NCPA Policy Digest

From Date: Mon, 23 Mar 1998 09:29:24 (CST) X-Sender:

From: "John C. Goodman- National Center for Policy Analysis" Subject: [RightNow] NCPA Policy Digest 3-23-98

National Center for Policy Analysis POLICY DIGEST Monday, March 23, 1998

PointCast can automatically load NCPA's Policy Digest summaries on your desktop for easy reading. For information go to  IN TODAY'S DIGEST

o MOST ECONOMIC MEASURES INDICATE LOWER INFLATION AHEAD, and prices are estimated to increase only 2 percent in 1998....NCPA


o RECENT REFORMS HELPED BRAZIL REVERSE THE FLIGHT OF CAPITAL, with foreign capital coming in to buy plant and equipment....WALL STREET JOURNAL

o A YOUTH UNEMPLOYMENT RATE OF 33 PERCENT is discouraging Italians from having children, leading to a rapidly aging population....WALL STREET JOURNAL

o RED TAPE COST ONE U.S. COLLEGE $21 MILLION, estimates the president of Stanford University....WASHINGTON TIMES

o ABOUT 13 PERCENT OF U.S. CHILDREN WERE UNINSURED IN 1993- 94, and about a fifth of those children uninsured went without care....NEW ENGLAND JOURNAL OF MEDICINE

o CHILEAN WORKERS RECEIVE 80 PERCENT OF PRE-RETIREMENT INCOME under their privatized social security system....WASHINGTON POST


The price of oil has reached a 12-year low of about $13 per barrel. A year ago the price was over $20 per barrel and in 1981 it was over $35 per barrel. Historically, the sharp rise in oil prices during the 1970s undoubtedly contributed to double-digit increases in the Consumer Price Index.

However, some economists recommend that the Federal Reserve tighten credit and raise interest rates to control inflation. Lower energy prices, they say, are simply obscuring the fundamental inflationary forces that are still at work. The true cause of inflation is growth of the money supply, which they believe is presently too fast for price stability.

The idea that money growth is the sole cause of inflation is known as monetarism and in principle it is right. The problem, however, is that there is no way of knowing exactly what rate of growth of the money supply is correct. Economic growth, investment, labor supply and the demand for money are just a few of the variables that can make some particular money growth rate inflationary at one time and deflationary at another.

Determining the right noninflationary monetary policy involves looking at many variables, not just the money supply. Today, most of these other variables are signaling lower inflation, not higher inflation. In fact, the National Association of Business Economists has lowered its estimate of inflation in 1998 from 3 percent a year ago to just 2 percent today (see figure).

The monetarists are still fighting the inflation of the 1970s -- and ignoring evidence contrary to their position. Following their advice would risk a recession. The Federal Reserve should reject it.

Source: Bruce Bartlett (senior fellow, National Center for Policy Analysis), March 23, 1998. For text go to


Economic growth now appears to be benefiting workers at the bottom of the economic ladder, according to Labor Department data.

o Adjusted for inflation, weekly earnings for those with wages below those earned by 90 percent of the work force rose 1.6 percent last year, to $260 -- the first jump since 1991 and the biggest since the government started collecting such figures in 1979.

o Weekly earnings for the top 10 percent rose by only 0.9 percent last year.

o According to the Federal Reserve, vigorous demand at New England temporary employment agencies has produced wage increases of up to 15 percent, and wages in the retail sector are running 4 percent to 6 percent higher than the previous year.

o Meanwhile, unemployment among high-school dropouts fell to 7 percent earlier this year -- down from 8.8 percent a year earlier and from 11.5 percent in 1992. Since the early 1970s, a variety of forces, from the decline of organized labor to the flood of low-skilled immigrants, has suppressed wages at the lowest level of employment. Except for the past two years, the gap between earnings of college graduates and high-school graduates had been widening. But that stopped in 1996 and 1997 -- partially because of the tight labor market, economists report. Companies which would have hired more experienced workers in the past are now taking people without experience and training them on the job. Source: Jacob M. Schlesinger, "Wages for Low-Paid Workers Rose in 1997," Wall Street Journal, March 23, 1998.

