The Taxing Logic of Carbon Cost Guesswork

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An article by three prominent economists* in the New York Times this week summarized the Climate Leadership Council’s Conservative Case for Climate Action“. The “four pillars” of this climate plan include (1) a revenue-neutral tax on carbon emissions, which are used to fund… (2) quarterly “carbon dividend” payments to all Americans; (3) border tax adjustments to account for carbon emissions and carbon taxes abroad; (4) eliminating all other regulations on emissions of carbon. The “Case” is thus a shift from traditional environmental regulation to a policy based on tax incentives, then wrapped around a redistributive universal income mechanism.

I’ll dispense with the latter “feature” by referencing my recent post on the universal basic income: bad idea! The economists advocate for the carbon dividend sincerely, but also perhaps as a political inducement to the left and confused centrists.

The Limits of Our Knowledge

The most interesting aspect of the “Case” is how it demonstrates uncertainty around the wisdom of carbon restrictions of any kind: traditional regulations, market-oriented trading, or tax incentives. Those all involve assumptions about the extent to which carbon emissions should be restricted, and it’s not clear that any one form of restriction is more ham-handed than another. Traditional regulation may restrict output in various ways. For example, standards on fuel efficiency are an indirect way of restricting output. A carbon market, with private trading in assigned “rights” to emit carbon, is more economically efficient in the sense that a tradeoff is involved for any decision having carbon implications at the margin. However, the establishment of a carbon market ultimately means that a limit must be imposed on the total quantity of rights available for trading.

A carbon tax imputes a cost of carbon emissions to society. It also imposes tradeoffs, so it is similar to carbon trading in being more economically efficient than traditional regulation. A producer can attempt to adjust a production process such that it emits less carbon, and the incidence of the tax falls partly on final consumers, who adjust the carbon intensity of their behavior accordingly. For our purposes here, a tax is more illuminating in the sense that we can assess inputs to the cost imputation. Even a cursory examination shows that the cost estimate can vary widely given reasonable differences in the inputs. So, in a sense, a tax helps to reveal the weakness of the case against carbon and the carbon-based rationale for allowing a coercive environmental authority to sclerose the arteries of the market system.

The three economists propose an initial tax of $40 per metric ton of emitted carbon. The basis for that figure is the so-called “social cost of carbon” (SCC), a theoretical construct that is not readily measured. Economists have long subscribed to the theory of social costs, or negative externalities, and to the legitimacy of government action to force cost causers to internalize social costs via corrective taxation. However, the wisdom of allowing the state to intrude upon markets in this way depends on our ability to actually measure specific external costs.

Fatuous Forecasts

The SCC is based on the presumed long-run costs of an incremental ton of carbon in the environment. I do not use the word “presumed” lightly. The $40 estimate subsumes a variety of speculative assumptions about the climate’s response to carbon emissions, the future economic impact of that response, and the rate at which society should be willing to trade those future costs against present costs. The figure only counts costs, without considering the huge potential benefits of warming, should it actually occur.

Ronald Bailey at Reason illustrates the many controversies surrounding the calculation of the SCC. He notes the tremendous uncertainty surrounding an Obama Administration estimate of $36 a ton in 2007 dollars. It used an outdated climate sensitivity figure much higher than more recent estimates, which would bring the calculated SCC down to just $16.

A discount rate of 3% was applied to projected future carbon costs to produce an SCC in present value terms. The idea is that today’s “collective” would be indifferent between paying this cost today and suffering the burden of future costs inflicted by carbon emissions. This presumes that 3% is the expected return society can earn for the future by investing resources today. Unfortunately, the SCC is tremendously sensitive to the discount rate. Together with the more realistic estimate of climate sensitivity, a discount rate of 7% (the Office of Management and Budget’s regulatory guidance) would actually make the SCC negative!

Another U.S. regulatory standard, according to Bailey, is that calculations of social cost are confined to costs borne domestically. However, the SCC attempts to encompass global costs, inflating the estimate by a factor of 4 to 14 times. The justification for the global calculation is apparent righteousness in owning up to the costs we cause as a nation, and also for the example it sets for other countries in crafting their own carbon policies. Unfortunately, it also magnifies the great uncertainties inherent in this messy calculation.

Lack of Evidence

This guest essay on the Watts Up With That? web site by Paul Driessen and Roger Bezdek takes a less gracious view of the SCC than Bailey, if that is possible. As they note, in addition to climate sensitivity, the SCC must come to grips with the challenge of measuring the economic damage caused by each degree of warming. This includes factors far into the future that simply cannot be projected with any confidence. We are expected to place faith in distant cost estimates of heat-related deaths, widespread crop failures, severe storm damage, coastal flooding, and many other calamities that are little more than scare stories. For example, the widely reported connection between atmospheric carbon concentration and severe weather is demonstrably false, as are reports that Pacific islands have been swallowed by the sea due to global warming.

Ignoring the Benefits

The SCC makes no allowance for the real benefits of burning fossil fuels, which have been a powerful engine of economic growth and still hold the potential to lift the underdeveloped world out of poverty and environmental  distress. The benefits of carbon also include fewer cold-related deaths, higher agricultural output, and a greener environment. It isn’t surprising that these benefits are ignored in the SCC calculation, as any recognition of that promise would undermine the narrative that fossil fuels are unambiguously evil. Indeed, an effort to calculate only the net costs of carbon emissions would likely expose the entire exercise as a sham.

The “four pillars” of the Climate Leadership Council‘s case for climate action rest upon an incredibly flimsy foundation. Like anthropomorphic climate change itself, appropriate measurement of a social cost of carbon is an unsettled issue. Its magnitude is far too uncertain to use as a tool of public policy: as either a tax or a rationale for carbon regulation of any kind. And let’s face it, taxation and regulation are coercive acts that better be undertaken with respect for the distortions they create. In this case, it’s not even clear that carbon emissions should be treated as an external cost in many applications, as opposed to an external benefit. So much for the corrective wisdom of authorities. The government is not well-equipped to centrally plan the economy, let alone the environment.

  • The three economists are Martin Feldstein, Ted Halstead and Greg Mankiw.

National Endowment for Rich Farts

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Wailing has begun over the possible defunding and demise of the National Endowment for the Arts (NEA). How could those cretins propose to eliminate an institution so very critical to promoting artistic expression? If that’s your reaction, you haven’t thought much about the main beneficiaries of federal sinkholes like the NEA. Granted, at $146 million annually, it is not a major federal budget item, but I’d rather not stoop to defend a lousy program because it’s small. So what’s my beef with the NEA, you ask? Read on.

First, any implication that the NEA is the lifeblood of the arts is laughable. No, the arts won’t die if federal funding is denied. Jeff Jacoby quotes figures suggesting that grants from the NEA represented less than 1% of all support for the arts and culture in the U.S. in 2015. Great art was created prior to the establishment of the NEA in 1965. Without the NEA, such bungles as “Piss Christ” would have met with less acclaim. As such a minor funding vehicle, eliminating the NEA won’t make much difference to artists, but it will end a subsidy for wealthy patrons, who can and do provide support for worthy projects, but also derive essentially private benefits from the federal arts spigot.

A large share of NEA grant money goes to non-profit organizations that are already subsidized to the extent that they are not taxed. (Let’s face it: the term “non-profit” itself is often a term of art.) Large arts organizations, which receive a significant share of NEA grants, often have highly-paid administrators and sumptuous facilities. Contributions to those organizations are tax-deductible for the donors. And few of those organizations provide art to the public for free or at a discount. Indeed, as noted at the last link, they often charge significant prices for attendance, and their audiences include a disproportionate percentage of high-income patrons.

Lawrence Reed argues persuasively that government need not subsidize the arts in an article in his series on the Cliches of Progressivism. Here are the highlights:

  • “Government funding of the arts… carries with it all the downsides of dependence on politics.
  • Claims that arts spending is magically “multiplied” are specious and usually self-serving, and never look at alternative uses of the same money.
  • Culture arises naturally and spontaneously among people who chose to interact with each other. Art is part of that, but it also competes with all sorts of other things people choose to do with their time and money.
  • If art is truly important, then the last thing we should want to do is politicize it or divert it toward those things that people with power think we should see or hear.”

