Category Archives: Setting Economic Priorities

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.

The License Barrier

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Jared Meyer writes,

Excessive permitting processes are part of professional licensing. They also act as a deterrent to work and were seen as a large problem by small businesses. The utter complexity of many states’ permitting processes makes it difficult for entrepreneurs to focus on getting their ideas off the ground, and for small business owners to devote the necessary time to ensuring their businesses stay alive.

He cites a survey by Thumbtack, a business services firm working with the Kauffman Foundation, which shows that small business owners find licensing and permitting to be a significant barrier to their development.

Pointer from Don Boudreaux.

Delivering Flexible Benefits

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Wired reports,

At a recent event, hosted by Andreessen-Horowitz, on the future of retail, Berland pointed out that there are two things you always have with you: a credit card and a smartphone. The day is coming when we combine them. “What we are hyper-focused on is how do we merge those two things,” she says. “Especially as one day the physical card will disappear.”

Even before I read that story, I was thinking of using two media to deliver flex-benefit dollars: smart phones, for people who have them; and paper, for people who don’t. With smart phones, you require use of biometric ID to spend flex-benefit dollars, and I assume you make fraud a lot harder to pull off. With paper, you could print the person’s photo on the paper in order to make fraud difficult.

Means, Needs, and Federalism

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For Setting National Economic Priorities, I have been suggesting consolidating means-tested programs into a single flexible benefit. One goal is to reduce marginal tax rates. Another advantage of this approach is that the first $2000 or so of the benefit can be directed toward purchasing catastrophic health insurance.

A third advantage of this approach is that it can untangle some of the overlaps between national and state/local programs. The basic principle would be that the Federal government, with a generic flex-benefit, would offer support based on means-testing. It could leave the assessment of special household needs to state and local governments as well as charities.

Special needs would include learning-disabled children, expensive medical illness, or high-cost housing.

We can imagine the Federal government paying households flex-benefit dollars based on a simple formula–perhaps $6000 per adult and $4000 per child, minus 25 percent of the household’s (taxable income plus value of employer-provided health insurance). Those of you who have been following these posts will notice that I keep playing with different values of the parameters. Those issues are still unsettled in my mind. It only recently occurred to me that fairness in distributing the universal benefit requires including employer-provided health insurance as income for purposes of phasing out the flex-dollar benefit.

By default, this money would go into a savings account. Households would not be allowed to withdraw from the savings account until they have purchased catastrophic health insurance.

State and local governments would be able to contribute to these accounts, based on their assessment of household needs. A household with a severely disabled child might receive $5000 per year from a state. A household in an area with expensive housing might receive $4000 a year from the local government. It would be up to state and local governments to decide whether to use this mechanism for distributing benefits or use something else.

We would abolish Medicaid. Instead, we would have the Federal government pay a fixed dollar amount to states that would go toward the cost of health care for the elderly and disabled that currently are covered by Medicaid.

We would abolish the Department of Housing and Urban Development. We would get rid of Federal mortgage subsidies and instead allow households to use money from their flex-benefit savings accounts to go toward down payments.

We would abolish the Department of Education. Instead, we would retain a research department, housed in the National Science Foundation, to evaluate educational effectiveness and to fund experimental pilot programs.

Employment and ACA

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Casey Mulligan writes,

the ACA will put millions of workers in the economically extreme situation of having zero short-term financial reward (or less) to working full-time rather than part-time.

In economics jargon, this means the ACA creates marginal tax rates on labor income that exceed 100 percent.

The SNEP solution might be as follows:

1. Re-orient health financing policy toward catastrophic health insurance and health savings accounts. Create a national standard catastrophic health insurance plan that acts like true insurance and is reasonably affordable.

2. Repeal the ACA.

3. For non-elderly households with able-bodied adults, replace Medicaid and other means-tested programs with the universal benefit or flex-benefit.

4. For a household without health insurance who receives the flex-benefits, automatically allocate an amount of flexdollars toward health insurance. Perhaps the first $1500 per person in a household would go toward a combination of health insurance (which could be the national standard catastrophic plan) and a health savings account.

5. Close to half of current Medicaid spending is on the elderly and the disabled. I do not think that the flex-benefit system deals with those groups. At this point, I do not see a better approach than Medicaid in those cases.

This would create something like universal health insurance coverage, but with an emphasis on real insurance rather than Medicaid or pre-paid health plans. It also would get rid of the problem of high marginal tax rates. Thus, it would be better than the ACA in both dimensions–there would be fewer households without health insurance and fewer households facing strong disincentives to work.

The Federal Government and Occupational Licensing

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Morris Kleiner writes,

There is good reason for workers in licensed fields to push for the laws. Jobs in a service-oriented economy are more likely to be licensed, which raises wages by about 15 percent, as I found in research with the Princeton economist Alan B. Krueger, the former head of President Obama’s Council of Economic Advisers. This is largely because of the ability of regulated professions working through state legislators and regulatory boards to limit the supply of practitioners and to drive up costs to consumers.

What can the Federal government do about this? Some options:

1. Require states to accept licenses from other states unless there is a compelling case that other states’ qualifications are not relevant (might be the case with lawyers, for example, because you need to know a different set of laws).

2. Strong-arm states by making federal aid for worker training, unemployment benefits, and other programs conditional on a state getting rid of anti-competitive licensing laws.

