Medicare versus Social Security

I hear this point a lot:

At any politically plausible margin, it makes more sense to take $1 out of Medicare than to take it out of Social Security. Social Security checks can be used to buy health care services.

I think that this analysis neglects one key point. Medical care in the United States (or anywhere, for that matter), is hard to bargain with at the time of a procedure (especially an emergent one). It is hard to discuss prices at the ER door during a myocardial infarct, where minutes matter. Here, the real benefit of medicare is the ability to exert market power to set standardized prices (to avoid the power asymmetry otherwise present in medical bargaining).

It is not ideal, but I have not yet come up with a better idea than collective price setting and my own experiences as an uninsured person in the US were certainly eye-opening in this regard. It was amazing how few doctors would even consider accepting cash for services.

A sentence that you just don't want to hear

Matt Yglesias was writing about an innovative program in the Netherlands when he made the comment:

At this point, it just strikes me as fundamentally unlikely that bold policy innovation is going to come out of the sclerotic United States.

At the time, I mentioned it to Mark (my co-blogger) as one of those sentences that you just don't want to have applied to your country, even in jest. Now Jeffrey Early is willing to ask when was the last time that the United States was a policy innovator. His depressing suggestion is back when Richard Nixon was president.

So here is my question to the blogosphere: what can the United States do to go back to being a leader in policy innovation?

[My own angle is to look at work being done at places like The Incidental Economist to see if we can possibly find an alternative way forward for Health Care Policy]

A return to education as a topic

This is an interesting perspective from Matt Yglesias about the tensions in the education reform movement:

The ambiguous policy upshot of this is precisely what makes intra-progressive fights over education policy so fraught. The exact same evidence which suggests that we should offer higher salaries to teachers also suggests that many of our current teachers are sub-par. It’s easy to assemble a “let’s spend less money on teachers” coalition, which is just conventional anti-tax politics. And it’s easy to assemble a “let’s give more money to the teachers we have” coalition, which is conventional service provider politics. What’s tricky is a “let’s spend more money precisely in order to get different people in this field” coalition.

I think that there is another angle to all of this discussion that is often forgotten. Current teachers include people who sacrificed earning potential for long-term job security (and did so in an environment where this was a part of their explicit employment contracts). The modern vogue for reneging on promises that are not inconvenient is not helpful to the debate. There may be cases where this is necessary, but it should be a painful last resort and not a routine talking point (see state pensions and the rhetoric about them).

EDIT: Also worth reading is Dana Goldstein's column

Modeling assumptions

From Matt Yglesias:

I’ll note, however, that you might be a freshwater economist if you think it makes sense to reassure us that a deflationary spiral is impossible because your model says so even though deflationary spirals do, in fact, occur in human history. To me, a model that denies the possibility of something happening that does, in fact, happen indicates that you’re working with a flawed model.

I can't comment on whether or not this is a fair assessment of the work in question. But it is always a good idea to "reality check" model outputs and ensure that the distribution of events generated by the model looks something like real data. If important events occur in real data that your model dismisses as impossible than model misspecification or missing confounding variables should be immediately suspected.


EDIT: Noah Smith also comments and it is well worth the read. He traces these conclusions to some rather strong assumptions . . .

Alternatives to Social Security

Matthew Ygelesias tackles the difficult question of what is the alternative to a government run universal pension plan. After all, if we want to replace the current system of government run pensions then it makes sense to have an alternative.

The results are pretty dismal.

So where else does the money come from? Well:

— Defined benefit pensions.
— Labor income.
— Private savings.

These three alternatives are all deeply problematic. The problems with defined benefit pensions in the public sector (chronic underfunding, etc.) are well-known, and in the private sector those problems are even more severe. Labor income is not a realistic option for people over a certain age. And private savings are, frankly, a disaster. As a country, we’ve tried to deal with the decline of defined benefit pensions by encouraging the mass middle class to engage in private retirement savings with 401(k) plans, IRAs, etc. And it doesn’t work. On the one hand, people don’t save enough. On the second hand, the tax policy is deeply regressive. On the third hand, virtually 100 percent of the management fees extracted from customers through these vehicles are value-destroying rents. On the fourth hand, it’s extraordinarily difficult for a middle class person to properly diversify his portfolio. And on the fifth hand, widespread ownership of index funds and mutual funds undermines corporate governance.

