Baselines Matter for Comparisons

I read an opinion piece by Samuelson in today's Washington Post that I found interesting but a bit strange. In it, he tried to show how both the left and the right could learn from Sweden's approach to insure higher growth. I agree that making the comparison is a beneficial exercise for thinking about US policy, however I find some of the specifics baffling.

In particular, he mentions benefit reductions, weakening union power, and market deregulation as something the right would embrace about Sweden's economic reforms and supposedly something we could learn as well. He states that about a third of deficit reduction came from higher taxes, I'd guess the implication is the rest came from cut spending (I'm feeling too lazy tonight to look up the precise figures, it is plausible that economic growth, probably export led, may have also been credited aside from spending cuts and taxes).

I have some doubts about the comparison as it is presented. Sweden was spending an enormous amount of its GDP on social transfers, I have no doubt that cutting some of these transfers was socially efficient in Sweden. Also, Swedish unions were highly powerful, weakening them may have been beneficial.

The US, however, has one of the smallest states in the developed world as measured by either spending or taxation. We also have very low social transfers and weak unions. Because of a different baseline, it doesn't follow that copying Sweden's reforms would spur our economy the same way, we have a very different starting point.

It probably is true that our composition of social spending needs to change drastically, I advocate for this rather frequently, but it doesn't follow from the success of Sweden's reforms that transfers have to be reduced here, where they are already lower (though selling a presentation in Washington probably requires throwing a bone out to say it does). I find it impossible to figure out how we could improve the work incentive aspects of our social spending in this country without substantially raising transfers, we simply spend too little to not run into increased costs as we broaden the base of people receiving benefits, which is a necessary step if we intend to increase work effort while lowering poverty.

I don't disagree that the US can learn a lot from Sweden or that Sweden probably doesn't have a few things to learn from the US (though the seem to be paying more attention and have learned rather a lot of what we have to teach already). However, learning in either direction takes acknowledging the differences in starting points rather more explicitly, Sweden remains has one of the top five biggest states in the developed world while the US is among the five smallest (by taxation and excluding the very smallest developed countries that aren't really comparable). Of the conservative goals mentioned by Samuelson, the only ones that I see as being applicable once different starting points are acknowledged is balanced budgets becoming a popular goal and base broadening. As for the rest, I think the Swedish model shows that we're already on the other side of efficient regarding them rather than them being something that needs to be decreased. All the comparative evidence tends to lead me to thinking that many government's in Europe are too large and powerful and need to be reduced while many US problems originate in too small and weak of a state. Starting points matter and we're in almost a precisely opposite place that Sweden was during its economic crisis in regards to unions, transfers, and income tax levels (specific policies may be more similar, I have broad categories in mind).

Budget Committee Inequality Report: Taxes

 Paul Ryan makes a number of claims about the tax system, below I quote his major points:

The 1986 tax reform, by cutting top rates and broadening the base, caused the average federal income tax rate paid by the top 1 percent to go up; average federal income tax rates for the bottom 80 percent to fall; and the burden of the federal income tax to shift from the bottom 80 percent to the top 20 percent, especially the top 1 percent. At the same time, the incentive effects of lower rates produced a rise in taxable income and an increase in federal income tax revenues.

The results of this successful reform illustrate the folly of looking only at what is happening to tax rates when analyzing the distributional effects of pro-growth tax policy. Lowering tax rates while eliminating shelters that are overwhelmingly used by upper-income taxpayers results in a more progressive federal income tax overall, while creating the kind of economic growth that allows all income groups to prosper while incidentally bringing in more revenue to the government.

 I have a few issues with this story. First of all tax reform didn't involve just income taxes, it impacted all Federal taxes. The appropriate dataset to look at isn't income taxes alone, it's all Federal taxes. Looking at all Federal taxes reveals a rather different story from that Ryan is telling.

The chart below is reproduced from Piketty and Saez, "How Progressive is the U.S. Federal Tax System? A Historical and International Perspective," using average Federal taxes (including income, payroll, estate, and corporate).

