Changes in Consumer Credit Laws

Kyle Kerkenhoff's paper (p. 78) tabulates several ways that consumer credit laws have changed since 2007.

The Future of Driving

Copyright, The New York Times Company

Driverless vehicles would be a windfall for households and businesses that acquire them but would probably increase traffic and nationwide fuel usage.

Google and other innovators are working on vehicles that someday might drive themselves with little or no attention from human passengers. The vehicles of the future will have fast, observant computers that automatically communicate position and road conditions with other vehicles on the road.

Driverless vehicles are expected to help children, the blind, the elderly and others who currently cannot safely drive themselves. Helped by their huge amounts of data and computing power, driverless cars are also purported to reduce traffic congestion and nationwide fuel consumption by driving smarter.

But smarter driving will lead to more driving, because smarter driving reduces the cost per mile of vehicle usage. The end result of additional driving could be more traffic and more aggregate fuel consumption.

These days, a driver has three main costs of the trip to consider: fuel consumption, vehicle wear and tear, and time and attention devoted to driving that could be for something else. (Drivers also need to consider other costs of vehicle ownership, such as the purchase price and the cost of insuring the vehicle.)

Fuel and wear and tear cost roughly 50 cents a mile, which is why employers reimburse employees for job-related personal vehicle usage at about that rate. At an average speed of 30 miles an hour (including stops, traffic conditions and so on), each mile takes two minutes of driver time. For those who value their time at more than $15 an hour, the time cost of the trip exceeds the combined fuel and wear and tear costs.

Research has shown that cutting travel costs through reduced gas prices causes people to drive more, for example by eschewing carpools and public transportation. A driverless car should also cause people to use their vehicles for more miles, because they could use their time in the car to sleep, work, watch television, read a book and do other things they might normally do at home.

Households and business may also begin to use vehicles with no human passengers or drivers in order to move goods from one place to another and, by economizing on the human driver costs, they may want to move more goods than they do today.

As people take on additional activities in their personal vehicles, they may also demand larger vehicles that necessarily require more fuel per mile.

Before driverless cars are adopted, a number of hurdles must be cleared. Some refinements in vehicle technology need to be resolved; insurance companies and state regulators must also figure out liability issues.

Even if driverless vehicles led to more congestion and more aggregate fuel consumption, driverless vehicles would be a welcome technological advance, because the billions of hours that people already devote to driving could be put to alternative uses.

But expect new driving technologies to increase the number of vehicles on the road.

The Wealthy Keep the Tax Man Guessing

Copyright, The New York Times Company

Although wealthy people are a small fraction of the population, their behavior is of great practical interest to Treasury officials.

Every year, the United States Treasury receives extraordinary amounts of personal income tax revenue in April as individuals file their returns and reconcile the taxes they owe with the taxes that were withheld from their paychecks during the previous calendar year. Most people do not owe much, if anything, when they file their return but a small group of taxpayers has large balances to settle.

The chart below shows the inflation-adjusted amount of individual income tax receipts by the Treasury in April of each year since 1998, as reported by in the Daily Treasury Statement. The amount has fluctuated wildly, from a low of $122 billion to a high of $235 billion. The standard deviation of these April receipts is $36 billion.

United States Treasury

The general state of the economy in the calendar year helps to predict the amount the Treasury receives in following April. At the same time, additional fluctuations in April receipts derive from the situations and behaviors of a small segment of the population not well represented in the unemployment rate and other measures of the business cycle: the wealthy.

First of all, taxes are withheld less often from asset income like dividends and capital gains than they are withheld from wages. The wealthy receive a larger share of their income from assets than from wages, not to mention that by definition the wealthy have more of both types of income. Second, much of the population does not owe any income tax – let alone owe extra in April – and the wealthy pay a disproportionate share of income taxes.

