Category Archive for: Social Insurance [Return to Main]

Wednesday, May 31, 2017

Rethinking the Universalism versus Targeting Debate

Raj M. Desai at Brookings:

Rethinking the universalism versus targeting debate: According to the International Labor Organization’s latest Social Protection Report, over 70 percent of the world’s population lacks adequate access to social protection. Meanwhile, efforts around the world to redesign social safety nets have revived the debate on targeting versus universalism. Universalism, of course, proposes that all citizens of a nation receive the same publicly provided benefits. By contrast, proponents of targeting argue for using various mechanisms to identify, and distribute the bulk of benefits to, the poor. In the 1970s and 1980s, many developing countries shifted away from broad social policies that emphasized universal benefits (but that often only covered a small fraction of the population) toward programs that required beneficiaries to meet specific criteria. But after years of emphasis on the need to target public resources to vulnerable segments of the population, the pendulum appears to be swinging back toward universalism. What does this imply for developing countries seeking to expand their systems of social protection? ...

Monday, May 22, 2017

The Heartless Tradeoffs in the Trump Budget

I have a new column:

The Heartless Tradeoffs in the Trump Budget: As the bombshells continue to drop on the Trump administration, behind the scenes Trump’s first detailed budget proposal is being developed, and it has a few bombshells of its own, particularly for the poor. The budget proposal is not yet finalized, so the details could change, but according to what has leaked so far, the budget is a combination of tax cuts for the wealthy, reduced spending on social programs that serve the needy, and wishful thinking about tax cuts and economic growth. ...

Wednesday, May 17, 2017

Trump Tax Plan Would Give 400 Highest-Income Americans More Than $15 Million a Year in Tax Cuts

Brandon DeBot at the CBPP:

Trump Tax Plan Would Give 400 Highest-Income Americans More Than $15 Million a Year in Tax Cuts: President Trump’s tax plan contains specific, costly tax cuts for the wealthy and profitable corporations but only vague promises for working families.[1] Even accounting for his proposal to restrict most itemized deductions, the top 1 percent would still receive annual tax cuts averaging at least $250,000 per household. But the tax cuts at the very top would be far larger. Their annual tax cuts would be more than five times the typical college graduate’s lifetime earnings.The 400 highest-income taxpayers — whose incomes average more than $300 million a year — would get average tax cuts of at least $15 million a year each, we estimate from IRS data.  Their annual tax cuts would be more than five times the typical college graduate’s lifetime earnings.[2]..  The total tax cut for these 400 households would be at least $6 billion annually.
The Trump plan prioritizes these tax cuts for the highest-income Americans over many worthy programs that need more resources. For example, $6 billion is more than the federal government spends on grants for major job training programs to assist people struggling in today’s economy. An additional annual investment of $6 billion could enable roughly 1.5 million adults each year to train for a new career.[3]
Also, $6 billion is roughly the cost of providing 600,000 low-income families with housing vouchers that would help them afford decent, stable housing. ...
Yet, far from investing in these areas, President Trump has proposed to sharply cut the budget area (non-defense discretionary programs) that funds job training and housing vouchers, even as his tax plan delivers massive tax cuts to the top.[5] ...
While the Trump tax plan would clearly shower windfall tax cuts on those at the very top, it provides little detail on whether or how it would help working families. Indeed, the plan wouldn’t provide any tax benefits to at least 17 million working families and individuals because they don’t earn enough to owe federal income taxes (though most pay significant payroll and other taxes). Those families would very likely be worse off under the plan because policymakers eventually would likely pay for the large tax cuts for the very wealthy at least in part by cutting programs on which they and millions of other low- and middle-income families rely.[9]

Thursday, May 11, 2017

SNAP Helps Low-Wage Workers

Brynne Keith-Jennings at the CBPP:

SNAP Helps Low-Wage Workers: For millions of Americans, work doesn’t provide enough income for them to feed their families. Our major new report explains that SNAP (formerly food stamps) provides workers with low pay and often fluctuating incomes with crucial additional monthly income to help put food on the table. It also helps workers get by while they’re between jobs.
Up to 30 percent of Americans earn pay that would barely lift a family above the poverty line for full-time, year-round work. And, in many cases, workers who want a full-time job can only get part-time work or have irregular schedules that can change from week to week, with little advance notice or worker input.
Also, low-wage jobs tend to lack crucial supports such as paid sick leave, which can cost workers their jobs when they get sick or must care for an ill family member. In addition, low-wage workers are less likely than other workers to qualify for unemployment insurance.
SNAP benefits support work. The benefit formula phases out benefits slowly as earnings rise and includes a 20 percent deduction for earned income to reflect work-related expenses. As a result, SNAP benefits fall by only 24 to 36 cents for each additional $1 of earnings for most households. SNAP benefits can help smooth out volatile income and provide much-needed food assistance when workers’ hours are cut or they lose their jobs.
SNAP participants work in a wide range of jobs but, compared to all workers, a greater share of them are in service occupations (see graph) and industries such as retail and hospitality — jobs likelier to have low wages and other disadvantages. In some occupations, such as dishwashers, food preparation workers, and nursing, psychiatric, and home health aides, at least one-quarter of workers participate in SNAP. For them and millions of others whose jobs don’t provide enough or steady income to provide for their families, SNAP provides essential support.

Monday, May 08, 2017

The Great Risk Shift is Back

I have a new column:

Killing Banking Rules Will Invite a Whopper of a Recession: The vote in the House of Representatives to dismantle Obamacare was not the only attempt to undo key legislation from the Obama years that occurred last Thursday. Though it mostly went unnoticed, the House Financial Services Committee voted in favor of the Financial Choice Act. This legislation would substantially weaken the Dodd-Frank financial reforms.
If the Republicans are successful, and that is not assured at this point for either piece of legislation, it will increase economic insecurity for most households. ...

Monday, March 27, 2017

Tax Cuts Can’t be Financed by Reducing Government Waste

I have a new column (my title was "Some of These Markets are Not Like the Others"):

It’s a Ruse: Tax Cuts Can’t be Financed by Reducing Government Waste: The Republicans suffered a humiliating defeat on their proposal to cut taxes for the wealthy disguised as healthcare reform. But as the Trump administration has made clear, they are not about to give up on their tax cut plans.
But how will those tax cuts be financed? The Republican’s health care reform plan would have delivered $600 billion in tax cuts, but with that option gone where will the money come from? ...

Thursday, February 23, 2017

Justifying Health Insurance

Jonathan Baron at RegBlog:

Justifying Health Insurance: Recent discussions about revising or replacing the Affordable Care Act (ACA) raise philosophical questions about the rationale for having a health insurance system. Among these philosophical questions are the extent to which such insurance should be compulsory, and, relatedly, the extent to which the cost of compulsory insurance should depend on risk and ability to pay. As lawmakers continue to debate the path forward for health policy, it is helpful to review the economic and moral justifications for health insurance.
From a utilitarian, or “welfare economics,” perspective, the main purpose of insurance is redistribution. Insurance redistributes money collected from a broad group to those who suffer some misfortune that can be mitigated with money, such as a treatable illness. Those who suffer such misfortunes find greater utility from the money than those who pay premiums but have no misfortune, so this redistribution increases total utility.
An increase in total utility also justifies other forms of redistribution. ...

Monday, February 13, 2017

A Credible and Bold Basic Income

Thomas Piketty:

Is our basic income really universal?: After our call « For a credible and bold basic income » launched by a group of ten researchers  (Antoine Bozio, Thomas Breda, Julia Cagé, Lucas Chancel, Elise Huillery, Camille Landais, Dominique Méda, Emmanuel Saez, Tancrède Voituriez), we received considerable support and also, of course, questions and requests for clarification. The first question was: Given that the system of a basic income which we propose does not defend the idea of an identical monthly allowance paid to each individual, is it really universal? The question is legitimate and I would like to reply here as clearly as possible. ...

Background (from the link in the excerpt):

...The goals of the candidates standing in the presidential primary elections launched by the left must be judged on the relevance of their proposals, their impact on the recovery of economic activity and employment in France, and their effect on social cohesion in the country.
The economic and fiscal policy adopted during François Hollande’s five-year term of office has prevented France from engaging in the dynamics of strong and sustainable economic recovery. The choice made in 2012 to forcibly impose an increase in taxes and reduce deficits in a period of recession killed any hope of growth. The numerous warnings launched in this respect remained unanswered. Those who bear the responsibility for this disastrous policy and who claim to have had no part in it must be held to account today.
In the ongoing debates in the primaries, discussions are crystallizing around a new issue: a basic income (in French sometime referred to as a « revenu universel » or « revenu de base »). Benoît Hamon is faced with the accusation that he is incompetent to govern because he introduced this proposal. According to his critics, the introduction of a basic income would mean bankruptcy for France. The accusation is easily made but over-hasty. Economically and socially, a basic income can be both relevant and innovative. It could be quite the reverse of the fiscal and budgetary choices made in 2012 and in particular the incredibly complex and inefficient tax credit for competitivity and employment, not to mention the exoneration of overtime which even the right wing has abandoned and Manuel Valls would like to bring back today. Properly designed and defined, the basic income can be a structuring element in a new foundation for our social model. ...

Tuesday, January 17, 2017

No Agricultural Economist Was Harmed–Let Alone Interviewed–During the Making of this Article

Marc Bellemare:

No Agricultural Economist Was Harmed–Let Alone Interviewed–During the Making of this Article: This past weekend, the New York Times ran an article about the kinds of food SNAP recipients purchase, based on a new USDA report.

Here is how the NYT article began:

What do households on food stamps buy at the grocery store?
The answer was largely a mystery until now. The United States Department of Agriculture, which oversees the $74 billion food stamp program called SNAP, has published a detailed report that provides a glimpse into the shopping cart of the typical household that receives food stamps.

The findings show that the No. 1 purchases by SNAP households are soft drinks, which accounted for 5 percent of the dollars they spent on food. The category of “sweetened beverages,” which includes fruit juices, energy drinks and sweetened teas, accounted for almost 10 percent of the dollars they spent on food.