3. Pass a “right to provide service” law that permits any firm to provide a service, regardless of whether it uses licensed personnel. For services that potentially endanger consumers, require providers to undergo periodic audits to ensure that their safety practices are state of the art. Also, require service providers to obtain insurance against lawsuits for fraud or malpractice. This would lead the insurance companies regulate the service providers. Perhaps such a law could only apply to firms that do business in more than one state (I am really fuzzy on how the Commerce Clause separates state from federal power these days. My sense is that it doesn’t.)

Politics and Policy

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William Galston writes,

The document’s emphasis on the middle class is a thinly veiled repudiation of the Romney campaign, whose emphasis on “job creators” reduced the 2012 Republican convention to a gathering of the National Federation of Independent Businesses. As Sen. Mitch McConnell noted at a “Room to Grow” public event last week, Republicans must stop imagining that average Americans are anything like John Galt in Ayn Rand’s “Atlas Shrugged.” Few of them are entrepreneurs, let alone heroic individualists. Most of them are holding jobs or looking for them. A political party that doesn’t address their needs isn’t likely to get their votes.

Pointer from Reihan Salam.

Let me propose the following distinction between politics and policy. Politics is a set of gestures and poses that politicians use to win votes, either in elections or in Congress concerning legislation. Policy is what actually gets done.

The Obama team has been magnificent at executing gestures and poses and thereby winning votes. Their approach to policy appears to have been much more haphazard, with results that I imagine disappoint even many of their supporters.

My criticism of “Room to Grow” is that it while it purports to be a policy document, it is in fact a set of gestures and poses. I think that the way Galston and Salam discuss “Room to Grow” tends to confirm that. Rather than complain that these are just gestures and poses, they are willing to engage with the gestures and poses and ask how well they will work politically.

I seem to be the only one who cares whether there is a coherent, implementable policy agenda embedded in “Room to Grow.” Maybe it is premature to worry about that. If you don’t get the poses and gestures right, you won’t have the opportunity to implement anything. But I do not think you should come in as unprepared as the Obama Administration was to deal with actual policy.

Unreformed Conservatism?

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James Pethokoukis writes,

Reagan-era nostalgia, unfortunately, is not much of a superpower. Without recognition that new economic challenges require new thinking and new solutions, this tired GOP sequel is unlikely to attract much of an audience.

He refers to the manifesto entitled Reform, Restore, Modernize. I also find it unsatisfying, but I think James is too quick to dismiss it the way he does. My main problem is that the “specifics” in the manifesto are mere bullet points stating wished-for policy achievements. Until they drill down into “how,” they have not done enough.

Looking at this manifesto and at “Room to Grow,” I am happy to see this sort of ferment but disappointed with what i see so far. Of course, as long as SNEP remains vaporware, I have to be cautious in my criticism.

Room to Grow has Room to Grow

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My initial reaction to Room to Grow was negative. Let me try to offer a more balanced assessment.

A. One could argue that the purpose of the project is to shift the conservative conversation away from spending cuts, tax cuts, and a balanced budget. The idea is to focus on policies that will improve the way government deals with ordinary Americans in terms of health care, education, and work. My comments on that are:

1. I commend the conservative reform movement for trying to come up with policies that help ordinary people. I think that is the right thing to do.

2. Having said that, I think that the less populist parts of the conservative agenda, such as reducing taxes on capital and putting entitlements on a sustainable path, are also the right thing to do. Maybe it is prudent for conservatives to set those goals aside for a few years, but it would be wrong to abandon them altogether.

3. I think that one can argue that many progressives approaches for helping ordinary people have been at best ineffective and at worst harmful, with the latter a frequent result.

4. I think that there is zero chance that progressives will admit that conservatives have better approaches for helping ordinary people. I think that there is zero chance that the progressive media will credit conservatives with caring about ordinary people.

B. The glossy paper and colorful layout of RtG led me to expect a finished product. It is anything but that. I think it would have been better presented as a conversation starter than as a program. My specific complaints are those that I have outlined in earlier posts.

1. The chapters are not coordinated, and so the ideas do not fit together. In some cases, they are clearly incompatible with one another. For me, the lack of coherence makes it misleading for RtG to call itself an agenda.

2. Sometimes, problems are identified, such as the power of incumbents in health care and education to block innovation, without proposing bold solutions.

3. At least four chapters propose new tax credits.* I think we should be taking support for “merit goods” (aka social engineering) out of the tax code, not putting more of it in. While I support the thrust of reducing the tax burden on ordinary working Americans, I think that cutting payroll taxes would be a better approach than loading more tax credits into the system.

*Maybe more. I just remembered that the chapter on employment policies proposes a business tax credit for hiring workers who have been unemployed for a long time.

4. I worry that RtG lends itself to legislative gesturing. A member of the House or Senate can introduce one of these proposals in isolation, issue a press release, and say “Look at me. I’m offering a solution for X.” In fact, the sort of coherent approach to policy that I think is needed can probably only come from the executive branch.

5. I am increasingly convinced that all of our means-tested programs need to be consolidated along the lines I have suggested. At the very least, somebody needs to think about the interaction among them.

6. RtG did call my attention to two issues that I had not considered before: child-care subsidies; and potential marriage penalties embedded in means-tested programs. I will think about those issues and revise my ideas if necessary.