Growthology

Why Means Testing Threatens Growth

Andrew Biggs doesn't like means testing.  For example, Biggs analyzes a Heritage Foundation plan to reform entitlements and balance the budget, which includes a flat tax (hurrah) and means testing (hiss) in terms of implicit tax rates on elderly workers. Their flat tax rate would be 25 percent, but because of means testing, "total marginal tax rates in retirement could reach 72%."  

... there is reason to believe that people are more responsive to marginal tax rates during or near retirement — when the option not to work is clearly available — than during their prime working years, when the need to support a family and save for retirement means that most people will work as much as they can. In a 2008 study of workers over the age of 70, Lucie Schmidt of Williams College and Purvi Sevak of Hunter College found that "a reduction in the marginal tax rate that would increase the payoff to working by 10% would increase labor force participation by 7.5% among men and 11.4% among women." These are far greater responses to tax incentives than have been found among younger workers. For the population as a whole, the Congressional Budget Office assumes a response about one-third this size. The effect on marginal tax rates of the means test proposed in the Heritage budget would be almost four times larger than the increase studied by Schmidt and Sevak — and in the wrong direction — and so would be likely to yield a powerful undesirable response. Similarly, a study by Eric French of the Federal Reserve and John Jones of the State University of New York found that labor-force "participation decisions are most sensitive to financial incentives when workers are old." Means tests would thus impose powerful negative incentives precisely when people are most responsive to them.

He makes a compelling case, Professor Caplan.  

A Game Changer

Rarely do I read something that changes my mind on a topic about which I felt pretty strongly.  If you care about college sports, you have to read "The Shame of College Sports," a lengthy essay by Taylor Branch in the October issue of The Atlantic.

Do you favor the amateur ideal in college sports?  Like the phrase "student-athelete"? Recoil at paying big salaries to college running backs?  Feel indignant that Buckeyes sold memorobilia in exchange for tatoos or that the father of Auburn's QB pimped his son's services around the SEC? Yeah, me too.  Until I read this:

Using the “student-athlete” defense, colleges have compiled a string of victories in liability cases. On the afternoon of October 26, 1974, the Texas Christian University Horned Frogs were playing the Alabama Crimson Tide in Birmingham, Alabama. Kent Waldrep, a TCU running back, carried the ball on a “Red Right 28” sweep toward the Crimson Tide’s sideline, where he was met by a swarm of tacklers. 

... Waldrep was paralyzed: he had lost all movement and feeling below his neck. After nine months of paying his medical bills, Texas Christian refused to pay any more, so the Waldrep family coped for years on dwindling charity.

Through the 1990s, from his wheelchair, Waldrep pressed a lawsuit for workers’ compensation. (He also, through heroic rehabilitation efforts, recovered feeling in his arms, and eventually learned to drive a specially rigged van. “I can brush my teeth,” he told me last year, “but I still need help to bathe and dress.”) His attorneys haggled with TCU and the state worker-compensation fund over what constituted employment. Clearly, TCU had provided football players with equipment for the job, as a typical employer would—but did the university pay wages, withhold income taxes on his financial aid, or control work conditions and performance? The appeals court finally rejected Waldrep’s claim in June of 2000, ruling that he was not an employee because he had not paid taxes on financial aid that he could have kept even if he quit football. (Waldrep told me school officials “said they recruited me as a student, not an athlete,” which he says was absurd.)

It goes on and on.  The one-year scholarships that leave injured kids high and dry, unable to finish college if they are hurt and cut from the team. The NCAA raking in huge royalties for the likeness of players in video games, decades after they have left their teams, and of course the people whose likeness are used get zero.

 

Crippling Inflation and American Health Care

The news that health care premiums in the U.S. rose last year by 9 percent is another shock to the body politic that must by now realize something is deeply rotten.  A page 6 story in the Wall Street Journal today by Anna Matthews includes a powerful chart showing that the average annual premium rose from roughly $6000 per family in 2000 to just over $15,000 in 2011.  The Kaiser Family Foundation produced the report and its researchers estimated that the new PPACA health care reform was responsible for "only" one-sixth of the premium spike last year. 

Contrast this news with the steady stagnation in median family incomes, which the Census Dept. says dropped by 2.3 percent in 2010.  Median household income was $49,445 in 2010, compared to roughly $53,000 in 2000. Wow. It should be blindingly obvious that Americans' labor productivity is generating higher labor earnings, but that those earning are being sponged up entirely by health care costs which are predominantly paid by employers. Translation: workers are being robbed, and they don't even know how badly.

My numbers above are undoubtedly a crude approximation, but the simple fact is the benefits (like health care premiums paid by employers) are not counted as income.  They are not taxed as income by the IRS.  They are not accounted in the Census report on median incomes. And so forth.  To be fair, the Kaiser report indicates that approximately $3000 of the $15,000 typical premium is paid by the individual, not the employer, compared to half that amount ten years ago.  That means employer-paid benefits not-counted as income rose from $4500 to $12,000 over the decade.  Here's the point: if benefits were recognized as income - the single policy fix needed to solve this dilemma - families would have seen annual incomes of $57,500 in 2000 and $61,500 today, and they would see that in just one decade the proportion of U.S. pay taken by insurance premiums went from 10.4 percent to 24.4 percent. If Americans knew this in the way that only dollars being taken from their pockets can awaken the mind, they would react rationally with a wave of market pressures that would rationalize the mess that the federal bureaucracy has built.