Reed’s comment regarding “multipliers” might need some explanation in this context. The NEA’s defenders often claim that each dollar of NEA grant money results in multiple additional grants from other sources, but there is absolutely no evidence to support this claim except for a requirement that NEA grants be matched at the state level (not to mention a requirement for a state-level arts agency). Obviously, that represents another cost to taxpayers. It is quite possible, in fact, that the NEA and matching state grants act as substitutes for, and depress, private arts giving. See this piece in Forbes for more background. This NBER research utilized a large panel data set on individual charities and found only mixed support for the proposition that government grants encourage private contributions. In fact, the estimated effect was ambiguous for individual categories of charitable giving (which did not explicitly address the arts as a category). In any case, a positive cross-sectional effect of government grants on private giving for individual charities is consistent with a negative effect on other charities that do not receive public grants.

In a 20-year-old report from the Heritage Foundation, Stuart Butler offered a list of reasons to defund the NEA, which have held up well. Here, I provide eight that seem relevant:

  1. The arts will have more than enough support without the NEA: See above.
  2. Welfare for cultural elitists: See above. NEA grants fund a number of big and very elite organizations, but they would have you believe that it’s a veritable welfare program for the arts. That is a huge distortion. There is no question that the distribution of patrons of these organizations skews to the wealthy.
  3. Discourages charitable gifts to the arts: See above. Is the award of an NEA grant the equivalent of establishing a credit record to an arts organization? This might hold up for a few small organizations with projects the NEA has funded, but again, the support for this proposition is anecdotal and self-serving, and the numbers are small. And is there an implied stain on the legitimacy of any organization unable to win such a grant?
  4. Lowers the quality of American art: Committee decisions and central planning are not conducive to the spirit of creativity. Public institutions are often guided by political agendas, and government-sanctioned art stands in sharp contradiction to the ideal of free expression. Butler quotes Ralph Waldo Emerson: “Beauty will not come at the call of the legislature…. It will come, as always, unannounced, and spring up between the feet of brave and earnest men.”
  5. Funds pornography: this is not my hot button… it’s an issue only to the extent that public funds should not be used for purposes only flimsily in the public interest that many taxpayers find morally repugnant.
  6. Promotes politically correct art: See #4 above. The merits are then judged on the basis of criteria like race, ethnicity, and gender identity, not the quality of the art itself.
  7. Wastes resources: Butler offers a few examples of the waste at the NEA, a shortcoming common to all bureaucracies. The NEA funds organizations that behave as non-profit cronyists, engaging in lobbying efforts for more support. Butler also cites evidence that recipients of government grants in the UK hire more administrative staff than non-recipients, and tend not to reduce ticket prices.
  8. Funding the NEA disturbs the U.S. tradition of limited government: I suppose this goes without saying….

The federal government in the U.S. was granted a set of enumerated powers in the Constitution, and promoting the arts was not one of them. It wasn’t as if the subject didn’t come up at the Constitutional Convention. It did, and it was voted down. Today, entrenched interests at organizations like the NEA and National Public Radio distort the character of the constituencies they serve. In reality, those constituencies  are heavily concentrated among the cultural and economic elite. The NEA and NPR also promote the fiction that they are all that stand between access to the arts and culture and a bleak, artless dystopia. Give them credit for creating a fantasy about which the political left readily suspends disbelief.

Embracing the Robots

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Machines have always been regarded with suspicion as a potential threat to the livelihood of workers. That is still the case, despite the demonstrated power of machines make life easier and goods cheaper. Today, the automation of jobs in manufacturing and even service jobs has raised new alarm about the future of human labor, and the prospect of a broad deployment of artificial intelligence (AI) has made the situation seem much scarier. Even the technologists of Silicon Valley have taken a keen interest in promoting policies like the Universal Basic Income (UBI) to cushion the loss of jobs they expect their inventions to precipitate. The UBI is an idea discussed in last Sunday’s post on Sacred Cow Chips. In addition to the reasons for rejecting that policy cited in that post, however, we should question the premise that automation and AI are unambiguously job killing.

The same stories of future joblessness have been told for over two centuries, and they have been wrong every time. The vulnerability in our popular psyche with respect to automation is four-fold: 1) the belief that we compete with machines, rather than collaborate with them; 2) our perpetual inability to anticipate the new and unforeseeable opportunities that arise as technology is deployed; 3) our tendency to undervalue new technologies for the freedoms they create for higher-order pursuits; and 4) the heavy discount we apply to the ability of workers and markets to anticipate and adjust to changes in market conditions.

Despite the technological upheavals of the past, employment has not only risen over time, but real wages have as well. Matt Ridley writes of just how wrong the dire predictions of machine-for-human substitution have been. He also disputes the notion that “this time it’s different”:

The argument that artificial intelligence will cause mass unemployment is as unpersuasive as the argument that threshing machines, machine tools, dishwashers or computers would cause mass unemployment. These technologies simply free people to do other things and fulfill other needs. And they make people more productive, which increases their ability to buy other forms of labour. ‘The bogeyman of automation consumes worrying capacity that should be saved for real problems,’ scoffed the economist Herbert Simon in the 1960s.

As Ridley notes, the process of substituting capital for labor has been more or less continuous over the past 250 years, and there are now more jobs, and at far higher wages, than ever. Automation has generally involved replacement of strictly manual labor, but it has always required collaboration with human labor to one degree or another.

The tools and machines we use in performing all kinds of manual tasks become ever-more sophisticated, and while they change the human role in performing those tasks, the tasks themselves largely remain or are replaced by new, higher-order tasks. Will the combination of automation and AI change that? Will it make human labor obsolete? Call me an AI skeptic, but I do not believe it will have broad enough applicability to obviate a human role in the production of goods and services. We will perform tasks much better and faster, and AI will create new and more rewarding forms of human-machine collaboration.

Tyler Cowen believes that AI and  automation will bring powerful benefits in the long run, but he raises the specter of a transition to widespread automation involving a lengthy period of high unemployment and depressed wages. Cowen points to a 70-year period for England, beginning in 1760, covering the start of the industrial revolution. He reports one estimate that real wages rose just 22% during this transition, and that gains in real wages were not sustained until the 1830s. Evidently, Cowen views more recent automation of factories as another stage of the “great stagnation” phenomenon he has emphasized. Some commenters on Cowen’s blog, Marginal Revolution, insist that estimates of real wages from the early stages of the industrial revolution are basically junk. Others note that the population of England doubled during that period, which likely depressed wages.

David Henderson does not buy into Cowans’ pessimism about transition costs. For one thing, a longer perspective on the industrial revolution would undoubtedly show that average growth in the income of workers was dismal or nonexistent prior to 1760. Henderson also notes that Cowen hedges his description of the evidence of wage stagnation during that era. It should also be mentioned the share of the U.S. work force engaged in agricultural production was 40% in 1900, but is only 2% today, and the rapid transition away from farm jobs in the first half of the 20th century did not itself lead to mass unemployment nor declining wages (HT: Russ Roberts). Cowen cites more recent data on stagnant median income, but Henderson warns that even recent inflation adjustments are fraught with difficulties, that average household size has changed, and that immigration, by adding households and bringing labor market competition, has had at least some depressing effect on the U.S. median wage.

Even positive long-run effects and a smooth transition in the aggregate won’t matter much to any individual whose job is easily automated. There is no doubt that some individuals will fall on hard times, and finding new work might require a lengthy search, accepting lower pay, or retraining. Can something be done to ease the transition? This point is addressed by Don Boudreaux in another context in “Transition Problems and Costs“. Specifically, Boudreaux’s post is about transitions made necessary by changing patterns of international trade, but his points are relevant to this discussion. Most fundamentally, we should not assume that the state must have a role in easing those transitions. We don’t reflexively call for aid when workers of a particular firm lose their jobs because a competitor captures a greater share of the market, nor when consumers decide they don’t like their product. In the end, these are private problems that can and should be solved privately. However, the state certainly should take a role in improving the function of markets such that unemployed resources are absorbed more readily:

Getting rid of, or at least reducing, occupational licensing will certainly help laid-off workers transition to new jobs. Ditto for reducing taxes, regulations, and zoning restrictions – many of which discourage entrepreneurs from starting new firms and from expanding existing ones. While much ‘worker transitioning’ involves workers moving to where jobs are, much of it also involves – and could involve even more – businesses and jobs moving to where available workers are.