Had the NYT’s intention been to provide arguments to those who wish to dismantle SNAP–a program which, in 2014, provided an average of $125 to spend on food to 46.5 million Americans with low or no income; that’s one in seven Americans–it wouldn’t have done a better job. This is especially given that title: “In the Shopping Cart of a Food Stamp Household: Lots of Soda.”

My Twitter feed came alive with (justified) criticism of the article. My University of Minnesota colleague Joe Soss wrote a long response on his Facebook page which should be read in full to appreciate just how bad the NYT reporting was, part of which reads as follows:

The story hammers away at the idea that “the No.1 purchases by SNAP households are soft drinks, which account for about 10 percent of the dollars they spend on food.” Milk is No. 1 among non-SNAP households, we’re told, not soft drinks. At the start of the article, [NYT reporter Anahad] O’Connor frames these and other alleged facts with a quote that tells readers what SNAP really is: “SNAP is a multibillion-dollar taxpayer subsidy of the soda industry.” The story doubles down on this misleading image of the program by ending with a discussion of how the big soda companies lobby to keep the SNAP funds flowing — and with a quote asserting, “This is the first time we’ve had confirmation that this massive taxpayer program is promoting all the wrong kinds of foods.”

I want to be clear here: This is bullshit. It’s a political hack job on a program that helps millions of Americans feed themselves, and we should all be outraged that the NYT has disguised it as a piece of factual news reporting on its front page …

But what does the USDA report actually say? … Spoiler Alert: The report does not say that SNAP changes what people buy at the grocery–and that includes encouraging them to buy soda–and the report’s findings differ considerably from the portrayal Anahad O’Connor presents in the NYT … Here are the top three items in the report’s own summary of its major findings, reported in an attention-grabbing, color-shaded box:

1. There were no major differences in the expenditure patterns of SNAP and non-SNAP households, no matter how the data were categorized. Similar to most American households: ...

Later, the report adds these bullet points to its summary, in a separate “pay attention” box:

4. Overall, there were few differences between SNAP and non-SNAP household expenditures by USDA Food Pattern categories. Expenditure shares for each of the USDA Food Patter categories (dairy, fruits, grains, oils, protein foods, solid fats and added sugars (SoFAS), and vegetables) varied by no more than 3 cents per dollar when comparing SNAP and non-SNAP households.

...Most of the other comments I read regarding the NYT article were to the effect of: “Who is the NYT to tell poor people what they can and cannot spend their money on?,” as though one being poor necessarily implies that one is morally inferior, and so one needs to get told by Wealthy, Educated White Liberals (WEWLs) what one can and cannot buy. ...

I also find paternalism appalling,* no matter which side it comes from. It is especially appalling when said paternalism strongly hints at the idea that the poor are somehow morally deficient. The left gets up in arms when the right talks about mandatory drug tests for welfare recipients; this is no different. ...

And here is another thing about that NYT article: There are many, many agricultural economists who have done high-quality work on SNAP that steers clear from cheap advocacy. In no particular order: Parke Wilde at Tufts; Shelly Ver Ploeg at USDA’s Economic Research Service; my grad-school colleague Chad Meyerhoefer at Lehigh; Minnesota alum Travis Smith, now at UGA; my erstwhile colleague Tim Beatty; Craig Gundersen at Illinois; and so on, and so forth.

Were any of them interviewed in the article? Of course not. I mean, why would you talk to anyone over in icky flyover country? Why would you slum it at state schools? Instead, the reporter chose to go full TED Talk on the reader, remain comfortably ensconced in area code 212, and go with… Marion Nestle who, faisant flèche de tout bois, chose to use the report’s finding to attack her favorite bête noire: Big Bad Ag. Quoth Nestle:

“… SNAP is a multibillion-dollar taxpayer subsidy of the soda industry,” said Marion Nestle, a professor of nutrition, food studies and public health at New York University. “It’s pretty shocking.”

No. What is shocking is that an article which I would not have published when I was editor of my college’s newspaper not only gets published in but makes the front page of the New York Times, supposedly one of the last bastions of Real Journalism in this era of fake news and filter bubbles. ...

Wednesday, January 04, 2017

The Risk Shift, Revisited

Jared Bernstein:

The risk shift, revisited: Back in the late 2000s, two authors — the economics journalist Peter Gosselin and the political scientist Jacob Hacker — wrote books documenting what they both called “the risk shift.” The idea was that policy and social norms had changed in ways that shifted economic risk — invoked by retirement, illness, job stability and loss of income — from government and firms to individuals and families. The result was greater inequality and worse: greater insecurity among the many people on the wrong side of the risk shift. ...
Which begs the question: how could a significant (albeit minority) share of the electorate that’s increasingly exposed to and suffering from the long risk shift possibly elect leaders that threaten to exacerbate and hasten the shift? ...

Friday, November 18, 2016

Paul Krugman: The Medicare Killers

Why do Republicans want to dismantle Medicare?:

The Medicare Killers, by Paul Krugman, NY Times: During the campaign, Donald Trump often promised to ... represent the interests of working-class voters who depend on major government programs. “I’m not going to cut Social Security like every other Republican and I’m not going to cut Medicare or Medicaid,” he declared, under the headline “Why Donald Trump Won’t Touch Your Entitlements.”
It was, of course, a lie. The transition team’s point man on Social Security is a longtime advocate of privatization, and all indications are that the incoming administration is getting ready to kill Medicare, replacing it with vouchers that can be applied to the purchase of private insurance. Oh, and it’s also likely to raise the age of Medicare eligibility. ...
While Medicare is an essential program for a great majority of Americans, it’s especially important for the white working-class voters who supported Mr. Trump most strongly. ... People like Paul Ryan ... have often managed to bamboozle the media into believing that their efforts to dismantle Medicare and other programs are driven by valid economic concerns. They aren’t.
It has been obvious for a long time that Medicare is actually more efficient than private insurance, mainly because it doesn’t spend large sums on overhead and marketing, and, of course, it needn’t make room for profits.
What’s not widely known is that the cost-saving measures included in ... Obamacare, have been remarkably successful in their efforts to ... rein in the long-term rise in Medicare expenses. ... This success is one main reason long-term budget projections have dramatically improved.
So why try to destroy this successful program...? ... It would be very helpful for opponents of government to do away with a program that clearly demonstrates the power of government to improve people’s lives.
And there’s an additional benefit to the right from Medicare privatization: It would create a lot of opportunities for private profits, earned by diverting dollars that could have been used to provide health care. ...
You might think this would make the whole idea a non-starter. And this push will, in fact, fail — just like Social Security privatization in 2005 — if voters realize what’s happening.
What’s crucial now is to make sure that voters do, in fact, realize what’s going on. And this isn’t just a job for politicians. It’s also a chance for the news media, which failed so badly during the campaign, to start doing its job.

Friday, November 11, 2016

Handouts With a Twist: Rebuilding America’s Infrastructure

Robert Frank:

Handouts With a Twist: Rebuilding America’s Infrastructure: ...Redistributive taxation has always been a fraught subject in America. It is thus encouraging that many prominent conservatives now favor a system of basic income guarantees. ...
In many ways, it’s an appealing idea. But given the realities of American political culture, cash transfers alone cannot solve the problem. They might work, though, if combined with ... an offer of employment as trainees ... to rebuild the nation’s crumbling infrastructure. ...
Previous expansions of the nation’s infrastructure — such as the Works Progress Administration during the Great Depression and the Interstate Highway System initiative of the 1950s — have identified many useful tasks that could be done by properly supervised unskilled workers. Together, the earnings from such jobs plus the small basic income grant would exceed the poverty threshold. ...
We could provide more generous support for those most in need, while at the same time providing them with an opportunity to contribute directly to the nation’s prosperity.

Wednesday, November 02, 2016

Can China Reduce Its National Savings Rate with More Social Insurance?

The theme of the day so far appears to be social insurance. This is from Brad Setser (the full post is much longer):

Can China Reduce Its National Savings Rate with More Social Insurance?: Andrew Batson recently pushed back a bit against my attempt to frame one of China’s core macroeconomic problems as “too much savings.” He argues that policies to bring down savings have been tried in China – spending on social insurance rose in the ‘aughts – and it didn’t bring down national savings...
So is there no hope? ...
I am more optimistic than Andrew is, even with data from the expansion of social insurance in the ‘aughts, for three reasons:
• There is significant evidence that higher spending on public health in particular lowers savings
• There are still significant gaps in China’s social safety net that could be filled in and thus there is scope to make China’s system of social insurance more generous.
• Many of China’s social insurance programs seem to take in more in contributions than they pay out in benefits. That is part of the reason why it isn’t a surprise that the expansion of social insurance, as they were designed, didn’t lower national savings. And it is also suggests there is scope to change the way social insurance is funded and in the process lower national savings.
Let me take each point in turn. ...
Bottom line: A broad redesign of China’s system of social insurance seems to offer potential to lower China’s level of savings.
These issues here of course are complex: the balance between social insurance and incentives to work; the balance between a pay-go system and a funded system; and the question of how to split cost and responsibilities between municipality, province and the central government.
Yet it still seems, from affair, that there is room to reform China’s system of social insurance in ways that would provide stronger and more consistent coverage, with more portable benefits, ideally financed through a more progressive system of taxation.
And in the interim, well, China’s central government has ample fiscal space and could easily pick up more of the tab – allowing contributions to be cut temporarily. That seems like a healthier way of providing short-term stimulus than another round of credit loosening. It does, though, require tolerance of bigger central government fiscal deficits.

Why We Need Social Insurance

I make this argument every few years. Seemed like it was time to make it again (it's at MoneyWatch):

The economic case for social insurance: Republicans and Democrats have very different ideas about social insurance programs such as unemployment compensation, Social Security, Medicare and food stamps. Democrats would like to see the scope and generosity of these programs increased, while Republicans would like to cut back, if not eliminate, many of these programs (e.g. Obamacare). 

It’s true that GOP presidential nominee Donald Trump has, at times, said he’ll protect Medicare and Social Security. But given Trump’s plans to cut taxes and raise the national debt by trillions over the next decade, and the general Republican sentiment about social insurance, it’s hard to see how these programs can be protected if Republicans gain control of Congress and the presidency.

