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.

Changing Assistance for the Unemployed

Copyright, The New York Times Company

Even if federal unemployment insurance expires at the end of the year, it will be replaced by an even more generous assistance program for people leaving their jobs.

Unemployment insurance is jointly administered and financed by federal and state governments, offering funds to “covered” people who lost their jobs and have as yet been unable to find and start a new one. The cash assistance comes weekly, with states paying benefits of about $300 a week for 26 weeks or until the person starts a new job, whichever comes first.

Normally, the assistance stops after 26 weeks, even if the beneficiary has yet to find a job. But during recessions the federal government’s temporary “extended” and “emergency” unemployment compensation programs pick up benefits after the state benefits are exhausted.

During the recent recession, the federal government paid benefits for up to 73 additional weeks, making the total benefit duration 99 weeks.

The temporary federal programs have expiration dates, but Congress has routinely extended them, at least through 2012. A couple of the federal programs fully expired that year, so in 2013 the unemployed could get benefits for no longer than 73 weeks.

The last remaining federal program, known as Emergency Unemployment Compensation, is set to fully expire at the end of this year. Congress has extended its final expiration date several times in the past – most recently as part of the fiscal cliff deal – but there is no guarantee that Congress will continue its extensions.

If the emergency program continues while the new health care assistance comes on line, the incentives of workers and employers to create and retain jobs will take a big hit. The solid line in the chart below shows my estimates of the average marginal tax rate on worker’s income, accounting for the fact that earning income on a job results in both additional taxes and withheld federal benefits. The higher the tax rate, the less is the incentive to work.

Casey B. Mulligan’s estimates of the impact of emergency unemployment compensation ending in December 2013.

The dashed line shows the marginal tax rate if the emergency program really does expire at the end of the year. Tax rates will increase in January, but much less than they would without the expiration, because the assistance lost from the emergency program will be offset by the health assistance coming online.

The federal unemployment benefits at risk of expiration are economically more important than the already-expired programs, because it is less common for unemployment to last more than 73 weeks (when the expired programs kicked in) than it is to last 26.

Unemployment benefits from any program help people who desperately need it, but they also keep the labor market depressed by permitting people to remain unemployed longer and making layoffs more common. The remaining emergency program is the most important and thereby does the most to help people and the most to keep the labor market depressed.

Even if the emergency program is allowed to expire on Jan. 1, it will ‘be replaced by an even larger program — the Affordable Care Act — assisting the unemployed and others, including premium subsidies for health insurance.

Most people have jobs that provide health insurance and will be ineligible for premium subsidies for as long as they work. But as soon as they are fired, quit, retire or otherwise leave the payroll, they will be eligible for monthly assistance to pay for their health insurance premiums and out-of-pocket expenses.

For households between 100 and 400 percent of the poverty line – that’s about half of households – the new assistance will average about $110 a week, tax free (unlike unemployment benefits, which are taxable). Moreover, the premium assistance is not limited to 26 weeks; it can last for decades.

Regardless of how you evaluate the relative costs and benefits of the emergency program, now is the time for Emergency Unemployment Compensation to expire to make way for new assistance programs.

New multimedia site on marginal tax rates

marginaltaxrates.us

When the Second (HI Coverage) Shoe Drops

Earlier I wrote about 20+ million people who will lose employer health insurance coverage, even though that coverage was "adequate" under the standards of the Affordable Care Act.

The federal government estimated that millions of people (see 75 CFR 34553) participate in employer health plans that would, sometime between Jan 1, 2012 and Jan 1, 2014, have to begin to comply with ACA regulations in terms of services covered (among other things).  Actually the time window extends to late 2014 because of the early renewal option.

Most of those plans will adjust to comply. But many will be canceled because canceling a plan is consistent with the law even while keeping an inadequate plan is not.

The dynamics of the cancellations will be interesting. Due to healthcare.gov's currently bad reputation, I expect that a significant group of employers will comply in the short run and cancel in future years when the prospect of cancellation is less traumatic for their employees. However, that approach doesn't solve the problem of financing the extra benefits in the interim ... employees will pay for that.

The extra health insurance premiums are one of the many ironies ... these employees will be paying more because of a law that was supposed to save them money.

The Labor Market and Labor Policy Since Kennedy

Copyright, The New York Times Company

Fundamental changes in economic performance since the John F. Kennedy presidency help explain why economic policy debates are so polarized these days.