I think the drawbacks to the first two approaches are well known. But the concerns about the government savings vehicles are very thought provoking. Instead of a single (fatal objection), like the first two options, he lists a series of smaller problems that add up to a big issue. That being said, the issue of people not saving enough is always a concern.

I'd say that there is one more issue, though, that we should consider. Older adults are more easily subject to fraud on the part of either third parties or their money managers. It's not always clear that they have strong advocates. So even if people saved enough, the third option has the sixth downside of being vulnerable to theft in a way that pensions and labor income are not.

Taxes and Growth via Yglesias

This entire piece is worth reading. In particular:

The other mechanism that seems to be on offer is labor supply. This makes a lot of sense to me as applied to low-income people. If you work at McDonald’s or drive a taxi then you face a real choice about whether or not to increase your hours worked at the margin in exchange for more money. Driving a cab at 2AM is obviously a huge pain in the ass and not especially lucrative. To the extent that cab drivers face higher income taxes, they have even more reason not to work so late since it becomes even less lucrative. And the availability or non-availability of late night cabs has a variety of downstream impacts on bars & restaurants, drunk driving, etc.

But it’s a lot harder to see this at the high end. A very large share of high-income professionals basically have a marginal wage of $0. The CEO of WalMart can’t cut back his hours by 5 percent in exchange for a 5 percent pay cut. What’s more, a lot of high-end work is characterized by zero-sum competition. It’s plausible to imagine higher income tax rates making veteran NBA players more likely at the margin to retire rather than play one more season at the minimum. But what are the downstream economic implications of Mike Bibby retiring? There overall quantity of NBA players is fixed and there are plenty of other people willing to step up and do that job. The average quality of NBA talent might decline, but so what? The players just play against each other. And it’s not just athletes. Fancy lawyers and high-frequency traders are playing against each other. Marginal changes in average quality don’t matter. If anything, reducing the average quality of America’s lawyers and finance guys would be beneficial if it inspired more people to do something else with their time.

Last, of course, one of the main reasons for taxing the rich is precisely that the utility of a rich person’s marginal dollar is so low. Giving the dollar to someone else will increase overall well-being.

I think that this is a very strong argument and one that we really need to give more thought to. The empirical data for the effects on growth for taxing high incomes is mixed (at best) and the consequences for accelerating our current recession are non-trivial. After all, we are firing people from government jobs at the same time as there is tepid growth in private sector employment. The stated reason is to try and prevent our budget deficit from growing out of control.

However, if restoring the Clinton-era tax rates did not have a direct mechanism to retard economic growth then perhaps we could fire fewer public sector workers? That would help with the large unemployment rate that we have in the United States and the culture focus of self-worth via paid employment.

I think that the question of higher marginal tax rates on very high income earners does bear some thought.

Essential Yglesias

Matt Yglesias on taxing oil and gas:

One is that while low elasticity implies that a tax is unlikely to be very effective at reducing demand, by the exact same token a low elasticity implies that taxing whatever it is you’re proposing to tax will be a very efficient way of raising revenue. So if you’re the kind of person who believes the government should raise revenue, then there’s really no possible result in the elasticity literature that should make you hesitate to tax gasoline and/or oil.

The other thing is that these elasticity estimates generally imply that the relationship between price and demand is going to be linear, which is almost certainly false. Which is to say that the estimate is only reliable when you’re considering a relatively small policy shift. Nothing wrong with that, there’s just no way to get an empirical estimate about some crazy shift outside the realm of ordinary experience. But it is a real limitation to what this kind of work can tell us.

The second point, that relationships like these are unlikely to be linear is a theme that Mark has been trying to communicate for years and it is nice to see the idea beginning to get traction.

But the first point is a really good one. I like government (not unlimited government, but unlimited ice cream is bad for me too) and I recognize that we need to raise revenue somehow. If the tax on fuel consumption is a way to raise revenue that is a major benefit.

Now it is true that this could adversely impact the transportation options of the less well off. But there are a number of options including means tested fuel tax credits and improved public transportation infrastructure that could be tried. But I think the bottom line is that this tax is like alcohol and cigarette taxes -- we want to discourage an activity and raise revenue for basic services at the same time; while it isn't optimal tax policy (which might address issues like the capital gains tax) it is a major improvement.

