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Gabriela Calderon de Burgos

Since Javier Milei not only made the campaign for Argentina’s presidency a three‐​horse race but became the likeliest to occupy the Casa Rosada this coming December, there has been much reporting in the international press about dollarization, his frontline proposal. On this topic, there seems to be plenty of confusion, and so I’d like to recommend what I consider are essential readings to clear the fog.

Let’s begin with the books. Central bankers and their fans tend to be allergic to the very idea of dollarization. By and large, they have not been trained on the topic. For a quick monetary history lesson, I recommend Nobel laureate F.A. Hayek’s classic The Denationalisation of Money (originally published in 1976). This will give you a brief background on the history of money and central banking and the philosophy behind what makes money universally accepted.

If you want to jump straight into dollarization, the best and most practical book is Manuel Hinds’ Playing Monopoly with the Devil: Dollarization and Domestic Currencies in Developing Countries (2006). Hinds explained to me that he did not intend to write a book on dollarization, but merely a practical manual to persuade his fellow Salvadorans that it was the right monetary regime for El Salvador when he was Minister of Finance. In the end, he ended up putting together a clever way of explaining why national currencies in developing countries fail to live up to their promises.

One should also view the recent online event Cato held with Hinds and Emilio Ocampo, Milei’s main adviser on dollarization.

After this, you can follow up with Hinds and Ben Steill’s Money, Markets and Sovereignty (2009) where, in offering a superb defense of economic liberalism, they explain how eras of liberal trade have coincided with a universal monetary standard (a.k.a., the US dollar).

There has been a lot of talk in recent years about the supposedly imminent fall of the dollar’s reign. For this, it is worth reading Ronald McKinnon’s The Unloved Dollar Standard: From Bretton Woods to the Rise of China (2012). He explains how the US dollar came to be the international currency it is today and how this standard facilitates international trade. I found this book helpful in the dollarization discussion in Ecuador because it demolishes one of the most enduring macroeconomic fallacies: that the exchange rate should be used to correct trade imbalances across countries.

To understand why dollarization is essential for a developing country with weak institutions, read Steve Hanke’s essay, “Reflections on the Rule of Law and Dollarization in Ecuador” (2015). More recently, but along the same lines, Cato published “Money, Stability and Free Societies” (2020), also by Hanke. It is worth quoting the beginning of this essay to get a taste of why this matters so much:

“Monetary instability poses a threat to free societies. Indeed, currency instability, banking crises, soaring inflation, sovereign debt defaults, and economic booms and busts all have a common source: monetary instability. Furthermore, all these ills induced by monetary instability bring with them calls for policy changes, many of which threaten free societies. One who understood this simple fact was Karl Schiller, who was the German Finance Minister from 1966 until 1972. Schiller’s mantra was clear and uncompromising: ‘Stability is not everything, but without stability, everything is nothing’ (Marsh 1992: 30). Well, Schiller’s mantra is my mantra.”

In fact, since at least the 1990s, Cato has been publishing some of the most important studies regarding dollarization. I especially recommend the essays in the Cato Journal Winter 1999: “A Monetary Constitution for Argentina: Rules for Dollarization” by Steve H. Hanke and Kurt Schuler; and “Lessons from the Monetary Experience of Panama: A Dollar Economy with Financial Integration” by Jose Luis Moreno‐​Villalaz. This last paper explains why a dollarized economy with an internationally integrated banking system is far superior to the national lender‐​of‐​last resort model for many developing countries.

Also in 1999, Cato published a paper by Hanke (“A Dollarization Blueprint for Argentina”). Since Hanke’s and Shuler’s proposal, the Argentinean peso has collapsed twice (2001 and 2018), and three times if you count the peso’s ongoing freefall (it just passed the 1,000 pesos per dollar barrier).

In 2005, Cato Journal published “Some Theory and History of Dollarization” (2005) by Schuler. More recently, “Dollarization: The Case of Zimbabwe” (2011) by Joseph Noko explained how dollarization played out in Zimbabwe. And in regard to the constant debate surrounding dollarization in Ecuador, Cato’s Senior Fellow Lawrence White explained why “A Strong Currency is No Reason to Keep Tariffs High” (2019).

Finally, my colleague Daniel Raisbeck and I wrote a policy brief on why “Argentina should dollarize, pronto” and several blog posts reacting to the most common criticisms leveled at the proposal.

