Thursday, June 16, 2022

Recession Time? Don’t Act Surprised

Treasury Secretary Yellen does not see any indicator of an imminent recession.  She isn’t looking.  The normal economic tailwinds have calmed and, as predicted, Biden's economic policies are a significant headwind.

A recession is sometimes defined as a reduction in the number employed nationally for a couple of months.  Other times it is defined as a reduction in real GDP for two quarters or more.

When it comes to predicting events like this, my recursive approach is to first understand where the general trends are heading.  In technical terms, is the economy’s “steady state” above or below where we are now, and how much?  If the trends are strong up, small perturbations around that trend will not make a recession.  If the trends are flat, then even a small negative shock will create a recession by one or more of the definitions.  Which definition will be triggered can be assessed by contrasting employment trends with productivity trends.

Four important trends are worth considering: organic productivity growth, organic population growth, recovery from the pandemic recession, and new public policies affecting productivity,  population, or employment.

Organic trends

Given that recessions are defined in absolute rather than per capita terms, population growth is normally an economic tailwind.  However, annual adult population has fallen from a bit above one percent 1980-2018 to about 0.4 percent.  Illegal immigration is a wild card here because we do not know how many are immigrating, what fraction are adults, and whether and how those adults will be economically engaged.  With that caveat, we now are in a situation where even a small negative shock that would not have caused a recession in the one-percent population growth era will now.

Recovery from the pandemic was also a tailwind.  It someday will continue to lift employment, but at the moment it looks like employment has recovered as much as it can given the serious health problems encountered during the pandemic, including but not limited to self-destructive substance abuse habits that are not complementary with productive employment.  Some of these people will show up on payrolls but how reliably they show up for work is another question.  Diabetes, liver disease and heart disease have gotten out of control since 2020.

Workers lost skills and capital laid idle during the pandemic.  These are recovering, although their recovery will not be fully recognized in the growth data.  GDP and productivity levels were exaggerated during the pandemic as many goods were unavailable or low quality in ways not captured by the national accountants.  For example, public school teachers stayed home from school but the national accountants assumed that they were as productive as ever merely because they continued to get paid.  As they get back to traditional teaching, this will not be officially recognized as economic progress for the same reason the pandemic regress was never acknowledged. 

Crime has gotten bad, especially in big cities where productivity is normally the highest.  Consumers and businesses are avoiding big cities, which is a cost (“excess burden”) beyond the crime statistics because the whole point of the avoidance behaviors is to keep from being one of those statistics.

Fitzgerald, Hassett, and I predicted in 2020 that Biden’s economic agenda would reduce the levels of full-time equivalent employment per capita by 3.1 percent and real gdp per capita by 8.5 percent.  If that level effect were spread over five years, that would be 0.6 percent per year and 1.7 percent per year, respectively, as shown in the Table as an addendum panel.  That by itself makes a recession likely in one of those five years.

Regulatory Policy

Our analysis of Biden’s agenda distinguished regulation from capital taxation from labor taxation.  His regulatory agenda seems to be going ahead as we expected.  The good news is that Biden’s nomination of David Weil to the Department of Labor was rejected by the Senate and Biden was slow to fully mismanage the National Labor Relations Board.  But we did not anticipate that Biden’s DOL would disrupt labor markets as much as it did with its mask mandates.  Sticking with our original estimate, it looks that Biden’s regulatory agenda is reducing employment by 0.2 percent per year (of five years) and real GDP by 0.7 percent per year below the organic trends.  See the Table’s top panel.

Of particular concern over the next few months is the reliability of the electric grid and air travel.  Snafus of this type are already built into our regulatory analysis but these examples put more texture on the economic reasoning that links the marginal regulations with poor economic performance.

Capital Taxation: Inflation Sneaks In

Biden’s Build Back Better bill would implement much of the capital taxation we envisioned in 2020.  The good news is that the bill has not yet passed, and passage of its capital tax elements are not imminent in some other form.  The bad news is that inflation is taxing businesses without any Congressional action (recall Feldstein and more recently Hassett on the effect of inflation on the cost of capital), while it appears that Biden will let temporary provisions in the 2017 TCJA expire.  With capital taxation during the Biden administration increasing about half of what we expected, it would reduce real GDP by about 0.4 percent per year over five years.

Speaking of inflation, higher Fed Funds rates are already showing up in mortgage rates.  In effect, the Federal Reserve is introducing a tax (or cutting a subsidy) on structures investment, which is likely to send at least that sector into a recession.  Socially responsible (a.k.a., woke) investing is also skewing the allocation of capital.

Combining capital taxation and regulation, the headwinds in the Biden economy are 0.25 percent per year for employment and 1.1 percent per year for real GDP.

