Brink Lindsey on a Universal Benefit

He writes,

I think a good case can be made that a UBI [universal basic income] would be more helpful to the disadvantaged than the patchwork of frequently intrusive, infantilizing, bureaucratic, and wasteful means-tested programs that presently constitutes the American social safety net. So if I could wave a magic wand and replace the policy status quo with a UBI, I would do so. That said, my reading of the available evidence convinces me that a social policy that channels benefits through work and thereby encourages paid employment has important advantages over a UBI in helping the disadvantaged to live full, happy, productive, and rewarding lives.

…a UBI cannot be recommended as sound social policy. The great challenge at present is to arrest and reverse the slide of less skilled Americans into a permanent underclass – even as automation and globalization continue to marginalize the role and value of low-skill work. But as the celebrated negative income tax experiments of the late 1960s and early 1970s made clear, unconditional income support reduces labor supply. Perhaps not dramatically, but still the impact is going in the wrong direction. By contrast, wage subsidies in the form of graduated payments to employers of low-skill workers can increase the attractiveness of work and boost labor force participation.

My remarks:

1. I think it is important to distinguish adding a universal benefit to the existing means-tested programs from using it to replace existing means-tested programs. I doubt that the negative income tax experiments give us any idea of how the latter would work, particularly today. (a) I don’t think that the experiments replaced existing programs and (b) today’s programs are much more generous than they were when the experiments were done.

2. Accordingly, I hope Brink would support an effort to wave the magic wand and replace current programs with a universal flexible benefit.

3. Why have wage subsidies on the one hand and payroll taxes on the other? Why not instead introduce a graduated payroll tax, which is lower for low-wage workers, possibly even zero below a certain income level?

4. There are going to be people who simply cannot work. You don’t want to force them to live on minimal resources just because you are afraid of giving other people the incentive to loaf. My solution would be to have the universal flexible benefit, which would come from taxpayers at the national level, provide minimal resources. However, state and local governments as well as charities might supplement these benefits on the basis of needs.

I, Too, Remember the 1970s

Robert Waldmann writes,

There is a blog discussion among Keynesian to New Keynesian economists on the cause of the new Classical & Rational expectations revolutions. I have been typing my usual comments. I will now try a post. The question is: how important was stagflation in causing the abandonement of old Keynesian models ? I basically agree with Simon Wren-Lewis this time.

On the other hand, Noah Smith writes,

Sure, the old paradigm could explain the 70s, but it didn’t predict it. You can always add some wrinkles after the fact to fit the last Big Thing that happened. When people saw the “Keynsian” economists (a label I’m using for the pre-Lucas aggregate-only modelers) adding what looked like epicycles, they probably did the sensible thing, and narrowed their eyes, and said “Wait sec, you guys are just tacking stuff on to cover up your mistake!” The 70s probably made aggregate-only macro seem like a degenerate research program.

Pointers from Mark Thoma.

Let me try to clear some things up. In some sense, Milton Friedman predicted stagflation in his 1967 Presidential address, but he did not use a New Classical Model. By introducing rational expectations, Lucas produced the New Classical Model.

I want to talk about two stages of “conversion” of mainstream macro. Stage one was the conversion to Milton Friedman’s Presidential Address, delivered in 1967 and published in 1968. Stage two was the conversion from Friedman’s non-rational-expectations version to the New Classical model, which had rational expectations.

Stage one:

–By the mid-1970s, mainstream macro featured a natural rate of unemployment. Before the Great Stagflation, it didn’t.

–By the mid-1970s, mainstream macro featured an equation in which the price level was determined by the money supply. Before the Great Stagflation, it didn’t.

Stage two took over graduate macro without really penetrating freshman macro. It changed from Friedman’s story, which implicitly used backward-looking expectations, to Lucas’ model, which used forward-looking expectations.

