Sunday, December 29, 2013

Welfare Benefits for Big Business?

Copyright, The New York Times Company

News reports have emerged this year that some of the nation’s largest and best-known corporations – like Walmart and McDonald’s – may have disproportionate numbers of their employees taking part in public assistance programs like Medicaid and food stamps. A video that went viral on YouTube criticized McDonald’s for offering its employees assistance with navigating the complex web of federal government assistance programs.

Most public assistance programs are aimed at poor people and limit participants’ incomes to a maximum somewhere around the poverty line (about $20,000 a year for a family of three). Because jobs generate incomes, it’s difficult for a worker to be admitted into antipoverty programs unless he or she works part time or earns near the minimum wage. Thus, it is no surprise that employers like McDonald’s and Walmart offering part-time or minimum-wage positions would have a disproportionate number of their employees in such programs.

One point of view is that employers just want to be helpful, and some of them happen to be in a line of business where they can create job opportunities for low-skilled people, many of whom can also benefit from knowledge about antipoverty programs. But critics assert that low pay is a deliberate corporate strategy to use government program revenues to enhance their bottom line.

Economists have long cataloged the winners and losses from antipoverty programs – we call it the “economic incidence” – and the answer is more subtle than either side acknowledges.

First and foremost, antipoverty programs raise wages and reduce profits in the short run because they implicitly penalize work, especially the full-time work that is most likely to raise an employee above the poverty line. In effect, employers not only have to compete with each other for employees, but they have to compete with the welfare state, too (as a recruiter, Stacey G. Reece, explains in his congressional testimony).

But the welfare state may also give big employers an advantage over small employers. Big employers achieve a scale large enough to host a number of employee benefit programs from education assistance and retirement plans to advice and assistance with welfare programs that small employers cannot afford. Going forward, I expect that large employers will offer more help for employees to navigate the Affordable Care Act than small employers will.

Although the earned-income tax credit is an exception, many safety-net programs permit participation on a part-year basis, which conveys an advantage to seasonal businesses, large and small. Employees at seasonal businesses have two sources of income – an employer paycheck during the parts of the year that they’re on the payroll and government program benefits during the rest of the year – while employees at nonseasonal businesses just have one income source.

Government transfer payments move purchasing power from those who finance the programs – taxpayers and the buyers of government debt – to the transfer programs’ participants. The transfers hurt businesses that serve, or borrow from, the program financers but may help businesses who serve transfer program participants. Walmart and McDonald’s may be among the latter group, too.

On the whole, social safety-net programs make it more costly to do business but nonetheless may confer competitive advantages on particular types of businesses.

Friday, December 20, 2013

Predictions of the Impact of the Affordable Care Act on the Labor Market

  1. Wedges, Labor Market Behavior, and Health Insurance Coverage with Trevor S. Gallen. The Affordable Care Act’s taxes, subsidies, and regulations significantly alter terms of trade in both goods and factor markets. We use a multi-sector (intra-national) trade model to predict and quantify consequences of the Affordable Care Act for the incidence of health insurance coverage and patterns of labor usage. If and when the new exchange plans are competitive with employer-sponsored insurance (ESI), our model suggests that more than 20 million people will leave ESI as a consequence of the law. Behavioral changes that are captured in the model could add about 3 million participants to the new exchange plans: beyond those that would participate solely as the result of employer decisions to stop offering coverage and beyond those who would have been uninsured. Industries and regions will grow, decline, and change coverage on the basis of their relative demand for skilled labor.
  2. Wedges, Wages, and Productivity with Trevor S. Gallen. Our paper documents the large labor market wedges created by taxes, subsidies, and regulations included in the Affordable Care Act. The law changes terms of trade in both goods and factor markets for firms offering health insurance coverage. We use a multi-sector (intra-national) trade model to predict and quantify consequences of the Affordable Care Act for the patterns of output, labor usage, and employee compensation. We find that the law will significantly redistribute from high-wage workers to low-wage workers and to non-workers, reduce total factor productivity about one percent, reduce per-capita labor hours about three percent (especially among low-skill workers), reduce output per capita about two percent, and reduce employment less for sectors that ultimately pay employer penalties.
  3. It looks like the start of ACA subsidies coincides with the expiration of Emergency Unemployment benefits. That coincidence should not be confused with impact (use your mouse to slide the chart or click here to see full screen).

Wednesday, December 18, 2013

Inequality and Good Intentions

Copyright, The New York Times Company

A new book says good intentions are a barrier to equality and to progress among the world’s poor.

For most of human history, family incomes were barely enough to survive and life was short. But in “The Great Escape: Health, Wealth and the Origins of Inequality,” Professor Angus Deaton of Princeton writes that while economic progress allowed much of the world to escape poverty, “escapes leave people behind, and luck favors some and not others; it makes opportunities, but not everyone is equally equipped or determined to seize them.”

Professor Deaton also deals with the events after the great escape: that is, how the progress of some families and nations affects the prospects for progress of those initially left behind.

Imitation is one force and works in the direction of progress for all. The poor can look to the progress of others to embark on their own escape. Professor Deaton shows how the imitation of new methods has occurred, for example, with medical technologies that have allowed the residents of a number of poor nations to live longer than Americans did just a hundred years ago, and sometimes longer than Americans live today.

But new methods can harm those with vested interests in the old ones, and the vested interests can use their political power to block competition and progress. Professor Deaton explains how “the emperors of China, worried about threats to their power from merchants, banned oceangoing voyages in 1430,” adding, “Similarly, Francis I, emperor of Austria, banned railways because of their potential to bring about revolution and threaten his power.”

Progress begets inequality, and the resulting inequality can either encourage more progress or impede it, or both. Professor Deaton suggests that inequality in the modern United States has had both of these effects.

He points to a third influence of progress and inequality on outcomes for those left behind: good intentions. As part of the world becomes rich and no longer worries about day-to-day survival, it can look outward. Many residents of developed countries have a “need to help” those less fortunate.

But the attempts to help often – perhaps even usually – go awry.

As medical progress began to diffuse around the world, people stopped dying so young, and that made for an increase in population, especially in less-developed countries. Developed countries thought they would help poor nations by encouraging population control, based on the dubious proposition that more people means more poverty.

“What the world’s poor – the people who were actually having all these babies – thought about all this was not given much consideration,” Professor Deaton says, citing China’s continuing one-child policy as an example. He adds: “The misdiagnosis of the population explosion by the vast majority of social scientists and policy makers, and the grave harm that the resultant mistaken policy did to many millions, were among the most serious intellectual and ethical failures of a century in which there were many.”

Other types of foreign aid to developing nations have also been a disaster, he says, with “pictures of starving children being used to raise funds that were used in part to prolong war, or to N.G.O.-funded camps being used as bases to train militias bent on genocide.”

Professor Deaton’s book is primarily international in focus, and he insists that help for the American poor is different and more effective than aiding the world’s poor. Nevertheless, American readers may be left wondering how much aid to American poor, is, as Professor Deaton says, “more about satisfying our own need to help, and less about improving the lot of the poor.”

Thursday, December 12, 2013

JEL Review of The Redistribution Recession

“Somewhere, Milton Friedman is smiling.
Casey Mulligan ... has provided an unalloyed Chicago-style explanation for the U.S. economy’s poor performance during and immediately after the Great Recession.”

