Welfare Benefits for Big Business?

Copyright, The New York Times Company

News reports have emerged this year that some of the nation’s largest and best-known corporations – like Walmart and McDonald’s – may have disproportionate numbers of their employees taking part in public assistance programs like Medicaid and food stamps. A video that went viral on YouTube criticized McDonald’s for offering its employees assistance with navigating the complex web of federal government assistance programs.

Most public assistance programs are aimed at poor people and limit participants’ incomes to a maximum somewhere around the poverty line (about $20,000 a year for a family of three). Because jobs generate incomes, it’s difficult for a worker to be admitted into antipoverty programs unless he or she works part time or earns near the minimum wage. Thus, it is no surprise that employers like McDonald’s and Walmart offering part-time or minimum-wage positions would have a disproportionate number of their employees in such programs.

One point of view is that employers just want to be helpful, and some of them happen to be in a line of business where they can create job opportunities for low-skilled people, many of whom can also benefit from knowledge about antipoverty programs. But critics assert that low pay is a deliberate corporate strategy to use government program revenues to enhance their bottom line.

Economists have long cataloged the winners and losses from antipoverty programs – we call it the “economic incidence” – and the answer is more subtle than either side acknowledges.

First and foremost, antipoverty programs raise wages and reduce profits in the short run because they implicitly penalize work, especially the full-time work that is most likely to raise an employee above the poverty line. In effect, employers not only have to compete with each other for employees, but they have to compete with the welfare state, too (as a recruiter, Stacey G. Reece, explains in his congressional testimony).

But the welfare state may also give big employers an advantage over small employers. Big employers achieve a scale large enough to host a number of employee benefit programs from education assistance and retirement plans to advice and assistance with welfare programs that small employers cannot afford. Going forward, I expect that large employers will offer more help for employees to navigate the Affordable Care Act than small employers will.

Although the earned-income tax credit is an exception, many safety-net programs permit participation on a part-year basis, which conveys an advantage to seasonal businesses, large and small. Employees at seasonal businesses have two sources of income – an employer paycheck during the parts of the year that they’re on the payroll and government program benefits during the rest of the year – while employees at nonseasonal businesses just have one income source.

Government transfer payments move purchasing power from those who finance the programs – taxpayers and the buyers of government debt – to the transfer programs’ participants. The transfers hurt businesses that serve, or borrow from, the program financers but may help businesses who serve transfer program participants. Walmart and McDonald’s may be among the latter group, too.

On the whole, social safety-net programs make it more costly to do business but nonetheless may confer competitive advantages on particular types of businesses.

Predictions of the Impact of the Affordable Care Act on the Labor Market

1. Wedges, Labor Market Behavior, and Health Insurance Coverage with Trevor S. Gallen. The Affordable Care Act’s taxes, subsidies, and regulations significantly alter terms of trade in both goods and factor markets. We use a multi-sector (intra-national) trade model to predict and quantify consequences of the Affordable Care Act for the incidence of health insurance coverage and patterns of labor usage. If and when the new exchange plans are competitive with employer-sponsored insurance (ESI), our model suggests that more than 20 million people will leave ESI as a consequence of the law. Behavioral changes that are captured in the model could add about 3 million participants to the new exchange plans: beyond those that would participate solely as the result of employer decisions to stop offering coverage and beyond those who would have been uninsured. Industries and regions will grow, decline, and change coverage on the basis of their relative demand for skilled labor.
2. Wedges, Wages, and Productivity with Trevor S. Gallen. Our paper documents the large labor market wedges created by taxes, subsidies, and regulations included in the Affordable Care Act. The law changes terms of trade in both goods and factor markets for firms offering health insurance coverage. We use a multi-sector (intra-national) trade model to predict and quantify consequences of the Affordable Care Act for the patterns of output, labor usage, and employee compensation. We find that the law will significantly redistribute from high-wage workers to low-wage workers and to non-workers, reduce total factor productivity about one percent, reduce per-capita labor hours about three percent (especially among low-skill workers), reduce output per capita about two percent, and reduce employment less for sectors that ultimately pay employer penalties.
3. It looks like the start of ACA subsidies coincides with the expiration of Emergency Unemployment benefits. That coincidence should not be confused with impact (use your mouse to slide the chart or click here to see full screen).
   
   
   

Inequality and Good Intentions

Copyright, The New York Times Company

A new book says good intentions are a barrier to equality and to progress among the world’s poor.

For most of human history, family incomes were barely enough to survive and life was short. But in “The Great Escape: Health, Wealth and the Origins of Inequality,” Professor Angus Deaton of Princeton writes that while economic progress allowed much of the world to escape poverty, “escapes leave people behind, and luck favors some and not others; it makes opportunities, but not everyone is equally equipped or determined to seize them.”

Professor Deaton also deals with the events after the great escape: that is, how the progress of some families and nations affects the prospects for progress of those initially left behind.