In my view, there was no empirical event that drove the stage two conversion. That is, there was nothing that took place in the 1970s that required a rational-expectations explanation. You could predict stagflation just using Friedman’s model with backward-looking expectations. So maybe I am agreeing here with Wren-Lewis rather than with Smith, or maybe I am disagreeing a tad with both.

In my view, what drove stage two was (a) the inconsistency between believing in the paradigm of rational agents and believing in backward-looking expectations and (b) the aura of mathematical superiority that was associated with rational expectations modeling. Honestly, I think that (b) had a lot to do with it.

My macro memoir blames Stan Fischer at MIT for a lot of (b).

Do Short-Sales Costs Matter?

Noah Smith says that they do.

So in the equity market, shorts face huge disincentives, and longs don’t. That means over-optimistic longs get to set the price.

I am skeptical. Financial markets tend to find a way to work around barriers. For example, on alternative to shorting a stock is to buy a put option and write a call option.

Corporate Profits and Stock Prices

Scott Sumner is suspicious.

Here is the evolution of labor compensation and corporate after-tax profits over the past 9 quarters:

Total labor compensation: $8315.3b. —-> $9049.5b. Up 8.8%

After-tax corporate profits: $1184.6b. —-> $1099.5b. Down 7.2%

…I know of no other data confirming that plunge. Stock prices are soaring. Corporations have been reporting very strong earnings. If someone can find non-government data supporting the claim that workers are far outperforming corporations in recent years, I’d love to see the evidence.

Robert Shiller tracks the data for the S&P 500. His earnings measure only goes through the end of 2013. From December 2011 to December 2013, he shows the S&P 500 up 45 %, dividends up 32 percent, and earnings up 15 percent. Since then, stock prices have gone up more than 5 percent, so if profits truly took a dive then the market is doing a great job of ignoring it.

We are going to see some upward revisions in Commerce Department data for corporate profits or some downward adjustment in stock prices. Personally, I expect to see some of both.

Ralph Nader’s Worldview

From an interview with Tyler Cowen.

If you look at the history of nations, major redirections for justice were brought about by never more than 1 percent of the active citizenry. Whether it was civil rights, the environment, or consumer protection, they had one asset: They represented what Abraham Lincoln called the “public sentiment.” Nowadays people give up on themselves and rationalize their own powerlessness, but it takes very few people in congressional districts and around the country to make major, long-overdue changes in American society that are supported by large numbers of people.

In other words, the Ralph Naders of the world are the heroes. People with great moral vision who use the forces of activism and government to overcome the evils of the private sector.

Unfortunately, what is required to become a Ralph Nader is an unshakable belief in your own righteousness and in the wrongheadedness of those with whom you disagree. Tyler tries to get Nader to admit that he has gotten something wrong, and all Nader can come with is

I underestimated the power of corporations to crumble the countervailing force we call government.

To me, Nader’s absolute certainty about his own righteousness makes the whole idea of an alliance involving him untenable. If you are that certain of yourself, then you cannot accept other people on equal terms. Working with him cannot involve give-and-take. It has to be obedience.

Larry Summers on SecStag

He writes,

With very low real interest rates and with low inflation, this also means very low nominal interest rates, so one would expect increasing risk-seeking by investors. As such, one would expect greater reliance on Ponzi
finance and increased financial instability.

Pointer from Tyler Cowen.

Larry thinks that if the government spends more money, it will work on improving JFK airport. If government does not spend more, then the private sector will take crazy risks.

I mean, if you think that government spends money wisely and the private sector does not, you do not need a whole theory of secular stagnation. To me, it looks like an opinion masquerading as a theory.

Maybe I am being too grumpy. The actual grumpy economist™, John Cochrane, has this to say.

The natural rate is per Laubach and Williams, about -0.5%. But we still have 2% inflation, so the actual real interest rate is -1.5%, well above -0.5%. With 2% inflation, we need something like a 4-5% negative “natural rate” to cause a serious zero bound problem. While Summers’ discussion points to low interest rates, it is awfully hard to get any sensible economic model that has a sharply negative long run real rate.

