Thursday, December 31, 2015

Actually, free markets aren't efficient in theory, either

Image: If we don't get the biggest pie, then what's the point? (source)

The fundamental assumption of free market capitalism is that the free market can provide goods more efficiently than the government, or any other system. If the government interferes in the free market--even with the best of intentions--it will only make things worse. Rent controls cause a housing shortage; price controls cause oversupplies; minimum wage laws increase unemployment. The further we get away from a pure free market, the worse the inefficiencies and unintended consequences. It may be necessary to assist the less fortunate sometimes, but government should interfere as little as possible in order to avoid making things worse. Interference will certainly do harm; it could easily do more harm than good.

A more technical way of expressing this free-market-is-always-best ethos is to say that the free market will naturally reach an efficient equilibrium. An equilibrium of prices will ensure efficient allocation goods to all members of society. It may not be the most socially just distribution, but it will certainly be the most efficient distribution that can possibly be attained. Making the distribution more just--that is, making each person's slice of the pie closer to equal--will result in less pie overall. We can have a full pie with very unequal pieces; we can have a smaller pie with less unequal pieces; but we can't have a full pie with less unequal pieces. In other words, there is a trade-off between equity (or fairness) and efficiency. Increasing equity necessarily results in less efficiency.

Pushed to its limits, this idea is actually a liberating, social justice imperative. With a free market ensuring the most efficient outcome, the pie becomes so big that even with very inequitable slices, the poor are still better off. Even with a very unequally-cut pie, free market capitalism creates such an enormous pie that even the poor have a bigger slice than they could ever hope for in any other pie, no matter how egalitarian the slices are cut. Sure, a market might produce winners and losers, but when the pie is big enough, even the losers are better off.

This idea--that government programs which increase equity are necessary less efficient--underpins bipartisan social policy adventures such as school choice vouchers and privatizing social security. The idea is that--because markets are so efficient--any (real or otherwise) problems with anything can be improved by making them function more like free markets.

Obviously, if the equity-efficiency trade-off exists, we are essentially arguing over values. I may prioritize equity over efficiency while someone else may prioritize efficiency over equity, and there is no right answer, per se. But that the equity-efficiency trade-off exists is utterly fundamental to free market capitalism. Without that trade-off, free market capitalism makes no sense. If free market capitalism doesn't produce the biggest pie, then what's the point? If free market capitalism can't produce the biggest pie, why should we tolerate the incredible inequities it creates?

George Orwell and Karl Marx don't want your iPhone: communism, capital, and private possessions

Image: Street art inspired by George Orwell's Animal Farm (source)

Animal Farm
The novel Animal Farm by George Orwell is remembered as a cautionary tale against the inevitable problems of leftism. In Animal Farm, the farm animals--led by the pigs Snowball and Napoleon--rebel against their drunk and incompetent farmer, eventually prevailing and setting up a farm where all the animals are better off. The animals all learn to read and write, and plans are in the works for all the animals' stalls to have electricity and running water. In order to realize these admirable goals, the animals agree to give up all their possessions so they can be used to benefit the entire farm, and the animals all work hard to contribute to the common good. But Napoleon is able to drive away Snowball, and rather than continuing with the egalitarian projects, Napoleon starts using the community's wealth to improve the condition of the pigs. As a result, the quality of life of the rest of the animals declines until they are far worse off than before the revolution, and--unbeknownst to the animals other than the pigs--some of the animals are even assassinated in order to improve the power and wealth of the pigs. The pigs eventually obtain so many special privileges at the expense of the other animals that they become indistinguishable from the oppressive farmers, and the golden rule of the revolution: "All animals are equal" becomes "All animals are equal, but some animals are more equal than others."

It is impossible to argue that the scenario in Animal Farm isn't more or less what happened in the Soviet Union, Cuba, and Ethiopia. In the name of the common good, a privileged few were able to exploit the rest of society. And this scenario was certainly played out to a horrific level in Cambodia. Yet Orwell could not possibly have intended his work to be a cautionary against leftism generally. Ironically, Orwell considered himself a socialist--and not one of those Scandinavian social democrats who call themselves socialists but actually seek to create a more humane form of capitalism--Orwell was a true socialist who believed that private ownership of capital should be abolished. He traveled to Spain to fight alongside the socialists in the Spanish Civil War, where he was wounded, nearly fatally.

The book's resemblance to the actual history of Soviet-style communism is no coincidence. Orwell wrote Animal Farm as a critique of Soviet-style communism generally and Joseph Stalin in particular. Ironically--given the way the novel is remembered today--Orwell felt compelled to write Animal Farm to counteract the fact that Joseph Stalin was held in very high regard in capitalist Great Britain in the early- to mid-1940's. Orwell believed that Stalinism should be spurned due to its Reign of Terror and dictatorship, even if the Soviet Union was an ally against the Nazis.

Many often assume that communism necessarily demands an Animal Farm-style collectivization of wealth, and the inevitable seizing of society's wealth by the powerful--as if that's even different from our capitalist world where 1% of people own half of all world wealth and half the world lives in abject deprivation, or the United States where the richest 1% controls over a third of all wealth, the richest 10% control over three quarters of all wealth, and the richest 0.1% are about as wealthy as the poorest 90%. Yet Orwell is not alone on the left in his views on collectivization. Karl Marx himself was careful to make the distinction between productive capital and personal possessions, since personal possessions cannot be used to exploit people, but capital can. Your house, mementos from a deceased loved one, family heirlooms, books, pets, smartphone, etc--all of these things are not capital because they cannot be used to exploit people. I'm with Karl and George on this one. If your iPhone makes you happy, keep it, because you can't use it to exploit people.

Comparing the quality of child care services of Finland and the United States

I've spilled much ink on how social democracy is a far more efficient welfare system than one that relies on the private market. Again, when aggregate (private plus public) welfare spending is about the same in the United States as the social democracies, it's clear that social democracy is a far more efficient use of resources.

But this perspective overlooks how much better social democratic welfare services are compared to private market services in the United States. Here, I highlight child care in Finland as an example, but the same analysis could be repeated for nursing homes or other areas of social welfare.

