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The Lighthouse is the weekly email newsletter of the Independent Institute.
Subscribe now, or browse Back Issues.

Volume 15, Issue 42: October 15, 2013

  1. The Default and Crash of 2013?
  2. Federal Shutdown Roundup, Part 2
  3. Big Insurance: Obamacare’s Wealthiest Lobby and Largest Beneficiary
  4. Minimum Wage, Maximum Nonsense
  5. New Blog Posts
  6. Selected News Alerts

The Independent Review: Subscribe or renew today and get a free copy of the 25th Anniversary Edition of Crisis and Levithan: Critical Episodes in the Growth of American Government, by Robert Higgs.


1) The Default and Crash of 2013?

The big news this week is the approaching debt ceiling deadline and possible federal default. According to U.S. Treasury Secretary Jack Lew, unless Congress and the Administration come to an agreement, the federal government won’t be able to pay all of its debts come Thursday, October 17. What are the political and economic implications if Uncle Sam defaults? Are we heading for an unprecedented crash?

Many pundits assert that a federal default is unprecedented, but they have forgotten their history. As economist and Independent Institute Advisory Board member J. Huston McCulloch explains at The Beacon, the U.S. government effectively defaulted when, from 1862 to 1879, it halted gold redemption on demand for United States Notes. And in 1933, the U.S. government effectively defaulted when it announced that it would no longer redeem Treasury bonds for gold at $20.67 per ounce. (Foreign creditors would, beginning two years later, get to have their U.S. bonds redeemed in gold at the diluted rate of $35 per ounce, but American bondholders lost the ability to get paid in gold.)

What effects would a default likely have? As Independent Institute Research Fellow Craig Eyermann notes at MyGovCost, it depends on exactly how the U.S. government responds. If the Treasury Department refuses to make principal and interest payments to the nation’s creditors, it will be taking a huge risk with the country’s economic health. Interest rates would rise and stock prices fall. Unless they’re completely incompetent, Treasury officials would probably succeed in making those payments but would suspend payments to suppliers and contractors. But if such a suspension were prolonged, the result could be another recession, according to Eyermann. As bad as an explicit Treasury default would be, McCulloch argues that worse consequences would result if the U.S. government implicitly defaulted on its debts with an inflationary monetary policy. His long-term solution to the whole mess is for the nation to adopt an effective Balanced Budget Amendment—although not the type of proposal that Republicans in Congress have proposed in recent years.

The Defaults of 1933, 1862, ... and 2013?, by J. Huston McCulloch (The Beacon, 10/10/13)

The Risks of Default, Technical Default, and Business as Usual, by Craig Eyermann (MyGovCost News & Blog, 10/14/13)

MyGovCost.org – Home of the Government Cost Calculator

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2) Federal Shutdown Roundup, Part 2

The ongoing federal shutdown, such as it is, has been accompanied by massive hype and yellow journalism. As Independent Institute Senior Fellow Benjamin W. Powell notes in the Huffington Post, the vast majority of Americans have not been affected by it.

“The longer the shutdown continues, the more Americans should realize how oversized their government has become,” Powell writes. “If we just give shutdown a chance, we might all realize that what we need is more of the government shutdown, not less.”

Writing at MyGovCost News and Blog, Independent Institute Communications Counsel K. Lloyd Billingsley notes that even some of the federal government’s most bloated bureaucracies freely admit that they are staffed almost entirely with “non-essential” employees—including 95 percent of the Department of Education and almost as many at the Environmental Protection Agency and the Federal Communications Commission. “Non-essential employees may be incompetent, wasteful, and abusive to taxpayers,” he writes, “but they remain essential for expansion of the ruling class.”

