• About

Sacred Cow Chips

Sacred Cow Chips

Tag Archives: American Enterprise Institute

Gains From Medicare Trade

08 Thursday Dec 2016

Posted by Nuetzel in Medicare, Privatization, Profit Motive

≈ 2 Comments

Tags

ACA, American Enterprise Institute, CMS, Donald Trump, Health Savings Accounts, HHS, IPAB, John C. Goodman, MACRA, Medicare, Medicare Advantage, Medicare Part C, Medigap, Obamacare, Original Medicare, Premium Support Plan, Privatization, Tom Price

Boomers and Medicare

Here’s a bit of zero-sum ignorance: private profits are robbed from consumers; only non-profits or government can deliver full value, or so this logic goes. Those who subscribe to this notion dismiss the function of private incentives in creating value, yet those incentives are responsible for nearly all of the material blessings of modern life. What the government seems to do best, on the other hand, is writing checks. It’s not really clear it does that very well, of course, but it does have the coercive power of taxation required to do so. Capital employed by government is not a “free” input. It bears opportunity costs and incentive costs that are seldom considered by critics of the private sector.

The role of private profit and the zero-sum fallacy come up in the context of proposals to privatize government services. In what follows, I discuss a case in point: privatization of Medicare. Rep. Tom Price, the Chairman of the House Budget Committee, is Donald Trump’s nominee to head HHS. In November, Price said Congress would attempt to pass legislation overhauling Medicare in the first year of the Trump Administration. James Capretta of the American Enterprise Institute (AEI) explains some of the features of the possible reforms. Price has supported the concept of a premium support plan whereby seniors would purchase their own coverage from private insurers, paid at least in part by the government (also see here).

Medicare and Its Ills

The Medicare program is beset with problems: it has huge unfunded liabilities; it’s cash flows are being undermined by demographic trends; fraud and bureaucratic waste run rampant; it’s unpopular with doctors; and the regulations imposed on healthcare providers are often misguided.

Writing checks to health care providers is really the primary “good” created by the federal government in the administration of Medicare. The Centers for Medicare & Medicaid Services (CMS), a branch of the Department of Health and Human Services (HHS), also performs regulatory functions mandated by legislation, such as the Affordable Care Act (ACA).

More recently, CMS has been implementing the Medicare Access and Chip Reauthorization Act of 2015 (MACRA), which will introduce changes to the payment formulas for physician compensation under the plan. Economist John C. Goodman offers a cogent explanation of the ill-conceived economic planning at the heart of Medicare regulation and its implementation of MACRA in particular:

“…the government’s current payment formulas create perverse economic incentives — to maximize income against the formulas instead of putting patient welfare first. The goal is to change those incentives, so that providers will get paid more if they lower costs and raise quality.

But after the new formulas replace the old ones, provider incentives in a very real sense will be unchanged. They will still have an economic incentive to maximize income by exploiting the formulas, even if that is at the expense of their patients.“

After describing several ways in which Medicare regulation, now and prospectively, leads to perverse results, Goodman advances the powerful argument that the market can regulate health care delivery to seniors more effectively than CMS.

“If the government’s metrics are sound, why not allow health plans to advertise their metrics to potential enrollees and compete on these quality measures. Right now, they cannot. Every communication from health plans to Medicare enrollees must be approved by CMS. … Under MACRA, health plans profit by satisfying the government, not their customers. … Better yet, why not let the market (rather than government) decide on the quality metrics?“

Private Medicare Exists

Wait a minute: profit? But isn’t Medicare a government program, free from the presumed evils of profit-seekers? Well, here’s the thing: almost all of the tasks of managing the provision of Medicare coverage are handled by the private sector under contract with CMS, subject to CMS regulation, of course. That is true even for Part A and Part B benefits, or “original Medicare”, as it’s sometimes called.

Under “original” Medicare, private insurers process “fee-for-service” claims and payments, provide call center services, manage clinician enrollment, and perform fraud investigations. Yes, these companies can earn a profit on these services. Unfortunately, CMS regulation probably serves to insulate them from real competition, subverting efficiency goals. Goodman’s suggestion would refocus incentives on providing value to the consumers these insurers must ultimately serve.

Then there are “Medigap” or Medicare Supplement policies that cover out-of-pocket costs not covered under Parts A and B. These policies are designed by CMS, but they are sold and managed by private insurers.

