Tag Archives: political economy

Is Government Intervention in the Market Counterproductive?

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There have been many iterations of the boom and bust cycles inherent in a free market economy; standing out in national memory are the series of recessions and panics/depressions through the 19th and 20th centuries and the early parts of the current century in the US.

What’s the history of those cycles, though, in the context of government intervention?  In the 19th and early 20th centuries, there wasn’t any government intervention to speak of.  Every one of those bust periods ran their natural course because government had no means of intervening, and that was deliberate.  The worst of those cycles, the panics, were, to be sure sharp and deep.  But they also generally were short-lived (frequently one or two years, although the Panic of 1837 lasted seven years), as the free market recovered on its own: people saw those periods as opportunities—the creative destruction of which some economists speak.  Every time, too, our economy came out of those periods of creative destruction stronger than it was when it entered them.

A couple of the more extreme examples illustrate.  The Panic of 1907 was cut short by the intervention of a banker, JP Morgan, who put his own money on the line to rebuild confidence in the banking system of the time.  (Imagine that happening today: 100 years ago, wealth was concentrated at the top sufficiently to enable one man to do this.  Today, the blatherings of the Liberal political class to the contrary, no one man or small group of men has the concentrated wealth to achieve such a thing.)

The Depression of 1920-1921 (remember that one?  I didn’t think so) lasted all of 18 months, and the Federal government’s intervention was limited to an early instance of—small—unemployment insurance payments.

Contrast that with the boom/bust cycles since the early- mid-20th centuries.  Franklin Roosevelt had the Federal government intervene massively in the Great Depression, instigating farm price controls, labor price floors, relocation of failed farmers (including onto functioning farms worked by black farmers, but that’s for a different post), and so on.  In fact, his most serious intervention, those price controls, occurred just as the economy was beginning to recover on its own, and that intervention snuffed out the recovery.

There’s more.  The long recession and stagflation of the Nixon through Carter years was exacerbated by Federally implemented price controls and rationing of key commodities like oil.

The Panic of 2008, although nominally over in 2009, still is having its depressive effects on economic and employment growth as a direct result of Federal government intervention: “stimulus” spending of trillions of dollars, regulation of commodity production (particularly coal, oil, and natural gas), and a vast expansion of the national welfare program.

Government intervention isn’t a neutral failure of no effect; it’s a positive failure: it slows recovery if it doesn’t block it outright.  It does have the positive effect, though, of giving elected politicians and their agency bureaucrats an opportunity to claim to be doing something “for the sake of the poor,” and so of garnering votes for the next election.

Moral Hazard and Obamacare Welfare

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The recent CBO report on the mid- and long-term effect on willingness to be employed of Obamacare hinted at the moral hazard of Obamacare and of welfare, generally [emphasis added].

In 2014, for example, a single person or a family whose income is 150 percent of the FPL [Federal Poverty Level] and is eligible for subsidies will pay 4 percent of their income for a certain “silver” health care plan purchased through an exchange; if their income is 200 percent of the FPL, they will pay 6.3 percent of their income for that plan.  An increase in income thus raises the enrollee premium (and reduces the subsidy) both because the percentage-of-income formula applies to a larger dollar amount and because that percentage itself increases.  People whose income exceeds 400 percent of the FPL are ineligible for premium subsidies, and for some people those subsidies will drop abruptly to zero when income crosses that threshold.

That’s the mechanism through which this particular iteration of moral hazard works.  It’s a tradeoff of a short-term gain of minor security in return for giving up the opportunity for better lives in the longer term and permanently through working more hours, including to the point of working full-time, thereby increasing their earned income.

This mechanism is, in fact, an enormous marginal tax on the next dollar of earned income, and it hits our poor and marginal citizens the hardest.  This tax reduces the net value of the income increase from taking a better job or working more hours.  It’s a cynical poverty trap.

It’s not that these folks are lazy—that’s a question only in the minds of Progressives trying to distract from their failure by demonizing Republicans and Conservatives.  It’s that this iteration of moral hazard has honest men making entirely rational economic decisions—to stay on the welfare program(s).