Income Groups 1960 1970 1980 1990 2000 2004

Full Population 21.4  23.3  26.6  25.8  27.4  23.4
P20-40              13.9  18.5  16.3  16.2  13.1    9.4
P40-60              15.9  20.2  21.4  21.0  20.0  16.1
P60-80              16.7  20.7  24.5  24.3  23.9  20.5
P80-90              17.4  20.5  26.7  26.2  26.4  22.7
P90-95              18.7  21.4  27.9  27.9  28.7  24.9
P95-99              23.5  25.6  31.0  28.6  31.1  27.2
P99-99.5           34.0  36.1  37.6  31.5  35.7  31.3
P99.5-99.9        41.4  44.6  43.0  33.0  38.4  33.0
P99.9-99.99      55.3  59.1  51.0  34.3  40.2  34.1
P99.99-100       71.4  74.6  59.3  35.4  40.8  34.7

Pay and Elite Justifying Myth

Has anyone noticed that whenever progressive taxes are mentioned the moral right to that income is justified as being the amount produced but whenever low incomes are mentioned the value of each worker's production is considered irrelevant and instead the prevailing wage determined by the labor market justifies it?

This creates a frame where the rich are irreplaceable while those that aren't are simply commodities. But is there any good reason why we should look at things this way? The wage of those that aren't rich is considered just because it is where the wage demand of the marginal laborer lies. But why should this be any different for a CEO? Why is it just to pay him based on production rather than the marginal wage for the nearest equivalent individual to replace that CEO? Is there any truly good reason to believe the CEO is truly worth what they are paid relative to the next equivalent individual or do we simply have a cultural bias that causes us to look at employee's differently based on status. Elite workers get paid on production, whatever their value relative to the marginal individual that could replace them, the rest accept a wage determined by the market.

Social Security: Thinking about Pay As You Go

Robert J. Samuelson has a column in today's Washington Post questioning whether or not Social Security today is the program that Roosevelt wanted. I don't know the history well enough to have an opinion, but his statement that "Roosevelt rejected Social Security as a “pay-as-you-go” system that channeled the taxes of today’s workers to pay today’s retirees. That, he believed, would saddle future generations with huge debts — or higher taxes — as the number of retirees expanded," resulted me thinking about pay as you go systems. My main thought was, for an economy as large as the United States, what could a Social Security system possibly be other than pay as go?

As Samuelson points out, "in 1960, there were five workers per recipient; today, there are three, and by 2025 the ratio will approach two."

This fact remains whether or not Social Security was pay as you go. What difference would it make if it had been saved? We could perhaps have bundled dollar bills paid in into giant bales and stored them in a vault until needed, but this would do nothing but drive inflation when they were taken out. We can do this anyway through monetary mechanisms to drive production and reduce debts without the absurdity of bailing dollar bills.

Budget Committee Inequality Report: Welfare Reform

Ryan states in his report that:

According to the CBO’s study, one contributing factor to the declining share of transfer payments going to lower-income households was the decline in spending on Aid to Families with Dependent Children and its successor, Temporary Assistance for Needy Families, relative to market income. These relative declines occurred as a result of bipartisan efforts in the late 1990s to transform cash welfare by encouraging work, limiting the duration of benefits, and giving states more control over the money being spent.

At the time, opponents of these reforms charged that the reform effort would cause large increases in poverty and despair. Instead, the exact opposite occurred. These reforms cut welfare caseloads in half against a backdrop of falling poverty rates, falling child poverty rates, low unemployment, and rising income for the lowest quintile. In fact, over the period studied by the CBO, the lowest quintile’s income gains were most pronounced after the passage of the 1996 welfare reform law (see Figure 1 on page 2).

As a result of methodology limitations in the CBO’s study, this successful welfare reform effort appears to have reduced government’s role in making the distribution of income more equal, but it does not follow that welfare reform caused income inequality to get worse. In many cases, welfare checks were replaced by paychecks. The CBO report states that its analysis does not account for the incentive effects of changes to taxes or transfer programs. In the case of welfare, that means that the analysis does not account for the sea change in the incentive structure of the program that led large numbers of welfare recipients to escape the grip of government dependence in favor of gainful employment and independence.

 He goes on to state:

Creation of new means-tested entitlements/tax credits: Also, as the CBO’s study notes, the decline in transfer payments to low-income families with children was largely offset by increased spending on other means-tested programs and tax credits. In the late 1990s and early 2000s, Congress created a number of new means-tested entitlements (such as the State Children’s Health Insurance Program) and tax credits (such as the Earned Income Tax Credit, or EITC, and the Child Tax Credit, or CTC) that raised the after-tax income of lower-income households.