Most recently, the Argentineans Nicolás Cachanosky and Emilio Ocampo, have published several studies that might be of interest to those wanting to study dollarization and its effects. Among these are: “Can dollarization constrain a populist leader? The Case of Rafael Correa in Ecuador” (Nicolás Cachanosky, Alexander W. Salter and Ignacio Savanti); “Dollarization Dynamics: A Comment”; “Lessons from Dollarization in Latin America in the 21st Century” (Nicolás Cachanosky, Emilio Ocampo, Alexander William Salter); and “Synthetic Control Analysis of Ecuador’s Dollarization” (Nicolás Cachanosky, Emilio Ocampo, Karla Hernández, John Ramseur). These are academic publications, but Cachanosky is also involved in the public discussion of dollarization through his Substack, which you can read here.

Jeffrey A. Singer

In April 2022, when the Food and Drug Administration announced plans to ban the sale of menthol cigarettes and cigars, I blogged about it, explaining why it was a bad idea. Later, in response to the agency’s request for public comments on the proposal, I submitted these comments, which stated the agency’s war on menthol tobacco is not evidence‐​based and warned that a ban would fuel a black market and worsen criminal justice inequities.

Alas, my warnings went unheeded. Last Friday, the FDA formally submitted its proposed ban to the Office of Management and Budget. The OMB can make final tweaks to the proposed rule, but this is one of the last steps the FDA must take before the rule goes into effect. The Biden administration supports the ban and will likely encourage the OMB to sign off.

In my comments, I stated that, according to the National Survey on Drug Use and Health, in 2020, 81 percent of Black and 51 percent of Hispanic smokers preferred menthol‐​flavored cigarettes. While the proposed rule is intended to reduce tobacco‐​related health outcome disparities in Black and Brown communities, a closer look at the data on menthol cigarettes, as well as the European Union’s experience with a menthol ban, suggest that the proposed product standard will not work, and will likely foster a black market. Perhaps even worse, the ban might further aggravate criminal justice inequities.

Interestingly, researchers from Yale and Duke universities reported on what is already happening where states have banned menthol tobacco just last week in the Journal of the American Medical Association:

Synthetic chemicals that mimic menthol’s cooling sensations are being added to newly introduced “non‐​menthol” cigarettes in states that have banned the additive. The additives appear to be an effort to circumvent an expected federal ban of menthol cigarettes by the FDA later this year. Already, California and Massachusetts have enacted laws banning sales of menthol cigarettes.

In 2011, researchers conducted a prospective cohort study with over 85,000 participants in twele southern states. They concluded: “The findings suggest that menthol cigarettes are no more, and perhaps less, harmful than non‐​menthol cigarettes.”

Interestingly, research conducted by Dr. Brian Rostron of the FDA Center for Tobacco Products and reported in the October 2012 journal Nicotine and Tobacco Research concluded: “We found evidence of lower cancer mortality risk among menthol smokers compared with non‐​menthol smokers among smokers at ages 50 and over in the U.S. population.”

A study published in the Journal of the National Cancer Institute in April 2022, involving a large cohort of African Americans and Whites in twelve southern states recruited between 2002 and 2009, found that menthol smokers had no greater difficulty quitting tobacco than non‐​menthol smokers. Perhaps more significantly, the researchers performed a meta‐​analysis of all the research on menthol cigarettes and cancer risk and concluded, “A significantly lower risk [12 percent lower] of lung cancer is seen among menthol smokers.”

A January 2020 study by the Reason Foundation found states with the highest menthol cigarette consumption had the lowest youth smoking rates.

If the FDA is basing its ban on concerns about teen smoking, the agency’s regulators should know that the US Centers for Disease Control and Prevention reported in March 2022 that 60 percent of teen smokers choose non‐​menthol cigarettes.

Menthol smokers tend to smoke fewer cigarettes per day. This might help partially explain the lower lung cancer mortality rate among menthol cigarette smokers.

The EU banned menthol cigarettes in 2020. A recent EU survey finds 40 percent of menthol smokers switched to non‐​menthol, and only 8 percent quit smoking. And menthol smokers have come up with workarounds, such as “mentholizing” recessed cigarette filters and menthol flavor inserts, or have added menthol to their tobacco.

More importantly, however, 13 percent reported getting menthol cigarettes from “other sources.” A black market for smuggled menthol cigarettes has emerged. A significant source is Belarus, where menthol brands such as Minsk, Fest, and Queen are smuggled into EU countries. The UK press reported that such “illicit whites,” as they are called, are smuggled into the country by gangs and can be purchased “under the counter” from small British tobacconists for the right price.

But worst of all, banning menthol cigarettes can exacerbate racial and ethnic inequities in law enforcement and the criminal justice system.

