Air Pollution

“The Mortality and Medical Costs of Air Pollution: Evidence from Changes in Wind Direction,” by Tatyana Deryugina, Garth Heutel, Nolan H. Miller, David Molitor, and Julian Reif. November 2016. NBER #22796.

PETER VAN DOREN is editor of Regulation and a senior fellow at the Cato Institute.

Reducing exposure to fine particulate matter (PM 2.5) accounts for 90% of the estimated benefits of conventional federal air pollution regulations. This has raised questions about the reliability of those benefit estimates; are they too optimistic?

The estimates of the mortality benefits of PM 2.5 reduction used by the U.S. Environmental Protection Agency come from two studies, commonly referred to as the American Cancer Society Study and the Harvard Six Cities Study. Both have been the subject of much methodological criticism.

Economists have responded to the methodological weaknesses of those studies by investigating the results of natural experiments in which people are exposed to pollutants in a manner that is plausibly random. One such research design involves random changes in prevailing wind direction that briefly expose different populations of people to pollutants. I described one such study in my Winter 2015–2016 Working Papers column. Here is another.

The authors argue that changes in wind direction affect subsequent short-term morbidity and mortality only through exposure to air pollution. They examine three-day mortality and morbidity effects among Medicare patients at the county level from 1999 to 2011. A 1 microgram per cubic meter (μg/​m3) increase in PM 2.5 for one day causes 0.61 additional deaths per million elderly during the next three days, 2.7 life-years lost per million beneficiaries, and 2.3 additional emergency room visits per million elderly, costing $15,000 per million elderly. At $100,000 per statistical life year, they estimate that the mortality cost of a 1 μg/​m3 increase in PM 2.5 is $270,000 per million elderly, an order of magnitude higher than the cost of the additional emergency room visits.

From 1999 to 2011, average PM 2.5 concentrations declined by 3.65 μg/​m3. According to the estimates of the paper, this reduction would result in 150,000 extra life-years annually, which if valued at $100,000 per life year would equal $15 billion in annual benefits. The EPA estimates that the annual compliance costs of the 1990 Clean Air Act standards were $44 billion in 2010. This suggests the PM 2.5 regulations do not pass a cost–benefit test.

Health Care Expenditures

“Do Certificate-of-Need Laws Limit Spending?” by Matthew D. Mitchell. November 2016. SSRN #2871325.

From 1965 until the early 1980s, Medicare encouraged health care capital expenditures because of its “cost-plus” reimbursement framework, which guaranteed federal payments above the marginal cost of a service. As a result, many providers were accused of wastefully overinvesting in capital, at the public’s expense.

Rather than change the incentives in this reimbursement framework, the federal government responded by mandating that states enact Certificate of Need (CON) laws. The laws would require health care providers to seek approval from state boards before making major capital investments. The thinking was that such oversight would reduce unnecessary capital expenditures. CON critics, on the other hand, charged that the laws discourage both market innovation and competition, resulting in higher prices and lower service quality.

Medicare changed its reimbursement practices in the mid-1980s and repealed the CON requirements in 1987. But 35 states and Washington, D.C. still have CON requirements. This paper surveys the refereed literature on the effects of CON programs to determine if they did, indeed, reduce wasteful expenditures and health care costs. The papers overwhelmingly conclude that CON programs increase per-unit costs and expenditures because they restrict entry and reduce health care competition.

Payday Lending

“Much Ado about Nothing? Evidence Suggests No Adverse Effects of Payday Lending on Military Members,” by Susan Payne Carter and William Skimmyhorn. March 2015.

“Access to Short-term Credit and Consumption Smoothing within the Paycycle,” by Mary Zaki. March 2016. SSRN #2741001.

Congress effectively banned payday lending to active members of the military in 2007. Prior to 2007 some states had payday lending bans while others did not. The initial assignment of soldiers to training bases at the start of their military service is random; some were assigned to bases in states that allowed payday lending, others were assigned to bases in states that did not. These facts allow the authors of these papers to conduct an assessment of how the end of payday lending for those affected by the federal ban affected outcomes relative to those soldiers who never had access to payday lending because they served in a state with a preexisting ban.

