Economist: It would be terrible if people stopped depending on their employers for their health care.

Casey Mulligan says if the law actually applies to Congress, look for it to be far too bountiful, in a Speenhamland kind of way (see also Polanyi). The state, it seems, must do all it can to avoid producing healthy shirkers amongst the general populace, even if that requires dispensing a certain amount of injustice. A sad commentary on both human flourishing and the rule of law, is it not?  Excerpts:

To promote economic efficiency and the goal of universal health coverage, perhaps members of Congress should not be required to enroll in the new insurance exchanges.

...Because members of Congress are accustomed to high-quality medical care provided to them through federal employee benefit programs, one might expect that they would push for top quality care to be delivered through the exchanges too.

...If the exchange plans were good enough, people who are rushing to find a job, and people considering leaving their job, would no longer have to see employment as their only means of obtaining top quality, subsidized coverage. As a result, some of those would work less (see the Congressional Budget Office on some of health reform’s work incentives, and a 1994 explanation from Alan Krueger and Uwe E. Reinhardt). 

...Although politically incorrect and perhaps unfair, allowing members of Congress to keep their federal employee coverage might be the best thing for universal coverage and reducing the impact of the Affordable Care Act on the federal budget. 

Rosenbloom on proven incentives to get offshore cash back home

David Rosenbloom has a great letter to the editor in Tax Notes today [gated], excerpts:

Recent press reports describe a large increase in January tax receipts as taxpayers shifted substantial amounts of income forward into 2012 in order to avoid the higher taxes anticipated for 2013. 

...We have been told, again and again, that there must be lower tax rates on accumulated foreign earnings in order to provide an appropriate incentive for U.S. multinational companies to repatriate the enormous sums they hold offshore.  

...It turns out that incentives can be created just as well by raising taxes as by lowering them. 

Who knew?

Nice. Empirical evidence that to get cash repatriated, the trick is to raise taxes with enough lead time for companies to move thing around. Best part: this process is totally repeatable next year.

No sugar industry sans big gov

From Tim Carney: 

Last fiscal year, Americans paid about 69.9 cents per pound of refined sugar. The world price was less than 27.8 cents. 

Why is that? Why, industrial policy/central planning of course: state-provided infrastructure, subsidies, import quotas, tariffs, etc. But according to the beneficiaries of all of this central planning, it's not all the planning.  It's global competition from mercenary states that don't have things like...wait for it....labor and environmental protections!

"Go down to Brazil," [anti-NAFTA sugar farmer James Dickson] says. "Check out the working conditions." Brazil's labor costs are much lower, and so are its environmental regulations. "They do stuff to their sugar we would never do."

Carney says not so fast, there's plenty of that to go around:

The federal government also made it possible for the industry to get cheap labor from the Bahamas and Jamaica. Through the British West Indies program, which was created during the Great Depression, "the United States government played a direct role in negotiating employment contracts for offshore laborers," explained Everglades historian David McCally. Uncle Sam even paid to ferry cane-cutters from the islands to Florida. 

The guest-worker program put in place exploitative pay levels and work rules. For its part, Florida helped the industry by making it difficult or even illegal for cane cutters to quit. One farmer, lobbying the USDA against allowing Puerto Rican cutters, explained his reason: "Labor transported from the Bahama Islands can be deported and sent home, if it does not work, which cannot be done in the instance of labor from domestic United States or Puerto Rico." 

All of this was the subject of a little known film called H2 Worker by Stephanie Black (who also produced Life and Debt, a must-see for anyone interested in development economics) which you should watch if you haven't yet, even though it is admittedly quite slow in parts.

Carney concludes:

Florida sugar cane is an industry literally built on big government, and growers know it will wither in a free market.

Not literally. But otherwise true enough.