Labor Taxation: Direction Unclear

Labor taxation is an interesting wild card here.  Marginal tax rates on work were cut sharply when the $300 weekly unemployment bonus expired last summer.  That effect has played out already.  But I expect that Congressional Democrats, and even some Republicans, will expand unemployment benefits if anything resembling a recession were occurring.  That could easily and quickly reduce employment by one percent, if not more.  On the other hand, various federal health insurance subsidies are about to expire.  If they do (without resurrection), that will encourage work.

Bottom Line

Overall, a recession is highly likely with so many headwinds and so few tailwinds.  A recession is more likely by the GDP definition than the employment definition.  The depth of the recession depends on how much Congress destabilizes things by further adding to the already large federal portfolio of programs for the unemployed and poor and further adding to tax burdens.

Friday, April 8, 2022

Is the Missing ERP Revealing Bad News about Biden's Health?

15 USC 1022(a) requires

"The President shall annually transmit to the Congress not later than 10 days after the submission of the budget ... an economic report (hereinafter in this chapter referred to as the “Economic Report”) together with the annual report of the Council of Economic Advisers...."

Because the budget was submitted March 28, 2022, yesterday was the due date for submitting the 2022 Economic Report of the President.   No report has been released in 2022 and neither the White House nor news media have said anything about this year's report.

CEA, like many other government agencies, is funded with public money.  It should perform its duties as directed by the public through the statutes duly enacted by its representatives in Congress.

Moreover, CEA is unique from most of the rest of the Executive Office of the President in that it is explicitly created and directed by federal statutes.  As it should, this unique statutory basis has elevated CEA's influence within the White House.  But if CEA does not comply with the law, what stops the rest of the bureaucracy from treating CEA as just one of many White House Offices and Councils whose entire existence could be erased at the whim of the President or senior staff?

Why the lack of compliance with 15 USC 1022(a)?  Here are my guesses, beginning with those I assess to be most likely.

  • Biden, who must at least meet with CEA and sign the report, is too feeble to perform all of the duties required of him by law and politics.  Senior staff have made the tough decision as to which laws will not be followed in order to reserve Biden's energy for other duties.
    • I am not the only one to notice that it has been a month since Biden had anything on his public schedule later than mid-afternoon.
    • This theory predicts that no EOP employees get fired.

  • Biden's senior staff views statutes as mere suggestions, and therefore even a minor logistical challenge would be enough to ignore 15 USC 1022(a).
    • This is consistent with the fact that the FY 2023 budget (an OMB product) missed the statutory deadline too, which has occurred before when a President was just coming into office or when the deadline occurred during a government shutdown but (I think) is otherwise unprecedented.
    • Expected punishment is low, under the theory that a Democratic Congress would not hold a Democratic administration accountable.
    • This possibility is the worst for (among other things) the CEA as an institution because then CEA itself becomes a mere suggestion.

  • The draft ERP, which likely began in early 2021, contains something that in hindsight is terribly embarrassing to the Biden administration.  It either needs to be rewritten or released on a day when other news distracts all of the attention.  This is bit unlikely, because the embarrassment would have to be something that the ERP covers that the (much longer) President's Budget does not.  On the other hand, this explanation is complementary with the Biden-debilitation story because likely the President would be needed to adjudicate a serious dispute among senior staff.  [More generally it would be interesting to know how disputes are resolved when POTUS is debilitated.  Does VPOTUS help?]

  • The current CEA is unaware of 15 USC 1022(a) and what actions are required to comply with it.  I doubt this because the CEA chair, Cecilia Rouse, was a CEA member who had helped prepare two prior ERPs (2010 and 2011).

  • The current CEA is aware of 15 USC 1022(a) and the actions are required to comply with it, but proved incapable of doing its part.  I doubt this even more because that puts the President in jeopardy and an army of former CEA staff could have been called to help on a volunteer basis.  More time could have been obtained by going downstairs and asking OMB to delay its budget release, which itself was already past the statutory deadline.

  • Progressives in the administration have objected to even the mildest citation of unintended consequences and the law of demand (mild enough that even Jared Bernstein insists that they be mentioned).  Such objections could likely exist, but very unlikely stop the lawful ERP transmittal because
    • The CEA chair had much time to engage in earnest debate with the rest of the administration  (as CEA 45 often did, sometimes for more than a year).  In the end she could assert her statutory authority to issue the ERP as she and POTUS see fit.
    • Possibly the CEA chair would be willing to fudge the economics for the progressive cause, and therefore the dispute would not be reason to miss the statutory deadline.

Even if the 2022 ERP is transmitted to Congress next week, it will be more than 100 days into the calendar year, as compared to the previous "record" (lawfully) set in 2019 on the 78th day of the year.  96 percent of all previous ERPs (75 in total) had been transmitted by February 23, which is the 54th day of every year.