As I wrote to the FDA in my public comments on the proposed rule:

Prohibition fuels an underground market where peaceful, voluntary transactions become crimes. It gives law enforcement another reason to interact with non‐​violent people who commit these victimless crimes. Like everyone else, police respond to incentives. They are rewarded by arrests and convictions. Low‐​level street dealers in illegal substances are “low‐​hanging fruit.” They are much easier to find in dense inner cities and less dangerous to confront than violent felons. Law enforcement tends to scour racial or ethnic minority communities for victimless crimes because they are “easy pickings.” That’s how we wind up with African Americans arrested for marijuana violations four times as often as whites, even though both groups use marijuana roughly equally.

And never forget Eric Garner. New York City’s exorbitant taxes on cigarette packages generated an underground market in untaxed individual cigarettes, called “loosies.” In 2014, police infamously encountered 43‐​year‐​old Eric Garner selling loosies on a street corner, and a policeman’s chokehold led to his death as he repeated, “I can’t breathe.” This happened without a menthol ban. With menthol cigarettes more popular among Blacks and Hispanics, expect police to focus their attention on minority communities.

The last thing this country needs is yet another reason for law enforcement to engage with minorities they suspect are committing the victimless crime of selling menthol cigarettes in the black market.

Sadly, it appears the menthol‐​ban train has already left the station. This means more business opportunities for purveyors of black market products—ranging from illicit drugs to cigars and cigarettes. And if history teaches us anything, we can expect to witness many harmful unintended consequences.

Michael F. Cannon

I am happy to announce the release of my latest book, Recovery: A Guide to Reforming the U.S. Health Sector.

If I have any notoriety in this crazy world, it is for the work I did trying to stop ObamaCare. For my pains, The New Republic called me “ObamaCare’s single most relentless antagonist.” Vox called me, “The man who could bring down ObamaCare.” The Week called me “ObamaCare’s fiercest critic.” The New York Post called me, “ObamaCare’s Enemy No. 1.” You get the idea. Most of the editors who wrote those things did not mean them as a compliment.

Unfortunately, in the United States’ hyper‐​partisan political climate, this means that half of the country will be open to my new book while the other half will not. Doubly unfortunate, most people who work in health policy are in the second group.

Reader, if you are in that second group, I beseech you: give Recovery a chance. There may be more for you in this book than you might think. Recovery is fundamentally about making health care more universal and restoring your right to make your health decisions.

How so? Let’s start with a chart from the book. It may be the most important chart you will ever see in health policy.

The following chart shows the results of a series of experiments that several employers ran. An amazing thing happened in those experiments. Something you almost never see happening in health care: prices fell.

In these studies, employers tested an innovation that consistently and dramatically reduced health care prices, in a very short period, across a wide range of services. Those services included:

MRI scans
CT scans
Knee and shoulder arthroscopy
Cataract removal
Hip and knee replacement
Colonoscopy
Lab tests

For every one of these medical services, the innovation these employers tested caused prices to fall immediately and significantly—without denying medical care to anyone. Everyone got the care they needed. The innovation was even able to overcome the market power of monopolistic hospitals and get them to reduce their prices, too. The academics who published the results, including health economist James C. Robinson of the University of California‐​Berkeley, believe this innovation could bring prices down even more than it did in these experiments.

For we supporters of universal health care, this is the best news you’ve ever heard and the most important chart you’ve ever seen. If you want health care to be universal, what you want more than anything is falling medical prices. Falling prices make health care more universal three times over:

They bring health care and health insurance within the reach of those who previously could not afford them. It thereby shrinks the number of people who cannot afford the medical care they need.
They reduce the cost of helping people who still cannot afford the care they need: that group is now smaller and health care prices are lower.
They leave the rest of us with more resources, because we too benefit from lower medical prices, making it easier for us to help that now‐​smaller group of people.

If universal health care is your goal, falling prices—this chart—should be your obsession. It was not government programs that made food so universal that we are now keeping a record 8 billion humans alive on this planet. It was first and foremost falling food prices.

As always, there’s both good news and bad news here. The good news is someone discovered an innovation capable of overcoming the market power of monopolist providers to reduce prices to make health care more universal without denying care to anyone. The bad news is that this innovation is…giving people less health insurance.

The employers and insurers who ran these experiments noticed three things.

Providers charged wildly varying prices for certain services. Hospitals charged anywhere from $12,000 to $60,000 for hip and knee replacements, for example.
Those higher prices did not correlate with quality. They were pure exercises of hospitals’ market power.
For all their vaunted purchasing power, not even yuuuge insurance companies (e.g., Aetna) and employers (e.g., the State of California) could, for the life of them, negotiate those prices down.

The innovation those insurers and employers decided to test is something health wonks call a “reference price” or a “reverse deductible.” Those are needlessly dorky terms, though. All they mean is that the insurers told patients they could go to any hospital they wished for hip or knee replacements but the insurer would only pay $30,000. If their hospital charged $60,000, the patient would be on the hook for 100 percent of the difference. In other words, this innovation gave patients less insurance than they had before.