Boudreaux also notes that workers should never be treated as passive victims. They are quite capable of acting on their own behalf. They often act out of risk avoidance to save their funds against the advent of a job loss, invest in retraining, and seek out new opportunities. There is no question, however, that many workers will need new skills in an economy shaped by increasing automation and AI. This article discusses some private initiatives that can help close the so-called “skills gap”.

Crucially, government should not accelerate the process of automation beyond its natural pace. That means markets and prices must be allowed to play their natural role in directing resources to their highest-valued uses. Unfortunately, government often interferes with that process by imposing employment regulations and wage controls — i.e., the minimum wage. Increasingly, we are seeing that many jobs performed by low-skilled workers can be automated, and the expense of automation becomes more worthwhile as the cost of labor is inflated to artificial levels by government mandate. That point was emphasized in a 2015 post on Sacred Cow Chips entitled “Automate No Job Before Its Time.

Another past post on Sacred Cow Chips called “Robots and Tradeoffs” covered several ways in which we will adjust to a more automated economy, none of which will require the intrusive hand of government. One certainty is that humans will always value human service, even when a robot is more efficient, so there will be always be opportunities for work. There will also be ways in which humans can compete with machines (or collaborate more effectively) via human augmentation. Moreover, we should not discount the potential for the ownership of machines to become more widely dispersed over time, mitigating the feared impact of automation on the distribution of income. The diffusion of specific technologies become more widespread as their costs decline. That phenomenon has unfolded rapidly with wireless technology, particularly the hardware and software necessary to make productive use of the wireless internet. The same is likely to occur with 3-D printing and other advances. For example, robots are increasingly entering consumer markets, and there is no reason to believe that the same downward cost pressures won’t allow them to be used in home production or small-scale business applications. The ability to leverage technology will require learning, but web-enabled instruction is becoming increasingly accessible as well.

Can the ownership of productive technologies become sufficiently widespread to assure a broad distribution of rewards? It’s possible that cost reductions will allow that to happen, but broadening the ownership of capital might require new saving constructs as well. That might involve cooperative ownership of capital by associations of private parties engaged in diverse lines of business. Stable family structures can also play a role in promoting saving.

It is often said that automation and AI will mean an end to scarcity. If that were the case, the implications for labor would be beside the point. Why would anyone care about jobs in a world without want? Of course, work might be done purely for pleasure, but that would make “labor” economically indistinguishable from leisure. Reaching that point would mean a prolonged process of falling prices, lifting real wages on a pace matching increases in productivity. But in a world without scarcity, prices must be zero, and that will never happen. Human wants are unlimited and resources are finite. We’ll use resources more productively, but we will always find new wants. And if prices are positive, including the cost of capital, it is certain that demands for labor will remain.

The Insidious Guaranteed Income

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Praise for the concept of a “universal basic income” (UBI) is increasingly common among people who should know better. The UBI’s appeal is based on: 1) improvement in work incentives for those currently on public aid; 2) the permanent and universal cushion it promises against loss of livelihood; 3) the presumed benefits to those whose work requires a lengthy period of development to attain economic viability; and 4) the fact that everyone gets a prize, so it is “fair”. There are advocates who believe #2 is the primary reason a UBI is needed because they fear a mass loss of employment in the age of artificial intelligence and automation. I’ll offer some skepticism regarding that prospect in a forthcoming post.

And what are the drawbacks of a UBI? As an economic matter, it is outrageously expensive in both budgetary terms and, more subtly but no less importantly, in terms of its perverse effects on the allocation of resources. However, there are more fundamental reasons to oppose the UBI on libertarian grounds.

Advocates of a UBI often use $10,000 per adult per year as a working baseline. That yields a cost of a guaranteed income for every adult in the U.S. on the order of $2.1 trillion. We now spend about $0.7 trillion a year on public aid programs, excluding administrative costs (the cost is $1.1 trillion all-in). The incremental cost of a UBI as a wholesale replacement for all other aid programs would therefore be about $1.4 trillion. That’s roughly a 40% increase in federal outlays…. Good luck funding that! And there’s a strong chance that some of the existing aid programs would be retained. The impact could be blunted by excluding individuals above certain income thresholds, or via taxes applied to the UBI in higher tax brackets. However, a significant dent in the cost would require denying the full benefit to a large segment of the middle class, making the program into something other than a UBI.

Nathan Keeble at Mises Wire discusses some of the implications of a UBI for incentives and resource allocation. A traditional criticism of means-tested welfare programs is that benefits decline as market income increases, so market income is effectively taxed at a high marginal rate. (This is not a feature of the Earned Income Tax Credit (EITC).) Thus, low-income individuals face negative incentives to earn market income. This is the so-called “welfare cliff”. A UBI doesn’t have this shortcoming, but it would create serious incentive problems in other ways. A $1.4 trillion hit on taxpayers will distort work, saving and investment incentives in ways that would make the welfare cliff look minor by comparison. The incidence of these taxes would fall heavily on the most productive segments of society. It would also have very negative implications for the employment prospects of individuals in the lowest economic strata.

Keeble describes another way in which a UBI is destructive. It is a subsidy granted irrespective of the value created by work effort. Should an individual have a strong preference for leisure as opposed to work, a UBI subsidy exerts a strong income effect in accommodating that choice. Or, should an individual have a strong preference for performing varieties of work for which they are not well-suited, and despite having a relatively low market value for them, the income effect of a UBI subsidy will tend to accommodate that choice as well. In other words, a UBI will subsidize non-economic activity:

The struggling entrepreneurs and artists mentioned earlier are struggling for a reason. For whatever reason, the market has deemed the goods they are providing to be insufficiently valuable. Their work simply isn’t productive according to those who would potentially consume the goods or services in question. In a functioning marketplace, producers of goods the consumers don’t want would quickly have to abandon such endeavors and focus their efforts into productive areas of the economy. The universal basic income, however, allows them to continue their less-valued endeavors with the money of those who have actually produced value, which gets to the ultimate problem of all government welfare programs.

I concede, however, that unconditional cash transfers can be beneficial as a way of delivering aid to impoverished communities. This application, however, involves a subsidy that is less than universal, as it targets cash at the poor, or poor segments of society. The UBI experiments described in this article involve private charity in delivering aid to poor communities in underdeveloped countries, not government sponsored foreign aid or redistribution. Yes, cash is more effective than in-kind aid such as food or subsidized housing, a proposition that economists have always tended to support as a rule. The cash certainly provides relief, and it may well be used as seed money for productive enterprises, especially if the aid is viewed as temporary rather than permanent. But that is not in the spirit of a true UBI.

More fundamentally, a UBI is objectionable from a libertarian perspective because it involves a confiscation of resources. In “Why Libertarians Should Oppose the Universal Basic Income“, Bryan Caplan makes the point succinctly:

Forced charity is unjust. Individuals have a moral right to decide if and when they want to help others….

Forcing people to help others who can’t help themselves… is at least defensible. Forcing people to help everyone is not. And for all its faults, at least the status quo makes some effort to target people who can’t help themselves. The whole idea of the Universal Basic Income, in contrast, is to give money to everyone whether they need it or not.”

Later, Caplan says:

…libertarianism isn’t about the freedom to be coercively supported by strangers. It’s about the freedom to be left alone by strangers.

Both Keeble and Caplan would argue that the status quo, with its hodge-podge of welfare programs offering tempting but rotten incentives to recipients, is preferable to the massive distortions that would be created by a UBI. The mechanics of such an intrusion are costly enough, but as Don Boudreaux has warned, the UBI would put government in a fairly dominant position as a provider:

… such an income-guarantee by government will further fuel the argument that government is a uniquely important and foundational source of our rights and our prosperity – and, therefore, government is uniquely entitled to regulate our behavior.

Sins of American Health Insurance

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The advances in Health-Care seems to be putting some distance between the doctor and patient.

Health insurance in the U.S. suffers from many dysfunctions, but a couple of basic steps in its institutional evolution lie at the root of its worst shortcomings. I say this after coming across another great post by John Cochrane the other day, this time with some of his thoughts on fashioning an Obamacare replacement. He lays out a few basic principles, one of which is that “health insurance is not a payment plan for small expenses“, or shouldn’t be.

