Why Small Benefits Work Better

The Fixes blog in the New York Times on an excellent program called Youth Villages that helps to keep kids in their homes and out of foster care.  There's a few things I want to pick out about this article, which I'll go through.  The central them is that in home care is almost always cheaper than institutional care.

By age 23 or 24, fewer than half of the former foster care youths in the study were working. Close to a quarter had no high school diploma or equivalency degree and only 6 percent had completed a two- or four-year post-secondary degree. Nearly 60 percent of males had been convicted of a crime and 77 percent of females had been pregnant.

This frames how bad the issue is.

The idea is to help youths return to their original families wherever it is possible to do so safely by providing their parents, or in some cases other relatives, with an extensive array of in-home support services. This approach may seem counterintuitive, given that child welfare agencies intervene when courts deem parents unfit to care for their children. However, evidence indicates that intensive in-home services can bring substantial changes in families — and produce more successful outcomes than out-of-home models like foster homes or institutional care.

This isn't counter-intuitive to anyone that works in government.  Trying to get this through people's heads is one of the key roles my agency plays.  Government, and especially the Federal government, knows just how terribly wasteful institutional care is and works hard to try to get public support for these programs.  It doesn't work, because the reaction is always we only want to give services to people that really need it.  Everyone else should just be more personally responsible and the wouldn't need services.

While this may or may not be true, the result of this attitude is that by the time anyone is in bad enough shape that it's evident they really need it and aren't trying to skim from the public purse, it's already a crisis and institutionalization is usually the only option.  Raising eligibility requirements makes this worse.  Lowering eligibility requirements so that more people qualify for cheaper service intervention can save money in the long run and has much higher success rates in turning these people into production citizens.  This will be costly in the short run however, since it requires temporarily paying for the high number of institutionalized people in the system currently as well as the increased benefits.  Since means testing and other forms of eligibility requirements are so popular to save money right now, expect things to move in the opposite direction.

Youth Villages monitors outcomes for every child it serves and allows independent researchers access to its data. The organization reports that, two years after completing its in-home programs, 83 percent of youths served were living successfully in families, 85 percent were in school or had gained a high school or equivalency degree, and 82 percent reported no trouble with the law.

Am I Suggesting Class War?

I realized the last few posts could be fairly easily classified as class war.  The short answer is that no this is not meant to advocate for class war.

The longer answer is that this is not class warfare from anything like a socialist perspective, I am making no claims, and do not believe, that there are any inherent conflict of interest between the wealthy and the rest of society or that this is some way linked to control of the means of production or any particular segment of society's resources.

What I'm suggesting instead is pure interest group politics.  A number of innovations, some outside our control and ultimately part of the international system, as well as a number of others particular to decisions made by our government, have led to a shift in incentives and potential awards among groups that individuals can potentially identify with and become a member of.  Unsurprisingly, this leads to them joining and identifying more frequently with the groups whose rewards have become greater.

This of course is a huge problem.  Our system works because it manages to align the interests of many groups in our society, I would be willing to say that the success or failure of a society is largely determined by its ability to align the interests of the individuals making it up and its ability to attract new individuals into it.  Changes that interfere with this are potentially extremely destructive, the more interests begin to diverge the more potential gain that individual actors see in creating further divergences that benefit themselves more than others.  Eventually, cooperation becomes increasingly more difficult the further interests diverge and the lack of coordination between actors begins to shrink the pie.

In our system, it used to be that the interests of the wealthy diverged significantly from each other and were more closely aligned with the interests of their business and those that were involved in their industry.  While this may not have declined greatly, their interests as members of the upper income bracket, and probably more significantly, as earners of investment income have certainly converged meaning that, at the margins, they have become more likely to cooperate with each other and gain those benefits and let the interests of their individual industry and business be secondary (at the margins is an important phrase here, I'm not suggesting they no longer put their business first, just that there is a greater range where their business interests seems less relevant than the interests they share with other wealthy folks).

So, fundamentally, this is a simple failure of political economy, not class war.  There is no inherent conflict between income brackets, but a failure of political culture has strengthened a community of interest within the upper income bracket while weakening the community of interests between income brackets relative to this.  This is leading to a predictable outcome.

Bridging Cross Cutting Cleavages, Horizontal and Vertical Links

I plan for this to be my last post on this subject, it has already gone on far longer than I had intended it to do.

The first issue is another driving factor behind the increasing community of interests that elites have.  That is the 1980s tax reform which substantially simplified our tax policy.  While in general I support this reform (capital gains being taxed at a lower rate excepted) this reform inadvertently eliminated many of the issues that previously created divisions within the broader group of the wealthy.  With the earlier tax code, a wide variety of loopholes existed which created incentives for the wealthy to protect the loopholes they used, while regarding others as expendable.  The simplified tax code eliminated these divisions, creating a greater community of interest.  Again, I like tax simplification and think it is worth it, but since I also like for people in a democracy to be divided so no one group can win out, I think it's worth noting that there's a potential cost to simplification.

On to the main topic, which is the linkages between groups.  The main point is that there are very strong horizontal issues that unite the wealthy and distinguish them from the rest of us.  The biggest one being the focus on investment income rather wage income.  This presents a unified front and the group is manageable enough to keep up a coherent message.  Below this level, despite the relatively low earnings from capital gains, we are simply to diverse to match this lobby.

These leads naturally into some of the vertical linkages that still exist.  Corporations themselves are an important vertical link between the wealthy and the rest of us.  This gives many of them a way to identify their interests with those of all of us, after all, if your employer is doing well it's more likely you'll do well.  However, the way that income is earned at the top has caused this linkage which involves shared interests across most sectors of society (the bottom quintile doesn't have much say here) to weaken relative to the horizontal linkages amongst the wealthy.  Despite this, this vertical linkage inherent in the corporation provides the wealthy with a platform to make their own views heard potentially in virtually every electoral district in the US.  It also allows them to speak for an entire group of people, rather than having to speak solely for themselves, even when they are advancing their narrow interests rather than the interests of the company as a whole.  If it were truly corporations advocating rather than their wealthy owner, our corporate taxes would be rock bottom and our capital gains and income taxes wouldn't have changed so much.

