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 vox.com, 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

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.

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.

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.

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.

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.