Category Archives: Setting Economic Priorities

Libertarian Scandinavian Welfare State?

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Olivia Goldhill writes,

The Finnish government is currently drawing up plans to introduce a national basic income. A final proposal won’t be presented until November 2016, but if all goes to schedule, Finland will scrap all existing benefits and instead hand out €800 ($870) per month—to everyone.

Pointer from Tyler Cowen.

Before the 2016 election turned into a Trumped-up referendum on immigration, I had a vague hope of promoting a roughly similar idea for the U.S. Get rid of food stamps, housing subsidies, Federal payments for Medicaid, etc., and replace with a basic income. Let the states or local governments deal with people who have particular needs, such as people with uninsurable medical conditions.

Accrual Accounting for Government

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Jeremy Liss writes,

By using an accounting method known as cash-basis accounting, legislators project future spending without having to consider billions of dollars of long-term financial commitments, leaving many budgets balanced in name only.

The Federal government also should have accrual accounting. In fact, back when I was drawing up my preferred list of priorities for the 2016 campaign, this was on the list. But I do not think that Donald Trump is planning on making it an issue.

Punishing Low-income Workers

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Commenting on a new CBO report, Charles Hughes writes,

The median marginal tax rate for households just above the poverty level is almost 34 percent, the highest for any income level. Some households that receive larger benefits or higher state taxes have even higher effective rates: 10 percent of households just above the poverty line face a marginal rate higher than 65 percent. For each additional dollar earned in this range, these households would lose almost two-thirds to taxes or lost benefits. The comparable rate for the highest earners, households above 400 percent of the poverty level, is only 43.4 percent. If anything this analysis might understate how steep the effective marginal rates are for some households. CBO only considers the combined effect of income taxes, payroll taxes, SNAP and ACA exchange subsidies, so households that participate in other programs like TANF or housing assistance could face even higher rates.

I think that this ought to be a big issue. Sending a message to low-income households that says, in effect, “You might as well not work” is bound to have bad consequences. I wish that the Republicans were talking more about this and less about immigration.

The Welfare State, Europe and America

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Michael Tanner and Charles Hughes write,

In Austria, Croatia, and Denmark, the effective marginal tax rate for someone leaving welfare for work was nearly 100 percent, meaning that a person would gain virtually no additional income from working. In another 16 countries, individuals would face an effective marginal tax rate in excess of 50 percent.

Benefits in the United States fit comfortably into the mainstream of welfare states. Excluding Medicaid, the United States would rank 10th among the EU nations analyzed, more generous than France and slightly less generous than Sweden. Thirty-five states offer a package more generous than the mean benefit package offered in the European countries analyzed.

In my view, the key goal of reform should be reducing the marginal tax rate. This can be done either with a high level of benefits (in which case the budget cost is very high, and people with relatively high incomes will still be receiving benefits) or a low level of benefits (in which case we are looking for charities or local governments to fill in gaps). I prefer the latter approach.

You can look at my old posts on universal benefits or flexible benefits, often in the category “Setting Economic Priorities.” I once wanted to do a project that would try to put something like that on the agenda for the 2016 election campaign. That looks like something that would have been doomed, seeing how the campaign is actually shaping up. It looks as though the Republicans are going to have to spend so much time talking economic nationalism with respect to Mexico and China that even if they win the Presidency, they will have no economic policy mandate whatsoever.

Make Working Matter

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Raven Molloy, Christopher L. Smith, and Abigail Wozniak write,

internal migration within the United States has fallen continuously since the 1980s, reversing the upward trend that occurred earlier in the 20th century.

Pointer from Richard Florida.

The kaleidoscope is not shaking so much, which may impede the formation of new patterns of specialization and trade. What is that? The authors write,

We find a decline in the wage gain associated with changing employers, but no change in the wage gain
associated with staying at the same employer (i.e. the return to firm-specific tenure). We find qualitatively similar results in the Current Population Survey (CPS) and Panel Study of Income Dynamics (PSID). Although our evidence is only descriptive, it suggests that the distribution of the relevant set of outside offers has shifted in a way that makes labor market transitions—and hence geographic transitions—less desirable to workers.