My evidence for this is a bit weak, but something that always nags at me when looking at US policy is how effective mobilization has been among the wealthy over the past 30 years in lowering the top income brackets as well as the capital gains rate while simultaneously being abjectly horrible at lowering the corporate tax rate, whose base level is well above OECD averages.

This really lies at the root of my thinking on this issue. Policy changes instituted in the 80s led to a great strengthening of interests that united the upper end of our income bracket while not materially effecting interests or incentives for the rest of society to become more unified.  Over time, these changes have played a self-reinforcing role, as the wealthy adapt their existing portfolios to match with the new set of incentives their rewards for going along with the interests of the rest of the wealthy increase, while their incentives for focusing on the vertical linkages with the rest of society decrease.  Today's wealthy are far more diversified and have a much more international outlook than previous generations, they simply aren't as tightly tied to the individual businesses that unite their interests with the rest of society's.  Since corporate taxes continue to vary greatly between industries, the owners of businesses have widely varying incentives in pressuring for changes in these taxes, while their incentives for lowering the income and capital gains taxes are similar.  So, given the choice, they'll accept the continuation of high corporate taxes, but rising capital gains or personal income taxes are something worth fighting with all their might.

This isn't to say that there don't remain a number of vertical linkages, but most of these are a side show rather than something fundamental to our success as a society.  The NRA would be a great example of this kind of vertical link, while it may advantage a few particular wealthy interests it is a link between them and the rest of society, however, it's not exactly advocating on issues that will make or break the future success of our society.

It may also be that the internet will eventually allow the creation of horizontally linked groups among the non-wealthy that can successfully apply counter pressure.  The Tea Party could be a forerunner of this, though it is arguably if the pressure they are applying could be called counter pressure.  It remains to be seen however if this pressure will be a long term thing or simply a temporary response to current conditions.  The policy changes that have altered incentives at the top have led to constant pressure, and the formation of a number of long lived formal entities, such as think tanks.  To properly counter this it would be necessary for citizen groups to form that would have a similar longevity and ability to get out the vote and to apply pressure to individual Congresspeople year in and year out.  I'm sceptical this will happen, though hopeful it will.

[Edit:  I will do one more very short post, probably a paragraph or two at most, on this subject that I forgot to include in this post that I think is very relevant for addressing how divergent interests can easily lead to regulatory arbitrage among the states.]

How Has Cleavage Become Less Cross Cutting

In my last post I advanced a thesis that the problem for our democracy wasn't money in politics, that's always been there, but instead that there is a greater community of interest among the wealthy today than in the past, the wealthy have advantages of organization that allow their interests to operate across multiple districts, and fewer groups exist today that can operate with similar reach and influence within districts.  So what has changed over the past 30 years to lead to this result?  This is by no means a complete (or even all that well thought out) list but just my general impression.  It could certainly use some research to look at how influential various groups have been and to examine the degree to which they were cross cutting.  However, that's beyond the scope of a blog post.  Please feel free to suggest additional groups I'm ignoring or pointing out connections I missed, I'm curious how well this would stand up to serious scrutiny.

So the first issue is what changed to provide a unity of purpose among the wealthy that was previously lacking.  The first issue is the rise of multinational corporations.  This has been going on for some time and in my opinion is probably on the whole a good thing.  This does however make it very difficult for local or state governments to check a corporation since they are so mobile and even restricts the Federal government to some degree.  It provides a unity of purpose by focusing all those involved in these corporations on issues such as repatriating foreign earnings as well as on US trade law.  Before, businesses would have had more competing interests by which state they operated in, with this development their competing interests are all abroad while they are a more unified front in regards to US policy as a whole.

The second issue is the financialization of the US economy.  This is linked to deregulation and increased possibility of profits and to probably a greater degree the lowering of the capital gains tax.  This vastly increased incentives for the wealthy to focus on income from capital gains rather than from income from dividends or other sources of profit from their businesses.  Since finance and investment impacts all businesses this led the wealthy to have a greater community of interest in making it easier to earn from sources that would provide from capital gains rather than focusing on what benefited the earnings from their particular line of business.  By making capital more fungible, individual investors had less incentive to be divided among the lines of their particular business and more incentive to identify with other investors relative to their individual industries.

The third issue is the emergence of a greater sense of identification among elites.  I don't want to make too big a deal of this, especially since I haven't read any of the books that discuss this at length, but the idea that there is a global elite that shares a number of values and interests and feels little attachment to individual countries has become common enough that I give it some credence, at the margins anyway.  To the extent this is true, it makes coordination easier and provides more forums for the individuals involved to meet each other and to begin to identify with a shared set of values rather than being divided among groups identifying more with their home state and region and thus having more common purpose with their region of origin rather than other elites.

I'm being far more long winded than I intended, or have time for.  The rest of this post will be more summary.

Money, Politics, and Cross Cutting Cleavages

So, this post was spurred by reading a couple of different posts on the Economist today (one on Bob Herbert, the other, less influential one for this post, on ideology and in particular the bit about politicians serving special interests as corrupt, which I find nonsensical since I believe all interests, including the people at large, are special interests.  If they weren't why do we still have the home mortgage deduction and low gas taxes, those individual special interests aren't strong enough, the people at large however preserves this folly.) , as well as by Bob Herbert's column.

Money influencing politics is a common, and in my opinion, lazy correlation to draw and not clearly causal of anything.  Concentrations of wealth have always been around, the question is whether and to what degree that influences the political process, and to the extent that it does how to forestall this.  To figure that out requires that we think for a bit about how money might influence the political process, beyond the easy way of campaign contributions, which I've read enough on to believe they aren't highly correlated with elections and thus probably not all that influential.

I believe that a better way of looking at it is solely in the terms of interest group politics (and, to pick on an earlier linked post, something that I think all politics is so it's impossible to distinguish between corrupt politicians serving special interests and others).  Specifically, I have in mind Federalist Paper Number 10.  In my view, the great and aggregate interests particular to the wealthy have benefited from an ever larger number of innovations that have made coordination amongst them easier as well as making their interests more uniform while reducing the influence of smaller and particular interests in breaking up the great interests.  In addition, great and aggregate interests that used to have the power to counter the interests of the wealthy, such as labor unions (not that I like labor unions, I believe they deserved what they got due to their own bad policies, but despite their flaws they were an aggregate interest that was able to oppose the wealthy on the national stage), have declined in power and lost their ability to act as a separate countervailing interests.