It therefore changed whose money was at stake. Instead of the insurance company being on the hook for prices in excess of $30,000, it was the patient’s money on the line. That change made patients care a lot more about prices than they do when they’re spending someone else’s money.

As a result of that one simple change, all sorts of amazing things happened. Things that definitely do not happen in health care. Because health care is a special sector of the economy. Where these things. Definitely. Do. Not. Happen.

Patients started demanding price information from hospitals.
Hospitals furnished patients with clear, useful price information. (Transparency!)
Patients responded to high prices by changing their behavior. Patients increased the market share of low‐​price hospitals from one‐​half to two‐​thirds.
Hospitals responded by reducing the prices. (*Taps the chart.*) The chart shows average price reductions but high‐​price hospitals reduced prices for hip and knee replacements by 37 percent—about $16,000 per procedure—over a two‐​year period. Some hospitals approached insurance companies about reopening their contracts so they could reduce their prices.

Price‐​sensitive consumers did what large employers and insurance companies—and for that matter, the Department of Justice—could not: they broke the monopolies. All without denying care to anyone.

There’s an important lesson here. In the United States, the pursuit of universal health care has largely taken the shape of having the government encourage more and more health insurance coverage. All sorts of government policies push in that direction. The tax exclusion for employer‐​sponsored health insurance. State and federal laws requiring health insurance purchasers to buy “essential” types of coverage that they might otherwise not. Medicare. Medicaid. CHIP. HIPAA. ObamaCare. And all the while, we advocates of universal health care wonder why prices keep soaring.

Note that the experiments in this chart were pure austerity. All they did was take something away from patients: coverage of the cost of these services in excess of the reference prices. (Sorry, wonky, I know.) And yet, no one lost access to care. Everyone was fine. (Well, not everyone. Inefficient, price‐​gouging, monopolistic providers lost market share. That’s a feature, not a bug.) The price reductions even reduced the cost of health insurance for every one of these patients’ coworkers.

Recovery does not advocate austerity or taking coverage away from consumers. It does not propose to have government mandate “This One Successful Innovation We Found.” Such a mandate wouldn’t work, anyway. The health care industry would hate it and spend tons of money lobbying against it. (Remember, this is the industry that for decades has led all other industries in lobbying expenditures.) The benefits would not be salient to workers and consumers, who would therefore be susceptible to industry fear‐​mongering.

Recovery proposes to make health care more universal by letting consumers control the $4.7 trillion sloshing around in our high‐​priced, wasteful U.S. health sector. That way, consumers can choose whether this type of insurance feature is right for them. It would do so by using traditionally Democratic “public option” principles to reform Medicare—which would put an end to how the pharmaceutical, hospital, and insurance industries have captured that program. And by discarding the worst parts and keeping the best parts of tax‐​free health savings accounts.

Recovery further proposes to make health care more universal by eliminating barriers to proven ways of reducing the problem of preexisting conditions. And by eliminating barriers to nurse practitioners and other mid‐​level clinicians. And by reducing barriers to women exercising their right to choose contraception. And by eliminating unwise medical malpractice liability “reforms.” And by improving care for veterans…

If you support universal health care and the right of patients to make their own health decisions, there might be more for you in Recovery than you might think. I hope you’ll give it a look.

Justin Logan

Like many Americans, since last Saturday I’ve been watching events in Israel with sorrow and horror. I woke up at 5 am for some reason, picked up my phone, and saw image after image that turned my stomach. Terrorism, and the targeting of civilians, especially children, cannot be justified. Civilized people across the world were horrified by it.

As a foreign policy analyst, I expected a host of U.S. policy issues would pile up and require comment, but to my surprise, there haven’t been a ton of them. Biden sent a carrier strike group to the eastern Med, volunteered to rearm Israel, and supported Israel’s right to defend itself.

Biden’s speech distinguished between the Hamas terrorists and “democracies like Israel and the United States.” He argued that “terrorists purposefully target civilians, kill them. We uphold the laws of war. It matters. There’s a difference.”

The opening phase of Israel’s campaign in Gaza has been unprecedented in scale. In the first six days, Israel dropped 6,000 bombs. By way of comparison, the counter‐​ISIS campaign, which took place across all of Iraq and Syria, dropped between 2–5,000 bombs per month.

Brig. Gen. Dan Goldfuss sensibly argued that the goal of the campaign is to “change the reality within Gaza to prevent such a thing from happening again.” IDF spokesman Daniel Hagari echoed this: “to eliminate top Hamas officials, this is a top priority.”