And I haven’t even mentioned Medicare Parts C and D, which are much more significantly privatized than original Medicare or Medigap. The Part C program, also known as Medicare Advantage, allows retirees to choose from a variety of privately-offered plans as an alternative to traditional Medicare. At a minimum, these plans must cover benefits that are the equivalent to Parts A and B, as judged by CMS, though apparently “equivalency” still allows some of those benefits to be declined in exchange for a rebate on the premium. More optional benefits are available for an additional premium under these plans, including a reduced out-of-pocket maximum, a lower deductible, and reduced copays. Part C has grown dramatically since its introduction in 1996 and now covers 32% of Medicare enrollees. Apparently these choices are quite popular with seniors. So why, then, is privatization such a bogeyman with the left, and with seniors who are cowed by the anti-choice narrative?

What’s To Privatize?

Not privatized are the following Medicare functions: the collection of payroll-tax contributions of current workers; accounting and reporting functions pertaining to the Trust Fund; decisions surrounding eligibility criteria; the benefit designs and pricing of Part A (hospitalization) and Part B (optional out-patient medical coverage, including drugs administered by a physician); approval of provider plan designs and pricing under Parts C; regulation and oversight of all other aspects of Medicare, including processes managed by private administrative contractors and providers of optional coverage; and regulation of health care providers. 

The Independent Payment Advisory Board (IPAB) was created under the Affordable Care Act (ACA), aka Obamacare, to achieve Medicare costs savings under certain conditions, beginning in 2015. Its mandate is rather confusing, however, as IPAB is ostensibly restricted by the ACA from meddling with health care coverage and quality. Proposals from IPAB are expected to cover such areas as government negotiation of drug prices under Part D, a Part B formulary, restrictions on the “protected status” of certain drugs, and increasing incentives for diagnostic coding for Part C plans. Note that these steps are confined to optional or already-private parts of Medicare. They are extensions of the administrative and regulatory functions described above. Despite the restrictions on IPAB’s activities under the ACA, these steps would have an impact on coverage and quality, and they mostly involve functions for which market solutions are better-suited than one-size-fits-all regulatory actions.

The opportunities for privatization are in 1) creating more choice and flexibility in Parts A and B, or simply migrating them to Parts C and D, along with premium support; 2) eliminating regulatory burdens, including the elimination of IPAB.

Impacts On Seniors Now and Later

Privatization is unlikely to have any mandatory impact on current or near-future Medicare beneficiaries. That it might is a scare story circulating on social media (i.e., fake news), but I’m not aware of any privatization proposal that would make mandatory changes affecting anyone older than their mid-50s. Voluntary benefit choices, such as Part C and D plans, would be given more emphasis.

There should be an intensive review of the regulatory costs imposed on providers and, in turn, patients. Many providers simply refuse to accept patients with Medicare coverage, and regulation encourages health care delivery to become increasingly concentrated into large organizations, reducing choices and often increasing costs. Lightening the regulatory burden is likely to bring immediate benefits to seniors by improving access to care and allowing providers to be more patient-focused, rather than compliance-focused.

Again, the most heavily privatized parts of Medicare are obviously quite popular with seniors. The benefits are also provided at lower cost, although the government pays the providers of those plans extra subsidies, which may increase their cost to taxpayers. Enrollees should be granted more flexibility through the private market, including choices to limit coverage, even down to catastrophic health events. Consumers should be given at least limited control over the funds used to pay their premia. That would include choice over whether to choose lower premia and put the excess premium support into consumer-controlled Health Saving Account (HSA) contributions.

Other Reforms

Pricing is a controversial area, but that’s where the terms of mutually beneficial trades are made, and it’s what markets do best. Pricing flexibility for private plans would be beneficial from the standpoint of matching consumer needs with the appropriate level of coverage, especially with fewer regulatory restrictions. Such flexibility need not address risk rating in order to have beneficial effects.

Regulations imposed on physicians and other providers should be limited to those demanded by private plans and the networks to which they belong, as well as clear-cut legislative rules and standards of practice imposed by professional licensing boards. The better part of future contributions to the Trust Fund by younger workers (i.e., those not grandfathered into the existing program) should be redirected toward the purchase today of future benefits in retirement, based on actuarial principles.

