the (very complex and expensive) FDA approval process, creating Lucentis — only to have it discovered after the fact that Avastin worked essentially as well "off label" (meaning it has no formal FDA indication) at a vastly lower cost. But to achieve that lower cost requires dividing the contents of a manufacturer's vial into many small doses through repackaging.

So making repackaged Avastin unavailable via overly complex use standards has the effect of making Lucentis the only option and restoring the value of FDA approval of substitutable drugs. Draw your own conclusions, but FDA's appointments to its recently created Pharmacy Compounding Advisory Committee — which has an ophthalmic pharmaceutical company representative (who happens to work for the maker of Eylea) but not an ophthalmologist with actual experience using compounded drugs — seems to support that analysis.

Whatever its motivation, the FDA — which is taking comments on the rules through May 20 — should not create unwarranted roadblocks to the use of an important therapeutic option. I bet Heller would have backed me up when I say we need to restore some sanity to this process.

Craig H. Kliger is an ophthalmologist and executive vice president of the California Academy of Eye Physicians and Surgeons.

A Bipartisan Approach to Energy

Derrick Freeman - May 15, 2015

The infrastructure debate in Washington usually centers on planes, trains, and automobiles. However, President Obama recently highlighted America's other great infrastructure challenge — modernizing the way we move kilowatts to power our homes and businesses — by unveiling the first Quadrennial Energy Review (QER). Developed by the U.S. Department of Energy, the QER is a strategic plan for upgrading the nation's energy systems — the vast network of storage, distribution, and transmission facilities that power the U.S. economy. Based on similar exercises at the Pentagon and the State Department, the QER provides a new roadmap for policymakers struggling to understand America's fast-changing energy landscape.

The last comprehensive national energy report was published nearly 14 years ago — well before two key developments that have transformed America's energy landscape: the shale gas and oil boom and the rapid expansion of wind and solar energy. While the QER is not a comprehensive document, it does examine, and calls for measures to improve, America's energy backbone.

With the QER, Congress has an opportunity to move beyond the distracting and highly partisan Keystone XL pipeline debate and focus instead on urgently needed improvements to America's aging energy systems.

Two key Republican lawmakers, House Energy and Commerce Committee chairman Fred Upton (R., Mich.) and Energy and Power Subcommittee chairman Ed Whitfield (R., Ky.), offered an encouraging response to the White House announcement: "We need a modern and resilient energy infrastructure that will meet tomorrow's challenges. We are reviewing the administration's full recommendations, but we have already found common ground where we will work together."

America's energy infrastructure faces several challenges. One is simply to connect the new geography of shale oil and gas development with U.S. consumers. Another is to upgrade the electrical grid to accommodate more "distributed" energy from wind and solar. A third is to protect our energy systems from potential cyber attacks.

The last several years have provided many examples of the vulnerability of America's energy infrastructure. Most dramatic were the power outages and havoc wreaked by Superstorm Sandy on the Eastern Seaboard, where tens of millions of people were left without power for days and businesses suffered devastating losses.

Energy bottlenecks are also increasingly common. For example, a crude-oil backup at Cushing, Okla., due to limited pipeline capacity to transport to Gulf Coast refineries, depressed the price of West Texas oil, resulting in big losses to the local and regional economies.

The QER addresses these significant problems by calling for improved efficiencies in siting and permitting of transmission, storage and distribution (TS&D) infrastructure, and enhanced development of a modern electrical grid to improve electricity reliability.

Moreover, the changing geography of U.S. oil and gas production highlights the inadequacies of our existing energy infrastructure. North Dakota's Bakken shale formations produce 1 million barrels of oil per day, and about 60 percent is moved by rail going to the East and West Coasts. This has created congestion on the rail network, with crude oil sharing limited space with agricultural and other commodity shipments. To alleviate the bottlenecks, the QER proposes a new grant program at the Department of Transportation devoted to improving transportation links.

Rising consumer demand also is placing stress on our energy infrastructure. The just-ended record cold winter in New England produced not only enormous snow banks, but also big spikes in demand for electricity and heating. Thanks mostly to a lack of pipeline capacity for natural gas, New England consumers have some of the highest energy bills in the country. Here again the QER's call for increased efficiency in the siting and permitting of TS&D infrastructure would be very helpful.