The wealthy have become an even more important driver of tax revenues in recent history, as an increasing share of the nation’s income has accrued to them. Thomas Piketty and Emmanuel Saez have compiled decades of data for the United States (and other countries). They find, for example, that the very wealthiest of America’s households — the top one-tenth of 1 percent — recently received about one-thirteenth of the nation’s income, while they received only one-fiftieth in the 1960s and 1970s.

The wealthy are sometimes idolized and other times envied, and for these reasons alone their behavior is of interest. But Treasury officials have another reason to stay abreast of the wealthy: their activities are an important determinant of the amount of revenue received by the Treasury, and when it is received.

If you have special insights into how the wealthy behave, consider applying for a job at the Treasury.

Varieties of Not Working

Copyright, The New York Times Company

Employment can be a better indicator of labor market activity than unemployment, because unemployment is not the only way that a person can be without work.

The blue series in the chart below shows the reduction in unemployment since March 2012, expressed as a percentage of the population (e.g., in a population of 100 million, 0.1 percentage points means 100,000 people and 0.5 percentage points means 500,000.) In order to correct for the movement of baby boomers into retirement, I used Bureau of Labor Statistics data only for people 25 to 54 years old (this group is about 124 million and has been falling a little). Over the subsequent year, and especially since mid-2012, unemployment was reduced significantly.

Bureau of Labor Statistics

But reduced unemployment is not the same as more employment, because the third labor force classification is “out of the labor force.” Neither the unemployed nor those out of the labor force have a job, but only the unemployed are actively looking for one.

The red series in the chart shows that the “out of the labor force” ranks have increased roughly as much as unemployment has been reduced, and the difference between the blue and the red series indicates the change in the fraction of the population that is employed. For the months when the blue series is above the red series, employment per capita has increased since March 2012.

Because the blue series hardly exceeds the red series, if at all, the large majority of the reduction in unemployment has been associated with offsetting increases in people out of the labor force.

While the reduction in unemployment and the growth in the out of the labor force more or less cancel each other out, jobs are at least being created fast enough to absorb the growth in the working-age population. That additional population increases demand, which contributes to the jobs being created.

Retirements and going to school could increase the number of people out of the labor force, but the data I’ve shown are for an age group in which retirement and schooling are rare. For the 25-to-54 age group, “out of the labor force” typically represents people who are finding ways to get by without working.

Some people moving out of the labor force devote their time to caring for their young children while their spouses obtain cash income for the family. That some of the growth in those out of the labor force has occurred among married people suggests that such specialization in the family could be part of the story. But the fact that this group is growing especially among unmarried people suggests that family specialization explains at best a minority of the aggregate changes.

Unemployment insurance benefits are paid only to people who report that they are actively looking for work. Some unemployed have long been skeptical that they can find a good job and are just going through the motions of job search to satisfy the unemployment program’s requirements (see this testimony to a House subcommittee by Stacey G. Reece, co-owner of a recruitment firm in Gainesville, Fla., who said he witnessed people “applying for jobs only to protect their status for unemployment insurance”).

When such a person’s unemployment benefits run out, he may look less actively for work, which changes his classification from unemployed to out of the labor force.

The termination of unemployment benefits can, and sometimes does, have the opposite effect, because the loss of income can make out-of-work people more seriously consider accepting a low-paying job. But unemployment insurance is by no means the only safety-net program. The Supplemental Nutrition Assistance Program (formerly known as food stamps) is a major and newly expanded safety-net program and does not require its beneficiaries to work or be looking for work. Curiously, SNAP has been expanding while the unemployment rate falls.

People without jobs increasingly take part in the disability insurance program, which does not require people to look for work because “disability” means that the person is unable to work. Medicaid is another major safety program that does not require its participants to work.

A significant part of the recent reductions in the unemployment rate may reflect movements of people between safety net programs rather than any significant change in their job-finding prospects.

Small Businesses and the Affordable Care Act

Copyright, The New York Times Company

Small businesses have spoken out against the Affordable Care Act, but medium-size businesses, customers and taxpayers may be the ones ultimately harmed.