Criminal Justice System: Labor Destroyed

I've been postponing my next post in the rethinking ideology section to do some reading on the topic of criminal convictions and employment.  I still haven't found the time to do more than skim a few articles but since I eventually do want to get around to putting this all together into a fairly coherent platform (my goal has coalesced into something similar to the Republican's Pledge to America or Paul Ryan's Roadmap for America's Future, since actual politician's running for office haven't come up with a coherent political vision that addresses America's problems in a way that I believe could actually solve them I'm taking on the task myself so when I write to my representatives about how I dislike what they're doing I can send them a real alternate vision, this will wait till I've given some thought on each of the issues that I'd like to address in separate posts to make me think through them more, with the more radical things like Constitutional changes allowing for national level representation to be confined to appendixes) I think it's time to write another post.

What I want to address today is how adversely our criminal justice system affects our labor pool and how this is rarely considered in conversations about criminal justice topics.  The data is unfortunately too messy for me to have found any simple graphics or data I'd find worth putting up here, what there seems to be agreement about is that any criminal record at all significantly adversely affects employment prospects as well as reducing income.  Based on what I read, the reduction in income seems to be around 30% for someone with a criminal record vs. someone without.  Thus in addition to a significant amount of state spending required to incarcerate someone, we also end up permanently reducing the income of those individuals, further permanently reducing state revenue (with some potential for an offsetting effect due to reduced crime through a deterrent effect, I have no idea how these numbers compare).

Education: A Radial Idea; Get Politics Out of the Classroom

Something that has always bothered me about the education in the US is how highly politicized it is.  We have school board elections in Texas resulting in dedicated political entrepreneurs attempting to influence how nationwide textbooks are written by using their skills at political mobilization to stack the board.  School board elections happen on the ballot, which may be a poor representation of those most interested in the school and get too many voting on board elections that have neither the knowledge or interest to make an informed decision.  We also have shenanigans like New York State hiking tuition at state schools and putting the money into the general fund.  There are few places more clearly in need of expert opinions, from the fields being taught especially, yet these expert opinions seem weak relative to the political forces that determine education policy.

So to fix this, a truly radical idea, depoliticize the schools.  Remove them entirely from government oversight.  Create an entirely separate institution, with revenue raising capability, to oversee the school system that is not directly answerable to the state.  To maintain democratic governance an oversight board would be elected.  These elections would be a required form during school registration (though making a selection would be optional) to insure the parents have a say in how their kids are educated.  An additional open election would be held so those without kids currently in school could elect a certain proportion of the oversight board members as well. Local oversight boards would then elect a number of their own members to sit on state and national boards, or there could be direct elections to these boards as well (though at this point we're getting into a pretty complicated additional electoral system).  Curriculum would be drawn up, likely primarily at the national level, by a panel of experts in each field with input from members of the board selected for these panels.

Revenue collection would be a major problem.  Parents would of course be a large source of revenue but the rest of society has a nearly equal interest in the education of children* so this institution would need to have powers to collect revenue more broadly, which would require a special grant of powers from the government.  This likely makes the idea a non-starter but if we are going to remove the school system from existing partisan politics and political issues that have no bearing on education truly radical options, such as this (though hopefully more detailed and carefully thought through than this skeletal outline), will be necessary.

*I see arguments that parents should be solely responsible for the education of their children fairly frequently.  While I agree that parents are responsible for the upbringing of their child, I don't see that this carries over well into education.  Parents are the ones who will suffer the consequences if their child ends up being a brat or is completely ungrateful or lacking in a number of other signs of a good upbringing, we all suffer if a child ends up being without marketable skills and able to participate in society.  Whether or not we have kids, today's kids, whoever their parents are, are going to be the people working for our companies, paying for our social security, paying the taxes that keep society going, fighting and dying in our wars, and providing staff to the nursing homes we live in tomorrow.  We have almost as much interest that kids are educated to be competent at their jobs as parents are.  Our interest in most other parts of a child's upbringing is limited, but when it comes to education and skills we face a much different set of incentives and responsibilities if we desire to live in a functioning society.

Education: Expanding Opportunities; A National Research University System

There are a number of fields where it is constantly claimed that we have too few graduates of, namely primary care physicians, engineers, and scientists.  There is also a number of very good criticisms of our government that we are underinvesting in a number of basic research fields, energy especially but also materials science and a few other fields.

To create incentives to fix this problem a national research university system could be instituted.  To encourage a focus on these majors, especially among people who fear they might not otherwise be able to afford college, degrees at this university would be free, with a contingency that a graduate work in the US for several years (5 being an easy number); similar to how we have service requirements for ROTC programs.  Degrees would be limited to fields that we have a demonstrated need for, so available majors would be confined to the sciences, engineering, and medicine (though only primary care would be offered through this school with a requirement that graduates work in primary care for 5 years).  Other courses would be offered in conjunction with the National Online University to provide a rounded education without requiring additional staff.  All professors would also be funded researchers and, to the extent practical, students attending the university would be required to fulfill work study requirements that would involve acting as research assistants.

The narrow focus of these universities would limit competition with more traditional universities and the focus on research would help to fulfill another needed policy goal.  Providing these degrees at no cost to the student would also provide valuable downward pressure on degree costs that existing federal programs such as loans and grants do not.

Education: Expanding Opportunities; a National Online University

I believe one of the main barriers to people improving their skills is a feeling that they're either not prepared and thus not willing to risk the time and money on education or that they simply  have difficulty in figuring out how to get from where they are today to where they want to be tomorrow.

A national online university would be a partial solution to both of these issues.  It could focus on providing a decent quality, no frills education that people across the United States would be able to access to update their skills and to prepare to move on to more traditional colleges and universities.  Also it would provide a way to provide everyone with access to college preparatory work without needing to worry about how reputable the local schools are.  Of course, efforts would also have to be made to make broadband more accessible to the poor to make this work but that's a separate issue.

The online university would focus on two things, remedial courses and skills small businesses most need that can be taught online, principally business and computing courses.  All courses would also be offered at very low cost to attract as many applicants as possible.

