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.”