For more on Economic Issues go to


Just a few months ago, it looked like the Asian crisis would plunge Latin America's largest economy into a pit of disaster. But Brazil has turned a surge in capital flight from the country into an equally dramatic inflow of dollars today.

The quick reversal is being attributed to a massive increase in interest rates, a package of $18 billion in emergency budget cuts, and a new emphasis on long-stalled congressional reforms to trim the role of government.

o A recently approved overhaul of the federal social security system should eventually reduce benefit payments by about 1 percent of Gross Domestic Product -- with the full effect still some years off.

o One major problem, international economists report, is high spending by Brazil's state governments -- which are spending the proceeds from privatizations with unhealthy haste.

o Nevertheless, reforms have helped the country accumulate hard-currency reserves of about $63 billion -- about $12 billion above their low point last fall and nearing a historic record.

Some of the capital inflow has been directed to investments in plant and equipment. Observers say that what makes this impressive is that only a small portion has been directed toward privatizations, which have been the main magnet for foreign direct investments to date.

Still, Brazil isn't out of the woods. Interest rates remain at 28 percent, bad debts and unemployment are rising, and there is a long-term trend toward more moderate growth in durable goods sales.

Source: Matt Moffett, "Brazil's Economy Stages a Speedy Rebound," Wall Street Journal, March 23, 1998.

For more on International issues go to


Because of government policies designed to protect European workers from economic hardship, the continent faces the prospect of too few future workers and too many retirees. European countries could have eased its demographic problems by permitting greater immigration of workers, some economists contend. Birth rates are below worker-replacement levels in Italy, France and Spain.

o In Italy, for example, the number of people in their prime child-bearing ages of 20 to 34 is expected to shrink by 30 percent over the next 12 years -- while those 65 and over will increase 15 percent. o Birth rates in Italy are down 13 percent since 1985 -- and are only at about half the level at which parents replace themselves.

o Experts say it is no coincidence that youth unemployment in Italy is now 33 percent -- and 26 percent in France, where birth rates have fallen 16 percent since 1985.

o Demographers point out that people avoid having children when unemployment is high and economic conditions are bleak -- such as happened in the U.S. during the Great Depression, when birth rates dropped 26 percent in 10 years.

Unemployment is so high, experts contend, because most European countries have such a heavy layer of labor laws and mandated health and pension benefits. High unemployment has dissuaded many young couples from having children in an effort to avoid additional responsibilities.

In 1995, the median ages of Europe and the U.S. were only about two years apart -- 36 and 34, respectively. But in two decades the U.S. median age is projected to be only about 37, while half the people in Europe will be 45 or older. Italy will have a median age of nearly 50 by 2020.

The cost of caring for this aged population will be extraordinarily high. Source: Peter Francese, "The Gray Continent," Wall Street Journal, March 23, 1998.


The president of Stanford University, Gerhard Casper, has quantified how much "irrational red tape" due to "excessive government regulation" is costing his school. Using "extremely conservative accounting" and not including any capital costs, he has put the figure at $21 million a year.

Here are some of his horror stories: o To install some combustibles in a laboratory, Stanford had to spend $600,000 to comply with government regulations.

o Regulations covering the use of a one-pint bottle of alcohol used in a university lab fall under six agency jurisdictions -- the air quality management district, sewer district, the Occupational Health and Safety Administration, the local fire department, the county environmental health department and the state hazardous waste agency.

o State regulations require that lab containers carry a special label itemizing six specific pieces of technical information -- even if the chemical might be in its original container and labeled by the manufacturer. o The Environmental Protection Agency alone has imposed $460,000 in fines on the university, $235,000 in state administrative costs and $300,000 in contributions to private environmental groups. That's money, Casper points out, that might have gone to scholarships or lowering tuition costs.

Source: Arnold Beichman, "Research Tangled in Red Tape," Washington Times, March 23, 1998.

For more on Higher Education Issues go to


A new children's health insurance program was enacted as part of the Balanced Budget Act of 1997. A study recently published in the New England Journal of Medicine examined the role of health insurance in children's access to regular or primary care from physicians in their offices, clinics or health maintenance organizations.

