Tuesday, July 18, 2017

Samsara and Sisyphus: The Fundamental Futility of the GOP's Health-care Effort

The Republicans' quest to repeal and replace the Affordable Care Act feels a bit like the Hindu concept of Samsara, during which individuals live, die, and undergo reincarnation. It seems like we just hit the 'die' point once more. First, conservative Senators Jerry Moran and Mike Lee sank BCRA (the Senate's replacement for the ACA), arguing that it kept too much of Obamacare in place. Then, after McConnell began a push for full repeal (with a replacement at a later date), Sens. Susan Collins, Shelley Moore Capito, and Lisa Murkowski announced their opposition, preemptively sinking McConnell's Plan B.

Two questions on everyone's mind: are Republicans capable of legislating, and will this tiresome process continue?


Back in March, Paul Ryan and his minions in the House released the American Health Care Act, aptly named to remind onlookers of America's uniquely perverse health-care system. Despite his well-documented affection for Ayn Rand, Ryan's bill was not anarcho-capitalist enough for some conservative Republicans. In particular, they criticized the tax credits in the bill as a new entitlement, and didn't think the legislation went far enough to deregulate the insurance market. The bill was also too harsh for some moderates, with the CBO projecting 24 million people to lose health insurance over the next decade. Squeezed on both sides, the measure was pronounced 'dead' in mid-March. Ryan went so far as to declare Obamacare the 'law of the land'.


However, April showers bring medical bankruptcy, and the introduction of the MacArthur Amendment gave AHCA a new lease on life. Designed to address conservative complaints, this provision allowed states to obtain waivers for certain ACA regulations, namely community rating and essential health benefits. In practice, this would mean the proliferation of shoddy, high-deductible plans and exorbitant pricing for individuals with preexisting conditions.


Despite the transformation of Smeagol AHCA into Gollum AHCA to satisfy the bloodlust of the far right, moderates got on board. This acquiescence likely sprung from cosmetic changes made at the last second, namely an extra $8 billion for high-risk pools. With enough of both factions satisfied by changes to the bill, AHCA finally passed the House in early May.


Then came the super-secret boys club of 13 Senators that released the Better Care Reconciliation Act, another gem of a bill. The CBO estimates that BCRA would increase the number of uninsured Americans by 22 million over the next decade, cut Medicaid by almost $800 billion, raise premiums and deductibles for low-income Americans, and make it easy to price out those with preexisting conditions (thanks to the absurdly easy waiver process). While the Cruz Amendment sought to emulate the success of the MacArthur Amendment by slyly making the bill more conservative, the measure failed to appease the most hard-line right-wingers. Lacking 50 votes, BCRA is dead for the foreseeable future.


Why are the Republicans failing so miserably at passing health-care legislation? While there are plenty of political reasons, the fundamental problem is that Republicans have no coherent vision for health insurance in America.


Most Republicans want at least two things out of health-care reform: less government regulation, and lower taxes and spending. However, while doctrinaire conservatives yearn for these ends exclusively, GOP moderates also care about health-care for the poor and uninsured.


These additional goals are what create the GOP's woes: you cannot simultaneously have lower taxes and spending, less regulation, and a lower uninsured rate without dramatically lowering the price of healthcare or increasing government deficits.


The intuitive reason for this is fairly simple: if you lower taxes, then the government has less money for premium subsidies and Medicaid. Either the government has to shrink these programs, cut other spending, or borrow money. Given the GOP's aversion to budget deficits, the latter option seems unlikely. Furthermore, budget reconciliation rules (the fast-track process the Republicans are using) dictate that reconciliation bills can't increase the deficit outside of the ten-year budget window.


Cutting other spending is wickedly difficult, as attested to by current budget negotiations: the Republicans are seeking to cut food stamps, TANF, and other welfare programs, along with the EPA, State Department, Energy Department, and other agencies. These budget talks illustrate that there are very few painless spending cuts available. Choosing between throwing people off of food support or health insurance is not a fun decision.


Other options for cuts, such as defense, Social Security, and Medicare, are also off the table in the current political climate. Republicans probably couldn't make these cuts even if they wanted to: reconciliation rules dictate that reconciliation bills must only alter spending and revenue in areas under the jurisdiction of the assigned committee. As such, domestic spending cuts to non-health-care-related matters would be prohibited.