In its 34 months, the Kennedy administration embraced a range of interesting federal economic policies. Kennedy proposed permanently cutting personal and corporate income tax rates to promote economic growth, and his cuts became law. During his administration, the maximum duration of unemployment benefits was temporarily extended only 13 weeks, less than in any other recession since then.

He expanded the federal space program. He wanted a strong peacetime military and was willing to use it to stand up to communism. His Department of Justice, led by his brother Robert F. Kennedy, was tough on labor unions.

President Kennedy pushed for national health reform, although he did not see any legislation passed during his term. As a candidate and then president, Kennedy was initially cautious on civil rights issues, but ultimately worked to put together a civil-rights bill that became the Civil Rights Act of 1964.

From today’s perspective, Kennedy looks like a hybrid of a Democrat and a Republican, and as America remembers his assassination in November 1963, journalists and scholars continue to debate whether Kennedy was a liberal.

In my view, Kennedy was entirely a Democrat, but that’s less visible today because Democrats and Republicans, and their respective economists, were a lot less different than they are now, especially on matters of microeconomics. Kennedy was advised by James Tobin of Yale, a Nobel laureate who advised other Democratic presidents, too.

Both Tobin and Milton Friedman, who subsequently advised several Republican candidates and was an adviser to President Richard M. Nixon, were concerned that antipoverty programs would perpetuate poverty by giving people too little reward for taking care of themselves. Tobin wrote that high marginal tax rates cause “needless waste and demoralization,” adding:

This application of the means test is bad economics as well as bad sociology. It is almost as if our present programs of public assistance had been consciously contrived to perpetuate the conditions they are supposed to alleviate.

Tobin thought public programs had gone seriously awry whenever program participants kept less than a third of what they earned on a job, rather than losing it to extra taxes or withdrawn benefits. Friedman thought that people should keep at least half of their earnings after taking into account taxes or lost benefits. Yet in modern times, Friedman and Tobin appear to be quibbling, because now we have millions of citizens who keep a quarter of what they make, or less, in net earnings beyond the benefits they forgo, yet few Democrats are concerned that federal antipoverty programs might be counterproductive.

In “Roofs or Ceilings?” Milton Friedman and George J. Stigler wrote about the economic damage done by minimum wages, rent controls and other restrictions on market prices. Tobin offered similar explanations, writing:

People who lack the capacity to earn a decent living need to be helped, but they will not be helped by minimum wage laws, trade union wage pressures or other devices which seek to compel employers to pay them more than their work is worth. The more likely outcome of such regulations is that the intended beneficiaries are not employed at all.

(Unlike Friedman, Tobin did subsequently support a minimum-wage increase, because he thought better antipoverty tools would not be used).

These days, Democrats push for higher minimum wages, without any apparent concern that poor people might have more trouble finding work.

My point is not that Democrats are more wrong about economics that they used to be, but that, regardless of who is right or wrong, the gaps between Democrats and Republicans in economic reasoning are greater now than they used to be.

The economy is different now than it was in the 1960s, especially in that the incomes of the poor have not kept up with national incomes. When the poor are prevented from working by minimum wages or high marginal tax rates, a lesser fraction of national income is lost than in Kennedy’s era, when the poor could produce a more significant piece of the national economic pie.

So proponents of big social programs have less reason to be cautious about program expansions.

As long as the American economy produces such a wide range of labor market outcomes, we may never see a president, who, like Kennedy, has such wide-ranging economic policies.

Epstein read the ACA in 2009

In about 80 seconds in 2009 (carved out of the embedded video above), Epstein explained exactly why "If you like your plan, you won't keep it." See especially 29:26

Section 102 is essentially a national disgrace. It's simply a falsification of everything that was said by the President ....

Update: Patrick Sullivan points us here: http://www.youtube.com/watch?v=d-6ppmuBmkQ

The Marriage Tax and the Labor Tax

I received this question by email

If households respond to -- what I understand is -- a steep marriage penalty embedded in the subsidy formulae by postponing marriage or even by divorcing, would not this further broaden the effect of the Act in the labor market. In the limit, if every household sought subsidies under such an "income splitting" basis, would not more households qualify, and would not more households be influenced over a larger range of the income curve than even your study assumed? And thus would not the impact on the labor market be even larger [than calculated here]?