The best parts of Cochrane’s post, I think, relate to two longstanding features of the health insurance market in the U.S.:

The original sin of American health insurance is the tax deduction for employer-provided group plans — but not, to this day, for employer contributions to portable individual insurance. ‘Insurance’ then became a payment plan, to maximize the tax deduction, and then horrendously inefficient as people were no longer spending their own money.

Worse, nobody who hopes to get a job with benefits then buys long-term individual insurance. This provision alone pretty much created the preexisting conditions problem.”

The last two sentences are insightful commentary on the inadequacy of coverage for pre-existing conditions, though “creating the pre-existing conditions problem” should probably read “foreclosed any easy solution to the pre-existing conditions problem“. During World War II, the government authorized the tax deduction for employer-provided health plans as a concession to labor interests frustrated by war-time wage controls. Cochrane should be forgiven for making this sound like a deal with the devil. Today, employer-provided coverage is almost always limited to one’s job tenure (plus 18 months under COBRA, since 1985). In the 1940s, the benefits might have been generous, but portability was probably the last thing on their minds, especially in light of the long job tenures of the day and the fact that many employers, at that time,  offered coverage to vested retirees. The dominance of employer-provided coverage after WW-II pretty much ruled out lifetime insurability in a world with relatively high job mobility.

The tax deduction also helped to institutionalize the faulty notion that “good” health insurance should cover a panoply of services involving small, recurring expenses that are properly considered normal health upkeep. Instead, insurance should cover large, unexpected expenses for services necessary to treat injuries or severe illness. In addition, the coverage and the premium should, at the buyer’s option, include a guarantee of future insurability at standard rates. This option should not be mandated, but a refusal to opt-in must come at the risk of potentially large future health care obligations.

Cochrane also says:

Cross-subsidies are a second original sin. Our government doesn’t like taxing and spending on budget where we can see it. So it forces others to pay: It forces employers to provide health insurance. It forces hospitals to provide free care. It low-balls Medicare and Medicaid reimbursement.

The big problem: These patches and cross-subsidies cannot stand competition. Yet without supply competition, costs increase, the number of people needing subsidized care rises, and around we go.”

Competition and choice must exist in health care delivery and in the health insurance market to keep costs under control. But if person A is an identifiable health risk and person B is not, and if healthy B is forced to pay the same premium for health coverage as sickly A, then A is cross-subsidized by B. Competition will encourage B to bail out of the risk pool. If B is prohibited from doing so, costs will soar because the cross-subsidies create incentives for A to over-utilize services, even making allowance for A’s greater need. Thus, forcing A and B into the same risk pool ultimately exacerbates the plight of both A and B by raising costs. That’s where we find ourselves today.

Enabling competition and dismantling cross-subsidies can only occur if all consumers are able to purchase not just health insurance, but long-term health insurability. To avoid a painful transition, publicly-funded high-risk pools might be necessary for the existing type As of the world, who are already burdened by poor health and might not be able to afford the premium necessary for insurance. Going forward, those who refuse a future-insurability option must understand that if they fail to opt-in prior to developing a serious health condition, they will have to rely on Medicaid, private charity, or a risk-rated policy, if they can afford it.

Will Republicans abolish the ill-founded tax deduction? Almost certainly not. They are likely to extend it to the individual side of the market, despite the fact that this will have an additional inflating impact on health care costs. At least it will reduce the current advantage of employer-paid coverage, potentially broadening the market faced by individuals. Also, Republicans might take steps to restore choice, promote competition, and eliminate cross-subsidies. As Cochrane notes, there are also ideas in play to improve portability. Questions remain about many of the details, however, including Medicaid reforms. On the whole, I’m hopeful that we’ll see most of Obamacare’s short-sighted provisions and rules rolled back and replaced by legislation to encourage the development of the market for insurance coverage and for future insurability.

Administrative Cost Causers

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Certain enterprises seem plagued by declining productivity and increasing costs, or what is sometimes called the “cost disease”. This includes such areas as education, health care, and infrastructure development. Prompted by a fascinating post by Scott Alexander at Slate Star Codex, John Cochrane boils things down to administrative bloat, sometimes caused by regulation. He also identifies a lack of competition as a cause of the bloat. To that I would add institutional arrangements like third-party payments that create gaps between the scheduled prices established by payers and the user’s willingness to pay. Ryan Bourne at the CATO Institute also comments on Alexander’s post; he presents a framework for analysis but demurs from weighing-in on the causes because the U.S. lacks a proper index of public sector output. He mentions Cochrane’s post, but essentially ignores his contribution to the discussion, which I believe is essential to understanding the phenomenon described by Alexander.

The facts are: 1) costs in K – 12 education have tripled since 1970 (but not the student population), while student achievement has remained flat; as a consequence, productivity in education has declined by two-thirds! Alexander notes, “College is even worse.” 2) The cost of health care has increased by 400% since 1970. While longevity has increased and treatments for many ills have improved, we have not enjoyed a 400% improvement in health care delivery and outcomes, and other developed countries achieve the same outcomes at much lower cost; 3) the cost of new infrastructure has increased drastically in the U.S. Alexander cites the cost of the new subway extension in New York City ($2.2 billion per kilometer) at a cost of about 10 – 50 times that of equivalent projects in other parts of the world. These are just a few examples.

What explains these rampant cost increases? Economists are often tempted to attribute such phenomena to “Baumol’s disease“, which holds that sectors in which productivity is relatively static will experience increasing costs due to advances in productivity in other sectors. A classic example is an orchestra. In the act of playing a particular piece of music, an orchestra today has about the same productivity as an orchestra of 200 years ago (though technology can make musicians more productive in other ways). But as productivity grows for workers in the rest of the economy, their real wages will increase. Musicians, and potential future musicians, will then face a steeper tradeoff in their decision to proceed with musical careers. This tendency will increase their reservation wages as musicians. Moreover, consumers achieving more affluence from their work in other sectors — higher real wages — may demand more concerts, and some of those benefits will flow to members of the orchestra.

Have the orchestra’s costs increased without any corresponding increase in real productivity? Well, that argument isn’t quite cinched, since the real wages of the orchestra members and the real revenue derived from their productivity have both increased. Nevertheless, Alexander presents data showing that the real pay of public school teachers, hospital workers, and most physicians (excepting some specialists) has been stagnant, so at least those crucial labor inputs do not account for the increasing costs. While the pay of construction workers has undoubtedly increased, it cannot plausibly account for the cost increases in infrastructure development. But here is Alexander:

I don’t have a similar graph for subway workers, but come on. The overall pictures is that health care and education costs have managed to increase by ten times without a single cent of the gains going to teachers, doctors, or nurses.”

So what might explain the “cost disease” plaguing these sectors? Alexander discusses, and dismisses, several possible theories, and finally settles on a very partial cause: regulation. From personal experience, I can attest to the bizarre commitment of large pools of talent to regulatory compliance. And there is validity to the argument that this bloat is related to legal risks, which organizations attempt to mitigate by creating layers of controls. Cochrane agrees that the real answer is sometimes related to regulation, but the explanation is much broader:

The ratio of teachers to students hasn’t gone down a lot — but the ratio of administrators to students has shot up. Most large public school systems spend more than half their budget on administrators. Similarly, class sizes at most colleges and universities haven’t changed that much — but administrative staff have exploded. There are 2.5 people handling insurance claims for every doctor. Construction sites have always had a lot of people standing around for every one actually working the machine. But now for every person operating the machine there is an army of planners, regulators, lawyers, administrative staff, consultants and so on.”

Cochrane shines a light on perhaps the most important reason for administrative bloat: an absence of competition:

These are all areas either run by the government or with large government involvement. …with not much competition. In turn, however, they are not by a long shot ‘natural monopolies’ or failure of some free market. The main effect of our regulatory and legal system is not so much to directly raise costs, as it is to lessen competition (that is often its purpose). The lack of competition leads to the cost disease.

Though textbooks teach that monopoly leads to profits, it doesn’t. ‘The best of all monopoly profits is a quiet life’ said Hicks. Everywhere we see businesses protected from competition, especially highly regulated businesses, we see the cost disease spreading. And it spreads largely by forcing companies to hire loads of useless people.

The quote of Sir John Hicks is particularly informative. Protection from competition means that profits are less risky. The protected monopolist’s profits might be limited by social contract, but they are subject to less business risk. Hicks’ observation suggests that monopolists are likely to take a more langourous approach to cost control.

