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The Agenda

NRO’s domestic-policy blog, by Reihan Salam.

Mike Pence Isn’t Giving In to Obamacare



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Republican governors and state legislatures across the country are under pressure to accept Obamacare’s Medicaid expansion, and the Obama administration and health-reform liberals are excited to announce their latest victory: Indiana governor Mike Pence has announced he’ll take the money and buy into the law he’s supposed to want to repeal.

Well, not so fast: Pence isn’t doing what, say, governors John Kasich and Chris Christie (Republican governors of bluer states) did, and decide to expand their state’s Medicaid programs basically as-is. Pence wants to use federal funding to expand an altered form of Healthy Indiana, a program the state’s run since 2008 for people with incomes up to 200 percent of the poverty level. Pence isn’t really “expanding Medicaid,” and the Obama administration can’t really claim that he’s going along with the law — he’s trying to bend it as much as possible.

But that doesn’t mean what he’s doing is a great idea, because there’s only so much he can bend it. Healthy Indiana was praised by many conservatives but criticized by others, and now Pence’s proposal both supersizes it and waters down in order to have a chance at approval from federal health-care bureaucrats.

What did he have to do to it?

A brief explanation of the original Healthy Indiana (“HIP”) program: Everyone earning under 200 percent of the poverty line not already eligible for Medicaid could apply, though the number of spots were limited. HIP enrollees to make contributions between 2 and 5 percent of income every month to a health-savings account, called POWER, which the state would subsidize so that the contributions equaled $1,100 each year. The deductible for their plan was equivalent to that, $1,100, after which they had catastrophic coverage paid at Medicare (not Medicaid) rates. Preventative care was totally free — which is a good thing for the unhealthy population Medicaid serves — and were required if enrollees wanted to roll over their HSA contributions from year to year. (A good simple explanation of the program can be found in this FAQ.)

Before the ACA, lots of states around the country chose, like Indiana, to expand Medicaid beyond its standard federal eligibility categories with their own funds, but HIP was probably the most conservative and most consumer-driven. It certainly was much better than ordinary Medicaid: It required contributions from the enrollees and incentivized them to use the right care and avoid the emergency room, while ordinary Medicaid has almost no cost-sharing at all. It also got them much better access to care because its reimbursement rates were much higher than standard Medicaid’s. It was expensive — more expensive than expected — but getting health insurance for poor Americans is never going to be cheap. It was extremely popular, and though health outcomes weren’t yet clear, preventative care use was up and emergency-room use was down versus normal Medicaid.

But in order to get a waiver to spend the money on offer from the ACA Medicaid expansion — which would allow Indiana to provide the program to a lot more citizens who were eligible — Pence had to change the program to make it more comprehensive and more generous. Here’s where the problem comes in: Critics of Pence say he’s changed the program so much as to make it unrecognizable, a terrible idea, and basically just any old Medicaid expansion.

They’re wrong: It still is fundamentally consumer-driven in a way ordinary Medicaid is not; it should work a lot better for people’s health than ordinary Medicaid; and it’s a clear rejection of the one-size-fits-all approach of Obamacare.

Keep reading this post . . .

The Dangers Created by the Dollar’s Dominance



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According to Ryan Avent of The Economist, the U.S. dollar’s rapid appreciation in the early 2000s, the result of mercantilist currency manipulation on the part of several of America’s trading partners, led to a steep increase in the relative cost of American tradable goods. This in turn did a great deal of damage to the U.S. economy:

What would we expect to happen in such a circumstance? Well, we would expect a big blow to industries that were cost-sensitive and highly exposed to foreign markets. We would expect to see large current-account deficits and for net trade to be a substantial drag on growth. We might anticipate that the central bank would struggle to boost demand given weakness in external demand, and we might expect that efforts to boost demand would overwhelmingly work by lifting growth in non-traded sectors.

And that is pretty much exactly what happened. The Fed is often accused of having created a bubble to spur domestic demand, and thus creating the conditions for a housing bust and a financial panic. Yet Avent, drawing on new work from economists Doug Campbell and Ju Hyun Pyun, suggests that what the U.S. really ought to have done is intervene in foreign-exchange markets to dampen or even reverse dollar appreciation. Campbell and Pyun find that the dollar had an effective appreciation of 48 percent from 1990 to 2002, which led to a dramatic spike in relative unit labor costs. Not surprisingly, this led to a steep decrease in manufacturing employment in manufacturing industries exposed to foreign competition. There is nothing wrong with exposing U.S. manufacturers to vigorous foreign competition. There is something wrong with standing idly by as foreign central banks force currency appreciation that puts U.S. manufacturers at a disadvantage that has little to do with their managerial prowess. 

Avent argues that the U.S. ought to reconsider its reluctance to intervene in foreign-exchange markets, as depreciations have a strong track record as a tool for lifting expectations for growth and inflation while substantial currency appreciation appears to have a strong contractionary effect. If anything, Avent maintains that “not intervening to weaken the dollar is by far the more dangerous policy approach,” as the alternative is a Fed that has no choice but to create financial bubbles to achieve full employment at home. Directly weakening the dollar is, in Avent’s view, “the surest way to escape the current doldrums.”

One concern is that if the U.S. were to intervene in foreign-exchange markets, it would jeopardize its role as the world’s primary reserve currency. According to Avent, the opposite is the case: if weakening the dollar offers an alternative to constant bubble-creation, the dollar will become a safer asset, thus reinforcing the dollar’s dominant role. But I wonder if moving away from the dollar’s role as the world’s primary reserve currency might actually be a good thing, as Michael Pettis has argued.

For Pettis, the dollar’s dominance in the global monetary system is not an “exorbitant privilege.” Rather, it is an “exorbitant burden” that forces Americans to bear substantial costs:

When foreigners actively buy dollar assets they force down the value of their currency against the dollar. U.S. manufacturers are thus penalized by the overvalued dollar and so must reduce production and fire American workers. The only way to prevent unemployment from rising then is for the United States to increase domestic demand — and with it domestic employment — by running up public or private debt. But, of course, an increase in debt is the same as a reduction in savings. If a rise in foreign savings is passed on to the United States by foreign accumulation of dollar assets, in other words, U.S. savings must decline. There is no other possibility.

So where is the privilege in all this? Ask any economist to describe the greatest weaknesses in the U.S. economy, and almost certainly the list will include the gaping trade deficit, the low level of savings, and high levels of private and public debt. But it is foreign accumulation of U.S. dollar assets that, at best, permits these three conditions (which, by the way, really are manifestations of the same condition) and, at worst, causes them to deteriorate.

The U.S. needs to take action to force other major economies to share in this burden. Avent’s prescription — that the U.S. ought to intervene in foreign-exchange markets to resist efforts to drive up the dollar’s value — is an excellent first step.

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Letting States Experiment with Pre-K Funding: Will They Just Follow the Wishes of the Education Establishment?



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Kudos to Senator Mike Lee and Representative Matt Salmon for proposing a new approach to early-education policy on the home page yesterday. The lawmakers recognize that the nation’s largest preschool program, Head Start, has failed to demonstrate any persistent impacts when subjected to rigorous evaluation. They propose to cancel federal funding for Head Start and send the money to the states for pre-K education. “It’s time to distribute [Head Start’s] funds to the states and let them experiment,” they write.

Any proposal that eliminates spending on Head Start is a positive step. But is it wise to simply give the money to states?

Early education policy involves a couple of major challenges. First, we don’t know what works. There is no special formula, no secret education sauce, that has been consistently shown to have long-lasting effects on children. Therefore, states would have little guidance as to how to “experiment” with the federal money. They would likely follow the advice of the public-education establishment, which does not exactly have a great track record in converting taxpayer dollars into achievement gains.

The second challenge is that it’s difficult to evaluate the effectiveness of preschool once it has been implemented. To confidently attribute cognitive, behavioral, or health-related impacts to a preschool program requires a large-scale randomized experiment. States are sometimes called the “laboratories of democracy,” but laboratories are most useful when literal experiments are conducted in them. How many states are prepared to conduct one?

So, although Lee and Salmon are right to defund Head Start, distributing the money to the states may not generate the thriving marketplace of preschool ideas that they envision.