By law, all Finnish children have a right to child care services their family can afford, but even the wealthiest parents are only charged a couple hundred dollars per month. Sara Mead describes the high quality of these services:
Publicly funded kindergartens and preschool in Finland are of quite high-quality, with quality standards roughly on par with those universal pre-k advocates seek for publicly funded pre-k programs in the United States. Kindergartens must have at least one adult for every seven children over age three, for every four children under age three, or for every two one-year-olds (infants under age one are rarely enrolled in kindergartens because Finland offers generous parental leave supports for parents in their child’s first year of life).
To ensure high quality care, there are strict credentialing standards for workers:
One out of every three adults working in kindergartens holds a bachelor’s degree as a certified kindergarten teacher (in effect, the lead teacher in each classroom). The other two adults must hold credentials as “licensed practical nurses,” a vocational degree that is roughly equivalent to a high school diploma with specialized education and training to work with young children.
Finnish child care centers must strictly adhere to a set cirriculum, which also helps to ensure high quality care:
Kindergartens must adhere to the National Curriculum Guidelines for Early Childhood Education and Care in Finland—comprehensive standards for child care environments and activities that address the developmental needs of the whole child—and with more detailed early childhood plans that each municipality must create to implement the national curriculum guidelines. These guidelines are aligned with the National Core Curriculum for Preschool Education in Finland, which is in turn aligned with the National Core Curriculum for Basic Education. These class size, teacher qualifications, and curriculum standards make the programs offered by Finnish kindergartens higher in quality than those offered by many state pre-k programs and Head Start centers in the United States.
Compare this to the American child care system (emphasis added):
In Texas, a person only needs a high school qualification or equivalent to operate a home day care. (That includes online degrees.)...Caregivers are also required to attend a state-sanctioned education session. According to a trainer, Tata had wandered in and out of the classroom, put her head down on the table, and spent much of the time texting. But since the law only requires applicants to show up, Tata had satisfied the requirement.
By national standards, Texas child care regulations are typical—better than average in some respects, worse in others. That is to say, they are painfully minimal. “You know, when we walk into some of these places, they’re meeting the letter of the standards,” Lahmeyer says. “But it’s like a warehouse for children. You know it when, as the inspector, you are the most interesting thing the kids have seen all day. They attach themselves to you and are trying to engage because there’s nothing else going on for them.”
Like most states, Texas inspects child care centers at least once a year, but only has the manpower to visit home day cares every two. Even egregious violations don’t always lead to shutdowns. Sometimes, that’s because parents, lacking alternatives, fight to keep notorious places open. An inspector named Carol McGinnis told me she’d recently visited a center in “total disarray,” with “feces smeared on the walls.” Nevertheless, if the agency closed it, McGinnis expected some parents would resist, because it was one of the few places offering care on weekends.
On other occasions, the process of closing a day care can be torturous. Lahmeyer recalled one place that racked up repeated violations over two years before a judge would shut it down. “I can tell you there’s a fair number [of cases] that we lost because the judge decided, No child’s died yet, so they stay open,” Lahmeyer says...I asked McGinnis how many of the area’s providers she’d trust with her own child. She answered promptly: “Twenty percent.”

Saturday, December 26, 2015

"Neutrality" in statistics: comparing the Palma inequality ratios of the United States with the social democracies

Image: Palma ratios--a measure of inequality--of selected countries (ordered by Palma v.3, source)

As the graph at the top of the page shows, the social democracies (marked with red squares) have lower inequality as measured by Palma ratios compared to the liberal countries, including the United States (marked with blue squares). My goal here is to argue that the social democracies really are better and limiting inequality, and since the Palma ratio is rarely used and the Gini coefficient has become the standard measure of inequality, the rest of this post is about why the Palma ratio is a better measure of inequality than the Gini.

I wrote previously about Gini coefficients and Palma ratios as measures of inequality. At that time, I noticed a nonsense conclusion someone had made: based on the fact that the pre-tax pre-transfer Gini coefficients of the United States and the social democracies are approximately equal, this writer had concluded that taxes and transfers were the only reason why the social democracies had less inequality than the United States.

Even at a glance, this simply cannot be correct. McDonald's workers in Denmark, for example, make three times the hourly wage of McDonald's workers in the United States. There's simply no way that pre-tax pre-transfer inequality can possibly be similar. Indeed--as I pointed out then--the richest 1% in the United States take home 18% of all pre-tax income, but the richest 1% in Denmark take home just 4%. Clearly, the Gini coefficients are wrong; pre-tax, pre-transfer inequality is not similar between the United States and Denmark.

This matters greatly from a social policy perspective. Taxes and transfers may indeed be effective policies for limiting inequality, but they're not the only effective policies. As I pointed out at the time, full employment is probably a more powerful tool against inequality than taxes and transfers, and I argued that inequality was too complex to capture with a single number, though the Palma ratio was probably the best option for a single measure of inequality.

Alex Cobham and Andy Sumner penned a review of the evidence against the Gini coefficient and in support of the Palma ratio. Before diving into their review, some background on inequality measures is necessary.

The Lorenz curve is simply a graph of the distribution of the wealth of a country. As you can see, perfect inequality would yeild a straight line, whereas any inequality bends the line downwards:

Greater inequality will result in a line that deviates further from the perfectly straight line running diagonally across the graph, but the Lorenz curve can also visually illustrate where inequality occurs. For example, take these hypothetical Lorenz curves:

We can see that inequality in the country represented by the green line is primarily due to the poor being very poor. The green line deviates most from the straight diagonal at the bottom of the income distribution; since the line rises so little for the first 30% of the population, it's clear that the bottom 30% are very poor relative to the standards of this country. And since the line is relatively straight after 30%, the richest 70% are fairly income equal to each other; inequality is thus caused by deprivation of the poorest 30%.

The red line, however, is nearly straight for the first 85% of the population. Since this line is so straight, it indicates that the bottom 85% are pretty equal in their share of national income. The abrupt turn upwards of the red line indicates that the richest 15% are far richer than the poorest 85%.

