When to Kill the Export-Import Bank?

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Paul Krugman writes,

under current conditions mercantilism works – so this is exactly the moment when ending an export-support program really would cost jobs.

Pointer from Mark Thoma.

I say that the right time to kill it is any time you can.

If killing the Ex-Im bank is tea-party mischief, then I say let’s have more such mischief.

The AEI’s Tom Donnelly writes,

The worst thing about the defense loan program is that it only applies to our richest and best allies – NATO Europe, Israel, Japan, South Korea, the ones who can most afford to finance arms purchases on their own – and does nothing for real at-risk states in Africa, Latin America or the Middle East. The FMS-DELG duo has hampered, not helped the Pentagon’s security “partnering” efforts. In today’s environment, and particularly when China aims to replace Russia as the alternate, non-US source of front-line military equipment, the United States government needs a bigger, better and more aggressive export credit agency. The Congress should rejuvenate, not exterminate, the Ex-Im Bank.

His case for the Export-Import Bank speaks for (i.e., against) itself.

A Peevish Thought on Obamacare

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Timothy Taylor writes,

Setting up a health insurance system that offers the right incentives to patients and providers for cost-effectiveness and innovation is a fundamentally difficult task, and those practical challenges don’t disappear just by invoking talismanic phrases like “universal coverage” or “single-payer.”

The worst thing about Obamacare is not the web site glitches or the employer mandates or even the high marginal tax rates. The worst thing is that the Obama folks regard catastrophic health insurance (what I call “real insurance”) as bad and they view “insurance” that covers every little expense as good. I think it’s the other way around.

Even if you think that people will skimp on checkups if they have catastrophic coverage, then the right policy is to subsidize checkups, not insulate them from the cost of all medical services.

I like to say that as individuals, we want unlimited access to medical services without having to pay for them. Comprehensive health insurance does offer that. However, collectively, that does not work. If medical services aren’t rationed by individuals making choices, they have to be rationed by bureaucrats.

That brings us to the Independent Payment Advisory Board, or what Sarah Palin called the death panels. The IPAB is the only economically meaningful mechanism for reducing spending under Obamacare. Fifteen bureaucrats in Washington will tell doctors and patients what to do and what not to do.

If Obamacare remains in place, then I predict that in ten years IPAB will be the most powerful agency in Washington. More powerful than the Fed, the NSA, or the IRS. In fact, the health care reformers on the left want it that way. Former Senator Tom Daschle explicitly said that we need something like the Fed to run health care.

Have a nice day.

A Peevish Thought on Immigration Reform

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Art Carden points to a new Hoover project on immigration reform, a periodical called Peregrine. Tim Kane explains,

Each issue of Peregrine will consider a handful of new ideas for pragmatic, incremental reform.

I also heard Tim on a late-night radio program, and he was very articulate and persuasive in support of more immigration.

My peevish thought is that it is sort of a waste of time for economists to discuss immigration policy. Immigration is first and foremost a national security issue. Why bother talking about costs and benefits of different types of immigrant workers when we don’t actually control who comes in?

I understand the case for open borders. If we had open borders, we could have lots of people coming here, trying to make lives work. Some will be happy, stay, and become citizens, and others will be unhappy and decide to go home.

When lots of people legally come to the country, that is open borders. What we have instead are lots of people illegally coming to the country, and that is something different. It’s not an outcome that anybody explicitly advocates, but it emerges as a sort of weird compromise between open borders and enforcing an immigration policy. A hypocrisy equilibrium, if you will.

Note that this story argues that the current flood of children across the border is due to an increase in criminal violence in Latin American countries that threatens children. Again, I do not think that economists have much to contribute to the discussion.

In Our Hands

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Charles Murray’s book of that title is almost ten years old. It is relevant to the idea of a universal benefit.

For a universal benefit, I propose something like $6000 for each adult in a household and $4000 for each child. Murray proposed $10,000 per adult and zero per child.

Murray described the program as a cash grant. I describe it as flex-dollars that can only be used for “merit” goods, meaning health care, food, housing, and education.

Each of us presumes that people will purchase health insurance. I am explicit that catastrophic health insurance would be mandatory.

I propose something like a 20 percent marginal tax rate, or phase-out rate, for the universal benefit. Murray proposed a 20 percent marginal tax rate for incomes between $25,000 and $50,000, with a zero marginal tax rate otherwise. (This is a tax rate that specifically reduces the benefit, and it is over and above existing income and payroll taxes.)

So a single adult with zero income would get $10,000 under Murray’s plan, $6000 under mine. At $25,000 income, you still get $10,000 under Murray’s plan, only $1000 under mine. At $50,000 and up you get $5000 under Murray’s plan, but at $30,000 and up you get zero under mine.

A household with two adults, two children, and zero income gets $20,000 under either plan. If each adult earns $25,000, then the household gets $20,000 under Murray’s plan (because it looks at individual income, not household income) and $10,000 under mine. If each adult earns $50,000 (and up), the household still gets $10,000 under Murray’s plan. If each adult earns $50,000, the household gets $0 under my plan.