The EITC and the CTC are refundable credits, meaning that if a taxpayer’s credit exceeds his or her tax liability, he or she receives the balance of the credit in the form of a payment. The CBO notes that an increase in the refundable portion of these credits largely took the place of cash welfare spending, as government income-support programs migrated to the tax code and became tied to work status.

The increase in these credits was also partially responsible for the observed increase in the progressivity of the federal income tax over the period studied. The CBO study noted that “The lowest income quintile has a negative average federal tax rate because, as a group, households in that quintile qualify for more in refundable tax credits than they owe in income taxes before the credits are applied.”

Class, Resentment, and Means Testing

Reading over Ryan's Budget and Inequality reports have led me to reflect on a rather large number of things. To break out one particular issue that is recurrent in these reports is Ryan's insistence on trying to limit our welfare state to only those that really need it.

This idea is laudable at first glace, but this falls into one of those policies that I contend are bad because they lead to the formation of economic class and class resentment.  I'll use myself as an example to explain.

When I decided that I wanted to get my Master's degree, I decided to change my whole life around to get it. I left Canada so I could move back in with my parents. I got a really boring job I hated and worked at it for a year to save. I went home for one summer to save more money.

I then decided to look into what programs were out there to help me pay for it. While I had saved and was working enough to get by it really involved me pinching pennies. I found that I qualified for enough subsidized loans that I could live decently while in school.

However, I also found out that there were some grants I didn't qualify for because I had been so responsible. If I hadn't saved for a year I would have had less income and qualified for some assistance as a result of that. If I hadn't moved home, but had instead got my own place (which would have been far preferable for any young 20 something), I would have received even more grants, but the very fact I lived at home qualified me as a dependent in the eyes of New York State and disqualified me for a great deal of assistance.

My initial reaction was a great deal of resentment. Here I was, doing everything right, but if I had done everything wrong I would have received all kinds of free money. How unfair everything seemed. Why is the state rewarding bozos who do everything wrong while responsible people like me have to work so hard and don't get anything?

Years later, what I've realized is that the state would have been wasting money on me. Rather obviously, I was going to get that degree no matter what. It would require more tax dollars to pay for a degree that I was going to get anyway.  However, for a poorer individual, who didn't have family to move in with and perhaps needed to go directly to school to get away from a crowd back home that was bad for them, that money mattered a great deal. The system is set up the way it is to try to help the marginal student that needed the help to get a degree, raise their human capital, and likely pay back far more then they received in benefits to society at large (not that it is set up very well to do this, but that is separate issue), while saving money by denying assistance to people who are already doing everything right without the help. So far, so good.

The problem, of course, is that resentment I felt. Not every student denied public assistance goes on and gets a political science degree and changes their political beliefs in response to having greater knowledge (when I went in to school I was a staunch conservative, I actually favored Giuliani for awhile, but as I read more and learned more about American politics (my history and foreign knowledge were better, but I was pretty pig ignorant and tribal when it came to American politics at that point in time) my political beliefs shifted a great deal, I always took pragmatism and empirical evidence seriously, and like the author of Do-Gooders, I associated that with Conservatives at the time). Many more are going to remember that resentment they felt when they looked for assistance and couldn't get it and let that influence their political beliefs and actions well beyond the brief point in time they needed it. They'll continue to feel like the government unfairly discriminates against them and in favor of losers unwilling to put in the work and make the sacrifices that they made to get where they are. They won't think through it to realize that what the programs are set up to do is to try and get people to get a degree who wouldn't normally do so, not to give a handout to someone that was going to do it anyway.

And this sort of emotional response is basically what people will have regarding virtually every means tested program. They'll encounter programs that don't work for people that tried to save, programs that won't help people that get injured or disabled and try to work anyway, and programs that don't work for people that work hard but can't seem to quite make ends meet. The programs will reward those that have thought ahead and tried to manipulate it (Medicaid look back and nursing home costs) rather than those that follow the rules in good faith and don't try to move money around to game the system. They'll be stuck with the roommate with a free ride whose a recovering drug addict, walking out of the disability office after being denied while seeing a smelly derelict get it, and praying not to get sick while they're without health insurance while seeing the destitute homeless man surrounded by paramedics because he passed out in a bus shelter.