Remedial courses would be offered at no cost, provided that a student passes a course.  If a student fails they would have the option of retaking the course or instead to try the next lower level, no charge will be levied if this course is successfully completed.  This can be repeated until a student passes a course, with a number of well publicized exceptions for extenuating circumstances where a course could be dropped.  These remedial courses would go up to the standard 100 and 101 level courses in subjects such as college writing or mathematics, which have come to grace the course lists for virtually ever university.  The idea is to make going back to college easy, and to make it particularly easy and painless for those unsure if they are capable of doing the work so they can test themselves and gradually build the confidence they need.

The business focused portion should be fairly self-explanatory.  It's simply a low cost way for business owners, or those wanting to become a business owner, to test the waters in a low cost way to see if college courses will benefit them.  It can also provide individuals with a number of skills that will make them better employees.

To a certain degree this would compete with existing community colleges and online universities.  Community college coverage is highly variable across communities however and existing online colleges aren't necessarily widely known about and can be expensive or of questionable quality, sometimes both.  A national school would benefit from economies of scale as well as being easier to promote to those most in need of its services.

[As a side note, Edward L. Glaeser is promoting human capital as a driver of American renewal as well on the NY Times Economix blog.  Being quite a prominent economist I thought I'd point it out.  His vision is to sell this to the Republicans so it is likely to be vastly different from mine.  I personally can't see how we can reach those most in need of a skills update without state intervention but it will be very interesting to see his take in his next post.]

Education: More Second Chances

I believe that a major flaw in our economy is that we give too little support to those that need retraining or that need to upgrade their skills later in life.  I do realize that we have a multitude of different targeted programs that seek to address this, I'm not suggesting that we make the system more complex by simply adding additional programs.  Rather, I'd like to suggest that we make a broader set of programs with simpler rules that would be accessible to most anyone working.  In my next post I'll get into some more involved ideas, in this post I'll lay out some more basic ones.  The objective here is to focus on making education and training accessible to people at every stage of their life and in particular people that have made mistakes that make getting training more difficult.

1.  Expanded education tax credits.  This would supplement existing programs and would allow for a broader range of expenses to be targeted by the credit.  Existing credits would be expanded to cover the entire cost of part time attendance at a state school (this would likely be in the ballpark of up to $8,000 a year total), as well as related expenses including text books and child care.  I had looked at New York State data for rough numbers but quickly realized the subject was too complicated to be worth the time in making specific recommendations in a blog post.  These credits would have to be written carefully, the target is a full time worker going to night school in order to get a better job in the future, or to get new skills because of fear of a job being eliminated or off-shored.  This is not meant as a tax break for wealthier families to put their kids through college, though a kid wanting to pay for their own college would be a perfect target for this credit.  While generally opposed to means testing it is also likely worthwhile to phase this out at high incomes to prevent it from being a subsidy for executive MBAs who don't really need it.  A gradual phase out starting at $100,000 a year may be in order, or if a more complicated provision isn't too distortionary, a lower phase out with an additional allowance per child could also work.  In any case, this credit should be designed so that families don't have to make hard choices about taking a chance on their own success or being able to better provide for their children's needs.  This tax credit should be limited to the income earner, or alternately for dual income households, to the secondary income earner as well.  Other household members should not be eligible for this expanded credit.

2.  Supplementary unemployment benefits.  This program would be designed to encourage unemployed workers to update their skills so that they are more likely to be able to get a job after unemployment at a higher wage then when they went on unemployment.  It would also be designed to encourage them to continue working while receiving unemployment.  The requirements would be that the beneficiary be enrolled in school full time and also that they look for part time employment while in school.  Unlike regular unemployment, beneficiaries would continue to receive benefits if they take a part-time job while in school.  It would extend the unemployment benefits, though it would likely be beneficial to make this at a reduced rate, for up to two years to supplement the income they make from working part time to something closer to the income they received while fully employed.  The objective would be to use periods of economic disruption as an opportunity to upgrade the workforce to meet changing economic needs and reduce long term structural unemployment.  It would also prevent long gaps in resumes by encouraging workers to take jobs that pay much less while unemployed and feeling justified in doing this by having school as a reason for doing this.

Both these suggestions would likely be expensive in the short run, though longer run cost would be more unpredictable since they would be likely to result in larger long term government revenue.  I believe paying for these out of slightly higher taxes on high incomes would be justified and likely acceptable to most Americans.  After all, this isn't giving out freebies, it's giving people an opportunity to work hard to better themselves that they might not otherwise have due to choices they find difficult to make.  Only those willing to take on the task of both working and going to school would qualify for either program.

Education: The Low Hanging Fruit

I'll eventually get into some more complicated issues but as a first step I'd like to list what I consider some common sense educational reforms.  By common sense I don't mean easy to put in place, instead, while there are few that would argue these reforms wouldn't help our education system, these are very difficult to pass reforms for social or political reasons.  Since I'm putting an emphasis on the labor force at the heart of my take of rethinking ideology I'm going to ignore the political difficulties since if you can't successfully argue for the core of your thesis despite obstacles there is little reason to even attempt the approach.

Also, I'd like to note that the vast bulk of what I know about the education comes from newspapers and does not come from any particular expertise (other than a lot of time spent in school).  While I've tracked back information to a journal article here and there I'm communicating primarily based upon what I see the current consensus is rather than on any particular expertise.

1.  Start the school day later.  There has been a lot of research that younger people simply aren't wired to get up as early as older people.  While I have no idea what the magnitude of the effect would be, simply making the school day start later would help to increase the amount of learning that goes on in classrooms.  I would also guess it would reduce problem behaviors.  There are obviously a number of social and political reasons why instituting this reform would be difficult.  Incidentally, this is also one of those traits our meritocratic society selects for that has nothing to do with merit.  Those that are naturally early risers have an advantage over those that are late risers that sets in quite early.  While this certainly impacts your lifetime ability to contribute this has nothing to do with any individual merit you possess, it's solely an artifact of our institutions.

2. Make the school year longer.  Our school year has become shorter than that of many of our competitors and this is likely associated with less overall learning.

3. Shorten summer break and break up the school year more.  I've heard in a few places that lower performing students in particular have their skills deteriorate over long breaks.  Since these are the students I am most concerned about doing what will help them learn best is necessary.

