Category Archives: Setting Economic Priorities

SNEP and the EITC

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Reihan Salam writes,

In theory, the EITC is a simple program. But in practice — and in particular from the vantage point of recipients — it’s opaque and complex. It’s almost surprising how much recipients did know about how their behavior related to the refund.

Salam’s piece has many useful links for what I am calling the Setting National Economic Priorities project. One of the project’s ideas is to introduce a standard “fade-out” rate of 20 percent for all means-tested programs in the safety net. A next step might be to consolidate all such programs into a single “flexdollar” benefit program, which I have described in previous posts.

My priors, which I think are supported by the research cited by Salam, is that trying to use a program like the EITC for social engineering is a mug’s game. I think that the flexdollar idea is a reasonable compromise between offering a pure cash benefit and trying to do fine-grained social engineering.

SNEP: Fade-out Benefits First, Consolidate Later?

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A few days ago, I proposed an idea to replace means-tested programs with flexible benefits. Part of the idea was to get rid of the various income thresholds and instead start with a fixed sum of flexdollars that “fades out” at a rate of 20 percent for each dollar that a household earns.

It occurs to me that this can be thought of as two separate proposals.

1. Replace all earnings thresholds in means-tested programs with a fade-out.

2. Consolidate means-tested programs into flexdollars.

Since my main concern is to lower implicit marginal tax rates on low-income households, maybe the simplest thing to do is to focus on doing (1) first, and leave (2) for later. Thus, for each means-tested program, replace all earnings tests with a fade-out rate of 20 percent, meaning that you lose 20 cents in food stamps for every dollar of income. So if a family of four with zero income gets $8000 per year in food stamps, a family with $20,000 in income would get $4000, and a family with $40,000 in income would get no food stamps.

In fact, food stamps work sort of like this. See A Quick Guide to SNAP. But the rules are more complex. And then you have Medicaid, welfare, housing subsidies, and Obamacare subsidies, all with different approaches to means testing. I think it would be pretty straightforward to introduce a “flat tax” of 20 percent for all of these means-tested programs. With Medicaid, perhaps the fade-out could be applied to the Federal subsidy given to states, and then it would be up to states to pass this through to individuals.

Comments welcome.

SNEP Solution: Alternatives to the FDA Process

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One of the problem areas is anachronistic regulatory models. The FDA drug approval process is onerous. The FDA acts as if the worst error that it can make is to approve a drug that it later regrets approving. Essentially, it treats every drug as snake oil unless proven otherwise. As scientific progress speeds up, the FDA process turns into a significant bottleneck.

Bartley J. Madden and Gregory Conko propose,

However, after making a preliminary demonstration of safety and efficacy by completing Phase I trials and at least one Phase II trial, drug manufacturers would be given the option to place an experimental product on a parallel Free To Choose track that would enable patients, advised by their doctors, to make an informed choice to use the experimental drug. Drug makers could opt to continue pursuing a standard FDA approval—with all the attendant clinical testing that would require—concurrent with placing a drug on the Free To Choose track. Or, they could put off standard FDA-regulated clinical trials indefinitely, using Free To Choose track experience to guide future development decisions and randomized control trial designs.

Thanks to Alex Tabarrok for pointing me to the article. However, I think that there may be other instances in which the social cost of denying access to a drug is high relative to the risk that the drug will cause harm.

Somebody who is dying or enduring great suffering might have little or nothing to lose from trying an unproven remedy even before Phase I trials are complete.

As medicine becomes more customized, to the genetic makeup of the patient (or, in the case of cancer, the genetic makeup of the tumor), a question arises as to what is the relevant population for a clinical trial.

SNEP Solution: Flexible Benefits and Extreme Catastrophic Health Insurance

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The problem is high implicit marginal tax rates on many people who are eligible for benefits from means-tested government programs. I think that a generic solution might consist of flexible benefits.

One approach would be to replace all forms of means-tested assistance, including food stamps, housing subsidies, Medicaid, and the EITC, with a single cash benefit. For this purpose, we might also think of unemployment insurance as a means-tested benefit.

The classic approach is the negative income tax. What I would suggest is a modification of the negative income tax, in which recipients are instead given flexdollars. These would be like vouchers or food stamps, in that they can be used only for “merit goods:” food, health care/insurance, housing, and education/training. One way to think of this is that it takes the food stamp concept and broadens it to include the other merit goods.

Flexdollars would start at a high level for households with no income and then fade out at rate of 20 percent of the recipient’s adjusted gross income. This “fade-out” would act as a marginal tax rate on income, so we should be careful not to set the fade-out rate too high.

Suppose that a household receives $7500 in flexdollars per member. Thus, a family of four with zero income would receive $30,000 in flexdollars. A family of four with $20,000 in income would lose 20 percent of $20,000, or $4,000, to fade-out, and hence would receive only $26,000. A family of four with a $50,000 income would receive $20,000. A family of four with a $100,000 income would receive $10,000. A family of four with a $150,000 income would receive nothing.