Precedents for selling sovereignty

This is an interesting take on the Honduran charter cities (which I view as just a super-charged gated community or free zone), finding historical precedents in the longstanding and uncontroversial tradition of sales by states of parts of their territorial jurisdiction:

The first point is that international legal precedent affords us an abundance of examples in which states freely exchange sovereignty over territories for money. Most Americans will have heard of the Louisiana and the Alaska Purchases, of course, but there are also less well-known cases: Woodrow Wilson’s purchase of sovereignty over the Danish West Indies in 1917, for instance. Europeans may recall cases closer to home. Here one thinks of Prussia’s purchases of sovereignty over Lauenburg and Jade Bay. Last, but not least, there is Asia, where, among other cases, Britain recently concluded its ninety-nine-year lease for sovereignty over the New Territories and Kowloon extension in Hong Kong.

...The Honduran debate grows still more interesting when one considers its theoretical relevance to today’s highly indebted states. Should people, or rather their elected representatives, be able to treat parts of their state’s territory as assets in transactions?... Statesmen have often answered in the affirmative during the twentieth century; indeed, on occasion they have alienated their own territory as a path towards fiscal salvation ... without the direct majority consent of the people affected by the transfer. Nonetheless, all the transactions have been held to be perfectly valid in international law.

The author gives some more contemporary examples: one scholar has suggested that Greece could reduce its debt by selling jurisdiction over some of its islands; US "Special Operations Command" (I have no idea what that is) recently opined that jurisdiction was “a commodity driven by market-like forces” that will go to the “state, organization, corporation, tribe, gang, etc. that can best meet individual security, economic, and demographic interests.” He forgot to add, at the lowest cost, naturally. He concludes that there is plenty of precedent for states to buy jurisdiction and sovereign rights from the recognized “owners.” He concludes:

Whatever the orientation of Honduras and its court system in the twenty-first century, these precedents attest to the existence of a marketplace open to all. 

Thinking about statehood as a commodity with owners that can auction it off--disturbing, especially because what then are the humans. In particular, what then are the humans in the designated for-sale zone. Spoils of war capitalism?

The cost to Canadians of pension splitting

We had a lively discussion over Lisa Philipp's paper today, during which a question arose regarding the cost of pension splitting to the budget, i.e., how much does pension splitting cost as a matter of tax expenditure analysis?  Note for non-Canadian readers, the pension splitting issue is as follows: Canada has individual filing only, no joint filing.  But for various reasons, in 2007 Canada introduced what amounts to joint filing with respect to private pension income, i.e., one spouse can deduct and the other include up to half of an annual pension income stream (some restrictions apply)--this is not for a federal pension income but strictly for income generated from private retirement savings.  A ready answer to the TEA question was not immediately found, but I've since had a look at the Tax Expenditures and Evaluations 2011 Report, found the data and made this handy chart:

So we can see that pension income splitting created a $840 million hole in the budget in 2007 and it has increased since then to about $925 million.   In class someone pointed out that pension splitting rule incidentally increased the value of a related tax benefit, namely the pension income credit, i.e., the amount of pension income a taxpayer is allowed tax-free (currently $2,000).  Sure enough the TEA report explains in fn 39: "The introduction of pension income splitting in 2007 increases the number of individuals claiming the Pension Income Credit and thus increases the value of this tax expenditure (i.e. spouses who previously did not have pension income)".  Putting the two pension benefits together yields this:

So we can see the cost of the credit increased by about $110 million in 2007, dropped a bit in 2009 and by 2011 was again about $100 million higher than it was in 2006.  It therefore seems plausible to attribute about $100 million of the credit's cost to the pension splitting rule, bringing the total TEA cost of the latter to about a billion per year.

That is about 0.4% of the total annual budget (which is currently about $245 billion) or about 4% of the annual budgetary deficit (currently about $26 billion).  Not huge perhaps, but not to be dismissed as nothing, either, especially when we know there is scant policy here: this is a straight up tax giveaway for Canadians with private pensions, i.e., higher income retirees.  Political pandering?  A quick scan of the TEA list shows it is in the league, TEA cost-wise, of the working income tax benefit and the medical expense tax benefit.  I am now very curious how many Canadians share the pension splitting benefit, both alone and in comparison to other tax expenditures.  I don't know how to find that though, so will leave the discussion right here.

Sub-primal scream therapy

Let's get the week started off right.