Israel has every right to defend itself and, speaking for myself here, it has every right to be in a frothing rage, too. If it can kill or capture the perpetrators, deter future ones, and/​or destroy Hamas military assets, those are righteous and just goals.

Speaking again for myself, when I’m in the throes of a frothing rage, I sometimes don’t think clearly, much less strategically. So I share many of the concerns Nahal Toosi raises in this article. Toosi spoke to a number of Israeli analysts and officials, all of whom seemed to be either coming from or headed to funerals, or both, and found them understandably rent by grief and grasping for a strategy: “The problem, from what I could gather in conversations with Israeli and U.S. officials and analysts, is that no one seems to know exactly how to end this particular evil without unleashing more of it.” She mentions the lessons of the Global War on Terror and admits:

It is tough to raise such lessons with Israelis now given their heartbreak. But early decisions are what could have the most long‐​term impact. This is not just a moral argument about avoiding killing innocents. It’s a practical one about how to win a war. (emphasis mine)

This seems like an essential point. All civilized people have concerns about the innocent people in Gaza, who are suffering as a result of the war Hamas started, just as they should for the innocent men, women, and children in Israel who were butchered by Hamas terrorists. (We can exempt from the category “civilized people” the contemptible groups who have proudly paraded their bigotry in the intervening week.) But even if one didn’t give a whit about people in Gaza: do we have a clear picture of how Israel’s incipient campaign ties in to its objective of making another 10/7 much less likely?

Lawrence Freedman raises similarly stark questions in his long read in the FT this weekend.

For our part, we Americans weren’t in an advice‐​taking mood after our 9/11. We made a host of decisions, many of them bad, and the consequences are still with us. But if Israel makes any bad decisions, it will live next door to them. We Americans had the luxury of just throwing our hands up and coming back to North America.

So I hope, for Israel’s sake but also for the sake of innocent civilians in Gaza—and, as an American, for the prevention of escalation in the region that would risk U.S. involvement—that Israel makes better decisions than we Americans did in our rage after 9/11.

Chris Edwards

The federal “tax gap” is the amount of taxes owed but not paid, essentially the amount of cheating on federal taxes. All tax systems have tax gaps, and there are pros and cons of using tougher enforcement to reduce the gap. The size of the federal tax gap is not a major problem, as it has been stable over time relative to the size of the economy and is smaller than the average gap in Europe.

The IRS released a new estimate of the tax gap yesterday, which it billed as a “significant jump from previous estimates.” But when compared to the size of the economy, the new estimate is not a significant jump. Despite much political rhetoric to the contrary, tax cheating is not a growing problem for the economy.

The gross tax gap in 2021 was $688 billion, according to the IRS. After late payments and enforcement actions, the net tax gap was $625 billion. Of the net total, $475 billion stemmed from individual income taxes, $37 billion from corporate income taxes, $112 billion from payroll taxes, and $1 billion from estate taxes.

The new report includes gross tax gap estimates for prior years. The dollar values of the tax gap have increased over time, but the gap is similar to previous estimates when compared to U.S. gross domestic product, as shown in the chart. I’ve used the GDP of the middle year for the multiyear gap estimates.

The flip side of the gross tax gap is the “voluntary compliance rate,” which is the tax paid on time divided by the estimated full amount owed. The IRS report shows that the voluntary compliance rate has hovered between 82 and 85 percent since 2001, and it was 84.9 percent in 2021.

No one likes tax cheating, especially when perpetrated by the rich and powerful. But there are civil liberties trade‐​offs when the government tries to close the gap by overly vigorous enforcement and heavy‐​handed regulations. The optimal tax gap is not zero because that would impose huge compliance costs on taxpayers and because the IRS makes frequent errors.

That said, there is a win‐​win approach to reducing the tax gap. Simplifying the tax code and cutting tax rates would reduce the ability and incentive for taxpayers to cheat. It would also cut compliance costs and boost civil liberties. Congress should put tax simplification back on the agenda.

I discuss IRS funding and the tax gap in recent congressional testimony here.

Colleen Hroncich

When I think about education, the Bob Dylan song “The Times They Are a‑Changin’” often comes to mind. In the past few years, things have changed dramatically on the education front. Parents are increasingly looking beyond their children’s assigned district school, and states are responding to that demand by adopting and expanding education choice programs that allow some taxpayer funding to follow kids to a variety of education options.

A few years ago, there wasn’t a single state with universal education choice, and now ten have universal or nearly universal programs.

As parents—armed with increased awareness and funding—search for new learning environments for their children, will the supply be there? In many areas, the answer is “yes,” thanks to a growing universe of education entrepreneurs. Parents, teachers, and others are stepping up to create microschools, hybrid schools, homeschool co‐​ops, online resources, and more. But a great idea may not make it to fruition if government regulations choke it. That’s why the yes. every kid. foundation. started the Eduprenuer Support Program.