There is another characteristic shared by public education, health care and infrastructure: not only do those enterprises face minimal, if any, competition, but there is a disconnection between the users of those services and the payers. The cost of public education to taxpayers often bears no relationship to their use of the system. The cost of health care is often borne by third-party payers, rather than patients. The users of public infrastructure are seldom asked to cover its costs. So while monopoly is worse than competition, third-party payments free users of the responsibility to make decisions at the margin, short-circuiting the role of consumer incentives in controlling costs. This could manifest in increasing marginal costs, but it is very likely to enable or even require administrative bloat to take place.

Free of competition, and with customers who do not face tradeoffs between usage and price, providers will manage both their services and costs based on rules established by third-parties, and worse, by multiple layers of payers (as when government subsidizes insurers, when employers offer insurance coverage, and when government subsidizes those employers for doing so). Third-party payers are sometimes lacking in information or direct control (e.g., taxpayers). Payers often face incentives that do not promote efficient delivery of services for which they are obligated to pay. The standards by which costs are justified are seldom subjected to a true market test.

If Cochrane is right, that cost disease is driven by administrative bloat, which in turn is often a consequence of regulation, a lack of competition, and third-party payments, then several general solutions suggest themselves: first, regulate lightly; second, promote competition; third, rely on direct, non-subsidized payments by users whenever possible. In education, these guidelines mean giving public schools more autonomy and allowing parental choice. For health care, they mean an end to mandates and regulatory burdens on insurers, employers and providers, allowing consumer choice in selecting health coverage, ending prohibitions on competition in the insurance marketplace, and eliminating tax subsidies. In infrastructure, the guidelines support streamlining the review process for infrastructure projects, avoiding subsidies to over-invest, relying more heavily on user fees to pay for infrastructure, and expanding the role of private developers and operators of infrastructure facilities.

The Looting Wage and Its Ultimate Victims

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Like children asking their peers to exchange quarters for nickels, advocates of a “living wage” hope that the government and voters will agree that workers should be paid by private employers at a rate the activists deem appropriate, regardless of skills. (The “living wage” is left-speak for a very high minimum wage.) Even worse, those advocates actually believe that such a trade can be justified. Or do they? The simple economics of the claim is undermined by assertions that a living wage is simply a matter of social justice. But social justice cannot be served in this way unless one’s definition is so bound up in virtue signaling that you don’t know the difference. It’s even too charitable to say that the left’s definition of social justice is simply bound up in the present and the short-term interests of specific groups. The unfortunate truth is that the “living wage” sacrifices the very well-being of a large number of individuals in those groups, now and in the future. Here’s why:

Suppose the government mandates a “living wage” as well as a series of measures intended to neutralize all of its unintended consequences. These measures would include a complete prohibition of involuntary terminations, investments in automation, price hikes, movement of capital abroad, and immigration. The measures must also include subsidies for failing employers. Just imagine the burden of compliance costs related to these measures, and the complex task of carving out exceptions, such as the allowable price hike in the wake of an increase in the cost of raw materials. What about the additional workers who would enter the labor force to seek employment at the higher wage? Should they be prohibited from doing so, or should employers be required to hire them, or should they be subsidized to hire them? And how will taxpayers afford all of these government subsidies?

Clearly, the situation described thus far is not sustainable. Both the initial wage hike and many of the other steps, ostensibly intended to cushion the blow on various parties, represent flagrant abridgments of private property rights, or rather, property takings! Of course, the real intent is for private parties to pay for the “living wage”. Presumably, employers are to pay the costs, especially large employers and their wealthy investors, like you when the value of those shares in your IRA, pension or 401k plan begins to tank. The reality is, however, that the unintended consequences will spread the cost in a variety of unpleasant ways.

Those in the coalition for living-wage legislation have not given much thought to the reverberations of such a change. At the most basic level, some people cannot command a high wage because they lack higher-order skills. Some have not learned the importance of reliability, of making sure they arrive at work by a specific time every day. Some have not learned the importance of concentrated work effort, of demonstrating that effort and avoiding excessive slack time. Some communicate poorly, or fail to comport themselves in a manner that commands trust. Some have a sketchy work record, presenting a risk to prospective employers. Living wage advocates assert that all of this is irrelevant, but it means everything to an employer.

How would employers attempt to to survive under a living wage? One doesn’t have to think too deeply to realize that wage floors lead to a loss of jobs for several reasons. Those lacking the skills to justify the higher wage will be out the door. Some employers will fail, finding it impossible to pay the hike in their labor costs or to pass it along to their cost-conscious clientele. The living wage is likely to lead to premature automation of many tasks otherwise requiring unskilled to more moderately-skilled workers. The capital investment needed to automate any manual process may well become worthwhile given such a shock to wage rates. Moreover, while some in the living wage movement complain that U.S. employers seek-out lower wage rates abroad, the living wage itself would lead to more of this substitution. The living wage also creates opportunities for those willing to work illegally at sub-minimum wages, including many undocumented immigrants. By driving a larger wedge between the wages of other home countries and the U.S., the living wage creates an incentive migrate In pursuit of the enlarged set of black-market opportunities for labor.

So just imagine having the government mandate a wage that is nearly double the market-clearing level. The quanity of labor demanded declines and the quantity supplied increases, leaving a surplus of workers at the mandated wage. The demand for labor declines still more as the weakest firms close shop. And it declines still more over horizons long enough to enable investment in automation and relocation of production to foreign shores. Add to the mix an expanded flow of workers from abroad. Not all of these surplus workers, native and immigrant, would be willing to take “underground” work at a rate below the living wage, but some will.

So, which of the measures listed in the second paragraph would mitigate the costs imposed by the living wage? In reality, none of them would succeed without spreading the cost more widely. Prohibiting involuntary terminations? Businesses will fail and/or prices will rise. Prohibiting investment in automation? The same. Prohibiting price hikes? Business failures, terminations, and premature automation. Prohibiting movement of capital abroad? An outright revocation of property rights and a distortion of incentives for productive investment, which would also discourage the movement of capital into the country, not just out.

Are there measures that could make the “living wage” a sustainable outcome? Yes, but they cannot be accomplished immediately by decree. Indeed, doing so would thwart the achievement of the objective. In short, productivity must increase. While productivity is multi-dimensional, education, training and work experience all foster improvement in a worker’s ability to add value. Unfortunately, our system of public primary and secondary education has been unsuccessful in producing graduates who can compete in the labor market, even at today’s minimum wage. Wholesale reforms are needed, but even the best educational reforms will take time to come to fruition. In the workplace itself, apprenticeship programs could provide under-skilled workers an avenue toward greater competitiveness at higher wages. Again, apprenticeships may only make economic sense to employers at a legalized sub-minimum wage, as Australia allows.

Second, productivity is dependent on the quality and quality of the capital invested in a business. The key to improving this capital is profitability. It’s ironic that living-wage advocates fail to see that their proposal runs directly counter to steps that would contribute to  productivity and wages. Instead, they seem intent on killing the geese that lay golden eggs! Far better to allow those eggs to be transformed into new capital assets that can enhance worker productivity and justify higher wages. Some jobs will be replaced by automation, but capital and new technology tend to create new kinds of jobs and inevitably boost worker productivity. (See “Will Automation Make Us Poor?” by Aaron Bailey.) Employers will still have an interest in seeking out, if not developing, new talent. The automation should take place as part of a more natural evolution, not one prematurely hastened by unrealistically high wage mandates.

The living wage is a prescription for failure and a death-knell for the private economy. It will fail the least-skilled workers and even some semi-skilled workers who cannot compete for jobs at the living wage. It will automate jobs before the natural time dictated by the market-driven process of technical evolution. It will lead to higher prices, which drive down the real value of any wage gains that workers manage to capture. It will lead to business failures, especially among small businesses. It will offer false hope to unskilled immigrants. It will reduce capital investment among smaller firms struggling to meet the higher wage bill. It may well lead to a slew of even more destructive public policies, such as business subsidies and other price controls. And it will create dependency on the state. The living wage is a destructive policy and ultimately a prescription for the death of self-sufficiency. It  cannot foster real social justice.