Congress should instead consider David Armor and Sonia Sousa’s proposal in National Affairs: Take the federal money currently spent on preschool and use it to fund a multitude of early-education experiments modeled on the Head Start Impact Study. More experiments could formally test the theories — some would say excuses — advanced by preschool advocates as to why previous programs have proven ineffective. The evaluations might reveal what works, or they might produce a steady stream of null effects that humbles the social planners. Either way, the results would help policymakers make decisions based on evidence rather than intuition.

Who Will Win and Who Will Lose from Seattle’s New Minimum Wage Hike?



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Earlier this month, I offered thoughts on Seattle’s minimum wage hike, and I mentioned the fact that poverty in the Seattle metropolitan area is concentrated in its suburban regions. Alan Berube of the Brookings Institution writes on a similar theme, yet in his effort to put a positive spin on Seattle’s new wage floor, he neglects to think through the potential consequences. Drawing on American Community Survey, Berube and his colleague Sid Kulkarni found that between 2009 and 2011, there were on average 149,000 jobs (full-time and part-time) in Seattle proper that paid less than $15 per hour, or 30 percent of all jobs in Seattle, while suburban King County had an average of 216,000 jobs, or 34 percent of all jobs in the region, falling in the same category.

Berube makes the point that many suburbanites will benefit from Seattle’s new minimum wage, as they will work within the city limits. Yet Berube doesn’t explore the possibility that better-trained or more highly motivated suburban workers might displace their low-wage counterparts currently residing in Seattle. Assuming Seattle’s new minimum wage doesn’t dramatically increase the demand for low-wage workers, which seems unlikely given that the new minimum wage will greatly increase the cost of employing such workers, it is easy to imagine that we’d see at least some displacement along these lines. Berube cites a University of Washington analysis of the minimum wage hike, and it is fascinating. Among other things, it finds that an increase in the minimum wage to $15 per hour will reduce poverty in Seattle from 13.6 percent to 9.4 percent if employment and hours don’t change, which is to say this number is utterly useless, as it assumes away the central question, which is whether raising the price of low-wage labor will lead local employers to demand more work effort and substitute capital for labor. The report does, however, include this helpful chart.

 

Workers in Seattle <=$9.32 $9.33-12.12 $12.13-15 $15.01-18 Over $18 Total $15 or under
Live and Work in Seattle 11% 9% 9% 8% 64% 20%
Live in Seattle, Work Outside 15% 9% 9% 8% 59% 33%
Live outside Seattle, Work in Seattle 7% 6% 6% 8% 73% 19%

The absolute numbers are also instructive:

 

Workers in Seattle <=$9.32 $9.33-12.12 $12.13-15 $15.01-18 Over $18 All Workers
Live and Work in Seattle 23,112 19,067 17,871 16,077 133,387 209,514
Live in Seattle, Work Outside 18,824 10,717 11,756 9,404 74,243 124,944
Live outside Seattle, Work in Seattle 14,803 13,753 13,103 18,196 160,899 220,754
Total Seattle residents 41,936 29,784 29,627 25,481 207,630 334,458
Total Workers in Seattle 37,915 32,820 30,974 34,273 294,286 430,268

Let’s consider what might happen to the 11 percent of those who live and work in Seattle (23,112) who are currently earning $9.32 per hour or less. Is it safe to assume that employment and hours won’t change for these workers, or their future counterparts, as the new wage floor takes effect? The 9 percent of those who live and work in Seattle who are currently earning between $12.13 and $15 might not be affected (19,067), but one assumes that those workers who are further down the wage ladder will have a different experience, not least because these workers who live and work in Seattle will face new competition from low-wage workers who live in Seattle yet who currently work low-wage jobs outside of the city (many of whom will find a shorter commute attractive, particularly it comes with a wage increase) and, of course, from workers who live outside Seattle and will now find it worth their while to travel into the city. What will happen to these displaced Seattle residents? If they see a reduction in hours or if they lose their jobs outright, they’d see their market incomes drop to the point where they might no longer be able to afford to live in Seattle, or they’ll depend on transfers to pay for scarce low-rent housing. The net result might be a sharpening of the phenomenon Berube has identified, namely that poverty in the Seattle region is concentrated in the suburbs, as low-wage Seattleites are forced to leave their city to find more affordable accommodation.

My impression is that the minimum wage hike will make the Seattle region more rather than less economically segregated, and it will deepen the tendency towards labor market polarization as a nontrivial number of workers, starting with those who command a market wage of $9.32 or less, will find themselves locked out of formal employment.

In Making Progressive Politics Work, Lane Kenworthy has a brief chapter on low-wage work, which includes the following passage:

Even if we do a superb job with schooling, high-end services won’t employ everyone. Imagine a high-skill, high-employment economy of the future with 85% of the working-age population in paid work. Suppose 65% complete university and end up in high-end service jobs. That optimistic scenario still leaves 20% in other jobs. Some will work in manufacturing or farming, but what of the rest?

They could work in low-end services. However, some favour minimising such jobs. One way to do that is to set the wage floor at a very high level, perhaps supplemented by heavy payroll taxes, in order to reduce employer demand for low-end positions. Another possibility is to offer an unconditional basic income grant at a level generous enough to reduce the supply of people willing to work in a low-paying job.

I don’t think that’s the best way to proceed. As we get richer, most of us are willing to outsource more tasks that we don’t have time or expertise or desire to do ourselves – changing the oil in the car, mowing the lawn, cleaning, cooking, caring for children and other family members, advising, educating, organising, managing, transporting. And improved productivity and lower costs abroad will reduce the price we pay for food, manufactured goods, and some services, leaving us with more disposable income. So we’ll want more people teaching pre-school children, helping others find their way in the labour market or through a midlife career transition, caring for the elderly, and so on, and we will be better able to purchase such services. If there is demand for these services and a supply of people willing to perform them, why discourage them?

These types of jobs can be especially valuable for the young and immigrants, two groups who tend to struggle in the labour market. Some low-end service jobs will be in the public sector, but not all. To facilitate low-end service employment in the private sector, we need a modest wage floor, modest payroll taxes, and social programmes that encourage and support employment. [Emphasis added]

There is much wisdom in this brief passage. For politicians, talk is cheap, and so are minimum wage hikes. The costs of minimum wage hikes are borne by employers and by the workers who are excluded from the labor market, or who find their hours reduced, as employers demand greater productivity from their more expensive workforce. Employment-conditional earnings subsidies are a far more effective way to alleviate poverty than statutory wage floors, but they cost money. We need to get over our aversion to spending money in a transparent, above-board way when the alternative is forcing poor people to bear the cost of our political posturing — our desire to demonstrate that we “feel the pain” of low-wage workers without acknowledging the ways in which policies like high wage floors might inflict pain on the young and the less-skilled.

The Importance of Giving All Workers Access to a Retirement Savings Plan



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Back in January, Sylvester Schieber and Andrew Biggs made the case that retirement incomes are in much better shape than is commonly understood. Because the Current Population Survey (CPS) fails to count the bulk of the income older Americans derive from 401(k) and IRA plans, observers relying on CPS data have concluded that the shift from defined-benefit pensions to defined-contribution savings plans has greatly reduced retirement incomes. And some of these observers have thus concluded that we ought to increase Social Security benefits to mitigate the effects of this decline. Schieber and Biggs use the incomes retirees report to the IRS to get a clearer picture of what’s happening on the ground. They find that while the CPS reported $5.6 billion in individual IRA income in 2008, retirees reported $111 billion in IRA income to the IRS. Similarly, the CPS reports that Social Security beneficiaries collected $222 billion in pensions or annuity income while federal tax filings show that these households collected $457 billion. IRS data offers a much rosier picture of retirement incomes than CPS data, and Schieber and Biggs note that it doesn’t factor in distributions from Roth plans or pension and IRA distributions to low-income retirees who do not file annual tax forms. Moreover, they maintain that CPS understates participation in retirement plans, as the CPS relies on individual responses that are not always reliable. For example, CPS finds that only half of American workers are offered retirement plans while a 2011 analysis by the Social Security Administration’s Office of Retirement and Disability Policy finds that 72 percent of all private workers were offered retirement plans, including 84 percent at large firms with 100 employees or more.