Update: ERP 2022 was electronically transmitted April 14, 2022, which was the 104th day of the year and 17 days after the budget submission.
  • The Joint Economic Committee is the statutory Congressional receiver of the annual ERP.  The hard copies, which is usually provided to JEC on the official "day of transmittal," was not delivered until April 25, 2022.  This observation adds support to the Biden-disability theory because POTUS at least signs the hard copies.
  • On the other hand, the excellent CEA45 production editor, Al Imhoff, also served in that role for ERP 2022 (see p. 345).  The fact that a second production editor was hired (Kellam worked on Obama-era ERPs) suggests that CEA46 was so late writing its chapters that there was no time for Imhoff to serially process them as he did for CEA45.  This hypothesis is also consistent with the fact that many more of CEA45's chapters were released as stand-alone public reports throughout the year (Imhoff was copy editing many of those too), some of which could be entered into ERP production 4-5 months ahead of the statutory deadline.

Tuesday, April 5, 2022

New Emissions Regulations are Coercive Paternalism, not Environmental Science, or even Benevolent Paternalism

Trump's CEA showed, based on credit transactions among manufacturers, that vehicle standards to abate a ton of CO2 cost about $163 on the margin, while even Obama said the abatement was worth only $50.  i.e., tightening emissions regulations fails a cost-benefit test by a wide margin.

Now Biden claims that new stricter standards pass a cost benefit test.  Although this will be cast as an environmental issue, the new conclusion is driven by assumptions unrelated to environmental economics or climate science:

(1) Consumer fuel savings get (mostly) double counted because "behavioral economics."  Specifically, 

"The agency’s analysis assumes that potential car and light truck buyers value only the savings in fuel costs from purchasing a higher-MPG model they expect to realize over the first 30 months they own it. Depending on the discount rate buyers are assumed to apply, this amounts to 25-30 percent of the expected savings in fuel costs over its entire lifetime." (p. 420 of DOT's final rule)

This double counting (100 - 27.5% = 72.5% of $98 billion in fuel savings) is more than quadruple the purported $16 billion net benefit shown in Table VI-11 of the final rule.

[I call it double counting because, by the principle of revealed prevalence, fuel savings is already built into the price and sales of fuel-efficient vehicles; many consumers do not purchase such vehicles because of the relative price and characteristics of competing vehicles.  Alternatively, you could say that DOT ignores benefit of low-MPG vehicles, but the revealed-preference result is the same. 

Following an Economics 301 homework solution from October 2019, in December 2020 Trump's CEA provided a vector proof -- that the market price for GHG credits (i) reflects fuel savings as consumers perceive them and (ii) fully quantifies the industry-level real GDP effects of changing GHG standards, without any additional term for fuel savings -- on the White House website.  See the appendix of this document.]

By comparison, the gross climate benefit is purportedly $27.5 billion.  i.e., they would have to more than double their already inflated "social cost of carbon" to push their thumb on the scale as vigorously as they did with "behavioral economics."  See below for more on paternalism.

(2) Biden says that some tightening comes for free because 5 manufacturers had already signed a pledge with California EPA to so tighten

But this ignores that California rules, when followed by just a subset of manufacturers, do not reduce the supply of federal credits, whereas changes in federal rules do even if the federal rules are not as strict as California's.  The equilibrium credit price is built into the prices paid by purchasers of new cars.

(3) When the above are enough to tilt the scale, all costs and benefits are discounted 3%/yr.  When an extra push is needed, Biden discounts environmental benefits at 2.5% per year while everything else is discounted 3%/yr.

"the use of the social rate of return on capital ... inappropriately underestimates the impacts of climate change for the purposes of estimating the SC-GHG. ... the consumption rate of interest is the theoretically appropriate discount rate in an intergenerational context." (p. 547 of the Technical Support Document.  See also p. 573 of the final rule.)

More on coercive paternalism

Trump's DOT and EPA spoke forcefully against paternalism as a justification for fuel standards.  If people lack knowledge, give them the knowledge rather than imposing a decision on them.  Here is how they said it

"the idea that regulating fuel economy and CO2 emissions can mitigate the consequences of inadequate access to information by placing decisions that depend on access to complete information in the hands of regulators rather than buyers has superficial appeal. Yet commenters do not establish that such a drastic step is necessary to overcome any inadequacy of information, or that requiring manufacturers to supply higher fuel economy will be more effective than less intrusive approaches such as expanding the range of information available to buyers." (85 FR 24608, italics added) 

In contrast, Biden's DOT and EPA say nothing like this, but instead extol the purported virtues of "behavioral economics."  They do not mention less intrusive approaches, let alone show why they would have fewer net benefits.

Saturday, April 2, 2022

White House Economic Analysis of Ukraine

The 2019 Economic Report of the President includes the most extensive economic analysis of Ukraine of any President going back at least to Truman.  It discussed:

  • Historical harms -- including murder -- imposed on Ukraine by Moscow (Chapter 8),
  • The extensive costs of the collective ownership imposed on Ukrainian agriculture, asking why would collective ownership of healthcare work out any better if the economic incentives were the same (Chapter 8),
  • How the New York Times covered up and lied about events in Ukraine because the events were incongruent with the leftist fantasies of many of its readers (Chapter 8).  Pulitzer Prizes were awarded for those lies!
  • Ukrainian energy trade (Chapter 5).
Below is one of the charts from the 2019 ERP.