-Read the rest of Christopher L. Foote's review (jump to p. 1194).

Links to other reviews of the book.

Wednesday, December 11, 2013

Doctor Shortage?

Copyright, The New York Times Company

The supply and demand for health services will experience a variety of changes in the near future, especially those from the Affordable Care Act. But nobody has quantified their net impact on the market for doctors. The new law pushes demand for physicians in both directions, making it is easy for advocates on either side of the law to cherry-pick provisions they support.

The law is beginning to build new markets for individual insurance policies that in some ways can reduce the demand for health care and doctors.

Participating families above 250 percent of the poverty line will, on average, pay 30 percent of their medical expenses out of pocket, as compared with the 17 percent out of pocket that is typical for employer-sponsored health plans. That gives patients almost twice the incentive to avoid using doctors or to seek treatments that are less expensive and likely less physician-intensive.

In some states, patients are being pushed toward less physician-intensive care because the insurance plans offered on the exchanges have narrower networks that exclude some of the more expensive facilities. Some of these excluded providers may be considered among the best in the industry, because state regulators seek to keep insurance premiums low. This is a force that could help limit the demand for doctorss in narrow-network states.

Other states include their top facilities in the networks accessible by residents who buy their insurance on the exchanges and do not have this force limiting physician demand. Moreover, the broad-network states will likely pull dcotorss away from the narrow network states where demand for them is less.

Although the new law pushes the insured to shoulder a larger share of their health expenses, the law also mandates that insurance pay for a wider range of health goods and services. That mandate by itself could increase the demand for doctors.

The Affordable Care Act is supposed to increase the fraction of the population with health insurance, and it will in the long run because of the individual mandate, the large insurance subsidies and Medicaid expansions in a number of states. (In the short run, the act is reducing the number of people with health insurance, as many longstanding policies have been canceled because they do not conform with the new law.)

It is a mistake to assume that every person getting insurance coverage is an additional person demanding health care, because many of the so-called uninsured are actually insured in one way or another. Take Medicaid enrollment, for example. Sixteen million people were not enrolled in Medicaid in June 2010 yet participated in the program at other times during the fiscal year, largely because they don’t bother enrolling (or know that they can) when they are healthy and turn to it only when need arises.

If and when those who are eligible but unenrolled make contact with hospitals and other providers – when they actually need the coverage – they are reminded to enroll. In an economic sense, these 16 million were, in effect, insured all along, despite their absence from the official statistics. The new law’s individual mandate encourages some of these people to be perpetually enrolled, even when they are healthy, which is more a change in their official classification than a change in their use of health care.

The numbers of slots in medical schools and residency positions, and rules that permit nurses to perform a wider range of services, have important effects on the incomes of doctors, because easier entry into the medical profession reduces physician incomes. I’m not sure that the new law does much to change these entry barriers, though.

Proponents of the Affordable Care Act can point to the provisions that reduce physician demand and help prevent a doctor shortage; opponents can say that more insurance means more demand on an already strained profession.

A good economist should be able to examine all the provisions and tell us the net result. But none have done this. The most we have in terms of a comprehensive calculus of health reform and the demand for physicians is the example of Romneycare from Massachusetts, which Scott Gottlieb and Ezekiel Emanuel hold up as proof that there will be no doctor shortage.

But Romneycare is a different law than the Affordable Care Act and covered a different population. Even without those differences, Massachusetts could increase health care in the state in part by pulling in medical professionals from elsewhere in the nation.

The Affordable Care Act cannot do the same, except to pull medical professionals from abroad, where the barriers to moving are much greater.

If only the payments to physicians were free to adjust in response to the law, entry barriers, demographics and other forces, there would be neither a shortage nor a glut in the sense that doctors would be available to whoever would pay the market price and positions would be available for qualified doctors willing to work for that price.

But the new law limits payments to physicians and other medical providers. If patients are lucky, the demand for doctors will be low enough that the limits will not matter. But if the new law results in a significant net increase in physician demand, the payment limits will help remind us of Soviet-era limits on the price of bread, with queues and black markets to follow.

Friday, December 6, 2013

Just a Coincidence

Economists have traditionally discussed how minimum wages and high tax rates might -- probably -- depress the labor market.

Now we have a President who repeatedly claims that minimum wages and other programs that tax employers and attempt to subsidize the poor and unemployed do not depress the labor market, and in fact revitalize it. Moreover, he claims that no serious economist holds what I described as the traditional view.

At the same time, the labor market stubbornly refuses to recover from the recession, long after the banking sector and stock market have recovered.

Don't be fooled by the correlation: it's just a coincidence -- or perhaps a conspiracy among the unobserved variables -- that the labor market is depressed at the same time that the federal government implements policies that were once thought to depress the labor market.

One would also be foolish to assume that the President who appeared to mislead part of America about the affects of the Affordable Care Act might mislead anyone about the economic effects of redistribution.

Tuesday, December 3, 2013

The Affordable Care Act and Marginal Tax Rates

I updated my ACA and Romneycare papers. The updates add the so-called "family glitch," Medicaid expansion, and end-of-year reconciliation of advance premium credits. is hosting excel files with those updates and extensions (use the version with "update" in the file name).

Robots and Property Values

Copyright, The New York Times Company

As robots begin to move goods and people from place to place, urban land might become more valuable. has announced that it is testing package delivery by drones — small, unmanned helicopters that would bring a purchase from Amazon’s fulfillment center to the customer’s front porch. Driverless cars are being developed to help move goods and people from place to place.

“Location, location, location” is the saying in real estate: a property’s value is determined primarily by its location. An apartment in central Illinois might be worth 20 times as much in Manhattan, because a Manhattan apartment gives its resident access to many more goods, activities and high-paying jobs.

This is not to say that urban living is always the best, or that all urban properties are created equal. Locations involve trade-offs, and rural areas offer amenities that big cities cannot. But for centuries, real estate markets have shown that people and businesses are willing to pay more for urban properties.

As technology helps with moving goods and people more cheaply, it might seem that urban real estate would give up some of its price premium because distance becomes less of an obstacle to economic transactions. Wouldn’t a driverless car cause some workers to sell their Manhattan apartments and commute to their jobs from more spacious homes in the suburbs or even rural New York State?

But don’t forget that many people and businesses currently avoid urban areas because of the monthly expense of owning or renting urban property. New technologies might allow them to use urban properties on a part-time basis, or use less urban property to accomplish the same tasks, which would make urban property more valuable.

A restaurant may need less refrigeration and storage space because it takes multiple food deliveries per day. Grocery stores may save on shelf space by having a greater fraction of their items delivered directly to customers without being shelved in the store. Households may opt for less storage space or parking, for example — and more room for people — when they can get items and transportation cheaply and on time.

For every Manhattan resident who leaves his apartment for the suburbs, there could be many others for whom technology induces them to use a Manhattan property on a part-time basis.

New technologies are more likely to emerge in urban areas, because that’s where the innovators expect to find the most customers. Amazon said that it planned to start its drone service in urban areas, and I wouldn’t be surprised if the first commercial uses of driverless cars were in big cities like San Francisco or Los Angeles.

