The proposals of a free-market economist

Ed Glaeser writes,

Charter schools sadly remain a niche product, so pushing for their expansion—and for greater school-choice options more broadly—is necessary. Another alternative that could open up new education opportunities would be vocational training that bypasses the school system entirely. Washington could pay for programs inculcating marketable skills—from plumbing to computer programming. These programs could be competitively sourced, meaning that labor unions and community colleges and for-profit entrepreneurs could compete to offer them. But providers would get paid only if students learned real skills.

…The Social Security system should also be made friendlier to the young. The payroll taxes that fund Social Security could be eliminated for those under 30 and phased in later in life. Younger workers and their employers would initially pay nothing into the system. That shift would eliminate a large tax-related barrier to hiring the young and make it more financially attractive for young people to work. That reform would reduce revenues, true; but raising the age of retirement could offset the lost funds.

. . .The best way to preserve our vital small-business ecosystem is not to throw money at every struggling business but instead to make it as easy as possible for new businesses to open after the pandemic has passed.

If a state isn’t allowing any construction in high-demand areas, shouldn’t the federal government reduce its infrastructure support? Use money to nudge states—and let states nudge communities.

Yes, we know that these are all non-starters politically. But if we’re going to indulge in fantasies, they may as well be good ones.

Contrarian on infrastructure

[This is one of those posts that is not about the virus crisis, although it wouldn’t be at all difficult to talk about pandemic response preparation as infrastructure]
Eli Lehrer writes,

There is no evidence that America’s infrastructure is crumbling or that it is not globally competitive. Indeed, judged by its performance, our existing infrastructure works well. Rather than building more of what it already has, therefore, America should direct its new investments toward visionary projects on the scale of the transcontinental railroad, the interstate-highway system, and the internet, all of which have helped the nation achieve its status as world leader.

. . .a few examples of the types of projects that could be considered. Three in particular fit the bill: building infrastructure for automated, electric cars; transforming the power grid to make clean energy very cheap; and colonizing outer space and exploiting its resources.

I only partly agree. I do think that it would be easier to switch to autonomous vehicles if you could build the road system from scratch. Ideally, you would want to keep legacy drivers off of those roads. But how do you get from here to there? Autonomous car lanes on existing roads?

What concerns me most about the power grid is robustness. What you want is to be able to keep power going to an area even if the nearest transformer fails.

I don’t see colonizing out space as an infastructure issue. Sorry.

The math of the UBI

In a podcast with Erik Torenberg, Bryan Caplan trashes the universal basic income. He gives the following arithmetic example:

UBI for a family of four of $48,000.
Tax rate of 25 percent.

That means that the “breakeven” family income (where you net zero from the government) is $192,000. That is ridiculously high. Ergo, he says, we need targeted welfare policies.

But. . .

What is the target? If your target is to ensure that no family falls below $48,000 a year, then you give a family earning $40,000 a year $8000 and you give a family earning $48,000 a year nothing. Essentially, you have a 100 percent marginal tax rate on any earnings until the family hits $48,000.

Our current welfare system provides nearly this level of disincentive, with tax rates for low income people around 80 percent.

I assume Bryan would agree that these high marginal tax rates are unwise. But he does not articulate his preferred approach.

If you go to my essay on the UBI, you will see that my preferred approach is a smaller UBI, say $10,000 for a family of four, with local governments and charities providing additional targeted support based on family circumstances other than willingness to work. A family with a disabled child would get more local support, for example. So would a family where the parents are unable to work. The low overall UBI would make the breakeven point lower. The targeted support based on family circumstances would keep marginal tax rates low for people who are able to work.

If it will help, you can think of the UBI as a negative income tax. A UBI of $10,000 with a 25 percent tax rate is arithmetically equal to a negative income tax rate of 25 percent for a family with an income of $40,000 or less.

The UBI is radical

From a comment:

Does your endorsement of a UBI square with your broad insistence that new policies should start from where we are?

