Deepish Thought

Links to this, not entirely convincing, argument against negative income taxes by Jim Manzi have shown up in a couple of places lately (Tyler Cowen and Megan McArdle).  There are several aspects of the post that are somewhat questionable.  The one that I find most interesting is that we can achieve the same goals by simply recycling policy from the 90s.

“the only method that has consistently demonstrated in the U.S. that it can humanely get people off welfare and into jobs was the workfare movement of the 1990s (which it did without increasing government costs, by the way).”

1990’s reform was indeed fairly effective at reducing welfare dependency.  However, context is important.  In times of economic prosperity and relatively abundant job opportunities, limiting welfare eligibility can act as the spur that pushes people into active participation in the labor market.  In tougher times it becomes somewhat questionable policy.  In 2012 President Obama granted waivers to states allowing them breach limits specified in the legislation.  Many Republicans were harshly critical of this move.  However, the lousy economy meant there was no realistic way for states to meet the targets.

Fundamentally, workfare operates on the assumption that employment opportunities are available if people are willing to take them.

This need not always be the case.

Employers are willing to take on an additional worker if a couple of things are true.  Firstly, the value of the worker’s output must exceed the cost of employment.  Secondly, the cost of employment must be less than plausible alternatives, primarily outsourcing and automation.

We live in a world where two things are inarguably true.  The cost of employing people is going up.  Obamacare is just the latest in a long line of policy initiatives which make employing people more expensive.  Given the current Liberal enthusiasm for jacking up the minimum wage, it is almost certainly not going to be the last.

Meanwhile, the cost of alternatives to employing people has collapsed.  It is clichéd to point out that globalization and automation have reduced low skill employment.  However, with regard to automation, we may be closer to the beginning than the end.  Consider, for example, how many people with high school educations make a living driving.  Then consider how close we are to a world in which most of those drivers won’t be needed.

This is not an argument that low skill employment must inevitably disappear.  In a more economically rational world the price of low skill labor would fall to the point where employment opportunities would reappear – Say’s Law to the rescue.  But this is not an economically rationale world, it’s a political one where the government mandates a floor price (minimum wage + payroll taxes + insurance + unemployment + ……) for low skill labor.

In this world mandating that low skill people find work isn’t going to achieve very much.  They can’t legally accept employment at a rate that sane employers would be willing to pay.  Or, in other words, it isn’t legal for low skill wages to fall to the market clearing rate.

It’s tempting to suggest that we should simply get rid of the minimum wage laws, payroll taxes, insurance requirements and regulations that drive up the cost of employing people.  However, as politically viable policy this pretty much a non-starter.   Even if Republicans had the House, the Whitehouse and a filibuster proof majority in the Senate can you imagine them repealing the minimum wage and replacing it with nothing?

For political (and humanitarian) reasons, doing something about employment costs requires that we also have an alternative way of maintaining the total income of low skill people.

Considered in this light, a well-designed Negative Income Tax solves two problems.  It offers a better alternative to the horrendous existing tangle of welfare programs that supports people while preserving the incentive to work, which would be the usual argument made in its favor.  In addition, it offers a possible solution to one of the more difficult policy challenges we face.  How do you keep low skill people employed in a labor market which generates less and less demand for low skill labor at the current price?

Alan Blinder has put forward a defense of the Affordable Care Act in today’s WSJ (gated).  It’s not terribly convincing.  Considering some of his points:

“But a badly designed website doesn’t signify a badly designed policy.”

True.  But bad execution will kill a good idea just as effectively as a bad one.  Also, the people who keep telling us that the ACA is good policy are the same ones who assured us that the website would be ready.  Then that it would be fixed by December 1^st.

“While Americans either read about or experience the website’s failures firsthand, the enemies of health-care reform are telling them that ObamaCare is a failure. And since virtually no one actually understands how the new law works, the verdict sounds plausible.”

This is a pretty telling admission.  The ACA passed 3 ½ years ago and we still don’t know what’s in it?  What has the administration been doing all this time?  Is a program that’s too complicated to explain too complicated to execute?  Was it even a good idea?

“Thus tech “glitches” make the law’s critics look better and make the administration look like the gang that couldn’t shoot straight.”

“It undermines trust in health-care reform and, more generally, in the government’s ability to solve problems.”

Yup.  Kind of a problem if your basic philosophy is that Washington needs to exercise more control over the economy.

“And it’s not just website problems. Americans are also hearing more and more about a second snafu. (Remember what those five letters stand for.) The president assured people over and over again that “if you like your [health insurance] plan, you can keep it.” Well, it turns out that maybe you can’t; your current insurance might get canceled.”

