He left out Medicaid, I think, because he recognizes that he couldn’t commit to preserving funding levels for it because it’s unrealistic as a fiscal matter. Unless we address Medicaid’s spending trajectory, we won’t be able to address our fiscal problems.
In other words, if he folds Medicaid in with other anti-poverty programs, he either has to cut the total amount spent on poverty or leave in place a fiscal doomsday machine. I’ll have to think about that argument.
On the safety net, his Expanding Opportunity plan says,
It should always pay to work. But fixing these incentives is no easy task. To phase out benefits more slowly would mean to subsidize millions of middle- and even upper-income families; in other words, it would be prohibitively expensive. But lowering the effective marginal tax rate at the bottom of the income scale by reducing the amount of aid would mean deep cuts for the most vulnerable.
Suppose we are talking about cash assistance. You can pick two of the following three characteristics:
1. Enough money for people with no income to be able to obtain basic needs, such as food and medical care.
2. Low implicit marginal tax rates, meaning that as people earn their own income, their cash benefits phase out slowly (or not at all).
3. Low overall budget cost.
What Ryan is saying is that he will leave it up to the states to deal with these trade-offs. His thinking is that if aid is administered locally through community and non-profit agencies, those institutions can attach the appropriate conditionality to receiving aid. If someone is able to work but does not seek or accept work, the agency can cut that person off. It is harder for a remote Washington agency to make the determination of who is trying to find work and who is not.
These local providers also can customize aid. As Ryan puts it,
it makes little sense to provide a household with a consistent stream of SNAP benefits when what the household may need most is reliable transportation to and from work. Giving providers this kind of flexibility will allow them to intervene early on with targeted benefits in cases where short-term assistance can prevent someone from falling into deeper poverty.
I strongly agree with Ryan that conditionality and customization ought to be applied at the local level, not the Federal level. However, my own view is that only some income assistance should be conditional and customized. I would like to see the Federal government provide assistance that depends on income but is otherwise unconditional. I think that the government assistance should phase out at a low rate of, say, 20 percent or 25 percent as an individual’s earnings rise.
My thinking is that this federal assistance might not be sufficient to satisfy condition (1). State and local governments would fill in the “needs gaps.” They would do so by looking carefully at individual household situations, attaching conditions and customizing.
Ryan would address the issue of Federal income assistance by expanding the Earned Income Tax Credit (EITC) so that it covers childless workers. Also, he writes,
another potential area of reform should focus upon EITC simplicity and delivery. If families received
the credit with their paychecks, the link between work and the EITC would be that much clearer.40 This reform
would also allow low-income to keep more of their money if it could reduce improper payments (which
amounted to $13.3 billion in fiscal year 2013 alone); they wouldn’t have to rely on tax-preparation firms to get
the credit. The most recent attempt at creating a periodic EITC was through the Advance EITC, which
experienced low take-up rates and extremely high rates of fraud and noncompliance.43 This proposal, therefore,
would direct the Treasury Department to investigate further how to provide a work-based tax credit that may
appear on a worker’s paycheck.
Finally, I commend Stephanie Mencimer of Mother Jones for offering a serious, informed critique of what I am calling conditionality and customization. She concludes,
the safety net today really doesn’t deliver the kind of customized service that Ryan thinks it should. It’s just too expensive, too hard to provide on a large scale, and in the end, not all that more effective than simply giving people money they need to keep the lights on until they can get back on their feet on their own.
Read the whole thing. Pointer from Tyler Cowen. Again, I think that some assistance should be customized/conditional, and funded at the state and local level. Federal assistance should look more like straight cash, with crude, simple rules.
Ryan excludes Medicaid from his Opportunity Grants. But truly untangling the safety net requires disassembling Medicaid and allowing that funding to be reallocated, either to new healthcare programs or in some instances to different ends entirely. Our current allocation of spending across healthcare, housing, nutrition, training, etc. is an arbitrary artifact of separate legislative authorizations and bureaucracies evolving over decades. We should not be segmenting healthcare (which is as large as all the other buckets combined) as somehow untouchable, especially when it is not where someone in poverty would likely want to spend a marginal dollar.