Beginning next year, the Affordable Care Act will penalize employers that fail to offer health insurance to their employees. Because small employers are especially unlikely to offer health insurance (see Table 3 in this paper from the Congressional Budget Office), and large businesses are likely to avoid the penalties because they already offer insurance, the penalties seem like an attack on small business.

But the Affordable Care Act simultaneously rewards employees at small companies by heavily subsidizing their purchases of health insurance on the exchanges created by the law. Because employees cannot take the subsidies with them if they switch to a large company offering health insurance, the subsidies are, in effect, subsidies to the small businesses themselves, helping them compete more cheaply in the market for employees.

Employees at the smallest companies, with fewer than 50 employees, are eligible to receive the subsidies, even though their employers are exempt from the penalties.

Indeed, some medium-size businesses that currently offer health insurance say they find the smaller company “penalty plus subsidy” combination attractive and plan to drop their health insurance plans in order to partake in it, too, even though their participation will entail a penalty.

The Affordable Care Act also created tax credits for small business that are already available. These credits perhaps have too many strings attached to be attractive to employers, because only 770,000 employees (in an economy with more than 130 million) worked for employers claiming the credit in 2010 (see Page 9 of this report from the Government Accountability Office). The Affordable Care Act also promised to provide small-business employees a choice of health plans, but implementation of that plan has been pushed back until 2015.

Many small businesses are not as good with bureaucracy and red tape as large businesses are – that’s one reason they did not offer health insurance in the first place. The employee subsidies coming online next year are pretty complicated, as evidenced by the 21-page application that must be completed by each employee, and the fact that any one year’s subsidy has to be estimated based on historical employee data, advanced from the Internal Revenue Service to the insurer, and then later reconciled when the employee’s family income for the year can be fully documented.

I suspect that large businesses will have human resource personnel dedicated to helping company employees complete the application and obtain and accurately reconcile the subsidy to which they are entitled. Employees at smaller business may have to fend for themselves.

We also have to remember that businesses compete for customers and for employees. A business that experiences a little direct harm from the act may benefit on the whole because competitors are harmed more. This is especially true because of the heavy penalty the law puts on businesses that expand from 49 to 50 employees: that one hire will cost the employer $40,000 annually in penalties, on top of that employee’s usual salary and benefits.

Thus, the type of company that may benefit the most from the law is not necessarily large or small but a company with small competitors that have been looking for opportunities to expand their market share, and in the process bring the number of their employees to more than 49.

Indexation Perils

Copyright, The New York Times Company

Indexing fiscal policy parameters to consumer price inflation was a nice improvement in the 1970s when both price and wage inflation took off, but the American economy is different now and may require different index approaches.

Economic policy often involves setting benefit amounts or thresholds for program eligibility or for new tax brackets. A few examples are the federal poverty line of $23,550 (for a family of four), the maximum food-stamp benefit of $668 a month and a $113,700 cap on income subject to taxation for Social Security.

Ideally, policy parameters are chosen to balance costs and benefits. The $110,100 threshold might have been pretty sensible for 2012, but we doubt that a $110,100 threshold would be equally sensible in 2017 or 2022. If nothing else, the existence of inflation means that a dollar will not have the same economic value in the future as it does now.

Costs and benefits could be re-evaluated every year, but it is sometimes easier to set a formula for automatic updating — guessing, in effect, how the optimal policy will change over time. Many fiscal policy parameters are now indexed to consumer price inflation, based on the assumption that they should remain in a fairly fixed ratio to consumer prices.

The income tax code was not always indexed, and the rapid inflation of the 1970s awakened many Americans to “bracket creep,” as inflation raised the dollar earnings of the poor and middle class and put them in tax brackets originally meant for higher-income taxpayers, without necessarily giving them any additional purchasing power.

