Political Entrepreneurs

The Economic Engine of Political Change

Entitlement Reform and Public Employees: Interesting Battles, Important Experiments

January 13th, 2013 by Wayne Leighton

In December the U.S. Government Accountability Office (GAO)  released a report on retiree health benefits and the liabilities of the U.S. Postal System. Sounds pretty esoteric, right? We’re talking about one entry on the balance sheet of a government agency that is not particularly innovative or popular. Yawn.

And yet, this issue points directly to questions that will drive any future discussion of fiscal reform in the United States. It’s best to pay attention. For example, the GAO reports_

As of the end of fiscal year 2012, OPM estimated that USPS’s total health benefit liability for future and current retirees was approximately $94 billion—of which $48 billion was unfunded and $46 billion was in the Postal Service Retiree Health Benefit Fund.

In short, the U.S. Postal System has not set aside sufficient funds to pay for future expected healthcare costs of its retired employees. The Postal Accountability and Enhancement Act requires the USPS to make payments to prefund the expected future healthcare costs. Yet the USPS has been losing money every year. In response, management, employee unions and other stakeholders argue that the prepayment rule is contributing to the USPS’s already serious financial woes.

A requirement to pre-fund future healthcare costs (which will be massive) may not look like a harbinger of major fiscal reform. But it nonetheless shows the shifting forces in debates about government spending.

Even more interesting are the reforms related to healthcare, pensions, and other benefits for state-level public workers, many of which have been adopted in just the past few years.

A report by the National Conference of State Legislatures focuses only on pension reforms for public workers and teachers, covering the brief period of 2009-2011. It turns out that 43 states took at least some steps at pension reform. Of particular note are the reforms put in place in Michigan, Rhode Island and Utah.

In these three states and elsewhere, the common element is a move to replace a defined benefit pension with something approaching a defined contribution plan. The employee chooses a contribution level and the employer (the state) also makes a contribution up to a certain percentage of the employee’s salary. Of course, many private-sector employers made this move long ago (see, e.g., 401Ks and employer matching).

These ground-breaking reforms are significantly lowering liabilities that ultimately will be picked  up by taxpayers. We’re talking about billions, if not tens of billions, of dollars of savings in each state.

There are many lessons to be learned from these experiences. How did political entrepreneurs in Michigan, Rhode Island, Utah and elsewhere make it happen? Why this idea, and at this time? What obstacles stood in the way of reform, and how were they overcome? What are the implications for other debates about entitlement reform?

 

Madmen, Intellectuals, & Academic Scribblers

The Economic Engine of Political Change

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From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.189, ch.7)

The most successful entrepreneurs know what they do well, they know the market and the opportunities within it, and they choose those activities that create the most value. This is true in economic as well as political markets.

Madmen, Intellectuals, & Academic Scribblers

The Economic Engine of Political Change

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From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.178, ch.7)

[W]hen the right elements come together at the right time and place and overwhelm the status quo, it is because special people make it happen. We call them political entrepreneurs.

Madmen, Intellectuals, & Academic Scribblers

The Economic Engine of Political Change

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From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.176. ch.7)

While we started this book with Danny Biasone saving basketball, we end it with Norman Borlaug saving a billion lives. These stories are not that different. Both faced vested interests, which were reinforced by popular beliefs that things should be a certain way—that is, until a better idea came along.

Madmen, Intellectuals, & Academic Scribblers

The Economic Engine of Political Change

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From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.174, ch.6)

Because there was a general belief that homeownership was a good thing, politicians found the public with open arms.... Everybody was winning—except Alfred Marshall, whose supply and demand curves were difficult to see through the haze of excitement at the time, and except Friedrich Hayek, whose competition as a discovery procedure was befuddled... In short, once politicians started getting credit for homeownership rates, the housing market was doomed.

Madmen, Intellectuals, & Academic Scribblers

The Economic Engine of Political Change

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From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.166, ch.6)

Everyone responded rationally to the incentives before them. In short, the rules that guided homeownership changed over time, which in turn changed the incentives of these actors. And bad things happened.

Madmen, Intellectuals, & Academic Scribblers

The Economic Engine of Political Change

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From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.153, ch.6)

They understood the economics. The ideas had already won in ... the regulatory agency itself. All that remained to be overcome were some vested interests and a handful of madmen in authority.

Madmen, Intellectuals, & Academic Scribblers

The Economic Engine of Political Change

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From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.146, ch.6)

If the idea for auctions of spectrum use rights had been part of the public debate since at least 1959, why didn’t the relevant institutions change sooner? What interests stood in the way?

Madmen, Intellectuals, & Academic Scribblers

The Economic Engine of Political Change

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From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.121, ch.5)

When an academic scribbler comes up with a new idea, it has to resonate well with widely shared beliefs, which in turn must overcome the vested interests at the table. Many forces come together to explain political change, even though it may seem like coincidence of time and place.

Madmen, Intellectuals, & Academic Scribblers

The Economic Engine of Political Change

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From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.120, ch.5)

It’s the rules of the political game that deserve our focus, not politicians’ personalities or party affiliations.

Madmen, Intellectuals, & Academic Scribblers

The Economic Engine of Political Change

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From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.119, ch.5)

In short, ideas are a type of higher-order capital in society. Like a society that is poor in capital and therefore produces little consumer value, a society that is poor in ideas and institutions will have bad incentives and therefore few of the desirable outcomes that people want.

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