Senators Worried about Incentives

The part of the paper Mr. Sessions is talking about is "The ACA has not been introduced into a tax-free economy, so its marginal tax rate hikes add to marginal tax rates already in effect. I estimate that, by 2015, the average marginal after-tax share among household heads and spouses with near-median weekly earnings will have fallen to 0.50 from 0.60 in 2007, largely from the ACA but also from other expansions in safety net programs. That is a massive 17 percent reduction in the reward to working – akin to erasing a decade of labor productivity growth without the wealth effect...."

Businesses Adjust to the ACA: A Survey

Here's the link. I didn't read it yet.

Jimmy Spithill Likes Supply & Demand

I think he does ... here are the pictures what do you think?

Last year Supply & Demand crashed the America's Cup practice course in Newport RI and these shots were taken from Supply & Demand as Spithill's Oracle boat rounded the mark and Supply & Demand was approaching it, starboard hull flying :).

Here's Dean Barker and his crew:



Thanks to Scott Klodowski for the photos. Or maybe Meredith took them ... (bunch of pics mixed in one folder).

Eminent Domain Abuse in Chicago

The Chicago Tribune reports that the Metropolitan Pier and Exposition Authority (aka McPier) is attempting to seize private property near Cermak and Prairie (across from McCormick Place) using the power of eminent domain. The property would be handed to hotel management corporations like Marriott.

Some of the property falls outside of the jurisdiction of McPier, so it has convinced the city of Chicago to go after the remaining property.

The Chicago Tribune article does not comment on the private property aspects of these actions, but both of them are using the power of government to forcibly redistribute private property from one private use to another.  The victims are politically weak and the beneficiaries politically connected.

When Medicare Opened for Business

Copyright, The New York Times Company

The Affordable Care Act creates health insurance marketplaces or “exchanges” where families and individuals can purchase private health insurance. Most people currently without insurance will be eligible for assistance with their health insurance premiums, capping their payments at 2 to 10 percent of their household income.

The federal budget, and perhaps also the health of millions of people, depends on how many people take advantage of the new program.

People will not be forced to take part in the exchanges, but those who do not will be assessed a small penalty for not being insured (whichever is greater, 1 percent of household income, or $95 per person) that would appear on their federal tax return when they file in early 2015. Doctors and hospitals may also insist that their uninsured patients join the exchanges rather than requesting “free” care.

On July 1, 1966, Americans 65 and older were first eligible to take part in the new Medicare health insurance program, in which the federal government paid much of the cost. Previously, almost half of the elderly had no health insurance.

By the end of 1966, 19 million people were enrolled in Medicare, almost exactly the same as the number of Americans who were 65 or older at the time. The first full year of the program was 1967.

Source: Bureau of Economic Analysis

Those were the days before rapid Internet communication, and a number of elderly people lived in rural areas away from major hospitals and medical centers. In the current environment, the health insurance programs coming on line next week might spread even more quickly than Medicare did.

On the other hand, the elderly population may have been easier to reach than today’s uninsured nonelderly people, because the elderly had already been participating in the Social Security pension program. Also, the new health insurance exchanges will have staggered enrollment periods (about two months near the end of each calendar year), whereas elderly are enrolling in Medicare all year long (a person’s Medicare enrollment period is seven months based on the date he or she turns 65).

The Medicare-eligible population – essentially people 65 and over – is also less policy-sensitive than the population eligible for the new exchange plans. People over 65 are created by waiting for 64-year-olds to have another birthday, and there’s not much policy and economic events can do about that. But people eligible for the new exchange subsidies must be in families with income of 100 to 400 percent of the poverty line and must not have a job that offers affordable coverage — conditions that economic change or policies might affect.

Incentives and economic events are likely to increase the number of people eligible for the exchange subsidies, but those economic behaviors may take some time to play out. For that reason, participation in the exchange plans may continue to increase significantly even after 2015, when the program will have been two years old.

Based on the Medicare experience, I expect more than 15 million people to enroll in the new exchange plans by 2015, with millions more joining thereafter as the economy adjusts to the new law.

The "Coase Theorem" and Big Business

Copyright, The New York Times Company

Big businesses, especially those with large shares of the markets in which they sell, are sometimes thought to harm the economy because they sell to customers with little fear of competition from other sellers. Big businesses charge too much, the argument goes, and all customers can do in response is to purchase less. (The seller understands that customers respond to high prices by purchasing less, but the high profit margins are thought to more than compensate for the lower volume.)