So why do I bring this up now? Though Schieber and Biggs are right that the retirement income picture is not all doom-and-gloom, there is a difference between being offered a retirement plan and actually participating in one. In 2012, the Bureau of Labor Statistics observed that workers in management, professional, and related occupations had twice as much access to employer-sponsored retirement plans and three times the participation rate of service occupations; full-time workers had almost twice the access and three times the participation of part-time workers; union workers had an edge over non-union workers, as did high-wage workers over low-wage workers and workers in large establishments (with 500 workers and more) over workers in small establishments (with 100 workers or less). Since the 2008 crisis, it is low-wage service work that has been expanding, and it is reasonable to assume that these jobs offer relatively little in the way of access to employer-sponsored retirement savings plans. And low-wage workers are less likely to participate in retirement savings plans even when they have access to them in light of their higher marginal propensity to consume.

Florida Sen. Marco Rubio calls for allowing all American workers who don’t have access to an employer-sponsored retirement savings plan to enroll in the federal Thrift Savings Program. This is a straightforward way to make access to a well-designed retirement savings plan universal. Granted, Rubio’s proposal won’t solve the participation problem — this would require making participation mandatory, or using auto-enrollment (i.e., opt-out rather than opt-in) to raise participation levels. But auto-enrollment is a tough political sell, particularly to the extent that it reduces disposable income for cash-strapped Americans. Even without auto-enrollment, Rubio’s proposal is a huge step forward for building a more equitable, sustainable retirement savings system.

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The Growing Recognition That Excessive Land-Use Regulation Limits Opportunity



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There is a growing recognition that stringent local land-use regulations are one of the main barriers to upward mobility for low- and middle-income Americans. In a new Democracy Journal review of Thomas Piketty’s Capital in the Twenty-First Century, Lawrence Summers, a veteran of the Clinton and Obama administrations and one of America’s most influential economists, argues that “the two most important steps that public policy can take with respect to wealth inequality are the strengthening of financial regulation to more fully eliminate implicit and explicit subsidies to financial activity,” a widely-held view, and, more surprisingly, “an easing of land-use restrictions that cause the real estate of the rich in major metropolitan areas to keep rising in value.” It shouldn’t be too surprising that Summers takes this view, as he is a colleague of Edward Glaeser, the Harvard economist who has arguably done more than anyone else to put the perverse effects of excessive local land-use regulation on the map.

Encouragingly, a new report from the U.S. Chamber Foundation connects the regulatory climate to housing prices: it turns out that more entrepreneurship-friendly jurisdictions tend to have lower housing prices, as these jurisdictions generally make it easier to obtain construction permits. And Jay Weiser, a professor of law and real estate at Baruch College, recently discussed the ways in which local land-use regulations exacerbate poverty at the AEI Ideas blog:

As Louis Hyman noted in his book Debtor Nation, government-subsidized debt pressured low-wealth families to borrow for houses and cars rather than build up savings. With Southern California’s low permitted densities and vast distances – Riverside County and its Inland Empire neighbor, San Bernardino County, together are larger in area than West Virginia – public transportation is impractical, and many low-wage jobs don’t pay enough to justify the time and expense of commuting. The guarantee state, by encouraging high consumer leverage to acquire illiquid, oversized, high-maintenance houses, ironically heightened the inequality bemoaned by progressives. When highly leveraged, low-wealth homeowners lose a job or need to do extensive home or auto repairs, they get wiped out.  Renters are in a better position to build long-term wealth through diversified savings.

Brookings Institution scholar Alan Berube (an author of a suburban poverty study) says of the Inland Empire, “This is where poor people live now, and this is where they are going to live.” But Berube’s incantation makes an eternal truth out of reversible government decisions that created sprawl. Raising densities and ending the preference for single-family homes could reconcentrate people near viable working-class jobs in places like Los Angeles.

This is a theme that we’ve addressed in this space as well, and I was pleasantly surprised to find that at least some conservative state legislators are thinking along broadly similar lines. That is, while the left fixates on setting higher and higher statutory wage floors, the right needs to think harder about the sources of the cost growth in housing, medical care, and other domains that are eating into disposable income and making it difficult if not impossible for people of modest means to build wealth and to improve their standard of living. Though conservatives and libertarians have yet to translate these inchoate concerns about the ways in local land-use regulation can limit opportunity into a policy agenda, we’re in a much better position now than we were in as recently as a few years ago. The tide is turning.

I should add that Karen Weise of Bloomberg Businessweek has more on the housing beat. She reports that though “the most direct route to keep prices in check is to create more supply,” the housing construction recovery “mostly isn’t in areas facing the biggest squeeze.” Even when high-cost metros are building more than usual, they’re not keeping pace with the national average. Weise cites Jed Kolko, chief economist at Trulia, who observes that because high-cost cities tend to have geographic limitations that limit the scope for housing construction, their main option for increasing supply is building denser projects, featuring taller multi-family dwellings with smaller units. But the political barriers are steep, as Kolko explains to Weise. While the negative externalities associated with construction are very visible, as are changes to the character of the built environment that longtime residents might find distasteful, “the benefits of greater affordability are more diffuse, shared across a whole metro area and often delivering the most help to residents of the future.” Moreover, incumbent homeowners benefit from supply constraints that force housing prices to increase.

Where Weise goes astray is in suggesting that “if people earn more, high housing prices are less of a problem,” and all but endorsing a minimum wage hike as a viable strategy for addressing the affordability crunch. This is disappointing in light of the sanity of the rest of the piece. Leaving aside the question of whether raising local minimum wages will reliably lead to higher incomes rather than to more substitution of capital for labor, etc., why would higher incomes resolve the affordability crunch if housing supply remains tightly constrained? Would higher incomes in a given region mean more money chasing after a limited supply of housing units? There is no getting around the need to increase housing supply.

And instead of just acknowledging the political barriers to new development in high-cost cities, it is worth noting that scholars like David Schleicher of the George Mason University School of Law have devised ingenious ways around them, like TILTs or “tax increment local transfers.” The basic idea is that if a local community approves a zoning amendment that allows for increased density, residents of the community would get a cut of the new tax revenues generated by the new construction for some limited period of time. This time limit creates an incentive for local residents to want develop to happen quickly, as the clock starts ticking once permission to build is granted. Whereas community opposition to development now means that developers have to pay ever larger bribes, or “community benefits agreements,” to get their projects built, TILTs create a situation in which community opposition, and the delays it creates, shrink the period during which community residents get their cut of tax revenue. In effect, TILTs force NIMBYs to make a difficult choice: they can either be their NIMBY selves and not get paid, or they can go from a “not in my backyard” stance to a “yes in my backyard” stance and secure cold, hard cash, or other local benefits, in the process.

Schleicher is too modest to say that he’s solved the NIMBY problem. But he’s certainly made some headway.

Marco Rubio Couldn’t Be More Timely: Social Security’s Situation Keeps Getting Worse



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On Tuesday, Marco Rubio introduced a vision for expanding retirement options, and shoring up Social Security in a pro-growth way (see what Reihan wrote about it below). This is important for a couple reasons: First, this hasn’t been something Republicans have talked about for years, and a confident, creative conservatism should have ideas on how to ensure that the program accomplishes its goal (providing a living for elderly who can’t support themselves).

But second, the forward-looking financial situation of the program has deteriorated significantly over the last half decade or so. The recession immediately sent it into the red — the dedicated revenues from the payroll tax dropped below the benefits being paid out for the first time in history, forcing the program to start drawing on its “trust fund” of debt that the Treasury owes it, which has to be paid for with general revenues. This is a problem for the federal budget, not just for the existence of Social Security, and it’s now a problem that is growing even faster than we expected. The Committee for a Responsible Federal Budget put together the following charts to show what’s been going on just during the week recovery, after the recession blew a hole in the program’s finances.

Here are four years’ worth of projections of Social Security’s cash-flow deficit – the amount by which benefits paid exceed payroll taxes — for 2011 to 2021. Dark blue is the CBO’s most recent numbers, from April 2014:

The changes in the near term are a little noisy, but as you can see, the actuarial projections have repeatedly gotten worse. And 0.whatever percent of GDP may not look like much, but of course it is — 0.4 percent of GDP is about $50 or 60 billion. That’s what self-sustaining Social Security is draining from the federal budget each year, and it’s only going to get a lot bigger. The difference is, interestingly, a combination of revenues and spending — payroll-tax collections keep disappointing, and people keep retiring earlier than expected (there is actually a lot more going on than just this, but those are two big issues and the intuitive, non-technical ones).