Ukraine was never even mentioned in an ERP between 1947 and 1992.  Nor were any related keywords (see below).
  • The 1993 ERP noted that Ukraine was among former Soviet republics issuing its own currency in 1992 (pp. 304-5).
  • The 1994 ERP noted that "[CEA member] Stiglitz traveled to Russia and Ukraine and established an official relationship with the Russian Government's Working Center for Economic Reform." (p. 256)
  • The 1995 ERP noted that the U.S. engaged in several bilateral investment treaties, including "treaties with the former Soviet republics of Georgia, Ukraine, and Belarus." (p. 249).
  • The 1997 ERP cited Ukraine in a list of many countries allocated "U.S. non-military bilateral aid" and that in the case of Russia and Ukraine, this aid was for "public health programs" (pp. 264-5).  It also cited the "explosion at Chernobyl" as part of a paragraph about "how developing countries treat their environment."  [I wish the 2019 ERP had included a section on environmental stewardship by socialist countries, but the idea did not occur to me until much later.  The environmental rhetoric was much the same as modern-day socialists'].
  • On page 167 of the 1998 ERP, it was noted that Ukraine was one among several countries assigned "less stringent" emissions limits by the Kyoto protocol.  On page 259, a large list of countries receiving U.S. aid was listed, including Ukraine.
  • On page 290 of the 1999 ERP, it was noted that currency boards have been recommended for countries such as "Indonesia, Russia, and Ukraine."
  • Page 260 of the 2001 ERP reports that CEA "initiated a new dialogue with economic officials in Ukraine."
  • Page 131 of the 2005 ERP includes a box about "The Benefits of Land Titles."  Several countries are mentioned in the box, with Ukraine as one of those where "entrepreneurs believe their property rights are secure [and therefore] reinvest ... back in their business."
  • In a paragraph about the "disadvantages to nuclear power," p. 172 of the 2008 ERP cites the "Chernobyl nuclear power plant in Ukraine."
  • The 2010 ERP notes the rapid deprecation of "the currencies of Hungary, Poland, and Ukraine" (p. 86).
  • A footnote on p. 130 of the 2012 ERP explains which countries are included in its emerging markets index.  Ukraine is one of 21.
  • Figure 1-4 of the 2014 ERP has international comparisons of quarterly real GDP time series.  Ukraine is one of the countries included.  A similar chart is repeated on page 117.
This post was based on text searches for "Ukraine", "Ukrainian," "Holodomor," "Kyiv," "Kiev," or "Chernobyl" in the 1947-2021 ERPs.

Wednesday, March 30, 2022

The Most Tardy ERP in History

The White House Council of Economic Advisers' Annual Report, a.k.a., Economic Report of the President, has not yet been transmitted to Congress as of today, the 89th day of 2022.

This is the latest ERP transmittal ever, with the previous record being 2019, which was transmitted on the 78th day (signed on the 77th -- see photo below) following a prolonged federal government shutdown.  

By law, the ERP must be transmitted to Congress annually.  Initially, the deadline was within 60 days of when Congress began its regular session, which is typically January 3.  In 1978, that deadline was shortened to 20 (?) days.  In 1990, and still today, a 10-day deadline is triggered by the President's Budget submission rather than the Congressional session.  That submission occurred on March 28, putting the 2022 ERP deadline at Thursday April 7, 2022.

Unless the law is to be broken by a wide margin, the 2022 ERP will be the first ever issued in April.  It will be only the 4th of 76 to be transmitted after February 23.

Saturday, November 13, 2021

Social Justice Thrives in Cook County during Tradeoff Holiday

During this terrible pandemic, a silver lining has been that many inconvenient tradeoffs no longer apply. A Yale study showed that paying people not to work does not, for the time being, prevent anyone from working. Perhaps also emptying the prisons can enhance public safety. We can have social justice and safety at the same time.

Figure 1 below shows points-in-time numbers of people in Illinois prisons who were convicted in Cook County and admitted to prison within the past half year. The stock of new convicts had been between 3000 and 4000, until the pandemic when it dropped to 1000. Figure 2 limits the sample to convicted murderers. They had been entering Illinois prisons at a rate of about 130 per year (65 per half year), until the first half of 2020 when the rate dropped to about 40 per year (20 per half year).

I hope that Chicago-area activists can work to help maintain this progress. Perhaps they could even lend some expertise to the rest of Illinois (not shown in the charts above), which has missed a social-justice opportunity by continuing to admit convicted murderers to prison at pre-pandemic rates.

Formerly experts thought that incarceration enhanced public safety.  But that was based on old data, examined by researchers lacking sufficient social-justice training.  Especially during a pandemic, there is no reason to worry about adverse consequences until somebody has conducted a new study using state-of-the-art empirical methods.