Perhaps the best cost-control reform would be repeal of the tax deductibility of insurance premia on employer-paid insurance plans. This provision of the tax code has already inflated health care costs for all consumers, including seniors, via demand-side pressure, and it has inflated their insurance premia as well. If extended to all consumers, tax deductibility would be less discriminatory toward consumers in the individual market and most seniors, but it would inflate costs all the more, with unevenly distributed effects. Unfortunately, rather than eliminating it entirely, qualification for the tax deduction is very likely to be broadened.

Conclusions

The Medicare program is truly in need of an overhaul, but reform proposals, and especially proposals that would put decision-making power into the hands of consumers, are always greeted with reflexive shrieks from sanctimonious worshippers of the state. The most prominent reform under consideration now would offer more of what’s working best in the Medicare program: private choices in coverage and costs. Solving the long-term funding issues will be much easier without a centralized regime that encourages escalating costs.

Earning a profit is usually the mark of a job well done. It is compensation for the use of capital and the assumption of risk (i.e., no bailouts). Physicians, nurses, chiropractors, insurance agents and customer service reps all earn compensation for their contributions. Providers of capital should too, including the owners of health insurance companies who do well by their customers. And if you think the absence of profit in the public sector creates value, remember the damage inflicted by taxes. Capital isn’t “free” to society just because it can be confiscated by the government.

Obama’s On-The-Clock Undertime Rule

23 Monday May 2016

Posted by Nuetzel in Labor Markets, Regulation, Uncategorized

≈ Leave a comment

Tags

AEIdeas, American Enterprise Institute, Andy Puzder, Business Formation, Compliance Costs, DOL Overtime Exemption, Flexible Work Arrangements, Hourly workers vs. Management, James Pethokoukis, John Cochrane, Nick Gillespie, Obama administration, Overtime Costs, Overtime rules, Private Compensation, Reason, Salaried Status, Warren Meyer

obama-unemployment-2

Hurting the ones you love: one of the Obama Administration’s calling cards is a penchant for misguided economic policy; the change in an overtime rule announced Wednesday by the Department of Labor (DOL) is a classic example. The DOL has amended the rule, which requires payments of time-and-a-half to workers who exceed 40 hours per week, by doubling the threshold at which salaried employees are exempt from overtime to $47,500 annually. This affects almost 5 million workers earning between the old threshold of $23,660 and the new threshold. While the media heralds Obama for “lifting the wages of millions of workers”, those with a grasp of economic reality know that it is a destructive policy.

The rule change is unambiguously bad for employers, many of which are small businesses. That should not be too difficult to understand. Most private employers operate in competitive markets and do not earn lavish profits at the expense of their employees. They need good employees, especially those in positions of responsibility, and they must pay them competitively. By imposing higher costs on these businesses, the rule puts them in a position of greater vulnerability in the marketplace. The higher costs also include extra record keeping to stay in compliance with the rule. The impact on new business formation is likely to be particularly damaging:

“We might be told that the answer for a startup is simply to ‘go and raise more money.’ But — aside from diluting the founders who are paying for the company with their sweat in exchange for the hope of a payoff that comes in years, if ever — raising capital is the single most difficult thing I do as a startup entrepreneur. I would invite anyone not in our field to give it a shot before he endorses a regulation that will impose greater capital costs on us.

Regulators often act as though they cannot imagine a world where a few hundred or a few thousand dollars can make the difference between success and failure. If you raise our costs even modestly, you will put some of us out of business.“

Shutting down, or not starting up, is a bad outcome, but that will be a consequence in some cases. However, there are other margins along which employers might respond. First, a lucky few well-placed managers might be rewarded with a small salary bump to lift them above the new exemption threshold. More likely, employers will reduce the base salaries of employees to accommodate the added overtime costs, leaving total compensation roughly unchanged.

Many other salaried employees with pay falling between the old and new thresholds are likely to lose their salaried status. Their new hourly wage might be discounted to allow them to work the hours to which they’re accustomed, as demotivating as that sounds. If their employers limit their hours, it is possible that a few extra workers could be hired to fill the gap. Perhaps that is what the administration hopes when it claims that an objective of the new rule is to create jobs. Unfortunately, those few lucky hires will owe their jobs to the forced sacrifice of hours by existing employees.

