The Fallacy of the Heap Returns

The (il)logic of Obamaeconomics has returned:

• Each $100 of weekly unemployment bonus has hardly any negative effect (some might say "no statistically significant effect") on employment or GDP.
• Food stamp benefits have hardly any negative effect on employment or GDP.
• Rental assistance has hardly any negative effect on employment or GDP.
• Obamacare subsidies have hardly any negative effect on employment or GDP.
• Minimum wage increases have hardly any negative effect on employment or GDP.
• A new negative income tax has hardly any negative effect on employment or GDP.

My writings rarely express disagreement with any of the bullets by themselves.  For the sake of argument, I am not disputing them here.

Where I disagree is the assertion that the combination of all of the bullets, which is Biden's pandemic relief proposal, would have hardly any negative effect on employment or GDP.  We could talk about the convexity of deadweight costs, and the fact that the new redistribution goes on top of a lot of redistribution in the baseline, but this point was well known even among the noneconomist ancients.  It is the fallacy of the heap.

Every Econ 101 teacher has to confront this fallacy.  Invariably every class has a student pushing back on the law of demand, "Raise the price of a car by a penny and that will not stop anyone from purchasing the car."  Teacher has to say, OK let the seller of the car raise the price $10,000, just one penny at a time.  Each penny increase has no effect on sales ... therefore $10K has no effect on sales.

Economists  beware of vague predicates!  Biden's smorgasbord of redistribution will noticeably reduce employment and GDP.

COVID-19 policy: your costs will be ignored unless you speak up

It is a fact that, despite requirements to the contrary, Federal health professionals do not consider the costs of health-enhancing rules and regulations in their normal course of operations.  Jerry Ellig has documented this fact in his regulatory report cards where he shows that the cost-benefit analysis from HHS (the Federal department making health policy) consistently ranks as one of the worst agencies in terms of considering costs as part of its regulatory impact analysis.  (Using other Federal agencies as a benchmark is an incredibly low bar!).

This HHS tradition is not new (Ellig's latest report card was prepared in 20116), and continues even into the current administration, as I witnessed first hand.  For example, when HHS is of a mind to reduce the number of people uninsured, they impose any cost on taxpayers and consumers in pursuit of getting people signed up for insurance and furthermore pretend that those costs are so negligible as to be unworthy of counting.

We can safely assume that HHS continues this approach to COVID-19.  They want to minimize the rate of new infections.  It won't matter to them how much of our money that costs.  It won't matter how much human capital our children and young adults lose.

Although it was not true in the past with health insurance, opioids, and other matters, perhaps this time they are doing the right things.  If so, it is the blind squirrel story, because they are ignoring costs.

The only way for Federal health decisions to reflect costs is for YOU TO SPEAK UP.  HHS reports to elected officials, who can and often do listen to their constituents.  President Trump certainly does listen (I know that first hand).  But they will not hear unless PEOPLE SPEAK UP.

Cass Sunstein, whom I admire, has nonetheless made a big mistake by perpetuating the myth that "Technocrats have triumphed,” which is his way of asserting that Americans are now ruled over by nonpartisan career professionals who carefully balance costs and benefits.  This depiction of balancing costs and benefits is absurd, especially as regards to health policy, which is the single biggest area of Federal regulation.

What I never anticipated is that it would become so obvious to so many regular people how health policy is conducted without regard to the costs they bear.

Cowen and Cochrane are confused about price controls

Tyler Cowen and John Cochrane think that the minimum wage traces out a labor demand curve.  It does not.  There are many ways that a competitive labor market can comply with the minimum wage, and cutting employment is only one of them.  E.g., change the composition of compensation, change the work schedule, change the location of employment, etc.

So labor demand could be wage-elastic but a socially costly minimum wage have no effect (or even a positive effect) on employment in a competitive labor market.

For a more detailed analysis, see also The Upside Down Economics of Regulated and Otherwise Rigid Prices.

Monopolies are unhealthy, but high taxes make the disease worse

Copyright, TheHill.com

Taxes are necessary to fund worthy government activities, but taxes come with side effects. The side effects can be especially harmful in an economy where businesses enjoy monopoly power.

People and businesses individually attempt to reduce their tax burden by doing less of the activities taxed at high rates and more of the activities tax at low rates or by doing activities that aren't taxed at all.