Part of the GOP’s objection to these programs is the idea that they take money from those who have earned and deserve it and redistribute it to those who have not. They say that’s unfair. Is that true, or is there an economic basis for social insurance? ...

Monday, October 03, 2016

Unemployment Insurance Generosity and Aggregate Employment

Arindrajit Dube, Chris Boone, Lucas Goodman, and Ethan Kaplan:

Unemployment Insurance Generosity and Aggregate Employment: Abstract We estimate the impact of unemployment insurance (UI) extensions on aggregate employment during the Great Recession. Using a border discontinuity design, we compare employment dynamics in border counties of states with longer maximum UI benefit duration to contiguous counties in states with shorter durations between 2007 and 2014. ... Using either the baseline or the “refined” border design, we find no statistically significant impact of increasing unemployment insurance generosity on aggregate employment. Similar results obtain from instrumental variables estimates that only use variation in UI benefit duration induced by national-level policy changes—namely the 2008 benefit extension and the subsequent 2014 expiration of the Emergency Unemployment Compensation program. Our point estimates vary in sign, but are uniformly small in magnitude and most are estimated with sufficient precision to rule out substantial impacts of the policy. Based on the confidence intervals of all of our preferred specifications, we can reject negative impacts on the employment-to-population ratio exceeding 1.2 percentage points from an increase in maximum UI benefit duration from 26 to 99 weeks. Our more precise estimates rule out decreases in excess of 0.5 percentage points from the policy expansion. Overall, our macro employment estimates from the UI benefit extention can be rationalized with a small, negative labor supply effect from the UI benefit expansion—as suggested by a number of recent studies—along with a moderately sized fiscal multiplier. 
Also, our results differ substantially from Hagedorn, Karahan, Manovskii and Mitman (2015) and Hagedorn, Manovskii and Mitman (2016)  despite employing apparently similar strategies. In an online Appendix, we compare our results to those papers and discuss in detail what accounts for the substantial differences in our respective estimates, and decompose the differences due to choice of dataset and specifications.

Here is the link to the paper:

Here is a link to a media advisory with a synopsis of the study:

Thursday, September 22, 2016

Don't Believe Trump’s Tax and Spending Plans

At MoneyWatch, why I think Social Security and Medicare will be in danger of large cuts if Trump is elected:

Don't believe Trump’s tax and spending plans: Donald Trump’s new tax plan will increase the national debt between $4.4 trillion and $5.9 trillion over a decade, and that’s according to estimates from the conservative Tax Foundation. That range of $1.5 trillion is due to uncertainty about how Trump would levy some types of business taxes and how his tax cuts would be paid for.
First, the Republican candidate says, higher economic growth from lower taxes and deregulation will pay for most of the increase in the debt. According to Trump, his plan will boost output substantially, and the higher tax revenue that comes with it will offset most of the lost revenue. 
Second, his “penny plan” would make up the rest of the revenue lost to his tax cuts. This plan would cut spending on nondefense programs funded by annual appropriations by 1 percent each year. 
Since the cuts would affect only a part of the budget (defense and entitlement programs such as Medicare and Social Security are excluded), the plan would reduce spending on programs such as“veterans’ medical care…, scientific and medical research, border enforcement, education, child care, national parks, air traffic control, housing assistance for low-income families, and maintenance of harbors, dams, and waterways,” according to the Center on Budget and Policy Priorities. The total spending reduction would be approximately 25 percent over 10 years.
You should be skeptical of both claims. ...

Wednesday, September 14, 2016

Safety Net Cut Poverty Nearly in Half Last Year

Danilo Trisi at the CBPP:

Safety Net Cut Poverty Nearly in Half Last Year: Safety net programs cut the poverty rate nearly in half in 2015, lifting 38 million people — including 8 million children — above the poverty line, our analysis of Census data released yesterday finds. The Census data show the impact of a broad range of government assistance, such as Social Security, SNAP (formerly food stamps), Supplemental Security Income, rent subsidies, and tax credits for working families like the Earned Income Tax Credit (EITC) and Child Tax Credit. The figures rebut claims that government programs do little to reduce poverty.
Government benefits and taxes cut the poverty rate from 26.3 percent to 14.3 percent in 2015. Among children, they cut the poverty rate from 26.8 percent to 16.1 percent... This analysis uses the Census Bureau’s Supplemental Poverty Measure (SPM), which counts various government non-cash benefits as income, as most analysts favor. ...
These figures understate the safety net’s effectiveness because they don’t correct for households’ underreporting of government... In 2012, the most recent year for which we have data corrected for such underreporting, the safety net lowered the SPM poverty rate from 29.1 percent to 13.8 percent — a poverty rate 2.2 percentage points lower than in SPM data without these corrections.
Policymakers negotiating budget and tax priorities should keep in mind that the safety net keeps millions of children, adults, and seniors of all races and ethnicities from falling below the poverty line. Deep cuts to these programs would make them much less effective at reducing poverty and would push the U.S. poverty rate substantially higher.

Sunday, August 28, 2016

Brexit: This Backlash Has Been a Long Time Coming

Kevin O’Rourke at VoxEU:

Brexit: This backlash has been a long time coming: Editors' note: This column first appeared as a chapter in the VoxEU ebook, Brexit Beckons: Thinking ahead by leading economists, available to download free of charge here.

It has recently become commonplace to argue that globalisation can leave people behind, and that this can have severe political consequences. Since 23 June, this has even become conventional wisdom. While I welcome this belated acceptance of the blindingly obvious, I can't but help feeling a little frustrated, since this has been self-evident for many years now. What we are seeing, in part, is what happens to conventional wisdom when, all of a sudden, it finds that it can no longer dismiss as irrelevant something that had been staring it in the face for a long time.

The main point of my 1999 book with Jeff Williamson was that globalisation produces both winners and losers, and that this can lead to an anti-globalisation backlash (O'Rourke and Williamson 1999). We argued this based on late-19th century evidence. Then, the main losers from trade were European landowners, who found themselves competing with an elastic supply of cheap New World land. The result was that in Germany and France, Italy and Sweden, the move towards ever-freer trade that had been ongoing for several years was halted, and replaced by a shift towards protection that benefited not only agricultural interests, but industrial ones as well. Meanwhile, across the Atlantic, immigration restrictions were gradually tightened, as workers found themselves competing with European migrants coming from ever-poorer source countries. 

While Jeff and I were firmly focused on economic history, we were writing with half an eye on the ‘trade and wages’ debate that was raging during the 1990s. There was an obvious potential parallel between 19th-century European landowners, newly exposed to competition with elastic supplies of New World land, and late 20th-century OECD unskilled workers, newly exposed to competition with elastic supplies of Asian, and especially Chinese, labour. In our concluding chapter, we wrote that:

"A focus of this book has been the political implications of globalization, and the lessons are sobering. Politicians, journalists, and market analysts have a tendency to extrapolate the immediate past into the indefinite future, and such thinking suggests that the world is irreversibly headed toward ever greater levels of economic integration. The historical record suggests the contrary… unless politicians worry about who gains and who loses, they may be forced by the electorate to stop efforts to strengthen global economy links, and perhaps even to dismantle them…The globalization experience of the Atlantic economy prior to the Great War speaks directly and eloquently to globalization debates today. Economists who base their views of globalization, convergence, inequality, and policy solely on the years since 1970 are making a great mistake. We hope that this book will help them to avoid that mistake— or remedy it."

This time it is not different

You may argue that the economic history of a century ago is irrelevant – after all, this time is different. But ever since the beginning of the present century, at the very latest, it has been obvious that the politics of globalisation today bears a family resemblance to that of 100 years ago. 

  • It was as long ago as 2001 that Kenneth Scheve and Matthew Slaughter published an article finding that Heckscher-Ohlin logic did a pretty good job of explaining American attitudes towards trade – lower-skilled workers were more protectionist (Scheve and Slaughter 2001: 267). 

Later work extended this finding to the rest of the world. 

  • If the high skilled were more favourably inclined towards free trade in all countries, this would not be consistent with Heckscher-Ohlin theory, but that is not what the opinion survey evidence suggested – the Scheve-Slaughter finding held in rich countries, but not in poor ones (O'Rourke and Sinnott 2001: 157, Mayda and Rodrik 2005: 1393).

You may further argue that such political science evidence is irrelevant, or at least that conventional wisdom could be forgiven for ignoring it. But by the first decade of the 21st century, again at the very latest, it was clear that these forces could have tangible political effects. 

  • In 2005, a French referendum rejected the so-called 'Constitutional Treaty' by a convincing margin. 

While the treaty itself was a technical document largely having to do with decision-making procedures inside the EU, the referendum campaign ended up becoming, to a very large extent, a debate about globalisation in its local, European manifestation. 

Opponents of the treaty pointed to the outsourcing of jobs to cheap labour competitors in Eastern Europe, and to the famous Polish plumber. Predictably enough, professionals voted overwhelmingly in favour of the treaty, while blue-collar workers, clerical workers and farmers rejected it. The net result was a clear rejection of the treaty.

Lessons not learned

Shamefully, the response was to repackage the treaty, give it a new name, and push it through regardless – a shabby manoeuver that has done much to fuel Euroscepticism in France. There was of course no referendum on the Lisbon Treaty in that country, but there was in Ireland in 2008. Once again, a clear class divide opened up, with rich areas overwhelmingly supporting Lisbon, and poor areas overwhelmingly rejecting it. Survey evidence commissioned afterwards by the Irish government suggested that what canvassers on the doorsteps had found was indeed the case – hostility towards immigration in the poorer parts of Dublin was an important factor explaining the "No" vote there (O'Rourke 2008, Sinnott et al. 2010).

For a long time, conventional wisdom ignored these rather large straws in the wind – after all, the Irish could always be asked to vote again, while the French could always be told that they couldn't vote again. And so the show could go on. But now Brexit is happening, and the obvious cannot be ignored any longer. 

Recent work suggests that exposure to Chinese import competition was a common factor in many British regions that voted to leave the EU (Colantone and Stanig 2016). If this finding survives the scholarly scrutiny that it deserves, it will hardly come as a surprise. But it is nevertheless crucial, since these are precisely the kinds of regions that are voting for the National Front in France. And unlike Britain, France is absolutely central to the European project.