A change from a salary to hourly pay will have other repercussions for employees. Their relationships to their employers will be fundamentally transformed. Ambitious “hourly” managers might not have the opportunity to work extra hours in order to demonstrate their commitment to the business and a job well done. When the rule change was first proposed last June, I paraphrased a businessman who is one of my favorite bloggers, Warren Meyer (also see Meyer’s follow-ups here and here):

“As [Meyer] tells it, the change will convert ambitious young managers into clock-punchers. In case that sounds too much like a negative personality change, a more sympathetic view is that many workers do not mind putting in extra hours, even as it reduces their effective wage. They have their reasons, ranging from the non-pecuniary, such as simple work ethic, enjoyment and pride in their contribution to reward-driven competitiveness and ambition.“

As hourly employees, these workers might have to kiss goodbye to bonus payments, certain benefits, and flexible work arrangements, not to mention prestige. The following quotes are from a gated Wall Street Journal article but are quoted by James Pethokoukis in his piece at the AEIdeas blog of the American Enterprise Institute:

“Jason Parker, co-founder of K-9 Resorts, a franchiser of luxury dog hotels based in Fanwood, N.J., said the chain will reduce starting pay for newly hired assistant managers to about $35,000 from the $40,000 it pays now. That will absorb the overtime pay he expects he would have to give them, he said. …

Terry Shea, co-owner of two Wrapsody gift shops in Alabama, would prefer to keep her store managers exempt from the overtime-pay requirement as they are now. But raising their salaries above the new threshold to ensure that would be too big of a jump for those jobs in her region, she said. Instead, she’ll convert the managers to hourly employees and try to limit their weekly hours to as close to 40 as possible. She’ll also have to stop giving them a comp day when their weekly hours exceed 46, a benefit she said they like as working moms.

‘I will be demoted,’ said one of her store managers Bridget Veazey, who views the hourly classification as a step backward. ‘Being salaried means I have the flexibility to work the way I want,’ including staying an extra 30 minutes to perfect a window display or taking work home, she said. She is particularly concerned Ms. Shea might stop taking the managers on out-of-town trips to buy goods from retail markets, an experience she said would help her résumé but includes long days.“

Here is some other reading on the rule change: Nick Gillespie in Reason  agrees that it’s a bad idea. Andy Puzder in Forbes weighs in on the negative consequences for workers.  John Cochrane explores the simple economic implications of mandated wage increases, of which the overtime rule is an example. As he shows, only when the demand for labor hours is perfectly insensitive to wages can a mandated wage avoid reducing labor input.

This is another classic example of progressive good intentions gone awry. Government is singularly incapable of managing the private economy to good effect via rules and regulations. Private businesses hire employees to meet their needs in serving customers. The private compensation arrangements they make are mutually beneficial to businesses and their employees and are able to accommodate a variety of unique employee life-circumstances. Good employees are rewarded with additional compensation and more responsibility. By and large, salaried workers like being salaried! Hard work pays off, but the Obama Administration seems to view that simple, market truism as a defect. Please, don’t try to help too much!

The Inhumane Minimum Wage Fantasy

22 Monday Feb 2016

Posted by Nuetzel in Minimum Wage, Poverty

≈ Leave a comment

Tags

American Enterprise Institute, Angela Rachidi, Congressional Budget Office, David Neumark, Don Boudreaux, Economic Policy Institute, Living Wage, Low-skilled labor, Minimum Wage, OLena Nizalova, Public Assistance, Wefare Cliff

min-wage ball n chain

An analysis by the Economic Policy Institute (EPI) is the basis for breathless claims by the Left that a substantial increase in the minimum wage would have “sweeping benefits for low-income families.” The EPI study purports to show that spending on public assistance will decline significantly with the increase in the minimum wage. Author David Cooper’s analysis is purely static, dressed up with a few linear regression equations relating participation in federal welfare programs to the wage distribution. However, his conclusion is preordained by the very design of the analysis, which relies on pooled data from public assistance programs across 2012 – 2014. This was a period over which wages were generally rising, but the federal minimum wage was constant (and only a few state minimum wages were increased).

It’s no surprise that higher wages are associated with a reduced likelihood of receiving needs-based public assistance in a cross section. That’s not quite the same as measuring the dynamic impact of an increase in the minimum wage. The adjustment to a higher wage floor involves more complex shifts in the structure of the economy, including higher prices, a higher incidence of small business failure and the substitution of automated systems for labor. And celebration would not be in order if the policy change prompted a deterioration in the employment prospects of the least-skilled workers, and it would.