Here’s the breakdown of revenue misses versus spending overrides that makes up the gap between the March 2011 projection and April 2014:

This gap means that the Social Security trust fund is shrinking a lot faster than expected — it’s on track to be exhausted in 2031 now, rather than 2038.

The odd thing about Social Security accounting is that it’s both useful and meaningless. In some sense, it’s relatively meaningless when the trust fund is actually exhausted — that will just be the point at which the program, judged from its inception until that date, begins spending general-revenue dollars rather than tax dollars.

But on a cash-flow basis, it’s already doing that today. Senator Elizabeth Warren likes to talk about making Social Security more generous without talking about how to pay for it, claiming that the program has a trust fund that will be funded for the next two decades. But that trust fund can’t produce any dollars without laying a claim on federal debt — which means less spending elsewhere in the federal budget, or higher income taxes. So as a legal and accounting matter, it’s quite right to say that benefits are scheduled to be cut to about three-quarters of what’s been promised in 2031 (what payroll-tax revenues will be able to pay for), but as an economic matter, this doesn’t much matter. The useful, angle of its accounting, though, is that because Social Security ties its spending to a specific revenue source, we can see how the individual program is growing faster than the revenues we’re supposed to be using to pay for it.

A final note: It’s always worth being skeptical of long-term budgetary projections (the above now extend seven years into the future) — obviously, the whole point of this post is that the projections for Social Security have dramatically worsened. But it’s hard to see how the long-term picture for Social Security could possibly improve: CRFB has done some neat work on how our health-care budget problem has gotten smaller of late, thanks to the slowdown in health-care costs that’s happened over the past decade. But as Social Security is designed, that can’t really happen, and unless the American economy grows noticeably faster than predicted or creates noticeably more employment opportunities than expected, Social Security’s picture really can’t improve.

Quick Political Point About Rubio’s Social Security Reform Proposal



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I’ve been hearing a number of convoluted liberal critiques of Florida Sen. Marco Rubio’s call for a modernizing Social Security by (a) making it more generous to low-income households and (b) somewhat less generous to high-income households, (c) giving all workers who don’t have access to an employer-sponsored retirement savings plan access to the low-cost retirement savings plan that serves federal workers, and (d) encouraging people to delay retirement by giving older workers a large tax cut. Specifically, I’m being told that giving all workers access to the Thrift Savings Plan is somehow a secret plot to undermine Social Security, despite the fact that Rubio is calling for add-on savings that would simply level the playing field between low-wage and high-wage workers, and that the payroll tax cut is completely trivial, particularly when compared to a minimum wage hike (yes, this is actually what I’ve been hearing). And though I’m sorry to say it, I see this as good political news for the right, as it suggests that liberal lawmakers won’t be willing to simply mimic Rubio’s proposal. If conservatives are alone in calling for eliminating Social Security payroll taxes for workers who reach retirement age, they will have a very effective political weapon at their disposal. Keep in mind that President Obama has floated the idea of a switch to chained CPI for calculating the growth of Social Security benefits and setting the thresholds for marginal tax rates, a move that would substantially reduce growth in Social Security benefits while raising taxes on middle-income households over time. Which do you think is a better political sell?

Rubio’s Federal 401(k) Plan: A Useful Idea, but With Some Political Headaches



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Senator Marco Rubio recently announced his plan to revamp how Americans save for retirement. Along with the conventional (yet important) ideas of raising the retirement age and eliminating the Social Security earnings test, Rubio’s plan contains an unorthodox element: He wants to open the Thrift Savings Plan (TSP) to the 75 million workers who do not have an employer-sponsored plan. The TSP is a 401(k)-type retirement account administered by the federal government exclusively for federal employees. It’s been held up as a model for how a defined-contribution plan should be run: miniscule administrative costs supporting a diverse selection of individual and life-cycle funds.

Should more Americans participate in the TSP? That depends on just how large the TSP would become. If tens of millions of Americans sign up, the federal government would be in charge of administering a large portion of the nation’s savings. One need not be a tinfoil hat-wearer to wonder if politics will creep into the investment options that are offered. In this age of people losing their livelihoods over their political beliefs, I can imagine a situation in which the federal government is urged to “divest” from companies led by people who, say, oppose same-sex marriage. Given the amount of money the government would oversee, that pressure could be a backdoor way for the government to regulate business practices and even political speech.

It’s not an unfounded fear. Many public pensions at the state and local level have already divested or frozen their gun and tobacco holdings due to political pressure. When now-mayor Bill de Blasio was New York City’s public advocate, he drew up a list of what he called the “dirty dozen” investment firms with gun holdings, stating that, “Elected leaders understand that this [divestment] is a tool of government with huge ramifications.” And now activists even want public pensions to divest from fossil fuels!

Unlike some of the large public pension funds with in-house active portfolio management, the TSP offers index funds maintained by a private firm. So the situation is a bit different: Politicians generally don’t feel a “fiduciary responsibility” to divest when the money is held in defined-contribution accounts rather than a single defined-benefit fund. Nevertheless, whether the TSP’s structure would provide enough insulation from politics is an open question.

Another concern is that the most popular fund in the TSP — the “G fund” — carries an implicit government subsidy. It holds special non-marketable securities, issued exclusively to the TSP by the Treasury, that have the low volatility of short-term bonds but the higher interest rate of longer-term bonds. Back when Andrew Biggs and I were comparing federal and private-sector compensation, we calculated that the implicit subsidy was worth a 2 percent raise for federal employees, or around $2.3 billion annually. Would every participating American be entitled to this same subsidy? That could mean a 10- or 20-fold increase in its cost.

More generally, would the returns on all of the TSP funds carry a de facto guarantee? Like every defined-contribution plan, the TSP’s investment risk is supposed to rest solely with participants. But if the TSP is the nation’s government-run 401(k), an economic downturn might lead to political pressure for a bailout when returns are lower than expected. Would politicians be able to resist? These are the kinds of questions that Rubio will have to answer.

Rubio’s Social Security Reform Makes a Lot of Sense



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Over the last few months, Florida Sen. Marco Rubio has been releasing a series of domestic policy proposals, the most recent of which is the best yet. Drawing on the work of Andrew Biggs of the American Enterprise Institute, a leading expert on Social Security, among other things, Rubio has outlined a strategy for shoring up and improving Social Security for future generations. Rubio represents Florida, where 18.2 percent of the population is over the age of 65, which about a third higher than the U.S. average (13.7 percent). And when Rubio ran for the GOP Senate nomination in 2010, he took a real risk by explicitly calling for a Social Security reform that might, for example, raise the retirement age for younger workers. Rather than leave it at that, Rubio has now offered a proposal that ought to serve as a model for conservative policy innovation. First, Rubio made it extremely clear that he doesn’t just begrudgingly accept Social Security as a concession to political reality that he would eliminate if he could. He makes an affirmative case for Social Security, which he characterizes as a central element of the American dream. This is vitally important for conservatives, as it undermines the deep-seated notion that the right has a hidden agenda to dismantle the safety net. Second, Rubio calls for reform not just on the grounds that the Social Security system is fiscally unsustainable, though he does make that case, but also on the grounds that its current structure “does not line up with the needs and realities of our post-industrial economy.” That is, Rubio doesn’t just make the case for extending Social Security’s lifespan. He also makes the case for modernizing the program to better meet the needs of retirees. Third, he offers a proposal — opening access to the federal government’s Thrift Savings Plan to all citizens — that recognizes that many employers, including a large share of low-wage employers, don’t offer employer-sponsored 401K plans, and that the federal government can play a constructive role.