Finally, the country represented by the blue curve--because it does not bend as far away from the straight diagonal--has less inequality than the countries represented by the green and red lines.

As this hypothetical example shows, comparing Lorenz curves can be very valuable as Lorenz curves visually display both the magnitude of inequality and well as the points in the income distribution where inequality occurs.

Cobham and Sumner explain the limitations of the Gini coefficient:
Atkinson (1973) demonstrates just why this matters, and how it ensures that the Gini is far from a ‘neutral’ measure of inequality. He first highlights that, in comparing two countries where the Lorenz curves do not intersect, we can say--and the Gini will suffice to do so--that the country with the curve closer to the line of complete equality is more equal than the other. When Lorenz curves cross, however, things become less clear.

Atkinson presents the case of the United Kingdom and West Germany, for which the Lorenz curves then crossed at around 50% of the population. The income share of the lowest-income 50% is higher (closer to the 45-degree line) in West Germany, while that of the highest-income 50% is closer to the line in the UK--but the Gini coefficient shows the UK to be less unequal. Atkinson concludes:
Summary measures such as the Gini coefficient are often presented as purely 'scientific', but in fact they explicitly embody values about a desirable distribution of income (p.66).

Tuesday, December 22, 2015

Falling through the cracks of the American welfare system

Image: On this map, the darkened counties in Mississippi are some of the poorest counties in the entire United States. These counties were not served by Obamacare health insurance subsidies. (source)

A look back at three of the worst examples I have ever encountered of neoliberal welfare programs letting eligible individuals fall through the cracks.

First, a 2013 warning about Obamacare in Mississippi (emphasis added):
No insurer is offering to sell plans through the federal health law’s marketplaces in 36 of the state’s 82 counties, including some of the poorest parts of the Delta region, said Mississippi Insurance Commissioner Mike Chaney.
As a result, 54,000 people who may qualify for subsidized coverage would be unable to get it, estimates the Center for Mississippi Health Policy, a nonpartisan research group.
Many make a living picking soybeans, working on tree farms or in fast food restaurants, earning too little to buy coverage on their own.
“That’s the place where it’s most needed,” said Roy Mitchell, executive director of the Mississippi Health Advocacy Program. “There’s a high uninsured population there. One of the highest infant mortality rates in the country is in that area.["]
Second, a 2001 study of the Child Care and Development Fund--a program that is supposed to pay for child care for young children so their parents can go to work (emphasis in original):
Based on recently released and revised data from the U.S. Department of Health and Human Services (HHS), CLASP estimates that states served about 14 percent of federally-eligible children (approximately 1 out of 7) in FY 2000.
You did not misread that: CCDF was so poorly funded that 86% of eligible children did not receive benefits.

Tuesday, December 15, 2015

When communism means free markets and capitalism means central planning

Image (left to right): Josip Broz Tito (President of Communist Yugoslavia), United States President Nixon, Pelagija Broz (Tito's wife), and Pat Nixon (Nixon's wife) en route to a 1971 Presidential dinner hosted by Nixon in Tito's honor. (source)

This post is meant to address one of the most common misconceptions about what, exactly, are communism and capitalism. It is nearly universally assumed (even by those whose job it is to write about social policy) that communism means a centrally planned economy and capitalism means a free market economy, but this is totally false. Communism and capitalism can exist--and have existed--in a free market or centrally planned economy. Indeed--as we will see below--the Yugoslavian Communists believed that communism should exist in a libertarian free market paradise, where government "withered away" to nothing and everyone was supposed to get their social welfare services (like health care) from their employer. If you couldn't get health insurance from an employer, you were on your own--there was no government program to provide medical care as a last resort, because the government had "whithered away" entirely. To these libertarian communists, the government was not even supposed to build roads and other infrastructure. The Yugoslavian Communists believed that this was the most faithful plan to bring about Karl Marx's vision of a communist worker's paradise, and for several decades following World War II, this type of free market communism existed in Yugoslavia.

It's equally preposterous that capitalism is synonymous with free markets; capitalism and central planning have gone together well throughout history, as we shall see below.

Communism and capitalism have nothing to do with the structure of markets and everything to do with ownership. To see what this means, let's take a very simplified example, then we'll apply it to real world examples like former Yugoslavia.

Monday, December 14, 2015

Comparing poverty rates (absolute and relative) of the United States to the social democracies

Image: Relative poverty is confusing for most Americans. (source)

I've got a series of posts on relative poverty that I started in 2013 but never published. The reason I moved them to the back burner is that my goal here is persuasion, and Americans simply don't care about relative poverty. They should--relative poverty kills--but it's a somewhat complicated argument.

Second, and more importantly, I'm interested in comparing the United States to the social democracies, and the data don't match up. I assumed it was impossible to do a comparison of poverty because the United States uses an absolute poverty measure, while the rest of the developed world uses relative poverty and does not keep data on absolute poverty (I found some data on absolute levels of income for this post, but it's not on poverty).

So while I couldn't compare absolute poverty rates, I could compare relative poverty rates (because those data do exist for the United States), but nobody cares about relative poverty in the United States.

In short, I gave up on comparing the poverty rates of the United States versus other countries.

Fortunately, Dylan Matthews highlighted the complicated research that translated income data for several European countries into absolute poverty rates using the absolute poverty line of the United States.
It actually is possible to use the Luxembourg Income Study database to estimate more precisely how many people live under the US poverty in America versus Finland. If you use the granular microdata and follow the same procedures in looking at the US as in looking at other countries, you can come up with a fair comparison...Stockholm University's Markus Jäntti, a senior scholar with the Luxembourg Income Study, did just that kind of number crunching for me. Using the same poverty line as Petrilli and Wright, he found that the absolute poverty rate in the US in 2010 was about 10 percent, and in Finland it was about 4.5 percent. Finland's rate wasn't slightly lower — it was more than halved compared with the US.
Jäntti and Gornick also produced numbers for a wider range of countries in a 2011 paper. They used data from 2004, which included not just Finland but all four major Nordic nations. And they found that poverty rates in those countries — as measured using the US poverty line — were much lower than in the US. Child poverty in particular was much lower: 11.8 percent in the US, and a mere 1.9 percent in Denmark.