Thus, while cities already give their residents access to more goods and services, technology may further shift that advantage and thereby increase urban property values.

Wednesday, November 27, 2013

Changing Assistance for the Unemployed

Copyright, The New York Times Company

Even if federal unemployment insurance expires at the end of the year, it will be replaced by an even more generous assistance program for people leaving their jobs.

Unemployment insurance is jointly administered and financed by federal and state governments, offering funds to “covered” people who lost their jobs and have as yet been unable to find and start a new one. The cash assistance comes weekly, with states paying benefits of about $300 a week for 26 weeks or until the person starts a new job, whichever comes first.

Normally, the assistance stops after 26 weeks, even if the beneficiary has yet to find a job. But during recessions the federal government’s temporary “extended” and “emergency” unemployment compensation programs pick up benefits after the state benefits are exhausted.

During the recent recession, the federal government paid benefits for up to 73 additional weeks, making the total benefit duration 99 weeks.

The temporary federal programs have expiration dates, but Congress has routinely extended them, at least through 2012. A couple of the federal programs fully expired that year, so in 2013 the unemployed could get benefits for no longer than 73 weeks.

The last remaining federal program, known as Emergency Unemployment Compensation, is set to fully expire at the end of this year. Congress has extended its final expiration date several times in the past – most recently as part of the fiscal cliff deal – but there is no guarantee that Congress will continue its extensions.

If the emergency program continues while the new health care assistance comes on line, the incentives of workers and employers to create and retain jobs will take a big hit. The solid line in the chart below shows my estimates of the average marginal tax rate on worker’s income, accounting for the fact that earning income on a job results in both additional taxes and withheld federal benefits. The higher the tax rate, the less is the incentive to work.

Casey B. Mulligan's estimates of the impact of emergency unemployment compensation ending in December 2013. Casey B. Mulligan’s estimates of the impact of emergency unemployment compensation ending in December 2013.

The dashed line shows the marginal tax rate if the emergency program really does expire at the end of the year. Tax rates will increase in January, but much less than they would without the expiration, because the assistance lost from the emergency program will be offset by the health assistance coming online.

The federal unemployment benefits at risk of expiration are economically more important than the already-expired programs, because it is less common for unemployment to last more than 73 weeks (when the expired programs kicked in) than it is to last 26.

Unemployment benefits from any program help people who desperately need it, but they also keep the labor market depressed by permitting people to remain unemployed longer and making layoffs more common. The remaining emergency program is the most important and thereby does the most to help people and the most to keep the labor market depressed.

Even if the emergency program is allowed to expire on Jan. 1, it will ‘be replaced by an even larger program — the Affordable Care Act — assisting the unemployed and others, including premium subsidies for health insurance.

Most people have jobs that provide health insurance and will be ineligible for premium subsidies for as long as they work. But as soon as they are fired, quit, retire or otherwise leave the payroll, they will be eligible for monthly assistance to pay for their health insurance premiums and out-of-pocket expenses.

For households between 100 and 400 percent of the poverty line – that’s about half of households – the new assistance will average about $110 a week, tax free (unlike unemployment benefits, which are taxable). Moreover, the premium assistance is not limited to 26 weeks; it can last for decades.

Regardless of how you evaluate the relative costs and benefits of the emergency program, now is the time for Emergency Unemployment Compensation to expire to make way for new assistance programs.

Thursday, November 21, 2013

When the Second (HI Coverage) Shoe Drops

Earlier I wrote about 20+ million people who will lose employer health insurance coverage, even though that coverage was "adequate" under the standards of the Affordable Care Act.

The federal government estimated that millions of people (see 75 CFR 34553) participate in employer health plans that would, sometime between Jan 1, 2012 and Jan 1, 2014, have to begin to comply with ACA regulations in terms of services covered (among other things).  Actually the time window extends to late 2014 because of the early renewal option.

Most of those plans will adjust to comply. But many will be canceled because canceling a plan is consistent with the law even while keeping an inadequate plan is not.

The dynamics of the cancellations will be interesting. Due to's currently bad reputation, I expect that a significant group of employers will comply in the short run and cancel in future years when the prospect of cancellation is less traumatic for their employees. However, that approach doesn't solve the problem of financing the extra benefits in the interim ... employees will pay for that.

The extra health insurance premiums are one of the many ironies ... these employees will be paying more because of a law that was supposed to save them money.

Wednesday, November 20, 2013

The Labor Market and Labor Policy Since Kennedy

Copyright, The New York Times Company

Fundamental changes in economic performance since the John F. Kennedy presidency help explain why economic policy debates are so polarized these days.

In its 34 months, the Kennedy administration embraced a range of interesting federal economic policies. Kennedy proposed permanently cutting personal and corporate income tax rates to promote economic growth, and his cuts became law. During his administration, the maximum duration of unemployment benefits was temporarily extended only 13 weeks, less than in any other recession since then.

He expanded the federal space program. He wanted a strong peacetime military and was willing to use it to stand up to communism. His Department of Justice, led by his brother Robert F. Kennedy, was tough on labor unions.

President Kennedy pushed for national health reform, although he did not see any legislation passed during his term. As a candidate and then president, Kennedy was initially cautious on civil rights issues, but ultimately worked to put together a civil-rights bill that became the Civil Rights Act of 1964.

From today’s perspective, Kennedy looks like a hybrid of a Democrat and a Republican, and as America remembers his assassination in November 1963, journalists and scholars continue to debate whether Kennedy was a liberal.

In my view, Kennedy was entirely a Democrat, but that’s less visible today because Democrats and Republicans, and their respective economists, were a lot less different than they are now, especially on matters of microeconomics. Kennedy was advised by James Tobin of Yale, a Nobel laureate who advised other Democratic presidents, too.

Both Tobin and Milton Friedman, who subsequently advised several Republican candidates and was an adviser to President Richard M. Nixon, were concerned that antipoverty programs would perpetuate poverty by giving people too little reward for taking care of themselves. Tobin wrote that high marginal tax rates cause “needless waste and demoralization,” adding:

This application of the means test is bad economics as well as bad sociology. It is almost as if our present programs of public assistance had been consciously contrived to perpetuate the conditions they are supposed to alleviate.

Tobin thought public programs had gone seriously awry whenever program participants kept less than a third of what they earned on a job, rather than losing it to extra taxes or withdrawn benefits. Friedman thought that people should keep at least half of their earnings after taking into account taxes or lost benefits. Yet in modern times, Friedman and Tobin appear to be quibbling, because now we have millions of citizens who keep a quarter of what they make, or less, in net earnings beyond the benefits they forgo, yet few Democrats are concerned that federal antipoverty programs might be counterproductive.

In “Roofs or Ceilings?” Milton Friedman and George J. Stigler wrote about the economic damage done by minimum wages, rent controls and other restrictions on market prices. Tobin offered similar explanations, writing:

People who lack the capacity to earn a decent living need to be helped, but they will not be helped by minimum wage laws, trade union wage pressures or other devices which seek to compel employers to pay them more than their work is worth. The more likely outcome of such regulations is that the intended beneficiaries are not employed at all.

(Unlike Friedman, Tobin did subsequently support a minimum-wage increase, because he thought better antipoverty tools would not be used).