Though there are potential pitfalls to giving all Americans access to the Thrift Savings Plan, which I’m hoping my colleagues will address, Rubio is recognizing that, as Ray Boshara has observed, America’s asset-accumulating institutions do a much better job of serving high-earners than low-earners. By “asset-accumulating institutions,” I mean banks (which, believe it or not, are often worse at meeting the needs of low-income households than check-cashing outlets and payday lenders), employers (large firms that employ large numbers of high-wage workers are more likely to offer retirement savings plans and opportunities for advancement than small firms that tend to employ low-wage workers), and the tax code (which provides tax incentives for savers that benefit high-income households far more than low-income households). The irony is that while affluent people are embedded in institutions that make it easy to make good decisions, e.g., they’re more likely to have employers that default them into retirement savings plans, they’re already in a good position to make good decisions, as they don’t lead lives defined by resource scarcities that make it difficult to act in their best long-term interests. Poor people, meanwhile, are nudged in the direction of wealth-draining institutions like payday lenders and check-cashing outlets.

So what Rubio is trying to do is level the playing field — he doesn’t want to undermine the wealth-building institutions that benefit the well-off. Rather, he wants to extend a similar institution to those who’ve been left out by the status quo. This includes low-income households, but also the large and growing number of freelancers and others who can’t rely on an employer to provide them with simple, low-cost retirement savings options. His ideas bears a strong resemblance to Scott Winship’s call for “citizen benefits,” and it represents a promising turn in conservative thinking.

Rubio also calls for eliminating the Social Security payroll tax for retirement-age individuals, an idea that Biggs has championed on a number of occasions. Encouraging delayed retirement is a far more effective way to generate Social Security savings than, say, embracing chained CPI, yet it is politically challenging to simply raise the retirement age. Rather than just rely on the stick of a higher retirement age, Rubio employs the carrot of sharply reducing the tax burden on older workers. Biggs has observed that because Social Security benefits are based on the highest 35 years of earnings, additional year of work in your early 60s is unlikely to increase your benefits by much. Moreover, female retirees receive a spousal benefit, which is not impacted by additional taxes. And individuals who reach the full retirement age are ineligible for Social Security disability benefits, yet they still have to pay the disability payroll tax. So while the “net tax rate” (taxes minus benefits) imposed by Social Security on younger workers is low or even negative, it is quite high for near-retirees. He cites a number of scholar who’ve found that increasing after-tax earnings for over-62 workers would substantially increase this cohort’s labor supply, which is to say it would cause individuals to delay retirement. This in turn would (a) on average improve the health and well-being of this cohort by reducing its social isolation and (b) generate meaningful savings for the Social Security system. And again, these savings are achieved not by forcing older workers to work, but giving them a good reason to do so.

There are, to be sure, places where Rubio could have gone further. Biggs calls for transitioning Social Security to a universal flat benefit. But his proposal is truly excellent, and I hope that other conservative lawmakers learn from it.

Food Stamp Rolls Are Finally Shrinking. Why Did It Take So Long?



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The Wall Street Journal featured this nice graphic yesterday, showing that the number of food-stamp (“SNAP”) recipients in America, after an incredible surge during the recent recession, has definitely finally peaked and is steadily falling — though it’s barely fallen in absolute terms.

The drop isn’t dramatic yet: Recipients are down from 47.7 million to 46.2 million, according to monthly data from the USDA. (A less dramatic version of this chart, from the liberal Center on Budget and Policy Priorities, is here.) Nonetheless, it’s encouraging, and it should be accelerated not just by further improvement in the economy. With the employment situation, and real wages, recovering slowly but steadily, why has it taken this long to put a dent in the number of food-stamp recipients?

In large part because this has been such a rotten recovery: Yes, wages have grown a bit and unemployment has dropped, but the share of the population employed has barely budged, the housing market remains depressed, millions have dropped out of the labor force, and jobs have been created much more slowly than in past recoveries. That said, SNAP rolls have always dropped well after the worst of a recession has hit. The sheer size of the increase is exceptional here, but the lag is nothing new: Note, for instance, that recipients in the early-90s recession peaked in the beginning of 1994 — when the recession actually occurred in 1990 and unemployment peaked in 1992).

This is partly because people who’ve been unemployed are likely to get low-wage or part-time jobs that leave them still eligible for benefits. The labor market also typically recovers more slowly for low-skill workers, those who are more likely to be on SNAP while employed or unemployed, than it does for high-skill workers.

The cost of the program isn’t going to drop as dramatically as the number of recipients, but it’s going to drop, slowly: The CBO’s projection from last year, which has been slightly pessimistic actually, was that spending will drop steadily from about $82 billion in 2013 to $77 billion a year in 2017 (this drop is much more dramatic as a share of GDP).

Besides an improving economy, it’s possible that a small reform to the program included in the farm bill passed earlier this year will reduce SNAP rolls (and spending) somewhat. It doesn’t take effect immediately, but the CBO estimated that it would save $8.6 billion over the next ten years, by moving people off the food-stamp roles. How? Congress tried to close something called the “heat and eat” loophole, under which states could make their residents eligible for substantial SNAP benefits if the residents received any help from the state with their heating bills — as little as $0.10. But this year, primarily blue states that had eagerly made use of the program found an obvious way around it. 

Congress set the minimum heating benefit to qualify for SNAP at $20 a month, when it had previously been basically nothing at all. So states, including New York and Connecticut, are just deciding to spend a few million dollars more a year on the heating program (called “LIHEAP”) in order to keep people eligible for tens or hundreds of millions of dollars in federal food-stamp dollars. The CBO’s savings may not evaporate entirely, but most states are moving to boost their LIHEAP spending to save their food-stamp dollars. Not every state took advantage of the loophole in the first place, so the ones that did do it are almost all going to try to keep up the scam. It’s very tricky to figure out how to end this for good, but categorical eligibility was a problematic idea in the first place.

And why did we see such an incredible surge in SNAP enrollment in the first place? This recession was obviously much worse than what we saw in the early 2000s or the early 1990s, but SNAP is also a more generous program than it was then. Work requirements, for instance, have been substantially weakened in most states. The maximum benefit was also expanded from 2009 to 2013 under the president’s stimulus package, contemporaneously with a big push to enroll people in the program. The stimulus also marginally and briefly widened eligiblity, but more generous benefits plus the promotion campaign probably had more to do with why this increase was so dramatic (even taking into account the exceptionally bad economy).

Why Did Romneycare Save Lives? (If It Did)



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Last week, Annals of Internal Medicine published the results of a groundbreaking study: When people get health insurance, they’re less likely to die. You’re probably wondering why it took a Harvard economist to figure that out, but the relationship between health insurance and mortality is less obvious than it seems.

The authors of the study conclude Massachusetts’s 2006 health reform was associated with a 4.5 percent decrease in deaths preventable by health care, and that for every 830 people who gain insurance, there’s one fewer death per year.

The study compared pre- and post-health-care-reform mortality rates of nonelderly adults in Massachusetts to mortality rates in control groups in non-reform states. Of course, since this isn’t a randomized control trial, all we have here is correlation, and a sensible causation (that health insurance saves lives). Nonetheless, the findings were significant, represented in the chart below:

Health-amenable mortality in Massachusetts begins a slight decline relative to the control group shortly after the 2006 reforms, while other-cause mortality does not change significantly.

Assuming the change isn’t due to other factors, this would seem to call into question the results of the widely publicized Oregon Health Insurance Experiment, which applied the “gold standard” method of research, a randomized trial, to the subject by comparing health outcomes of a group that received Medicaid coverage with a control group that did not receive coverage.

While OHIE authors concluded that Medicaid recipients used more health care — including more care that has been “linked to improved outcomes” — they also concluded that the effects of increased utilization were unclear:

This randomized, controlled study showed that Medicaid coverage generated no significant improvements in measured physical health outcomes in the first 2 years, but it did increase use of health care services, raise rates of diabetes detection and management, lower rates of depression, and reduce financial strain.

The study also concluded that Medicaid coverage had no significant impact on mortality. So is insurance coverage good for health in Massachusetts and useless in Oregon? Probably not.

Why? The two studies are not measuring quite the same thing. Looking at the type of insurance participants gained in each study may better explain the discrepancy.

Keep reading this post . . .

What EITC Recipients Know about the Program — and What That Suggests about Reform



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As labor-force participation continues to languish, low-income workers continue to struggle to make ends meet, and the minimum-wage debate heats up, it’s worth taking every possible opportunity to advance the conversation around pro-work and anti-poverty policies.