And he adds this:

From my point of view, the focus on and evident emptiness of the “demand” solution — its reliance on magic — just emphasizes where the real hard problems are.

When to Kill the Export-Import Bank?

Paul Krugman writes,

under current conditions mercantilism works – so this is exactly the moment when ending an export-support program really would cost jobs.

Pointer from Mark Thoma.

I say that the right time to kill it is any time you can.

If killing the Ex-Im bank is tea-party mischief, then I say let’s have more such mischief.

The AEI’s Tom Donnelly writes,

The worst thing about the defense loan program is that it only applies to our richest and best allies – NATO Europe, Israel, Japan, South Korea, the ones who can most afford to finance arms purchases on their own – and does nothing for real at-risk states in Africa, Latin America or the Middle East. The FMS-DELG duo has hampered, not helped the Pentagon’s security “partnering” efforts. In today’s environment, and particularly when China aims to replace Russia as the alternate, non-US source of front-line military equipment, the United States government needs a bigger, better and more aggressive export credit agency. The Congress should rejuvenate, not exterminate, the Ex-Im Bank.

His case for the Export-Import Bank speaks for (i.e., against) itself.

A Peevish Thought on Obamacare

Timothy Taylor writes,

Setting up a health insurance system that offers the right incentives to patients and providers for cost-effectiveness and innovation is a fundamentally difficult task, and those practical challenges don’t disappear just by invoking talismanic phrases like “universal coverage” or “single-payer.”

The worst thing about Obamacare is not the web site glitches or the employer mandates or even the high marginal tax rates. The worst thing is that the Obama folks regard catastrophic health insurance (what I call “real insurance”) as bad and they view “insurance” that covers every little expense as good. I think it’s the other way around.

Even if you think that people will skimp on checkups if they have catastrophic coverage, then the right policy is to subsidize checkups, not insulate them from the cost of all medical services.

I like to say that as individuals, we want unlimited access to medical services without having to pay for them. Comprehensive health insurance does offer that. However, collectively, that does not work. If medical services aren’t rationed by individuals making choices, they have to be rationed by bureaucrats.

That brings us to the Independent Payment Advisory Board, or what Sarah Palin called the death panels. The IPAB is the only economically meaningful mechanism for reducing spending under Obamacare. Fifteen bureaucrats in Washington will tell doctors and patients what to do and what not to do.

If Obamacare remains in place, then I predict that in ten years IPAB will be the most powerful agency in Washington. More powerful than the Fed, the NSA, or the IRS. In fact, the health care reformers on the left want it that way. Former Senator Tom Daschle explicitly said that we need something like the Fed to run health care.

Have a nice day.

A Peevish Thought on Immigration Reform

Art Carden points to a new Hoover project on immigration reform, a periodical called Peregrine. Tim Kane explains,

Each issue of Peregrine will consider a handful of new ideas for pragmatic, incremental reform.

I also heard Tim on a late-night radio program, and he was very articulate and persuasive in support of more immigration.

My peevish thought is that it is sort of a waste of time for economists to discuss immigration policy. Immigration is first and foremost a national security issue. Why bother talking about costs and benefits of different types of immigrant workers when we don’t actually control who comes in?

I understand the case for open borders. If we had open borders, we could have lots of people coming here, trying to make lives work. Some will be happy, stay, and become citizens, and others will be unhappy and decide to go home.

When lots of people legally come to the country, that is open borders. What we have instead are lots of people illegally coming to the country, and that is something different. It’s not an outcome that anybody explicitly advocates, but it emerges as a sort of weird compromise between open borders and enforcing an immigration policy. A hypocrisy equilibrium, if you will.

Note that this story argues that the current flood of children across the border is due to an increase in criminal violence in Latin American countries that threatens children. Again, I do not think that economists have much to contribute to the discussion.

In Our Hands

Charles Murray’s book of that title is almost ten years old. It is relevant to the idea of a universal benefit.

For a universal benefit, I propose something like $6000 for each adult in a household and $4000 for each child. Murray proposed $10,000 per adult and zero per child.