Sure, mine is a back-of-the-envelope calculation mixing a few apples and oranges.  Not all households are paying family premiums, granted, the Kaise dollars aren't in real terms, and only 60 percent of employers offer coverage. Although, the latter point isn't so much a feature as a bug, since it implies that entrepreneurs don't get the kind of tax treatment that big firms do.  But these are quibbles.  The basic big numbers described above tell a fundamentally true and scary story about how Washington health care policies are in the process of crippling the U.S. economy, something that has been going on for half a century but is now spinning out of control.  

When I was a young policy wonk, I thought we would have a few decades to work this out.  But if health care inflation continues galloping like this, we only have a few years before Main Street is broken.  How can housing recover if median incomes are being gutted? What scares is not whether there will be a fix from Washington, but that the fix will be complicated.  It shouldn't be.  The fix is fundamental tax reform: recognize all employer benefits as income, and simultaneously lower incomes tax rates to be revenue neutral.

The Real Costs of Patent Trolls: $500-billion and Lost Innovation

There is a new paper out on the real costs of patent trolls. Who are patent trolls? They are those patent owners in the business of holding others up for ransom, as opposed to doing something useful with their (often trivial) patents. The subject is absurdly controversial, not to mention politicized, marbled with romanticism, and generally impossible to have a coherent discussion about, so this new paper's empiricism is highly welcome.

Here is the gist:

• Costs associated with patent trolls have touched $500-billion in the last decade, an incredible tax on innovators
• Very little of the money lost to trolls' actions goes to small investors, as the romantics would have it. It is mostly a deadweight loss to innovation, and thus to all of us.

You can read the entire paper here.

In a related vein, the OECD has a new report out that, among other things, highlights the declining quality of patents in the last decade. Graph follows:

 

Fixing Politics with Math! (Kids and Supreme Court Edition)

Readers are aware of my ever-deepening conviction that America's economic problems are not really economic. They are political. Practically any high school senior could devise a fiscal solution to the deficit mess.  I wouldn't like the growth effect of the higher tax rates, and you may not like the spending cuts, but this is a 1-pager that my old pal Mick Lewis would have scribbled out 10 minutes before the assignment was due in Civics.  And he would have gotten an A.  

Today, I'll describe what I see as one of the deepest - and worsening - political problems in our democracy.  Gerrymandering.  What Mick can't do, or any of my friends from Columbus can't do collectively, is fix the politicians who are making the mess.  We literally can't pick our representatives any more, because they have fixed the political game and are picking their voters through the process of Gerrymandering.  Another friend, Paul Parrish, just posted the new map of Ohio's congressional re-districting on facebook with the comment: "What is this? My son could have drawn a better map with his crayons."

Believe me, it's not just Republicans.  In California's 2002 redistricting, the seat I competed for was redistricted from a 50-50 partisan split into a roughly 60-40 safe seat for Democrats. Heck, Dem incumbents even "lawfully" paid the consultant who was asked by the state to draw the new maps. How sweet is that deal?  To his credit, Arnold Schwarzenegger fought to change abusive redistricting, but it remains rampant about everywhere else in the country.

The Supreme Court Pass

Gerrymandering got out of control in the 2002 redistricting process, and actually in the years afterwards when the normal once-a-decade process turned into a state by state, once-my-party-is-elected-majority process. Voters became pawns in this charade.  

A legal challenge finally made its way to the Supreme Court, which is truly the only institution with the authority to police political abuses of this scope and scale. The case was VIETH et al. v. JUBELIRER, and was decided on April 28, 2004.  My birthday, which is an ironic gift.

In the lengthy 4-1-4 decision, the Court took a pass.  The 4-Justice plurality ruling said that redistricting is a "political" matter for Congress alone to manage because the Court itself lacked jurisdiction per the Constitution. This is wrong.  Precedent says so, but frankly so does Originalism. Would the Court remove itself if a racist Congress reordered districts so that black members were redistricted ad hoc?  Would it rest idly if rural votes were essentially diminished to nil in each of the 50 states?  These are possible tactics of modern gerrymandering, and I don't believe for a second the Court would abide them as Constitutional.  Neither did the fifth justice, whose consenting opinion hinged on these words:

When presented with a claim of injury from partisan gerrymandering, courts confront two obstacles. First is the lack of comprehensive and neutral principles for drawing electoral boundaries. No substantive definition of fairness in districting seems to command general assent. Second is the absence of rules to limit and confine judicial intervention.

I had hoped the Court would revisit this, or somehow it would be fixed by mobs of angry voters, but the Ohio map indicates it is getting worse. So, in anticipation of this rising in a new case to the Supreme Court, I'd like to weigh in the blog post from a humble economist.  I think they call these amicus briefs or something.  Dunno.  When the time comes, here's what we need Justice Kennedy to understand: there is a simple and neutral principle for drawing fair boundaries.  