There are a few gaping holes in the EPI analysis. One involves a data limitation whereby the distribution of public assistance by wage decile is related to individual workers or their families. It is one thing to say that most recipients of public assistance work for a living. It is quite another to say “Most recipients of public assistance work or have a family member who works.” Obviously, the latter does not imply the former, yet the analysis asks you to accept that the wage rates of family members who perform work during a year are the determining factor in welfare program participation, rather than the employment status and hours of all members of the household.

The analysis includes cross-sectional regressions relating the receipt of public assistance (yes or no) to wages imputed at the individual level, controlling for a complex function of age (polynomial terms), other demographic factors and part-time work status during the previous year. As stated above, the data are plagued by measurement issues. Furthermore (and this is a technical critique), linear regression is not an appropriate statistical methodology with a binary dependent variable. The author should have known better, but we’ll leave that aside.

Controlling for part-time status is intended to create a more reliable estimate of the effect of wages on program participation, as part-timers are more likely to earn low wage rates. But if hours matter in that way, then the regression is all the more suspect because hours of work are otherwise ignored (except in the imputation of wage rates).

The truth is that poverty is not a wage problem as much as a jobs and hours problem. A recent post by Angela Rachidi  of the American Enterprise Institute notes that “Only 11.7% of poor working-age adults worked full-time for the entire year in 2014.” Impoverished individuals who work full or part-time are concentrated in low-skilled occupations. Those are likely to be the same kinds of jobs for which impoverished non-workers might otherwise compete. Many of those jobs are at or near the minimum wage, but increasing the wage floor will only exacerbate the problem of unemployment or underemployment.

An increase in the minimum wage might help those workers who are able to keep their jobs. Unfortunately, if they remain employed, they are likely to suffer non-wage repercussions at their jobs. Therefore, the size of the net economic gain for those lucky enough to keep their jobs is open to question, though their measured income will rise. Still, keeping your job may be a big challenge.

The EPI analysis pays no heed to the negative employment effects of changes in the minimum wage. These stem from  employers’ efforts to control costs, hiring only when the skills and expected productivity of a worker exceed the cost. Growth and job opportunities are thus quashed by the intervention, including the gain in skills that comes with experience. If a business hikes price to defray higher labor costs, the negative impact on customers will induce them to buy less, reducing the need for labor. Another possible impact may be caused by the so-called “welfare cliff“, or the tendency of many program benefits to decline as income rises, which imposes a marginal tax rate on beneficiaries’ labor income. A higher wage floor might induce a worker to reduce hours to avoid the cliff, if their employer allows it, or it might induce another employed member of the same household to reduce hours.

Here is the extent of EPI’s treatment of the negative employment effects of a higher minimum wage, quoting the Congressional Budget Office (CBO):

“CBO predicts that federal expenses would initially go down, but could later increase if the higher minimum wage has a significant negative effect on employment. On net, they conclude that ‘it is unclear whether the effect for the coming decade as a whole would be a small increase or a small decrease in budget deficits.’ It is important to note that the CBO’s ambiguity on this point is driven by their atypically high estimates of the probability of significant employment loss stemming from such an increase. If employment loss is insignificant (as most research on a minimum-wage increase of this magnitude indicates), the budget savings would surely dominate.” [Emphasis added]

The parenthetical, bolded statement is offered by Cooper without any support whatsoever, and it is incorrect. First, the evidence that the wage floor has negative employment effects “has been piling up” of late. “Living wage” advocates should not be encouraged by the recent experience of six large cities that have increased their minimum wages. Here is further information on the District of Columbia and WalMart’s reaction to a recent wage hike. The long-run effects of minimum wages are the most destructive, according to a recent paper authored by David Neumark and Olena Nizalova:

“The evidence indicates that even as individuals reach their late 20’s, they earn less and perhaps work less the longer they were exposed to a higher minimum wage at younger ages. The adverse longer-run effects of facing high minimum wages at young ages are stronger for blacks. From a policy perspective, these longer-run effects of minimum wages are likely more significant than the contemporaneous effects of minimum wages on youths that are the focus of most research and policy debate.“

Other recent work shows that minimum wage increases during the Great Recession increased unemployment among workers age 16 – 30 with less than a high-school education. Another paper finds that minimum wage hikes are bad anti-poverty measures, poorly targeted and regressive in their effects on the poor due to higher prices. A couple of previous posts on Sacred Cow Chips include many links to other work on minimum wages: “Major Mistake: The Minimum Opportunity Wage“, and “Unintended Consequences: Living (Without a) Wage“. Today, many jobs are at risk of automation, so the responsiveness of employers might be greater than ever.