If the primary activities hit with high rates were unpleasant -- pollution is an example -- then thankfully taxes would not only bring revenue to the treasury but also induce people to pollute less.

However, most of the objects of taxation are labor and capital, which are not intrinsically undesirable the way pollution is. The reduction in labor and capital, and ultimately national income, by taxes is a regrettable side effect.

The size of government is ultimately a along the tradeoff between reducing side effects and obtaining tax revenue. 

Former Obama-administration economists, and New York Times economist Paul Krugman, have recently decided to treat corporate income as a kind of pollution that is supposedly a source of tax revenue without adverse consequences. They are confused about how monopolies work. 

We all agree that a real problem with monopolies is that they may charge too much, owing to the fact that by definition they have little concern that a competitor will outbid them. But charging high prices is equivalent to producing too little, because customers' natural reaction to high prices is to buy less.

So the problem with monopolized industries is that they produce too little, and with their lower production levels, they ultimately have less need to hire labor and capital. Taxing monopolies only worsens their low usage of labor and capital. In this way, monopolies are the opposite of pollution.

A second feature of monopolies is that everybody wants to own one! The result is a competition for the ability to have a monopoly. Sometimes this feature of competition for monopoly rights only adds to the problem, as when businesses compete to convince government officials to grant them monopoly power.

Other times, businesses and individuals compete to invent a new product that they can successfully monopolize. Yes, it's too bad for the consumer that the new product costs so much -- that's the first feature of monopoly noted above -- but that's better than having no product at all. Taxing the profits of innovators discourages innovation.

An important aspect of taxing monopoly profits is therefore to understand how the monopoly rights are attained and who benefits from the competition for rights. Certainly, the headline "monopolists" of today, like Facebook, Google, Apple, etc., got their monopoly rights from socially valuable innovation and not government favors.

Are we sure that we want to discourage the next generation of innovators?

None of this is to say that monopoly is a sign of a healthy economic system. It's just that taxes probably make the disease worse. A time of rising monopoly is the time for tax cuts, not increases.

Read here to feel the Joy of Voting

The economic analysis of voting primarily takes voting as instrumental: like a bank account, a vote is supposed to be nothing more than a means to an end. A few of us have argued against this: e.g., Geoffrey Brennan, Bryan Caplan, and recently Becker and Mulligan, but that is a small minority.

Another way to appreciate the same point is to see what actual Catalan voters had to say last weekend:

The polling station workers thought that if they had computers with older technology they may be able to connect to a wifi system [the Spanish government was blocking polling stations' internet access] ... we all started clapping – it had worked! They were connected. One man inside excitedly ran to inform the others... “I’m going to be the first to vote!” he yelled excitedly, to laughter. The two elderly women and a handful of others inside took up their ballot papers and voted.

Then the gates opened and the first round of people walked through. Everyone was cheering and applauding jubilantly ...the faces of those who came through were still calm and resolute but some became tearful after they voted. It was a really moving moment, and it’s hard to accurately put it in words. The best way I can describe it to say there was an overwhelming sense of dignity about both the moment and the people.

You can read the full account here.

That voting is to many people not merely a means to an end is better understood by Catalan separatists than the Spanish government.

Machine proves Paul Krugman wrong about the recession

Click for short video

Click for short video

For more on the two "sides" to this argument, see

• The Redistribution Recession (2012, esp., Figure 11.1: At least half, but less than 100.0%, of the reduction in labor was a result of public policies that redistribute).
• Paul Krugman's blog entry Nov 2012.

Use the machine yourself.

See more examples of economics questions answered by machine.

Getting rid of ACA subsidies is easy, politically and economically

The conventional wisdom is that creating a subsidy program creates a sense of entitlement that, via political pressures, prevents it from being phased out later. This wisdom applies, perhaps, to a number of federal programs.

But the Affordable Care Act's premium assistance subsidies (technically, they are "tax credits" administered with the personal income tax) are different because, unlike beneficiaries of Social Security, Food Stamps, and so many others, a recipient of a premium assistance subsidy must also pay SOME OF HIS OWN MONEY. Many of them are doing so because of the individual mandate, which could be eliminated with little political cost. With the individual mandate gone, these people would voluntarily forgo their subsidy in order to keep their own money.