Too that end, a recent paper (gated, good summary here) provides some useful and fine-grained analysis of recipient perceptions of the Earned Income Tax Credit (EITC). Those insights, it turns out, provide tentative support for Marco Rubio’s skeletal but developing framework for replacing it with a direct wage subsidy.

Researchers Laura Tach and Sarah Halpern-Meekin’s recent paper provides some data relevant to the question. In the paper, Tax Code Knowledge and Behavioral Responses Among EITC Recipients: Policy Insights from Qualitative Data, the authors try to answer a basic question: How do recipients perceive and respond to the program? There is a large literature on aggregate behavioral responses to the EITC, but less understanding of why recipients behave the way they do, so Tach and Halpern-Meekin have conducted semi-structured interviews of 115 EITC recipients from around Boston.

What did they find? Almost all recipients knew about the EITC’s existence. Most (70 percent) had some sense that they received the credit because they did low-income work. Strikingly, only 38 percent understood that they also received the credit because they had children.

Although recipients could estimate their total federal tax refund, less than 10 percent knew what proportion of it came from the EITC.

Do recipients understand how their EITC benefit is determined? The researchers asked recipients to predict what would happen if they made more money, got married or divorced, or had an additional child. For predicted income increases, there was less confusion in the phase-in range ($8,050 or less) than in the phase-out range ($16,601 or more). About 64 percent of recipients in the phase-in range correctly predicted their refund would increase with more income, but only about 45 percent of recipients in the phase-out range correctly thought the refund would decrease with more income, and about 21 percent didn’t know.

These accuracy differences, the authors speculate, might partially explain the relatively strong employment effects of the EITC in the phase-in range compared to the phase-out range.

What about potential changes in marital status or having another kid? For changes in marital status, it was out of sight, out of mind. The authors found that “program participants did not think about the tax implications of marital status in large part because they were so far from getting married or divorced, which limited their understanding of, and responses to, the EITC’s (dis)incentives for marriage.” As for having more kids, most (76 percent) knew that it would increase the refund, even though they often incorrectly thought that the refund would increase at a flat rate with each additional child, when in fact it increases less for each additional child up to three and then stops increasing.

Of particular interest, the authors note, is that EITC recipients maximized refunds “in ways other than altering their labor supply and family behavior,” for example by claiming zero dependents (acting as a forced savings mechanism and minimizing the chances of a big tax hit at year’s end), among other strategies. Recipients often chose these strategies over changing their work behavior because their employment or family situation was so inflexible.

In theory, the EITC is a simple program. But in practice — and in particular from the vantage point of recipients — it’s opaque and complex. It’s almost surprising how much recipients did know about how their behavior related to the refund.

Nonetheless, large numbers of recipients were unsure of (or often incorrect about) how their behavior related to changes in the refund. Inadvertent noncompliance was also quite common — much more so than outright fraud, according to the authors, who noted “respondents freely volunteered their tax filing strategies to us, often unprompted and without embarrassment or evasion, sometimes even as a way of sharing advice they hoped would be helpful.”

Although the EITC is imperfect (see Jim Manzi on this front), it’s superior to a legally mandated minimum wage, which — notwithstanding historically low inflation-adjusted levels — is the wrong policy to emphasize when there are such outsized benefits to labor-force attachment.

But is there a better way? Although Tach and Halpern-Meekin recommend a few modest and worthwhile reforms (e.g. simplifying eligibility criteria), we could take a further step and replace the EITC with a much simpler direct wage subsidy via a reverse payroll tax, per Oren Cass’s proposal in National Review (which is gated — here is a useful interview describing most aspects of the proposal). The incentives of such a program would be easily perceived in each paycheck, distinguishing it from other annual tax refunds and sources of income support.

That said, we shouldn’t cavalierly reform or replace the EITC. Initiated as a modest tax credit in 1975 to offset Social Security payroll taxes and encourage work, the EITC has moved from an academic exercise — famously advocated by Milton Friedman — to surpassing Temporary Assistance for Needy Families (TANF) in size and impact on poverty. That is a remarkable policy achievement. But we can improve on it and indeed we should try.

President Obama and the Unraveling of Iraq



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Dexter Filkins’s dispatch on Iraqi Prime Minister Nuri al-Maliki the state of Iraq makes for depressing reading, but it offers invaluable insight into President Obama’s approach to foreign policy.

For several months, American officials told me, they were unable to answer basic questions in meetings with Iraqis—like how many troops they wanted to leave behind—because the Administration had not decided. “We got no guidance from the White House,” Jeffrey told me. “We didn’t know where the President was. Maliki kept saying, ‘I don’t know what I have to sell.’ ” At one meeting, Maliki said that he was willing to sign an executive agreement granting the soldiers permission to stay, if he didn’t have to persuade the parliament to accept immunity. The Obama Administration quickly rejected the idea. “The American attitude was: Let’s get out of here as quickly as possible,” Sami al-Askari, the Iraqi member of parliament, said.

The last American combat troops departed Iraq on December 18, 2011. Some U.S. officials believe that Maliki never intended to allow soldiers to remain; in a recent e-mail, he denied ever supporting such a plan, saying, “I am the owner of the idea of withdrawing the U.S. troops.” Many Iraqi and American officials are convinced that even a modest force would have been able to prevent chaos—not by fighting but by providing training, signals intelligence, and a symbolic presence. “If you had a few hundred here, not even a few thousand, they would be coöperating with you, and they would become your partners,” Askari told me. “But, when they left, all of them left. There’s no one to talk to about anything.”

Filkins quotes Ben Rhodes, the U.S. deputy national-security adviser, who insists that having troops in Iraq “did not allow us to dictate sectarian alliances.” But of course no one claims otherwise. Rather, the argument is that the presence of U.S. forces might have restrained Maliki, as it had in the past, a point made by Lieutenant General Michael Barbero, the deputy commander in Iraq until January 2011, who expresses anger at the Obama administration for having failed to push for an agreement that would have allowed for an ongoing U.S. presence and for leaving the U.S. with no leverage in Iraq. After devoting an enormous amount of blood and treasure to keep Iraq whole, the U.S. allowed Iran to dictate the shape of Iraq’s government, which remains in power: 

The U.S. obtained a transcript of the meeting, and knew the exact terms of the agreement. Yet it decided not to contest Iran’s interference. At a meeting of the National Security Council a month later, the White House signed off on the new regime. Officials who had spent much of the previous decade trying to secure American interests in the country were outraged. “We lost four thousand five hundred Americans only to let the Iranians dictate the outcome of the war? To result in strategic defeat?” the former American diplomat told me. [Expletive.] At least one U.S. diplomat in Baghdad resigned in protest. And Ayad Allawi, the secular Iraqi leader who captured the most votes, was deeply embittered. “I needed American support,” he told me last summer. “But they wanted to leave, and they handed the country to the Iranians. Iraq is a failed state now, an Iranian colony.” 

While conservatives focus on Benghazi, President Obama’s most egregious foreign policy decision has attracted very little attention. One assumes that this is because Republicans want to wash their hands of Iraq almost as much as Democrats do. But someone at some point will have to remember that there is more at stake than the outcome of the next election, and that when the United States makes a commitment, it is vitally important that we honor it. 

Spreading the Middle Class Kids Around?



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David L. Kirp, a professor at the Goldman School of Public Policy at the University of California, Berkeley, argues that the key to improving early childhood education outcomes for poor children is to include them in mixed-income classrooms:

A 2007 Connecticut study found that poor children who attended economically mixed prekindergarten classes progressed from well below the national average in crucial language skills to just above it during the course of the school year, while those in low-income-only classes remained below the norm. A new evaluation of Boston’s heralded preschools reaches the same conclusion — peers matter. “Vocabulary and background knowledge play a major role in student learning,” says Jason Sachs, who runs the Boston program, “and interacting with mixed-income students allows for richer discussions among students.” (In achievement and other measures, well-off kids in integrated settings do neither better nor worse.)

Kirp also makes a political argument, namely that broadening Head Start to include middle-income families will lead to more political pressure for increased funding:

While parents without money are obliged to take what they can get, better-off parents will insist on the best for their kids. Confronted with those demands, elected officials are more likely to spend what’s needed to deliver first-rate early education. An economic analysis of political support for redistribution, prepared for the World Bank, concludes that the poor are actually worse off when a program like Head Start targets them exclusively.