Beyond the damage inflicted directly on these subsidized people’s true welfare and their morality, the moral hazard inflicts a broader failure, too:

Apart from harm to individuals, ObamaCare is also wasting human potential because fewer workers mean a less prosperous, less dynamic economy.  Contrary to liberal patronizing, many near-seniors, moms, and the rest like their jobs and contribute to productivity.  The 2.5 million worker ObamaCare job exodus, CBO estimates, translates into a 1.5% to 2% reduction in the total number of hours worked, which means less growth.

That failure, that slowed growth rate, reduces the ability of those who do wish to work more, who do wish to make things concretely better for their families, to do so.  It hits hardest, again, our poor, but this effect extends to the lower- and mid-middle class man who is working and looking to work more and earn more.

Here’s a concrete example, courtesy of Keith Hennessy, via AEIdeas:

  • A family of four with one wage-earner has $35,300 of income this year and no health insurance through work. Because of the significant Affordable Care Act subsidies, this family can buy health insurance for only $1,410/year.
  • The other spouse wants to take a part-time job to supplement their family income. This part-time job would earn them an additional $12,000 per year (gross).
  • But this additional income would reduce their ACA premium subsidy, so they would now have to pay $2,970/year for the same health plan.
  • This reduced subsidy, a direct result of the spouse’s part time work and higher family income, reduces the value of the $12,000 of added income by $1,560 (=$2,970 – $1,410). That subsidy reduction is 13 percent of the gross income increase.
  • So maybe this spouse chooses not to take the new part time job because the net financial benefit of additional paid work just isn’t worth it.”

When all the welfare payments (means-tested, also) for which a family in this income stratum is eligible are included in this sort of calculation, the subsidy reduction becomes a much larger per centage of the income increase—and even can be larger than that increase: a net income reduction from earning more through working.

This is illustrated in the graph below from Pennsylvania State Secretary of Public Welfare that shows how public benefits interact with each other to create welfare cliffs—income cliffs—that “phase” out as income smoothly increases.

What this means is that as people in these low-end earner brackets make more money, they face massive effective marginal tax rates—sometimes the equivalent of 100%.  Every dollar they earn would lose them more than a dollar in public assistance.

Hennessey extended his example [emphasis his]:

My back-of-the-envelope calculation, using H&R Block’s tax calculator, is that the ACA increases this moderate income family’s marginal effective [federal] tax rate by 13 percentage points, from about 37% to about 50%. The 37% includes very little income taxes, but a lot of reduced EITC and reduced refundable child credit, as well as higher employer and employee-side payroll taxes.

Then, the moral hazard question Hennessy asked, but which the Progressives avoid:

Finally, the hard one: do the benefits of the premium subsidy to this family outweigh the costs of trapping this family at this income level by killing the financial benefit they receive from more work, education, training, or other professional advancement?

This is moral hazard.  It’s economically more efficient, at least in the near term—that paycheck to paycheck, welfare payment to welfare payment time frame in which our poor and working poor exist—to not work more, to not earn more, but rather to continue the welfare payments.  This is not a matter of laziness; this is that cynically created poverty trap.

Again, it reaches beyond the welfare recipient, too.  Those who do make the choice to work more are forced by that choice to pay for those who choose to work less: the former are the ones who must pay the taxes that partially cover the welfare payments, with government borrowing covering the rest (a future tax on those working men and their children).

Friday’s Jobs Report

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…again shows the failure of President Barack Obama’s economic ideology.  And it comes in conjunction with the CBO’s report that Obama’s Obamacare is destructive of American employment.

The jobs report showed that we added all of 113,000 jobs in January.  Oh, and the headline unemployment rate fell to 6.6%.  That drop in unemployment is a thing about which to brag?  Not so much.

In 2013, we added (an inadequate) 194,000 jobs per month.  Adding December’s numbers, the two months of December and January contained a total of 188,000 jobs.  We really need to be adding in the range of 330,000-350,000 per month in order to have a decent recovery from any recession, much less the Panic of 2008 (which ordinary Americans think still is in progress, albeit at the level of recession rather than panic).