So, maybe some of the wage differentials that used to cause people to migrate within the U.S. have been arbitraged away. But what about the differential between working and not working? Shouldn’t that be enough to motivate people to change locations?

My answer would be that the accumulation of fragmented means-tested programs has produced a high implicit marginal tax rate on people who do not have steady work. This gets back to the idea of consolidating those programs into a single flexible benefit program with a clear, low marginal tax rate.

The EITC in Practice

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Timothy Taylor writes,

The EITC adds a lot of complexity to the tax forms of the working poor, who are often not well-positioned to cope with that complexity, nor to hire someone else to cope with it. About 20% of EITC payments go to those who don’t actually qualify, which seems to happen because low-income people hand over their tax forms to paid tax preparers who try to get them signed up. Of course, there’s another group, not well-measured as far as I know, of working-poor households who would be eligible for the EITC but don’t know how to sign up for it.

One of the advantages of a universal benefit is that you give the money to everyone. My idea is that you would then tax some of it back at a marginal rate of 20 or 25 percent. That is, for every dollar that someone earns in the market, they are lose 20 cents or 25 cents in universal benefits. Compared to a marginal tax rate of zero, 25 percent is more complex and has a disincentive. But it is much less complex and de-motivating than our current system of sharp cut-off points for benefits like food stamps and housing assistance. And having a non-zero tax rate allows you to have a higher basic benefit at lower overall budget cost.

Michael Tanner on a Guaranteed National Income

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He writes,

As strong as the argument in favor of a guaranteed income may be, there are simply too many unanswered questions to rush forward with any such plan. Opponents of the welfare state have long criticized its supporters for believing that even good intentions justified failed programs. In considering some form of a universal basic income, we should avoid falling into the same trap. Instead we should pursue incremental steps: consolidate existing welfare programs, move from in-kind to cash benefits, increase transparency, and gather additional data. This would allow us to reap some of the gains from a universal income without the costs or risks.

It is a comprehensive, well-balanced paper. Nonetheless, I disagree with his conclusion. I think that the incentive problems with the current system are so bad that I would like to see the next Administration take its best shot at something better. As you know, my preference is for a negative-income-tax type system, but with the added administrative issue of having the grants be in the form of flexible-benefit dollars that only can be used for food, housing, medical care, and education. In terms of the trade-offs Tanner discusses, I am willing to incur higher administrative costs in order to keep the overall cost of the grants lower while trying to keep the implicit marginal tax rate below 25 percent.

Because the current system discourages marriage and work, I think that the larger mistake would be to leave it in place rather than try something that is likely to be better, knowing that it will be imperfect.

Reason Roundtable on Reform Conservatism

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Self-recommending.

Ben Domenech writes,

[Yuval] Levin’s lofty governing philosophy is at odds with the incongruent grab bag of policies that reformocons offer.

That pretty much summarizes my reaction to Room to Grow, which took me several blog posts to articulate.

In terms of Jonathan Rauch’s dichotomy, the reform conservatives are closer to professional politicians, who scorn ideological purity that leaves you unable to exercise power. Libertarians behave more like amateurs. It certainly is unrealistic to expect a candidate to appeal to the Republican base by taking a libertarian view of immigration, just as it would be unrealistic to expect a candidate to appeal to the Democratic base by taking a libertarian view of education policy, health care policy, etc.

However, even if I try to think like a “professional,” I have problems with what we have seen from the reform conservatives thus far.

On foreign policy, I would like to see reform conservatives commit to not getting bogged down in another nation-building exercise. Can they stay away from promises to Americanize the Middle East and instead acknowledge that many societies around the world are not ready to become open-access orders (in North-Wallis-Weingast terminology)?

On the issue of domestic security, I have long been influenced by David Brin, and consequently I support government surveillance but with vigorous, independent auditing. Read what I wrote eleven years ago.

On economic issues, I start out by doubting that any collection of econo-wonk policy proposals is going to define the reform conservative “brand.” I certainly cannot get excited by a grab bag of tax credits.

To bring me on board, reform conservatives will have to do more than just play small ball. They will have to come front and center on one or both of two issues. One is fundamental health policy reform that leads to a higher proportion of medical services paid for by the people who obtain those services, rather than by third parties. The other is changing the path of entitlement spending to one which is sustainable.