No. It is a radical idea to replace food stamps, housing subsidies, EITC, TANF, Medicaid, and even Social Security and Medicare with a UBI.

How could we experiment gradually with a UBI? One approach would be to replace everything except Medicaid, Social Security, and Medicare with a small UBI. Try it for five years, and see what happens. If the consequences are not dire, then enlarge the UBI and replace Medicaid with a mandate to purchase at least catastrophic health insurance.

If my view of the incentive effects is correct, then after about 15 or 20 years we should see higher rates of labor force participation and marriage, as people start to notice that they are not losing benefits by working or by marrying someone who works.

David Henderson attacks the UBI

He writes,

A UBI, moreover, would create more of a welfare culture than we have now. Imagine four young men meeting in college and figuring out that when they reach age 21, they can each get $10,000 a year from the federal government forever. There are a lot of places they could go in America and rent a three- or four-bedroom house for $1,500 a month ($18,000 a year), leaving $22,000 a year to spend on food, cable, and various amenities. Would they want to stay out of the labor force forever? Probably most of them would not, but the UBI could easily postpone their becoming responsible adults for five years or more.

I think that this is probably wrong. If it is wrong, it is demagogic.

Henderson writes as if our current welfare programs do not cover everyone. In fact, those four young men could be eligible for Medicaid, food stamps, housing vouchers, and so on. They could stay out of the labor force just about as easily as they could under a UBI.

I really think that my essay on the basic trade-offs of the UBI is the most objective, least demagogic piece you can read about the idea. That essay points out that a UBI has two parameters with which to try to manipulate three objectives. The parameters are the amount of the UBI and the tax rate on earned income. The objectives are offering a generous benefit, keeping the disincentive to work low, and keeping the budget cost low.

Henderson is correct in pointing out that giving every adult about $10,000 a year would strain the budget. In my essay, I propose giving an entire family of four $10,000, which is half of what they would receive under many current proposals. Most people would not want to live on the UBI that I would offer. To the extent that they were able to work, I believe that they would do so.

The problem with my proposal is that it does not provide for a family that is unable to work and/or has special needs, such as a child with an expensive medical condition. I suggest that those special needs be met by charities and local governments.

The poverty trap

“>Ariel J. Binder and John Bound write,

The existing literature, in our view, has not satisfactorily explained the decline in less-educated male labor-force participation. This leads us to develop a new explanation. As others have documented, family structure in the United States has changed dramatically since the 1960s, featuring a tremendous decline in the share of less-educated men forming and maintaining stable marriages. We additionally show an increase in the share of less-educated men living with their parents or other relatives. Providing for a new family plausibly incentivizes a man to engage in labor market activity: a reduction in the prospects of forming and maintaining a stable family, then, removes an important labor supply incentive. At the same time, the possibility of drawing income support from existing relatives creates a feasible labor-force exit. We suspect that changing family structure not only shifts male labor supply incentives independently of labor market conditions, but also moderates the effect of a male labor demand shock on labor-force participation. Since male earning potential is an important determinant of new marriage formation, a persistent labor demand shock which reduces male earning potential exerts an impact on male labor-force participation which operates through the marriage market.

Thanks to a reader for forwarding the paper.

Let me add to their story. Once upon a time, a woman with a child needed a husband for support. But in recent decades, government benefits have provided support. Moreover, these benefits go away as a household earns income. At the margin, a man who earns a modest wage has his income implicitly taxed at a high rate should he marry the mother of his child. The woman has little or no economic incentive to marry him, because together they cannot keep much of the income that he earns. And so he drops out of the labor force, because he no longer is motivated to work in order to get married.

Most studies fail to show an effect on labor supply of policies that change the way that benefits are provided and taxed. But these studies are limited to short time periods. In my view, our benefits policies have over a long period of time created a poverty trap by changing cultural habits. If we were to change those policies, and in particular replace existing means-tested programs with a universal basic income, it would take a long time for cultural habits to re-adjust. But my hope is that if government stopped holding people in the poverty trap, cultural habits eventually would improve.

