Deepish Thought

After France, which country has the second largest welfare state?

The USA!?!?

http://pileusblog.wordpress.com/2014/01/28/the-united-states-big-welfare-state/

Perhaps not as crazy as it sounds.  The US has a lot of welfare tax expenditures while traditional welfare states often heavily tax benefits, which reduces net welfare expenditures.

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)

Greg Mankiw has posted a brief analysis of the President’s repeated, and apparently false, assertion that, “If you like your plan, you can keep it.”

1. The White House staff did not know the statement was false.  That is, they did not understand the law the administration was promoting.

2. The White House staff knew the statement was false, but they decided to keep this fact from the President.  That is, they let the President unwittingly lie to the American people.

3. The White House staff knew the statement was false and told the President so, but the President decided to keep saying it anyway.  That is, the President consciously decided to lie to the American people.

Options 1 and 2 are a little problematic.  Both imply that the President didn’t really understand his own signature legislative achievement.  Option 1 implies that not only did the President not know what he was doing, but also that he employed people couldn’t grasp a fairly obvious implication of the ACA.

To simplify is the President a liar (Option 3) or a moron (Option 1 or 2)?

It’s difficult to know for sure, but the President would probably prefer liar.  Perhaps somebody in the Whitehouse press corps should ask.

Some time has passed.  Passions have cooled.  We can now make a level headed assessment of the shutdown strategy pursued by House Republicans.

Objectively speaking it still sucked donkey d**k.

Consider an alternate universe in which House Republicans passed a ‘clean’ CR, upped the debt ceiling for 6 months without conditions, then went on vacation for 2 weeks.  In other words, did pretty much what Democrats asked them to do.  In this universe the Republican Party has sustained zero reputational damage, the bungled Obamacare rollout has been the undisputed number one news story for a month, the President’s approval ratings are in the toilet, Democratic unity is disintegrating as Democrats in vulnerable seats try desperately to distance themselves from Obamacare, and political world is decisively tipping in a Republican direction.

Compare this to our world where the Republican brand has been thoroughly trashed,  Democrats were gifted a talking point for the 2014 elections, divisions in the Republican party have been exacerbated, and the Whitehouse got a two week free pass from scrutiny over the rollout.

In fairness, the Obamacare rollout may end up being such a catastrophe that it swamps memories of the budget shutdown.   But it’s very hard to see how Republicans are better off for having pursued the shutdown strategy.  Our alternate universe looks much better for the Republican Party

If the results of implementing your strategy were worse than the results of doing what your opponents asked you to do, then, inarguably, your strategy sucked.

There is currently a great deal of enthusiasm in Liberal circles for raising the minimum wage. In fact, a $15 minimum wage is on the ballot for upcoming elections in the Washington city of SeaTac and both Seattle mayoral candidates have expressed interest.  To many this seems like an idea whose time has come.

The optimistic case for a $15 minimum wage goes something like:  Low wage workers spend a high percentage of their incomes, so increasing the minimum wage will increase demand which, along with lower turnover, higher productivity and higher employee satisfaction, will more than compensate employers for the increased wage cost, so there will be no impact on employment. 

In short, it’s all sunshine and bunnies.

There are several potential problems with this argument.  However, if you want to dissuade a Liberal friend from voting for a $15 minimum wage it might be better to point out that even if the optimistic case turns out to be substantially true in the short term, raising the minimum wage makes low skill workers more expensive relative to possible substitutes, foreign labor and automation.  Given time employers will find ways to utilize those substitutes.

Consider your local McDonald’s restaurant.  Low wage workers take your order, fill it and clean up the mess you leave behind.  McDonald’s has experimented with automating all of these things to some degree.  The reason your local McDonald’s still employs a bunch of people is that they’re currently cheaper and more flexible than the automation alternatives.  Double the cost of employing those people and the cheaper part may no longer be true.

Congress spent the past week having a serious, thoughtful, substantive and bipartisan debate about Syria.

On the down side this does highlight an uncomfortable truth. The partisan dysfunction we normally expect from Washington isn’t due to the failings of our elected representatives, however much we might enjoy blaming them. When circumstances require it, Congress is clearly capable of operating in the way we say we’d prefer.

The fact that serious, thoughtful, substantive and bipartisan debate is largely absent from every other issue simply reflects the deep political divisions in the country as a whole. Red and blue voters demand that their representatives hold to strict party lines. So they do.

My favorite Daily Beaster, Megan McCardle, recently posted some pretty interesting observations on the tax code:

Anyway, I’ve got a better idea: let’s get rid of the corporate income tax entirely.

No, really, hear me out.  The corporate income tax is the source of almost all the tax-dodging activity in America.  This activity is extremely expensive, and millions of valuable man-hours are diverted into it.  As well as into writing semi-numerate op-eds about the corporate income tax.

Why not get rid of the tax, and the tax avoidance, by radically simplifying the tax code?  Eliminate the corporate income tax–and then also eliminate the special rates for capital gains and dividends.  Tax all income once, progressively, when it’s realized by a person.

This is a very attractive idea.  Any plan that drastically simplifies the tax code, saves untold billions in compliance costs, eliminates opportunities for tax evasion, and removes the motivation for employing half of K street, is worthy of serious consideration (even if the politics suck and the chances on enactment are approximately zero).