"See, if you blame your parents, you see it's not your default."

"I just want this to end, I just want some, some..." "Foreclosure?"  "Augh!"

Elites call for higher taxes in France, stamp feet when their wish is actually granted

Its fascinating to me that elites will only accept high marginal tax rates for purposes of destruction, namely, war.  When it comes to building something, a marginal 75% tax rate on top incomes is seen as outrageous and out of the question-no sane person could support it.  Tax resistance is really anti-social in that way.

MRU lectures on development

From Marginal Revolution:

At MRUniversity we just released over 30 new videos on leading thinkers on development. We cover Amartya Sen (who gets three), Bela Belassa, Karl Polanyi, Adam Smith, Paul Romer, William Easterly

 I'm glad to see Polanyi on the list, and right beside Adam Smith, precisely correct (though in their full listing the two are separated by Schumpeter and Gerschenkron, fair enough.  As to Easterly I am not as enthusiastic but I will watch it anyway.  Also on the list: Krugman, Stiglitz, Ostrom, Rodrik, Acemoglu, Banerjee, Collier, more.  Yes, the list is almost wholly male--only Ostrom, Anne Kreuger and Esther Duflo are included and all three are American (ok, Duflo is also French). Nevertheless it looks like a fascinating series.

Trickle down government...wha??

I'm still scratching my head over this. So...is trickle down nonsense now? Or is it affirmed as solid doctrine, but bad if it involves government? Is it an argument that government should inure to the benefit of the top, whose contributions to society will have the effect of trickling government largesse down to the 47%? Or is it to say that government programs aimed at the top are no good because they will (or will not?) trickle down? I'm stumped.

Expensive to be poor: dental edition

From Propublica, a look at dental treatment for the poor.  First, medicaid pays so little that many dentists won't accept medicaid patients at all; second, when they do accept these patients, they exploit them ruthlessly to extract every possible dollar, either from medicaid or the patients themselves or both.  For those without access to dentists, the Romney plan (emergency room care for all) doesn't appear quite workable:

Not that many dentists actually accept Medicaid. There are some states where the reimbursement rates are so low that even the chains don't go there. Like in Florida, for example, the Medicaid rates are so low there that chains don't really even bother. So children end up going to the emergency room because they have a toothache and there's nothing else they can do. They end up in hospitals to treat a tooth. 

There was a famous case in Maryland where a 10-year-old boy had a toothache and it was abscessed and he ended up dying because he didn't have a dentist.

But for those lucky enough to find a dentist who will take them on, the situation seems only marginally better: instead of dying, you get this:

We looked at two of the larger [dental] chains, and found evidence that these companies were putting pressure on their dentists to produce at certain revenue targets, thus encouraging them to do procedures that may have been unnecessary.

... One of the chains focused on kids on Medicaid, and the reimbursement rates for Medicaid are pretty low. So in order to get a lot of revenue from these patients they were doing things like taking x-rays that were not needed, or putting stainless steel crowns instead of fillings on their teeth. They could make twice as much money from Medicaid on these crowns versus just putting a filling on a tooth. Kids were getting treatments that they really didn't need.

...We had one example of an 87-year-old woman who had already been to the dentist and she went in to have two teeth pulled, thinking it would be cheaper at [New York-based] Aspen Dental. Instead they looked at her mouth and they came up with a treatment plan that was going to cost $8,000. They convinced her though hard-sell tactics to borrow that money through a credit card, and something like $2,000 of that was just to clean her teeth. (Aspen Dental's response is here.)

How do these dentists sleep at night?  Well, they have big loans to pay off, you see:

These days, when dentists get out of dental school, they often owe anywhere between $200,000 and $300,000 dollars. Dental school is actually more expensive than medical school. So they come out with these huge debts, in a lot of cases they can't really afford to start their own practice. 

These dental chains hire people, a lot of the time right out of dental school, and they pay fairly decent salaries and they have a bonus system where the more work you do on a patient the more you get paid. That's true for a private dentist as well, but the difference is that these companies are owned by private equity firms, and they're managed in a different way. You have people who are not dentists coming up with a business plan that's based on metrics. They try to get new patients in who haven't been to the dentist in a while, and they've already calculated how much revenue the average new patient should generate. 

