Robert Doar on the Ryan Plan

He says,

He left out Medicaid, I think, because he recognizes that he couldn’t commit to preserving funding levels for it because it’s unrealistic as a fiscal matter. Unless we address Medicaid’s spending trajectory, we won’t be able to address our fiscal problems.

In other words, if he folds Medicaid in with other anti-poverty programs, he either has to cut the total amount spent on poverty or leave in place a fiscal doomsday machine. I’ll have to think about that argument.

Europe Still in Trouble

Barry Eichengreen and Ugo Panizza write,

For the debts of European countries to be sustainable, their governments will have to run large primary budget surpluses. But there are both political and economic reasons to question whether this is possible. The evidence presented in this column is not optimistic about Europe’s crisis countries. Whereas large primary surpluses for extended periods of time did occur in the past, they were always associated with exceptional circumstances.

Pointer from Mark Thoma. Read the whole thing. Shorter version: Have a nice day.

Imagine No FDA

Kevin Tracey writes,

Since news of this clinical trial’s success became public, people from all over the U.S. stricken with rheumatoid arthritis have emailed, called and sent letters pressing for their shot at potentially effective—but not yet FDA-approved—treatments. Most wrote that they would gladly travel to Europe if it meant they could get access to the device.

That’s exactly the point: Some patients are very willing to take a calculated risk, but misaligned incentives in the industry are driving potential stakeholders with new solutions out of the business.

Imagine that we had no FDA, but we understood that deceptive advertising and patient ignorance can lead to bad outcomes. It seems to me that principles-based regulation could work.

The basic principle might be: the patient must be capable of understanding and articulating the risks and potential benefits of a proposed treatment. One possible way for a doctor to prove that this principle is satisfied is by recording an interview with a patient in which the patient explains in his own words why he is choosing this particular treatment.

Paul Ryan on Income Assistance

On the safety net, his Expanding Opportunity plan says,

It should always pay to work. But fixing these incentives is no easy task. To phase out benefits more slowly would mean to subsidize millions of middle- and even upper-income families; in other words, it would be prohibitively expensive. But lowering the effective marginal tax rate at the bottom of the income scale by reducing the amount of aid would mean deep cuts for the most vulnerable.

Suppose we are talking about cash assistance. You can pick two of the following three characteristics:

1. Enough money for people with no income to be able to obtain basic needs, such as food and medical care.

2. Low implicit marginal tax rates, meaning that as people earn their own income, their cash benefits phase out slowly (or not at all).

3. Low overall budget cost.

What Ryan is saying is that he will leave it up to the states to deal with these trade-offs. His thinking is that if aid is administered locally through community and non-profit agencies, those institutions can attach the appropriate conditionality to receiving aid. If someone is able to work but does not seek or accept work, the agency can cut that person off. It is harder for a remote Washington agency to make the determination of who is trying to find work and who is not.

These local providers also can customize aid. As Ryan puts it,

it makes little sense to provide a household with a consistent stream of SNAP benefits when what the household may need most is reliable transportation to and from work. Giving providers this kind of flexibility will allow them to intervene early on with targeted benefits in cases where short-term assistance can prevent someone from falling into deeper poverty.

I strongly agree with Ryan that conditionality and customization ought to be applied at the local level, not the Federal level. However, my own view is that only some income assistance should be conditional and customized. I would like to see the Federal government provide assistance that depends on income but is otherwise unconditional. I think that the government assistance should phase out at a low rate of, say, 20 percent or 25 percent as an individual’s earnings rise.

My thinking is that this federal assistance might not be sufficient to satisfy condition (1). State and local governments would fill in the “needs gaps.” They would do so by looking carefully at individual household situations, attaching conditions and customizing.

Ryan would address the issue of Federal income assistance by expanding the Earned Income Tax Credit (EITC) so that it covers childless workers. Also, he writes,

another potential area of reform should focus upon EITC simplicity and delivery. If families received
the credit with their paychecks, the link between work and the EITC would be that much clearer.40 This reform
would also allow low-income to keep more of their money if it could reduce improper payments (which
amounted to $13.3 billion in fiscal year 2013 alone); they wouldn’t have to rely on tax-preparation firms to get
the credit. The most recent attempt at creating a periodic EITC was through the Advance EITC, which
experienced low take-up rates and extremely high rates of fraud and noncompliance.43 This proposal, therefore,
would direct the Treasury Department to investigate further how to provide a work-based tax credit that may
appear on a worker’s paycheck.

Finally, I commend Stephanie Mencimer of Mother Jones for offering a serious, informed critique of what I am calling conditionality and customization. She concludes,

the safety net today really doesn’t deliver the kind of customized service that Ryan thinks it should. It’s just too expensive, too hard to provide on a large scale, and in the end, not all that more effective than simply giving people money they need to keep the lights on until they can get back on their feet on their own.

Read the whole thing. Pointer from Tyler Cowen. Again, I think that some assistance should be customized/conditional, and funded at the state and local level. Federal assistance should look more like straight cash, with crude, simple rules.

The Importance of Having a Business Plan

Russ Roberts talks with Sam Altman, the CEO of Y Combinator, who says

I’ve never written one in my life. At the stage that we are operating at, it’s irrelevant. Like financial projections also we never look at. …We would rather them spend the time working on their product, talking to users. What we care about is: Have you built a product? Have you spoken to users? Can we see that? Can we talk about where it may involve? The really good interviews end up being this back-and-forth brainstorming session about all the things they can do. The future directions the product can go in, what you can do to get users, what they can do to improve it. We care about stuff like that. But in terms of business plans or financial projections, nothing.

There are people, not all of them professors of business schools, who swear by business plans. I am, like the Y Combinator folks, skeptical of them.

Also, Altman is bullish on biotech.