These days, Democrats push for higher minimum wages, without any apparent concern that poor people might have more trouble finding work.

My point is not that Democrats are more wrong about economics that they used to be, but that, regardless of who is right or wrong, the gaps between Democrats and Republicans in economic reasoning are greater now than they used to be.

The economy is different now than it was in the 1960s, especially in that the incomes of the poor have not kept up with national incomes. When the poor are prevented from working by minimum wages or high marginal tax rates, a lesser fraction of national income is lost than in Kennedy’s era, when the poor could produce a more significant piece of the national economic pie.

So proponents of big social programs have less reason to be cautious about program expansions.

As long as the American economy produces such a wide range of labor market outcomes, we may never see a president, who, like Kennedy, has such wide-ranging economic policies.

Tuesday, November 19, 2013

Epstein read the ACA in 2009

In about 80 seconds in 2009 (carved out of the embedded video above), Epstein explained exactly why "If you like your plan, you won't keep it." See especially 29:26
Section 102 is essentially a national disgrace. It's simply a falsification of everything that was said by the President ....

Update: Patrick Sullivan points us here:

Wednesday, November 13, 2013

The Marriage Tax and the Labor Tax

I received this question by email

If households respond to -- what I understand is -- a steep marriage penalty embedded in the subsidy formulae by postponing marriage or even by divorcing, would not this further broaden the effect of the Act in the labor market. In the limit, if every household sought subsidies under such an "income splitting" basis, would not more households qualify, and would not more households be influenced over a larger range of the income curve than even your study assumed? And thus would not the impact on the labor market be even larger [than calculated here]?

My answer:

It depends, even though I agree that the ACA includes a steep marriage tax as well as its steep taxes on labor income. My labor income MTR estimates are based on, among other things, estimates (from the CBO and others) of the number of people participating in the ACA exchanges. Your email provides a good reason to suspect that exchange participation will ultimately exceed the estimates. There are other reasons too.

Table 8 in my paper shows what would happen if one increased the exchange participation estimates -- see esp. the "exchange take-up" and "percentage of ESI moving to exchanges" rows.

But if the exchange participation estimates are accurate (maybe other factors offset the one you mentioned), then my headline estimates (Table 1) are fine even though the ACA reduces the incidence of marriage.

The Slow Death of the Employer Mandate

Copyright, The New York Times Company

Students of health reform can be informed and entertained by revisiting a book by the health reform champion John E. McDonough.

As a member of the Massachusetts House of Representatives from 1985 to 1997, Mr. McDonough had worked for state health reform well before the now famous Romneycare health reform of 2006. During that time he also earned a doctorate in public health.

Like many other former legislators, he wrote a book about his experiences and relationships in office. “Experiencing Politics” (published 13 years ago) organizes his stories around social science models of the political process, including the principal-agent model and punctuated equilibrium theory.

The models are known by fancy phrases in the academic literature, but Mr. McDonough quickly brings them down to earth with explanations that are nontechnical and addressed to the general public. His stories are engaging and bring the models alive, even to social scientists who have seen the models on paper, yet may be dubious that they have much practical value.

Mr. McDonough is not trained as an economist, but usually shows good economic instincts in the book (though he does not mention that per-employee penalties and minimum wages might reduce employment among low-skill workers).

Why is politics so contentious and polarized these days? Mr. McDonough explains that there’s a lot at stake: “We invest enormous authority and trust in our government” and “we give our legislatures remarkable powers to pass laws that govern our own behaviors, from the trivial to the profound.”

Of particular interest today are his Chapters 6 and 7 on Massachusetts health legislation between 1988 and 1997. Mr. McDonough describes how the state’s previous system of hospital rate regulation had been put in place for the purpose of controlling medical spending and how he believes it might have worked for a time.

But he says the academic studies on which he relied became outdated. “I didn’t see it coming,” he says, adding, “Massachusetts government lost the ability to manage its hospital regulatory system with discipline and integrity.” He and other legislators concluded that “market-based contracting, organized around managed care, could correct the worst aspects of market failure, not perfectly but far better than regulation.”

Mr. McDonough describes how Gov. Michael Dukakis’s 1988 law sought to achieve universal coverage in Massachusetts with a legislative package that included a $1,680 penalty (per employee, per year) on employers who did not provide health coverage to their employees. Adjusted for inflation, that would be like proposing a $2,863 penalty in 2006, when Romneycare was passed with a mere $295 employer mandate.

The Dukakis package passed narrowly, and to gain legislative approval the final law delayed the employer mandate’s implementation by four years. Does that sound familiar? The national Affordable Care Act was passed in 2010, with an employer mandate to begin in 2014.

Mr. McDonough describes how those four years gave Massachusetts employers time to organize their opposition. Moreover, as 1992 approached, the Massachusetts labor market was weak. Arguably both of these things happened nationally between 2010 and 2013.

As a legislator, Mr. McDonough met with business executives to respond to their concerns over health reform. He recalls one of those meetings where “sitting quietly through my presentation was the owner of a Domino’s Pizza shop.” The shop owner explained: “I compete against pizza stores that pay everything and everyone under the table. I pay unemployment, worker’s comp, FICA, you name it, and you want to add one more thing that I have to dig up while my competitors pay none of those things? Come on.”

Mr. McDonough had no reply to alleviate that concern. With a few months to go until the originally scheduled implementation, Massachusetts lawmakers decided to delay the Dukakis employer mandate for three years. It would be delayed two more times and then, in exchange for business community support for a coverage expansion for children, ultimately repealed.

On the national level, while Congress was not consulted, with six months to go before the originally scheduled implementation, the Obama administration delayed its employer mandate one year.

Although today Mr. McDonough notes the differences rather than the parallels between the Dukakis law and the Affordable Care Act, proponents of the national employer mandate should be worried that it may be approaching the end of its political life.

Sunday, November 10, 2013

New Food Stamp Benefit

Under the traditional rules for setting food stamp/SNAP benefits, monthly benefits would have increased $25.48 between October 2008 and the present, except for the small fraction of beneficiaries who receive the minimum benefit.  In early 2009, the ARRA deviated from those rules by legislating an immediate $46.53 increase.  That extra increase expired, putting the program back on its traditional path for benefits (but not eligibility -- that's another story).

Of course, putting a program back on its traditional path is known in Washington as a cruel cut.

The average amount of the cut, accounting for beneficiaries who receive the program minimum benefit, is $20.36 per month.  That's about 1/2 of one percent of the employee compensation of the median non-elderly household head or spouse when they are working (and thereby not getting SNAP benefits).  Almost half of the reductions in labor among such person result in SNAP participation, which is why putting SNAP benefits back on their traditional path increases the reward to work by about 1/4th of one percent of compensation.

The overall reward to work is about half of compensation, so the new SNAP benefits increase the reward to work itself by about 1/2 of one percent.  By itself, the change would increase aggregate hours worked by somewhere in the range of (0.2,0.4) of one percent.  That change would be partly realized as additional employment and another part as additional hours.  E.g, at the very high end the additional nationwide employment addition would be 500,000.

However, this increase in the reward to work is small when compared to the reduced reward to work that came in January 2013 with the expiration of the payroll tax cut, and tiny when compared to the reward to work that is coming January 2014 from the ACA.