Imitation is one force and works in the direction of progress for all. The poor can look to the progress of others to embark on their own escape. Professor Deaton shows how the imitation of new methods has occurred, for example, with medical technologies that have allowed the residents of a number of poor nations to live longer than Americans did just a hundred years ago, and sometimes longer than Americans live today.

But new methods can harm those with vested interests in the old ones, and the vested interests can use their political power to block competition and progress. Professor Deaton explains how “the emperors of China, worried about threats to their power from merchants, banned oceangoing voyages in 1430,” adding, “Similarly, Francis I, emperor of Austria, banned railways because of their potential to bring about revolution and threaten his power.”

Progress begets inequality, and the resulting inequality can either encourage more progress or impede it, or both. Professor Deaton suggests that inequality in the modern United States has had both of these effects.

He points to a third influence of progress and inequality on outcomes for those left behind: good intentions. As part of the world becomes rich and no longer worries about day-to-day survival, it can look outward. Many residents of developed countries have a “need to help” those less fortunate.

But the attempts to help often – perhaps even usually – go awry.

As medical progress began to diffuse around the world, people stopped dying so young, and that made for an increase in population, especially in less-developed countries. Developed countries thought they would help poor nations by encouraging population control, based on the dubious proposition that more people means more poverty.

“What the world’s poor – the people who were actually having all these babies – thought about all this was not given much consideration,” Professor Deaton says, citing China’s continuing one-child policy as an example. He adds: “The misdiagnosis of the population explosion by the vast majority of social scientists and policy makers, and the grave harm that the resultant mistaken policy did to many millions, were among the most serious intellectual and ethical failures of a century in which there were many.”

Other types of foreign aid to developing nations have also been a disaster, he says, with “pictures of starving children being used to raise funds that were used in part to prolong war, or to N.G.O.-funded camps being used as bases to train militias bent on genocide.”

Professor Deaton’s book is primarily international in focus, and he insists that help for the American poor is different and more effective than aiding the world’s poor. Nevertheless, American readers may be left wondering how much aid to American poor, is, as Professor Deaton says, “more about satisfying our own need to help, and less about improving the lot of the poor.”

Both Sides Agree Less Work Because of Obamacare: Kudlow Report

JEL Review of The Redistribution Recession

“Somewhere, Milton Friedman is smiling.
Casey Mulligan ... has provided an unalloyed Chicago-style explanation for the U.S. economy’s poor performance during and immediately after the Great Recession.”

-Read the rest of Christopher L. Foote's review (jump to p. 1194).

Links to other reviews of the book.

Doctor Shortage?

Copyright, The New York Times Company

The supply and demand for health services will experience a variety of changes in the near future, especially those from the Affordable Care Act. But nobody has quantified their net impact on the market for doctors. The new law pushes demand for physicians in both directions, making it is easy for advocates on either side of the law to cherry-pick provisions they support.

The law is beginning to build new markets for individual insurance policies that in some ways can reduce the demand for health care and doctors.

Participating families above 250 percent of the poverty line will, on average, pay 30 percent of their medical expenses out of pocket, as compared with the 17 percent out of pocket that is typical for employer-sponsored health plans. That gives patients almost twice the incentive to avoid using doctors or to seek treatments that are less expensive and likely less physician-intensive.

In some states, patients are being pushed toward less physician-intensive care because the insurance plans offered on the exchanges have narrower networks that exclude some of the more expensive facilities. Some of these excluded providers may be considered among the best in the industry, because state regulators seek to keep insurance premiums low. This is a force that could help limit the demand for doctorss in narrow-network states.

Other states include their top facilities in the networks accessible by residents who buy their insurance on the exchanges and do not have this force limiting physician demand. Moreover, the broad-network states will likely pull dcotorss away from the narrow network states where demand for them is less.

Although the new law pushes the insured to shoulder a larger share of their health expenses, the law also mandates that insurance pay for a wider range of health goods and services. That mandate by itself could increase the demand for doctors.

The Affordable Care Act is supposed to increase the fraction of the population with health insurance, and it will in the long run because of the individual mandate, the large insurance subsidies and Medicaid expansions in a number of states. (In the short run, the act is reducing the number of people with health insurance, as many longstanding policies have been canceled because they do not conform with the new law.)

It is a mistake to assume that every person getting insurance coverage is an additional person demanding health care, because many of the so-called uninsured are actually insured in one way or another. Take Medicaid enrollment, for example. Sixteen million people were not enrolled in Medicaid in June 2010 yet participated in the program at other times during the fiscal year, largely because they don’t bother enrolling (or know that they can) when they are healthy and turn to it only when need arises.

If and when those who are eligible but unenrolled make contact with hospitals and other providers – when they actually need the coverage – they are reminded to enroll. In an economic sense, these 16 million were, in effect, insured all along, despite their absence from the official statistics. The new law’s individual mandate encourages some of these people to be perpetually enrolled, even when they are healthy, which is more a change in their official classification than a change in their use of health care.