Also buried in the numbers is a broader measure of unemployment: a statistic that also includes part-time workers who’d rather work full-time and folks that are marginally attached to the labor force (those unemployed who are on the verge of giving up but haven’t yet).  This broader measure of unemployment was 12.7% for January.  That’s a drop from December’s broader unemployment rate (of 13.1%), but it’s still abysmally high.

This is, for all that, improvement–how is that a failure?  We’re where we should have been four years ago, even according to President Barack Obama’s own predictions back then.

Or, as James Pethokoukis puts it at AEIdeas,

Before the Great Recession, there were 122 million full-time jobs in America. Now 4 1/2 years after its end, there are still just 118 million full-time jobs in America despite a labor force that is 1.6 million larger and a nonjailed, nonmilitary adult working-age population that is 14 million larger.

This graph which Pethokoukis reprinted from the Federal Reserve Economic Database paints the picture: http://www.aei-ideas.org/wp-content/uploads/2014/02/020714jobs1.png

Regulations Begetting Regulations

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Insurers are facing pressure from regulators and lawmakers about plans that offer limited choices of doctors and hospitals, a tactic the industry said is vital to keep down coverage prices in the new health law’s marketplaces.

Yeah—Obamacare regulates what coverages must be offered and at what prices (i.e., at no increase in price while adding mandatory coverage for contraceptives, pre-natal care, maternity care, etc.  And regardless of whether the man required to buy a health plan needs these things.  Or the empty-nesters.  Or post-menopausal women.  Or…).

However, since the insurers can only control costs—and remain in this new business of supplying government-mandated welfare—by controlling how many doctors or hospitals are in their networks, now we “need” additional regulations to “instruct” the insurers in this area.

Under [a] new federal proposal, insurers selling plans in the federally run marketplace would be required to submit to the Centers for Medicare and Medicaid Services a full list of providers in a network before their plans are approved for listing in the exchanges.  In the future, regulators also plan to develop federal standards for the required number of providers.

And [Emphasis added]

California Insurance Commissioner Dave Jones said he plans to revise his agency’s standards for insurers’ health networks partly because current regulations don’t give him enough power to continue oversight after a health plan goes on the market.

And so on, across lots of states.

Of course, absent government’s Obamacare intervention in this “market,” such layers of regulation wouldn’t be necessary.  The bottom layer of regulation wouldn’t be necessary.

But then, what would these bureaucrats do for jobs?  How would Progressive politicians justify their elective jobs?

Income Inequality and Education

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Senators Lamar Alexander (R, TN) and Tim Scott (R, SC) are proposing legislation that would address income inequality (while acknowledging that income inequality by itself is not, of necessity, bad) by addressing a critical aspect of opportunity equality (or inequality): education.

While I disagree with the details of the plans, the two Senators most assuredly are on the right track.

Alexander’s proposed bill, the Scholarships for Kids Act, would transfer Federal dollars to States, and each State then would determine how parents could apply the funding.  Scott’s proposed bill, the CHOICE Act, would use Federal transfers to States to facilitate each State’s ability to supplement existing scholarship programs for “military families, those with children facing physical challenges, and students in impoverished areas.”

I remain adamantly opposed to using our Federal tax code for social engineering; that simply distorts the market being engineered.  Such Federal transfers have two additional seriously negative aspects: they maintain State addiction to Federal handouts, and they transfer citizens’ Federal tax dollars from, for instance, those of bankrupt Illinois to those of more flush Iowa.

It is encouraging, though, to see Alexander and Scott acknowledging the need for each State to be responsible for its own education spending (albeit with OPM) and for identifying and addressing its unique education needs.  We just need to eliminate Federal involvement (and resulting Federal diktats) from the equation.

For all that, the proposed legislations are steps in the right direction, and I don’t oppose them outright—but we need to take care in the next Congressional session to move these programs, and other programs involving Federal transfers, in the direction of eliminating the transfers altogether by eliminating the taxes that produce the funds being transferred.  Those funds should not be taken out of the pocketbooks of those who earned them.

Equality of opportunity will inevitably lead to unequal incomes (and to unequal outcomes, generally), but that opportunity will allow everyone to prosper to the extent each one is willing to work and has the talent to do so.  Education is one of a very few critical aspects of that opportunity.