[Technical note: the traditional SNAP procedure is to increase the maximum benefit (for each household size) proportionally every October according to food price inflation.  Note that the vast majority of SNAP households do not receive the maximum benefit, but instead receive the maximum benefit minus an amount according to their family income.  I.e., adding $25 to the maximum benefit adds $25 to essentially every SNAP household's benefit, which is why my calculations are based on the dollar addition to benefits rather than the percentage increase in maximum benefit.]

Thursday, November 7, 2013

People on the group market to lose coverage

There's been a lot of news about people losing their individual coverage as a consequence of the ACA. But the bigger news coming will be people losing group coverage through their employer.

The ACA pays for much of the health costs of people (under 400 percent of the federal poverty line, which is about half of America) who will get insurance through the ACA's exchanges, but ONLY if their employer (or family member's employer) is not offering them affordable coverage. It's like paying employees to work somewhere that does not offer coverage.

Because employers cannot cherry pick which employees are offered coverage, you might say that poses a dilemma for employers:
  • drop coverage to help their employees below 400% FPL get the subsidies,
  • or keep it to help their higher income employees keep their employer coverage (and the tax advantages that go with it) and to avoid the ACA's employer mandate penalty.
Competitive markets create compensating differentials to eliminate such dilemmas, but let's ignore the economics for today.

There are massive loopholes in the ACA so that coverage can be retained for employees who want employer coverage, and dropped for those who do not:

  • Put early retirees on the exchanges. Former employees do not have to be offered the same coverage as current employees (the offer of coverage might not even be that relevant because I don't think that the ACA premium tax credits obligate people to accept coverage from a former employer). Early retirees many times have little or no wages after they retire, which can help keep their income below 400% FPL. Earlier retirees are older than most of the workforce, so the subsidy they'd get is large compared to other families with the same income. As of 2011, there were about 2 million early retirees on their former employer's plan and below 400% FPL. More would adjust the timing of their income to get below 400% FPL if they were paid to do so, as they will be next year. Including their dependents, here alone we get roughly 3 million people who could lose employer coverage this way.
  • Implement waiting periods. New hires do not have to be offered coverage right away. It has to be offered within 90 days plus any other eligibility hurdles the employer has (e.g., complete a training program). New hires tend to be lower income people, plus the eligibility hurdles do not have to be uniform by occupation, so in this way employers can have people who are both on the payroll and getting subsidies on the exchanges, yet nonetheless no employer penalty accrues and higher income people can be covered by the employer from day one. At any point in time, JOLTS says that 12+ million people have been hired in the last 90 days. Their propensity to have employer coverage is probably lower than the average worker (a significant majority of employees can get coverage fromt their employer), but still there easily could be 3 million workers here, plus another 3 million dependents, at a point in time during which the ACA is fully operational, who would have been covered by the employer if it weren't for the ACA.
  • Require employees -- or even invite them at their option -- to work part time without employer coverage rather than working full time with it. In many cases, employees can make more working part-time. In other cases, they would make just a little less, while working a lot less. 3 million workers is a conservative estimate of how many people will be moved in this way from jobs with coverage to jobs without coverage. Add 2 or 3 million dependents to get 5+ million people moved off of employer coverage this way.  A combination of the part-time and waiting-period options is to declare a new employee as "variable time," so that he has to be employed through the end of the calendar year before it is determined whether he is a full-time employee and thereby eligible for employer coverage.
  • Drop spouses from employer plans.  I'm not sure how common this will be, and how many of the dropped spouses will be able to get coverage from their own employer (would that count as "losing your coverage"?)
  • Adjust the affordability of coverage. Require employees to pay most of the premium (with pretax dollars) for employer coverage and compensate them with additional salary. This approach will free the low-income employees to receive exchange subsidies, although for large employers it will generate a $3,000 penalty for each such employee-year. Burkhauser and coauthors estimate that a couple million workers, plus dependents, would lose affordable coverage that way (they would still have coverage, but it would not be affordable by the ACA's definition).
  • Unemployed people who use the exchanges rather than COBRA.  More than a million unemployed workers are on their former employers health plan and have incomes below 400% of the federal povertly line.  People who could use COBRA are still eligible for exchange subsidies.  Including dependents, that's about 2 million people who could move from employer coverage to exchange plans, although technically they wouldn't be "losing" their coverage.

As far as I can tell, the CBO has not considered all of these adjustments, let alone considered the additional economic adjustments I left out here, yet even they admit that 8-9 million people at a point in time will not have any employer coverage as a consequence of a fully-implemented ACA.

I am still working on my own estimate, but the real number has to be in the 20+ million range, plus 2 million or so people who would have chosen to stay on an employer plan through COBRA.

Of course, the American taxpayer - regardless of whether he has employer coverage -- will pay for these group coverage loses that were promised to not occur. Moreover, this is not an issue of the adequacy of the group coverage that's lost (although there are millions of separate and additional instances where group coverage will be lost because it is supposedly inadequate), it simply that the ACA induces market participants to tolerate coverage loses in order to, at taxpayer expense, reduce the monetary loses they experience as a consequence of the law.

Wednesday, November 6, 2013

Two Studies on the Consequences of Romneycare

My paper cited a few studies of the Massachusetts economy before and after Romneycare. Here a few more:

I found that Romneycare increased the Massachusetts marginal tax rate on labor by an average of 0.4 percent points (of total compensation).  From my perspective, I'd expect the Romneycare employment impact to be somewhat smaller than the 0.6% cited above: perhaps 0.2 or 0.3%.

Given that Obamacare increases national average marginal tax rates by about 5 percentage points (about 12 times more than Romneycare did in MA), trying to extrapolate the Massachusetts experience to the ACA -- as many ACA advocates do -- is bold exercise in extrapolation.  But if you absolutely had to extrapolate that way, I'd multiply the Massachusetts results by a factor of something like 12: the ACA's employment impact would be in the -2 to -4 percent range.

Multiplication by twelve is sensitive to all kinds of second order errors like rounding errors and I don't recommend it. We have MUCH better ways of forecasting the ACA's consequences.  Stay tuned for those.

In the Death Spiral We Trust

Copyright, The New York Times Company

The insurance-market death spiral makes sense in theory, but economists do not really know if, and how often, it is a practical consideration in real-world health insurance markets.

Adverse selection refers to a failure of buyers and sellers to transact because one or the other has additional information about the quality or cost of the product to be traded. A classic example from the 2001 Nobel laureate George Akerlof is the market for quality used automobiles, which in theory cannot exist, because buyers of used cars demand a heavy discount because of the likelihood that a used car they might buy will be defective. In theory, nobody sells a quality used car, because it would have to be priced like a lemon.

The used car market is, in theory, caught in a kind of self-fulfilling prophecy in which only defective cars are traded in the marketplace and are priced accordingly.

The same phenomenon has been used to describe the health insurance market. In theory, absent government intervention, only sick people will buy health insurance, which means that insurers have to charge a lot for the insurance, which means that healthy customers will not buy insurance. This is the supposed “death spiral” for health insurance markets.