4. Look at making the school day longer.  I have no idea if this is actually something that would help since I'm unsure if kids do a good job paying attention over long periods of time.  If this is a major problem, a longer school day with a few breaks for more fun activities may be in order.

5. More guidance, and in particular resources, for self-study.  While this may benefit all kids, this suggestion is more for those at the upper half of the distribution.  A frequent frustration of mine as a younger kid was that I wanted to learn all kinds of new things but had no idea where to start.  This led me to read a lot of Greek philosophy, or other subjects where I happened to have stumbled across author names or titles, which looking back on it was a waste of time because I didn't really have the background to understand it, particularly how different the culture was, till later.  A listing of progressively more difficult resources, not just age-level appropriate which may not be challenging enough for every student, would be helpful.  Combining this with an online library for accessing these texts would also be helpful.  Some sort of rewards system would also be necessary to get the full benefit, whether some kind of accelerated coursework or some form of more material reward.

6.  Explore more incentive systems for classroom work, especially for low income students.  I've heard the idea but haven't read much.  I see no particular reason to oppose it, except for spending.  Targeting this to lower income students may be ideal, wealthier parents tend to set up incentive systems for their kids already anyway.  It's those whose parents aren't doing this that could use a break.

Much of this could be achieved simply with more federal funding.  In general, I don't believe current levels of taxation are high enough to sustain our investment in either our labor force or our physical infrastructure so I'll simply be assuming taxes will eventually go up to pay for this, though I'll likely be doing another spot on taxation since I'm still thinking through some issues with it.  Also, I assume a better education system will involve more centralized control, though I see some options with this, issues that I'll be getting into in later posts

Some Thoughts on Long Range Economic Development

Over the next few posts I intend to start going into some of the domestic factors that I believe are holding the US back.  This will all be very speculative and based on a rather general observation of mine that I admittedly haven't researched enough to have 100% confidence in.  That is that I believe that over longer periods of time the key thing holding back societies is their inability to maximize the potential of their labor supply and that an emphasis on capital rather than labor leads to the misallocation of resources.  I believe the key thing to long run development is to balance development of all of a nation's resources.  In the modern USA I believe we have enough capital sloshing around that capital is unlikely to be the limiting factor.  Growing our supply of capital will do us little benefit, though it will shift incomes around, if it is instead the quality of labor where our society is lacking.  This is sharply different from the 18th, 19th, and the first half of the 20th century where we remained under-capitalized.  This is no longer the case here, though investment is likely to be the limiting conditions in less developed nations.

This is a slight shift in emphasis from what I generally see as the main thrust of mainstream social science and is rooted in a basic criticism I have towards the field that we place too much emphasis on 18th, 19th century and early 20th century thinkers (this does not apply equally to all subfields, some of which are much more modern).  The major emphasis in both political science and economics has been in explaining industrialization.  While I agree this was a major event, I also think it was a unique one and the lessons learned from it are not truly generalizable.  I believe there were elements of this transition that stood out so strongly that other threads of development were left completely obscured by the key role that capital development played in the transition to industrialization.  Focusing on capital formation distracts us from deeper issues that are playing a greater role today as we move more completely out of the initial transition to an industrial society and into whatever is coming next.  This is rooted in a few observations, such as the lack of success of slashing taxes to encourage capital formation towards creating broad based growth and the ability to sustain growth and production in countries that focus more on encouraging a highly skilled labor supply, but I will admit it is very preliminary.

Based on what may be a faulty starting assumption however, I will be suggesting that a focus on taking an approach that seeks to maximize the quality and efficient allocation of our existing labor supply is the proper foundation to build a new approach to American politics and government on.  While education will be a significant part of this I intend to make the approach much broader.  I wish to examine how various policies, such as our prison system and discrimination against ex-cons or the difficulty of gaining a university degree or advanced technical training later in life, are leaving significant portions of our population in a condition where they can be nothing but under-utilized.  I will also be looking at how existing policies make labor mobility more difficult and policies that are blocking the kind of organizational flexibility that would be necessary to get every American working at their full potential.

My vision of society may not be widely shared but at its heart it's one that we give people as many chances as they need to get their act together so they can contribute and that breaks down any barrier that provides someone with an excuse not to put in the effort to better themselves.  I think our focus on trying to spur private investment and the focus on incentives does little to spur those people that have more awareness of the possibilities for failure than they do of the possibilities for success.  American society already has everything it needs to make the best and brightest do their thing, doing more to encourage this has little to no pay off.  Getting those who aren't the best and brightest to pull their weight and contribute everything they can is the real challenge we need to meet if we're going to compete with nation's having a multiple of our population in the 21st century.  They can afford to chew people up and spit them out if they don't meet their standards.  We used to do this, and still do, but it's no longer a luxury we can afford.

[Update:  After looking over this I think my brief digression into half thought out theory may have been unclear.  I'm not proposing anything terribly new or anything terribly different, just a shift in emphasis.  What I have in mind is that:
1. Growth is limited by a number of limiting conditions such as capital, labor, technology, or organizational sophistication.
2.  We tend to overemphasize capital as a limiting condition because the foundation of much of our social sciences comes from the 18th, 19th, and first half of the 20th century when our society was not yet fully industrialized so lack of capital was generally the limiting condition.  Also, capital formation is easily amenable to economic methods while the labor issues and technology I am pointing out falls into the less mathematically amenable realm of political economy as social forces and political concerns dominate over the actions of the private sector and the relatively easily tracked cash flows necessary for capital investment.
3.  While we certainly will continue to need more emphasis on capital formation than earlier societies did, our challenges are more likely to be in the form of trying to develop a sufficiently skilled labor force, though technology and science is also likely to be an issue.  This is because a society such as ours has an ample capital base and enough capital seems to be produced in its normal operation to meet our capital needs.  Additional capital has a decreasing rate of return because the amounts of skilled labor, technology, etc. are not available to give the full return on new capital spending.
4. The incentives to stay in school and get a good education are already enormous so lack of incentives is unlikely to be the reason our labor force is inadequate.
5. We need to look at why people are failing to develop skills that are rewarded in the modern economy.  Also, we need to think about how careers that can be very rewarding to society as a whole, such as scientific careers, are unable to capture their full social benefit.]