Just as many on the left want to “spread the wealth around,” Kirp calls for spreading the middle class kids around. But where exactly will they come from? 

Kirp leaves a number of assumptions unexamined. He takes for granted that higher funding necessarily means superior outcomes (the evidence for this claim is not strong), that the results of one 2007 Connecticut study are replicable in other environments under different conditions, and that well-off kids in integrated settings will always do neither better nor worse, regardless of what integration means — for example, is it possible that well-off kids might start to do worse once some threshold is passed? What share of the classroom has to consist of children from middle-income households? And is it only income that matters, or does family structure matter as well?

Let’s assume that Kirp is right and that programs like Head Start will only work if they integrate children from low-income households with children from middle-income and affluent households. Where exactly will the middle-income children come from?

Keep reading this post . . .

The Intra-Conservative Minimum Wage Debate



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Robert Costa and Karen Tumulty report on the growing number of Republicans who favor an increase in the federal hourly minimum wage. Several former Republican presidential candidates, including Tim Pawlenty, Rick Santorum, and Mitt Romney, have endorsed a minimum wage hike, as have a number of current GOP candidates for the House and Senate. As a general rule, these Republicans don’t offer substantive arguments for raising the federal minimum wage, and let’s be clear that state governments are free, as they’ve been for some time, to set state minimum wages that exceed the federal minimum wage. Rather, they focus on appearances, as when Pawlenty, president and CEO of the Financial Services Roundtable, an organization that lobbies on behalf of the financial services industry, frets that the GOP often looks like “the party of Scrooge.” I appreciate Pawlenty’s concern. And I actually do think that there is a political case for Republicans to accept a modest minimum wage increase and indexing the minimum wage to inflation, even though there is good reason to believe that a higher minimum wage would reduce net job growth.

But let’s be clear as to why there is a case for conservatives to get behind some compromise position on this issue. It is not because a higher minimum wage is the best, least harmful way to raise market incomes or employment levels, because it’s not. What we need are tighter labor markets, and to get there we need a combination of more aggressive monetary policy, housing and tax policy reform, and an immigration policy designed to increase demand for less- and mid-skilled workers currently residing in the U.S. If anything, we ought to consider lowering the federal minimum wage, or at least lowering it for the long-term unemployed and young workers, while modernizing (and expanding) federal wage subsidies, as Michael R. Strain of AEI has argued. By making work more accessible and more attractive, Strain’s approach will raise employment levels among less-skilled workers. Yet it might also depress market wages, at least in the short term, which is why increasing wage subsidies is crucial. Better monetary policy and structural reform are the best way create an environment conducive to productivity growth and wage growth, though this process will take some time. In an ideal world, these would be the labor market strategies the right would pursue. The political challenge is that Strain’s jobs agenda requires some increase in spending, and spending increases are anathema to most conservative lawmakers, even if Strain’s spending increases actually yield savings over time by encouraging skill accumulation (it’s much easier to gain skills when you’re working), which will in turn reduce anti-poverty spending (because only those who make it on the first rungs of the jobs ladder will be able to climb it, and to become economically self-reliant). 

The irony is that the conservatives who might be amenable to something like Strain’s approach — let’s not risk excluding workers from the formal labor market by raising the statutory minimum wage, but let’s spend intelligently to get people back to work — are the ones who are embracing a minimum wage increase as (essentially) a proxy for some better mix of policies, or as a way of signaling that they care about the well-being of American workers and that they’re willing to use the power of government to improve their well-being. And most of the conservatives opposed to a minimum wage increase are also disinclined toward active labor market policies of the kind Strain has in mind, including an expansion of federal wage subsidies, on the grounds that such policies represent big government overreach, or that they involve spending money we don’t have. It’s no wonder that low- and middle-income voters are skeptical as to whether conservatives are doing enough to defend their interests. The real case for a minimum wage compromise is not that it’s good policy. Rather, it’s that conservatives in Congress and in the states have done such a poor job of offering alternatives. That has to change.

Russia’s Demographic Decline and U.S. Immigration Policy



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Nicholas Eberstadt’s portrait of Russia’s steep demographic decline makes for sobering reading. Though Russia’s post-Soviet population decline has halted, Eberstadt maintains that it will start anew in a few years time, due to unusually high death rates from cardiovascular disease and injuries and the after-effects of the post-Soviet baby bust, which will sharply reduce the number of Russian women in their 20s for the next decade or so. Moreover, Eberstadt observes that though Russia produces a relatively large number of university graduates relative to its population (the share of Russian 25-to-64-year-olds with a college degree in the same ballpark as market democracies like Australia and Sweden), crude indicators like patent filings suggest that its not getting much productivity-enhancing knowledge production out of them. Given Russia’s reputation for scientific and mathematical prowess, you’d think that it would fare well in service experts. Yet according to Eberstadt, its exports of computer and information services just barely surpass those of the Philippines.

A few possible reasons for Russia’s knowledge-production deficit come to mind immediately: (a) as Lant Pritchett colorfully puts it, “schoolin’ ain’t learnin’,” and it could be that Russia’s human capital institutions aren’t actually adding value; (b) it could be that societies only yield knowledge production from their educated citizens if they have well-functioning innovation systems in place; or (c) Russia’s most creative citizens could be emigrating in disproportionately large numbers, and they are contributing to knowledge production in the countries in which they settle. My guess is that all of these factors are at work. And my cynical reaction to Eberstadt’s bleak assessment of Russia’s near-term future is that the U.S. and its allies would be wise to systematically ”poach” skilled Russians in the coming years. There are large numbers of Russians who could make substantial contribution to knowledge production in societies with strong innovation systems, like the U.S., yet their potential is greatly limited by Russia’s failing institutions. But systematic poaching of this kind would require some foresight on the part of western governments, and a recognition that market democracies would generally be better served by immigration policies that raise the average skill level, like those in Canada and Australia, rather than policies that lower the average skill level, like those currently in place in the U.S. 

On a separate note, I’ve noticed that when I discuss immigration here at The Agenda, readers are more inclined to focus on the fact that I’m amenable to increasing skilled immigration than on the fact that I favor reducing less-skilled immigration, even if the net result is either not change in net migration or a decrease in net migration. One line of argument I’ve seen is that I favor this approach because pundit jobs can’t be offshored, or something to that effect, i.e., my position is rooted in self-interest. If anything, the opposite is the case. As a professional living in the dense urban core of a high-cost metropolitan area, I benefit from a dense concentration of less-skilled workers, as this concentration makes it cheaper for me to outsource various household production tasks, thus allowing me to work longer hours. And these less-skilled workers don’t compete with me. Raising the number of skilled workers, in contrast, would increase competition in my chosen profession(s), and it would tend to intensify competition for positional goods. It would also have the effect of bidding up the wages of less- and mid-skilled workers who provide these skilled workers with services, thus making it more expensive for someone like me to outsource household production. So if anything I’d be better served by embracing the Bloomberg-Zuckerberg-Schwarzenegger consensus, which is that we ought to increase less-skilled immigration and skilled immigration.

There are, to be sure, other interests at stake; it’s extremely unlikely that my writing will change the ultimate outcome of the immigration debate, so perhaps I profit from my position in some other way. But how? My position is unpopular, particularly among influential people, and so I don’t personally profit from taking it. I would gain more points for embracing the pro-reform consensus (we obviously need more immigration, opposition to the Senate bill is motivated by bigotry, etc.) or straightforward restrictionism (which is more popular on the right). My position could be understood as contrarian, and I could be yielding some “interestingness” points from taking it. Yet the truth is that it’s not all that interesting — it only seems interesting because our public conversation about immigration tends to be so insipid. Nothing could be more basic than arguing that current less-skilled immigrants compete with new less-skilled immigrants while they (and less- and mid-skilled natives) benefit from gaining access to new skilled customers, who complement rather than compete with them. This is not rocket science. It is true that some skilled natives will be negatively impacted by the arrival of skilled immigrants, particularly in the short-run. But this neglects two important facts: (a) the work of skilled professionals can be offshored too; and (b) having a dense concentration of skilled workers in a given region creates spillover benefits, i.e., this concentration is non-zero-sum.