In a strong sense, EPI’s findings and conclusion are beside the point for the many low-skilled workers whose jobs would be at risk, as well as those who might never be given legitimate employment opportunities under a higher wage floor. Those erstwhile workers and job seekers are generally the least skilled and most in need of experience. But EPI, and unthinking living wage advocates, are all too eager to signal the humanity and virtue of their favored policies, foolishly ignoring the negative and inhumane employment consequences.

Pawning Growth For Redistribution

15 Monday Feb 2016

Posted by Nuetzel in Equality, Redistribution

≈ Leave a comment

Tags

Alan D. Viard, American Enterprise Institute, Angela Ranchidi, Bernie Sanders, Chelsea German, Dan Mitchell, Double Taxation, Economic Mobility, Fallacy of Redistribution, First Theorem of Government, Gallup, Household structure, Income Growth, John Cochrane, Minimum Wage, Poverty, Progressive Taxes, Redistribution, Third Way, Thomas Sowell, Welfare State

govt here to help

The following is no mystery: if you want prosperity, steer clear of policies that inhibit production and physical investment. This too: if you want to lift people out of poverty and dependency, don’t promote policies that discourage hiring and work incentives. Yet those are exactly the implications of policies repeatedly advocated by so-called redistributionists. The ignorance flows, in large part, from a distraction, a mere byproduct of economic life that has no direct relation to economic welfare, but upon which followers of Bernie Sanders are absolutely transfixed: income and wealth inequality. Attempts to manipulate the degree of inequality via steeply progressive taxes, transfers and market intervention is a suckers game of short-termism. It ultimately reduces the value of the economy’s capital stock, chases away productive activity, destroys jobs, and leaves us all poorer.

Absolute income growth is a better goal, and encouraging production is the best way to raise incomes in the long-run. Unless envy is your thing, income inequality is largely irrelevant as a policy goal. In “Why and How We Care About Inequality“, John Cochrane emphasizes that inequality may be a symptom of other problems, or perhaps no problem at all. His point is that treating a symptom won’t fix the underlying problem:

“A segment of America is stuck in widespread single motherhood … terrible early-child experiences, awful education, substance abuse, and criminality. 70% of male black high school dropouts will end up in prison, hence essentially unemployable and poor marriage prospects. Less than half are even looking for legal work.

This is a social and economic disaster. And it has nothing to do with whether hedge fund managers fly private or commercial. It is immune to floods of Government cash, and, as Casey Mulligan reminded us, Government programs are arguably as much of the problem as the solution. So are drug laws….“

The writers of the center-left Third Way blog give some details on income growth that might disappoint some progressives. They agree that the emphasis on redistribution is misplaced. Solving economic problems requires a different approach:

“From 1980 to 2010, income gains (after taxes and government transfers are included) favored the wealthy but were still spread across all income brackets: a 53% increase for the bottom quintile; a 41% increase for the next two; a 49% increase for the 4th; and a 90% increase for the richest fifth. Thus, while income inequality may offend our sense of justice, its actual impact on the middle class may be small.

With a singular focus on income inequality, the left’s main solutions are greater re-distribution and a re-writing of the rules to ‘un-rig’ the system. But, however well motivated, some of the biggest ideas into which they are directing their energy do not remotely address the underlying ‘Kodak’ conundrum—how do Americans find their place in a rapidly changing world? In fact, some would actually make the task of increasing shared prosperity significantly harder.“

The hubbub over inequality and redistribution is fueled by misconceptions. One is that the rich face low tax burdens, often lower than the middle class, a mistaken notion that Alan D. Viard debunks using 2013 data from a report from the Congressional Budget Office. The CBO report accounts for double taxation of dividends and capital gains at the corporate level and at the personal level (though capital gains are taxed to individuals now, while the anticipated corporate income is taxed later). The CBO study also accounts for employers’ share of payroll taxes (because it reduces labor income) so as to avoid exaggerating the tax system’s progressivity. Before accounting for federal benefits, which offset the tax burden, the middle 20% of income earners paid an average tax rate of less than 15%, while “the 1%” paid more than 29%. However, after correcting for federal benefits, the middle quintile paid a negative average tax rate, while the top 1% still paid almost 29%. That is a steeply graduated impact.