A Few Ways Our Society Advantages the Wealthy

Now that I've covered the big issue areas of the day, in regards to which I have relatively few unique suggestions, my focus over the next few weeks will be on areas where I think more significant changes are desirable and which are currently not at the top of the agenda.  Many of these suggestions involve trying to even the playing field between the wealthy and non-wealthy so that those without assets can more successfully compete in the economy against those better off.  The idea will be not to push transfer payments but rather to focus on making various forms of investment pay off better for those with few assets.

I often here a complaint leveled against progressive taxation and other policies that have disparate effects on rich and poor that it is unfair to tax the rich simply for being rich.  Those who argue this often go on to claim that the tax is even more unfair because public investments tend to be consumed by the poor and not the wealthy.

While I think most non-wealthy see these arguments as absurd, I think it's worth pointing out a few ways that the institutions of our society disproportionately advantage the wealthy.  There's a perfectly good reason why expecting the rich to bear a greater burden is a necessary part of the social contract, we live in a society where the institutions overwhelmingly favor those that already possess wealth.  While this is no excuse to simply expropriate the wealthy acknowledging these advantages upfront is necessary to think rationally about policy and the necessity of providing a set of advantages for those left well off to compete on a more even field.  Also, it should be noted I don't believe in trying to change society to eliminate these advantages.  Many of them are the results of institutions that are necessary for our society to compete globally and that have done much to grow the pie bigger for everyone.  I simply believe that there is a natural social contract that comes with these institutions to provide countervailing forces to help those without assets compete with those with preexisting wealth to become wealthy themselves.  This is by no means meant to be a comprehensive list, simply a number of the more obvious advantages that occur to me.

Some Thoughts on Taxation

I was intending to take this up later when I was able to take the time to assemble some data but this post today on the Economist DiA blog meant I had to address it.

Dr. Robert Frank has an interesting proposal to to tax consumption instead of income by making savings deductible.  I largely like this but with some caveats.

First, it's not distortion free because this will favor whatever type of savings are allowed under the plan.  Small but still there and worth mentioning.  I think this would be most noticeable in the case of financial assets vs. other kinds of investments meant to increase personal productivity.   Probably surmountable, this would have to be done in regards to small businesses that pay on individual income taxes anyway (and ideally should include education as a form of savings), but this is going to make it more complex.

Second, it can be argued that this favors wealth inequality, which I agree is a significant problem.  I think there are a few ways to lessen this.  My views on inequality are slightly odd though so a brief aside on that first.

I'm not really worried about inequality if it is all money tied up in businesses rather than money that is being used to create a real perceived gap in lifestyle or is used in the exercise of power (donating to political campaigns should not be counted as savings).  I do worry about inequality if it is simply inflating asset values, particularly in goods that can't be produced (in reasonable amounts or at reasonable cost) such as land.  This is too big of a subject to take up here, I'll do so in a later post.

Inequality is also a problem because it shapes outcomes.  While many want to deny this, there are too many historical examples of how the powerful have been able to shape social outcomes, both through the use of the state and simply by private economic power.  This isn't wholly avoidable and the costs of trying to correct it are too high and too uncertain to be worth trying to eliminate these advantages entirely, though trying to do so in part is worth doing.

So, we need to do something to make the tax even more progressive to help those with low incomes compete against those with high incomes who have a number of natural advantages.  With the goal in mind of increasing competition and presenting established fortunes with a constant flow of new challengers.  The first advantage to those trying to move up the ladder would be a fairly high standard exemption.  The second would be a standard income tax but only on very high earners and then at fairly low rates.  This is meant to equalize the playing field a bit, not predetermine the outcome.  These rates would ultimately be subject to actual budget analysis as to what the trade offs would be between a high consumption tax and the portion of it left to an income tax.  To give an idea what I have in mind, a ballpark figure would be 1% at $250K, 3% at $1M, 5% at $10M, and 10% at incomes over $10M.  Nothing scientific about it, but frankly, I think we know enough to say that high incomes distort the playing field but we don't know enough to say by how much in a way that amounts to more than pulling complicated sounding numbers out our rear ends.

Something will also have to be done about corporate taxes but since there are no recent news articles on the subject I can leave this for when I've done some real research on the subject.  Also taxes will have to be diversified further, a single revenue stream is always less than optimal and there are a few areas where positive goods can be achieved through the tax system, I will take this up later.

Of course, vast change in government always seems unlikely.  However, our revenue policies are so bad, and so widely recognized as being so, that this is the one policy area that I think there is a decent chance of having a revenue system 10 years from now that is completely different from today's.

[Update:  While this article got me to thinking, after considering it a little longer I think I may prefer to encourage people to keep money invested simply by slashing the corporate tax rate and simply treat all income equally.  This way, if you want to build up your vast fortune you're best off simply keeping the money invested and never realizing the gains.  You still get to be an uber-billionaire but most of the effects of inequality would be muted.  I'll take this up a little more when I treat corporate taxes later on.]

Social Security

I wish I had more to add on this topic but the debate already seems to be hitting most of the sensible options.  All I've got to add is that I don't like the idea of raising the retirement age because average life expectancy hasn't increased much for lower income workers.  Also, increasing life expectancy at age 65 is the proper number for calculating social security, much of the increase in overall life expectancy is do to better treatment of conditions that killed before 65, such as cardiovascular disease, only part of it is do to increased life expectancy after 65.


My only suggestion to make the program better is to change the different benefit calculations for early and late retirement to include caps.  That way manual workers, who probably can't work later in life and are likely to have lower life expectancy, won't see their benefits cut if they have to retire earlier.  Workers that enjoy better wages and less physically demanding jobs would have to work longer if they want to receive their full benefit.  Given the complexity of Social Security calculations, it would probably be necessary to make benefit payments either the cap or the old calculation, whichever is lower.  After taking a brief look at the numbers, I realized calculating the changes would take far more time than its worth so I don't know precisely how close to solvency this would get us.  Still, by using gradually increasing benefit caps there would be at least some room to allow for those lower on the income scale to retire early with full benefits while being able to raise the retirement age for those better off while retaining the broad based nature of the program.  I have something in mind like capping benefits at age 62 to $6000 a year, increasing the cap gradually to $12000 at 67 and then the maximum benefit available somewhere around 70.