Government As Hazard

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Lots of people think government can do good things, even if its always in fashion to wink about the state’s legendary incompetence. It can do lots of things, but the only way it can do them is by exercising its power to coerce. It’s simply impossible to form an effective government without granting it that power. We must hope it will do only good things, and there is reasonable consensus that its basic functions are good, at least in kind: national defense, law enforcement and protection of basic rights, and a judicial system. The mere performance of those functions requires coercive power, and funding them requires the coercive power of taxation.

To make things simple, for now let’s stipulate that all agree on both the necessary functions of government, some minimal scale and scope of those functions, and the taxes necessary to pay for them. We may all feel that we are better off. Anything in excess of that minimal portfolio as might be desired by an individual or group would necessarily make some feel better off and some feel worse off. Additional taxes would have to be collected to pay for it, and the activities themselves might be seen in some quarters as inappropriate, wasteful, or intrusive. Now, the coercion of the state becomes more binding on some individuals and groups. We no longer have a win-win proposition, and that is what  distinguishes marginal government activity from marginal private exchange. The latter is always predicated on mutual benefits for the transacting parties. In the jargon of economics, these voluntary, private trades are Pareto-improving moves, meaning that some individuals are made better off and no one is made worse off. In general, if all mutually beneficial trades are exploited, the final result is Pareto optimal (after Vilfredo Pareto), because no further activity can make anyone better off without making someone else worse off.

The limited government described in the hypothetical sounds as if it might be Pareto optimal, but let’s add a little more realism. Are there additional government functions that would improve well being without doing harm to anyone? There is general agreement that government should provide for other “public goods”, which would otherwise be under-demanded in the market, and under-provided, due the nonexclusive nature of their benefits (think public parks). Once those are provisioned, the outcome may be Pareto optimal. There may be unanimous agreement, as well, that government should take actions to mitigate certain external costs arising from private activity. (If some of the costs of private activity are not internalized, then those market transactions fail the test of Pareto improvement). These additional government functions require coercive power, of course. Now we are into more complex issues of public choice. The provision of goods with at least some public benefits requires judgement as to degree, and judgement is necessary as to the appropriate degree of mitigation of external costs when they are an issue. In other words, Pareto-improving moves get scarce once government assumes responsibilities beyond those described in our original hypothetical.

As the scale and scope of government grow, its coercive force must advance as well. Therefore, unanimous consent for this growth, and even widespread consensus, will be impossible to achieve. Its size will reach a level at which a substantial share of the population will assume the roles of “public servants”, all having a vested interest in the state’s continued growth, if only to boost their own pay. The potential conflict of those personal interests with the public interest could not be clearer. That’s a good reason to support strict limits on the size and power of government, not to mention restrictions on the power of public employees to unionize.

Those who wish for government to play a dominant role in society might think it’s all for the good. They might support changes in the rules of governance that facilitate the dominance and coercive power it confers upon them. That might include, for example, pushing the use of executive authority to extreme levels based on interpretations of complex, but often vague, legislation. It might include changes in parliamentary rules that make it easier for thin majorities of legislators to work their will. No doubt these rule  changes will lead to Pareto-degrading actions, though the ruling faction will be quite happy with their new powers.

But what happens when a shift in the balance of public opinion brings new leaders to power? Those leaders will inherit rules that facilitate their agenda and authority to exercise coercive power. No one at any point along the ideological spectrum should dismiss this sort of risk. That’s the spirit of a recent Bryan Caplan post, “Limited Government as Insurance“. Stretching powers in the service of particular policy goals may well backfire when those powers become available to an opposing faction:

“Imagine going back in time to January 20, 2009. Obama’s Inauguration Day. You’re a cheering fan. On that day, an angel appears and makes you this offer: If you give up on Obama’s best ideas, none of Trump’s worst ideas will happen either. Obamacare will never happen – but neither will Trump’s immigration policies. Would you take that deal?

I know, it’s a galling hypothetical. You want the good stuff without the bad stuff.

Caplan characterizes strict limits on government as a form of insurance against the risk of swings in the balance of power. He also considers plausible reasons for rejecting such a deal: “the arc of the moral universe”, or, you think your side will ultimately win, and will win for all time; and “asymmetric hyperbole”, or, the greatness of your policies outweighs any damage the other side can do with the same powers. If you really believe those things, it might seem reasonable to take your chances on an expansive state with expansive powers! A preference for limited government, however, does not require the contorted logic required to reject this insurance.

The U.S. Constitution includes many provisions originally intended to limit government and the exercise of coercive power. Those protections from the state have eroded over time, a process hastened by increasingly flexible judicial interpretations of the founding document. Caplan notes that there are a number of mechanisms by which limited government can be made durable:

Supermajority rules require more than a majority to act. Division of powers makes it hard for government bodies to accomplish anything on their own. Judicial review allows judges to invalidate acts of government. Federalism greatly reduces the cost of “voting with your feet.” If you think these institutions aren’t working, the obvious solution is to strengthen them. Impose more supermajority requirements. Divide more powers. Overturn legislation that fails to get support from six, seven, eight, or all nine Supreme Court Justices. Make states pay for their own spending with their own taxes, not federal grants.

Then comes the most insightful, but most disheartening, part of Caplan’s post: real steps to limit government will never be taken:

Limited government helps everyone in the long-run, but immediately hurts the ruling party. They fought hard to win power; now that they have it, they yearn to flex their muscles.

We might see a federal department abolished here or there, and we might see certain regulations rolled back, but those steps will be selective. The powers that put them there in the first place can be reapplied in the future. We might see more “business-friendly” actions, but those will be selective as well. In other words, corporatism will persist. And we might see tax cuts, but that won’t reduce the government’s absorption of resources, which is driven by the spending side. While this sounds discouraging, I nevertheless admire Caplan’s characterization of limited government as insurance against the other side’s bad policies. If only we could pull it off!

The Vagina Subsidies

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Many believe that women are entitled to taxpayer subsidies by virtue of “reproductive rights”, or simply gender disparities in health care costs. Is this reasonable from an economic perspective? Is it fair? Some components of this claim on public resources are highly controversial. I discussed these issues last week in the following post, originally titled “Spite and the ‘Right’ To Subsidies”:

The Women’s March on Washington on January 21st was not precise in communicating its real objectives. But the costumes were cute, and some critics felt that more of the men in attendance should have worn them. Anyway, the leaders and organizers fell short in terms of articulating a coherent agenda. Unless, of course, you just “got it”. These women were angry, but it’s not as contagious as they think: a great many circumspect women recognize the unmatched freedoms, privileges, and prosperity enjoyed by women (and men) in the U.S. The inherent divisiveness of identity politics is simply not appealing to everyone.

There are a number of reasons why those marching unfortunates might feel put upon, and it must have felt cathartic to wail and gnash teeth. The dissatisfaction is mostly related to the fact that Donald Trump is the president, but if I had to guess, I’d say a quarter of the marchers weren’t registered to vote. Probably a third of the remainder did not vote, despite their registration.

All that aside, what sort of policy purpose did the marchers hope to achieve? For one thing, they do not want to lose federal funding and cross-subsidies for support of women’s health issues, including reproductive rights or family planning (terms of art for preventing pregnancies). That’s a passable translation of “stay away from my vagina!” There are several avenues through which the federal government arranges payments or subsidies for women’s health services such as childbirth, maternity care, and birth-prevention products and services:

  1. Medicaid reimbursements account for the bulk of direct federal funding for family planning services; states are responsible for a major share of reimbursements as well.
  2. Federal funding also occurs under Title X, the Public Health Service Act of 1970, which authorizes federal grants for family planning services.
  3. Indirect funding occurs through cross-subsidies inherent in the structure of the Affordable Care Act (ACA), or Obamacare:
    • The ACA requires health insurance to include a set of “essential benefits”. Premium payments from those for whom such benefits are superfluous subsidize those who require those benefits.
    • The ACA prohibits “gender rating”, so that men effectively subsidize the higher cost of care and coverage for women (up to roughly middle age).
  4. Those purchasing coverage on the Obamacare exchanges may be eligible for federal subsidies on their premium payments.

Both Medicaid and Title X grants are intended to serve the family-planning needs of low-income women. Likewise, the federal subsidies (#4) for insurance covering family planning services, including contraceptives, are designed to assist low-income women. The cross-subsidies inherent in the structure of Obamacare premia confer family planning benefits (and penalties) across a broad range of incomes.