A few states have already seen something like this with their Medicaid program -- asking program participants to pay a small part of the overall cost -- and many participants voluntarily exited.

In addition, the rules setting minimum benefits could be eliminated. Some of those previously receiving subsidies would rather get a plan with fewer benefits but also requiring less of their own money (I wrote about them in my book). They too would voluntarily exit the ACA's premium assistance program.

Yet another step would be to cap the subsidy at the DOLLAR AMOUNT that persons with the same income and same state of residence were ACTUALLY RECEIVING during the Obama administration. The amount that the recipient would have to pay out of pocket would be the difference between the premium and that dollar amount. As premiums inevitably rise over time, that amount increases and participants would continue to voluntarily exit the program, never to return.

(A more dramatic version of this would be to cap the subsidy at the dollar amount that the SAME PERSON ACTUALLY RECEIVED during the Obama administration).

Presumably, exit from the subsidy program would not be random -- those whose participation had been more costly to the insurance plan would differentially remain in the program. As they did so, premiums would further rise above what they would have been with the ACA intact, which would further increase what participants have to pay out of pocket, and thereby further encourage voluntary exit.

Approaches like this not only make political sense, they make economic sense. Why should the American taxpayer pay, say, $200/month for a person's insurance coverage when that person himself is unwilling to pay $50/month for it? The answer: the primary beneficiaries of the subsidies are health providers (more paying demand for what they sell) and high-income Democrats (feel good when the official statistics say that coverage rates are high), and it need not be not politically unpopular to take away what is effectively a subsidy to health providers and high-income Democrats yet advertized as something else.

As with many things about the ACA, the conventional wisdom is wrong.

The media has been in the bag for Clinton, Obama, and Lincoln too

Even just in my own areas of expertise -- labor markets and health care -- it is easy to see how reporters and editors of "the news" have been promoting Democratic-party policies.  It's not just convenient ignorance about how incentives work.  Many times they know very well but are silent about it for fear of blemishing the narrative, even while proclaiming to their readers that they tell the whole story.

But this is nothing new.  As Harold Holzer found,

Lincoln alternately pampered, battled, and manipulated the three most powerful publishers of the day: Horace Greeley of the New York Tribune, James Gordon Bennett of the New York Herald, and Henry Raymond of the New York Times.

Lincoln authorized the most widespread censorship in the nation’s history, closing down papers that were “disloyal” and even jailing or exiling editors who opposed enlistment or sympathized with secession. The telegraph, the new invention that made instant reporting possible, was moved to the office of Secretary of War Stanton to deny it to unfriendly newsmen.

As long as the government controls significant resources, the consumers of media will want to know what the government is doing, and the government will sell access to that information to "newsmen" in exchange for favorable coverage.

It isn't merely about changing a specific journalist's mind.  It is also about helping those who are already inclined favorable to earn more profits than those inclined otherwise.  Media market entry and exit takes care of the rest.

Ransoms and Credible Public Policy: Brief Lecture Notes

For more than 20 years I have been using hostage ransom as my primary example of a "credible public policy" issue, the analysis of which were advanced by the important papers by Kydland-Prescott and Stokey.

The Obama administration has generously made the lecture (linked here in powerpoint) more interesting. I am a bit embarrassed, however, that the lecture assumed that the terrorists would receive $100,000 cash per hostage -- that appears to be underestimated by factor of 1000. But that is easy enough to edit for subsequent presentations.

But does the model also need to be updated to show the President lying about it redefining the word "ransom"?

Robert Reich: Changing the Facts to Fight the Good Fight

Yesterday Robert Reich claimed that

"Most people who lose their jobs don't even qualify for unemployment insurance."

As you can see from my cut and paste of his quote (italics added), he cited a newsmax article.  But that article lists several reasons why the unemployed choose not to apply for benefits.  On this issue of eligibility, the article says that most UNEMPLOYED do not qualify.  The reason is typically that the non-qualifying unemployed DID NOT LOSE THEIR JOBS.  As the article says,

"Unemployment benefits are only available to those who lost a job through no fault of their own. ... Many of the unemployed are recent college or high school graduates who are now looking for work. Others may have quit their jobs, or they left work years ago to take care of children and are now job-hunting again. People in those categories make up 52 percent of the unemployed."