Sunday, July 19, 2015

The real world evidence that a strong welfare state encourages entrepreneurship

Image: A job creator

Walter Frick has a must-read piece on the relationship between welfare and entrepreneurship. A taste:
Pundits and researchers often note the negative correlation between government spending and entrepreneurship, both within the U.S. and internationally, and conclude that growth requires trimming social welfare programs. Jim Manzi of the National Review, for example, a thoughtful commenter on economic policy, wrote last year that, “we must accept some amount of social dislocation in return for innovation.” But correlations can be misleading. A series of more recent studies challenge the view that larger or more activist government necessarily threatens entrepreneurship. In fact, that may get the relationship precisely backwards...
In another paper, Olds looked at the creation of the Children’s Health Insurance Program (CHIP), which offers publicly funded health insurance for kids whose families don’t qualify for Medicaid. By comparing the rate of entrepreneurship of those who just barely qualified for CHIP to those whose incomes just barely exceeded the cutoff, he was able to estimate the program’s impact on new business creation. The rate of incorporated business ownership for those eligible households just below the cutoff was 31 percent greater than for similarly situated families that could not rely on CHIP to care for their children if they needed it... 
A 2010 study by RAND found a similar effect with Medicare. American men were more likely to start a business just after turning 65 and qualifying for Medicare than just before. Here again, government can make entrepreneurship more appealing by making it less risky.

Links worth reading

David Minzer pens an absolutely must-read piece on the military intervention in Libya

Top military brass claims that drones create more terrorists than they kill

And here are a bunch of links I assembled back in December but forgot to publish:
Amanda Gailey on how gun enthusiasts believe government has run amok with power, then support the government in killing unarmed black men.

Marcy Wheeler makes the case that the CIA torture program successfully met all of its goals, none of which were creating accurate intelligence.

CIA was recently forced to declassify a large trove of documents; here is one detailing their involvement in starting a brutal 50-year-long civil war in Guatemala. (h/t Cora Currier) 

Connor Friedersdorf on epidemic rates of domestic violence in United States police officer families.

Over at Jacobin, Dylan Matthews makes the case for abolishing all immigration restrictions.

"Watch this video of an armed, drunk, disobedient white man -- and his encounter with the cops. Something seem odd?"

Financial criminals have been paid billions, but they rarely pay.

On the multi-billion dollar textbook and standardized test industry:
This is because standardized tests are not based on general knowledge. As I learned in the course of my investigation, they are based on specific knowledge contained in specific sets of books: the textbooks created by the test makers...Put simply, any teacher who wants his or her students to pass the tests has to give out books from the Big Three publishers.
And only wealthy schools can afford these textbooks

Wednesday, May 27, 2015

The human case against means testing

Image: A paper food stamp from 1980 (source)

I've already spilled quite a bit of ink (1 2 3) criticizing means testing on administrative grounds. Means testing is an extraordinary waste of resources; it's the reason the administrative costs of TANF are 15 times that of Social Security despite the fact that both programs fundamentally do the same thing (income transfer). And means testing in Obamacare is so irrational that Obamacare essentially spends billions of dollars to prevent millions of people from having health insurance.

But focusing on the administrative issues of means testing ignores the terrible human burden of means testing, which I hope to address now.

Before diving in, a few words about what I'm not writing about. I'm not discussing the cruelty of income or asset tests that are too low;* that injustice is obvious. Nor is this piece about the cruelty of benefits that are too low, or programs that are so poorly funded that the vast majority of eligible individuals don't receive benefits. These injustices are obvious. Less evident, however, are the ways that means testing itself places a burden on individuals and society generally, regardless of where the border between eligible and ineligible lies.

There are an endless number of tragic ways for means testing to destroy people's lives, but they all boil down to two basic issues. First, people who aren't eligible but need benefits must destroy their lives in order to attain and maintain eligibility. Second, means testing is necessarily imperfect. We will never design a perfect means testing bureaucracy, and some eligible people will always be incorrectly found to be ineligible. How many lives are we willing to destroy through imperfect means testing decisions?

"You'll have to get rid of everything"
Go and read this first person account of a family who needed to qualify for Medicaid because a family member became disabled in a horrible car accident in which she was not at fault. Only Medicaid covers the long term care equipment and services mommy needs to live, but Medicaid only covers poor people--so the entire family must live in poverty for the rest of their lives (they have to meet the so-called income and asset tests). The family had to liquidate their 401(k) (and pay the early withdraw tax penalties), sell their cars, empty their bank accounts, and sell all their valuables in order to meet the asset means test. Daddy had to cut his hours at work to 133% of the poverty line to meet the income means test; thereafter, 100% of any wages in excess of this level would be taken by Medicaid. Baby can never attend preschool when she gets older because the family can never earn or possess enough money to pay for tuition; auntie can't pay for baby's preschool because that would be Medicaid fraud. And baby can't have a college fund because any savings would make them ineligible for the Medicaid services that keep mommy alive. The entire story is so totally inane that it doesn't make any sense to blockquote it; it is well worth your time to read in full, even if you think you already understand that cruelty of our welfare system.

This may be an extreme example, but means testing necessarily results in distorted incentives. As the above story makes plain, when people depend on benefits, working more hours or saving any money becomes an impossibility. Thus, at the aggregate level, America's poor are forced to liquidate or forego savings and income in order to remain eligible for programs they depend on. For TANF (more commonly known as "welfare"):
Two of the first states to eliminate asset tests (Ohio and Virginia) actually saw declines in program enrollment and improvements in their overall bottom line.....What our research suggests, [] is that asset limits simply are not necessary to prevent misuse and actually discourage self-sufficiency.
You did not misread that: eliminating asset tests results in lower overall program costs and fewer people in need of benefits. Thus, by preserving asset tests, our political system demonstrates that poverty is a conscious goal: states are willing to pay money to ensure people remain in poverty.

Tuesday, April 28, 2015

How Vermont could have made single payer work, part 2: Green Frankenstein Care

Image: Frankenstein was grafted together of different parts of different cadavers and reanimated into a sentient being. Since single payer is apparently a political nonstarter in the United States, let's do the social policy equivalent and find a way to stitch together the component pieces of single payer.