The solution to this purported problem is to force everyone – especially the healthy – to buy health insurance. That starts a domino effect of other problems, including the unfortunate side effects of the redistribution, such as discouraging employers from creating and employees from accepting full-time jobs, which authors of the Affordable Care Act found to be necessary in order for everyone to be able to comply with the mandate to buy insurance.

I agree with the 2001 Nobel committee, which explained that the adverse selection idea is “a simple but profound and universal idea, with numerous implications and widespread applications.” Still, we don’t really know if the side effects of proposed market interventions are more tolerable than the disease itself.

The used automobile market is a good example. A prudent car buyer should be aware that defective cars are out there.

Nonetheless, the market for used cars did not experience a death spiral and today is active and vibrant. Without any government mandate that the owners of quality used cars sell them, the marketplace has devised a number of practices, such as cars leased from the manufacturer, manufacturer warranties and fleet resales, that help buyers expect quality used cars and thereby prevent the death spiral.

Economic theory predicts that all consumers buy actuarially fair insurance – that is, insurance in which each buyer expects to receive as much as he pays – so the mere fact that many people do not have health insurance (especially healthy people, who do not buy because it is too expensive) would seem to prove that the health insurance market is failing.

But the fact is that health insurance companies, like just about any business, have significant capital and labor overhead costs. Insurance premium revenue is needed to pay those costs. Under such conditions, the average consumer must expect to receive less than he pays. Many healthy people may thereby be uninsured for a good reason: the overhead costs are too much to justify whatever feeling of safety that insurance might give them.

The market might be selecting participants in a productive way. Forcing the insured to buy insurance may be a waste of society’s resources by adding to the already significant overhead costs.

Without proof that adverse selection outweighs other kinds of selection in health insurance, the death spiral may not be a serious threat, and government actions to prevent it may be unnecessary.

Wednesday, October 30, 2013

Work Now, and Let Uncle Sam Pay You Later

Copyright, The New York Times Company

Notwithstanding quirks in the Social Security system, public policy has sharply reduced the reward to work since 2007.

On Monday, the Economix blogger Nancy Folbre helped explain some of the complex factors that determine the rewards of working. Among other things, she noted the roles of work experience and Social Security benefits, both of which are examples of future consequences of working in the present.

This week I will examine Social Security and Medicare benefits from her forward-looking perspective, and in a future post I will examine work experience.

Professor Folbre says the payment of Social Security payroll taxes confers a benefit on the taxpayer in the form of additional Social Security benefits later in life. Indeed, the Social Security Administration calls the payroll taxes “contributions,” although employers are subject to penalties and even prosecution if they fail to deliver the “contributions” on time and in the legally prescribed amounts.

Technically, a worker’s lifetime history of taxable earnings, rather than the taxes themselves, traditionally determine a person’s old-age benefits, with more lifetime earnings sometimes resulting in more benefits (this book by the longtime Social Security actuary Robert J. Myers has all the details).

A classic paper by Martin Feldstein and Andrew Samwick was able to quantify the the link between lifetime earnings and old-age benefits as it was in 1990, assuming that Social Security rules would be unchanged over the next several decades. They found that secondary earners — in their view, spouses with significantly lower lifetime earnings than the other partner — would receive no future old-age benefits as a consequence of working, but that the value of benefits to patient, primary earners nearing retirement could be significant, especially if they were married.

If payroll taxes were always the same share of taxable earnings, we could ignore the distinction between the two for the purposes of quantifying incentives to work. But payroll tax rates have varied over time, most recently with the partial payroll tax holiday of 2011 and 2012 (interestingly, the Obama administration refers to the two-point reduction as a “tax cut”). Because the payroll tax rates are higher now than in 2012, a person moving earnings from 2012 to this year would increase his payroll tax but not increase his Social Security benefits.

That’s why I count the entire payroll tax cut as an increase in incentives for as long as the cut lasted, even if the rest of the payroll tax confers the benefits that Professor Folbre contends. If all we wanted to know was the amount by which incentives changed over the last 10 years or so, Professor Folbre’s assertion about the future pension benefits conferred would hardly be relevant, unless we thought that the link between present earnings and future benefits had been changing during that time frame.

I agree with Professor Folbre that the best quantitative estimate of marginal tax rates would account for the future consequences of working in the present, but writing in 2013 I am not willing to follow Professors Feldstein and Samwick and assume that Social Security rules will remain unchanged for the remaining lifetimes of today’s workers. In one way or another, we can expect health benefits or cash benefits for the elderly, or both, to be taxed or means-tested more than they are under current law.

Democrats have suggested means-testing Social Security and Medicare, with the likely result that people who worked and saved more during their lifetimes will find themselves with fewer benefits from those programs, compared with people who worked and saved less. Republicans have proposed means-testing Medicare, as part of transforming it to a health insurance premium-support program. The common denominator here is means-testing and the marginal tax rates that go with it.

Professor Folbre is unwilling to assume that “taxpayers derive no marginal benefits from programs such as Social Security.” But that’s hardly relevant for understanding how incentives evolve over time. Based on the considerations cited above, my guess is that the effect of working in the present on future Social Security and Medicare benefits was once somewhat positive (primary earners) or zero (secondary earners), and for primary earners has become less positive (or even negative) over time. By approximating these changes as zero, my work has thereby understated the amount by which marginal labor income tax rates have increased since 2007.

Regardless of whether redistribution is achieved by collecting more taxes from families with high incomes, providing more subsidies to families with low incomes, or both, an essential consequence is the same: a reduction in the reward for activities and efforts that raise incomes. New and revised federal programs do exactly that, in myriad ways, and will be doing so for the foreseeable future.

Monday, October 28, 2013

New Video on the Affordable Care Act and the Labor Market

2014 Marginal Tax Rates without the Individual Mandate

The odds of a one-year delay of the individual mandate have been rising since October 1. The work I did in August 2013 assumed that the individual mandate took effect 1/1/2014 as scheduled by the original law, and that the addition to marginal tax rates on that date would average 3.7 percentage points. Table 5 gives some of the details of the derivation.

The colored circle and rectangles show the ingredients that would change if the individual mandate were delayed beyond 12/31/2014. The red circle entry would become zero, which by itself would reduce the bottom line from 3.7 percentage points to 3.6 percentage points.

I based my estimates of the green rectangle's three parameters on rollouts of Medicare, Medicaid, and ARRA COBRA subsidies, none of which were supported by an individual mandate. Moreover, the most important of the three entries is the first one, representing unemployment, and I expect that the individual mandate will not apply to many unemployed people anyway. Arguably the green rectangle's entries would be the same without or without the individual mandate.

The blue entries are based on expectations of take-up of the exchange plans among workers who are not offered affordable coverage at work. Perhaps they would be cut by one third by eliminating the individual mandate for 2014, which would put the bottom line at about 3.3 percentage points.

[Added: If people without employer insurance do not begin their exchange coverage (perhaps because they don't have to because of the administrations new ruling) until 4/1/2014, their income between 1/1/2014 - 3/31/14 will still count toward their subsidy, but their subsidy will flow only for the last nine months of the year. The marginal tax rates from this scenario are therefore uniform throughout the year but the amount is 1/4 of the way from 3.7 percentage points (individual mandate all year) to the 3.3 percentage points with no individual mandate during the year).]