If the industry had more sellers, or the customers themselves were in charge of production, prices would be lower, consumers would buy more and in aggregate the industry’s sellers would produce more and need more employees.

This “monopoly view” is that dominant businesses result in less industry production and employment than would emerge in a competitive marketplace.

Consistent with the monopoly theory of big business, the federal government, especially the antitrust division of the Department of Justice, is authorized to punish businesses that are thought to be too large for the efficient operation of their marketplace, and in some instances to break them apart.

In the labor market, unions can sometimes be a dominant seller, and on that front there are opposing “monopoly” and “bargaining” theories, as I noted in last week’s post. The bargaining theory of labor unions suggests that they limit the economic damage that they do.

The same sort of bargaining theory is present in the antitrust field. A big business should not be satisfied with a high-price/low-volume outcome, even if it yields more profits than a low-price/high-volume outcome, because a price above marginal cost of production is inefficient: there may be ways that the buyer can be given a better deal and enhance the seller’s profits.

Profs. Kevin Murphy, Edward Snyder and Robert Topel of the University of Chicago have written about some of the results of bargaining between big businesses and their customers. Big businesses often offer volume discounts, quote nonlinear prices and give loyalty incentives to customers. All these policies can encourage customers to purchase more, perhaps in a quantity similar to what they would buy in a many-seller market with lower prices. If the bargaining view of monopolies is correct, then the monopoly view of big business has exaggerated the degree to which dominant sellers harm the economy.

While one point of view is that federal antitrust policy is not vigorous enough, Professor Coase reminds us that it is easy to exaggerate the economic problems created by dominant sellers.

Comprehensive book review by Richard V. Burkhauser

Professor Richard V. Burkhauser has written a comprehensive review of The Redistribution Recession.  I should be reading his books rather than the other way around, but nonetheless he read it from cover to cover and has summaries and evaluations of every single chapter.

Attack on Economists Who Think That Obamacare Will Contract the Labor Market

The "Coase Theorem" and Labor Unions

Copyright, The New York Times Company

Labor unions are organizations of workers through which workers collectively bargain with their employer(s) over wages, fringe benefits, working conditions and other ingredients of employment contracts.

Labor unions tend to support candidates from the Democratic Party more than they support Republicans, and “liberals” are thought to be the ones who would acknowledge socially productive activities by unions.

A supposedly conservative view is that, with the help of special legal exemptions from antitrust laws and their ability to put workers on strike, labor unions harm economic efficiency by restraining competition in the labor market. From this perspective, unions are harmful because, among other things, they interrupt production with strikes, waste resources with “featherbedding” rules that require employers to hire employees for useless or nonexistent tasks and ultimately reduce employment by forcing employers to pay high wages.



Professor Coase, who died on Labor Day at age 102, explained how the legal assignment of property rights might not be that important for determining how resources are used in the economy. His idea became known as “The Coase Theorem,” and he received the Nobel Memorial Prize in Economic Science in 1991.

Although Professor Coase was supposedly conservative (he resisted this label, but the University of Virginia urged him and other economists they deemed to be conservative to leave), his conclusions arguably support many of the liberal views of unions.

Professor Coase’s property rights logic suggests that reassignment of ownership of some production processes and decisions from owners and management to workers – as is often the case under union-negotiated contracts – should not significantly change how businesses are run. That means that unions should avoid strikes and oppose featherbedding and for the same economic reasons that union-free shops do. Union wage demands would not reduce employment, at least in the short run.

In this “bargaining” view, unions would achieve efficient outcomes by bargaining over many aspects of the employment relationship, and not just salaries. A bargaining union would not accept featherbedding, for example, but instead would offer to give up featherbedding in exchange for something else (perhaps cash, or the creation of an additional productive position), because the featherbedding costs the employer more than it benefits the union members. If unions do too much to shrink the size of the economic pie, it’s difficult for them to enhance the lives of their members. Indeed, reasoning like Professor Coase’s had, in the union context, already been examined by labor economists like Wassily Leontief at Harvard.