This is a follow-up to an earlier post written in response to Vermont's decision to abandon their efforts to create a state-wide single payer health care system, which would have been called Green Mountain Care. I argued that that single payer in the United States isn't dead, though a pure single payer health care system might not be possible in the unique political and legal environment of the United States. That's not a problem, however, because single payer advocates don't care about single payer per se; they are only interested in attaining the universal coverage and mammoth administrative savings offered by a single payer system. Fortunately, there are ways to reach these goals without single payer.

As Vermont's single payer advocates unfortunately found out, any health care reform proposal will end in failure if it doesn't camouflage its cost as well as the current system. Americans generally don't have a good conception of how atrociously expensive the American health care system is--because the cost is well concealed. Since the American system splits the costs of health care so many ways, it's not immediately obvious how much health care truly costs. For example, employer-sponsored insurance premiums are paid for in part by generous federal subsidies most Americans don't even realize exist, and by employer and employee contributions. Further masking cost, private insurance doesn't cover the elderly or long term care. And, private insurers deliberately design cost sharing (deductibles, copays, and coinsurance) to be be difficult to understand and therefore obscure the true out-of-pocket cost of health care.

Due to it's simplicity, Green Mountain Care couldn't provide this level of cost camouflage. The entire program was financed by simple, direct payroll and income taxes. Because the cost of the premiums weren't split up several ways and cost sharing was simple and transparent, the extraordinary cost of health care in America became unbearably obvious.

Thus, Vermont abandoned Green Mountain Care because it was too expensive--even though it was less expensive than the system it was supposed to replace. The irrationality of this decision is impossible to overstate.

Clearly, any attempt to achieve universal health insurance coverage will fail if it doesn't conceal its cost at least as well as the current system.

I suggested that single payer advocates could look for inspiration in the German and Japanese health care systems because--as in the United States--health insurance is heavily linked to employment. Yet with a few straightforward regulations, the German and Japanese systems attain universal coverage and all of the administrative savings of single payer. As I outlined in the previous post, these regulations are:
  • Government regulations set prices of all types of office visits and procedures
  • Only a single insurance plan can be sold
  • All insurers must be not for profit
  • Redistribution of medical loss imbalances to spread risk across insurers
  • Employer mandate to provide all employees with health insurance (with employee contribution)
  • Health insurance companies must continue to cover enrollees who lose their job or stop working for any reason 
Together, these regulations would allow our employer-based system to attain the cost savings and universal coverage of single payer.

It's worth noting that a single payer system isn't automatically better than other systems. Norway, for example, has a single payer health care system, yet per capita health care spending is far higher than Germany and Japan. Clearly, single payer is a great model for health care reform, but it isn't the only model, nor is it necessarily the best model, either.

Of course, this last post was fairly abstract, so here I intend to ground it by explaining how these reforms could be implemented--step by step--at a state (or possibly city/county) level.

Green Mountain Care would have been a pure single payer system. It would have been elegant and simple. This new system would work equally well, but only after boorishly stitching together seemingly unrelated reforms into a functioning--if ungraceful and confusing--whole. Such a system does not deserve the elegant name of Green Mountain Care. Instead, meet Green Frankenstein Care.

Thursday, April 23, 2015

No, taxes and transfers do not explain differences in inequality between US and Sweden

(See update below)

At Vox, Dylan Matthews claims that "government is the only reason the US has more inequality than Sweden." He bases this claim on the fact that the United States has a pretax Gini coefficient equal to that of Sweden, Norway, and Denmark; Finland's pretax Gini coefficient is actually higher than that of the United States. But after government taxes and transfers are accounted for, the Gini coefficients of the social democracies drop precipitously, while the United States' decreases far less:

Matthews argues that these data prove that government taxes and transfers are the "only" reasons why Norway, Sweden, Denmark, and Finland have lower inequality than the United States. Nothing else explains why the pretax/pretransfer Gini coefficients would be equal and posttax/posttransfer Gini coefficients so different. Clearly, it's only government intervention that reduces inequality.

This is analysis wrong, however, and makes little sense even at first glance. McDonald's workers in Norway and Denmark make almost three times their American counterparts. With a paucity of the minimum wage McJobs that dominate the American underclass, how can Scandinavian pretax/pretransfer inequality possibly be equivalent to the United States?

Our interpretation of these data matters greatly. If Matthews is correct, then taxes and transfers are the only useful weapons against inequality, and policies that take aim at pretax/pretransfer inequality--like full employment and laws to make unionization easier--are not worth pursuing.

But Matthews is wrong here, and the fault lies with the Gini coefficient.

Tuesday, February 17, 2015

Does social democracy / a large welfare state kill innovation?

Image: At The Next Web, Brad McCarty documents the history of the smartphone, including this 2001 state-of-the-art Nokia Communicator.

[Updated--see below]

As I often do with viewpoints I don't like, I find the most reputable expression of that idea so I can't be accused of choosing a poor representative for my critique. Enter Daron Acemoglu (MIT), James A. Robinson (Harvard), Thierry Verdier (Paris School of Economics), and their 2012 non-peer-reviewed paper Can't We All Be More Like Scandinavians? People with Big Ideas about welfare states eagerly point to this paper as proof that their evidence-free Big Ideas were right all along. Let's see what this paper really says.

The thrust of the paper is this: it's a well known fact that large welfare states stifle innovation, mostly due to limiting inequality and perhaps also by limiting economic insecurity. These are the "cuddly capitalists" (their term). In the "cutthroat capitalist" (their term) countries, inequality is much greater and economic security more tenuous, and--as a direct result--innovation is greater. Since the rewards are so great for success--and the consequences for failure so severe--incentives line up perfectly to maximize innovation.

So far, this isn't anything new. But Acemoglu, Robinson & Verdier take this logic one step further. Not only is there greater innovation in the cutthroat capitalist countries, they posit, but the innovation of the cutthroat capitalists makes cuddly capitalism possible. Were it not for the greater innovation and resulting economic growth which spills over from the cutthroat to cuddly capitalist countries, the large welfare states of the cuddly capitalist countries would not be possible.