“We saw growth in a new movement of parents and educators who were starting unconventional learning environments,” says Mike Donnelly, vice president at the Yes Foundation, who is heading up the support program. “This was exciting, but we also saw instances of government regulators aggressively enforcing regulations that threatened this new fledgling movement. We believed that these entrepreneurs could use some help to defend themselves, so we stepped in to try to serve that need.”

In many states, the regulatory environment hasn’t caught up with the changing education landscape. My colleague, Kerry McDonald, has catalogued the challenges education entrepreneurs face even in states that are generally business‐​friendly. In some cases, existing regulations make it impossible for edupreneurs to move forward. But in others, there are ways to structure a learning environment so it meets the regulatory requirements while retaining flexibility.

“Our Eduprenuer Support Program offers free legal support to help education entrepreneurs confidently navigate regulatory obstacles,” explains Mike. “Many entrepreneurs face questions about how regulatory frameworks like childcare, business formation, zoning, fire and safety codes, and compulsory attendance laws apply to them. We provide personalized support to educate and inform these courageous everyday entrepreneurs so they can move forward and offer more individualized educational opportunities to families in their community.”

Mike says the most worrisome situations are when an edupreneur faces the threat of being shut down by a government regulator. “While this does not happen frequently, it is happening—and as the movement grows it will not surprise me if these incidents become more frequent,” he adds.

His team has offered support in dozens of states, including a microschool in Washington that was told it had to comply with health codes that would have cost tens of thousands of dollars to comply with. In Hawaii, they talked with an edupreneur who was threatened with tens of thousands of dollars in fines by childcare regulators. And they counseled a Maryland edupreneur who was told they needed a childcare license. The Yes Foundation’s legal support team helped these education entrepreneurs understand how to face or respond to these challenges.

“As a new service of Yes Foundation started this year, we have been able to help close to 100 entrepreneurs,” notes Mike. “We expect to see this number increase significantly in 2024 as new edupreneurs start up and existing edupreneurs grow. Part of what makes us different is that we are philosophically aligned with and are totally focused on the unique problems that these education entrepreneurs are trying to solve.”

While no state makes it very easy, Mike says there are some that are a bit more friendly when it comes to starting unconventional learning environments. I was excited to learn that we’ll soon have more solid information about each state—EdChoice and Yes Foundation are planning to release a report in the coming weeks that analyzes and ranks all fifty states on the ease of doing business for education entrepreneurs.

As Mike describes the report, “We examined about ten key indicators across the states to assess the comparative ease of opening and operating unconventional educational settings for school‐​aged children. We looked at barriers like compulsory education laws, homeschooling regulations, private schooling regulations and childcare regulations as well as generally applicable regulations such as fire and safety codes. Based on our straightforward ranking system, Idaho, Montana, New Jersey, Oklahoma, and Texas rose to the top. At the bottom were Alabama, Hawaii, Tennessee, and Washington. These four states had barriers that made it more difficult for edupreneurs to open and operate, leaving children and families with fewer options for educational choice.”

Just like education entrepreneurs are stepping up to create new learning environments for children, the Yes Foundation has stepped up to ensure these edupreneurs have legal support to help them navigate regulatory roadblocks. To get help, an education entrepreneur from any state can ask a question at www​.yesle​gal​.org, and they’ll get a response from an attorney that will help them think through the challenges that they are facing.

“Our legal team (and all of us at the Yes family) believe that an environment that empowers families is the way forward,” Mike explains. “By helping education entrepreneurs, designing, advocating, implementing and defending people and policy that puts kids first, we are working towards a brighter future for education.”

Walter Olson

Voters will go to the polls soon in states and municipalities to decide ballot issues of significance for individual liberty, limited government, and sound public administration. Some highlights (via Ballotpedia and Bolts):