Reproductive Rights and Family Planning

Many taxpayers object to the use of tax dollars to pay for contraceptive services on religious or moral grounds. This is unrelated to a woman’s right to use contraceptives; it has to do with coerced payment for anyone’s contraceptives. The Supreme Court’s Hobby Lobby decision relieved private employers of the obligation to pay for abortifacients on religious grounds, however.

Even more controversial is the idea that federal tax dollars might be used to fund abortions. In fact, that is outlawed by the Hyde Amendment, a temporary provision routinely attached to budget appropriation bills each year. This amendment restricts the use of federal and state funds for abortion to cases of rape, incest, and when the mother’s life is in danger. Elective abortions, however, are not eligible for taxpayer funding. Unfortunately, Hyde and a related executive order issued by President Obama have not been wholly effective at preventing premium cross-subsidies and taxpayer subsidies from paying for elective abortions. That’s because of the limited choices of insurance plans available in many states and the failure of insurers and public authorities to monitor compliance. Carl Anderson in National Review explained these issues in “Obamacare’s Taxpayer-Funded Abortions“. Anderson points to the findings of a 2014 report from the federal General Accounting Office (GAO):

“Twenty-eight states have a legal environment that allows insurance plans within these exchanges to cover abortion. Among these 28 states, they found that 1,036 plans include abortion coverage, including every plan in New Jersey, Connecticut, Vermont, Rhode Island, and Hawaii. More than 95 percent of the plans in Massachusetts, New York, and California also cover abortion.

… The GAO report makes clear that those who want to find a plan that does not cover abortion will have a very difficult time. In some cases, the information is available in the Summary of Benefits. In other cases, it is only available on the insurer’s website. In other cases, the information is available only by calling the insurer.”

The ACA also required insurers to account and bill separately for abortion coverage, but compliance is spotty:

“… the GAO found that, of the 18 insurers it investigated, none of them charged separately for abortion coverage, and none of them even itemized the coverage on their bills.”

Planned Parenthood

It’s also quite likely that Title X grants and even Medicaid are funding abortions, despite prohibition by the Hyde Amendment. Medicaid is rife with mismanagement, with tens of billions of dollars of improper payments each year. Title X grants, if not tied to specific procedures, are used to cover overhead costs, some of which undoubtedly support the abortion practices of certain health service providers. Planned Parenthood (PP) is the largest abortion practice in the country, in furtherance of Margaret Sanger’s eugenic vision. Abortions have been declining nationwide in recent years, but PP’s abortion count has been fairly stable. Between 2009 and 2014, several other prominent PP services declined by half to two-thirds, such as cancer screenings, breast exams/breast care, and pap smears, while PP’s total income grew.

PP has aborted more than 300,000 pregnancies every year since 2007, yet the organization claims that those procedures account for only 3% of its activity. The 3% figure is derived by treating an abortion as the equivalent of a pregnancy test, or an STD test, or a breast exam, a PAP smear, or any other “discrete clinical interaction”. This renders the 3% claim meaningless, or much worse, a deception. Abortion is a costly procedure relative to most of the other services counted by PP as equivalent. “Prenatal care” services can be complex, but the small count of such services delivered (about 19,000 annually) indicates that it does not account for a major part of PP’s budget.

It is difficult to find information on PP’s fee revenue by service; one analysis concluded that abortions accounted for about 52% of PP’s fee income in 2010. But it is impossible to know exactly how the organization allocates public funds. Of course, fees from some services might cross-subsidize others. But almost half of PP’s annual budget is funded by taxpayers. Therefore, at a minimum, PP should be required to provide more auditable information on the question of how it allocates taxpayer funds.

Gender Rating

Another major source of cross subsidies is the absence of gender rating in insurance coverage under Obamacare and other law. Health care costs are higher for women than men for a variety of reasons: First, of course, there is childbirth and maternity care. Women also tend to utilize clinical services at higher rates than men. Perhaps women are more careful about attending to their health needs, as they are more likely than men to have regular checkups. They tend to have more stress fractures and other musculo-skeletal injuries. And they live longer than men, creating higher costs in their senior years. In the past, gender rating by insurers in the individual market led to premium disparities between women and men of 25%-85%. Some states have prohibited or restricted gender rating for years, however, and employer plans nationally have been prohibited from gender rating since 1978.

Prohibitions against gender rating, like other forms of community rating, are ill-founded from an economic perspective. Hadley Heath put it well in 2013 in “Women Should Pay More for Health Insurance:

“Pregnancy and childbearing aside, women seek preventive care and visit doctors more often. But these additional screenings cost money, and the person receiving the care should pay for it, not other members of her insurance pool (community-rated or not). After all, women may reap the benefits of this behavior by living longer lives; they should also take on the costs. …

A better, more equitable solution would be for both men and women to pay for more noncatastrophic health expenditures outside an insurance plan. This is the only way to ensure that individuals — not pools of people — pay for what they consume. … If our premiums don’t reflect our risk, our claims or our costs, then some people will be overcharged and others undercharged. The overcharged parties will underinsure, and the undercharged parties will overinsure, perpetuating the problems in our current system.”

Those who over-insure, or who have access to services at prices below cost by virtue of mandates and cross subsidies, will over-utilize scarce health care resources. Eliminating the prohibition on gender rating would not foreclose the opportunity to obtain reasonably-priced health care coverage, however. In fact, eliminating over-charges to men would give them an incentive to remain in the risk pool, which would restrain pricing in age ranges through which women experience higher costs. The elimination of cross subsidies to women would ease cost pressure in the delivery of services as well. And interstate competition among insurers would give women a better set of choices and prices. Heterosexual married couples would split the difference in gender-rated premium levels, of course, but lesbian couples would probably bear higher costs. In general, allowing choice in selecting coverage levels would focus costs on cost-causers, a requirement for economic efficiency. For example, to the extent that many pregnancies are intended, maternity care actually fails to meet the definition of an insurable risk. Requiring others to pay those costs creates an incredibly arbitrary and unfair burden, though insuring against complications is a different matter.

Assisting Low-Income Women

Again, much of the federal funding at issue is directed at low-income women. This includes Medicaid, Title X grants, and Obamacare subsidies on policies purchased through the state exchanges. Current discussions regarding an ACA replacement plan would subsidize low-income individuals via refundable tax credits, which are free of the nasty incentive effects of coverage mandates combined with cross subsidies. While some contend that Medicaid is under threat, the most “extreme” plans discussed thus far are limited to replacing current federal funding practices with block grants to the states, who manage the program. The grants might be frozen at current funding levels. In view of the Medicaid waste identified by the GAO, there is a need to create incentives for states to manage the program more effectively.

The rules prohibiting taxpayer-funded abortion payments are unlikely to change, though they might be given a more permanent form than by Hyde, and compliance efforts might be tightened. It is mistaken to argue in this context that denying funds to a poor woman for an abortion is the equivalent of burdening society with more dependency. One error is in thinking that somehow life is for sale by taxpayers. It is not. The second is in assigning a negative value to a person with untold potential. Those individuals should be thought of as sentient human assets to be nurtured under policies that promote family stability, effective educational institutions and incentives for self-reliance. The third mistake is in selling short the charitable motives of pro-lifers, most of whom know that true charity has nothing to do with the state.

Your Vagina, My Money

The marchers on the 21st of January were motivated in part by possible changes in the availability of federal tax money for women’s health care under the Trump Administration. There are several avenues through which that support is provided as aid to low-income women. The funding mechanisms and management of these programs must be improved, and they must be made more accountable to taxpayers. Moreover, subsidies to women are provided through the structure of premiums under Obamacare, which distort economic incentives, misallocate resources, and undermine the stability of health care costs and insurance premia. An end to “one-side-fits-all” insurance mandates and gender rating would go far in improving the efficiency and equity of health insurance.

The marchers’ concern also revolves around subsidized access to contraceptives and federal support for organizations that provide abortion services. Even complete removal of that support would have no bearing on fundamental “rights” in any true sense. It has nothing to do with the existence of a right to abort children, only the question of who pays. Ultimately, your reproductive decisions, and your non-reproductive decisions, should be your own financial responsibility, your insurer’s, or that of others who might wish to assist you. Private donors give many millions of dollars to Planned Parenthood every year, and presumably could give more. Don’t ask for taxpayers to be involved with your vagina in any way.