But wait! There is a slight bump in the road to solemnly dismantling the welfare state in the name of innovation. It's always taken as fact that the United States, the most cutthroat of the capitalists of the developed world, handily beats the rest of the world in innovation and technology. But where is the evidence?

Fortunately, Acemoglu, Robinson & Verdier have marshalled the strongest evidence available to demonstrate the superior capacity for innovation in the United States compared to the social democracies:
The United States is also widely viewed as a more innovative economy, providing greater incentives to its entrepreneurs  and workers alike, who tend to respond to these by working longer hours, taking more risks and playing the leading role in many of the transformative technologies of the last several decades ranging from software and hardware to pharmaceuticals and biomedical innovations. Figure 1 shows annual average hours of work in the United States, Denmark, Finland, Norway and Sweden since 1980, and shows the significant gap between the United States and the rest.
Sure enough, in a graph with a y-axis that doesn't begin at zero, Figure 1 indeed shows that people in the United States work more hours than in Scandinavia, except for the weird part in the early 80's (and earlier) where the Finns worked longer, that I guess we're just ignoring:

Some problems should be immediately obvious.

First, Acemoglu, Robinson & Verdier use the United States to represent all of the cutthroat capitalists. Might their conclusions be stronger if they considered other countries with high inequality and a fragile social safety net? This issue will be taken up below, but it shouldn't be too hard to guess why they omitted other cutthroat capitalists, like New Zealand and Ireland, from their analysis.

Second, Acemoglu, Robinson & Verdier assume that more work hours at the aggregate level results in more innovation. It doesn't. Longer aggregate work hours are simply indicative of higher poverty rates. It's well established that people work longer hours in countries with higher poverty rates. Thus, since the United States has such a high poverty rate while the Scandinavian countries have such a low poverty rate, it's no surprise that the average number of hours worked is lower in the Scandinavian countries. Clearly, average hours worked each week isn't a proxy measure of innovation, but a proxy measure for a country's poverty rate.

Third, productivity research is unequivocal that working more hours results in less innovation, not more. For a striking example, productivity experts estimate that if the early Macintosh engineers had worked 40 hours per week instead of 90, the first Macintosh computer would have been ready for release a full year earlier. In short, all available research argues that long hours lead to less innovation--meaning that Acemoglu, Robinson & Verdier could scarcely have chosen a worse proxy measure for innovation.

Saturday, January 17, 2015

2014 Detroit is a better candidate for social democracy than 1930's Finland

Image: An MRI machine allows doctors to examine tissues throughout the body from the outside. The technology available today would have seemed like science fiction decades ago. (source)

This short post concludes a series on racist assumptions underlying many debates about social policy. The scope of this series has been very wide, and this post will tie together some of these disparate ideas.

In part 1, focused on the violent, impoverished, and oppressed history of Finland. Finland's blood-soaked history--both in the years immediately preceding their transition to social democracy, as well as hundreds of years prior--demonstrates that a prosperous and harmonious society is in no way a prerequisite for social democracy. Such views are a smokescreen for underlying racism. Part 2 addressed the incredibly racist view that social democracy can only succeed in a racially, culturally or ethnically homogeneous society by focusing on the experiences of Kerala, India, and Sweden. Both places have extremely large minority groups; by most measures, Sweden is more diverse than France, the UK, Germany, and most other European countries. Part 3 took the superior societies vs. superior policies argument head on by looking in detail at the implementation of the first social democratic program in Finland, maternal health care. The superior societies argument holds that any policy will succeed in a superior society; the superior policies argument holds that superior policies can succeed in any society. That Finnish society is inherently superior to the rest of the world is absurd given Finnish society's initial resistance to the maternal health program. Widespread resistance to this policy cost the lives of thousands of infants and mothers.

Part 3 contains the most important argument in the entire series. When we assume that social democratic policies can only work in a society that is already prosperous and harmonious, we rule out the most effective solutions for improving quality of life in the places that most desperately need those policies. In particular, if 1930's Finland were a country today, their infant mortality rate would be the eleventh worst of any country in the entire world.

To conclude this series, part 4 will run with this idea by comparing the current quality of life indicators and resources of Detroit, the American city with the highest poverty rate, to those of Finland on the eve of the election of the first social democratic prime minister in 1927.

If you had nothing else except for data on the resources and quality of life indicators of Finland in 1927 and Detroit in 2014, which place would you expect to eventually lead the world in quality of life indicators? As we shall see--though quality of life indicators are appalling in Detroit--they are actually in a better position than Finland was decades ago. If Finland could transform itself a country with the best quality of life indicators in the entire world, Detroit can make a similar transition. Granted, it took extraordinary efforts over several decades for Finland to achieve these successes, and Detroit can expect a similarly long, difficult struggle. But it can be done.

Comparing 2014 Detroit and 1920's Finland
Detroit's infant mortality rate is a 15 per 1000 live births. That's a national disgrace. But Finland's infant mortality rate peaked at a whopping 90 per 1000 live births in the 1930's, a rate six times higher than Detroit. None of this is to say that an infant mortality rate of 15 per 1000 live births is anything but a catastrophe. Nevertheless, the situation in Finland in the first half of the 1900's was far worse than the situation currently facing Detroit.

Sunday, January 11, 2015

The neoliberal model on discrimination is wrong

Image: A patient's husband relaxes outside the beautiful Monroe Community Hospital in Rochester, New York. Now a long term care facility, Monroe Community Hospital was designed in 1930 by Thomas Boyde, Jr.. Boyde's architectural firm only interviewed him by mistake, believing he was white until he arrived for his interview. Though impressed with Boyde, the head of the firm only hired Boyde after polling the rest of the firm to see if they would object to working with an African-American architect. (source)

I feel compelled to start posts like this with a disclaimer:  People are more than economic units. People do not exist to serve the economy. The economy should exist to serve people, and not the other way around. This post is about workplace discrimination, and workplace discrimination should be combated simply because discrimination is wrong.