With a universal benefit, I have suggested replacing the EITC, food stamps, housing subsidies, unemployment insurance, and Medicaid with a single benefit. Actually, think of Medicaid as two programs–one for nursing homes, the other for health care. I would leave the nursing-home piece alone.

What Murray proposed in addition was to replace all of Medicaid, as well as all of Medicare and Social Security. That means that some of the benefit would have to go toward self-financing health care when you get old and self-financing some of your retirement (instead of Social Security, an adult over 65 would continue to receive Murray’s $10,000, but not my flexible benefit). Since the average person will incur about $100,000 in medical expenses after age 65, self-financing would require about $2000 a year to be saved, because it is hard to earn a return above the rate of health care cost growth. I would say that, conservatively, someone would want to save an additional $1000 per year to fund additional consumption after retirement.

After applying phase-out rates (what I am calling the marginal tax rate) and deducting the cost of self-financing medical care and additional consumption in retirement under Murray’s plan, this is how the two ideas compare:

Type of Household Income per adult Murray benefit My benefit
Single Adult $0 $7000 $6000
Single Adult $25,000 $7000 $1000
Single Adult $50,000 $5000 $0
Two Adults, Two Kids $0 $14,000 $20,000
Two Adults, Two Kids $25,000 $14,000 $10,000
Two Adults, Two Kids $50,000 $4,000 $0

Some remarks:

1. Suppose that catastrophic health insurance costs $1500 per adult and $500 per child. In that case, Murray would leave a household of four with zero income with just $10,000 per year to spend on food, housing, non-catastrophic health expenses, and everything else.

2. Murray’s plan is more generous to all but the very poor who have children. He wants people to bear the full financial burden of having children, and if that burden feels particularly heavy for the poor, this has the virtue of giving them an incentive to avoid having children.

3. Murray’s plan has a lower marginal tax rate (zero) for those earning $25,000 a year or less. The upside of this is that it really strengthens the incentive to work. The downside is that it raises the budgetary cost considerably.

4. Murray’s plan reverts to a zero marginal tax rate for those earning $50,000 or more. As far as I can tell, the main reason he wants to do this is that he thinks the additional $5000 will encourage high-income mothers to stay home with their children. I do not find this particularly persuasive, and I think you want a much stronger argument given how much this raises the cost of the plan.

5. The 18-21-year-old gets nothing in Murray’s plan. He clearly says he wants to get rid of college subsidies, so it seems to me that he wants to drop these folks into the labor pool in the expectation that they will learn to swim.

6. Keep in mind that under current policy, many low-income households face effective marginal tax rates of 100 percent or higher. That is, they are better off with something less than full-time, year-round work. That disturbs Murray and it disturbs me. It is possibly a source of a large share of social pathology.

Pre-commitment and Private Cities

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On this post, a commenter writes,

By the way, one way to solve certain coordination / collective action problems like this – “I’ll only do it if I know a lot of other people like me are also going to do it.” – is through the ‘Kickstarter’ mechanism.

…offers people the ability to pre-commit to purchase the items, but only if there are enough other precommitments. One pays nothing until the number of other commitments reaches the target subscription, and at that point the commitment becomes binding, the money is transferred, and the product produced and shipped.

The problem of filling up a new private city could perhaps be solved with some clever variation of this mechanism, but there would also be the issue of how to enforce the commitment to migrate. In this way, you could come up with a new private city business plan that includes taxes, services, and selective demographic criteria, and test the demand curves. Putting aside questions of legality, one could even try the nightclub model and discriminate with regard to pricing (like ‘ladies’ night’) to bring in people who have a special ability to attract other desirable residents who would be willing to pay a lot extra in taxes to subsidize the residency of those attractors, whom they wish to live around.

Some remarks:

1. Wasn’t there an attempt several years back to have libertarians commit to moving to the same state (I believe New Hampshire) to try to make it more libertarian?

2. Cities price-discriminate plenty today. Think of subsidies to professional sports teams.

3. I think the way to run the kickstarter city project would be to have people state conditions for moving and conditions they would help satisfy if they moved. (“I would move if there are at least two good yoga studios and at least 200 single professional men aged 30 to 40. I would help satisfy a condition about the number of physicians, the number of single females age 30 to 40” etc.) Everyone puts down a large deposit. Your deposit is refunded if your conditions for moving are not met. Otherwise, you either move or forfeit your deposit.

Casey Mulligan on the ACA

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He writes,

During a period that included more than a dozen tax increases, the ACA is arguably the largest as a single piece of legislation, adding about six percentage points to the marginal tax rate faced, on average, by workers in the economy. The only way to cite larger marginal tax increases would be to combine multiple coincident laws, such as the Revenue Acts of 1950 and 1951 and the new payroll tax rate that went into effect in 1950. Even with these adjustments, the ACA is still the third largest marginal tax rate hike during the seventy years.

We need the SNEP solution of replacing means-tested programs with a universal benefit.

Boomerang Kids

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Adam Davidson writes,

Nearly 45 percent of 25-year-olds, for instance, have outstanding loans, with an average debt above $20,000…And more than half of recent college graduates are unemployed or underemployed, meaning they make substandard wages in jobs that don’t require a college degree.