The increase in renewable electricity production also has placed new demands on infrastructure. The QER reports, "Solar electricity generation has increased 2-fold since 2008, and electricity generation from wind energy has more than tripled." Before you can introduce lots of wind turbines and solar energy, you first need a better grid and more energy storage to fully utilize these resources.  

While the Obama Administration did not issue a comprehensive energy strategy with the QER, it did deliver a smart and digestible plan that is narrowly focused on modernizing our critical energy infrastructure. This should enable Democrats and Republicans in Congress to find common ground on important aspects of energy policy and start building the trust necessary to take on more difficult issues. Ultimately, both parties will have to resolve the biggest sticking point of all: How to capitalize on American's new energy abundance, while also reducing greenhouse gas emissions?

In the meantime, modernizing the nation's energy infrastructure will advance both goals by connecting shale energy to consumers and integrating solar and wind power into the grid.

Derrick Freeman is a senior fellow and director of Energy Innovation Project at the Progressive Policy Institute.

Illinois Pension Debt Blew Up Chicago's Credit

Cezary Podkul, ProPublica - May 15, 2015

What happens when you've been kicking the fiscal can down the road for years, but the road suddenly hits a dead end? That's what Chicago – and the state of Illinois – are about to find out.

Chicago's immediate problem is yesterday's credit downgrade by Moody's Investors Services, which turned its debt to junk and could force the city to immediately come up with $2.2 billion to satisfy debts and other obligations.

It's not clear how – or if – the city could come up with that money.

When big cities have had debt crises – such as Detroit's recent problems or New York City's epic problems in the 1970s – states typically rode to the rescue in one way or another. But Illinois, which has the lowest credit rating of any state in the nation, says it can't help the stricken city.

The downgrade follows a Friday decision by the Illinois Supreme Court, which invalidated state limits on cost-of-living adjustments to state pensioners. The limits were part of a slate of reforms signed into law in 2013 by then-Gov. Pat Quinn, a Democrat, to deal with underfunded pensions.

Moody's said the court decision was key to its downgrade because the city has been hoping to dig out of its own financial hole by reducing cost-of-living adjustments, which typically raise the cost of pensions by close to 50 percent.

Chicago's predicament actually has its roots in a 2003 decision by Illinois to kick the pension can down the road – by borrowing money to fund pensions rather than trying to get the benefits reduced or to stepping up payments to make them financially sound.

In the ultimate can kick, the state borrowed a whopping $10 billion – the biggest bond issue in its history – on the premise that investing the proceeds would earn more than the interest on the bonds.

Unfortunately for Illinois taxpayers, the pension funds' investments, hurt badly by the financial market meltdown of 2008–2009, have earned less than expected.

Even worse, the state gets to deduct interest and principal on the bonds – currently some $500 million to $600 million a year – from the contributions it makes to the pension funds.

The net effect: The funds are worse rather than better off as a result of the pension bonds. Unfunded liabilities swelled from $43 billion when the bonds were sold to $86 billion by 2010, state data show.

Despite that grim history, Illinois borrowed another $7.2 billion for pensions in 2010 and 2011. By the time Quinn signed reforms in 2013, the state was in major trouble, with unfunded liabilities of nearly $100 billion – about $7,500 per resident.

Illinois isn't alone in turning to pension bonds.

In 1997, New Jersey tried to borrow its way out of pension fund problems with debts that are still being repaid. The California city of San Bernardino sought bankruptcy protection in 2012 under the weight of its pension costs, pension obligation bonds and other debts.

"The borrowing is taking the pressure off politicians from actually facing the actual reforms that need to happen on these pension systems," said Ted Dabrowski, vice president of policy at the Illinois Policy Institute in Chicago. "You've got a situation where the system is no longer sustainable, whether it's New Jersey or Illinois."

But Chicago and Illinois are the biggest examples of what happens when you can no longer kick the pension-cost can down the road. They are unlikely to be the last examples.

This piece originally appeared at ProPublica, a Pulitzer Prize-winning investigative newsroom. Sign up for their newsletter.

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