A troublesome skeptic might insist on metrics to indicate when the tradeoff-holiday has ended, when the path to safety might again involve more incarceration rather than less. Could it be dangerous to barrel forward on the social-justice highway, when at any moment we could find ourselves in high-speed reverse?

Such a reactionary critic forgets that social justice is crowd sourced. The overwhelming odds are that one of us will notice the situational shift and promptly alert the polity. In the worst-case scenario, remember: if we want to make an omelette, we must be prepared to break a few eggs.

[Update: Cook County Prosecutor Kim Foxx is often credited with reducing incarceration.  This week the American Constitution Society and the Black Law Students Association of UChicago Law School hosted her.  Did you encourage her to keep making the omelette?!]

Thursday, November 4, 2021

3rd release of Build Back Better: 7 million less employment

Last night a third release of BBB was shown to the public.  Both in pages and overall economics, it is in between the 1st and 2nd editions.

First-release items resurrected yesterday

  • Repeal of Trump's terrible rebate rule (Section 139301).  It is likely illegal so repealing it does nothing but CBO probably will credit Dems with cutting about spending by about $200B with this provision.
  • Drug "Price Negotiation Program" (Section 139001).
  • Rx "Drug Inflation Rebates" (Section 139101).
  • Favors to labor unions such as allowing union dues to be tax deductible (Section 138514) and giving the National Labor Relations Board new authority to levy hefty penalties on employers (Section 21006, which was also in previous releases).  
  • E-cigarette and tobacco taxes (Section 138520).
  • Federal family leave (Section 130001).
Important items maintained from the 2nd release
  • Affordable housing (still $150B across various sections such as 40001ff).
  • Expanded ACA premium tax credits (Sections 137301ff).
  • New federal childcare (Section 23001) and preK programs (Section 23002), including massive hidden taxes on marriage.
  • Child Tax Credit expansion (Section 137101ff).
  • Partial launch of the Green New Deal (various sections such as 136001ff).
  • Medicaid expansions (various sections).
  • Privacy regulation (Section 31501).
New item: Increase annual cap for deduction of State and Local Taxes (SALT) from $10K to $72.5K (Section 137601).  About 8 percent of filers are affected by this.  I guess that about 6 percent of filers are workers who would go from a binding cap to a nonbinding cap.   For such people, IF the federal and SALT rates remain constant, the overall marginal tax rate on labor income falls.  This is my assumption for the table below, but I note that lifting the SALT cap encourages states to increase SALT rates (for everyone, not just the 8 percent) and discourages states from cutting rates.  Moreover, the additional SALT revenues from those rate changes may well be spent on programs that pay people not to work.

This table shows 14 BBB provisions with significant hidden effects on incentives to work.  (My earlier post provides more detail on those incentives).  The final column of the table shows an estimated impact of these hidden incentives on FTE employment, allocated among the 14 provisions.  This does not include any employment effects of funding BBB with income taxes on households (Sections 138201ff) and businesses (Sections 138101ff).

Thursday, October 28, 2021

Revised Build Back Better: Cliffnotes

Hidden Work Disincentives

I had been tracking 13 types.  Three disappeared from today's revised bill.  The Medicaid expansions appear to be less.  Affordable housing was cut in half (still at $150B).  Dems once aspired to allow union dues to be tax deductible but that was cut.  Many other pro-union provisions remain.

The new childcare program has now replaced an income phaseout above 250% median income with a cliff.  This change from last month's bill to lastest draft has little effect on the average marginal tax rate because the same funds are being phased out over a narrower range.  I.e., a few people see very large additions to their marginal tax rate while others disincentivized with a phaseout now see no addition.

The "green energy" provisions have a lot of producer-protectionist elements in them, which add to the labor wedge much like excise taxes do.  However, the green energy provisions were scaled back in today's revision.

The Obamacare expansion (pp. 1458ff) is a bit more aggressive than last month's BBB bill.  The revision stops indexing -- ie health insurance gets more expensive over time and it is 100% taxpayer problem rather than plan members'.

My summary of marginal-tax-rate and employment effects are shown in the table below.  More derivations are available in my report although that report refers to last-month version.

Hidden Marriage Disincentives

Replacing the childcare phaseout with a cliff increases the (already remarkably large) marriage disincentive because even a father with moderate earnings will, if he joins the family, push them beyond the range of eligibility.  I.e., the family with married parents will likely be paying full price.  The various, and extreme, provisions to inflate the full price of childcare remain in the revised bill.

Pharma scores two wins

The news came out early that this bill would not have prescription-drug price controls.  But it also allows Trump's terrible rebate rule to continue.  Even Biden was expecting the revised bill to contain a repeal, with much savings in corporate welfare that could be put toward "transforming America."  Should I start calling it "Biden's terrible rebate rule"?