If you happen to go in and you don't really have anything wrong with your mouth and you're a new patient you're not fitting the model. That creates pressure for the dentists to find things that are 'wrong.'

The report goes on to show that the problems are mostly undetected because there is insufficient oversight.  A scholar who works on corruption in governance once told me that the recipe for corruption is greed plus opportunity.  You can't stop greed, he said--that's human nature.  But society has got to find ways to curb opportunity.  That's after all one of the main reasons to form a society at all--namely, to curb the human animal's propensity to exploit and destroy one another for personal gain.  For more on this issue, you can watch "Dollars and Dentists" at PBS.

Underground Economy in Canada, 1992-2009

Interesting stats, suggesting that the underground economy is not currently growing in Canada.  The CRA is careful to say that the UE is not an estimate of the tax gap, but CRA will look at these stats in light of the need to ensure everyone is "paying a fair share."  I'm only aware of an official statement of a "tax gap" by the U.S. and U.K.   

Private vs Public Healthcare Systems

Here is an interesting paper on private vs public health care systems in low- and middle-income countries, published earlier this year in PLOS Medicine, an open-access medical journal, in which the authors find that private systems don't deliver better efficiency, accountability or medical effectiveness in comparison to public systems.  But they might be faster and nicer to you in a private care system.  From the paper:

Introduction
Private sector healthcare delivery in low- and middle-income countries is sometimes argued to be more efficient, accountable, and sustainable than public sector delivery. Conversely, the public sector is often regarded as providing more equitable and evidence-based care. We performed a systematic review of research studies investigating the performance of private and public sector delivery in low- and middle-income countries. 

Methods and Findings
...Comparative cohort and cross-sectional studies suggested that providers in the private sector more frequently violated medical standards of practice and had poorer patient outcomes, but had greater reported timeliness and hospitality to patients. Reported efficiency tended to be lower in the private than in the public sector, resulting in part from perverse incentives for unnecessary testing and treatment. Public sector services experienced more limited availability of equipment, medications, and trained healthcare workers. When the definition of “private sector” included unlicensed and uncertified providers such as drug shop owners, most patients appeared to access care in the private sector; however, when unlicensed healthcare providers were excluded from the analysis, the majority of people accessed public sector care. “Competitive dynamics” for funding appeared between the two sectors, such that public funds and personnel were redirected to private sector development, followed by reductions in public sector service budgets and staff. 

Conclusions
Studies evaluated in this systematic review do not support the claim that the private sector is usually more efficient, accountable, or medically effective than the public sector; however, the public sector appears frequently to lack timeliness and hospitality towards patients.  

The incentive structure is interesting and echoes thoughts I've had before on privatizing water and waste disposal.  This study is not about high income countries, but the health care cost difference between the US and the rest of the high-income world suggests the findings might translate beyond the sample studied.

Dutch people must pay to throw it away

MR reports:

The Netherlands is rolling out some 6,000 smart garbage cans that can only be used when residents scan an RFID-enabled ID card.  Besides monitoring just how much trash someone disposes of, the cans will also measure and charge the user based on how much refuse they tossed.

Tyler Cowan responds: "I don't think this will do much to encourage littering or illegal garbage disposal.  It may encourage the purchase of less packaging and waste."  But why would this kind of tax not encourage avoidance and even evasion?  Is this a culture argument?

Do tax cuts lead to economic growth? Again, No.

Following on the report on state tax incentives, here is another report, this time from the Congressional Research Service, on the topic of taxes and economic growth.  David Leonhardt reports that the CRS finds that "changes over the past 65 years in the top marginal tax rate and the top capital gains tax rate do not appear correlated with economic growth."  

Do state tax incentives increase economic growth? No.

Taxprof points to this paper by Kenneth Meier and Soledad Artiz on whether state tax incentives actually deliver the economic growth their advocates consistently promise.  Their answer is no:

"Contrary to expectations, business taxation shows a significant positive relationship with the growth rate of GSP, implying that lowering business taxes may actually be harmful to the overall state economy. ... 