If Ohio voters approve Issue 2 to legalize and regulate pot sales, more than half the U.S. population will live in states that have legalized recreational marijuana. Issue 1 in the same state would establish a state constitutional right to “make and carry out one’s own reproductive decisions,” including decisions about abortion, contraception, fertility treatment, miscarriage care, and continuing pregnancy, while allowing the state to restrict abortion after fetal viability, except when “necessary to protect the pregnant patient’s life or health.”
Maine Question 3 would create a state utility authorized to take over Maine’s privately owned electric utilities and transmission operations. Sen. Bernie Sanders (I‑VT) and the Sierra Club are among its backers on the left, but even some progressives have doubts and the utility workers’ union outright opposes the takeover. Ironically, one of the state’s two investor‐​owned utilities, serving areas in the north and east of the state, is itself owned by Calgary, Alberta’s municipal electric utility.
On public finance, Colorado Proposition HH is being promoted as a reduction in property tax rates but is so drafted as to enable an end run around key provisions of the Colorado Taxpayer Bill of Rights (TABOR), enacted by voters in 1992, which has worked to limit the growth of government. Texas Proposition 3, a constitutional amendment, would prohibit the legislature from enacting a tax on wealth or on net worth in the future. It is one of more than a dozen constitutional amendments on the Texas ballot with fiscal or tax implications. Maine Question 1 would require voter approval of many bond issuances above $1 billion, and was advanced by opponents of Maine Question 3, the above‐​mentioned measure authorizing a state takeover of electric utilities, which would presumably be funded by such bond issuances.
Ranked choice voting in municipal elections, an idea I’ve written about favorably, will be on the ballot in three mid‐​sized Michigan communities, Kalamazoo, East Lansing, and Royal Oak; the state would still have to give its approval. In Minnetonka, Minn., where voters approved RCV in 2020, opponents of the voting method have placed on the ballot a measure that would reverse that decision. Earlier this year voters in Redondo Beach, Calif., and Burlington, Vt., approved RCV, the latest in a streak of local wins for the method, which is also employed statewide in Maine and Alaska.
In Louisiana, which follows its own election schedule, voters will decide tomorrow whether to ban foundations and nonprofits from making private grants to election administrators, as about half the states have lately done. I’ve argued that there are legitimate reasons states might want to scrutinize and in some cases restrict such grants. A new paper by Apoorva Lal and Daniel M. Thompson estimates that the receipt of a 2020 grant had a probable low‐​but‐​positive effect on turnout and on Democratic vote share, which works to confirm Republican political misgivings; at the same time they find (as has every other piece of serious research I know) that the effects were likely too small to have changed the outcome of that year’s presidential election.

Marc Joffe

While the recent rise in interest rates creates headaches for governments issuing bonds (and for the taxpayers who are obliged to pay debt service on these bonds), it provides an option for public pension funds managing large pools of assets. Rather than investing in riskier assets, pension fund managers can now earn 5% or more annually on bonds.

De‐​risking public pension portfolios is a win for future taxpayers who would no longer be on the hook for retiree benefits if pension investments go sour.

According to a Hoover Institution analysis, state and local pension systems have racked up over $5 trillion in unfunded pension liabilities. These liabilities could be radically reduced by shrinking the number of state and local government employees and switching those that remain from defined‐​benefit pension plans to defined‐​contribution plans, like those common in the private sector.

But until support can be found for these more comprehensive solutions, reformers can limit the growth of unfunded pension liabilities by advocating more prudent approaches to managing pension fund assets.

Before the 1950s, public pension systems invested their funds almost exclusively in bonds. But as officials sweetened benefits and member lifespans increased, the relatively paltry returns on bonds were insufficient to pay future benefits. Rather than increase employee and employer contributions, pension systems began “stretching for yield” by investing in higher return, but higher risk investment vehicles.

When interest rates bottomed out during the pandemic, long‐​term Treasury bonds were yielding around 1%, making them an especially poor fit for pension systems with “assumed rates of return” that averaged around 7%.

But now the margin between Treasury bond yields and pension plan return targets has narrowed considerably. And, for some pension plans with more conservative assumptions, corporate bonds may already provide sufficient yield.

For example, the Kentucky State Police Retirement System and the Kentucky Employee Retirement System Non‐​Hazardous Plan have return assumptions of 5.25%. A portfolio of long‐​term corporate bonds could meet this threshold.

Systems with higher return assumptions could migrate to low‐​risk, fixed‐​income portfolios by lowering their assumed rates of return. If a system reduces its return assumption from 7% to 5.25%, like the Kentucky plans, its reported liabilities would increase, and system actuaries would recommend higher pension contributions over the near term. While this is initially a bad outcome for taxpayers, they may be better off in the long run.

If pension systems hold portfolios of less volatile assets — Treasury or corporate bonds –there is less risk of investment losses that trigger sudden spikes in unfunded pension liabilities, and the sharp increases in pension contributions required to eliminate them.

Chris Edwards and Krit Chanwong

Federal spending and deficits are at dangerously high levels, and interest costs on government borrowing are soaring. If spending is not restrained, we may face an economic crisis. Congress should cut spending, and one good reform target is the huge and fast‐​growing Medicaid program.

Medicaid provides health coverage for lower‐​income individuals. It is administered by the states but the federal government provides about two‐​thirds of the funding. Federal Medicaid costs have more than doubled over the past decade from $265 billion in 2013 to $616 billion in 2023.