You would think that Mr. Reich knows the facts because he was IN CHARGE OF THE FEDERAL DEPARTMENT OF LABOR, which is intimately involved with unemployment insurance benefits.  But he also knows a good narrative, which is that job loss is typically endured with no government help.

Business Experience Is No Cure-All in Government

Because government and business are fundamentally different in their financing and their evaluation, good business practices can make for poor governing.

The election cycle regularly brings forth successful businesspeople who argue that voters should select them for public office over seasoned politicians because of the skills and experience they acquired in the business sector. In 1996, billionaire Ross Perot started his own political party to advance his quest for the presidency of the United States. Financier Mitt Romney was the Republican nominee in 2012. And now Carly Fiorina and Donald Trump are vying with politicians for the 2016 nomination, arguing, as the New York Post put it, that “America is in desperate need of a suave, successful businessperson like Trump — or former HP CEO Carly Fiorina — to solve what ails our economy.”

In their natural habitat, business leaders work with investors, customers and employees to create value. Each of their relationships is typically voluntary in that no investor is forced to provide funds, no customer is forced to purchase the product, and no employee is forced to work rather than pursuing some other opportunity.

The financing of government is unique in that the government can, and primarily does, force people and organizations to provide resources – these are taxes and takings. As a result, those at risk of taxes or takings change their behavior in order to reduce their exposure. A family may work less, in part because of the income tax burden that comes with working more. A business may cease to operate, or operate on a deliberately limited scale, in part because of the sales tax or regulatory burdens it faces while in operation.

Tax and regulatory avoidance behaviors are known in the economics profession as “excess burdens” because the burdens of taxes and regulations exceed the amount of resources that the government is acquiring. The family that pays $10,000 per year in taxes of course loses the $10,000, but it also has lost something in the adjustments it made – maybe working less – in order to avoid paying even more tax than the $10,000 it already pays. It makes tax-avoiding adjustments because it does not voluntarily pay taxes; rather, it pays them to prevent punishment, and it is perfectly legal to pursue less heavily taxed activities.

Some of the lost tax dollars might be recovered if the government spends it wisely – something like the dividend an investor would receive if he invested funds in a wisely managed business. But the losses due to tax-avoiding adjustments are irrecoverable and have no analogue in business, because unlike taxpayers, investors, employees and customers are voluntary contributors. As a result, a government leader ought to be less ambitious with his or her project ideas than a businessperson should, because government projects have their excess burdens.

The employer-employee relationship is also different in the public sector than it is in the business sector. Public-sector employees are five times more likely to be unionized than private-sector employees are. Moreover, the ultimate government employers are the elected officials, who of course cannot persist in their roles without being re-elected. As a result, a number of government employees are “asked” to participate in political activities that support their boss’s continued tenure.

Although past governing success is no guarantee of future performance in office, the next great president will likely have more experience in public office than business triumphs.

Is Obamatrade the same as freer trade?

The legal question du jour is whether Congress should allow special voting procedures (fast track) for international trade agreement agreements negotiated by the executive branch. This brings forth the age-old debate of the merits of free trade, as if free or freer trade is at stake with fast track.

But that is jumping to conclusions without reading the text of the trade agreements.

Experts jumped to conclusion, based on chapter titles alone, that the ARRA would help the economy recover, when in fact it prolonged the recession.

Experts jumped to the conclusion that Obamacare would create economic growth, when in fact it is hindering it.

Is Obamatrade another chapter in this saga, in which the federal government hinders economic growth and in the process convinces the experts to assert the opposite?

Reading the text of Obamatrade (specifically, the international trade agreements that would be fast tracked) is a better way of answering the question than extrapolating from the above historical pattern. But the text is secret.

Here are four educated guesses, that perhaps someday might be confirmed by reading the text.

1. There are some begger-thy-neighbor policies that are implemented when nations act unilaterally. Because they shrink the world economic pie, one might expect such policies be restricted by multinational agreements.
   
2. There are some internationally procompetitive policies that are implemented when nations act unilaterally. Multinational agreements set the stage for international collusion, which benefits the parties to the agreement but shrinks the worldwide pie and harms those not party to the agreement (the latter parties can be entire nations or parts of nations not represented).  Some of the nations harmed might be small nations and African nations.
   