Rising income inequality in the U.S. is more a matter of changes in household structure than in the distribution of rewards. This conclusion is based on the fact that income inequality has risen steadily over the past 50 years for households, but there has been no change in inequality across individuals. An increasing number of single-person households, primarily women over the age of 65, accounts for rising inequality at the household level. The greedy corporate CEOs of the “occupier” imagination are really not to blame for this trend, though I won’t defend corporate rent-seeking activities intended to insulate themselves from competition.

Measures of income inequality hide another important fact: one’s position in the income distribution is not static. Chelsea German notes that Americans have a high degree of economic mobility. According to a Cornell study, only 6% of individuals in the top 1% in a given year remain there in the following year. German adds that over half of income earners in the U.S. find themselves in the top 10% for at least one year of their working lives.

There are several reasons why redistributionist policies fail to meet objectives and instead reduce opportunities for the presumed beneficiaries to prosper. Dan Mitchell covers several of these issues, citing work on: the rational response of upper-income taxpayers to  punitive taxes; the insufficiency of funding an expanded welfare state by merely taxing “the rich”; the diversion of most anti-poverty funds to service providers (rather than directly to the poor); the meager valuation of benefits from recipients of Medicaid, and the fact that the program lacks any favorable impact on mortality and health measures. Mitchell features the “First Theorem of Government” in a sidebar:

“Above all else, the public sector is a racket for the enrichment of insiders, cronies, bureaucrats and interest groups.“

A few years back, the great Thomas Sowell explained “The Fallacy of Redistribution” thusly:

“You can only confiscate the wealth that exists at a given moment. You cannot confiscate future wealth — and that future wealth is less likely to be produced when people see that it is going to be confiscated.“

That future wealth can and should be enjoyed across the income spectrum, but punitive taxes destroy productive capital and jobs.

A great truth about poverty comes from Angela Ranchidi of the American Enterprise Institute: low wages are not at the root of poverty; it’s a lack of jobs. She quotes a Gallup report on this point, relative to the working-age poor in 2014:

“Census data show that, 61.7% did not work at all and another 26.6% worked less than full-time for the entire year. Only 11.7% of poor working-age adults worked full-time for the entire year in 2014. Low wages are not the primary cause of poverty; low work rates are. And if Gallup is correct, the full-time work rate may already be peaking.“

More than 88.3% of the working-age poor were either unemployed or underemployed! And here’s the kicker: redistributionists clamor for policies that would place an even higher floor on wage rates, yet the floor already in place has succeeded in compromising the ability of low-skilled workers to find full-time work.

Cochrane sums up the inequality debate by noting the obvious political motives of progressive redistributionists:

“Finally, why is “inequality” so strongly on the political agenda right now? Here I am not referring to academics. … All of economics has been studying various poverty traps for a generation…. 

[The] answer seems pretty clear. Because [the politicians and pundits] don’t want to talk about Obamacare, Dodd-Frank, bailouts, debt, the stimulus, the rotten cronyism of energy policy, denial of education to poor and minorities, the abject failure of their policies to help poor and middle class people, and especially sclerotic growth. Restarting a centuries-old fight about “inequality” and “tax the rich,” class envy resurrected from a Huey Long speech in the 1930s, is like throwing a puppy into a third grade math class that isn’t going well. You know you will make it to the bell.

That observation, together with the obvious incoherence of ideas the political inequality writers bring us leads me to a happy thought that this too will pass, and once a new set of talking points emerges we can go on to something else.“

Follow Sacred Cow Chips on WordPress.com

Recent Posts

  • The Impotence of AI for the Socialist Calculation Debate
  • No Radar, No Rudder: Fiscal & Monetary Destabilization
  • Health Care & Education: Slow Productivity Growth + Subsidies = Jacked Prices
  • Debt Ceiling Stopgaps and a Weak Legal Challenge
  • Some Critical Issues In the Gun Rights Debate