The federal government funds Medicaid with open‐​ended matching payments to the states. For administrative costs, the federal match averages 62 percent, and for medical costs the match is based on the Federal Medical Assistance Percentage. The FMAP is determined by each state’s per capita income—states with lower incomes receive higher matches and states with higher incomes receive lower matches. State FMAPs range from 50 to 83 percent.

The national average FMAP in coming years is expected to be 60 percent. That means for every $10 million that states expand their Medicaid programs, they pay $4 million and they send a bill to Washington for $6 million.

However, the federal match is even higher on Medicaid enrollees under the 2010 Affordable Care Act. The Act provides a 90 percent match to states that expand coverage to all adults under age 65 up to 138 percent of the poverty level. That creates a large incentive for states to join the ACA expansion and 40 states have done so.

The cost of the ACA expansion exceeded projections. A 2016 study found that enrollment in 24 early adopting states was double than originally projected. New York projected 76,000 ACA enrollees by 2015 but actual enrollment was 285,000. California projected 910,000 enrollees by 2016 but actual enrollment was 3.8 million.

Federal subsidies for the states create many distortions, which high federal matching rates exacerbate. A modest first step to reform Medicaid would be to reduce the ACA matching rate. The ACA expansion is now costing federal taxpayers about $120 billion a year.

Bad Incentives of Federal Funding

If a state with an FMAP of 60 percent expands its Medicaid by $10 million, it would cover $4 million and the federal government would cover $6 million. This creates an incentive for states to expand benefits beyond what they would provide if state taxpayers paid the full cost. Medicaid expansion allows state policymakers to spend on their constituents while only being accountable to their constituents for a fraction of the costs.

Also, as Michael Cannon noted, if a state spends, say, $4 million on an activity such as policing that does not receive matching federal aid, it buys $4 million of police protection. But if a state spends $4 million on Medicaid, it buys $10 million in health care spending. So federal aid distorts the legislative priorities of state policymakers, and public funds are misallocated.

Furthermore, Medicaid’s high federal match combined with the program’s size and complexity undermines state‐​level monitoring for waste and fraud. For every $10 million that state auditors may save from reducing waste or fraud in a state with a 60 percent match, the state government would gain just $4 million. As a result, states likely underinvest in program integrity activities such as examining billing claims and recipient eligibility.

Medicaid has long been on the Government Accountability Office’s high‐​risk list. The program’s improper payment rate was 16 percent in 2022, which amounted to $81 billion of erroneous or fraudulent payments. Some legislators think the rate is substantially higher.

State governments themselves abuse Medicaid with schemes to inflate matching dollars. To boost their federal match, they classify non‐​Medicaid spending as Medicaid spending, and they create accounting schemes such as overpaying health care facilities run by local governments and imposing taxes on health providers.

Medicaid’s financial structure creates irresponsibility all around. Budget expert James Capretta noted, “Medicaid’s current federal‐​state design also undermines political accountability. Neither the federal government nor the states are fully in charge. As a result, each side has tended to blame the other for the program’s shortcomings, and neither believes it has sufficient power to unilaterally impose effective reforms.”

Reduce ACA Matching Rate to FMAP

To generate federal budget savings and improve state incentives, Congress should cut the 90 percent ACA match to the state FMAP rates. The Congressional Budget Office estimates that such a reform would reduce federal deficits by $604 billion over 10 years.

A more thorough reform would be to convert federal Medicaid payments to per‐​capita block grants, while loosening regulations on the states to foster innovation. With block grants, the states would be encouraged to find more efficient benefit structures and to reduce fraud and waste. That was the successful approach of federal welfare reform in 1996. A further advantage of block grants is that they could help equalize current disparities between the states in federal Medicaid payments.

Michael Cannon has proposed Medicaid reforms in his new book Recovery, and further reform ideas are here and here.

Jeffrey Miron

This article appeared on Substack on October 13, 2023.

The Wall Street Journal recently praised Nikki Haley for advocating healthcare tort reform during the Republican debate. Haley and the WSJ believe that excessive malpractice lawsuits increase healthcare costs by forcing doctors to pay for expensive insurance and by incentivizing unnecessary defensive procedures.

Healthcare costs are undoubtedly out of control. Yet the percentage of healthcare costs due to malpractice suits is modest and has been relatively stable over time.

Even if lawsuits were a major source of health cost inflation, tort law reform invites unintended consequences. Doctors may increase risky surgeries, for example, if they have less fear of being sued. Studies suggest that reforms have contributed to worse patient outcomes or increased use of certain procedures, implying higher costs.

The policies that cause high and rising health care costs are subsidies for health insurance (Medicare, Medicaid, Obamacare, and the tax exclusion for employer‐​paid health insurance premiums). Politicians looking to constrain health costs should trim these subsidies.