Category Archives: Setting Economic Priorities

Oren Cass on Paul Ryan

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He writes,

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.

Universal Basic Income, zero marginal tax rate

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Ed Dolan writes,

a UBI would be administratively efficient and unobtrusive. It would require no verification of any personal trait or behavior…If the UBI were integrated into the existing federal income tax system, only households with no income at all would receive the full UBI benefit in cash. Those with low-to-moderate incomes would receive part of the benefit as a credit toward income and payroll taxes, and the rest in cash. Those with high incomes would get a tax credit

Pointer from Mark Thoma.

A universal benefit with a zero marginal tax rate is expensive. Dolan says that we could replace $500 billion in means-tested programs, but that only allows for a benefit of around $1600 per person. Next, he proposes eliminating important middle-class tax deductions, including not only the mortgage interest deduction but the IRA deduction and the personal exemption (!), bringing the benefit up to $5200 per person.

Dolan would exempt current social security recipients from the UBI, so that allows $5800 for the remaining UBI-eligibles.

I still prefer the solution of a benefit with a marginal tax rate of something like 20 percent or 25 percent. I also think that having a benefit that only can be spent on “merit” goods–food, shelter, health care, and education–makes some sense. However, I am open to the argument that administrative costs would detract from the approach of trying to limit the benefit to merit goods.

UPDATE: Commenting on Dolan’s piece, Timothy Taylor warns,

The U.S. political system does not excel at replacing complexity with simplicity, and then leaving well enough alone.

Paul Ryan’s Anti-Poverty Proposals

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He says,

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.

Two SNEP Goals Connected

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Jed Graham writes,

The $2.8 trillion Social Security Trust Fund is on track to be totally spent by 2030, the Congressional Budget Office said Tuesday. That’s one year earlier than projected in 2013 and a decade earlier than the CBO estimated as recently as 2011.

Graham points out that lower estimates for employment are contributing to the more adverse outlook for Social Security. I would say that this links two of the three main goals for SNEP, one of which is to increase employment and another of which is to work toward a sustainable Federal budget.

In fact, the third goal, to get the FCC and the FDA out of the way of progress, also links to the other two.

Suggested Economic Priorities

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From the 125th anniversary WSJ edition. John Cochrane writes,

Washington is stuck because that serves its interests. Long laws and vague regulations amount to arbitrary power. The administration uses this power to buy off allies and to silence opponents. Big businesses, public-employee unions and the well-connected get subsidies and protection, in return for political support. And silence: No insurance company will speak out against ObamaCare or the Department of Health and Human Services. No bank will speak out against Dodd-Frank or the Securities and Exchange Commission. Agencies from the Environmental Protection Agency to the Internal Revenue Service wait in the wings to punish the unwary.

…in the end, only an outraged electorate will bring change—and growth.

That is a dire outlook, given my lack of faith in democracy. Right now, the only outraged electorate is the Tea Party, and (a) much of their outrage is currently directed at the immigration issue, which is not central to the crony capitalism that concerns Cochrane, and (b) they are strongly opposed by the forces of the establishment, particularly in the media.

Peter Huber writes,

Washington’s drug-approval process, grounded as it is in a one-size-fits-all perspective on how drugs are supposed to operate, and anchored in clinical-trial protocols and statistical methods developed decades ago, is lagging far behind the science. We need a regulatory process that can keep pace with a rapid proliferation of highly customized therapies that are grounded in a mechanistic understanding of molecular biology. This will require fundamental changes in clinical-trial protocols and in the type of evidence that is required for drug approval.

Richard Epstein writes,

we have to bid farewell to the egalitarian mantra that we can lift the nation up out of its doldrums by raising minimum wages to living wages, by tightening overtime regulation, by strengthening public and private unions, by expanding family-leave protection, by continuing with aggressive enforcement of the antidiscrimination laws based on race, sex and age, by imposing a health-care mandate on employers, and by extending unemployment benefits. The tragic truth is that these feel-good measures hit hardest at the bottom end of the labor markets, especially minority teenagers desperate to gain work experience.

Conn Carroll’s Economic Proposals

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He writes.

If Republicans proposed limiting the mortgage interest deduction to just households with incomes below $200,000, and they eliminated the mortgage deduction for second homes, as well as the state and local tax deduction, the real property tax deduction, the state and local bond interest exclusion, and the investment income on life insurance exclusion, all of which predominately benefit wealthy households, they then could also cut the employee side of the payroll tax in half without adding a dime to the deficit.