Archives

  • June 2023
  • May 2023
  • April 2023
  • March 2023
  • February 2023
  • January 2023
  • December 2022
  • November 2022
  • October 2022
  • September 2022
  • August 2022
  • July 2022
  • June 2022
  • May 2022
  • April 2022
  • March 2022
  • February 2022
  • January 2022
  • December 2021
  • November 2021
  • October 2021
  • September 2021
  • August 2021
  • July 2021
  • June 2021
  • May 2021
  • April 2021
  • March 2021
  • February 2021
  • January 2021
  • December 2020
  • November 2020
  • October 2020
  • September 2020
  • August 2020
  • July 2020
  • June 2020
  • May 2020
  • April 2020
  • March 2020
  • February 2020
  • January 2020
  • December 2019
  • November 2019
  • October 2019
  • September 2019
  • August 2019
  • July 2019
  • June 2019
  • May 2019
  • April 2019
  • March 2019
  • February 2019
  • January 2019
  • December 2018
  • November 2018
  • October 2018
  • September 2018
  • August 2018
  • July 2018
  • June 2018
  • May 2018
  • April 2018
  • March 2018
  • February 2018
  • January 2018
  • December 2017
  • November 2017
  • October 2017
  • September 2017
  • August 2017
  • July 2017
  • June 2017
  • May 2017
  • April 2017
  • March 2017
  • February 2017
  • January 2017
  • December 2016
  • November 2016
  • October 2016
  • September 2016
  • August 2016
  • July 2016
  • June 2016
  • May 2016
  • April 2016
  • March 2016
  • February 2016
  • January 2016
  • December 2015
  • November 2015
  • October 2015
  • September 2015
  • August 2015
  • July 2015
  • June 2015
  • May 2015
  • April 2015
  • March 2015
  • February 2015
  • January 2015
  • December 2014
  • November 2014
  • October 2014
  • September 2014
  • August 2014
  • July 2014
  • June 2014
  • May 2014
  • April 2014
  • March 2014

Blogs I Follow

  • Ominous The Spirit
  • Passive Income Kickstart
  • OnlyFinance.net
  • TLC Cholesterol
  • Nintil
  • kendunning.net
  • DCWhispers.com
  • Hoong-Wai in the UK
  • Marginal REVOLUTION
  • Stlouis
  • Watts Up With That?
  • Aussie Nationalist Blog
  • American Elephants
  • The View from Alexandria
  • The Gymnasium
  • A Force for Good
  • Notes On Liberty
  • troymo
  • SUNDAY BLOG Stephanie Sievers
  • Miss Lou Acquiring Lore
  • Your Well Wisher Program
  • Objectivism In Depth
  • RobotEnomics
  • Orderstatistic
  • Paradigm Library

Blog at WordPress.com.

Ominous The Spirit

Ominous The Spirit is an artist that makes music, paints, and creates photography. He donates 100% of profits to charity.

Passive Income Kickstart

OnlyFinance.net

TLC Cholesterol

Nintil

To estimate, compare, distinguish, discuss, and trace to its principal sources everything

kendunning.net

The Future is Ours to Create

DCWhispers.com

Hoong-Wai in the UK

A Commonwealth immigrant's perspective on the UK's public arena.

Marginal REVOLUTION

Small Steps Toward A Much Better World

Stlouis

Watts Up With That?

The world's most viewed site on global warming and climate change

Aussie Nationalist Blog

Commentary from a Paleoconservative and Nationalist perspective

American Elephants

Defending Life, Liberty and the Pursuit of Happiness

The View from Alexandria

In advanced civilizations the period loosely called Alexandrian is usually associated with flexible morals, perfunctory religion, populist standards and cosmopolitan tastes, feminism, exotic cults, and the rapid turnover of high and low fads---in short, a falling away (which is all that decadence means) from the strictness of traditional rules, embodied in character and inforced from within. -- Jacques Barzun

The Gymnasium

A place for reason, politics, economics, and faith steeped in the classical liberal tradition

A Force for Good

How economics, morality, and markets combine

Notes On Liberty

Spontaneous thoughts on a humble creed

troymo

SUNDAY BLOG Stephanie Sievers

Escaping the everyday life with photographs from my travels

Miss Lou Acquiring Lore

Gallery of Life...

Your Well Wisher Program

Attempt to solve commonly known problems…

Objectivism In Depth

Exploring Ayn Rand's revolutionary philosophy.

RobotEnomics

(A)n (I)ntelligent Future

Orderstatistic

Economics, chess and anything else on my mind.

Paradigm Library

OODA Looping

  • Follow Following
    • Sacred Cow Chips
    • Join 123 other followers
    • Already have a WordPress.com account? Log in now.
    • Sacred Cow Chips
    • Customize
    • Follow Following
    • Sign up
    • Log in
    • Report this content
    • View site in Reader
    • Manage subscriptions
    • Collapse this bar
 

Loading Comments...