How We Hinder Mobility

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A plethora of regulations and subsidies established by governments at all levels is making it more difficult for Americans to move, especially from one state to another. Yale Law Professor David Schleicher identifies these barriers to mobility and writes that they compromise the nation’s ability to match jobs with workers. Thus, these laws beget economic immobility as well. His paper, “Stuck in Place: Law and the Economic Consequences of Residential Stability“, describes a number of the barriers:

Land-use laws and occupational licensing regimes limit entry into local and state labor markets; differing eligibility standards for public benefits, public employee pension policies, homeownership subsidies, state and local tax regimes, and even basic property law rules reduce exit from states and cities with less opportunity; and building codes, mobile home bans, federal location-based subsidies, legal constraints on knocking down houses and the problematic structure of Chapter 9 municipal bankruptcy all limit the capacity of failing cities to ‘shrink’ gracefully, directly reducing exit among some populations and increasing the economic and social costs of entry limits elsewhere.

To get a sense of the magnitude of declines in mobility over the past three decades, see Figure 3 in this discussion about mobility by Richard Florida at CityLab. The percentage of homeowners who move declined from almost 10% annually in the late 1980s to about 5% in 2016. The biggest declines occurred during the periods of economic weakness in 2001 and 2008. For renters, the percentage of movers declined from just above 35% in 1988 to less than 24% in 2016.

Workers who might otherwise migrate to jurisdictions with better economic opportunities often cannot do so. Schleicher notes that low-income workers suffer the most from these obstacles, which he divides into entry and exit barriers. Most of the obstacles he cites are compelling, though at times his emphasis veers toward enabling more effective government management of the macroeconomy, which is very unappealing to my libertarian instincts.

Entry Barriers

Schleicher emphasizes two major ways in which entry barriers are created. One is the spread and severity of land use restrictions such as zoning and construction laws, which have become so severe in some areas of the country that they have led to drastic inflation in housing prices. In a review of Schliecher’s paper, Ronald Bailey at Reason.com illustrates the disparities created by this process:

According to the Trulia real estate market analysis, the median house price in San Francisco is $1.2 million, with a median rent of $4,100 a month; in Youngstown it’s $93,000, with a median rent of $650. In other words, a Youngstown worker who sold his home for full price would receive enough money to rent a place in San Francisco for 22 months.

The contrast in the economies of these two cities is stark. The San Francisco Bay Area has experienced vibrant job growth over the past several years, while Youngstown has been struggling for decades. Given the difference in housing prices and rents, it would be almost impossible for a worker from Youngstown to pursue an opportunity in the Bay Area without a accepting a severe decline in their standard of living. Joel Kotkin makes a similar point in discussing the high cost of housing in some areas, but his focus is on the difficult prospects for economic mobility and homeownership among Millennials.

The second major entry barrier discussed by Schleicher takes the form of occupational licensing laws. They differ across states but have multiplied since the 1950s. According to Richard Florida (linked above), the share of American workers subject to some form of licensing requirement rose from just 5% in the 1950s to 25% by 2008. Schleicher cites low rates of interstate mobility among professions that typically require a license to practice. Veterans of those occupations tend to have an established book of business, however, so it’s reasonable to expect fewer distant moves. Nevertheless, the cost of obtaining a license in a new state and differing licensure requirements are likely to inhibit the mobility of licensed professionals.

Exit Barriers

One of the most interesting sections in Schleicher’s paper is on exit barriers. Locations are always “sticky” to the extent that local ties exist or develop over time, both between people and between people and local institutions. But some institutions create ties that are severely binding. For example, state and local government employees are often enrolled in defined benefit plans with lengthy vesting periods. Remaining in one system throughout a career can be a huge advantage. Other exit barriers involve differences in eligibility and levels of aid under federal programs managed by states such as Medicaid, Temporary Assistance to Needy Families (TANF), and the Supplemental Nutrition Assistance Program (SNAP — food stamps). Beyond the actual benefits at stake, administrative costs and delays in re-enrollment might hinder a needy family’s attempt to make an interstate move.

Local and state law on property transfers can also impinge on mobility. Real estate transfer taxes in some states certainly create an incentive to stay put. Also, while tax reassessments occur with regularity in most jurisdictions, some impose limits on the amount of the annual change in valuation, requiring a full tax revaluation on resale, so a seller must forego such a tax discount. Rent controls reward renters who stay in place, creating another exit barrier. And rent controls prevent entry as well, as they invariably reduce the supply of quality housing, thereby inflating the rents of vacated apartments available to new residents.

Finally, federal policies designed to encourage homeownership create exit barriers across the country. Ownership of a residence increases the “stickiness” of any locale, but the loss of a mortgage interest income-tax deduction adds to the sacrifice of a move to a rental unit in a more expensive location. So does the interest rate subsidy inherent in the implicit federal guarantee against default on mortgages securitized by Fannie Mae and Freddie Mac. Finally, when local economies are in a state of decline, home prices usually follow. Consequently, owners are likely to suffer reduced or negative equity in their homes and may be “locked in”, unable to pay off their mortgage on a sale, and therefore unable to leave their current residence.

Rent Seeking and Good Intentions

Some of the policies discussed above are the handiwork of those powerful enough to enlist government power in their own self-interest. That includes zoning laws, by which property owners can prevent land uses they deem undesirable. It also includes occupational licensing, a political avenue through which established business interests limit competition by new entrants. Of course, licensure is typically sold to voters as consumer protection, a claim that is often dubious.

Other policies that hinder mobility can be characterized as well-intentioned, like the old-style, defined benefit plans still in use by many state and local governments, or federal subsidies for homeownership. Many such policies are, or have been, promoted on the basis of the obvious gains they create for individuals, with little thought given to the “unseen” but damaging economic consequences. Rent controls fall into this category as well, but are very damaging in the long-term.

The Labor Market Ossified

All of the mobility-limiting policies discussed by Schleicher have a detrimental effect on the performance of labor markets. Workers tend to get stuck in depressed areas, where their value as human resources is diminished even while employers in other markets face limited supplies of qualified labor. This leads to higher structural unemployment, lower growth in output, and more difficulty for the private sector in meeting the needs of consumers than otherwise be possible.

I haven’t dealt with one other national policy dealing explicitly with geographic mobility: immigration. Restrictions on legal immigration and the issuance of green cards are often sought by interests hoping to protect Americans from competition for jobs. Suspending competition is never a good idea, however, as it leads to higher prices and undermines consumer interests. To the extent that businesses face a shortage of qualified talent to fill particular jobs, as is often the case, such restrictive policies are unequivocally damaging to the economy for the same reasons as barriers to interstate migration. Liberalized immigration allows more foreigners with peaceful, productive and often entrepreneurial intent to contribute to the country’s ability to create wealth.

Prescriptions

What can be done to promote interstate mobility? Here is a list that is undoubtedly incomplete: encourage state and local governments to end rent controls; liberalize zoning laws; reevaluate construction restrictions; liberalize occupational licensing; reduce real estate transfer taxes and smooth the timing of tax revaluations. Governments should also transition from defined benefit to defined contribution benefit plans, a step that would also allow them to avoid persistent overoptimism about their ability to meet future pension obligations. As long as states manage federal aid programs and have leeway in setting eligibility requirements and their share of benefits, there will be exit barriers to low-income recipients. Perhaps states should be required to coordinate benefits, with strict time limits, when recipients move interstate to pursue employment opportunities. Finally, subsidies encouraging homeownership should be phased out, including the federal tax deduction for mortgage interest and full privatization of Fannie Mae and Freddie Mac. A neutral stance with respect to homeownership would allow the market to seek an optimal balance in residential property ownership without creating excessive locational anchors.

Schleicher devotes a large part of his paper to the implications of reduced mobility for macroeconomic stabilization policy. In particular, he contends that measures intended to stimulate the economy cannot be as effective when labor supplies are inflexible. That might be true, but I’m loath to endorse Keynesian activism. Still, there is no doubt that geographic stasis of the kind described by Schleicher contributes to immobility in incomes as well. The main conclusion I draw from his paper is that governments ought to be very cautious about interfering in market transactions, even when convinced that their cause is noble. The law of unintended consequences has a way of foiling the best laid plans of social engineers.