Researchers analyzed responses from the 1993-94 National Health Interview survey concerning nearly 49,000 children under 18 years of age. o Researchers estimated 13 percent of U.S. children did not have health insurance coverage in 1993-94.

o Uninsured children were less likely than insured children to have a usual source of care -- 75.9 percent compared to 96.2 percent.

o And uninsured children were more likely to have gone without needed medical, dental or other health care -- 22.2 percent compared to 6.1 percent for insured children.

Among those with a usual source of care, uninsured children were more likely than insured children to have no regular physician -- 24.3 percent compared to 13.8 percent; less likely to have access to medical care after normal business hours -- 11.8 percent compared to 7.0 percent; and more likely to have families dissatisfied with at least one aspect of their care -- 19.6 percent compared to 14.0 percent.

Nearly three out of four of the families with uninsured children cited the expense of insurance as the main reason they lacked coverage.

Source: Paul W. Newacheck, et al., "Health Insurance and Access to Primary Care for Children," February 19, 1998, New England Journal of Medicine.

For more on Health issues


Since privatizing its old age pension system in 1981, Chilean retirees have begun to enjoy a bonanza in benefits. o The average real return on investment has been 12 percent per year -- three times the rate initially projected.

o The typical retiree is receiving a benefit equal to nearly 80 percent of his average annual income during the last 10 years of his working life -- almost double the percentage available under the U.S. Social Security system.

o The resources administered by the 14 private pension fund companies amount to $30 billion -- or around 43 percent of Gross Domestic Product as of 1997.

o Because it has improved the functioning of both capital and labor markets, privatization has helped push the economic growth rate up from the historical 3 percent a year to 7 percent on average during the last 12 years -- as well as pushing the Chilean savings rate to 25 percent and reducing unemployment to about 5 percent.

At least 10 percent of each Chilean's pre-tax wages are automatically deposited into his own private investment account each month, with the option of increasing deposits up to another 10 percent of pre-tax wages. Workers can choose one from among the 14 mutual-fund style companies which invest in stocks and bonds. The companies compete with one another to increase returns and workers can switch among them to try to achieve the best performance.

Upon retirement, a worker can choose one of two general payout options: o He may use the capital in his account to purchase an annuity from any private life insurance company.

o Or he may leave the funds in the account and make programmed withdrawals -- subject to limits based on the life expectancy of the retiree and his dependents. Unlike the U.S. Social Security system, any funds remaining in the account -- in the case of those who select the second option -- can be passed on to survivors. Source: Jose Pinera (International Center for Pension Reform), "In Chile, They Went Private 16 Years Ago," Washington Post, March 22, 1998.

For more on Social Security go to CHOOSE YOUR REGULATOR In a forthcoming article, a Yale Law School specialist will propose creation of a market for securities regulation. Roberta Romano argues that there would be significant benefits if securities firms were able to op out of oversight by the Securities and Exchange Commission in favor of another regulatory jurisdiction -- a U.S. state, for example, or a foreign country.

o Rather than allowing the SEC to retain a monopoly on securities regulation, competition would arise between various jurisdictions to sell their own brand of regulation in order to realize fees from the regulated parties.

o American firms can now incorporate in any state -- and that state's company law governs the firm throughout America.

o More American firms are incorporated in Delaware than in any other state -- and incorporation fees provide one- fifth of the state's tax revenues.

o Romano argues that competition would mean better regulation as each jurisdiction tries different regulatory approaches -- allowing an eventual comparison of what policies lead to the most smoothly functioning securities markets.

Companies would not necessarily choose the most lax regulator, since they want raise capital cheaply -- and it is cheaper when investors believe regulation is sound.

Firm would not be able to switch easily to a less exacting regulator, since shareholders would have to approve the move.

Romano says competition is likelier to raise regulatory standards -- so as to offer greater reassurance to investors -- than it is to lower them.

The article is to appear in the June 1998 edition of the Yale Law Journal.

Source: "The Market for Regulation," Economist, March 7, 1998.

For more on Regulatory Policy go to


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