In particular, it’s interesting (to me anyway) to speculate on how enacting this reform might change individual and corporate behavior:

• It would create a fairly powerful incentive for companies to retain earnings since this would allow shareholders to defer, though not ultimately avoid, taxation.  Dividends would probably become far less common.
• Capital structure of firms would likely become more conservative (i.e. leverage would decrease) for two reasons:
  • Firms that retain their earnings have less need to borrow
  • Elimination of corporate taxes also eliminates the tax advantages of debt financing (corporate interest payments are tax deductible, which ceases to matter if the tax rate is zero)
• Reductions in corporate dividends and issuance of corporate debt might have some interesting impacts on investment behavior.  Financial instruments like annuities may become more popular as investors look for ways to convert their portfolios into reliable income streams.
• Personal loans with stock as collateral are likely to become much more popular, and may attract the attention of the IRS.
• There would be a pretty dramatic adjustment period as firms scale back or abandon activities that were made economic by corporate tax breaks (bye-bye wind energy).
• Since the denizens of K Street aren’t going to go quietly, and politicians will remain found of doling out goodies to their favorite industries, we may see an expansion of subsidies, regulatory boondoggles, and unfunded mandates (welcome back wind energy).
• The adjustment period may be very painful, but the long term payoff would be huge.  Eliminating the misallocation of resources for tax reasons, and the massive waste of time and energy associated with managing corporate tax issues, would probably add a few tenths of a percent to our long term growth rate.  Over time this would make the country much richer.
• There is likely to be an expansion of audit activity at publically traded firms.  The loss of the tax cross check would likely cause greater scrutiny of corporate earnings, and there would be a lot of tax and finance people looking for new ways to justify their salaries.
• There is likely to be a big movement of liquid assets that currently reside overseas back to Wall Street.  For tax reasons multinationals have a ton of cash in overseas accounts.  With no corporate tax there’s no reason not to bring that money home.  This would help Wall Street, but hammer other financial centers.
• On the down side, a great deal of tax driven financial engineering will suddenly become unnecessary.  Combine this with reduced issuance of corporate debt and Wall Street firms would probably take big hit (oh dear, so sad).
• The impact on M&A activity is not totally easy to foresee.  On one hand firms are likely to accumulate cash and want to spend it on something.  On the other, any transaction creates a major taxable event for shareholders in the acquired firm.  On balance, I suspect firms may develop a bias for organic growth over acquisitions.
• Cheating on your personal taxes would become much harder.  Eliminating corporate taxes would free up a ton of resources and greatly enhance incentives for the IRS to go after individual “evil-doers”.  Anybody trying to run their personal expenses through a corporation would get crucified.
• Tax collections are likely to be disappointing in the first few years as people take advantage of the opportunity to postpone taxes through opting for capital appreciation over income.  Tax revenue is likely to be higher than expected in the out years.  Eventually people want to spend, so they’ll start cashing out and paying regular tax rates on their capital gains.  Combined with the aforementioned higher growth rate this would significantly improve the long term fiscal outlook.
  • If the switch happened tomorrow this would amount to a nice little bout of Keynesian stimulus, but not the kind of which Mr Krugman would approve.
• If you think the politics of personal income taxes are brutal now, just wait until they become the vehicle for collecting taxes on all income.
  • Whatever business K Street loses from corporate clients is liable to be made up by new business lobbying congress on the individual tax code.
• The change would have all kinds of international consequences:
  • Tax havens would likely lose a lot of corporate business, but see an increase in individual business.  The incentive for US taxpayers to push the envelope in order to minimize personal income taxes would increase dramatically.
  • In a major turnaround, the US may become a tax haven for foreign multi-nationals.
  • Since tax competition is not exactly popular in some major European capitals, a trade war with the EU wouldn’t be out of the question.
  • Alternatively, the huge competitive advantage handed to US firms may force the same policy on foreign governments, which would set off a cascade of unpredictable consequences.  For example, the part of the Irish economy that didn’t implode (European operations hub for US multi-nationals) exists largely because of Ireland’s favorable corporate tax rate.  If corporate tax rates went to zero everywhere it could be farewell to the remaining remnants of the Celtic Tiger, and welcome back to the basket case exporter of music, whiskey and people.

Tragically, we are unlikely to find out if any of the above speculations are remotely close to the mark.  No matter how sound the economic arguments, there is no elected official, living or yet to be born, who is going to cast a vote for a zero tax rate on corporations.  The attack ads practically write themselves.

Last week we went through the monthly ritual of analyzing the jobs number and drawing sweeping economic and political conclusions from this single (provisional) data point.

It seems like we could have more fun drawing sweeping economic and political conclusions from the extended data series.

Monthly growth of 200,000 jobs is widely considered to be indicative of a healthy recovery in the labor market (green line).

So far, the president’s record doesn’t look too healthy.

• The US has added 200K jobs in just 14 of the president’s 50 months in office
• The longest stretch of ‘healthy’ job growth was 4 consecutive months (Dec-11 through Mar-12)
• There have been 17 months of negative job growth
• The 45 months since the official end of the recession (Jun-09) have included 12 months of negative job growth (i.e. one in four)