Megan McArdle on Bifurcated Family Patterns

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She writes,

Could this be genetic? you ask. People who have impulse-control problems might be more likely to divorce and pass those traits on to their kids. Partially, sure. But two evidence points argue against genetic determinism. First, similar, although less severe, patterns show up in the case of kids who lose one parent, which is mostly not going to be due to homicide. And second, if this is genetic, how come it has changed over time? Have we all gotten genetically less able to stay out of jail or sustain a long-term marriage?

We know that children of single-parent households have worse outcomes than children of two-parent households. To simplify, let us say that there are favorable family patterns and unfavorable family patterns.

First question: how much of this is causal?

It could be that an inability to do well on the marshmallow test causes you to be less likely to raise children in a favorable family pattern and also more likely to pass on to your children genes that cause them to be unable to do well on the marshmallow test. That is how genetics could account for the relationship between family patterns and child outcomes.

Megan asks, what has changed over time? It could be two things. First, nowadays it may be that you have to be much better at the marshmallow test to sustain a favorable family pattern. Second, it may that we have gone through two or three generations of increasingly assortive mating.

Until 1965, a man who was in the top third on the marshmallow test might very well have been married to a woman in the bottom third, and conversely. For one thing, the top third and the bottom third were not that far apart. For another, the signals of being able to do well on the marshmallow test were not as clear (college education was too rare to be a reliable signal, particularly among women). Finally, men and women cared more about separate respective roles (breadwinner and homemaker) than about common abilities in the marshmallow test.

But in the 1960s that began to change. So you get one generation of assortive mating, and for the children of these marriages the difference between the top third and the bottom third on the marshmallow test starts to widen. Then they grow up, engage in assortive mating, have children, and difference widens once more. And so on.

But suppose we assume that there is a strong causal relationship between bad family patterns and bad outcomes. That leads to our

Second question: what can policy makers do to improve family patterns?

If anti-poverty programs are the solution, then why has the problem been getting worse? The Center on Budget and Policy Priorities (pointer from Mark Thoma) will tell you that anti-poverty programs are working to keep people out of poverty. So why are we not seeing more family stability? (Ross Douthat makes related points. Pointer from Tyler Cowen.)

Of course, there is a hypothesis, going back to Moynihan’s analysis, that anti-poverty programs are the problem, rather than the solution, because on the margin they reduce incentives to marry. I am skeptical about that, but as you know I am all for replacing current means-tested programs with a universal benefit that has a low implicit marginal tax rate. The idea is to reduce the adverse incentives that presently exist.

Megan, like Charles Murray, would like to see elites proclaim the benefits of good family patterns. I am skeptical of that, also.

My guess is that family patterns are not amenable to public policy interventions.

Economic Report of the President, 2015

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I have only glanced through it, but I like what I see. Previous reports under President Obama I found to be long on cheerleading for the his policies and much shorter on substance than what we used to see. This one appears to represent a return to substance. Greg Mankiw points out the way in which the report hints that the median household income has been hurt more by slow growth than by increased inequality.

I give the authors credit for putting a lot of focus on labor force participation trends. They write,

Overall, the most important factor affecting the aggregate participation rate in the recession and recovery has been the aging of the population. But there are a number of important trends and developments relevant for understanding the changes in participation of different subgroups of the population:
• Increased participation by older Americans, which may be attributable to an increase in skills among this population and also to changes in Social Security retirement benefits;
• Reduced participation by younger Americans as they stay in school longer;
• Continuation of an at least 65-year long trend of declining male labor force participation, which is especially stark for young minority men; and
• Tapering of the long-term trend of increasing female labor force participation, which dates back to before World War II.

Don’t get me wrong. I don’t think much of the policy recommendations in the report. I also think that if you are looking for clues to declining labor force participation, you should pay some attention to the high implicit marginal tax rates faced by people who are eligible for food stamps and other government benefits. As regular readers will remember, I favor replacing the hodge-podge of means-tested programs, including Medicaid, with a single cash grant that tapers off gradually as income rises (I would suggest that the implicit marginal tax rate be limited to something like 20 or 25 percent).