As an addition, Social Security should embark on a program to encourage gradual retirement so that workers are paying in longer.  I have doubts about the government's ability to effectively change culture so won't spend too much time on this but the program would certainly be more solvent if workers continued to pay in through their jobs past 65 by gradually transitioning to a partial work schedule.  There's only so much that can be done but shifting the cultural norm from an absolute shift from work to retirement to one of shifting from full to part time with a gradually declining work schedule would be beneficial to more than just Social Security.

Along similar lines, I have some issues with the decline in SSI/SSDI benefits with relatively low levels of income.  The numbers being simpler, but still enough that I need some time with them, I'll go into more details at a later date.

So What Should We Do About Health Care?

The last few posts left it unclear exactly where I think we should go with health care.  The honest answer is that I don't think it matters that much as long as we get universal coverage.  Once that is in place I think the various actors in the debate will have their incentives lined up in a way that will over time lead to cost controls.  The problem is essentially structural in that it has to do with the power, and diversity, of the various groups involved far more than it has to do with the technical aspects of providing care.

That said, I think there are some clear areas where there are real possibilities for reform that would save costs.  The first of these is to debate whether we want to move to fairly comprehensive health care as the norm, or if we want more limited access.  In either model, catastrophic coverage must be given, and have it clear who is providing it (having the government as a backstop for insurers is the problem, this exists today) for the system to work.  Beyond this, we can have a reasonable debate about how much we are willing to pay to increase access.  Given the disparity between low and high cost patients it is also essential to understand that expanding access is unlikely to do much to increase costs, between Medicare and Medicaid we are already paying for the most expensive conditions.  But there is a real debate to be had over whether we should be paying for routine payments out of pocket, or through individually purchased health care, or if the advantages of early detection and consistent follow up for more cost sensitive patients are worth the additional costs to the system

The second major issue is what limits we wish to impose on care provided from universal insurers.  Right now, it seems pretty easy to continue to get treatment well after the possibilities of success are low.  Should people really have the option of having the government pay for 2nd and 3rd line cancer treatment or is it reasonable to limit the publicly provided funds to the treatment with the highest chance of success, to give one example.  At some point a line will have to be drawn, the question is where.  My take is that everyone deserves at least one shot at treatment, after that I don't think there is a public responsibility to continue to provide public treatment for the same condition (I'd also hedge this with numerous exceptions, such as cost benefit analysis.  If a second treatment isn't expensive no reason to stop it.  Also if its a chronic condition and there is a high long run payoff to successful treatment it should also be paid for; some form of expert panel to weigh these issues, with feedback from the public, is necessary.).  Though a responsibility for hospice remains.

The third question regards supplementary insurance.  This being America, I think the answer is easy.  Whatever the minimum level of insurance required we should always have the option of purchasing more.  This should not bar us from getting the public version as well to prevent perverse incentives.  This should be a less regulated market but if we're not going to cover 2nd and 3rd line cancer treatments, or cover routine doctors visits from the other side, we certainly should allow a market in supplementary benefits.  Those that favor high degrees of equality are not infrequently against this, I ran into it often enough in Canada, but here I think there is a very strong argument that whatever the government offers those that want a Cadillac plan should be able to buy it.  I certainly don't think this should be subsidized, however.

At the end of this, I will admit that I simply don't know enough about the system to make specific recommendations.  I do think there are compelling reasons to approach the problem from a more systemic approach of how health care needs to look in the long run to fulfill its purpose.  Without doing this as well as looking at specific reforms that are possible today I don't think its possible to carry the public along with reform proposals or to deal with the perverse incentives that got us to where we are today.  Its not just a matter of specific flaws in the current system, it's also about fundamental problems with the system itself.

The Essential Problem with Health Care

I tend to believe that the primary systemic issue driving US health care costs is the interaction between the very concentrated nature of health care needs and the very fractured system of paying for it.  This gives every individual payer a massive incentive to attempt to pass on those with high health care needs to another payer rather than to seek ways to reduce costs for those people with high needs.  I'm not saying that fixing this problem will do anything on its own to reduce health care costs.  What I am suggesting is that this problem creates incentives that prevent fixes from being made.  Unless these incentives can be fixed health care reform to lower costs will be impossible. 

The only tested way to fix this problem is universal health care.  Reform proposals that avoid this don't appear to me to address this structural issue.  The essential reason for this is that without universal health care uncertainty as to whether a procedure will be payed for enters the system.  If there was a reasonable certainty that those without coverage that need treatment wouldn't be treated than it would be reasonable to expect that a non-universal system could work.  But as long as needed treatment can still be expected to be received whether or not someone can pay it is reasonable to expect that there is no real possibility of a proper market ever functioning in a way that will control costs (though it can function to raise capital and expand the system, the only part that seems to be malfunctioning is cost control, which seems to me predictable as a result of needed treatments being covered anyway).

With the payment system how it is, any individual entity can best achieve cost control by maximizing its responsibility for the 50% of people with low costs and minimizing its coverage of the 5% responsible for almost half the costs.  This is simply a much bigger reduction in costs than trying to deliver care most efficiently for a given mix of patients would be.  This problem has led to a vast array of ad hoc laws seeking to plug various gaps in the system.  I know that in New York one passed over the past year that would prevent health insurers from canceling entire insurance policies to avoid covering individuals with very high costs.  Laws such as this exist in every state and massively increase the complexity of regulation (and in my opinion, the size of the state) and thus the inefficiency of our health care system.

Public opinion on these issues unsurprisingly displays a high degree of cognitive dissonance.  We get extremely upset over individual instances of insurance company abuse, such as rescinding entire policies to deny one person coverage, yet get very upset over the high cost of insurance due to covering people that actually cost significant amounts of money to treat, like the kid whose insurance coverage got rescinded by the insurer.  At the same time, we expect to be covered ourselves if something ever goes horribly wrong.  The costs we face day to day in health care are just so disconnected from the high costs of treating serious conditions that it is difficult to keep the message focused on paying for complex medical needs rather than how much it costs to get a bottle of penicillin.  Which provides those that profit from expensive health care plenty of room to muddy the debate by taking the focus off the high cost sections of the system to instead focus on the low cost sections we experience day to day that are the source of all their profits.