The Room to Grow grab-bag eliminates the mortgage interest deduction twice, once each to pay for two separate tax credits. Obviously, you can only eliminate it once, and I prefer Carroll’s approach here.

Later, he writes,

Congress must stop punishing the working poor for getting married. Married couples should be allowed to keep their previously qualified for benefits through the first few years of marriage.

This sounds like a jerry-rigged solution to me. I think that the answer is to get rid of the steep benefit-eligibility cliffs for everyone. See my post on a universal flexible benefit.

Read his whole piece. I like it much better than Room to Grow.

The Incentive to Invest

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Timothy Taylor writes,

The very slow rebound in investment isn’t obvious to explain.

Read the whole thing. He walks through such explanations as uncertainty, difficulty obtaining financing, low aggregate demand (what Keynesians used to call the Accelerator Effect), and investment that has become less capital-intensive. On the latter, he writes,

it’s often a form of investment that involves reorganizing their firm around new information and communications technology–whether in terms of design, business operation, or far-flung global production networks. As a result, this form of investment doesn’t involve enough demand to push the economy to full employment.

All of these explanations are from a conventional AS-AD perspective. From a PSST perspective, I would look for bottlenecks, particularly in the service sector, where growth is most likely to occur. In the Setting National Economic Priorities Project, the following are considered possible bottlenecks:

–labor-market distortions, including high implicit marginal tax rates embedded in means-tested benefit programs
–the research/FDA approval/patent regime in medicine, given the state of the art in genetics and biochemistry
–the FCC spectrum regime, given the state of the art in spectrum utilization possibilities
–occupational licensing
–regulation of medical practice
–regulation/accreditation barriers to education innovation

The WSJ adds another layer to the mystery.

corporations used almost $600 billion in cash to buy back their own shares in 2013 and the uptrend continues into 2014. While that’s a positive trend for household wealth, it raises questions about companies’ commitment to move ahead with capital spending projects.

Remember the Tobin’s q theory of investment? It says that when stock prices are high relative to the value of existing capital, firms will invest more. Instead, we are seeing firms buy back stock to try to raise q.

This deserves more thought and analysis.

A Solution to Biomedical Research Incentives?

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I write,

In pharmaceuticals, the challenges with using the patent system are increasing. As Huber has pointed out, the nature of molecular medicine is changing. The system of rigid, blind clinical trials needs to be replaced by a regime of focused trials in which researchers learn and adapt as they go. Medical research may be valuable without producing a brand new molecule that cures a disease and thereby justifies a patent. It may instead focus on determining which combination of drugs will best treat a certain class of patients. A prize-grant would reward this sort of targeted research in a way that a patent cannot.

Brink Lindsey on a Universal Benefit

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He writes,

I think a good case can be made that a UBI [universal basic income] would be more helpful to the disadvantaged than the patchwork of frequently intrusive, infantilizing, bureaucratic, and wasteful means-tested programs that presently constitutes the American social safety net. So if I could wave a magic wand and replace the policy status quo with a UBI, I would do so. That said, my reading of the available evidence convinces me that a social policy that channels benefits through work and thereby encourages paid employment has important advantages over a UBI in helping the disadvantaged to live full, happy, productive, and rewarding lives.

…a UBI cannot be recommended as sound social policy. The great challenge at present is to arrest and reverse the slide of less skilled Americans into a permanent underclass – even as automation and globalization continue to marginalize the role and value of low-skill work. But as the celebrated negative income tax experiments of the late 1960s and early 1970s made clear, unconditional income support reduces labor supply. Perhaps not dramatically, but still the impact is going in the wrong direction. By contrast, wage subsidies in the form of graduated payments to employers of low-skill workers can increase the attractiveness of work and boost labor force participation.

My remarks:

1. I think it is important to distinguish adding a universal benefit to the existing means-tested programs from using it to replace existing means-tested programs. I doubt that the negative income tax experiments give us any idea of how the latter would work, particularly today. (a) I don’t think that the experiments replaced existing programs and (b) today’s programs are much more generous than they were when the experiments were done.

2. Accordingly, I hope Brink would support an effort to wave the magic wand and replace current programs with a universal flexible benefit.

3. Why have wage subsidies on the one hand and payroll taxes on the other? Why not instead introduce a graduated payroll tax, which is lower for low-wage workers, possibly even zero below a certain income level?

4. There are going to be people who simply cannot work. You don’t want to force them to live on minimal resources just because you are afraid of giving other people the incentive to loaf. My solution would be to have the universal flexible benefit, which would come from taxpayers at the national level, provide minimal resources. However, state and local governments as well as charities might supplement these benefits on the basis of needs.

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.