However, many costs and benefits of fiscal policy, especially those related to incomes and jobs, depend on wages rather than consumer prices and arguably fiscal policy parameters should be indexed to wages rather than consumer prices. A few policy parameters are indexed to wages, such as parts of the benefit formulas for Social Security and unemployment insurance, but consumer price indexation is more common.

If wages and consumer prices always moved together, the distinction would be largely academic. But in reality, wages change differently than consumer prices do. There is a tendency for wages to increase more than consumer prices over long periods of time, thanks to labor productivity gains.

Indexing can play a role in political debates, as the parties that believe that a policy parameter is too low might want it indexed to wages rather than consumer prices in order that it increase more over time (for the same reason, they might want it indexed to the average wage rather than the median wage, because average wages have tended to increase more than median wages have). Parties on the other side might push for consumer price indexation, or no indexation at all.

For example, if you think that the poverty line is too high, you are glad that the line is not indexed to wage inflation and might wish that it were not indexed at all, so that more of the population might creep out of the poverty category.

But in these times, we may see political parties switching sides on the indexing question, because a number of forces may cause wages to increase less than consumer prices, if at all.

Rising health insurance costs tend to reduce cash wages or cause them to grow less than consumer prices, as employers cannot compete well when they are paying more in cash wages and more for employee health insurance. I noted in an earlier post that the least-skilled workers are seeing their wages fall over time, largely because they are out of work and failing to acquire the skills that come with working.

Employers are also facing new health care regulations expected to reduce cash wages as many employers of low-skill workers are hit with per-employee fines of about $3,000 per employee per year. Were a federal sales tax, such as the value-added tax used in many European countries, to be created, consumer prices would increase significantly more than wages do.

While we can be thankful we are not now experiencing the high inflation rates of the 1970s that urgently introduced inflation indexing into fiscal policies, we may want to reconsider policy thresholds and how they relate to the labor market fundamentals.

Forgiveness Formulas

Copyright, The New York Times Company

In an ideal world, collecting debts would be as simple as asking debtors to pay their obligations when they are able to. But in reality most businesses have found that they need to obtain other assurances, such as collateral or the option to shut off services to a delinquent payer. Otherwise it is too easy for debtors to claim hardship and walk away without paying.

On the other hand, many families and other debtors do experience genuine hardship. In those cases it can be compassionate and even efficient to at least partly forgive the debts of people who have fallen on hard times. Many economists see loan defaults as (sometimes) an efficiency-enhancing form of risk-sharing.

Even the most hard-hearted lender may choose to partly forgive loans because too much lender effort is required to elicit full payment. Just as you cannot squeeze blood from a stone you cannot get much revenue from someone who does not have it.

One approach would be for lenders to develop and disclose a “forgiveness formula” that would clearly define “hard times” and indicate precisely what kind of forgiveness is possible. The advantage of forgiveness formulas is that distressed borrowers can be certain where they stand with the lender and can readily evaluate whether they were treated “fairly.”

Forgiveness formulas are also consistent with the idea that agreements should be clearly specified in writing, so the parties to the agreement fully understand each other and never have to argue about what the agreement really meant. Carefully specified written agreements are sometimes found in employment relationships, tenant-landlord relationships and even marriages.

This is the approach that the Federal Deposit Insurance Corporation took during the George W. Bush administration to restructure home mortgages that had fallen under water (that is, when home prices had fallen so much that selling the home would no longer provide enough proceeds to pay the mortgage in full). Borrowers were told what new mortgage terms would be affordable and under what net-present-value conditions those terms should be considered acceptable to lenders.

The clarity of forgiveness formulas is also their weakness, because they make it easier for debtors to “game the calculation” and can ultimately make loans more costly for borrowers who pay in full. The Internal Revenue Service has long been secretive about its procedures for auditing returns and restructuring delinquent tax payments, and the Treasury maintained that approach when it became involved with restructuring home mortgages (the Congressional Oversight Panel discusses this matter on Page 41 of this report).