The only interesting thing about my position, if any, is that it is based on the notion that U.S. immigration policy should be based first and foremost on what is best for Americans as a whole — not the demands of global justice, nor the interests of agribusiness or tech companies or software programmers or restaurant owners or restaurant customers. And in my considered judgment, we need to consider a few issues when crafting an immigration policy: automation (the jobs of today might be gone tomorrow, and this is particularly true of jobs for the less-skilled), wage stagnation (less- and mid-skilled workers face steep barriers to upward mobility), intergenerational dynamics (it’s much easier to achieve upward mobility if you are raised in a stable family with parents who have the skills, the knowledge, and the networks to prepare you for school and work), knowledge spillovers (the U.S. is better off when skilled workers are concentrated in U.S. cities and regions, as these concentration yield increasing returns), and cultural cohesion (societies in which people feel invested in governing institutions, and in which those at the bottom and top feel a sense of kinship and shared identity, are better off than societies divided by overlapping lines of culture and class), among others.  

The Key Obamacare Question: How Much Should Taxpayers Spend to Give Uninsured People More Years of Life?



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A new study published this week, “Changes in Mortality After Massachusetts Health Care Reform,” purports to show that the Massachusetts reform law (“Romneycare”) saved lives. Led by Benjamin Sommers, a Harvard health economist who served briefly in the Obama administration, the authors claim that covering the uninsured reduces their annual risk of death by 30 percent, which means about 1 death avoided for every 830 uninsured people given coverage.

On the assumption that it would cost $4,000 annually to cover the average uninsured person, University of Chicago professor Harold Pollack argues “It’s not so cheap, either, but it’s still worth it.” Michael Cannon at Cato Institute reaches the opposite conclusion. Assuming it cost $5,000 apiece to cover the uninsured, he argues that the policy fails to meet the World Health Organization’s definition of cost-effectiveness.

Who’s right? Is spending $3.3 million (Pollack) or $4.2 million (Cannon) to save a single life a worthwhile expenditure of tax dollars? Is the only reason these two disagree simply because they used different assumptions about the cost to cover the uninsured? You can decide the answer to both questions for yourself, but it helps to have a little bit more information.
 

How did Pollack and Cannon reach their conclusions?
Professor Pollack hypothetically assumes it would cost a state $4,000 to cover the uninsured for a year without explaining the origin of this figure. As it turns out, the CBO estimates that for the average person who qualifies for a subsidy on the exchange, the average taxpayer-financed subsidy will be $4,410. So Professor Pollack is not that far off the mark in his assumption.

Mr. Cannon uses $5,000 since it represents the average cost of employer-based coverage in Massachusetts in 2010. This translates into $4,150,000 per life saved.

The WHO considers a medical intervention to be “not cost-effective” if it costs more than three times a nation’s per capita GDP per year of life saved. With U.S. GDP per capita at $51,749, using Cannon’s $5,000 number, the average person whose life was saved by the Massachusetts health reform would have had to gain at least 26.7 years of added life. As Mr. Cannon puts it: “Given that the mortality gains were concentrated in the 35–64 group, that seems like a stretch.” Ergo, even if the Massachusetts results were correct, this was not a cost-effective way to spend taxpayer money.

What’s missing from their analyses?
Professor Pollack and Mr. Cannon both would be quick to concede that they’ve done just simple “quick and dirty” calculations to arrive at their conclusions. The reality is that there are two big unknowns even if we take the Massachusetts findings at face value.

What percent of lives saved were due to the insurance expansion?
First, we have no way of knowing whether all the lives purportedly saved in Massachusetts were among those who previously were uninsured, or whether there was something else in the law reducing mortality, too.

Keep reading this post . . .

Mitt Romney’s Miss on the Minimum Wage



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I have a great deal of respect for Mitt Romney as a man and as a business thinker, but it seems he simply hasn’t thought through his case for raising the minimum wage, delivered on Morning Joe this morning:

Let’s run through the problems here: If the GOP stands for higher wages and more jobs, which Romney says it needs to, the minimum wage is a terrible way to show it. You have to move pretty far left on the economic spectrum to get arguments that raising the price floor for jobs will actually create more of them — it just doesn’t make any sense. Organizing for Action, the nonprofit group that grew out of Obama’s campaign, has occasionally put this idea out there, but they just assume that the higher wages will be new economic activity added, which would translate into jobs:

Romney should (and does) know this isn’t how it works, that higher wages will have to come from somewhere — and it could be higher prices, or it could be fewer jobs. And Romney’s suggestion that this is especially important to minority communities, even if that’s what they support politically, isn’t economically sensible. A higher minimum wage hurts two groups: second earners and teenagers who drop out of the labor force, and people whose labor simply isn’t worth $10.10 an hour. Who is that? Besides teenagers, it’s also people without English-language skills, ex-cons (who are hugely disproportionately minority), and people without a high-school degree (again, a disproportionately minority group). Raising the minimum wage is a good way to push these people out of the labor force, which is an extremely bad way to help them prosper. Work-focused welfare programs, which Romney talked about during his campaign, or EITC reform, which he unsurprisingly didn’t, may not be as easy to explain as the minimum wage, but they’re better ways to help minority communities.

One of the best economic arguments against the minimum wage, in my view, is that states can figure out what works for themselves, and we shouldn’t have the federal government impose such a fundamental constraint on an economy that varies so widely in cost of living, growth prospects, etc. The principle here is one Romney should know acutely: He argued that he supported Romneycare but opposed Obamacare in large part because what was right for Massachusetts wasn’t necessarily right for the rest of America. Whether Romneycare was right for Massachusetts is a separate debate, but this was an important distinction — and one that should hold in labor policy as it does in health-care policy.

I think it’s possible Romney wasn’t really trying to make an economic argument, but a political one. That is, he was saying it’s hard for Republicans to oppose raising the minimum wage and also convince people that they care a lot about wages. Giving in on the minimum wage could be a useful way to demonstrate that we do care — even if, as Romney should know, it’s not the right underlying policy. This is more like the argument Tim Pawlenty and Rick Santorum (political sages, all) have been making, and they might well have a point.

The extremely tricky politics of this fight is why Reihan has argued (reluctantly) that we should consider indexing the minimum wage to inflation. While Romney didn’t say it on Morning Joe, that’s what he’s supported in the past. The problem is that here, he argued in favor of a higher minimum wage in general, when the current proposal isn’t to index it but to give it a huge boost (nearly 40 percent).

Attention, Elizabeth Warren: Students Are Already Free to Refinance Their College Loans



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A new bill championed by Senator Elizabeth Warren would allow holders of student-loan debt to refinance with the government at a lower interest rate. The “Bank on Students Emergency Refinancing Act” would drop the rate on existing college loans to the current rate on federal loans, roughly 4 percent — a large reduction for students who took out loans for around 7 percent before the 2008 recession.

Supporters portray the bill as simply leveling the playing field: “Homeowners and businesses are often able to refinance their debts. Students should be able to do the same,” according to Representative John Tierney, a sponsor of the House version of the bill. “It is outrageous that students can’t refinance at these historically low interest rates,” added Senator Barbara Boxer. “This legislation gives students the same fair shot as other borrowers have when interest rates decline.”

There’s a problem with that thinking: Students are already free to refinance their college loans. Most of the existing loans are federal-direct or federally guaranteed. Students can take them to any bank of their choosing and ask for a lower interest rate, just as homeowners and businesses can. The reason they don’t is that no private-sector bank is willing to take full responsibility for those loans at a lower rate — or even at the existing rate. The loans are not profitable for private lenders without taxpayer money to prop them up. In other words, students are already getting a great deal on federal loans, it’s just that some are not getting as great a deal as Senator Warren and her cosponsors would like.

The new bill would allow students to refinance with the federal government. But why should the government allow refinancing when it faces no competition? When homeowners ask their mortgage lenders for a lower rate, the lenders will comply only if they fear losing the loans to a competing lender. But the government, being willing to lose money on student loans, has no serious competition in the marketplace.

Senator Warren’s bill does not “level the playing field” or address any structural unfairness. It would simply increase the government’s transfer payments to people who have attended college. 

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