Rather than boosting the economy as expected, in reality these policies have been associated with a decrease in the growth rate of GSP and resultantly economic decline. Likely, although these policies bring in businesses, these businesses are not generating growth. This could also stem from the fact that a decrease in taxation limits the state’s ability to provide public services: a necessary component of a strong business climate. Overall, the most conservative interpretation of these results is that decreasing business taxes will not generate an increase in GSP."

Yet I don't expect massive changes in tax policy, because as the authors state, tax incentives = economic growth is a matter of faith:

The belief that tax rates affect business decisions, which in turn influence economic growth, is virtually universal among state politicians...

Although the theoretical support for a negative relationship between business taxation and economic development seems clear, few empirical studies have documented this relationship... 

Even though a negative relationship between business taxation and economic development is theoretically expected, empirically this relationship is still unknown.

There are thirty pages of appendix in the article, but somehow I doubt the data will alter the politics.

Moving McJobs-ward: more jobs but smaller paychecks, plus stagnation in pay equity

There's always plenty of talk about how many jobs have been saved or created but not nearly enough of what kind of jobs there are.  That's because quantity is relatively much easier to articulate than quantity and by articulate I mean "use for political purposes."  But today, NPR has this:

and this:

NPR says nothing about the gender pay gap, but isn't it amazing that since...oh, somewhere in the late 80s I guess (the graph inexplicably has no bottom axis but indicates it covers 1967-2011, but the tick marks don't seem to add up right), the two lines stop slowly coming together as they had been, and start moving up and down in sync, apparently perfectly preserving the inequality?

Also for the top chart, I note that of all male workers, 71% are currently in full time jobs now, versus 68% in 1967, while for female workers about 60% are currently full time, versus 43% in 1967.

NPR's  point is that "while high unemployment remains a big problem for the U.S. labor market, it's not the only problem. There's also a long-term stagnation in real earnings for people who have jobs."

Moreover one full time job with middle class wages, sick pay, vacation pay, health care benefits, and a pension plan is not equal to one part time job at minimum wage with no benefits of any kind.  And the trend is indeed McJobs-ward.  Yet the raw number is the primary message of the monthly obsession over job creation/savings.

The ultimate gated community is just a free zone with a new name

MR cautions not to "equate charter cities with extraterritoriality": a charter city works either "because a dominant hegemon — perhaps at a distance — supports the external system of law" or because "the external system of law serves up some new and especially tasty rents to domestic interest groups."  Either way, the charter city is not sovereign, rather some established sovereign is exerting control.  So a charter city is really just a free zone: another experiment in relaxing regulation that Honduras has already tried (along with many many countries, yes, including the U.S.), this one just has a name that taps into some emotional sentiment having to do with freedom and choice and entrepreneurialism.  If Honduras just called this another free zone project, perhaps few would take notice or wonder about it.

As this is just a new name for an old idea, it should not be surprising how quickly we see the familiar accountability/transparency issues pile up.  MR points to the Guardian, which reports:

Plans to create a neo-liberal start-up city in Honduras with its own laws, tax rules and police force suffered a setback on Friday when the economic guru who inspired the project said he has been unable to act as its guarantor and watchdog. 

...days after the deal was announced, Romer said he had not been given the powers and information necessary to fulfil his role as chairman of the transparency commission, which is meant to ensure governance of the new development zones.

Romer said he and four other international figures were appointed by presidential decree to the commission, which has wide-ranging powers to appoint and fire governors, nominate judges and hire auditors in the proposed new zones. But the five will issue a statement distancing themselves from this week's announcement and calling into question the legality of their appointment, which they say has not been published in the official gazette as required by Honduran law, ostensibly because of a challenge in the constitutional court.

Free zones have been around for a long time, they have been studied extensively, and they don't have a great track record, most especially when they lack major up front governance policy planning.  Calling the project a charter city won't avoid these difficult problems.