At the end of the year, unused flexdollars could go into flexible savings accounts. Tghese could be used for medical emergencies, down payments when buying a home, or to save for retirement.

There are two ways in which this represents an improvement over the current approach. First, it ensures that implicit marginal tax rates are low for benefit recipients. As it is now, people with low incomes easily can find that if they work they lose more in benefits than they obtain in pay. I think that is very corrosive, and I would put a high priority on restoring the incentive for people to work, while still giving them the means to meet basic needs.

The second benefit is that it gives recipients more flexibility and choice. Just as food-stamp recipients can decide for themselves what groceries to buy, flexdollar users can decide for themselves how much to allocate to housing vs. food vs. training.

One problem with a negative income tax or with flexdollars is that some families are needier than others, particularly with respect to medical issues. Someone with a lot of ailments and little in the way of resources will not have enough flexdollars to pay medical bills (remember that there is no longer Medicaid in this approach).

The solution I would propose would be to have taxpayers provide extreme catastrophic health insurance that kicks in if a household’s medical expenses exceed $30,000 in a year. For every additional dollar of medical expenses over $20,000, the government would pay 90 percent. For example, a household requiring $100,000 would receive $72,000. Of course, households would be permitted to obtain private insurance to cover lower levels of spending and/or to cover the remaining 10 percent of higher levels of spending. Overall, this idea bears some resemblance to the idea of “catastrophic reinsurance” that was floated about ten years ago.

I am thinking that we would eliminate Federal support for unemployment compensation. Instead, perhaps a private-sector form of unemployment insurance might emerge, and households would be able to buy this using flexdollars. If it turns out that nobody wants to spend their flexdollars on unemployment insurance, then that might be a sign that unemployment insurance is not such a great thing.

It might be best to phase in implementation. The first phase might be to fold in the EITC, food stamps, housing vouchers, and health insurance subsidies. Those are all programs that already take the form of cash or vouchers given to households. A later phase would be to replace Medicaid and unemployment insurance with flexdollars given to households. (Of course, if states want to continue to continue Medicaid or to provide unemployment compensation, without any Federal dollars to support the, they are welcome to do so. I doubt that would happen.) Another phase would be to wind down all forms of housing assistance, mortgage subsidies, Federal aid to education, training programs, Pell grants, and student loan programs, and replace these with flexdollars.

One challenge with implementation is in deciding which goods and services are eligible for flexdollars. Just as the food stamp program has to decide which groceries are eligible, the flexdollar program has to decide what counts as eligible medical services, housing services, and education services. Yes, that opens up the floodgates for lots of rent-seeking. If that gets really out of control, then it would be better to give people a straight cash benefit.

This is just a concept I am toying with. Criticism welcome.

Note that I once wrote an essay that I called The FlexDollar Welfare State that was not about an idea of this character. Instead, the essay criticized the George W. Bush Administration’s domestic policy initiatives. Actually, the best thing about the essay is the discussion of the oxymoron of “company benefits.”

What is interesting is that workers are not naturally suspicious of companies that pay “good benefits.” Apparently, most people believe that “good benefits” reflect generosity and sharing by the company, rather than a shrewd, calculated effort to save on compensation costs. My guess is that the people who see through the scam of “good benefits” tend to gravitate toward self-employment, which allows them to take their payments in cash and buy benefits themselves.

SNEP: A Spectrum Solution

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In Setting National Economic Priorities, the three problem areas are

1. Impediments to labor supply and demand
2. Anachronistic regulatory environment relative to technological change
3. Unsustainable fiscal path

Under (2), there is the problem of the FCC and spectrum. Many years ago, Coase argued that spectrum could be allocated using property rights, rather than command and control. The path of technology since then has made his ideas both more feasible and increasingly desirable.

I view the FCC as both structurally and culturally unable to move decisively away from command and control. Accordingly, my proposal would be to take spectrum regulation out of the hands of the FCC. Instead, I would transfer responsibility to a new agency, which might be called the Spectrum Property Rights Resolution Authority. All spectrum licenses would immediately convert to property rights. The owners of a particular band in a particular location could determine its use. The Resolution Authority would define these property rights more precisely. It also would provide mechanisms for settling conflicts among spectrum rights owners and resolving disputes between spectrum rights owners and device manufacturers.

Another problem is that some spectrum bands are reserved for government agencies, which proceed to waste spectrum by holding onto more than they need or by using obsolete equipment. I would propose privatizing this spectrum, and then having the government lease back what it needs. A Government Spectrum Leasing Corporation should be chartered for that purpose. This is similar to the Government Services Administration, which leases government buildings. The spectrum leasing corporation would be encouraged to upgrade the equipment used by government agencies, in order to economize on spectrum leasing.

Neither of these proposals is particularly original, by the way.

Reihan Salam on Low-Wage Employers

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He writes,

McDonald’s and other low-wage employers…are taking on a task that many American families and schools are failing to perform. To put it bluntly, McDonald’s is a company that hires large numbers of people with limited skills, many of whom are teenagers and young adults, and it introduces them to the ways of the workplace.