Concentration of Health Care Expenses in the US

It took me a little longer to get to this post than I expected, it's been a busy week.

I was looking for a report covering the issue in some detail that was not behind a pay wall.  The High Concentration of U.S. Health Care Expenditures by MW Stanton* fits the bill nicely.  I've seen this data in various places and it is all fairly similar, all the facts below will be taken from this report.  I believe the essential problem driving US health care problems, and really problems throughout the western world, is that health care costs are so concentrated that there is a serious disconnect between people's experiences and the actual costs of the system.  There is a basic distrust rooted in the fact that we don't see where the dollars are going to in our own lives.  This disparity comes clearly in the statistics.

• 5% of the population accounts for 49% of expenses (2002)
• 34% of those in the top 5% of spenders in 2002 where also in the top 5% for 2003 
• Those over 65 were 43% of the top 5% of spenders, this isn't a solely age related phenomenon
• The 15 most expensive conditions account for 44% of expenses
• The lower 50% of spenders account for only 3% of expenditures

While this data doesn't lead us to particulars about how to fix our current system it does tell us what some of the systemic issues are.  Mostly, it tells us that what people need insurance against is becoming part of the top 5% (or top 10% which isn't much better).  It also tells us that insurance needs to cover us for several years in the top part of the distribution. Further, for an individual insurer costs are always controlled most effectively by seeking to insure the lower 50% of spenders which still represent a very large pool.  For the insured however, we never know if we're going to be part of that 5% tomorrow, which is what we're trying to insure against.

It should also be noted that with costs so disparate there are differences in what each of us needs the health care system to do for us.  A system that is most efficient for paying the health care expenses of the 50% of the population that only spends 3% of the health care dollars isn't going to be the same as that which pools the resources of the other 95% to pay for the unlucky 5%.  For most of us, the most efficient system is likely no system at all, or health savings accounts or other mechanisms that can be used to pay the low day to day expenses.  However, if something goes wrong than we will quickly become very worried about how the system works for the upper 5%.

This does of course leave open the possibility that separate systems for basic and costly care could be constructed, perhaps with the government, or government regulated insurers, providing mandatory catastrophic coverage with an lightly regulated system for the rest of our health expenditures.  I haven't heard this proposed though so won't spend time on it.  I'll take up some more issues related to this in the next post.

*Stanton MW. The High Concentration of U.S. Health Care Expenditures. Research in Action, Issue 19. AHRQ Publication No. 06-0060, June 2006. Agency for Healthcare Research and Quality, Rockville, MD. http://www.ahrq.gov/research/ria19/expendria.htm

Health Care vs. the Health Care System

I think it can be conceptually useful when discussing the problems that we have with health care in the US to distinguish between health care and the health care system.

Health care has been around as long as recorded human history and likely far longer.  No particular system was required for health care for most of our history, the market or other naturally occurring institutions were sufficient for providing most primitive health services.  The small exceptions would be the simple hospice care provided by early hospitals or institutions such as leper colonies.  But for the most part, little was required beyond the skill of the individual physician and some participation from the local community.

A great deal of modern health care is similar.  Delivering primary care and many health services, such as hospice and a range of simple surgical procedures, probably could be delivered effectively outside of a broader health system.  There are of course advantages to embedding these services in a broader system, and drawbacks, but for this rather broad (and here ill-defined) range of services there is no need for some overall health care system.

However, modern medicine has also developed a number of interventions that are very resource intensive and require some kind of dedicated system to keep running.  I don't have the knowledge to give an exhaustive list of these interventions but it is difficult for me to see how medical issues such as emergency care, especially when emergency treatment leads to a need for intensive care, could possibly function without a system in place to make sure that the hospital can almost always recoup its expenses without necessarily knowing if a given patient will in fact be able to pay.  While this system doesn't (theoretically) necessarily require government intervention, in practice existing systems have always involved the state. 

I believe this distinction is necessary to make because of how it effects the political discussion.  Most of our interaction with the health care system is with the parts of the system that don't really require a system at all.  This gives a massive political advantage to those that want to keep the system as weak as possible.  It isn't hard to think of reforms that can improve access and there is a quite wide array of ways to make it easier for someone to see a doctor and to easily pay for something simple like antibiotics, setting a broken bone, child birth, or simple outpatient surgeries.  These areas can no doubt be improved by reforms such as improved access or could be easily paid for by greater use of health savings accounts or other free market oriented reforms.

The hard choices all lie in the areas where a health care system is required that most of us have little to no interaction with through most of our lives.  How do we build a system that can pay for treating autism?  How can we pay for cancer treatment or organ transplants?  How can our system create the right mix of specialists and general physicians when years of education can be a decade or more?  This is where we need to focus our attention if we want to build a working system.  People are afraid of the possibility that a medical condition may bankrupt them or that they can't provide a newborn child with the care it needs.  However, dealing with this is difficult because they are angry about the day to day costs of the medical system and the frustrations and delays they run into with the general health care needs that are part of their daily lives.  Solving this requires acknowledging that people's fear and anger are pulling in different directions and that all the hard choices have to be made regarding the systemic issues that are the source of their fears.  Going after the little stuff that causes anger just derails the conversation and prevents us from moving forward.

I'll expand on this idea a bit more tomorrow with some numbers to back it up.

Health Care: Some Background Reading

I was intending to do a post on health care today but no longer seem to have the time.  I came across a great link on Free Exchange though so I thought I'd recommend a couple of posts from the Incidental Economist blog as background reading before I get into my own take on the issues.  The first series is on cost, the second on quality.  Both show the US doing poorly on most measures.

On the cost piece, I think underspending on home health care services is likely at least a partial contributor to higher costs elsewhere.  Overall, I found the administration, red herrings, and underspending sections most interesting but I'd certainly recommend reading them all.

Starting this weekend I'll begin with a few posts trying to untangle what the problems with how we look at health care are and at how to fix this.  I've been wanting to do some graph with longer run numbers but I'm not sure I've got the time to commit, these may or may not appear.  I'd like something stretching back to before US health care costs diverge, which was before the 90s.  If someone knows of an existing blog, or other data source that already does this I'd love to hear about it.