Taxes and Growth

I think that this is the most insightful post I have read in ages:

Think about it this way: Grant to the tax skeptic all he wants about the idea that high taxes reduce the level of economic output. There’s an easy story to tell here. The quantity of economic output is, in part, a function of how much time and effort people want to put into doing market production. And the amount of time and effort any given person wants to put into market production is in part a feature of how much purchasing power extra time and effort put into market production will get him. Higher taxes—either on his labor or on his consumption of goods and services—reduces the purchasing power of extra time and effort on market production, and thus tend to reduce the amount of time and effort people put into it. You can tell a different, more leftwing story about this, but the point I want to make here is simply that this rightwing story about taxes and output is a story about levels not growth rates. If Americans started working the number of hours per year that South Koreans work, our per capita GDP would go way up.

But that’d be a onetime adjustment. Countries don’t grow over time by steadily increasing their number of hours worked. They grow, roughly speaking, because people think up better ways to do things and then businessmen either adopt those new better methods or else they get put out of business by those who did.

Taxes suppressing growth was a vicious argument because it suggested that it could (via compounding effects) lead to relative impoverishment over time. While it is true that less work could suppress some innovation at the margins, the story of changing absolute wealth actually seems more credible to me.

It focus the argument on what trade-offs are we willing to make between things like personal security and affluence. It also removes the idea that low taxes might spur growth levels and allow us to grow faster than thus reduce debt (as a proportion of GDP) via economic growth. But it is notable that more socialist and high tax countries (Sweden, Canada, The Netherlands) have not have a fall into relative poverty compared with the lower tax United States.

That is worth considering in these discussions.

Another New Haven thought

Matt Yglesias wonders if looking at just New Haven alone is the wrong unit of analysis as the surrounding county is quite prosperous. I think that this quote nicely summarizes the problem with this analysis:

But even the strongest cities can't -- and shouldn't have to -- handle the costs of urban poverty by themselves/ In the 1960s and 1970s, rich and middle-class city dwellers fled to the suburbs in part to escape having to pay the costs of addressing urban inequality. Rich enclaves have often formed right outside of urban political boundaries, where the prosperous can be close to the city without having to pay its taxes or attend its schools. A level playing field mans that people should be choosing where to live based on their desires for neighborhood or opportunity, not based on where they can avoid paying for the poor.

-- Edward Glaeser, Triumph of the City, page 258.

The difference between Seattle and New Haven is that the core of Seattle had managed to capture at least part of the prosperity that comes from institutions like the University of Washington and Microsoft. This suggests to me that there is at least a two stage process to using a university to enhance urban prosperity.

It also suggests we might want to be leery about things like significant budget cuts as it would be foolish to risk disrupting these types of success stories.

An interesting perspective

Matt Yglesias makes a good point:

And on the politics, it’s a mess. Right now we have conservatives simultaneously calling for huge spending cuts and also getting the line’s share of old people’s votes even while the vast majority of non-security spending is on old people. In essence, by first separating the domestic budget into “discretionary” and “entitlement” portions and then dividing the entitlement programs up into “what today’s old people get” versus “what tomorrow’s old people will get” the political class has created a large and vociferously right-wing class of people who are completely immune from the impact of their own calls for fiscal austerity. In my view, that reality is the biggest driver of our current political dysfunction.

I had not thought about things like this but it is a really good point. I dislike the idea of revising benefit levels because people plan their lives around these benefits and it seems unfair to change things mid-stream.

However, I had completely overlooked the political point involved. Social Security, Medicare and CHIP are 41% of the budget. Veterns and retirees are another 7%. This makes about half of the budget being focused on people over 55/60 years of age.

So I think I agree that this is a better point than the moral one. The conversation about the budget becomes a lot more sane if there is not a "protected class" of citizens. It's not a conclusion I like but I think it might be correct.

Employment in the US

Speaking of interesting graphs, the one posted by Matt Yglesias is rather interesting. January 2010 to January 2011 seems to have resulted in the creation of approximately 1 million private sector jobs coupled with the loss of 250 thousand public sector jobs. We can discuss whether this was an appropriate response to the budget realities of 2010 (it's an open question) but it is pretty clear that we are not trying any sort of classic Keynesian response to our current economic woes.

I could not agree more

From Matt Yglesias:

Opioid addiction is bad, and it’s perfectly reasonable for policymakers to try to minimize its incidence. But short of dying, experiencing chronic pain is one of the worst things that can happen to someone. The correct ordering of priorities is to try to make sure that nobody suffering from treatable chronic pain goes untreated, and then try to minimize addiction risks within that framework. The view that people suffering pain should get relief subject to the binding constraint that we need to fight addiction has a nice Puritan logic to it, but it doesn’t make any real sense.