The numbers of slots in medical schools and residency positions, and rules that permit nurses to perform a wider range of services, have important effects on the incomes of doctors, because easier entry into the medical profession reduces physician incomes. I’m not sure that the new law does much to change these entry barriers, though.

Proponents of the Affordable Care Act can point to the provisions that reduce physician demand and help prevent a doctor shortage; opponents can say that more insurance means more demand on an already strained profession.

A good economist should be able to examine all the provisions and tell us the net result. But none have done this. The most we have in terms of a comprehensive calculus of health reform and the demand for physicians is the example of Romneycare from Massachusetts, which Scott Gottlieb and Ezekiel Emanuel hold up as proof that there will be no doctor shortage.

But Romneycare is a different law than the Affordable Care Act and covered a different population. Even without those differences, Massachusetts could increase health care in the state in part by pulling in medical professionals from elsewhere in the nation.

The Affordable Care Act cannot do the same, except to pull medical professionals from abroad, where the barriers to moving are much greater.

If only the payments to physicians were free to adjust in response to the law, entry barriers, demographics and other forces, there would be neither a shortage nor a glut in the sense that doctors would be available to whoever would pay the market price and positions would be available for qualified doctors willing to work for that price.

But the new law limits payments to physicians and other medical providers. If patients are lucky, the demand for doctors will be low enough that the limits will not matter. But if the new law results in a significant net increase in physician demand, the payment limits will help remind us of Soviet-era limits on the price of bread, with queues and black markets to follow.

Just a Coincidence

Economists have traditionally discussed how minimum wages and high tax rates might -- probably -- depress the labor market.

Now we have a President who repeatedly claims that minimum wages and other programs that tax employers and attempt to subsidize the poor and unemployed do not depress the labor market, and in fact revitalize it. Moreover, he claims that no serious economist holds what I described as the traditional view.

At the same time, the labor market stubbornly refuses to recover from the recession, long after the banking sector and stock market have recovered.

Don't be fooled by the correlation: it's just a coincidence -- or perhaps a conspiracy among the unobserved variables -- that the labor market is depressed at the same time that the federal government implements policies that were once thought to depress the labor market.

One would also be foolish to assume that the President who appeared to mislead part of America about the affects of the Affordable Care Act might mislead anyone about the economic effects of redistribution.

The Affordable Care Act and Marginal Tax Rates

I updated my ACA and Romneycare papers. The updates add the so-called "family glitch," Medicaid expansion, and end-of-year reconciliation of advance premium credits.

nber.org is hosting excel files with those updates and extensions (use the version with "update" in the file name).

Robots and Property Values

Copyright, The New York Times Company

As robots begin to move goods and people from place to place, urban land might become more valuable.

Amazon.com has announced that it is testing package delivery by drones — small, unmanned helicopters that would bring a purchase from Amazon’s fulfillment center to the customer’s front porch. Driverless cars are being developed to help move goods and people from place to place.

“Location, location, location” is the saying in real estate: a property’s value is determined primarily by its location. An apartment in central Illinois might be worth 20 times as much in Manhattan, because a Manhattan apartment gives its resident access to many more goods, activities and high-paying jobs.

This is not to say that urban living is always the best, or that all urban properties are created equal. Locations involve trade-offs, and rural areas offer amenities that big cities cannot. But for centuries, real estate markets have shown that people and businesses are willing to pay more for urban properties.

As technology helps with moving goods and people more cheaply, it might seem that urban real estate would give up some of its price premium because distance becomes less of an obstacle to economic transactions. Wouldn’t a driverless car cause some workers to sell their Manhattan apartments and commute to their jobs from more spacious homes in the suburbs or even rural New York State?

But don’t forget that many people and businesses currently avoid urban areas because of the monthly expense of owning or renting urban property. New technologies might allow them to use urban properties on a part-time basis, or use less urban property to accomplish the same tasks, which would make urban property more valuable.

A restaurant may need less refrigeration and storage space because it takes multiple food deliveries per day. Grocery stores may save on shelf space by having a greater fraction of their items delivered directly to customers without being shelved in the store. Households may opt for less storage space or parking, for example — and more room for people — when they can get items and transportation cheaply and on time.

For every Manhattan resident who leaves his apartment for the suburbs, there could be many others for whom technology induces them to use a Manhattan property on a part-time basis.

New technologies are more likely to emerge in urban areas, because that’s where the innovators expect to find the most customers. Amazon said that it planned to start its drone service in urban areas, and I wouldn’t be surprised if the first commercial uses of driverless cars were in big cities like San Francisco or Los Angeles.

Thus, while cities already give their residents access to more goods and services, technology may further shift that advantage and thereby increase urban property values.