Employers are still the enemy

The revision maintains the directive for OSHA to increase employer fines by at least 10X (Section 21004).  Among other things, a private-sector employer with an unvaccinated employee on the payroll will be punishable by a fine of up to $1,365,320 PLUS up to $136,532 per day that employment continues (yes, $51 million per employee per year; note that the statute dictates specific amounts and that the amounts be annually indexed).  This far exceeds the social cost, if any, of employing such a person.

However, revised bill does not mandate employers to provide retirement accounts.  I am expecting this onerous mandate to show up in the new retirement bills introduced this week in House and Senate, but for now this element of freedom remains in employer-employee relations.

Thursday, October 14, 2021

Childcare in "Build Back Better"

Because childcare is said to be a highlight of the “Build Back Better” bill, I read through the bill and made notes here as to childcare provisions and some of their economic incentives, aside from the obvious that new spending must someday be financed with taxes.  You will be surprised at the disparity between what the bill incentivizes and what we're told it will do.

[For provisions less related to childcare, see my earlier summary.]

Section 23001 of the "Build Back Better" bill would use the Obamacare mold to create a federal childcare program.
  • Low-cost (a.k.a., "low quality") childcare would be prohibited unless the provider were to forgo all federal dollars, which would involve something like having zero children from a family at or below $200K annual income.
    • Childcare workers would have to be paid as much as elementary-school teachers.
    • According to the Bureau of Labor Statistics, elementary school teachers earned an average of $63,930 annually in 2019.
    • The same BLS data show childcare workers earning an average of $25,510.  I.e., under BBB childcare would have to pay them 151% more.
    • A 151% increase is similar to the increase in individual health insurance premiums that occurred when Obamacare came into effect.
    • See also Section 132002f (which appears to be eliminated in the Nov 3 revision).  Complying with all of these statutes, certifications, and the implementing final rules will add administrative costs to childcare.  E.g., just as physicians today complain about paperwork taking away from their real job, so will childcare providers under BBB.
    • Much of the extant supply of childcare is provided at a church or other faith-based location, but federal funds for expanding supply cannot be used there (this prohibition is about 80% of the way through the long Section 23001).  The result will be creating supply at locations that could not otherwise pass the market test because they are too costly or offer insufficient quality (by parents' assessment).    
    • When quality regulation was tried in Quebec, the results were opposite of advertized intentions:
      • there were “increases in early childhood anxiety and aggression”
      • “there was a large, significant, negative shock to the preschool, noncognitive development and health of children exposed to the new program, with little measured impact on cognitive skills.”
      • “worse health, lower life satisfaction, and higher crime rates later in life.”
      • HT Ryan Bourne
  • Families would pay on a sliding scale.  i.e., earning more means paying more for the same childcare.
    • Above 150% median family income ($102K annually), the implicit marginal tax rate would be 7% until the benefit is exhausted.
      • For a family with two children, they would face the 7 percent rate until income was beyond $400K
    • Between 75% and 150% median, the implicit marginal tax rate is about 14 percent.
    • The sliding scale is based on HOUSEHOLD income: the implicit marriage tax could easily be $20K per year that a couple has children under age 5.  [this is not the only marriage tax in BBB]
      • The unintended (?) consequences do not stop there.  Adding to the pool of "deadbeat dads" further discourages work because of the "overhang" (an economics term) of mounting child support debt.  As a UWisconsin study put it, "greater debt has a substantial negative effect on both fathers’ formal employment and child support payments."  See also this article.  
      • For most families, the childcare costs of having additional children 0-4 would be zero.  This will affect the number and spacing of births , and by this channel could reduce employment of mothers.  Also incentives to keep cousins in the household.
  • Although there are loopholes, child eligibility requires a parent to be employed (part-time is OK), self-employed, engaged in job search, job training, school, or on medical leave.  It’s OK if a second parent does no work (but see the marriage tax above).
Section 23002 creates a universal public pre-school program
  • no tuition charged to parents
  • applies to exactly two cohorts of children (age 3 and age 4).
Section 132001: Federal funding for childcare information services (i.e., finding childcare).  Less than 1/1000th of the funds spent in Sections 23001 and 23002.

Sections 137102f: Expanded Child Tax Credit (CTC).  See here for a detailed analysis of how the expansions discourage work, especially among single mothers.

Section 137201: Expanded Child and Dependent Care Tax Credit (CDCTC, not to be confused with the CTC).  This credit is tied to employment.  On the other hand, it is phaseout with income.  Therefore its net effect on national employment (not counting the tax increases that will eventually be needed to pay for it) will be less than the effects cited above.  Section 137202 is a similar provision administered on the employer side, but is not phased out with income and therefore expanding it is more likely to encourage work.  However, this provision is apparently rarely used by employers: see CBO's revenue score from the American Rescue Plan, which had the same provision except on a temporary basis.