Hospitals are also known to partly forgive medical debts incurred by the uninsured, while they make no accommodation for many others. Some states require hospitals to explain in writing how they go about discounting charges for hardship patients (as we can see in New York’s policy), but you might guess that hospitals worry that patients will game those calculations in order to pay less.

One advantage of health reforms that get more people on health insurance is that by getting people to pay for their health care before they get sick, the reforms reduce the number of cases in which clear forgiveness has to be traded off with formula gamesmanship.

ACA Forecasts Have Not Yet Been Grounded in Microeconomics

The Congressional Budget Office, Jonathan Gruber and others attempting to forecast the effect of the Affordable Care Act (ACA) on the propensity of employers to offer health insurance have gotten the microeconomics wrong.

Background: Beginning in 2014, employers who offer affordable health insurance will thereby render their employees ineligible for health insurance tax credits that can be large as $15,000 per family per year. All analysts agree that there are SOME employers who will react to this situation by dropping their coverage, and that their employees will benefit by obtaining the subsidies. The debate is about the size of this effect and whether it would large enough to offset other factors that might be encouraging employers to offer coverage.

In one way or another, the answer to the question is ultimately found through empirical analysis. One could wait until say, 2015, and measure what happened. For those of us who want a forecast before then, we must somehow relate historical episodes to what the ACA will do in 2014.

The approach of CBO, Professor Gruber (see 27:02 in this video), and others has been to (a) think of a "demand" for employer-sponsored insurance (hereafter, ESI) and (b) look at the historical sensitivity of that demand to the price of ESI, especially variation associated with the ESI subsidy implicit in the exclusion of ESI premiums from payroll taxes and employee income taxes. Item (b) is acceptable enough -- I agree that subsidies impact prices -- but item (a) is fundamentally flawed because the wrong demand curve has been identified.

Historically, there has not been a viable non-group insurance market, so that employers dropping their coverage are in effect asking a significant fraction of their employees to go uninsured or to apply for Medicaid. The demand curves traced out by such episodes are telling us about the distribution of employee preferences for being uninsured (or on Medicaid) and the distribution of ESI administration costs (broadly defined to include insurance loadings and other factors). Economic theory does not tell us the precise shape of these distributions, so it's nice to have examined the historical episodes, which suggest that the elasticity of the propensity to offer ESI with respect to the price of ESI is roughly -0.5. In other words, historical increases in ESI prices in the amount of 10% have caused roughly 5% of employers to drop coverage.

But, under the ACA, dropping ESI does not mean leaving the employees uninsured. The propensity of employers to drop ESI under the ACA therefore has little to do with the distribution of employee preferences for being uninsured or for participating in Medicaid. Thus, to a first approximation, the -0.5 elasticity cited above is irrelevant. (More precisely, the magnitude of the historical elasticity is probably a conservative lower bound on the magnitude of the elasticity relevant for ACA forecasts, because going uninsured is a feasible but unlikely choice for employees who lose ESI).

What we really need to know is the distribution of employee preferences to participate in the ACA's "exchange" plans, and the distribution of ESI administration costs as compared to exchange administration costs (again, broadly interpreted to include insurance loadings, etc.). Health economists have not studied that yet.

You might think that the distribution of ESI administration costs would be relevant for the ESI-exchange margin, but the exchanges will have administrative costs too. The application for exchange plans is 21 pages long: employers who drop ESI may well replace it by helping their employees with application and other administrative tasks, much like employers help employees with immigration paperwork. From this perspective, ESI and exchange participation look like very close substitutes and the 0.5 price elasticity magnitude looks like a wild underestimate.

Although the exchange plans will not be called "Medicaid," you might think that the distribution of preferences for Medicaid participation could be important because people will attach some of the same stigma to exchange participation as they do to Medicaid. I would agree with you if the purpose was to quantify the effect of Massachusetts' health reform on ESI coverage, because premium support was made available in Massachusetts primarily through its "Commonwealth Care" program which was a collection of 4 Medicaid managed plans (one plan has been added since). In contrast, recipients of federal ACA subsidies will be receiving cash they can spend on a plan of their choice, one or two of which will be the plans in which their state's U.S. Senators are enrolled: that’s a lot closer substitute for ESI than Medicaid is.