I’ve really come to believe that those two things, low cost and low cycle time, are the most important things for startups in a given area to be successful. But now, in biotech specifically, which is an area where we’ve been active recently, the costs and the cycle time have come down quite dramatically. And so you are able to have a startup that for a few million dollars or in a year or something can get something really meaningful done. And that’s a brand new thing.

Too Correlated to Fail

V.V. Chari and Christopher Phelan write,

the anticipation of bailouts creates incentives for banks to herd in the sense of making similar investments. This herding behavior makes bailouts more likely and potential crises more severe. Analyses of bailouts and moral hazard problems that focus exclusively on bank size are therefore misguided in our view, and the policy conclusion that limits on bank size can effectively solve moral hazard problems is unwarranted.

Pointer from James Pethokoukis. My argument against big banks is not that they are more prone to moral hazard. It is that they are better able to exploit political power to obtain regulatory leniency ex ante and bailouts ex post.

Matt Yglesias on the Era of Mood Affiliation

He writes,

The deep nature of the division is illustrated by the suspicious way in which legal opinions and policy preferences are lining up on this issue. Essentially everyone who believes the Affordable Care Act was an important step toward securing social justice also agrees that it would be absurd to construe the statute in a manner that’s plainly inconsistent with congress’ goals. And essentially everyone who believes it’s crucially important to give the crucial sentence the most straightforward possible reading rather than defer to the IRS’ efforts to make sense of the law as a whole, also believes that the law is a scandalous boondoggle.

Pointer from Scott Sumner. I also see mood affiliation in macroeconomics. As I point out in my memoir, in theory one could hold left-wing political views and reject Keynesian economic theory, or conversely. In practice, this is almost never the case.

Of course, Haidt and Kahneman would not be a bit surprised by any of this. They believe that emotional reactions drive “rational” analysis, rather than the other way around.

Oren Cass on Paul Ryan

He writes,

Ryan excludes Medicaid from his Opportunity Grants. But truly untangling the safety net requires disassembling Medicaid and allowing that funding to be reallocated, either to new healthcare programs or in some instances to different ends entirely. Our current allocation of spending across healthcare, housing, nutrition, training, etc. is an arbitrary artifact of separate legislative authorizations and bureaucracies evolving over decades. We should not be segmenting healthcare (which is as large as all the other buckets combined) as somehow untouchable, especially when it is not where someone in poverty would likely want to spend a marginal dollar.

I agree.

Cass also writes,

Ryan proposes reforms to the EITC that bring it closer to a wage subsidy (e.g., tying it directly to each paycheck), but for reasons unclear does not go the final step of simply replacing one with the other. More problematic, the expansion he proposes is small in both scope and scale – the result of funding it only through the cancellation of a potpourri of small programs and tax expenditures. For a work-incentives-led approach to be effective, funding to a wage subsidy needs to expand far more dramatically – ideally by reallocating it from existing anti-poverty programs that already go to those who work.

I agree with this criticism, also. But I share Cass’s overall take on Ryan’s proposals, which is that they are good reforms in an area much in need of reform.

Elite College Data Point

William Deresiewicz writes,

In 1985, 46 percent of incoming freshmen at the 250 most selective colleges came from the top quarter of the income distribution. By 2000, it was 55 percent. As of 2006, only about 15 percent of students at the most competitive schools came from the bottom half. The more prestigious the school, the more unequal its student body is apt to be. And public institutions are not much better than private ones. As of 2004, 40 percent of first-year students at the most selective state campuses came from families with incomes of more than $100,000, up from 32 percent just five years earlier.

He goes on,

The major reason for the trend is clear. Not increasing tuition, though that is a factor, but the ever-growing cost of manufacturing children who are fit to compete in the college admissions game. The more hurdles there are, the more expensive it is to catapult your kid across them. Wealthy families start buying their children’s way into elite colleges almost from the moment they are born: music lessons, sports equipment, foreign travel (“enrichment” programs, to use the all-too-perfect term)—most important, of course, private-school tuition or the costs of living in a place with top-tier public schools.

He himself strikes me as a cloistered academic, with the typical prejudices of a professor. I do not endorse the article, apart from the quoted paragraphs.

Paul Ryan on Education Policy

Federal education spending tends to be concentrated on programs, such as Head Start, that are political sacred cows but notoriously ineffective. Ryan would replace these with block grants, presumably hoping that at least some states will spend the money more wisely. For higher education, Expanding Opportunity, Ryan writes,

The federal government offers 14 tax benefits for higher education; they cost over $36 billion in forgone revenue in fiscal year 2014. By their very nature, most of these tax benefits are ineffective for low-income families. Families must pay tuition before they file their tax returns, so these credits and deductions don’t help cash-strapped students. And research finds that some of these benefits have little effect on enrollment—most recipients would have enrolled without them. Even more disconcerting is that states take advantage of these benefits by spending less on higher education or student aid.68 So not only is the federal government shortchanging other priorities, but these tax benefits are making college more expensive for everyone.

But you can be sure that any attempt to change these programs will run into a hornet’s nest of demagoguery.

Turning to accreditation, he writes,

Building on the reforms offered by Senator Mike Lee of Utah, new accreditors would submit to the Department certification standards as well as reporting requirements, credit transfer plans, and outcome-based
standards. They would also be empowered to accredit specific, high-quality courses rather than just schools or programs. As a result, students would be able to build an online program of their own, the sum of which could add up to a fully accredited degree. David Bergeron and Steven Klinsky describe such a system in which “students who complete the preapproved, tuition-free MOOC and also pass the confirmatory [new accreditor’s] assessment would earn accredited course hours from [the accreditor] itself. Enough such courses in the right scope and sequence (say physics from MITx, poetry from Harvard, theology from Notre Dame and so on) could lead to a fully accredited . . .degree.”