SNAFU might be an overly polite characterization.  The President is vulnerable here.  Either he didn’t actually understand the implications of his own signature legislative achievement.  Or he deliberately and repeatedly lied in order to sell it.

“Regarding coverage, while the health-exchange website’s problems are causing delays, they will be fixed—though I’m not sure I’d bet on Nov. 30. (If the administration makes that deadline, someone deserves a medal.) The initial enrollment period might have to be extended a bit, which would require some other adjustments. But even with delays, most of the uninsured will be able to get covered.”

I wouldn’t bet on November 30^th either.  Nor December 30^th for that matter.

Mostly this seems like soft peddling a pretty big problem.  If the initial enrolment period could easily be extended the Administration would have done it already.  Unfortunately the calendar isn’t infinitely flexible.  Changes have consequences.

From a perception perspective the situation is horrible.  On Jan 1 more people will have lost private health insurance due to the ACA than gained it.  A situation that may or may not be resolved by the end of open enrollment.

“Nor are the central elements of insurance reform affected by the technology glitches. Millions of people under the age of 26 are already benefiting by being kept on their parents’ policies. Pre-existing conditions will no longer prevent people from getting health insurance. Annual and lifetime limits will go the way of the dodo. Americans will like all that.”

I’m sure they will, until they get the bill.  All of these innovations will make health insurance more expensive.  Free lunches are difficult to legislate.

“Regarding cost containment, some of the law’s planned demonstration and pilot programs, designed to test various cost-reducing ideas, might be delayed. But they won’t be abandoned. Delays will hurt a bit because these experiments were destined to take years to complete in any case, and our political system is not known for patience.”

Has there been any positive news whatsoever about any of these pilot programs?  Negative news has been abundant.

“But there is at least some reason to think that the “affordable care” part of the act may be working already. The rate of inflation of medical costs has tumbled in recent years.”

We sacrificed the virgin, the volcano didn’t erupt, therefore……..

“All that said, no big social policy ever goes exactly as planned. Two additional hazards that have garnered relatively little attention to date worry me.

The first is the behavior of the “invincibles”—young people who, statistically speaking, are at little risk for high medical bills. To make universal coverage work, the government needs to bring them into the insurance pool as counterweights to the high-risk people.”

Not sure why we keep referring to young healthy people as “invincibles”.  Given what the legislation expects them to do “suckers” seems more appropriate.

“If many low-risk people stay out of the pool, we have a problem: The insured pool will be less healthy than the total population.”

Notice the subtle avoidance of the technical term for this possibility, which would be “death spiral”.

It’s too early to know what young healthy people will choose to do.  Many people place a very high value on having health insurance.  Young people may choose sign up for this reason, to avoid ‘wasting’ money on the penalty, or simply because it’s the law.

Of course if the website can’t be made to work they aren’t getting on board and the ACA will become a case study in adverse selection.

“Second, there’s the behavior of businesses with more than 50 employees. Some companies that now cover their workers with costly health-care plans might decide to drop that coverage once the exchanges are up and running.”

At this point businesses with lots of low wage employees resemble a group of penguins on the edge of the ice.  Nobody wants to be the first to jump.  But that doesn’t mean they aren’t considering taking the plunge.

Best guess is that businesses with a lot of high turnover/low wage employees initially manage costs through restricting as many employees as possible to less than 30 hours per week.  If the exchanges ever get unkinked, wholesale dumping of lower level employees onto the exchanges will begin shortly after.

“Considering all these problems, is the game worth the candle? Absolutely—because the status quo ante was so unacceptable. America cannot be a humane society if we leave 15% of our population uninsured.”

To be clear, even under the most optimistic assessments the ACA is going to solve maybe half of this problem – at enormous expense.

“America cannot be an efficient society if we spend 50% to 100% more of our incomes on health care than other countries, and yet don’t get better health outcomes.”

The second part of this statement is dubious at best.  Once you control for lifestyle differences (i.e. things like driving mileage, gun ownership etc.) that impact health but aren’t healthcare related the US healthcare system stacks up pretty well.

The first part is more interesting.   Something like 17% of US GDP is healthcare.  In other words 17% of the total economic output of the US is healthcare goods and services.  That’s a much higher percentage than other advanced countries, but is it the wrong percentage?  Don’t know, but then neither do any of the people who drafted the ACA.

“We can’t let a botched website get in the way of goals that big.”

No.  The poorly conceived, economically asinine, Rube Goldberg nature of the ACA is the reason we should start over.  The botched website really is incidental.

I’ve previously pointed out that hiking the minimum wage would likely prompt a wave of investment in automation.

My guess is that it will take a while to work out the kinks.  Nevertheless, it would appear that highly automated fast food is closer to primetime than I thought.

(hat tip: Marginal Revolution)