This is an example of what I mean by how poorly designed programs create class. On a personal level, I've felt the resentment that right wing demagogues try to exploit. I'm not proud of it, but I see on a visceral level the kind of buttons they're trying to push, I have them too. I understand why our programs are the way they are, it saves money this way by not providing responsible people with incentives to do what they're going to do anyway and instead focusing on people who were dealt a bad hand or screwed up badly.

But this also means that anyone who has tried to do everything right will see an unresponsive system whenever they need it. They'll be forced to spend down their hard earned savings to get assistance, meaning that they'll often be trapped in poverty by the time they qualify. When assistance could have changed things they didn't get it, when they do get it they feel it is too late because they're already discouraged and without hope, they feel nothing but resentment at the government by this point.

This is why I have a big problem with Ryan's solutions. He likes to decry class-based thinking, but it seems to me the programs he prefers cause it, not fix it. The small government he wants appears to me custom designed to create dependency, while the larger government he blames for it seems able to create problems that won't have the kind of dependency producing problems that result from means testing. I understand the emotional appeal of what Ryan is suggesting, but reflecting on my own emotional responses and what I've learned about the actual impacts of government programs lead me to believe that Ryan's favored methods are the cause of, and not solution to, the problems he wants to deal with. Perversity is a favorite claims of reactionaries, but I believe the data points in the direction that their own favored policies are the ones with perverse effects, and I think emotional responses such as my own explain why this is.

Budget Committee Inequality Report: Relative Inequality vs. Well Being

I'm going go through the rest of this report section by section.

This section is mostly an attempt to change the conversation. The problem with inequality is that there is a feeling that people are becoming increasingly unable to compete with the elite. The problem is that the price of goods being bought is diverging. Ryan tries to make it sound like it is absolute gains that are the problem and that the diverging costs mitigate it. But the reason that people are feeling pressured is that it is becoming ever harder to buy a house that will get one's children into a good school system, to get kids engaged in enough activities to get into top schools (how many parents try to send their kids on study abroad to get into a good college? how many feel they can't compete because they can't afford to do this?), and that the uncertainty of retirement and health care means that it is impossible to take any risks, even if there is a chance they might pay off.

Ryan's attempt to change the conversation to absolute well being just shows how out of touch he is. Movements like Occupy Wall Street, and the general chatter that comes up on blogs and the news, are attempting to send a message to our lawmakers about social anxiety. The fact that the family now has a Playstation doesn't make up for the fact that they now feel they are locked out of competition for better social position. This doesn't show up in income quintiles, it impacts someone in the 91st percentile as much as it does someone in the 9th. The problem is that there is a feeling, a feeling backed up by much of the data, that it is increasingly hard for two people of equal abilities to compete with each other for limited spots, such as in college admissions or for good jobs.

How is a poorer family with a equally good test scores supposed to compete with another when the richer family can send their kid to learn French in France for a study abroad, their kid has to work at McDonalds while the richer kid can spend their time in volunteer work and unpaid internships, and the richer kid can get into better schools before university? However unequal things may have been in reality before, the trend towards looking at extracurricular activities, as opposed to standardized tests and grades, has given everyone an increasing sense that money plays a greater role in determining life chances than ever. How can the kid that has to work to help maintain his family hope to compete with someone that doesn't and can focus into getting into a good college? How can someone that has to work a second job to make ends meet find the time to go to college to get skills? How can someone with a family to support take the risk of giving up health insurance to start a business and become an entrepreneur?

These questions are why inequality matters, it has nothing to do with how many Xboxs a family now has. All of Ryan's discussion just shows he doesn't get it, the problem is that people feel locked out of the elite in a way they didn't 40 years ago, the divergence in costs between the goods purchased by lower income households and the goods purchased by upper income households is one of the causes of the increasing salience of inequality, not something that mitigates its problems.

The rest of the section doesn't deserve much discussion. No one is disputing that some portion of the increase in inequality is due to structural changes such as increased awards to skills and technology. These changes are global in nature. However, the change in inequality regarding the one percent and the rest is pretty much unique to America and the easiest explanations all involve political changes in our economic structure and an increasing ability of existing elites to exclude those that are not like them and don't buy into their self-serving ideology (more on this another time). It is the portion not explained by international trends which is of interest to those discussing inequality, not the part of it that is.