I agree.
Cass also writes,
Ryan proposes reforms to the EITC that bring it closer to a wage subsidy (e.g., tying it directly to each paycheck), but for reasons unclear does not go the final step of simply replacing one with the other. More problematic, the expansion he proposes is small in both scope and scale – the result of funding it only through the cancellation of a potpourri of small programs and tax expenditures. For a work-incentives-led approach to be effective, funding to a wage subsidy needs to expand far more dramatically – ideally by reallocating it from existing anti-poverty programs that already go to those who work.
I agree with this criticism, also. But I share Cass’s overall take on Ryan’s proposals, which is that they are good reforms in an area much in need of reform.
Each state that wanted to participate would submit a plan to the federal government. That plan would lay out in detail the state’s proposed alternative. If everything passed muster, the federal government would give the green light. And the state would get more flexibility; it would get to combine into one stream of funding up to eleven different programs—things like food stamps, housing assistance, child care, cash welfare. This new, simpler stream of funding would become the Opportunity Grant, and it would be budget neutral. The state would get the same amount of money as under current law—not a penny less.
In effect, the state would say, “Give us some space, and we can figure this out.” And the federal government would say, “Go to it—on four conditions”: First, you’ve got to spend that money on people in need—not roads, not bridges, no funny business. Second, every person who can work should work. Third, you’ve got to give people choices. The state welfare agency can’t be the only game in town. People must have at least one other option, whether it’s a non-profit, a for-profit, what have you. And fourth, you’ve got to test the results. The federal government and the state must agree on a neutral third party to keep track of progress. That’s the deal.
There is much more here. I will read it and get back to you. Meanwhile, some first thoughts:
1. Devolving responsibility to the state level is a very defensible idea. The most-admired welfare states, from Sweden to Singapore, are much smaller than the United States.
2. My initial reaction to this is much more favorable than my initial reaction to “Room to Grow.” “Room to Grow” involved too much political positioning and gesturing for my taste. Instead Ryan’s proposals are designed to repair a set of programs that have become incoherent, rigid, and dysfunctional.
Interesting throughout. One early excerpt:
Russ: Yeah. I have a different perspective. I give money to food banks, also. But I also like giving cash to poor people, particularly [?]–I hate to say this; my offense on people, and I don’t know if I’ve talked about this on EconTalk because, particularly if they are going to spend it on drugs and alcohol, I sometimes feel like it’s good to give them cash. Because sometimes when you are desperately miserable, drugs and alcohol might be what you want. People say to me: Doesn’t the donor have a right to decide what the money is spent on? Of course the donor can earmark it. You can give to the food kitchen if you want, or I can. But I like the idea that I respect the recipient, and I treat the recipient like an adult, not like a child, and I don’t decide for that person what’s good for them. I let them make that decision. And I think that’s a dignified way to interact with desperately poor people. Even when they are a little bit off the beaten track
It comes from William Emmons, but I cannot find the presentation, which is referenced here. I got as far as I did by following a pointer from Tyler Cowen.
Emmons shows median real income for households headed by college graduates roughly constant from 1991 to 2012, with median real income over that same period falling over 15 percent for households headed by those without college degrees.
Some remarks:
1. I would guess that the share of households headed by someone with a college degree has gone up, so that perhaps overall median household income has gone up. And mean incomes have probably gone up even more, because the mean includes high-salary individuals, successful investors, and entrepreneurs.
2. This looks like workers without college degrees becoming ZMP.
3. Other factors of production, namely capital and foreign workers, are putting downward pressure on American wages.
It’s actually the poor and lower middle classes whose wealth — such as it is –lies fallow in no-interest bank accounts (or wealth-eroding cash if they have no bank account at all). It’s not the rich, but middle-class retirees that try to eke out a living on low-yield interest rates.