Because they have helped uncover distributions of administration costs and preferences for being uninsured, the historical studies are better suited to predict the number of people who will change from uninsured to insured as a consequence of the ACA, as RAND has done. But that's very different from predicting how many people move from ESI to non-group policies. Even without considering labor-market equilibrium effects or general equilibrium effects of the ACA on ESI coverage, we can already see that demand analysis has been misapplied in ACA forecasting and that the propensity of the ACA to reduce ESI coverage has been underestimated.

Why a $2,000 Employer Penalty is Really $3,046

Under the ACA, employers not offering health insurance will owe a $2,000 per employee "shared responsibility" penalty (unless the employer has fewer than 50 FTEs). This penalty is not deductible from business taxes, and thereby is equivalent from an employer's point of view to a $3,046 wage cut.

When an employer cuts wages by $3,046, he reduces his payroll expenses by $3,279, which includes the payroll tax he would have owed on the $3,046.

Payroll expenses are deductible, so by cutting his payroll expenses by $3,279, he increases his corporate tax by 39 percent of that = $1,279. So net of corporate tax this wage cut saves him $2,000, which is just enough to pay the $2,000 penalty.

Unless an employee (or employees like him) has opportunities to take a job at an employer who does not pay a penalty, he can expect the $2,000 penalty to ultimately depress his wages by $3,046.

Hidden Costs of the Minimum Wage

Copyright, The New York Times Company

The current federal minimum wage of $7.25 an hour is increasingly creating economic damage that needs to be considered with the benefits it might offer the poor.

Democrats are now proposing to increase the federal minimum wage to $9 an hour. News organizations have repeatedly noted that economists do not agree on the employment effects of historical minimum-wage changes (the more recent federal changes in 2007, 2008 and 2009 have not yet been studied enough for us to agree or disagree on results specific to those episodes) and do not agree on whether minimum wage increases confer benefits on the poor.

That doesn’t mean that we economists disagree on every aspect of the minimum wage. We agree that minimum wages do some economic damage, although reasonable economists sometimes believe that the damage can be offset and even outweighed by benefits.

More important, we agree that the extent of that damage increases with the gap between the minimum wage and the market wage that would prevail without the minimum. A $10 minimum wage does less damage in an economy in which market wages would have been $9 than it would in an economy in which market wages would have been $2.

Moreover, elevating the wage $2 above the market does more than twice the damage of elevating the wage $1 above the market. (Employers can more easily adjust to the first dollar by asking employees to take more responsibility or taking steps to reduce turnover, steps that get progressively harder.) That’s why economists who favor small minimum wage increases do not call for, say, a $100 minimum wage, because at that point the damage would far outweigh the benefits.

Market wages normally tend to increase over time with inflation and as workers become more productive. As long as the minimum wage is a fixed dollar amount, the tendency for market wages to increase over time means that economic damage from the minimum wage is shrinking. That’s one reason that economists who see benefits of minimum wages would like to see minimum wages indexed to inflation, allowing the minimum wage to increase automatically as the economic damages fell.

But these are not normal times. The least-skilled workers are seeing their wages fall over time, largely because they are out of work and failing to acquire the skills that come with working. Moreover, the new health care regulations going into effect in January are expected to reduce cash wages, as many employers of low-skill workers are hit with per-employee fines of about $3,000 per employee per year, as the law mandates new fringe benefits for other employers and low-skill workers have to compete with others for the part-time jobs that are a popular loophole in the new legislation. (The minimum wage law restricts flexibility on cash wages, by establishing a floor, but makes no rule on fringe benefits.)

To keep constant the damage from the federal minimum wage, the federal minimum wage needs not an increase but an automatic reduction over the next couple of years in order for it to stay in parallel with market wages.