The important difference between economic approaches to labor unions is not liberal versus conservative but “monopoly” versus “bargaining.” Milton Friedman took the monopoly view when he looked at the American Medical Association, which he understood as a union of medical doctors that restrains competition. Robert Barro took the bargaining view in his argument against Keynesian interpretations of wage rigidities.

Although it does not mention the Coase Theorem, “What Do Unions Do?” by Prof. Richard Freeman and Prof. James Medoff offers the most vivid explanations of the productivity consequences of unions. Strikes and featherbedding are rare in unionized industries. More typically, they said, unions enhance productivity by, among other things, reducing turnover and supporting training programs that make workers more productive.

One can argue whether it makes sense to give special legal protection to labor unions, but Ronald Coase’s results remind us that it is easy to exaggerate the consequences of those provisions.

Curse Words from Professor Gruber

"Because they're the same [bleep]ing bill. [Romney] just can't have his cake and eat it too. Basically, you know, it's the same bill. He can try to draw distinctions and stuff, but he's just [purposely misleading]." Jonathan Gruber compares the ACA to Romneycare, November 2011.

"the Affordable Care Act will, by 2015, add about twelve times more to average marginal labor income tax rates nationwide than the Massachusetts health reform added to average rates in Massachusetts following its 2006 statewide health reform." Casey B. Mulligan, August 2013.

Massachusetts Times 12

Copyright, The New York Times Company

The Affordable Care Act was intended to expand the fraction of the United States population covered by health insurance. The law includes taxes on employers and various implicit taxes on employees that go into effect over the next two years. Economic theory suggests that such taxes will contract the labor market in an amount commensurate with the amount of the new taxes.

The federal government and other advocates of Obamacare have dismissed concerns that the coming labor market contraction would be significant, or even noticeable, by pointing to Massachusetts’s experience with its so-called Romneycare system, also designed to expand insurance coverage. Because the Massachusetts labor market did not noticeably contract relative to the rest of the nation after its system went into effect, an official of the federal Department of Health and Human Services told The Washington Examiner that the experience in Massachusetts suggested “that the health care law will improve the affordability and accessibility of health care without significantly affecting the labor market.”

Prof. David Cutler of Harvard recently addressed, on this blog, concerns about possibly adverse tax effects, saying, “Additional data from Massachusetts, where a state law was the precursor to the Affordable Care Act, suggests that the fears are overblown” and “at this point the evidence overwhelmingly suggests no need for major worry.”

This position assumes that the Massachusetts system increased marginal labor income tax rates in the state by roughly the same magnitude that the Affordable Care Act will increase them in the United States (by marginal labor income tax rate, I mean the extra taxes paid, and subsidies forgone, as the result of working, expressed as a ratio to the total compensation from working). This assumption is no longer necessary, because the methods I have used to measure marginal tax rates from the American Recovery and Reinvestment Act of 2009, unemployment insurance expansions and the Affordable Care Act can also be applied to the Massachusetts health reform law. The results are shown in the chart below.

The left bar shows that the Massachusetts law did, on average, increase marginal tax rates and thereby reduce the reward to working. But the impact was well under one percentage point, and for that reason it’s probably not surprising that, relative to other states that were not experiencing health reform, the Massachusetts labor market did not change noticeably after the law went into effect.

The right bar shows the impact of the Affordable Care Act on nationwide marginal tax rates: it increases national rates about 12 times as much as the Massachusetts law increased rates. Earlier this year I explained why the Massachusetts law was so different from a tax perspective: among other things, its employer penalty is an order of magnitude less, the state’s population is not the same as the national population, and Massachusetts had already been helping unemployed people with health insurance.

It follows that the effect of the Affordable Care Act on employment and work hours would be roughly 12 times as great as the effect of the Massachusetts law. That doesn’t by itself tell us the exact impact of the national law because we don’t have a precise estimate of the impact in Massachusetts, except that it was small. For example, if the Massachusetts law reduced employment by 0.1 percent, the Affordable Care Act’s effect would be roughly 1.2 percent; not small. If the Massachusetts law’s effect were 0.25 percent (still small), the Affordable Care Act’s effect would be 3 percent: again, not small. The bottom line was that it was wrong to expect the two laws to have had the same effects.

Call me gloomy, but I’m one economist who thinks that adding, on average, five percentage points to marginal tax rates will noticeably depress the labor market, while adding a few tenths of a point in Massachusetts did not.