My answer:

It depends, even though I agree that the ACA includes a steep marriage tax as well as its steep taxes on labor income. My labor income MTR estimates are based on, among other things, estimates (from the CBO and others) of the number of people participating in the ACA exchanges. Your email provides a good reason to suspect that exchange participation will ultimately exceed the estimates. There are other reasons too.

Table 8 in my paper shows what would happen if one increased the exchange participation estimates -- see esp. the "exchange take-up" and "percentage of ESI moving to exchanges" rows.

But if the exchange participation estimates are accurate (maybe other factors offset the one you mentioned), then my headline estimates (Table 1) are fine even though the ACA reduces the incidence of marriage.

The Slow Death of the Employer Mandate

Copyright, The New York Times Company

Students of health reform can be informed and entertained by revisiting a book by the health reform champion John E. McDonough.

As a member of the Massachusetts House of Representatives from 1985 to 1997, Mr. McDonough had worked for state health reform well before the now famous Romneycare health reform of 2006. During that time he also earned a doctorate in public health.

Like many other former legislators, he wrote a book about his experiences and relationships in office. “Experiencing Politics” (published 13 years ago) organizes his stories around social science models of the political process, including the principal-agent model and punctuated equilibrium theory.

The models are known by fancy phrases in the academic literature, but Mr. McDonough quickly brings them down to earth with explanations that are nontechnical and addressed to the general public. His stories are engaging and bring the models alive, even to social scientists who have seen the models on paper, yet may be dubious that they have much practical value.

Mr. McDonough is not trained as an economist, but usually shows good economic instincts in the book (though he does not mention that per-employee penalties and minimum wages might reduce employment among low-skill workers).

Why is politics so contentious and polarized these days? Mr. McDonough explains that there’s a lot at stake: “We invest enormous authority and trust in our government” and “we give our legislatures remarkable powers to pass laws that govern our own behaviors, from the trivial to the profound.”

Of particular interest today are his Chapters 6 and 7 on Massachusetts health legislation between 1988 and 1997. Mr. McDonough describes how the state’s previous system of hospital rate regulation had been put in place for the purpose of controlling medical spending and how he believes it might have worked for a time.

But he says the academic studies on which he relied became outdated. “I didn’t see it coming,” he says, adding, “Massachusetts government lost the ability to manage its hospital regulatory system with discipline and integrity.” He and other legislators concluded that “market-based contracting, organized around managed care, could correct the worst aspects of market failure, not perfectly but far better than regulation.”

Mr. McDonough describes how Gov. Michael Dukakis’s 1988 law sought to achieve universal coverage in Massachusetts with a legislative package that included a $1,680 penalty (per employee, per year) on employers who did not provide health coverage to their employees. Adjusted for inflation, that would be like proposing a $2,863 penalty in 2006, when Romneycare was passed with a mere $295 employer mandate.

The Dukakis package passed narrowly, and to gain legislative approval the final law delayed the employer mandate’s implementation by four years. Does that sound familiar? The national Affordable Care Act was passed in 2010, with an employer mandate to begin in 2014.

Mr. McDonough describes how those four years gave Massachusetts employers time to organize their opposition. Moreover, as 1992 approached, the Massachusetts labor market was weak. Arguably both of these things happened nationally between 2010 and 2013.

As a legislator, Mr. McDonough met with business executives to respond to their concerns over health reform. He recalls one of those meetings where “sitting quietly through my presentation was the owner of a Domino’s Pizza shop.” The shop owner explained: “I compete against pizza stores that pay everything and everyone under the table. I pay unemployment, worker’s comp, FICA, you name it, and you want to add one more thing that I have to dig up while my competitors pay none of those things? Come on.”

Mr. McDonough had no reply to alleviate that concern. With a few months to go until the originally scheduled implementation, Massachusetts lawmakers decided to delay the Dukakis employer mandate for three years. It would be delayed two more times and then, in exchange for business community support for a coverage expansion for children, ultimately repealed.

On the national level, while Congress was not consulted, with six months to go before the originally scheduled implementation, the Obama administration delayed its employer mandate one year.

Although today Mr. McDonough notes the differences rather than the parallels between the Dukakis law and the Affordable Care Act, proponents of the national employer mandate should be worried that it may be approaching the end of its political life.