I have been enjoying Matt's comments on pain medication. The ability to relieve pain is one of the miracles of modern medicine and one that should not be squandered. There are always going to be limitations to any system but it is odd that we don't focus on those in need of pain relief first and abuse second.

After all, we don't ban driving just because some driver's are reckless or irresponsible.

More on Just Desserts

Matt Yglesias has a very good point:

And this is for good reason. It’s pretty clear if you read the paper that Mankiw doesn’t intend to be arguing for any really radical changes in the structure of American society. He wants to defend modern industrial capitalism, while bolstering the case for lower taxation of the rich and less generous spending on the non-rich. But think about his examples here. How is it that you can get rich writing books, making movies, designing MP3 players, or making TV shows? Well it’s thanks to statutory definitions of intellectual property. If the copyright on a book only lasted two years, JK Rowling wouldn’t be nearly as rich. If the inventor of the Xerox Alto owned some kind of perpetual right to the concept of a graphical user interface, Steve Jobs’ whole career would be unimaginable. And the firms involved in these industries are constantly “manipulating the system” of intellectual property to try to maximize their own advantage.

I think that this is a very astute point; the structure of modern intellectual property laws have made the creation of these goods very lucrative. But linking success to morality is a very tough proposition because most people who are very successful are going to benefit from favorable regulation (because in places where regulation is unfavorable, it ia harder to be a success).

Consider this small businessman in California (who has discovered that there is a tax for have retail hand scanners):

Then yesterday the bill arrived. Sure enough, the people of California had enacted a new tax on small business. $205 in my case, including $100 for existing and $105 for having a POS system with one barcode scanner. It's like a tax on progress, only applicable to forward thinking businesses that have migrated away from the inefficiency of the cash register. Want to raise state revenue? Require retail businesses to have a point-of-sale machine or pay a $205/year fine. At least then you'll have capital investments in equipment and services that lead to jobs and more tax revenue.



The bottom line is that politics in this state preclude tax increases and our state is tens of billions of dollars over budget. Conservatives decry tax increases while liberals won't budge on public services. This naturally results in the nickel and diming of small businesses. We don't have a union or trade group to defend us, so watch as our business fees silently rise 20%.

The merits of one specific tax may or may not be justified. But people can work hard at a socially productive activity and still end up with a marginal income due to the choices we make on how to tax and regulate business activity. We may have chosen the optimal levels of these things (anything is possible) but ascribing moral superiority to classes of people who manage to obtain favorable regulatory treatment does not appear to be ideal.

Education thought for the New Year

Here is a point from Matt Yglesias:

I think the evidence suggests that one of the most important skills people learn (or don’t) in school is self-discipline rather than specific knowledge. I don’t think learning the chronology of ancient near eastern empires (Sumeria then Assyria then Babylonia then Persia then Greece then Rome) in elementary school has ever been useful to me, or even that the chronology I learned is especially accurate, but a lot of life involves semi-arbitrary tasks and it’s worth one’s while to get used to performing them.

Going down this path would suggest that a lot of curriculum might be made optional and teachers might be able to focus on what they love (and are best at inspiring the students they teach). This could be another reason why approaches like the "Freedom Writers" could still have decent results despite completely ignoring the normal educational programme.

Nice Observation

Matt Ygelsias makes a good point:

Today’s report, which is being called bad numbers, we learned of 50,000 new private sector jobs and the loss of 11,000 more public sector jobs.

To me, this really does seem like a bad result. But conservatives in the audience need to recognize that we’re getting what they say they want. The private sector is growing and the public sector is shrinking. If you’re disappointed in the results, you can perhaps consider reviving your view of the desirability of executing this shift in the middle of a collapse in aggregate demand. But what you can’t do is say that the bad economy is somehow being caused by an Obama-era slide toward socialism. The slide isn’t happening. The explosion in government isn’t happening. The public sector is shrinking.

The precise balance between public and private employment is tricky. But I think it is good to recognize what the actual direction of change is.

Education Reform

I want to very quickly return to first principles. When Mark and I began discussing tenure reform, it was in the context of a "crisis" in education. This terminology continues to this day.