The government can't reduce regulations either. Out of all the ACA's regulations, the three conservatives hate the most are the individual mandate (everyone must buy insurance or pay a fee), community rating (can't charge sick patients higher prices in a given region), and essential health benefits (insurers must cover certain core services). Repealing these regulations would bring us back to the bad old days. Repealing the individual mandate would cause premiums to spike because many healthy individuals would exit the market absent the fee (pricing some out of the marketplace). The proliferation of sparse, high-deductible plans absent essential health-benefits would attract the healthy away from comprehensive care (further spiking premiums for the sick that need comprehensive care, and pricing some out of the market). The exclusion or surcharging of individuals with preexisting conditions is fairly self-explanatory. See a pattern? Unless the government was willing to generously fund a high-risk pool to cover sicker individuals, millions would lose health insurance without these regulations.


Thus, we return to taxing and spending. Republicans could conceivably deregulate the insurance market and lower the uninsured rate, but only if they were willing to spend oodles of money on high-risk pools. However, most experts believe that the paltry funds appropriated for "state flexibility" and high-risk pools in the GOP bills are woefully inadequate. Republicans could also maintain ACA insurance subsidies that would shield poor Americans from soaring premiums, but they don't want to do that either.


There is one more variable at play, and that is the cost of health-care. Almost everyone at this point knows that health-care costs in the United States are extremely high. Theoretically, if AHCA/BCRA slashed these costs, the GOP could gut regulations, lower taxes and spending, and hold steady the uninsured rate thanks to dirt-cheap health-care. However, this is wishful thinking. While some point to over-utilization of health-care as the culprit for high costs, the real villain is pricing. As Aaron Carroll points out, everything just costs more. There are likely many reasons for this, but showering individuals with cost-sharing (as would occur under the GOP plans) doesn't seem like it will make a big difference. For one thing, health care is a problematic market, with inelastic demand, externalities, poor information, and plenty of emotions that muddy decision-making. Indeed, empirical evidence indicates that consumers rarely shop around even when they can, and many procedures are hardly optional even in the face of substantial cost-sharing. As a result, adding market pressures to consumers can only go so far. Furthermore, the ACA already introduced more cost-sharing to the health insurance market (allowing cynical Republicans to rail against high deductibles during the 2016 campaign). I would be surprised if even more cost-sharing is the magic sauce to cure soaring health-care costs.


While I'm certainly glad these contradictions have held up the GOP's legislative agenda, the ideology upon which they settle is immensely important. If they choose the more conservative vision, where health-care is merely a consumer good in which the government should have a minuscule role, they will have chosen a dark, vile path, one in which dogmatic ideology outweighs rational compassion. This route involves prizing simplistic free-market principles over robust access to health-care.


However, if they go the other route, the GOP will have essentially acquiesced to the Democrats' philosophical framework. After all, if moderate Republicans think it is a bad thing to kick the poor off of government assistance, is it not a good thing to maintain or increase government aid and expand the insured population? Obviously, there is a point at which the costs of higher taxation outweigh the benefits of improved health-care, but moderates need to contend with the logical direction in which they are heading. Instead, GOP moderates gesticulate about how precious the Medicaid expansion is to their state, while simultaneously signing Grover Norquist's anti-tax pledge. They can't have it both ways.

Thursday, July 6, 2017

The Roots of Poverty

I recently had a debate with my father over whether poverty and racial wealth disparities were primarily due to environmental factors and bad public policies, or whether poor decision-making was the primary culprit.

My father argued a point similar to George Will's column in today's Washington Post. Based on recent sociological research from the American Enterprise Institute and the Institute for Family Studies, Will argues that a series of life choices known as the "Success Sequence" insure against poverty:

"The success sequence... is this: First get at least a high school diploma, then get a job, then get married, and only then have children. Wang and Wilcox [the authors of the study], focusing on millennials ages 28 to 34... have found that only 3 percent who follow this sequence are poor."
"Eighty-six percent of the Wang-Wilcox millennials who put 'marriage before the baby carriage' have family incomes in the middle or top third of incomes. Forty-seven percent who did not follow the sequence are in the bottom third"
While these findings seem intriguing, they fail to explain the U.S.'s high rate of poverty relative to other developed nations. Crucially, these countries have lower marriage rates and more out-of-wedlock births, contradicting Will's thesis. Some might object that these relative poverty figures (50% of the median income) are a poor measure of deprivation, since the U.S. is a wealthier nation than many other OECD countries. However, Switzerland and Norway have higher per-capita incomes than the U.S., more out-of-wedlock births, lower rates of marriage, and much lower rates of poverty.