What can be done? Great openness requires greater governments

This is where Dani Rodrik's finding that more open states had bigger governments in the late 20th century comes in (Rodrik 1998). Dani – who was long ago asking whether globalisation had gone too far (Rodrik 1997) – argues that markets expose workers to risk, and that government expenditure of various sorts can help protect them from those risks. 

In a series of articles (e.g. Huberman and Meissner 2009) and a book (Huberman 2012), Michael Huberman showed that this correlation between states and markets was present before 1914 as well. Countries with more liberal trade policies tended to have more advanced social protections of various sorts, and this helped maintain political support for openness.

Anti-immigration sentiment was clearly crucial in delivering an anti-EU vote in England. And if you talk to ordinary people, it seems clear that competition for scarce public housing and other public services was one important factor behind this. But if the problem was a lack of services per capita, then there were two possible solutions: 

  • Reduce the number of 'capitas' by restricting immigration; or 
  • Increase the supply of services. 

It is astonishing in retrospect how few people argued strongly for more services rather than fewer people.

Concluding remarks and possible solutions

If the Tories had really wanted to maintain support for the EU, investment in public services and public housing would have been the way to do it. If these had been elastically supplied, that would have muted the impression that there was a zero-sum competition between natives and immigrants. It wouldnít have satisfied the xenophobes, but not all anti-immigrant voters are xenophobes. But of course the Tories were never going to do that, at least not with George Osborne at the helm.

If the English want continued Single Market access, they will have to swallow continued labour mobility. There are complementary domestic policies that could help in making that politically feasible. We will have to wait and see what the English decide. But there are also lessons for the 27 remaining EU states (28 if, as I hope, Scotland remains a member). Too much market and too little state invites a backlash. Take the politics into account, and it becomes clear (as Dani Rodrik has often argued) that markets and states are complements, not substitutes.


Colantone, I. and P. Stanig (2016), "Brexit: Data Shows that Globalization Malaise, and not Immigration, Determined the Vote", Bocconi Knowledge, 12 July. 

Huberman, M. (2012), Odd Couple: International Trade and Labor Standards in History, New Haven, CT: Yale University Press.

Huberman, M. and C. M. Meissner (2009), "New evidence on the rise of trade and social protection",, 23 October. 

Mayda, A. M. and D. Rodrik (2005), "Why are some people (and countries) more protectionist than others?", European Economic Review 49(6).

Rodrik, D. (1997), Has Globalization Gone Too Far?, Washington, DC: Peterson Institute for International Economics. 

Rodrik, D. (1998), "Why do More Open Economies Have Bigger Governments?" Journal of Political Economy 106(5): 997-1032

O'Rourke, K. (2008), "The Irish "no" and the rich-poor/urban-rural divide",, 14 June. 

O'Rourke, K. and R. Sinnott (2001), "The Determinants of Individual Trade Policy Preferences: International Survey Evidence", Brookings Trade Forum. 

O'Rourke, K. and J. Williamson (1999), Globalization and History: The Evolution of a Nineteenth-Century Atlantic Economy, Cambridge, MA: MIT Press.

F. Scheve, K. F. and M. J. Slaughter (2001), "What determines individual trade-policy preferences?", Journal of International Economics 54(2).

Sinnott, R., J. A. Elkink, K. H. O'Rourke and J. McBride (2010), "Attitudes and Behaviour in the Referendum on the Treary of Lisbon", report prepared for the Department of Foreign Affairs.

Friday, July 01, 2016

Markets and States are Complements

Kevin O'Rourke:

Markets and states are complements: The main point of my 1999 book with Jeff Williamson was that globalisation produces both winners and losers, and that this can lead to an anti-globalisation backlash. ...
What was missing from all this was an analysis of what, if anything, governments can do about this. Which is where Dani Rodrik’s finding that more open states had bigger governments in the late 20th century comes in. Dani’s interpretation is that markets expose workers to risk, and that government expenditure of various sorts can help protect them from those risks. In a series of articles, and an important book, Michael Huberman showed that this correlation between states and markets was present before 1914 as well: countries with more liberal trade policies tended to have more advanced social protections of various sorts, and this helped maintain political support for openness.
Anti-immigration sentiment was clearly crucial in delivering an anti-EU vote in England. And if you talk to ordinary people, it seems clear that competition for scarce public housing and other public services was one important factor behind this. If the Tories had really wanted to maintain support for the EU, investment in public services and public housing would have been the way to do it: if these had been elastically supplied, that would have muted the impression that there was a zero-sum competition between natives and immigrants. It wouldn’t have satisfied the xenophobes, but not all anti-immigrant voters are xenophobes. But of course the Tories were never going to do that, at least not with Osborne at the helm.
If the English want continued Single Market access, they will have to swallow continued labor mobility. There are complementary domestic policies that could help in making that politically feasible. ...
Too much market and too little state invites a backlash. Take the politics into account, and it becomes clear (as Dani has often argued) that markets and states are complements, not substitutes.

Tuesday, June 07, 2016

Under Current Poverty Programs, It Pays to Work, Despite House Republicans’ Contentions

From the CBPP:

Commentary: Under Current Poverty Programs, It Pays to Work, Despite House Republicans’ Contentions, by June 6, 2016 by Isaac Shapiro: In the overwhelming majority of cases, adults in poverty are significantly better off if they take a job, work more hours, or receive a wage hike, we found in our recent comprehensive analysis of the data and research related to work and the safety net.[1] Further, various changes in the safety net over the past two decades (including health reform, or the Affordable Care Act) have substantially increased incentives to work for people in poverty.
Nevertheless, leading up to the release of their forthcoming plan to address poverty, House Republicans continue to claim that the low-income assistance system strongly discourages work. They have said that people receiving assistance from these programs often receive more, or nearly as much, from not working — and receiving government aid — than from working. Or they’ve argued that low-paid workers have little incentive to work more hours or seek higher wages because losses in government aid will cancel out the earnings gains. They may repeat such claims in the coming days. But our research has found that these assertions don’t withstand scrutiny. ...
Policymakers should not ignore those circumstances in which marginal tax rates can be quite high. But it’s important they also recognize that such circumstances are concentrated among a small fraction of families with earnings just above the poverty line that receive benefits from a number of programs that phase down simultaneously — and, just as importantly, that reducing such marginal rates involves very difficult tradeoffs.
There are really only two options to lowering marginal tax rates. One is to phase out benefits more slowly as earnings rise; this reduces marginal tax rates for those currently in the phase-out range. But it also extends benefits farther up the income scale and increases costs considerably, a tradeoff that many policymakers may not want to make. The second option is to shrink (or even eliminate) benefits for people in poverty so they have less of a benefit to phase out and thus lose less as benefits are phased down. This reduces marginal tax rates, but it pushes poor families into — or deeper into — poverty and increases hardship, and thus may cause significant harm to children in these families. In effect, the second option would “help” the poor by making them worse off. ...
The solution that some who use marginal-tax-rate arguments to attack safety net programs have advanced in the past — block grants with extensive state flexibility — does nothing to resolve these inevitable tradeoffs. Block grants would merely pass the buck in making these tradeoffs from federal to state decision-makers.

Monday, June 06, 2016

Is Health Insurance Good for Your Financial Health?

Nicole Dussault, Maxim Pinkovskiy, and Basit Zafar at the NY Fed's Liberty Street Economics blog:

Is Health Insurance Good for Your Financial Health?: What is the purpose of health care? What is the purpose of health insurance? When people fall ill, they seek health care in order to get better. But insurance has a slightly different function: Its main role is not to protect our health per se, but to protect our finances. For most people, lifetime health expenditures are quite low. However, some people have enormous health costs owing to major illnesses or health conditions. And this is where health insurance comes in—its goal (like that of any other form of insurance) is to protect these individuals against large, and sometimes ruinous, health expenditures. Has the recent health reform served this purpose?

Protection against financial hardship was one of the drivers behind passage of the 2010 Patient Protection and Affordable Care Act, commonly known as the Affordable Care Act (ACA). ...

In this blog post, we discuss the results of a research project that examines the effect of the Affordable Care Act’s Medicaid expansion on personal financial indicators. We find suggestive evidence that after the implementation of the ACA in the first quarter of 2014, counties with a high uninsurance burden pre-reform in states that subsequently expanded Medicaid had a decrease in average debt sent to collections agencies compared with such counties in states that did not expand Medicaid.

Our findings are consistent with prior research that has provided evidence that health insurance is good for individual finances...

While the full effects of the Affordable Care Act on financial health are yet to be seen, and while the effects of the ACA—positive or negative—are not restricted to financial health, we offer suggestive early evidence that the Medicaid expansion is fulfilling the goal of health insurance: providing “peace of mind” by protecting against financial hardship. ...

Thursday, June 02, 2016

President Obama Leans into Social Security Expansion

Jared Bernstein:

President Obama leans into Social Security expansion: “It’s time we finally made Social Security more generous and increased its benefits so today’s retirees and future generations get the dignified retirement that they have earned.” 
Guess who said that? Bernie Sanders? Hillary Clinton? The Donald? Sen. Warren? Dean Baker? Me? None of the above.
Those words were spoken by President Obama on Wednesday in his economics speech in Elkhart, Ind. ...
But wouldn’t it be fiscally reckless to expand benefits, say, for low-income retirees? Well, first, you heard the president suggest a “payfor,” by increasing taxes on those at the top of the scale. In fact..., there’s now a smaller share of covered earnings below the tax max: about 81 percent now vs. 90 percent a few decades ago. So there’s a real margin for new revenue to support the program.
Second, if you consider the three-legged retirement security stool — savings, pensions and Social Security — for many less well-off aging people, the latter is in the best financial shape of all..., contrary to critics’ false claims, it ain’t exactly going broke.
That said, the big point here is that we should get the venerable program on a more solid fiscal trajectory, one that doesn’t just close the long-term funding gap but considers an expansion of the type the president suggested. ...
It’s great to hear the president defending this essential, efficient, progressive program. ...