3. Rumor has it that financial services, which includes insurance, are part of the agreements. But there is no way that the Obama administration would allow foreign businesses to sell their health insurance products -- without politically correct elements like "free" birth control, deductibles ceilings, and regulated premiums. So expect the actual trade agreements to help prevent citizens from looking to foreign businesses to supply desirable products that are currently not supplied domestically.
   
4. Among world leaders, there is a near consensus to do a lot of bad economics in the name of "public health." E.g., to dishonor patents on pharmaceuticals and medical devices.
   

In my view one should seriously consider the possibility that the new and secret trade agreements make trade less free, rather than more.

Burtless: Two Economic Mistakes in One Sentence

Brookings' Gary Burtless writes

It seems odd that critics of the ACA emphasize the potentially adverse impacts of the law on workers forced to accept part-time jobs but fail to notice that their logic suggests more workers in total must be employed.

Dr. Burtless should have read my book, or some of the labor economics literature dealing with part-time work cited therein, to see why he has the economic logic backwards, and in fact nothing here is "odd."

My revised edition (to be published by University of Chicago Press), has the clearest explanation:

A conventional wisdom [e.g., Burtless quote] says that employment rates increase to “compensate” for work hours lost from taxes on full-time schedules. Under this view, more people working 29 hours rather than, say, 35, would mean that employers simply have to hire more or keep workers on the payroll longer in order to accomplish the tasks necessary to conduct their business. The conventional wisdom fails in two ways. ...full-time employment taxes can be avoided by reducing employment and increasing hours per employee. My conservative estimates suggest that this case will be far more prevalent than the twenty-niner situation: the ACA will reduce the nationwide weekly employment rate by 3 percent below what it would have been without the ACA.

...Moreover, even if full-time employment taxes were avoided by reducing weekly work hours, there would not be a commensurate increase in the employment rate because weekly hours would not be reduced for normal business or personal reasons, but rather to avoid penalties and implicit taxes. The penalties and implicit taxes make the business of an employer more expensive, or being an employee less rewarding, even in those cases when people avoid the new tax by adjusting their employment conditions rather than writing a check to the federal treasury. Some employers may go out of business, or never start their businesses in the first place, because of the extra cost of the tax (or the costs of adjustments needed to avoid the tax) or because of the additional costs (e.g., higher wages) needed to attract workers to positions that render them ineligible for exchange subsidies. The net result is that the labor market will involve fewer total hours, and that higher employment rates, if any, will not be enough to compensate for the reduced hours per week. This economic reasoning has been confirmed by empirical studies of previous public policies that raised the relative employer cost of weekly work hours, and failed to create a commensurate increase in employment because the average hour worked by employees had been made more expensive or less productive.

Program participants sometimes OVERestimate disincentives; good new book

I commonly hear it claimed that health insurance assistance does not discourage work because the rules are too complicated for people to understand that work does not pay. This claim is full of errors of logic and fact (see here and scroll to Q8). But let's look at one: why should we assume that people underestimate work disincentives rather than overestimate them?

Here's one story in which one man, Dave Campbell, decided to reduce his work hours in order to reduce his income in order to qualify for Medicaid, when it now appears that he probably would have qualified without reducing income.

... when Dave returned to work a few months after the accident, he pared his hours down to meet the $2,100 [monthly] level: why work more when it would all go to Medi-Cal [California's Medicaid program]...

Dave had been getting advice from a social worker and Medi-Cal expert, as well as his very smart Harvard/MIT professor/social-policy expert sister. Nevertheless, it appears that he/they overestimated the program's disincentives (as the disincentives applied to him).

I have not yet read Professor Campbell's new book that contains the full story. I expect that it is very good, because I did read her earlier book and found it to be excellent!

Reasons to continue the Elmendorf era

Very briefly,

1. We are fortunate to have their shoulders to stand on.  I find vast amounts of Elmendorf-era CBO research results to be interesting and rock-solid reliable.  The plain fact is that my books and my University of Chicago lectures highlight such CBO material.  I would be handicapped without it.
2. Elmendorf-era CBO updates as research progresses, without being gullible.  Is there any other DC institution in that category?