…In 1968, for instance, a vast majority of 20-somethings were living independent lives; more than half were married. But over the past 30 years, the onset of sustainable economic independence has been steadily receding. By 2007, before the recession even began, fewer than one in four young adults were married, and 34 percent relied on their parents for rent.

Pointer from Tyler Cowen.

Some comments:

1. Segments of our society are falling apart. The left’s treatments are exacerbating the problem. That is why I think that changing our system of means-tested benefits ought to be a high priority.

2. I chide my daughters for not working for a profit. But they are all out of the house. I am not a total failure.

3. Government-subsidized college loans contribute more to the problem than to the solution.

Private Cities, Continued

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On this post, Patri Friedman commented,

Think about the famous “double size, increase infrastructure cost by only 85%” rule for cities. So roughly every 16x size increase halves cost. You are trying to compete with established, funded incumbents who are easily 256x bigger than you and thus with 1/4 the infrastructure costs. And with high transaction costs for their customers to leave.

I think that the last sentence, concerning transaction costs of leaving, is interesting. I am not sure what the equilibrium would like if you brought those costs to zero.

Suppose that a big challenge with creating a new city is that the value is in the people there. This creates a Catch-22. You cannot convince me to move to a city until I know there are people there with whom I want to interact. And there won’t be people with whom to interact until you convince people to move to the city.

If there were zero transaction costs in changing cities, then you might get me to try a city before I am sure that it has enough interesting people for me. However, if I know that there are zero transaction costs to changing cities, then when I see interesting people in a city I may not be confident that they will stay there. So what do I do in that case?

I think that in that scenario, cities would behave like dating bars. Such bars tend to surge in popularity until they suddenly lose clientele.

Who Wrote These paragraphs?

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What other tribe will tell the Fed how to set interest rates, or Congress when to spend money? Mainstream macro has its discontents, but the more time you spend among the people pushing the alternatives, the more you realize how much lesser of an evil the mainstream academics represent.

Check your answer.

We have no business throwing applied-math majors into an economics Ph.D. program. Both a liberal arts mora-philosophy B.A. or equivalent and two years out in the real world working at a job of some sort should be required.

We have no business offering a narrow economics B.A. at all. At the undergraduate social-science level, the right way of organizing a major curriculum is to offer some flavor of history and moral philosophy: enough history that students are not ignorant, enough sociology and anthropology that students are not morons, and enough politics and philosophy that students are not fools. (And, I would say, a double dose of economics to ensure that majors understand what is key about our civilization and do not get the incidence of everything wrong.)

…A first-rate undergraduate economic major will also spend due time on government failure and bureaucratic failure, and thus reach the very economic conclusion that there are substantial trade-offs, and we must pick our poison among inadequate and imperfect alternatives, even in institution design.

Check your answer.

Pointers from Mark Thoma. Some thoughts on why there is such a focus on math.

1. Some economists really believe that the answers can be found inside equations.

2. Some economists (I think of Robert Hall) think that mathematical ability provides a reliable signal of overall intelligence, while other indicators are all more noisy.

3. It is a stable, self-perpetuating equilibrium. Once the math guys took over, they just keep giving the best jobs to other math guys.

4. Important questions in economics tend to have messy, ambiguous answers. Therefore, economists who do a bad job at answering important economic questions, or who do not even bother asking important economic questions, can do quite well for themselves.

5. Graduate students think that a class where the professor explains equations provides tangible training, while a class where a professor poses philosophical issues does not.

Mortgage Equity Withdrawal

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Bill McBride tracks data on mortgage equity withdrawal as a percentage of disposable income. You withdraw mortgage equity when you take out a second mortgage or refinance your existing mortgage with a larger loan (“cash-out refi,” as we call it). The graph at the link shows how from 2002-2007, the withdrawal rate was between 4 and 9 percent each quarter. Ordinarily, the number should be slightly negative, as people pay down the principal in their mortgages. We had big negative numbers in 2009-2011, “mostly because of debt cancellation per foreclosures and short sales, and some from modifications.”

Thanks to a commenter for the pointer. Some further comments:

1. From an AS-AD perspective, you can say that mortgage equity withdrawal boosted AD from 2002-2007, and then it went into reverse when the subprime crisis hit. This might be the best story for the drop in AD.

2. From a PSST perspective, you can say that a lot of consumption patterns were unsustainable, based on people spending capital gains on housing. When the capital gains leveled off and then turned into capital losses, the economy needed to find new patterns of trade, and it still has not done so.

3. Apropos of nothing, I once cursed out the guy who developed the measure of mortgage equity withdrawal. In about 1982 or so, Jim Kennedy was the forecaster for Industrial Production, and I was the forecast co-ordinator (we were both economists at the Fed). The forecast process, which was pretty much all clerical, was time-consuming and grueling. I had finally put a forecast to bed when Jim came in and said that the forecast for Industrial Production was out of synch and needed an update. He was very concerned about who might be blamed for the glitch. I shouted, “I don’t care whose bleeping fault it is!” I really lost my temper. It was just a case of my being tired, still at work long after I usually went home, and caught off balance by having my relief at being finished turned to anguish at finding that there was more work I had to do.