All I Am Saying Is Give Shutdown a Chance, by Benjamin W. Powell (The Huffington Post, 10/11/2013)

Video: Benjamin Powell Discusses Government Shutdown on Stossel (10/3/13)

The Federal Non-Essentiality Rule, by K. Lloyd Billingsley (MyGovCost News & Blog, 10/14/13)

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3) Big Insurance: Obamacare’s Wealthiest Lobby and Largest Beneficiary

One of the country’s top lobbyists for Obamacare is now pushing to end the law’s tax on health insurance premiums. This doesn’t represent a change of heart, however. It merely shows her commitment to advocating on behalf of the insurance industry. Karen Ignagni, the CEO of America’s Health Insurance Plans, spearheaded efforts for health reform to include mandates and government subsidies—the net effect of which is to line the pockets of insurance executives. Already, Obamacare has done wonders for the stock prices of the leading insurance companies, as Independent Institute Senior Fellow Lawrence J. McQuillan notes in an op-ed published in the Orange County Register and many other McClatchy newspapers.

In the two-plus years since President Obama signed his signature healthcare legislation into law, Aetna’s stock price has risen by one third, UnitedHealth’s has increased by 65 percent, and Humana’s has jumped more than three-fourths. “It pays to be one of the few sellers of a product the government is going to force everyone to buy and provides subsides to help them do it,” McQuillan writes.

Although the insurance industry is campaigning to eliminate a tax on insurance premiums, Ignangi’s group has actively supported efforts to enroll consumers in the new healthcare exchanges, via its contribution of seed money to Enroll America. This may be good for the insurance industry, but it’s bad news for consumers, McQuillan argues. “Americans would be better served by a patient-driven system of privately purchased, affordable and portable health insurance with health savings accounts and payment assistance for the poor,” he writes. “Tax breaks would go to individuals, not employers. This would put more buying power in the hands of patients seeking the best health care at the lowest price.”

If Obamacare Falters, Insurers May Pay High Price, by Lawrence J. McQuillan (The Orange County Register, 10/7/13)

Priceless: Curing the Healthcare Crisis, by John C. Goodman

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4) Minimum Wage, Maximum Nonsense

California Governor Jerry Brown recently signed into law an increase of the state’s minimum wage. By 2016, employers will be required to pay their least-skilled workers $10 per hour, up from the current minimum wage of $8 per hour. As Independent Institute Research Fellow Dominick T. Armentano notes, this law will hurt the most vulnerable members of the workforce—and those who will be prevented from entering it.

Like other forms of price ceilings, minimum wage laws have multiple negative effects. Because they raise the price of labor, minimum wage laws reduce the ability of employers to hire workers. (Economists call this an “income effect.”) And by raising the price of labor relative to other inputs, they encourage employers to use less labor and more labor-conserving inputs, such as computers. (This is a “substitution effect.”) Some studies have purported to show that minimum wage laws have positive labor-market consequences that outweigh the income and substitution effects, but such studies suffer from many flaws.

“First, most careful studies do show employment declining,” Armentano writes. “Second, the few that don’t may be seriously flawed since they fail to account accurately for certain variables, such as productivity and changes in personal income, that wash out the negative employment effects of higher minimums. Finally, in a strict sense, historical data cannot prove or disprove any theory (though it may be illustrative of probable outcomes) since it’s always unclear which variables are relevant and fully accounted for in any empirical study.” Minimum wage laws are more than maximum nonsense, he concludes: they are anti-social measures disguised as policies to help young workers and the underclass.

Minimum Wage, Maximum Nonsense, by Dominick T. Armentano (The Washington Times, 10/9/13)

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5) New Blog Posts

From The Beacon:

From MyGovCost News & Blog:

The Federal Non-Essentiality Rule
K. Lloyd Billingsley (10/14/13)

The Risks of Default, Technical Default, and Business as Usual
Craig Eyermann (10/14/13)

Green-Shirted Thugs
Craig Eyermann (10/10/13)

Government Hostile to Accountability — and Whistleblowers
K. Lloyd Billingsley (10/9/13)

You can find the Independent Institute’s Spanish-language website here and blog here.

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6) Selected News Alerts

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