Section 137301: a per-employee business credit of up to $5,000 annually is available for operators of childcare facilities (I don't think a household employing a nanny would count).  This might, to a small degree, offset the higher wages that such facilities would be required to pay (recall the 151% increase cited above).   [This was eliminated from later drafts]

Wednesday, October 6, 2021

Build Back Better's Hidden but Hefty Penalties on Work

Largely by stepping toward an economy in which workers bear the burden of distributing healthcare and housing with little regard to ability or willingness to pay, the Build Back Better bill (BBB) would implement the single largest permanent increase in work disincentives since the income tax came into its own during World War II.

The bill would also reduce work by limiting competition in the labor market, imposing employer mandates, and increasing consumer prices for telecommunications, energy, and other products.   All of these disincentives go on top of those already in the baseline due to a continuing portfolio of federal, state, and local tax, spending, and regulatory policies.

The implicit employment and income taxes in BBB would increase marginal tax rates on work by about 7 percentage points.  I expect that such a change in the disincentive would reduce full-time equivalent employment by about 4.5%, or about 7 million jobs. 

Penalizing Work and Hiring

The disincentives are delivered through two fundamental economic mechanisms.  First and foremost is the creation and expansion of employment-tested benefits.  Full-time employment is a major barrier to participating in the programs, even if that employment does not produce much income.  Especially, BBB allows even America’s highest-income households to participate in subsidized “Obamacare” insurance plans as long as they are not engaged in any job that offers health insurance.  For most full-time workers, their employment status by itself excludes them and their family from the additional Obamacare subsidies delivered through BBB, especially its sections 137501 and 137502.

[Some employers will respond to BBB by dropping their coverage, but from an employment-incentive perspective this only changes the form of the full-time employment tax to the Affordable Care Act’s (ACA’s) employer penalty for not offering coverage.  The salary equivalent of that penalty is almost $4,000 per full-time employee per year].

Family medical leave is another benefit tied to not working.  Section 130001 is quite explicit that eligibility requires a caregiving activity “in lieu of work, other than for monetary compensation.”   Family medical leave is a cash benefit paid in proportion to the number of hours of such caregiving.  [Presumably the beneficiary could not both engage in a normal work schedule and claim such caregiving activities, but the details would be the subject of future executive-branch rulemaking.  If double-dipping were rampant, this would raise expenditure on the program thereby requiring additional taxation that would itself discourage work.]

BBB also creates and expands employer mandates, with compliance enforced with penalties that are proportional to employment, regardless of how rich or poor the employees may be.  An example of a proportional employer-penalty scheme is BBB’s new requirement to administer IRA deductions from employee paychecks, with all employees enrolled by default.  The penalty for non-compliance is $10 per employee per day (Section 131101), which is similar in magnitude to the ACA’s penalty for failing to provide health insurance.

Section 21004 increases penalties on employers for failure to comply with federal occupational safety, health, and labor-standards requirements.  The increases are tenfold or more.  For example, the penalty for a large (100+) employer to employ an unvaccinated person is between $50,000 and $700,000 per violation and an additional $70,000 per day, all rescaled for the inflation adjustment prescribed in the statute.  This could amount to $51 million (sic) for every year that each unvaccinated person remains on the payroll.

These and other parts of BBB further reduce employment by suppressing competition in the labor market.  Such provisions seek to prevent non-union workplaces, which are almost 95 percent of all private employment, from distinguishing themselves from unionized workplaces.  Others put nonunion workplaces at an outright disadvantage.  [The labor union movement, of course, is an attempt to restrict or monopolize the supply of labor in order to extract higher employee compensation.]  Section 138514 would allow union dues to be deductible from federal income tax, putting about $400 million per year on the union side of the economic scale.  Other sections, such as 132002, target “infrastructure grants” to “labor unions and other employers … that pay the prevailing wage.”  Section 136401 creates a credit for the purchase of an electric vehicle that “satisfies the domestic assembly qualifications” (that is, unionized).


Penalizing income

The second mechanism is income-tested benefits, which discourage the earning of income by withholding benefits as a household’s income rises.  For example, Section 136407 creates a tax credit for 15 percent of the price of the purchase of an electric bicycle, but the credit is reduced $0.20 per additional dollar earned by the household.  More important, from an aggregate perspective, are the various additions to major income-tested programs such as Medicaid, “affordable housing” and the Child Tax Credit.  By my count, the various new affordable housing subsidies in BBB exceed $220 billion over ten years [two days after I wrote this, CBO estimated $312 billion].

Other provisions are, legally or economically, new excise taxes.  These discourage work by reducing real wages, especially to the extent these policies raise consumer prices by protecting incumbent producers.  A major example is section 31501, which directs the FTC to further enforce “privacy” rules that are effectively prohibitions on lower cost internet plans.  When President Trump and the 115th Congress repealed such prohibitions, the cost of internet service dropped so sharply and immediately that the consumer savings drew the attention of then Federal Reserve Chair Janet Yellen due to its visible effect on the overall Consumer Price Index.  This shows why we can expect higher prices for internet plans under BBB.