However, the real impact of recent news is that proposed reforms don’t have the potential to make immediate and dramatic improvements in education outcomes. Why does this matter?

Because if there is an incipient crisis and known strategies can directly address them then it would be grossly unethical not to try and address this in the fastest way possible. However, if there is not an immediate crisis the correct way forward is one that addresses all of the stakeholders and not radical top-down driven reform. In other words, Baltimore and not Washington, DC.

In the long run educational reform may be inevitable and positive. One of our well versed commentators (Stuart Buck) opined about the evidence:

It's consistent with any number of stories, including increased quality of teaching, better curriculum, finding a better fit for each individual students (some do better in a smaller school, for example), and the factors that you mention.

In my view, this suggests that we are going to experiment with news modes of education. After all, many people who I respect are strongly advocating for experimenting further with education reform (Jon Chait, Megan McArdle, Matt Yglesias, Alex Tabarrok come immediately to mind).

So why are there concerns about the process by which educational reform is occurring? Because, the discussion began with a question of where to allocate resources. Seyward Darby was arguing that we needed to accept teacher layoffs as part of the price if educational reform:

The president's beef is with a provision to prevent teacher layoffs, which Democrats tacked onto the bill along with several other domestic priorities. To pay for the measure, the House agreed to cut money from some of the president's key education reform initiatives. Obama isn't happy about it. Nor should he be.

Now, if there is a real and immediate crisis in education than, of course, dramatic measures can make sense. But is this really the time to spark a round of teacher layoffs in order to make slow improvements in who decides to apply for teaching jobs? Maybe, but it seems naive to think that we should fuel the testing of educational reform with layoffs at this precise moment. Readers of Felix Salmon may remember this week's jobs report:

Meanwhile, as the school year begins, we have this:

Employment in local government decreased by 76,000 in September with job losses in both education and noneducation.

As states and municipalities around the nation start running out of money, they’re going to fire people; this is only the beginning. And if October is any indication, the job losses in the local government sector are going to be at least as big as the job gains in the private sector.

So the real issue is whether this is the time for radical teacher employment restructuring -- should we lay off teachers to test educational reform? We do have a duty to the future but we also have a duty to the current students as well. The conversation would be different if the net resources for education were increasing but claiming that education is a priority in the midst of layoffs due to lack of funding seems disingenuous.

My interest in this subject grew from two arguments in the blogosphere. One, that the crisis in educational was so bad that the state should massively break contracts without cause. Notice that in cases like AIG and TARP, we were willing to spend a lot of money as a society to preserve financial contracts. Two, that reform has likely to be so important that teacher lay-offs in the midst of a recession were an acceptable sacrifice as the students would be better off.

If we don't accept that there is an immediate crisis then we can still move forward. But then it becomes an American-style bottom-up reform and not a Soviet-style top down reform. I like the Baltimore example -- specific communities negotiating ways to respond to the crisis and continuing to try ways to create a better future for their children. The result of a thousand experiments with engaged communities could very well result in a far better educational system in the long run.

And I think that is a good outcome.

Matthew Yglesias buries the lede... deep

Matthew Yglesias again steps up to defend the honor of charter schools with a post on Anders Böhlmark and Mikael Lindahl's paper “Does School Privatization Improve Educational Achievement? Evidence from Sweden’s Voucher Reform” (PDF) from which he concludes:

In effect, Swedish practice is like what exists in American states (Arizona, for example) with lots of charter schools and it’s quite similar to what the Obama administration (and I) are pushing. The big difference is that for-profit operators are allowed to run schools in Sweden, which I’d be for allowing.

There is, however, an asterisk next to the name of the paper. The footnote is easy to miss (you have to click on the 'More>>' button to find it), but it's worth the effort. It reads:

* Their answer? It does in the short-term, but the gains fade. All else being equal I favor more choice, so I’d regard the reform as a good thing but I assume the architects of the reform were hoping for something more.

The wonders of shifting rationales

(What a great week to be an education blogger)

The old case for sweeping reforms: The changes we're suggesting are drastic and costly with bad track records and the potential to severely damage the system they are meant to save, but the current state of education is so bad that the future of our country depends on implementing radical reforms.

The new case for sweeping reform: it turns out the problem is not that big or wide-reaching but it's good that people mistakenly thought it was so bad because that encourages us to make all these changes.

(h/t Matthew Yglesias)