The Perimeter Rule

A gerrymandered seat has that pornographic "you know it when you see it" subjective quality.  But its curves can be quantified in a revealing way.  Simply measure the perimeter of each district on a map and compare it to an ideal map with minimal perimeters.  That ratio should tell you how far the legislature has gone to bend the districts.  A perimeter ratio of 1 would be, literally, perfect.  A perimeter ratio of 1.25 would be reasonable, especially if the state were to respect rivers and county lines where convenient.  But a ratio of 2.0 or greater certainly fails a reasonableness standard.

Let's consider an example using a simple chessboard.  Imagine the chessboard is filled with relatively homogeneous voting communities of Alphas and Betas.  Alphas can represent social conservatives, or whites, or pacifists, what have you.  The Betas represent the opposite. Now imagine a smooth spread where alpha and beta communities alternate across the board, just like the colors of the squares on the board.  Now let's carve four equally populated districts.  Ideally carved districts would be cut into neat mega-squares, 4x4, right?  Each would have sixteen squares, with 8 alpha and 8 beta communities, and a perimeter of 16.

An alternative cut could neatly add two alphas to one district and two betas to another  This yields more partisan seats of 10-6 and 6-10, which both protects incumbents and advantages more partisan candidates. The new perimeters of these districts would be 22.  The perimeter ratio for this example would be 22/16 or about 1.4.

But our simplified gerrymander could be much more intense.  I've drawn one map which allows slivers to connect various squares so that a district could be drawn with 14 alphas and 2 betas, and a perimeter of 54!  That's a ratio of 3.38. As ugly as that number is, my guess is Ohio's new perimeter ratio is even bigger.

If I have time, I'll make some images.  It would be a nice graphic to show some high school seniors.  Or maybe Justice Kennedy.

My Credit Card Number is 5420 3960 ...

I had the opportunity to speak at the NABE conference in Dallas, which was wonderful in every way. The dinner was great the night before.  Dallas was fabulous.  My speech went very well. Not to mention, Herb Kelleher, founder of Southwest Airlines, was the luncheon speaker on Monday and he was stunningly good. What great irony it was for me to then visit Love Field and take the mid-trip flight from Dallas to the Kauffman HQ here in Kansas City.  I promptly lost my wallet ... sometime after clearing security but before the taxi dropped me off in KC.  

The three vital lessons I've learned from this experience:

First, losing your wallet only happens immediately after you get cash from an ATM.  This is just the gods laughing at you. Roll with the punches and laugh along.  This world has too many really difficiult stories (see: 15% U.S. poverty rate) to take stuff like lost wallets too seriously. This was self-inflected, and made me laugh even harder when I next discovered that my car battery was dead.

Second, I need to superglue my next Mastercard to the home office desk.  And NOT travel with the card that we use for all of our auto-bill-paying!  Stupid Tim.  Stupid Tim.  I'll get a second card, yes with a different number, for travel.  As it is, now I get to spend the next 4-6 weeks receiving notices from the newspaper, the lawncare service, insurance, phone, electric ... asking why my cc # isn't working and remindming me that a late fee kicked in 2 days prior. 

Third, I'm 99% sure the wallet slipped out mid-flight and was just sitting on my seat (7F or so).  By the way, I always keep my thin wallet in my front left pants pocket.  I learned watching Pop carry his three-inch thick wallet in his back pocket that it made his back ache over the years.  Besides, a front-loaded wallet is much harder to pickpocket ... word to the wise.  So on this day, when I yanked out my iPhone while in a sitting position, I bet the kung-fu grip skin pulled the wallet out as well. So there it sat.  But when I called Southwest to ask if they found a wallet, they took down a missing baggage / item report and my phone number, then promised a call within 24 hours with a report.  Cool.  Thirty-six hours later (Yes, mom, I cancelled my cards), no call, so I phoned back to assess the status and learned, no, it will take them "two to four weeks to match the lost item report with the warehouse in Dallas of all lost items, which is where they are shipped."  Huh?  This is the hyper efficient common sense air carrier I've loved and lauded?  For Pete's sake, it's a WALLET.  It has 5 business cards of mine and my driver's license.  Did it really get sent down to Dallas where it is put in a "warehouse" in line behind a dozen teddy bears, a thousand neck pillos, and the Ark of the Covenent to be matched by Debbie and Shawn with a database??  Wallet, black, trifold: Enter.  Herb, can't you just pull out any of the contents and match with a passenger list then, you know, call my emergency contact?

So what's lesson number three?  I'm torn here.  Maybe it's that I am a little more skeptical of flying Southwest as if it really is better than the others. Or maybe I should take a hint and superglue my driver's license to my own stupid forehead.  

A great "whiteboard" lesson on entrepreneurs in the economy

This video is awesome, and it features a voiceover by Kauffman president, Carl Schramm.  The sketches are priceless ... definitely something I would show to kick start an economics class discussion. Kudos to our team for putting this together.