Friday, May 27, 2016

Impoverished Children with Access to Food Stamps become Healthier and Wealthier Adults

At Microeconomic Insights:

Impoverished children with access to food stamps become healthier and wealthier adults: Adults who participated in the Food Stamp Program, renamed the Supplemental Nutrition Assistance Program (SNAP) in 2008, as children are healthier and better off financially than poverty-stricken families who did not have access to the program, according to findings in joint work with Douglas Almond and Diane Schanzenbach (this paper and a companion paper Almond, et al. 2011). Children with access were more likely as adults to graduate from high school, earn more, and rely less on government welfare programs as adults than impoverished children who did not have access to SNAP. Women, in particular, are substantially more likely to self-report they are in good health and are more economically self-sufficient in adulthood. We find no additional long-term health impacts for children from more exposure to the program during middle childhood, but individuals with access to food stamps before age 5 had measurably better health outcomes in adulthood with significant impacts for those in early childhood. ...
Policy lessons
In terms of policy, it’s important to recognize that the benefits of SNAP not only include improved food security in the short-run, but the program also helps prevent negative, long-term, and lasting effects of deprivation during childhood, such as less education and earnings as adults, along with health problems like obesity, heart disease, or diabetes.

Because these individuals are healthier and more financially sound, the benefits also pay out to taxpayers. Healthier Americans leads to less cost when it comes to future health care for the average taxpayer. Additionally, by increasing self-sufficiency, SNAP today can reduce the future costs of safety net programs and also increase tax revenues in the long run.

Our findings suggest that the SNAP benefits that go to children are better thought of as an investment rather than as charity.

Monday, April 18, 2016

Adjusting to Economic Shocks Tougher than Thought

Mark Muro at Brookings:

Adjusting to economic shocks tougher than thought: The mathematical models of economic theory have always sacrificed a bit of on-the-ground accuracy for what has been assumed to be a larger measure of insight.  Work on how local labor markets respond to shocks like mass layoff events and recessions is a case in point.  While the near-term pain of these shocks has raised more and more questions, the conventional wisdom of a relatively benign “adjustment” period over the medium-term has largely survived. The general consensus: Workers and local economies will adjust. Dislocated workers will leave distressed regions and move to healthier ones. Jobless rates will revert to the mean.  
Yet it now appears this consensus view of dislocation and recovery is breaking down.
In the last six months a burst of new empirical work—much of it focused on the region-by-region aftermath of the Great Recession—is shredding key aspects of the standard view and suggesting a much tougher path to adjustment for people and places.
Overall, the new research ... shows that the reality of adjustment is far from automatic, far from quick: ...
As to the upshot of this work, it’s increasingly clear that policymakers need to be thinking much more urgently about how to provide for and accelerate adjustment for the victims of economic shocks. ...

Thursday, March 31, 2016

Job Growth in Last Decade Was in Temp and Contract

Neil Irwin:

Job Growth in Last Decade Was in Temp and Contract: research ... indicates the proportion of American workers who don’t have traditional jobs — who instead work as independent contractors, through temporary services or on-call — has soared in the last decade. ...
Most remarkably, the number of Americans using these alternate work arrangements rose 9.4 million from 2005 to 2015. That was greater than the rise in overall employment, meaning there was a small net decline in the number of workers with conventional jobs.
That, in turn, raises still bigger questions about how employers have succeeded at shifting much the burden of providing social insurance onto workers, and what technological and economic forces are driving the shift. ...
This change in behavior has profound implications on social insurance. ...

Tuesday, March 29, 2016

'Trump, Cruz Tax-Cut Plans Would Force Historically Dramatic Cuts'

From the CBPP:

Trump, Cruz Tax-Cut Plans Would Force Historically Dramatic Cuts: The tax-cut proposals from Republican presidential candidates Donald Trump and Ted Cruz, in conjunction with their calls for balancing the budget, would dictate low levels of government spending not seen since about 1950, as we explain in a new paper.  Programs that receive support across the political spectrum and are important to the well-being of most Americans would dramatically shrink or disappear altogether.  Even if policymakers didn’t achieve budget balance under their tax-cut plans but simply offset the costs of the plans themselves, the consequences to essential programs — and to low- and middle-income Americans — would be severe. 
These conclusions emerge from an analysis of the Urban-Brookings Tax Policy Center’s (TPC) revenue estimates of the Trump and Cruz tax plans — which would reduce revenues by $9.5 trillion and $8.7 trillion over the next ten years, respectively, according to TPC — and CBPP estimates of what such revenue levels imply for government spending.  This analysis examines only the Trump and Cruz plans because TPC has not analyzed John Kasich’s proposals and because the proposals of Democratic candidates Hillary Clinton and Bernie Sanders would raise revenues, not reduce them.  The specific findings include...
As dramatic as these figures are, they understate the pressure that the two candidates’ proposals would place on many government programs.  Both have proposed large spending increases in certain areas, including Senator Cruz’s proposal to increase defense spending by $2.7 trillion over the next decade and Mr. Trump’s proposal to increase spending on veterans by $500 billion to $1 trillion over this period.  Offsetting the cost of such increases, as well as the tax cuts, would require even deeper cuts to other programs. ...

Thursday, March 24, 2016

Why Is the CBO Concocting a Phony Debt Crisis?

Lifted from Brad DeLong at Equitablog:

Why Is the CBO Concocting a Phony Debt Crisis?: Must-Read: Ari Rabin-Havt: Why Is the CBO Concocting a Phony Debt Crisis?: “The CBO assumes that Social Security and Medicare Part A will draw on the general fund of the US Treasury…
…to cover benefit shortfalls following the depletion of their trust funds, which at the current rate will occur in 2034. That would obviously lead to an exploding debt, but it’s a scenario prohibited by law. In the case of both programs, benefits must be paid either from revenue collected via payroll taxes or from accumulated savings in the programs’ trust funds. When those funds run out, full benefits will simply not be paid. ‘Because there is no borrowing authority, there is really a hard stop,’ said Goss.
Congress could pass a law saying that Social Security and Medicare Part A would begin drawing on the US Treasury general fund after 2034. Or, Congress could preemptively pass laws to avert the situation before the deadline; it could take the approach favored by progressives and increase revenue to the programs by lifting the payroll tax cap, or alternatively raise the retirement age and lower benefits. But the bottom line is the CBO projections disregard the actual law and assume a worst-case legislative scenario—and one that is politically unlikely, to boot…

Tuesday, March 22, 2016

Why Republican Elites are Threatened

New Column:

Why Republican Elites are Threatened, by Mark Thoma: ... Donald Trump’s tax plan will result in a fall in revenue of 9.5 trillion dollars over the next ten years, yet somehow he will fulfill his promise to protect Social Security and Medicare and balance the budget? When push comes to shove (or worse – this is Trump after all), who do you think he will protect, social insurance programs the working class relies upon for economic security or his own and his party’s wealthy interests? Ted Cruz has proposed an 8.6 trillion dollar tax cut. How, exactly, will that be financed without large cuts to social insurance programs or huge increases in the budget deficit?
Republicans have fooled people into thinking budget deficits can be reduced substantially by eliminating waste and fraud in government, cutting foreign aid, or that it is the fault of lazy, undeserving “others” who sponge off of government programs. ...

I am very happy that the Republican con is starting to come to light. Members of the working class who support Trump are beginning to see that the elites in the Republican Party do not have their best interests at heart. I am not pleased at all, however, that people are still being led to believe that there are simple answers to budget problems that do not require raising taxes, or, alternatively, reducing their hard-earned benefits from programs such as Social Security or Medicare. ...

Friday, March 18, 2016

'Calculate Your Economic Risk'

Why we need social insurance:

Calculate Your Economic Risk, NY Times: Two economic issues loom especially large in the United States today: widespread economic insecurity and soaring levels of income inequality. These ... issues ... are a prime concern of ordinary citizens. “How much economic risk do I face in the future?”... “How does my risk differ from that of others?” ...
We have discovered that, for many Americans, the future risk of poverty is far from trivial. Take someone who might be thought of as having a relatively low probability of poverty: an American who is in his or her later 30s, white, not married, with an education beyond high school. It turns out that the 15-year risk of poverty for such a person is actually 32 percent. ... If we project across a longer span of adulthood, it appears that a clear majority of Americans will experience poverty....
Race, education, marital status and age make a huge difference in terms of who is more or less likely to experience poverty. For example, the five-year risk of poverty is 5 percent for an American who is 45 to 49, white and married, with an education beyond high school. In contrast, the five-year risk for an individual who is 25 to 29, nonwhite and unmarried, with an education of high school or less is a whopping 72 percent. ...
We are in danger of becoming an economically polarized society in which a small percentage of the population is free from economic risk, while a vast majority of Americans will encounter poverty as a normal part of life.
With our calculator, Americans can for the first time examine their own economic vulnerability. Our hope is that such information will be both sobering and a clarion call to action.