He is arguing against Paul Krugman, who claimed that low interest rates hurt the rich, who otherwise enjoy clipping bond coupons.
I think it would be wise for economists to refrain from making claims about broad classes of people gaining or losing from low interest rates. Interest rates are an endogenous variable. At best, you can talk about who benefits from whatever exogenous event created low interest rates. Even then, general equilibrium analysis of that sort is rather difficult.
Maybe you want to talk about who benefits from the Fed’s policies. That is a proper question. In my view, the only clear beneficiaries are shareholders and managers of large banks.
[If house values continue to rise], Piketty (2014) will be right about the rise of capital in the twenty-first century. But the mechanism is quite distinct from the one proposed by Piketty (2014) (a better title would be Housing in the Twenty-First Century), and it has radically different policy implications. For instance, the literature studying markets with high housing costs finds that these costs are driven in large part by artificial
scarcity through land use regulation—see Glaeser, Gyourko and Saks (2005) and Quigley and Raphael (2005). A natural first step to combat the increasing role of housing wealth would be to reexamine these regulations and expand the housing supply.
Pointer from Tyler Cowen, who writes
Piketty’s mechanism of accumulation, as laid out in his book, is simply the wrong mechanism for understanding growing inequality, both theoretically and empirically.
That would appear to be the correct post-mortem on Piketty.
The chapter is by Scott Winship.
rather than instituting work-promoting reforms program-by-program, there is much to be said for consolidating them, thoughtfully modifying phase-out rates to transparently encourage people [to] move to work, and offering supports outside the confines of specific programs.
As part of SNEP, I have a somewhat specific proposal that attempts to do this. Winship refers a proposal by Oren Cass that sort of sounds like mine, but as I look closer the resemblance seems to go away. You can read Reihan Salam’s write-up from last year on the Cass proposal.
As an alternative, Winship writes,
Congressman Paul Ryan, who chairs the Budget Committee, has spoken favorably of the United Kingdom’s “universal credit.” Under this approach, various means-tested programs would again be consolidated, and benefits would be distributed to families as a single amount rather than through separate programs with their own applications procedures and bureaucracies. A universal credit may be designed with a single phase-out schedule as beneficiaries move into work
Yes. I need to find out more about the British experience, which I understand ran into a number of implementation snafus.
Again, I raise the issue of coherence. The big enchilada of means-tested programs is Medicaid. If you going to have a coherent policy document, then you need to decide whether or not Medicaid reform is going to consist of folding into a universal credit. Instead, the chapter on health care reform talks about a completely different approach to Medicaid.
I want to see a policy playbook, and that means that the ideas have to fit together. Relative to that expectation, RtG comes across to me like a bunch of vendors standing outside the ballpark, all shouting. “Tax credits!” Getcher health care reform here!” “Gotta have higher ed reform!”
1. From a Francophone blogger.
comparing the mean wealth of the x% through time is an implicit selection process where you only select the winners and forget the losers.
In other words, there are two ways to explain why the mean wealth of the x% has grown faster than the mean wealth of the whole population. According to Piketty, it means that the richer you are in the first place, the faster your capital grows over time (hence, the dynastic wealth world he foresees). But it might also be the opposite: this phenomenon is exactly what we should expect to see in a world of high wealth turnover, a world where fortune rewards skills, hard work and risk taking. Quite symptomatically, Piketty and its numerous followers have completely dismissed that possibility.
Pointer from Tyler Cowen.
The phrase “the income of the top X percent grew by z percent” is always a mis-statement, because of turnover among the top x percent. The point made above is that such a figure is always an upward-biased estimate of the actual growth of the actual incomes of actual people in the top x percent.
2. From Martin Feldstein.
his thesis rests on a false theory of how wealth evolves in a market economy, a
flawed interpretation of U.S. income-tax data, and a misunderstanding of the current nature of household
wealth.
These two criticisms cast aspersions on Piketty’s empirical analysis, which Feldstein’s former student Larry Summers said deserves a Nobel Prize.