A plethora of “green policies” have a similar effect on prices of transportation and energy, such as taxes on methane emissions (Section 30114), subsidies to rural utilities (Section 12007), and green electricity programs (Sections 30411, 136101).  Undoubtably the BBB will be sold as a windfall for the poor, but all of the bill's explicit and implicit excise taxes are particularly regressive.


Projected Employment Effects

The magnitude of BBB’s disincentives for work and hiring varies across households and firms.  They also vary by margin of response, such as adjusting work schedules, the duration of employment, or the duration of nonemployment.  Properly measured disincentives also reflect the reality that benefit takeup is typically well below one hundred percent.  I estimate that, on average, BBB implicit employment and income taxes would add almost seven percentage points to the marginal tax rate on labor income.  At least another two percentage points would someday be required to finance its projected $220 billion contribution to the annual federal budget deficit.

These disincentives are on top of the many other taxes on income, payroll, and sales; other implicit and explicit employment taxes; and longstanding income-tested benefits.  Even ignoring the additional financing, the disincentives would reduce the share of marginal product kept by the average worker from about 0.52 to 0.45, which is a reduction of about 13 percent.  I expect that such a change in the disincentive would reduce full-time equivalent employment by about 4.5%, or about 7 million jobs.  Perhaps employment would prove to be more sensitive to incentives, as it did during the 1990s welfare reform (see also the update below), or less sensitive, but 7 million is a good point estimate.

I estimated the 7 percentage points by aggregating the disincentives in the various sections of BBB.  The largest is the expansion of subsidies for Obamacare exchange plans.  Using the same methods as Mulligan (2015), I estimate that these subsidies by themselves add almost three percentage points.

For the employer IRA mandate, I estimate 0.5 percentage points, which is the average result from two methods.  One method is from Council of Economic Advisers (2019) analysis of the removal of an IRA mandate.  The second method is, based on the Harberger triangle method, to take half of the penalty and apply it to the 33 percent of workers who do not currently have pension coverage through an employer.

Although the BBB’s expanded Child Tax Credit (CTC) has received much attention, I do not find that it adds much to the marginal tax rate on labor income.  The CTC expansion removes a negative tax on labor income, but that applies only below the poverty line and is offset to some degree by expansions in the Earned Income Tax Credit.  The CTC creates a new five percent phaseout range, but my estimates from the Current Population Survey suggest that less than five percent of nonelderly persons aged 21-64 are in a household that with 2019 incomes that would be in that range.  I therefore estimate the expanded CTC’s contribution to the marginal tax rate increase to be only 0.24 percentage points.

For several other provisions, such as the Medicaid expansion in states that opted out of the original ACA expansion, the new Medicaid home and community-based programs, and affordable housing, I assume that each dollar budgeted in BBB translates into the same contribution to disincentives as each dollar expected to be spent on the expanded subsidies for exchange plans.

I assume that the effects on restraining competition in labor markets are the same as Council of Economic Advisers (2019) found for four Obama-era regulations intended to bolster unions (the Fiduciary rule, the Persuader rule, and two joint-employer rules).  I assume that the Green Energy components of BBB contribute one-fifth to the labor wedge of what Fitzgerald, Hassett, Kallen and Mulligan estimated for Biden’s campaign promises regarding renewable energy.

Many of the details of the BBB programs will remain unknown until it becomes law and executive agencies issue their rules for administering them.  Although I assume that benefit takeup is well under 100 percent, I may still have overestimated it in which case BBB would be more of an adverse productivity shock and less of a work disincentive.

[Adverse productivity shocks tend to have comparatively small employment effects and large adverse effects on wages, capital investment, and living standards.  As such, they have a lot in common with BBB’s prescriptions for higher marginal tax rates on corporate and noncorporate businesses, which are not analyzed here.  I have also not yet quantified the disincentive effects of various unemployment-benefit sweeteners in BBB, such as the Section 137507 that makes exchange plans essentially free during any calendar year in which a person has unemployment compensation.]

[Update: Many economists studying the EITC and CTC give a lot of attention to the option of having zero earnings during a full calendar year.  It is a fact that BBB gives almost every parent a significant bonus for choosing that option.  I find this option to be hardly relevant for a large majority of adults, but another approach would be to conclude from welfare reform and EITC changes that low-skill single mothers will be very responsive to the BBB's new subsidies for zero work.  If so, perhaps I underestimate the national employment effect by a million or so.  Thanks to Kevin Corinth, Bruce Meyer, Matthew Stadnicki, and Derek Wu]

[2nd update: BBB reduces childcare costs for some families and increases it for others.  Most important for these purposes, the bill's new childcare subsidies introduce a new set of income phaseouts much like Obamacare did in 2014.  Including the various childcare/credit programs, I now project BBB's employment impact to be -9 million.]

As a younger Barack Obama put it (watch for about 80 seconds), "I am absolutely convinced ... we have to have work as the centerpiece of any social policy."]