Thursday, March 17, 2016

'House Republicans Cling to False Promise of Austerity in their Budget Resolution'

The EPI's Hunter Blair:

House Republicans cling to false promise of austerity in their budget resolution: This week, the House Budget Committee reported out, on a party-line vote, their fiscal year 2017 budget resolution. Infighting between House Republicans, centered on the idea that proposed spending cuts should be even more drastic, suggests that this year’s budget resolution is unlikely to pass. However, with all the media attention focused on the House Republican’s inability to come to an agreement, we shouldn’t lose sight of just how austere their budget resolution already is, and how much damage the cuts it calls for would do to the economy over both the short and long run.
For example, the cuts over the first two years would impose a significantly larger fiscal drag on economic recovery than previous Republican budgets. ...
GOP House budget resolutions for the past several years have been obsessed with eliminating the budget deficit by the end of the ten year budget window. This was already a quixotic and damaging goal, and it has become even more so thanks to changes in the CBO’s baseline. And while deficits are created from revenue minus spending, congressional Republicans’ outright refusal to raise any taxes means that spending cuts—and thereby low- and middle- income people—must bear the entire brunt of the budget resolution’s burden. They bear this burden to the tune of $6.5 trillion in spending cuts to vital programs over ten years—programs that overwhelmingly serve those most in need. The cuts would take away affordable health insurance coverage from the millions that have gained it under the Affordable Care Act and then further erode the safety net with cuts to Medicaid, unemployment benefits, and nutrition assistance. Besides making the economic lives of vulnerable populations harder, focusing cuts on this group imposes a large fiscal drag, since these are households that tend to spend (not save) additional dollars of resources back into the economy. ...
In years beyond 2017, the fiscal drag would remain considerable (and would likely damage growth and job creation), but we’re unable to forecast these impacts precisely because the Fed may have regained some scope to (at least partially) offset fiscal cuts in later years. Looking forward, while it is hard to precisely quantify by how much, the deeper budget cuts throughout the ten year window in the House GOP budget resolution would almost surely further hinder and delay a full economic recovery, especially in the near-term.1 ...
1.The cuts in fiscal 2017 of the House GOP budget resolution total $186 billion. We assume a very conservative multiplier of 1.25—Medicaid and SNAP have very high multipliers (between 1.5-2 or even higher), so 1.25 strikes us as quite conservative. This 1.25 multiplier implies that the House budget cuts will place a 1.2 percent drag on a GDP growth in the next year. This loss in GDP means, all else equal, that job-growth in the next year will be 1.4 million less. Putting that in context, job-growth in 2015 was 2.7 million, so the pace of job-growth would be cut by more than half in the coming year. We should note that we are quite confident about this impact for 2017, given that there is little scope or obvious appetite for monetary policymakers to provide enough stimulus with their policy tools to offset this fiscal drag. Cuts totaling $321 billion in fiscal 2018 will also likely drag significantly on growth, but uncertainty about other economic influences on recovery (particularly the response of the Federal Reserve) makes calculating exactly how much hard to quantify.

Tuesday, March 15, 2016

'Rising insecurity and the rise of Trump and Sanders'

At MoneyWatch:

Rising insecurity and the rise of Trump and Sanders, by Mark Thoma: Capitalism is the best economic system yet invented for producing economic growth and satisfying the diverse desires of millions and millions of people. The key to its success is the ability to respond quickly to changes in economic conditions.
But this comes with a cost that has been magnified by the failure of our political system to protect the people who pay the price of capitalism's dynamism, a failure that has fueled the economic insecurity that's helping the rise of Donald Trump and Bernie Sanders. ...

See also: Why the Working Class Is Choosing Trump and Sanders.

'Return of the Undeserving Poor'

Paul Krugman:

Return of the Undeserving Poor: When I was growing up, income inequality wasn’t yet a big issue, because the middle class was strong and the plutocracy fairly marginal. But there was a great deal of alarm over the troubles of the African-American community, where social disorder was on the rise even as explicit legal discrimination (although not de facto discrimination) was coming to an end. What was going on?
There were all kinds of theories, ranging from cultural hand-waving to claims that it was all because of welfare. But some people, notably William Julius Wilson, argued that the underlying cause was economic: good jobs, while still fairly plentiful in America as a whole, were disappearing from the urban centers where the A-A population was concentrated. And the social collapse, while real, followed from that underlying cause.
This story contained a clear prediction — namely, that if whites were to face a similar disappearance of opportunity, they would develop similar behavior patterns. And sure enough, with the hollowing out of the middle class, we saw (via Mark Thoma) what Kevin Williamson at National Review describes as
the welfare dependency, the drug and alcohol addiction, the family anarchy
And what is the lesson? Why, that poor whites are moral failures, and they should move to where there are opportunities (where?). It’s really extraordinary.
Oh, and lots of swipes at food stamps, welfare programs, disability insurance (which conservatives insist is riddled with fraud, despite lots of evidence to the contrary.)
It’s surely worth noting that other advanced countries, with much more generous welfare states, aren’t showing anything like the kind of social collapse we’re seeing in the U.S. heartland. ...
Why, it’s almost as if having a strong safety net leads to better, not worse, social health. Culture still matters: US Hispanics do a lot better than one might have expected. But the idea that somehow food stamps are why we’re breaking bad is utterly at odds with the evidence. (Just as an aside, since someone will bring it up: all of those other advanced economies are just as open to trade as we are — so whatever you think of free trade, it doesn’t necessarily cause social collapse.)
Anyway, the right’s inability to face up to the evidence on this front is … just like its inability to face up to evidence on any other front.

Let me add:

Friday, March 11, 2016

'How Wage Insurance Could Ease Economic Inequality'

Robert Shiller:

How Wage Insurance Could Ease Economic Inequality: Wage insurance may not be on your radar, but it should be. It helps people who have lost their jobs and cannot find new ones that pay as well. That assistance can reduce economic inequality while providing incentives for unemployed people to go back to work quickly.
What’s more, wage insurance has bipartisan support, at least in its current limited form. We ought to expand it, both through government and in the private sector. ...
The role of government is important in this case because for social insurance, governments have a significant advantage in putting into place big ideas that are difficult to market. That was true for federal Old-Age, Survivors and Disability Insurance in the Social Security system starting in 1935, which was followed by an explosion of additional private pension, life insurance and disability plans. Government is needed again now.
But ultimately, there should be two insurance systems, a government one that is limited to assisting lower-income workers and a private one that allows everyone — including those with higher incomes — to buy insurance against wage loss. ...

Sunday, March 06, 2016

'It Pays to Work: Work Incentives and the Safety Net'

Via Brad DeLong:

It Pays to Work: Work Incentives and the Safety Net: Isaac Shapiro, Robert Greenstein, Danilo Trisi, and Bryann DaSilva, CBPP: Some critics of various low-income assistance programs argue that the safety net discourages work.  In particular, they contend that people receiving assistance from these programs can receive more, or nearly as much, from not working — and receiving government aid — than from working.  Or they argue that low-paid workers have little incentive to work more hours or seek higher wages because losses in government aid will cancel out the earnings gains. 
Careful analysis of the data and research demonstrates, however, that such charges are largely incorrect and that it pays to work.  In the overwhelming majority of cases, in fact, adults in poverty are significantly better off if they get a job, work more hours, or receive a wage hike.  Various changes in the safety net over the past two decades have transformed it into more of what analysts call a “work-based safety net” and substantially increased incentives to work for people in poverty. ...

Wednesday, March 02, 2016

'Nearly Half of American Children Living Near Poverty Line'

"Millions of children are living in families still struggling to make ends meet in our low-growth, low-wage economy":

Nearly half of American children living near poverty line, Eurekalert!: Nearly half of children in the United States live dangerously close to the poverty line, according to new research from the National Center for Children in Poverty (NCCP) at Columbia University's Mailman School of Public Health. Basic Facts about Low-Income Children, the center's annual series of profiles on child poverty in America, illustrates the severity of economic instability and poverty conditions faced by more than 31 million children throughout the United States. Using the latest data from the American Community Survey, NCCP researchers found that while the total number of children in the U.S. has remained about the same since 2008, more children today are likely to live in families barely able to afford their most basic needs.
"These data challenge the prevailing beliefs that many still hold about what poverty looks like and which children in this country are most likely to be at risk," said Renée Wilson-Simmons, DrPH, NCCP director. "The fact is, despite the significant gains we've made in expanding nutrition and health insurance programs to reach the children most in need, millions of children are living in families still struggling to make ends meet in our low-growth, low-wage economy."
According to NCCP researchers, the number of poor children in the U.S. grew by 18 percent from 2008 to 2014 (the latest available data), and the number of children living in low-income households grew by 10 percent. ...

Monday, February 22, 2016

A 'Second-Chance' Society

Social programs "need to be refitted for a polarized labor market hard-wired to generate inequalities":

Why Canada should foster a ‘second-chance’ society, by Miles Corak: Canadians should be thumping their chests, after all many others are patting us on the back. When it comes to social mobility we are among the world leaders. Even U.S. President Obama acknowledged that a poor child is more likely to move up in life in Canada than in the United States.
This kind of mobility, the capacity for children to become all that they can be without regard to their starting point in life, is the bedrock of fairness. ...
But ... the ... foundations of fairness are shifting; luck will matter more, meritocracy will be perverted by growing inequality, and our public policies haven’t really changed to prepare for the new reality that is already pressing on young people. ...
Canadians need to build a “second chance” society so that the consequences of bad luck or bad choices don’t matter as much.
There is a whole host of ways our social programs built up in an era of stable and steady job growth need to be refitted for a polarized labor market hard-wired to generate inequalities. ...

He goes on to explain some of the ways this might be accomplished.

Friday, February 19, 2016

'False Beliefs about Food Stamps'

Jayson Lusk:

False Beliefs about Food Stamps: In this post on the University of Illinois Policy Matters blog, Craig Gundersen tries to lay to rest a few false beliefs (or misconceptions) that may people (and policy makers) have about the Supplemental Nutrition Assistance Program (SNAP, also known as "food stamps").
Does SNAP participation lead to obesity obesity? [no]...
Does SNAP participation cut down hunger? [yes] ...
Finally, Gundersen takes on the idea that various health restrictions on SNAP spending will have much impact. ...
To that I'll add that most SNAP participants can easily get around the restrictions on what they buy by rearranging what they buy with SNAP and what they buy with non-SNAP dollars (see my explanation of that phenomenon here). ...

Thursday, February 11, 2016

'Instead of Working to Demonize Struggling Families...'

This is from Congresswoman Gwen Moore's website:

The Use of Political Stunts to Attack Social Programs: Today, Budget Committee members Congresswoman Gwen Moore (WI-04) and Congresswoman Barbara Lee (CA-13) sent a letter to Chairman Tom Price expressing their collective concern regarding reports that House Republicans intend to use the budget reconciliation process to attack critical social safety net programs.
“Both Congresswoman Lee and I were once recipients of the very social services that are currently being targeted by our Republican colleagues,” said Congresswoman Moore. “Our distinct perspectives and firsthand experiences with these vital public assistance programs add unique and empathetic voices to a debate overpowered by crass sentiments and hostile attitudes. With 46.7 million Americans battling poverty, we should be able to engage in an open debate about these life-saving programs in the light of day, not behind closed doors or with the help of political stunts.” 
“Today, more than 46 million Americans are living in poverty, including one in five American children. Republican proposals to use the budget process to make misguided and sweeping changes to our nation’s proven anti-poverty programs are destined to repeat the mistakes of the past while furthering eroding our social safety net. Their actions will result in more poverty, more hunger and less hope in America,” said Congresswoman Barbara Lee. “Attempts to use the budget process to push this extreme, Tea Party agenda is frankly disingenuous. Instead of working to demonize struggling families, we should be investing in programs that create more opportunity and build pathways into the middle class.”
The full text of letter can be found below...