More important than the individual mandate is the take-up rate of subsidized exchange plans. If fails and take-up was 1/3 of what was expected, the bottom line with the individual mandate would drop from 3.7 to 1.8 percentage points (see especially Table 8 of my paper). The health of and the health of the labor market are inversely related.

Since October 1, Obamacare has created positive social value

The best industrial organization economists understand that products have many attributes. Coca-Cola is not simply a substance for quenching consumers' thirst. Consumers value its brand image, familiarity, packaging, etc., which is why it dominates competing sodas despite tasting the same.

I urge Obamacare critics stick to legitimate critiques rather than fabricating them through economic misunderstandings. For example, was supposedly built at a cost of over $600 billion. Although I agree that has delivered hardly any value by enrolling (a handful of) people in health insurance, we cannot conclude that the social value created by Obamacare since October 1 has been negative.

First, the social purposes served by go beyond enrolling people in health insurance, just as the social purposes of Coca-Cola go beyond quenching thirst. I am no fan of Obamacare and thereby don't bear the burden of proof of said value, but can point to entertainment value as an example. Many times lousy unknown films make $50 million in a few months, and that understates the social value created because intellectual property like films cannot monetize all of the social value. I'm confident that has created more aggregate entertainment than, say, The Smurfs 2 or The Last Exorcism Part 2, which, in the span of a few months, each generated social values in the $20-120 million range.

Millions of Americans are chuckling over videos like these:

You might say that the enjoyment is offset by the pain experienced by Obamacare supporters when they view such videos. But as of October 1 there weren't that many Obamacare supporters (why would NBC and other major networks feature this kind of entertainment if it were offensive to half of the potential viewers?), and the few of them who exist can and do choose to ignore the allegedly major problems with

Like international trade, farce is usually a positive-sum game. My best guess is that the entertainment value generated by during October 2013 is about $200 million, with more value forthcoming, albeit at a diminishing rate.

Second, didn't cost $600+ million to build. Nobody knows for sure (that's part of the entertainment value!), but appears to cost $125-150 million. If created value only via entertainment, it has already generated a surplus in the neighborhood of $50 million.

As I said, has still more valuable product attributes. Somebody needs to quantify the value of reminding the public (and economists) about "Bright Promises, Dismal Performance" better than Milton Friedman ever did. Who knows what corruption might be uncovered in the Congressional hearings -- corruption that would have persisted undetected but for

Sunday, October 27, 2013

The Power of the Individual Mandate

Copyright, The New York Times Company

If and when the Affordable Care Act is executed as planned, it will leave few members of working families uninsured.

About 31 million members of nonpoor working families are without health insurance (according to my calculations from the Census Bureau’s current population survey). An important reason they do not have private health insurance coverage is that, in one way or another, they find it too expensive. Their employer may offer health insurance, but they decline coverage because the premiums are too much.

If their employer doesn’t offer insurance, the uninsured workers are, judging from their behavior, unwilling to switch to an employer that does offer health insurance in exchange for lower cash pay (of course, finding such an employer may not be easy and may require a move across state lines, but that’s my point: getting private insurance is costly).

The Affordable Care Act has at least two provisions to make insurance cheaper to workers who have so far been uninsured, compared with what employer insurance would have cost them in previous years, and these will take effect in the next couple of years (or whenever the federal government gets its systems running, whichever comes later).

The first provision is the “individual mandate penalty” for being uninsured, which will eventually reach the greater of 2.5 percent of husband-and-wife income, or $695 per uninsured family member (up to three, with uninsured children counting half, and the $695 indexed to inflation). Undocumented immigrants are not liable for the penalty.

The penalty effectively makes insurance cheaper because people can avoid it by getting insurance. In effect, all nonpoor legal residents pay the penalty, but people who purchase health insurance get their penalty applied toward their health insurance premiums.

The law’s premium assistance tax credits are another provision that makes insurance cheaper, at least for uninsured nonpoor people living in households below 400 percent of the federal poverty line.

These two provisions are a potent combination — and might be reinforced by the prospect of Internal Revenue Service enforcement of fines due.

I estimate that nine million of those who would have been uninsured without the law will find their own health insurance to be free, or even better, in the sense that their penalty (in the years 2016 and beyond) for being uninsured exceeds the premium that they probably would pay on the law’s new health insurance marketplaces (I use the Kaiser Family Foundation calculator to make these estimates because the marketplaces are not yet operational). As taxpayers, each of these families will be helping to pay for other people’s health insurance; those taxes will be owed regardless of what the family decides about its own insurance.

Without the individual mandate, those nine million people might be tempted to remain uninsured.

Although the remaining 22 million nonpoor workers (and their dependents) will have to pay something to have health insurance, most of them will find insurance to be cheaper than it was before the Affordable Care Act. In addition to the nine million who will find insurance to be free (in the sense defined above), another 13 million will find insurance to be at least 25 percent cheaper than it was to get employer insurance before the law passed, and they are therefore more likely to purchase it.

The individual mandate is politically unpopular, and we don’t yet know how vigorously the Internal Revenue Service will enforce it. The law precludes the I.R.S. from criminally prosecuting taxpayers who refuse to pay their penalty, and on this basis some observers have predicted that the I.R.S. will collect hardly any penalties. Others believe that the I.R.S. can get its penalty revenue if it tries hard enough.

After all, banks and other private-sector creditors cannot criminally prosecute either, yet they still manage to collect from most of their borrowers. Senator Tom Coburn, Republican of Oklahoma, explains how the I.R.S. can add penalties and interest to unpaid individual mandate penalties and establish a lien against the delinquent taxpayer’s property so that, should the property be sold, sales proceeds can go toward paying the I.R.S. The I.R.S. can also press delinquent taxpayers for payment.

The Affordable Care Act prohibits the I.R.S. from filing a Notice of Federal Lien, which would give its lien priority over other liens, but, again, that makes the I.R.S.’s collection toolbox more like the toolbox that private-sector creditors have.

For all of these reasons, the individual mandate can be enforced and thereby help discourage millions of people from going without health insurance.

Wednesday, October 16, 2013

Aging, Taxes, and the State of the Labor Market

Copyright, The New York Times Company

As people age each year, that tends to increase average ages. At the same time elderly people die and babies are born, and that tends to decrease average ages. The combination of these two forces can keep the average population age constant over time.

The baby boom from the late 1940s to early 1960s changed this calculus, because the number of babies born in those years was well above normal. Average ages fell when the baby boomers were born, and have risen thereafter because the baby boomers’ birthdays tended to outweigh the arrival of subsequent birth cohorts.

For decades, people tended to reduce the amount they worked – especially through retirement – as they reached 62 and beyond, because their health declined, they became eligible for Social Security, they wanted to spend time traveling or they looked forward to extra time with grandchildren. Still, retirement behavior need not reduce total workers per capita because people turning 62 can be replaced by young people coming into the work force.

In about 2008, the first baby boomers started to reach normal retirement ages. Their numbers are so large that the people coming out of school are too few to fully replace them. This historically unusual rate of population aging is expected to reduce employment per capita.

You might say that the natural rate of employment has been falling in recent years, for labor supply reasons that have nothing to do with the recession, financial crises and other economic events.