Later when I have more time I will elaborate and document these points, and explain why the detractors are confusing the forest with the trees.

Professor Krugman continues to misinform readers about Romneycare

"Obamacare is, in all important respects, identical to Romneycare."

Get the economics of Obamacare and Romneycare from Side Effects: The Economic Consequences of the Health Reform.  Especially Chapter 10, entitled "Romneycare times Eleven":

Overall, the ACA erodes nationwide average work incentives about eleven times more than Romneycare did in the state of Massachusetts . Table 10.1 is a good summary of why the differences are so dramatic: the amounts involved and the fraction of the potential workforce presented with a new income or employment tax as a consequence of health reform.

The primary difference between Romneycare and ACA employer penalties is the nominal amount: $ 295 versus $ 2,000 (plus health cost inflation), respectively. Also significant are the facts that the ACA penalty is not business-tax-deductible and that Massachusetts employers are especially likely to offer health insurance even without a penalty.

The subsidized coverage in Massachusetts has barriers to participation that are absent from the ACA and thereby make Romneycare’s implicit [full-time employment tax] less significant. Romneycare came after other permanent forms of assistance for Massachusetts workers leaving [jobs with health coverage], whereas, before the ACA, the federal government had no significant and permanent program for assisting nonelderly nonpoor adults with health insurance while they are not working. Accounting for the prevalence of various taxes, I find that the ACA’s implicit income tax (not shown in Table 10.1) is about eleven times greater than Romneycare’s.

I give the CBO a lot of credit on this. Unlike Professor Krugman, the CBO never fell into the trap of saying that Romneycare= Obamacare, therefore Obamacare has no noticeable effect on the labor market (CBO 2012).

Updated. I answer commenter Veritas with the excerpt below from Chapter 10 of Side Effects.

[The] federal government helped pay for much of Romneycare, whereas the ACA does not turn to any higher power for funding. ...Romneycare encouraged employers in the state to help employees use pre-tax dollars to pay for health insurance, which means that the U.S. Treasury would be passively assisting employees in the form of reduced personal income and payroll tax receipts from Massachusetts. The state also had federal money that was attached to a Medicaid waiver from the federal Department of Health and Human Services (Powell 2012). Thus one should not assume that Romneycare would be elevating Massachusetts labor income tax rates to [the] levels [needed when federal governments expand coverage],

I believe that Professor Gruber videos refer to the Medicaid waiver but, as my excerpt notes, Romneycare had even more federal funding than that.

Private and Public Comments on Health Cost Growth

Once upon a time, it was acknowledged in academic circles that the ACA did little to cut the growth rate of health care costs. See, for example, 24:05 and following in this video:

But then in this economists' letter to Congress and the American public, the same parties are claiming that the effect of the ACA on health care cost growth is so tremendous (in the direction of less cost) that it would create up to 400,000 jobs EVERY YEAR!

Another (unrelated and) excessively truthful part of this video starts just before the 24:00 mark "The American public doesn't actually care that much about the uninsured.  ...A lot of the uninsured don't care about the uninsured."

Leveraging a Lack of Economic Understanding

Anticipated here (italics added): 

A job, Mr. Mulligan explains, "is a transaction between buyers and sellers. When a transaction doesn't happen, it doesn't happen. We know that it doesn't matter on which side of the market you put the disincentives, the results are the same. . . . In this case you're putting an implicit tax on work for households, and employers aren't willing to compensate the households enough so they'll still work." Jobs can be destroyed by sellers (workers) as much as buyers (businesses). Mr. Mulligan reserves particular scorn for the economists making this "eliminated from the drudgery of labor market" argument, which he views as a form of trahison des clercs. "I don't know what their intentions are," he says, choosing his words carefully, "but it looks like they're trying to leverage the lack of economic education in their audience by making these sorts of points."

update: The University of Rhode Island says that it does not have permission to show the entire video. The relevant clip is here (somewhat longer clip here):

More video about ACA design fooling the voters

This is NOT the video from UPenn. This was is from Wash U, and I believe that Fox News uncovered it.

Jump to 30:11 for the discussion of how to undo the tax subsidy for health insurance. And watch for 90 seconds.

UPenn takes the high road

Upenn briefly removed its suddenly-viral video of the 2013 health conference plenary session. Thanks for putting it back!