Tuesday, January 12, 2016

'Republican Candidates Turn to a Touchy Topic: Poverty'

Eduardo Porter:

Republican Candidates Turn to a Touchy Topic: Poverty: On Saturday ... six Republican hopefuls gathered at a convention center here to talk about poverty. Donald Trump and Ted Cruz, the top two, weren’t there. But still, poverty?

Not even Democrats, who by Republicans’ own admission pretty much own the subject, have dedicated this kind of campaign time to those at the very bottom of the ladder. The votes simply aren’t there. And that’s especially true for Republicans.

What’s going on? ...Republicans ... have a coherent theory about the causes of America’s entrenched poverty that fits well with their underlying worldview: it’s largely the government’s fault. ...

“From the government standpoint, we have actually been building a trap,” Mr. Ryan said.

Trouble is, the evidence doesn’t much mesh with this view. ...


... Consider the huge tax cuts offered up by most Republican candidates. ... All of them provide most of their benefits to the rich.

Meanwhile, the House Republicans’ 2016 budget plan, drafted largely by Mr. Ryan, includes some $3 trillion, over 10 years, in cuts to programs that serve people of limited means.

As an antipoverty strategy, it’s impossible to square the circle of the largess of Republican tax plans and military spending plans with their parsimony everywhere else. As Senator Rubio of Florida noted: “What the other side is going to say is the Republicans, the conservatives, they are just looking to gut the antipoverty programs.”

Yes, they will. And Republicans’ priorities are helping the other side make its case.

Wednesday, December 23, 2015

'An Aging Society Is No Problem When Wages Rise'

Dean Baker:

An Aging Society Is No Problem When Wages Rise: Eduardo Porter discusses the question of whether retirees will have sufficient income in twenty or thirty years. He points out that if no additional revenue is raised, Social Security will not be able to pay full scheduled benefits after 2034.
While this is true, it is important to note that this would have also been true in the 1940, 1950s, 1960s, and 1970s. If projections were made for Social Security that assumed no increase in the payroll tax in the future, there would have been a severe shortfall in the trust fund making it unable to pay full scheduled benefits.
We have now gone 25 years with no increase in the payroll tax, by far the longest such period since the program was created. With life expectancy continually increasing, it is inevitable that a fixed tax rate will eventually prove inadequate if the retirement age is not raised. (The age for full benefits has already been raised from 65 to 66 and will rise further to 67 by 2022, but no further increases are scheduled.)
The past increases in the Social Security tax have generally not imposed a large burden on workers because real wages rose. The Social Security trustees project average wages to rise by more than 50 percent over the next three decades. If most workers share in this wage growth, then the two or three percentage point tax increase that might be needed to keep the program fully funded would be a small fraction of the wage growth workers see over this period. Of course, if income gains continue to be redistributed upward, then any increase in the Social Security tax will be a large burden.
For this reason, Social Security should be seen first and foremost as part of the story of wage inequality. If workers get their share of the benefits of productivity growth then supporting a larger population of retirees will not be a problem. On the other hand, if the wealthy manage to prevent workers from benefiting from growth during their working lives, they will also likely prevent them from having a secure retirement.

Monday, November 23, 2015

James Poterba Interview

James Poterba is interviewed by the Richmond Fed:

... EF: More recently, one of your areas of research has been retirement finance and the investment decisions of workers thinking about their retirement. In recent decades, we've seen a tremendous shift in the private sector from defined benefit retirement programs to defined contribution programs. Was this mainly a response by firms to the tightening of the regulatory environment for defined benefit plans, to changing demand from workers, or to something else?
Poterba: I think it's a bit of everything. A number of factors came together to create an environment in which firms were more comfortable offering defined contribution plans than defined benefit plans. One factor was that when firms began offering defined benefit plans, in World War II and the years following it, the U.S. economy and its population were growing rapidly. The size of the benefit recipient population from these plans relative to the workforce was small. It was also a time when life expectancy for people who were aged 65 was several years less than it is today. Over time, the financial executives at firms came to a greater recognition of the true cost of defined benefit plans.
I also think the fiduciary responsibilities and the financial burdens that were placed on firms under the Employee Retirement Income Security Act of 1974, or ERISA, have discouraged firms from continuing in the defined benefit sector. ERISA corrected a set of imbalances by requiring firms to take more responsibility for the retirement plans they were offering their workers and to fund those plans so that these were not empty promises. ERISA was enacted in the aftermath of some high-profile bankruptcies of major U.S. firms and the discovery that their defined benefit plans were not well-funded, leaving retirees with virtually no pension income.
But ERISA and the growing recognition of the costs of defined benefit plans are probably not the full story. The U.S. labor market has become more dynamic over time, or at least workers think it has, and that has led to fewer workers being well-suited to defined benefit plans. These plans worked very well for workers who had a long career at a single firm. Today, workers may overestimate the degree of dynamism in the labor market. But if they believe it is dynamic, they may place great value on a portable retirement structure that enables them to move from firm to firm and to take their retirement assets with them.
Most workers who are at large firms, firms that have 500 employees or more, have access to defined contribution plans. Unfortunately, we still don't have great coverage at smaller firms, below, say, 50 employees. For workers who will spend a long career at a small firm, the absence of these employer-based plans can make it harder to save for retirement. A key policy priority is pushing the coverage of defined contribution plans further down the firm size distribution. That's hard, because smaller firms are less likely to have the infrastructure in place in their HR departments or to have the spare resources to be able to learn how to establish a defined contribution plan and how to administer it. They are probably also more reluctant to take on the fiduciary burdens and responsibilities that come with offering these plans.
Another concern, within the defined contribution system, is the significant amount of leakage. Money that was originally contributed for retirement may be pulled out before the worker reaches retirement age.
EF: What is causing that? ...
Poterba: Say you've worked for 10 years at a firm that offers a 401(k) plan and you've been contributing all the way along. You decide to leave that firm. In some cases, the firm you are leaving may encourage you to take the money out of their retirement plan because they may not want to have you around as a legacy participant in their plan. ... Sometimes, the worker may choose to move the funds from the prior 401(k) plan to a retirement plan at their new employer, or to an IRA. Those moves keep the funds in the retirement system. But sometimes, the worker just spends the money. When an individual leaves a job, they may experience a spell of unemployment, or they may have health issues. There may be very good reasons for tapping into the 401(k) accumulation. Using the 401(k) system as a source of emergency cash, sort of as the ATM for these crises, diminishes what gets accumulated for retirement. ...

Inadequate social insurance for workers who lose their jobs leads to inadequate retirement savings. So while there may be a "very good reason" for this from an individual's perspective, from a larger social perspective this is a problem connected to our unwillingness to provide adequate social insurance for those who are the unlucky losers to the dynamism inherent in capitalism that propels us forward. Those who benefit so much from the dynamism could and should do more to help those who pay the costs.

Saturday, November 14, 2015

'The Silver Lining of Unemployment Benefits'

"Does making unemployment benefits more generous keep more people out of work? Ioana Marinescu shares her fascinating discovery that by making the job market more relaxed, they actually help match people with the few available job vacancies."

Monday, November 02, 2015

'A Shocking Rise in White Death Rates in Midlife'

Paul Starr writing at The American Prospect:

A Shocking Rise in White Death Rates in Midlife—and What It Says about American Society: Drugs, alcohol, and suicide have taken an unparalleled toll on middle-aged whites, especially those with a high school degree or less.

In a reversal of earlier trends, death rates among white non-Hispanic Americans in midlife increased sharply between 1999 and 2013, according to a new study by economists Anne Case and Angus Deaton, winner last month of the Nobel Prize for economics. The increased deaths were concentrated among those with the least education and resulted largely from drug and alcohol “poisonings,” suicide, and chronic liver diseases and cirrhosis. This midlife mortality reversal had no parallel in any other industrialized society or in other demographic groups in the United States.

Case and Deaton’s analysis, published today in the Proceedings of the National Academy of Sciences, also shows increased rates of illness, chronic pain, and disability among middle-aged whites. The findings have important implications for American politics and public policy, particularly for debates about economic inequality, public health, drug policy, disability insurance, and retirement income. The data also suggest why much of American politics may be taking on an increasingly harsh and desperate quality. ...

Tuesday, October 27, 2015

'A Strategy to Ignore Poverty'

Eduardo Porter:

A Strategy to Ignore Poverty, NY Times: Arizona, where I was born, in July became the first state to cut poor families’ access to welfare assistance to a maximum of 12 months over a lifetime. That’s a fifth of the time allowed under federal law, and means that 5,000 more people will lose their benefits by next June.
This is only the latest tightening of the screws in Arizona. Last year, about 29,000 poor families received benefits under the Temporary Assistance for Needy Families program, 16,000 fewer than in 2005. In 2009, in the middle of the worst economic downturn since the Depression of the 1930s, benefits were cut by 20 percent.
And if Paul Ryan, the Republican lawmaker from Wisconsin who is expected to become speaker of the House, has his way, poor people in many other states can expect similar treatment in the years ahead. ...

Wednesday, October 21, 2015

'Rising Disability Payments: Are Cuts to Workers’ Compensation Part of the Story?'

A summary of a new paper by Nick Buffie and Dean Baker (as they are careful to note, the results are preliminary):

Executive Summary There has been a large increase in the number of workers receiving Social Security Disability Insurance (DI) over the last quarter century. While most of this increase is explained by well - known demographic factors, such as the growing number of women in the workforce and the aging of the baby boomers, there is considerable concern that workers are increasingly choosing to collect DI benefits as an alternative to working. This concern has figured prominently in the debate over plans to maintain full funding for the DI program beyond the projected DI trust fund depletion date in late 2016.1,2

This paper examines the extent to which cuts in state workers’ compensation (WC) benefits may have contributed to the rise in DI awards. To some extent, these programs may be seen as alternative sources of support for workers with job - related injuries. Insofar as injured workers are less able to receive WC benefits, they may be more likely to turn to the DI program.