For this reason, in my book and elsewhere I look at labor time series that are adjusted for population aging. The chart of work hours per person below is an example. The chart is on an index scale, with the last month before the recession normalized to 100. An index value of, say, 90, means that hours per person were 90 percent of what they were in December 2007: a drop of 10 percent.

Calculated with data from the Bureau of Labor Statistics, the Census Bureau and the Bureau of Economic Analysis

The red series shows that, without any adjustment, the labor market is still about 6 percent below what it was: less than half recovered from its 10 percent drop. But the recovery is more significant if we adjust for age: the gray series had reached 96.3 by August 2013.

In other words, two of the six percentage points of the current depression of the red series is a consequence of population aging between 2007 and 2013. Because the Federal Reserve and other policy makers cannot stop the aging process and the labor supply shifts that go with it, they should understand that their job of helping recovery will be finished before the red series gets back to 100.

Economists disagree about many things, but they seem to agree with the basic idea that the lack of recovery is partly attributable to population aging, and that policy makers cannot stop the aging process. Paul Krugman, for example, notes that we need to adjust for demographics. He uses a slightly different adjustment, but his measure and mine agree that population aging by itself depresses the usual labor market indicators by 1 or 2 percent.

But aging is not the only change affecting labor supply. Marginal tax rates have increased five percentage points since 2007 and will increase another five percentage points over the next 15 months, a trend attributed especially to expansions in health and other safety net programs. By 2015, a typical worker will keep only half of the value created by employment, compared with 60 percent kept before the recession.

Economists have traditionally recognized that a 17 percent reduction in the reward to working (from keeping 60 to keeping 50) would significantly contract the labor market, and do so at least as much as the 2 percent that the aging of the baby boom does. Yet this time many economists are reluctant to acknowledge marginal tax rate increases, even though marginal tax rates affect labor supply in many of the same ways that aging does.

Perhaps the economists who are silent about marginal tax rate hikes are worried that acknowledging the new rates would overshadow their well-intentioned origins: helping the poor, the unemployed and people without health insurance.

Professor Krugman, for example, says life is too short for him to look closely at my criticism and at the marginal tax rates I’ve measured, and doesn’t indicate that he’s looking at anyone else’s measures either. He’s not the only one: I have visited several Federal Reserve banks since 2009, and hardly any of the economists there seemed to be aware of what’s happening to marginal tax rates.

The Federal Reserve cannot reverse the tax rate increases any more than they can reverse the aging process. Perhaps Congress should ask Janet Yellen, nominated as chairwoman of the Federal Reserve, what she knows about changes in tax and retirement rates, and what they say about the future of the labor market.

Tuesday, October 15, 2013

People are already advised to reduce their income

One of the myths about explicit and implicit taxes is that Americans have no clue what's going on, and cannot react to tax rates of which they are purportedly ignorant. That's wrong on many levels, one of which that less than two weeks after the Obamacare launch, personal finance columnists began advising readers to watch their income and consider cutting it in order to enhance their subsidy.

You might attempt to reconcile these two by assuming that nobody reads such columnists, except that the one column I linked has been shared thousands of times on facebook and I assume read by tens of thousands.

HT Tom Daula

Wednesday, October 9, 2013

Two posts on the sales tax and work incentives

If you want to measure the incentive for working, the sales tax needs special consideration.

(A)  Arithmetic.  Think of it this way:

(Disposable income) = (Total income) - (income taxes) - (sales taxes)

Sales taxes are levied as a percentage s of one's disposable income: namely, when you buy a dollar's worth of items at the store you get an extra sales tax charge of s dollars. Income taxes are, for simplicity, a fraction t of income. We have:

(Disposable income) = (Total income) - t*(Total income) - s*(Disposable income)


(Disposable income) = [(1-t)/(1+s)]*(Total income)

(B) Labor supply behavior.  In order to understand how labor supply behavior changes in response to tax rate changes, to a first approximation all we need to know is the percentage change in [(1-t)/(1+s)]. Over the past 10 years, U.S. sales taxes (levied at the state and local levels) have hardly changed, which means that the time series for t, which is what I showed in my WSJ article, is all we need to calculate the percentage change in [(1-t)/(1+s)].

John Cochrane explains this further on his blog. Today I gave an example, from the U.K., where sales tax rates were NOT constant.

The U.K. example also reminds us how the sales tax is included in the CPI so that, if you do have a marginal tax rate measure inclusive of the sales tax, you should NOT multiply it by a real wage deflated by the CPI because that would double-count the sales taxes. The MTR series that I showed in my WSJ article (and available here in excel format) does not include sales taxes, and therefore can be multiplied by wages deflated by the CPI.

Indeed, economists researching wages should make this multiplication more often than they do (which is hardly ever), because taxes are part of the functioning of prices in the labor market.

(C) Welfare analysis.  If you want to calculate the new deadweight losses from new income taxes, you have to consider the sales tax and any other other wedge between total income and disposable income, even if the sales tax were constant over time, because the behavioral changes avoiding the new income taxes have the side effect of reducing sales tax revenues.  That's what I do in the small section of my book (Appendix 4.3) that quantifies labor market deadweight losses.

Public Policy and Wages in the US and UK

Copyright, The New York Times Company

Between 2009 and 2011, the value-added tax in Britain increased to 20 percent from 15 percent. (The value-added tax is essentially a national sales tax.) Because the tax is part of the overall price of essentially anything bought in the country, it was no surprise that the rate of inflation of prices on consumer goods was elevated during those years as businesses passed on the cost of the taxes they paid to their customers.

In many circumstances, wages roughly keep up with consumer price inflation as the sellers of consumer goods use their extra revenue to compete for workers. But wage inflation is not guaranteed when consumer price inflation comes from sales tax increases, because the extra revenue goes to the public treasury in the form of sales tax receipts rather than going to the sellers of consumer goods.

In this way, increasing the sales tax rate to 20 percent from 15 percent should reduce real wages by 4 or 5 percent. (By real wages, I mean the resources that a person has as a consequence of working after taxes, subsidies and inflation. Because of taxes and subsidies, those resources are less than the aggregate economic value created by working and less than the cost to employers of having employees on the payroll.)

A recent study of wages in Britain confirmed this: inflation-adjusted wages fell 4 or 5 percent in Britain between 2009 and 2011.

While British workers saw their purchasing power eroded by the sales tax increase, the unemployed did not, because unemployment benefits in Britain are automatically indexed to inflation. Additional inflation of 5 percent meant a 5 percent rise in unemployment benefits. By giving a raise to the unemployed without giving a raise to workers, the added sales tax in Britain reduced the reward of working.

The United States does not have a national sales tax. A few states did increase their state sales tax rates between 2011 and this year (others decreased it), but the national average increase since 2007 has been only a couple of tenths of a percentage point.

Nevertheless, adjusted for taxes, subsidies and inflation, wages are lower in the United States, too. As I showed in a post last year (see especially the second chart), public policies in the United States reduced real wages by increasing the incomes of unemployed people through new unemployment benefits, food stamp expansions and other increases in benefits of the social safety net.

As long as the United States and Britain retain their wage-depressing public policies, neither country should expect its labor markets to return to what they used to be.