Economics or sociology?

Abby M. McCloskey writes,

Our social fabric is fraying, and people are losing a sense of purpose, dignity, and connection to one another. This too has implications for economic health. It is the strength of families and communities, not the broader economy, that is at the root of economic opportunity.

This goes along with the theme that I see emerging, which is that sociology is becoming more important than economics. To me, the widening of cultural gaps is very important. Those of us who live in affluent areas are really out of touch with much of the country in a way that was not as true fifty years ago. As I have said, back in 1965 at a Cardinals game, one would find people of all social classes sitting in the same section of the ballpark. That is not true any more.

McCloskey’s suggestions include

a voluntary national-service program. The activities would not be limited to military service but would include service in every venue, from childcare to eldercare to addiction recovery to environmental cleanup. While voluntary service is traditionally thought of as something for 18- or 19-year-olds, it could presumably be offered as a one-year program that anyone could participate in once in their lifetime for a set stipend of $30,000 or $15 an hour. The federal government would pay the stipend, or perhaps provide some other type of benefit, such as a credit for college costs, at that level. Instead of creating a large new federal agency to provide these service opportunities, citizens could partner with existing nonprofits or city-based projects. Indeed, such a program need not be a national one, but one that cities and communities could spearhead themselves.

She suggests starting with a trial pilot, rather than a full national program.

Even though service would be voluntary rather than obligatory, I am not on board with this suggestion. I don’t like to define “service” as working for a non-profit. Instead, if the goal is to help people feel useful and connected, I would look for ways to increase employment in general, including in the for-profit sector. Instead of a full stipend, the Federal government could offer a subsidy–perhaps a one-year exemption from the payroll tax.

Also, as one puts together a package of policies, it is important to keep in mind some fundamental trade-offs. For example, deep means-testing imposes high marginal tax rates, which impede upward mobility. See my essay on the UBI.

But in any case, this involves throwing economic solutions at sociological problems. My guess is that even if the economic ideas are well considered, the problems will confound economic policy. Of course, policies that are based on normative sociology (the study of what the causes of problems ought to be) will do even worse.

Oren Cass’ Working Hypothesis

Oren Cass writes,

a labor market in which workers can support strong families and communities is the central determinant of long-term prosperity and should be the central focus of public policy.

In other words, instead of counting GDP, we should be counting workers with enough income to support families. He goes on to say

if the Working Hypothesis is correct, a basic income would be entirely unresponsive to the nation’s challenges; indeed, the idea represents an explosive charge planted directly at the weakest points in society’s foundation. It would make work optional and render self-reliance moot; consumption would become an entitlement officially disconnected from production. A community in which people capable of making positive contributions are not expected to do so is unlikely to be one that thrives on any dimension in which productive contributions are needed.

Yuval Levin cites this paragraph and praises the book.

But Cass is wrong on the economics. If you object to policies that make earning a living unrewarding, then you should object to the policies we have now and appreciate that a universal basic income would be a huge improvement.

Cass uses rhetoric to make the universal basic income sound anti-work. But it is not. It would be much more pro-work than our patchwork of means-tested programs whose phase-outs create implicit tax rates that average 80 percent on earned income for the bottom fifth of earners.

Apparently, more people need to get up to speed on the basic economics of the UBI.

My case for the UBI

This essay elaborates on the issue of implicit tax rates that Greg Mankiw highlighted.

I am starting to get annoyed with the left-wing bias at Medium. It is one thing for the readers of the site to lean left. Fine. But my articles seem to get much, much less play than a lot of essays that offer nothing but left-wing drivel. And hardly anyone seems to come out of the left-wing echo chamber to read what I write. I get the sense that I am mostly being presented to the (few) people who already are sympathetic. It’s somewhat demotivating.