At the national level, there is a clear correlation between the sharp decline in WC benefits over the last quarter century and the rise in DI benefits. This paper examines whether there could be a causal relationship between the reduction in WC benefits and the rise in DI benefits by examining state - level data.

It finds:

  • In a variety of specifications , there is a strong relationship between the decline in state - level WC beneficiaries and rise in new DI awards. This suggests that people are turning to DI because they are le ss able to collect WC benefits.
  • A test of whether the rise in DI awards by state can be explained by policy changes to the state WC program found some evidence of a relationship. Given the difficulties in capturing the policy changes in the relevant variable, this is strongly suggestive that the rise in DI benefits was in part the result of state - level policy decisions to make WC programs less generous.
  • These estimates suggest that more than one - fifth of the rise in the number of workers receiving DI awards can be explained by cuts to WC programs. These results are preliminary.

We expect to conduct further tests of the relationship between WC and the DI program, but the results in this analysis strongly suggest that cuts in the former have led to increases in the latter. ...

Tuesday, October 20, 2015

'The Myth of Welfare’s Corrupting Influence on the Poor'

Eduardo Porter tries to set the record straight on welfare's influence on behavior:

The Myth of Welfare’s Corrupting Influence on the Poor: ...Few ideas are so deeply ingrained in the American popular imagination as the belief that government aid for poor people will just encourage bad behavior.
The proposition is particularly cherished on the conservative end of the spectrum... But even Franklin Delano Roosevelt, the father of the New Deal, called welfare “a narcotic, a subtle destroyer of the human spirit.” And it was President Bill Clinton, a Democrat, who put an end to “welfare as we know it.” ...
And yet, to a significant degree, it is wrong. Actual experience, from the richest country in the world to some of the poorest places on the planet, suggests that cash assistance can be of enormous help for the poor. And freeing them from what President Ronald Reagan memorably termed the “spider’s web of dependency” — also known as forcing the poor to swim or sink — is not the cure-all....
Abhijit Banerjee ... released a paper with three colleagues last week that carefully assessed the effects of seven cash-transfer programs in Mexico, Morocco, Honduras, Nicaragua, the Philippines and Indonesia. It found “no systematic evidence that cash transfer programs discourage work.” ...
Still, Professor Banerjee observed, in many countries, “we encounter the idea that handouts will make people lazy.”
Professor Banerjee suggests the spread of welfare aversion around the world might be an American confection. “Many governments have economic advisers with degrees from the United States who share the same ideology,” he said. “Ideology is much more pervasive than the facts.”
What is most perplexing is that the United States’ own experience with both welfare and its “reform” does not really support the charges. ...

Monday, October 19, 2015

Paul Krugman: Something Not Rotten in Denmark

The important lessons we can learn from Denmark:

Something Not Rotten in Denmark, by Paul Krugman, Commentary, NY Times: No doubt surprising many of the people watching the Democratic presidential debate, Bernie Sanders cited Denmark as a role model for how to help working people. Hillary Clinton demurred slightly, declaring that “we are not Denmark,” but agreed that Denmark is an inspiring example. ... But how great are the Danes, really? ...
Denmark maintains a welfare state ... that is beyond the wildest dreams of American liberals. ... To pay for these programs, Denmark collects a lot of taxes..., almost half of national income, compared with 25 percent in the United States. Describe these policies to any American conservative, and he would predict ruin. Surely those generous benefits must destroy the incentive to work, while those high taxes drive job creators into hiding or exile.
Strange to say, however, Denmark ... a prosperous nation that does quite well on job creation. ... It’s hard to imagine a better refutation of anti-tax, anti-government economic doctrine...
But ... is everything copacetic in Copenhagen? Actually, no..., its ... recovery from the global financial crisis has been slow and incomplete. ...
What explains this poor recent performance? The answer, mainly, is bad monetary and fiscal policy. Denmark hasn’t adopted the euro, but it manages its currency as if it had... And while the country has faced no market pressure to slash spending ... it has adopted fiscal austerity anyway.
The result is a sharp contrast with neighboring Sweden, which doesn’t shadow the euro (although it has made some mistakes on its own), hasn’t done much austerity, and has seen real G.D.P. per capita rise while Denmark’s falls.
But Denmark’s monetary and fiscal errors don’t say anything about the sustainability of a strong welfare state. In fact, people who denounce things like universal health coverage and subsidized child care tend also to be people who demand higher interest rates and spending cuts in a depressed economy. (Remember all the talk about “debasing” the dollar?) That is, U.S. conservatives actually approve of some Danish policies — but only the ones that have proved to be badly misguided.
So yes, we can learn a lot from Denmark, both its successes and its failures. And let me say that it was both a pleasure and a relief to hear people who might become president talk seriously about how we can learn from the experience of other countries, as opposed to just chanting “U.S.A.! U.S.A.! U.S.A.!”

Thursday, October 08, 2015

'We All Get ‘Free Stuff’ From the Government'

Bryce Covert:

We All Get ‘Free Stuff’ From the Government: ...Jeb Bush got caught sounding like a Mitt Romney rerun recently: He told a mostly white audience that he could attract black voters because his campaign “isn’t one of ... we’ll take care of you with free stuff.” ...
But the shorthand of “free stuff” also takes an incredibly narrow, and therefore misleading, view of government benefits. There’s a whole treasure trove of government handouts that aren’t dispensed through spending, but rather through the tax code. That doesn’t make them any less “free” than a rent voucher or an Electronic Benefit Transfer card. ...
What the government loses to tax expenditures dwarfs spending on welfare programs. ... These facts are obscured for most people. While those who get government benefits through spending programs are often aware — and too frequently ashamed — of that fact, those who get them through the tax system usually don’t realize they’ve received a handout. ...
Jeb Bush ,,, has saved at least $241,000 since 1981 through the mortgage interest deduction. ... Just days before he vowed not to promise voters more free stuff, he put out a tax plan that would give out a whole lot more of it. ...
Every four years, politicians stigmatize “free stuff” like food stamps and welfare while courting votes — and gloss over tax breaks. ... We turn a blind eye to giving out more and more tax breaks but balk at actually spending enough on welfare to truly help the most vulnerable among us.

Wednesday, October 07, 2015

The Welfare State and Economic Growth

Support for the point I was making in my column yesterday:

Rethinking Parameters of the US Welfare State, by Tim Taylor: ...The ... question ... was about whether the welfare state undermines productivity and growth. Garfinkel and Smeeding point out that in the big picture, all the high-income and high-productivity nations of the world have large welfare states; indeed, one can argue that growth rates for many high-income nations were higher in the mid- and late 20th century, when the welfare state was comparatively larger, than back in the 19th century when the welfare state was smaller. Indeed, improved levels of education and health are widely recognized as important components of improved productivity. As they write: "Furthermore, by reducing economic insecurity, social insurance and safety nets make people more willing to take economic risks."

One can make any number of arguments for improving the design of the various aspects of the welfare state, or to point to certain countries where aspects of the welfare state became overbearing or dysfunctional. But from a big-picture viewpoint, it's hard to make the case that a large welfare state has been a drag on growth. Garfinkel and Smeeding write:

"Of course, many other factors besides social welfare spending have changed in the past 150 years. But, as we have seen, welfare state spending is now very large relative to the total production of goods and services in all advanced industrialized nations. If such spending had large adverse effects, it is doubtful that growth rates would have been so large in the last 30 years. The crude historical relationship suggests, at a minimum, no great ill effects and, more likely, a positive effect. The burden of proof clearly lies on the side of those who claim that welfare state programs are strangling productivity and growth. If they are right, they need to explain not only why all rich nations have large welfare states, but more importantly why growth rates have grown in most rich nations as their welfare states have grown larger."

Saturday, September 19, 2015

Unemployment Insurance and Progressive Taxation as Automatic Stabilizers

Some preliminary results from a working paper by Alisdair Mckay and Ricardo Reis:

Optimal Automatic Stabilizers, by Alisdair McKay and Ricardo Reis: 1 Introduction How generous should the unemployment insurance system be? How progressive should the tax system be? These questions have been studied extensively and there are well-known trade-offs between social insurance and incentives. Typically these issues are explored in the context of a stationary economy. These policies, however, also serve as automatic stabilizers that alter the dynamics of the business cycle. The purpose of this paper is to ask how and when aggregate stabilization objectives call for, say, more generous unemployment benefits or a more progressive tax system than would be desirable in a stationary economy. ...
We consider two classic automatic stabilizers: unemployment benefits and progressive taxation. Both of these policies have roles in redistributing income and in providing social insurance. Redistribution affects aggregate demand in our model because households differ in their marginal propensities to consume. Social insurance affects aggregate demand through precautionary savings decisions because markets are incomplete. In addition to unemployment insurance and progressive taxation, we also consider a fiscal rule that makes government spending respond automatically to the state of the economy.
Our focus is on the manner in which the optimal fiscal structure of the economy is altered by aggregate stabilization concerns. Increasing the scope of the automatic stabilizers can lead to welfare gains if they raise equilibrium output when it would otherwise be inefficiently low and vice versa. Therefore, it is not stabilization per se that is the objective but rather eliminating inefficient fluctuations. An important aspect of the model specification is therefore the extent of inefficient business cycle fluctuations. Our model generates inefficient fluctuations because prices are sticky and monetary policy cannot fully eliminate the distortions. We show that in a reasonable calibration, more generous unemployment benefits and more progressive taxation are helpful in reducing these inefficiencies. Simply put, if unemployment is high when there is a negative output gap, a larger unemployment benefit will stimulate aggregate demand when it is inefficiently low thereby raising welfare. Similarly, if idiosyncratic risk is high when there is a negative output gap,1 providing social insurance through more progressive taxation will also increase welfare....