As an aside, I notice that the Guardian puts a price tag on the deal: a business consortium called NKG is paying $14 million for its city.  Who is NKG?  Not the Northern Kite Group or the Neumann Kaffee Group, I suspect.

 

 

Choosing Austerity

Menzie Chinn says the austerity being imposed on Greece, Spain etc is self-defeating, while in the US the states are voluntarily choosing austerity, to their own GDP detriment, in order to reduce the state for political reasons.  More:

...the approach of muddling through, dealing on an ad hoc basis with each crisis with aid conditioned on fiscal consolidation, is not working. It's not working partly because in the demand determined models we teach in intermediate macro work cutting government spending and raising taxes tends to depress output, as highlighted in this post. But when the countries affected are closely linked by trade, then the total effect of the contractionary policies conducted in individual countries results in even greater contraction.

Had these economies been on floating exchange rates, the contractionary effects might have been mitigated by depreciated currencies. But membership in the eurozone meant that shock absorber was gone. That is why the prospect of an expansionary fiscal contraction was never very plausible in the case of the GIIPS. But as long as the rest of the eurozone countries were unwilling to provide substantially more financing or transfers to the GIIPS, these governments had little alternative to fiscal consolidation. That is the fate of many, many countries that have faced IMF stabilization packages in earlier decades.

In contrast, the U.S. has currency flexibility so it can save itself, but the states chose austerity, and Chinn shows this has led to lower GDP growth.  Chinn says:

In contrast to Europe, the choice to slash spending and taxes was unforced. In the absence of tax cuts, spending could have been maintained at higher levels. Furthermore, the Federal government had the resources to further support the state and local governments. 

...Truly, much of the distress at the state and local level is essentially a self-inflicted wound, that allows a push for smaller government to proceed under the guise of austerity. 

Charts and more analysis at the link.

Higher Taxes Correlate with Prosperity

Taxes are one of three pillars of prosperity.   From Marginal Revolution:

In a recent book Besley and Persson 2011 argue that fiscal capacity is strongly correlated with economic performance across countries (see also here and here). They cite important historical work by Mark Dincecco who has shown that across Europe, between 1650 and 1900, higher taxes were associated with both limited government and economic growth (see here). The following graph is from Dincecco (2011) which contains similar figures for other European countries.

MR eyes this a bit warily, saying the correlation might be due to selection bias and incomplete data:

Modern states did not emerge out of nowhere.  They replaced pre-existing local systems of taxation, patronage, and rent seeking. ... There is plenty of evidence that these local systems imposed large deadweight losses [so] an increase in the measured size of central government need not have been associated with an increase in the total burden of government.  Rather the total deadweight loss of all regulations and taxes could have gone down in the 18^th and 19^th centuries, even as the tax rates  imposed by the central state went up. 

I am not sure but think this means that MR thinks that revenues could have been higher in the local system period than the data suggest?  Then MR adds a note about what caused revenues to increase:

Note: the increase in per capita revenues in England depicted in the figure is largely driven by higher rates of taxation (notably the excise) and more effective tax collection and not by Laffer curve effects (although the growth of a market economy during the 18th century did make it easier for the state to collect taxes).

So higher rates and better tax collection led to more revenues to be collected.  The Laffer thesis more or less says that low rates lead to more tax revenues since low rates produce more growth and more growth increases the base to be taxed, while higher taxes drive people out of the market and end up lowering revenues.  Leaving aside the evidence (or lack thereof) for the accuracy of this thesis in practice,  I take it that MR wants us to understand that revenues did not rise as a result of increased growth producing a bigger base and therefore more revenues at the same low rate as before, but rather England raised its tax rates and collected more taxes as a result.  Laffer doesn't seem to have played any role so I'm not sure what the point is of bringing him into this at all.  All in all I am finding MR more than usually confusing the point with this note, but I appreciate that they alerted me to the book.  Better just to read that, I think.

Must Read: Factual Free Market Fairness

This is required reading for anyone interested in markets, governance, and human flourishing.  Dierdre McCloskey never disappoints.  I won't even bother to excerpt because you just have to read the whole thing.