Murray described the program as a cash grant. I describe it as flex-dollars that can only be used for “merit” goods, meaning health care, food, housing, and education.

Each of us presumes that people will purchase health insurance. I am explicit that catastrophic health insurance would be mandatory.

I propose something like a 20 percent marginal tax rate, or phase-out rate, for the universal benefit. Murray proposed a 20 percent marginal tax rate for incomes between $25,000 and $50,000, with a zero marginal tax rate otherwise. (This is a tax rate that specifically reduces the benefit, and it is over and above existing income and payroll taxes.)

So a single adult with zero income would get $10,000 under Murray’s plan, $6000 under mine. At $25,000 income, you still get $10,000 under Murray’s plan, only $1000 under mine. At $50,000 and up you get $5000 under Murray’s plan, but at $30,000 and up you get zero under mine.

A household with two adults, two children, and zero income gets $20,000 under either plan. If each adult earns $25,000, then the household gets $20,000 under Murray’s plan (because it looks at individual income, not household income) and $10,000 under mine. If each adult earns $50,000 (and up), the household still gets $10,000 under Murray’s plan. If each adult earns $50,000, the household gets $0 under my plan.

With a universal benefit, I have suggested replacing the EITC, food stamps, housing subsidies, unemployment insurance, and Medicaid with a single benefit. Actually, think of Medicaid as two programs–one for nursing homes, the other for health care. I would leave the nursing-home piece alone.

What Murray proposed in addition was to replace all of Medicaid, as well as all of Medicare and Social Security. That means that some of the benefit would have to go toward self-financing health care when you get old and self-financing some of your retirement (instead of Social Security, an adult over 65 would continue to receive Murray’s $10,000, but not my flexible benefit). Since the average person will incur about $100,000 in medical expenses after age 65, self-financing would require about $2000 a year to be saved, because it is hard to earn a return above the rate of health care cost growth. I would say that, conservatively, someone would want to save an additional $1000 per year to fund additional consumption after retirement.

After applying phase-out rates (what I am calling the marginal tax rate) and deducting the cost of self-financing medical care and additional consumption in retirement under Murray’s plan, this is how the two ideas compare:

Type of Household Income per adult Murray benefit My benefit
Single Adult $0 $7000 $6000
Single Adult $25,000 $7000 $1000
Single Adult $50,000 $5000 $0
Two Adults, Two Kids $0 $14,000 $20,000
Two Adults, Two Kids $25,000 $14,000 $10,000
Two Adults, Two Kids $50,000 $4,000 $0

Some remarks:

1. Suppose that catastrophic health insurance costs $1500 per adult and $500 per child. In that case, Murray would leave a household of four with zero income with just $10,000 per year to spend on food, housing, non-catastrophic health expenses, and everything else.

2. Murray’s plan is more generous to all but the very poor who have children. He wants people to bear the full financial burden of having children, and if that burden feels particularly heavy for the poor, this has the virtue of giving them an incentive to avoid having children.

3. Murray’s plan has a lower marginal tax rate (zero) for those earning $25,000 a year or less. The upside of this is that it really strengthens the incentive to work. The downside is that it raises the budgetary cost considerably.

4. Murray’s plan reverts to a zero marginal tax rate for those earning $50,000 or more. As far as I can tell, the main reason he wants to do this is that he thinks the additional $5000 will encourage high-income mothers to stay home with their children. I do not find this particularly persuasive, and I think you want a much stronger argument given how much this raises the cost of the plan.

5. The 18-21-year-old gets nothing in Murray’s plan. He clearly says he wants to get rid of college subsidies, so it seems to me that he wants to drop these folks into the labor pool in the expectation that they will learn to swim.

6. Keep in mind that under current policy, many low-income households face effective marginal tax rates of 100 percent or higher. That is, they are better off with something less than full-time, year-round work. That disturbs Murray and it disturbs me. It is possibly a source of a large share of social pathology.