But in a neoliberal world, you have to speak the language of neoliberalism--so the rest of this page is written in neoliberal.

Even economy-first neoliberals should take interest in fighting workplace discrimination. For example, the productivity lost to workplace gender discrimination has been particularly well studied. Obviously, systematic discrimination against half of the workforce is not without consequences. Sexism in the labor market means that huge numbers of women don't return to work after giving birth or are passed over for supervisory roles, and that takes talent and productivity away from the economy. Gwynn Guilford summarizes research attempting to estimate the phenomenal economic growth that would result if the talents and hard work of women were not underutilized: of Japanese women drop out of the workforce after having their first child. Getting them back to work could boost Japan’s GDP by as much as 15 percent...If American women worked at the same rates men did, U.S. GDP could grow 9 percent, say economists; France’s would pop by more than 11 percent; and Italy’s would see a whopping 23 percent boost, according to OECD calculations. The average across the OECD would total 12 percent.
How can such inefficiency persist in a free market? Neoliberals believe that inefficiencies are rapidly corrected by the free market, so how can such extraordinary inefficiency possibly persist?

Gender inequality and social democratic policy

Image: A seahorse couple. Seahorses are very unusual in that males, not females, carry offspring through pregnancy and give birth. Thus, much of the following analysis will not apply to seahorses. (source)

For decades, the Scandinavian social democracies have led the world in limiting gender inequality. Currently, the World Economic Forum's Global Gender Gap report--which looks at several areas of women's status, including labor market indicators and the number of female representatives in government--ranks the Scandinavian social democracies very high. Four of the five Scandinavian social democracies take the top four spots; Denmark, the laggard, still finishes in the top ten at #8. Clearly, social democratic policy is effective in helping to limit gender inequality, and this post will broadly outline some social democratic strategies--universal child care and paid parental leave--and the evidence behind them.

This is a social policy blog, so I'm narrowly focusing on the policy basis of gender inequality. But it's important to note that sexism and discrimination have many causes and social policy can only be one medicine that cures a sick society. Confronting the economic roots of discrimination can only go so far. For example, women are disproportionate victims of violence. American men work about 10 hours more per week in paid employment, but women do so much housework that they have on average 5 fewer hours of leisure each week. Addressing the societal perpetuation of sexism in the workplace and beyond cannot simply be the sole responsibility of social policy. Aggressive enforcement of anti-discrimination laws and challenging everyday discrimination is also necessary. Social policy can only take us so far.

The economic case for sexism
In a fascinating article, Gwynn Guilford presents a very clear case about the economic incentives for sexist hiring and promotion practices, and the role of social democratic policy in fighting gender inequality. First, she addresses employers' economic incentives to pay women less than men, and to favor men for promotions:
For the vast majority of women who don’t return to work after giving birth, this is because the costs of returning—both financial and psychological—outweigh the benefits.

Here are the factors they’re likely weighing. Since it’s assumed the mother will take a long leave after giving birth, businesses systematically underpay women and skip them for promotions in favor of their male colleagues. Their husbands, therefore, likely have a much higher salary and aren’t eligible to take much more than a few weeks, at most, of paid childcare leave.

So women have little choice but to take many months off work to care for their newborn. Even in countries with robust maternal employment protections, low-skilled women in particular still face pressure to quit their jobs. Many who consider returning to work once their child is old enough for daycare struggle to find a job that pays well enough to cover childcare—or, with their skills now outdated, to find a job at all. Highly educated women, meanwhile, often find that taking a lengthy leave jolts them off the management track. And since this group tends to have wealthier husbands, without the professional motivation, there’s no point in returning.
Much evidence supports this argument. Danielle Kurtzleben summarizes research showing that American employers really do penalize women but not men for having children.

Guilford misses another reason women often drop out of the labor force: most human societies expect women, not men, to care for elderly or disabled relatives who are not able to care for themselves. This contributes to the gender pay gap for similar reasons. Another key issue (which she takes up outside this block quote) is that many women only work part-time after they have a child.

Putting this all together, we're really interested in three statistics--the gender pay gap, or the ratio of men's to women's wages; a comparison of the female and male labor force participation rate (the number of employed people as a percentage of working age adults); and a comparison of percentage of employed women and men working part time.

It's particularly important to keep track of all three because none can fully capture women's opportunities in the labor market. Two examples will make this clear. First, an increase in the gender pay gap can actually mean that the labor market is becoming less discriminatory towards women. Though counterintuitive, this can occur because these three measures are not independent. For example, the Scandinavian social democracies actually have a larger gender pay gap than countries with much more sexist labor markets, like Italy. The gender pay gap in Italy is so low because the Italian female labor force participation rate is very, very low. This low female labor force participation rate occurs because it's so difficult for Italian women to find employment that only the most highly skilled Italian female workers are reliably employed. In other words, most Italian jobs are low skill, but most women who have jobs in Italy are physicians, lawyers, or in other high skill fields where pay is high; there aren't many low skill female workers with jobs because they are unable to find work. Hence, high wage workers are grossly overrepresented in the female labor force, thus artificially decreasing the gender pay gap.

For a second example, the United States has traditionally had a surprisingly high female labor force participation rate. This is certainly due to a much higher poverty rate. Thus, for the United States, the labor force participation and part time work rates alone are likely to be misleading. Clearly, we need to consider all three measures to get an accurate picture.

In any case, in every country on earth, these measures are heavily weighted against women. Guilford summarizes research that suggest that unprecedented rates of economic growth could occur if the female labor force participation rate rose to that of men--there's simply so much bottled up talent and productivity in the world's women that can't be put to use because of sexism.

Using social policy to address economic roots of sexism
It should be very obvious that social policy can address each of the three root incentives for gender discrimination in hiring, pay, and promotions. Parental leave policies can be structured to encourage fathers to take parental leave, diminishing employers' incentives to pay women less. Universal child care services make it easier for women to return to work when babies become toddlers. Universal long term care services ensure that elderly relatives who are no longer able to care for themselves receive competent care even if their adult daughter or daughter-in-law returns to work. This isn't a new idea. Since the 1970's, the social democracies have implemented these policies with the stated intention of maximizing female labor force participation.