The first paper found no differences in separation from service or denial of security clearances because of bad credit among those with and without access to payday lending.

The second paper examined commissary purchases. After the ban, sales on paydays at bases were 21.74% higher than sales on non paydays. Before the ban, sales on paydays at bases near payday loan outlets were only 20.14% higher. There was a 1.6% smaller gap between payday and nonpayday sales when troops had access to payday loans. Payday loans allow members of the military to smooth their consumption across the paycycle.

Airline Mergers

“Are Legacy Airline Mergers Pro- or Anti-Competitive? Evidence from Recent U.S. Airline Mergers,” by Dennis Carlton, Mark Israel, Ian MacSwain, and Eugene Orlov. October 2016. SSRN #2851954.

Arline mergers have reduced the number of legacy airlines from six to three. Delta and Northwest have merged under the Delta name, United and Continental under the United name, and American and US Airways under American. Airlines are also now profitable for the first time in decades. Many armchair antitrust observers have thus concluded that the mergers were anticompetitive, harming consumers while pumping up airline profits.

The authors of this paper attempt to determine if this is the case. If the mergers had anticompetitive effects, routes on which the merged airlines competed directly (overlap routes) should see fare increases and output reductions (flight frequency and/​or passenger loadings) relative to non-overlap routes.

The authors confirm that fares and output on controls and treatment routes were statistically similar pre-merger. On average across all three mergers, fares on overlapping routes decreased 6.2% post-merger relative to control routes. Passenger loadings increased 12.4% and available seats increased 23.8%. Prices went down and output went up. The mergers were not anticompetitive.

Energy Standards

“Energy Efficiency Standards Are More Regressive than Energy Taxes: Theory and Evidence,” by Arik Levinson. December 2016. NBER #22956.

Economists recommend that policymakers combat negative externalities like pollution by changing prices rather than implementing “command-and-control” regulation. A tax on harmful air emissions, for instance, would encourage polluters to find the most efficient ways to reduce their emissions, whereas specific emissions control requirements—scrubbers, for instance—would fail to distinguish more efficient means of pollution control.

Unfortunately, legislatures almost always enact regulation rather than taxation; politicians would prefer to be seen mandating “clean” technologies rather than adopting new taxes. But many politicians claim that this policy choice is for a more high-minded reason: taxes are regressive, while mandates are more even-handed. Is this justification sound?

This paper examines the distributional effects of one specific command-and-control regulation: Corporate Average Fuel Economy (CAFE) standards. These standards mandate that automakers’ model-year vehicles, as a group, meet a minimum fuel-efficiency standard. The author, Arik Levinson, endeavors to determine if CAFE standards are less regressive than a similarly effective fuel tax.

Levinson first points out that a discussion of the distributional implications of taxes is incomplete without discussion of how the resulting revenues are used. The most affluent households have 10 times the income of the least affluent, but use only four times more gasoline, so a gasoline tax would be regressive in the sense that the affluent would pay a lower percentage of their income. But if the proceeds from that tax were rebated equally to all households, then the overall tax-plus-rebate program would be progressive because low-income households would get back more money than they paid.

The author then demonstrates that efficiency standards are equivalent to a tax on inefficient appliances. In the case of cars, a direct tax on energy use is a tax on gallons of gasoline used while the tax-equivalent of CAFE standards is a tax on gallons used per mile. Thus Levinson says that for any given use of the revenue (or imaginary revenue equivalent in the case of CAFE standards), the question is whether the direct tax increases faster with income than the “efficiency standard–equivalent tax.” Affluent households use four times as much gasoline as poor households, but affluent households use only three times the gasoline per mile as poor households. Thus the gas tax goes up faster with respect to income for affluent households than the tax-equivalent cost of efficiency standards with respect to income.

Since 2011, efficiency standards for cars have varied with the size of the “footprint” of the vehicle. Larger vehicles have more lenient standards on gasoline use. More affluent people buy larger vehicles. Levinson demonstrates that the net effect of the new footprint CAFE standards is to make efficiency standards even more regressive relative to a gas tax.

He concludes that on a revenue-neutral basis, a gasoline tax would indeed be regressive. But the old CAFE standards were more regressive than a gas tax would be, and the new footprint CAFE standards are even more regressive.