…Perhaps the employers who makes a risky bet on a raw employee, and who take the time and effort to train her, should be entitled to a small portion of her lifetime earnings as she moves on to more lucrative employment. That would create a powerful incentive for employers to devote real resources to building the skills of their workers.

At this point, the working title for my economic priorities project is “Setting National Economic Priorities.” “Setting National Priorities” makes a grandiose idea seem even grandioser. “Setting economic priorities,” which is another alternative, might not refer to economic policy at all.

I am currently most comfortable with the following three priority areas:

1. Improving labor supply and demand incentives for low-wage workers. Improving labor supply means making sure that the structure of means-tested benefits does not create high implicit marginal tax rates for low-wage workers. Improving labor demand means lowering the cost to employers of hiring low-wage workers, particularly health insurance mandates and payroll taxes. I think it also means removing barriers to entry in the education and health care industries. I think it also means reducing the economic friction caused by occupational licensing.

2. Reconfiguring for the 21st century the regulatory missions and mechanisms for dealing with industries that have undergone significant technological change. This includes telecommunications, medicine, the electric grid, and eventually probably should include air traffic and motor vehicles (because of drones and self-driving cars).

3. Reducing the risk of a fiscal train wreck. I suspect that bringing this risk down to what I would consider a reasonable level requires taking steps on Social Security and Medicare that are more radical than what is politically feasible. I would aim for more modest goals, such as indexing the eligibility age for both programs to longevity (hardly a modest goal from a political standpoint!) and developing budget reporting mechanisms (accrual accounting? stress testing?) that provide important information not currently used in the budget process.

Anyway, Reihan’s column fits in with (1).

Setting National Priorities, Revised Version

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Again, the inspiration is an old Brookings Institution series, called Setting National Priorities. The idea is to create a web document, with a lot of cross-references, that works top-down from a few high-level objectives down to specific administrative/regulatory and legislative changes. Schematically, it might be:

  1. Ultimate Objective I
    1. Intermediate Objective IA
      1. Administrative/regulatory initiatives
        1. Administrative/regulatory initiative ARIA1
        2. Administrative/regulatory initiative ARIA2
      2. Legislative initatives
        1. Legislative initiative LIA1
        2. Legislative initiative LIA2
    2. Intermediate Objective IB
    3. …
  2. Ultimate Objective II
    1. Intermediate Objective IIA
    2. …

At each level in the outline, there would be a single member of the Administration who is the “owner” responsible for execution. That is, there must be an organization chart corresponding to the outline. I will have more to say about the organization chart in future posts.

Here is a more specific example of a high-level objective and the lower breakdown.

  1. Increase the employment/population ratio by three percentage points. This objective will be owned by the chief of domestic government operations.
    1. Reduce for businesses the cost of compensation by 20 percent for workers earning less than $30,000 per year. This objective will be owned by the project manager for reducing the cost of compensation.
      1. Regulatory Changes
        1. Rewrite regulation X to say ____. This initiative will be owned by the head of the agency responsible for regulation X.
      2. Legislative Changes
        1. Pass legislation modifying employer-paid payroll tax rules to _____. This initiative will be owned by the project manager for the payroll tax legislative package.
    2. Reform safety-net programs and tax code in order to limit the total of implicit and explicit marginal tax rates for workers earning less than $80,000 per year to no more than 35 percent.
      1. Regulatory changes
        1. Rewrite eligibility rule Y to say ____. This initiative will be owned by the head of the agency responsible for eligibility rule Y.
      2. Legislative changes
        1. Enact legislation to change safety-net program Z to ____. This initiative will be owned by the project manager for the safety-net reform program legislative package.
        2. Enact legislation modifying employee-paid payroll tax rules to ____. This initiative will be owned by the project manager for the payroll tax legislative package.
    3. Replace anti-competitive occupational licensing rules with sensible consumer protection in health care and other services…[regulatory and legislative changes]

This is still very sketchy, but I hope it gives readers a better idea of the sort of thing I have in mind.

An SNP Project?

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The Brooking Institution used to put out a grandiose document called Setting National Priorities. It was sort of a “shadow” budget document. I looked for a recent version, but I did not find one.

Anyway, I am in the midst of noodling over various possible projects. One idea is to try to produce a version of SNP that would be designed with a Republican Administration in mind.

I like the idea of a pyramid model. That is, there should be a few high-level objectives, and then below that would be initiatives that feed into those objectives, and below that would be components of those initiatives, and so on. There should be between three and five high-level objectives.

For example, a high-level objective could be to revive the economy by unleashing entrepreneurship in nonfinancial business, including education and health care.

Another high-level objective could be to put fiscal policy on a sustainable path.

Another high-level objective could be to align regulatory missions and policies to 21st-century technological reality in energy and telecommunication.

One can imagine this being presented in WIKI format. Comments on the pros and cons of that for this project are welcome.

I realize that I need to do a lot more to flesh out this idea. Assuming it has some appeal (to others, but most of all to me), I will post more about it as it evolves.