But do these policies actually work? Have countries that have implemented these policies actually seen an improvement in our three indicators of workplace discrimination? Let's take a look:

Saturday, January 10, 2015

The interests of high skill workers do not align with capital

Image: Meg Whitman, former CEO of eBay (source)

It is frequently assumed that high skill workers don't need labor protections because they can protect themselves. It's only those defective low skill workers who need help from minimum wage laws and unions. This flawed assumption is based on the idea that what is good for employers is also good for high skill workers. According to this logic, employers may indeed benefit from squeezing every last penny of profit out of low skill workers with low pay and zero benefits, but for knowledge-based information work, employers benefit from happy, productive, and well-compensated high skill workers. And anyway, high skill workers can negotiate high wages for themselves due to their skill set. They made all the right choices in life; with the human capital they have accumulated, they now benefit from a better bargaining position with their employer.

This misconception is as wrong as it is toxic to workers generally, both high skill and low skill. Employers use the same tactics to squeeze high skill and low skill workers, though these tactics are indeed more effective with low skill workers. Nevertheless, when high skill workers fail to acknowledge that employers have an incentive to exploit them, they don't realize that the policies that help low skill workers usually help them, too. By assuming that the interests of high skill workers align with their employers, high skill workers often support policies that actually hurt them.

A perfect example of this misconception can be found in Michael Teitelbaum's recent article arguing there is no shortage of college students studying science, technology, engineering, and math (STEM). Though well-researched and articulated, he fails to realize the broader context in which this debate takes place.

Teitelbaum begins by assembling an impressive array of research to argue that there is no STEM shortage (emphasis added):
A compelling body of research is now available, from many leading academic researchers and from respected research organizations such as the National Bureau of Economic Research, the RAND Corporation, and the Urban Institute. No one has been able to find any evidence indicating current widespread labor market shortages or hiring difficulties in science and engineering occupations that require bachelors degrees or higher...All have concluded that U.S. higher education produces far more science and engineering graduates annually than there are S&E job openings—the only disagreement is whether it is 100 percent or 200 percent more...
It is true that high-skilled professional occupations almost always experience unemployment rates far lower than those for the rest of the U.S. workforce, but unemployment among scientists and engineers is higher than in other professions such as physicians, dentists, lawyers, and registered nurses, and surprisingly high unemployment rates prevail for recent graduates even in fields with alleged serious “shortages” such as engineering (7.0 percent), computer science (7.8 percent) and information systems (11.7 percent). 
He actually missed a good one: A 2011 American Chemical Society survey found that 9% of recent graduates of chemistry and chemical engineering PhD programs were unemployed, and a whopping 18% recent graduates of masters chemistry and chemical engineering programs were unemployed. That survey did find that average pay had risen, but this was likely due to the elimination of lower paying positions, not actual pay rises. The survey also found the lowest number of students pursuing advanced chemistry/chemical engineering degrees. Underemployment was an enormous problem: Just 38% of recent chemistry PhD graduates were able to find full time work; just over a third of recent bachelors degree graduates found full time work--and not all of these chemists were actually working as chemists.

Tuesday, January 6, 2015

How Vermont could have made single payer work

Image: Vermont Governor Peter Shumlin signed Vermont's single payer bill into law in 2011, only to scrap the plan in the final days of 2014. (source)

Vermont's attempt to establish a single payer health care system was killed by irrationality, as Sarah Kliff explains:
Another strike against single-payer systems, compared to other American health-care arrangements: they're financed in an unusually transparent way. And arranging that financing, from scratch, often proves impossible.

Right now, most Americans get their health insurance through an employer. That employer, unbeknownst to us, typically puts thousands of dollars into our policy alongside the money we kick in. According to the Kaiser Family Foundation, employers, on average, pay more than 80 percent of an individual worker's premiums. But Americans usually don't notice their employer subsidy for health insurance; it doesn't show up on their paycheck anywhere.

Or take Obamacare, which is funded partially by taxes on the rich, partially by fees on various players in the medical industry, and partially through cuts to Medicare. The cost is spread across many groups, and many government functions.

But by moving all the financing to the government, a single-payer health plan like the one Vermont considered would lay naked the incredible costs of our health care system. Vermonters would certainly notice the 9 percent income tax hike and 11.5 percent payroll tax that the Shumlin administration concluded would be necessary to raise enough funds.
In so many words, single payer is very expensive. But single payer would have been slightly less expensive than the current system in 2015 and far less expensive in the long run. In other words, single payer was killed because of its cost, even though it would have saved money--and it's difficult to overstate the irrationality of this decision. It would be like spending $100 on a hammer because the $90 hammer is too expensive.

As I've written before, societal resistance to new social policy is inevitable. Even the phenomenally popular Social Security program experienced widespread skepticism and resistance when it was first implemented. Social democratic policy was unpopular even in Scandinavia when it was first implemented. Good social policy anticipates societal resistance and finds a way to work with it. Only policies that can win over a skeptical public survive. And Vermont's single payer--despite its many strengths--was unable to win over enough popular support. In a perfect world, PR wouldn't matter. But we don't live in a perfect world, so having the best policy isn't good enough.

Wikipedia has a useful summary of the efforts of single payer advocates. A bill passed in 2010 provided state funding for a commission to study health care reform. This commission made three recommendations: two of the three explicitly demanded single payer, and one suggested a public option. Then, based on this study, a 2011 bill mandated the creation of Green Mountain Care, single payer health care system for Vermont.

The real problem is that Vermont locked itself into a pure single payer system and didn't allow itself any room to maneuver. The goal of single payer advocates isn't a single payer system, but universal health insurance coverage and cost savings through administrative simplicity. Single payer is the most direct way to accomplish these goals, but it's not the only way.

Obtaining single payer's benefits without single payer
I wrote previously about the many administrative strengths of single payer here and here, and don't need to repeat those arguments on this page. However, throughout those pieces, I kept obliquely referencing a "workaround" used by Germany and Japan to get all the benefits of single payer, even though Germany has over 200 payers and Japan over 2000.