It's worth digging into the data a bit more to examine why other countries with higher rates of out-of-wedlock births have lower poverty rates. Interestingly, it's not because their single-parent households are unusually prosperous. Rather, single-parent families are consistently poorer than two-parent households across OECD countries. However, the poverty rates of different family types vary between nations. While 11% of Sweden's single-working-parent households are in poverty, that rate is 35.8% in the U.S. Switzerland's rate is 21.6%, Norway's is 5.9%, and Denmark's is 5.1%.


Beyond ignoring these relevant international figures, Will omits several uniquely American problems that cement inter-generational poverty. For one thing, American zoning laws are often stricter than in other countries, driving up housing prices and preventing the poor from living in better neighborhoods. America also has a long history with racism that infects hiring practices, lending, and the justice system. Furthermore, America has an extraordinarily unequal education system, a relatively weak social safety net, and staggering income inequality. Wang and Wilcox's research elucidates the benefits of the "success sequence", but fails to explain why the United States does worse than other developed nations. Until they do, I reckon that it's worth considering the many other factors linked to poverty, most having to do with public policy and socioeconomic circumstances.

Sunday, June 25, 2017

Islamophobia and Media Outrage

Bigotry against Muslims in America, also known as Islamophobia, has been in the news a lot lately. Most recently, a Muslim teenager in Virginia was viciously murdered while walking to her local mosque. While it is not yet being investigated as a hate-crime, slurs against Muslim girls on a Portland train, vandalism of mosques, threats of genocide, and a rise in anti-Muslim hate crimes all point to a disturbing trend.

The rise in bigotry, intimidation, and violence towards Muslims is deeply concerning, and I do not want to downplay the devastating impact that hate and prejudice have on the Muslim community. However, I worry that the political dialogue in the U.S. is becoming warped by false perceptions of rampant anti-Muslim hatred.


Based on news reports and media attention, a casual observer would think that Muslims are one of the most persecuted minority groups in the United States. However, this is far from the case. According to the FBI Civil Rights division's 2015 statistics, 56.9% of hate crimes in the United States were racially motivated, while only 21.4% were prompted by religious bias. Even among the 1/5 of hate crimes that spawn from religious bigotry, only 22.2% were anti-Muslim. The biggest source of religious prejudice is still anti-Semitism, at 51.3%.


In light of these numbers, the Left's obsession with Islamophobia is puzzling. While Trump's harsh, anti-Muslim rhetoric may sustain the uptick in Islamophobic crimes, the numbers are still incredibly lopsided. Furthermore, Trump spills venom on virtually every marginalized group in society, particularly African-Americans and Hispanics. While the Left certainly worries about racism, the amount of attention given to anti-Muslim hate nearly matches these concerns. Furthermore, the Left's anxiety about racism is rooted more in concerns over police brutality and a broken criminal justice system than in harsh political rhetoric.


Now, this is to some extent justified given the U.S's long history with racism, Jim Crow, and slavery. Nonetheless, Trump's anti-black rhetoric could still potentially exacerbate racism from its higher baseline prevalence. Given this possibility, the focus on Trump's stoking of anti-Muslim bigotry seems oddly selective.


Now, maybe the media's focus on anti-Muslim hatred is benign. Maybe their fixation simply makes us more tolerant towards Muslims and less accepting of bigotry. However, I worry that the media's distortionary coverage has had unintended consequences, particularly when it comes to debating the ideas and beliefs of Islam. When the media treats the label of 'Muslim' like a race, it inoculates Muslims from having to defend their religious beliefs. To force such a defense would be a form of bigotry, tantamount to assaulting their personal identity.


However, Islam is not a race: it is a set of ideas. There are many Asian, Indian, African, and white Muslims all around the world, and the beliefs that they hold can be shed at any time. As such, questioning their views is not attacking their identity or personhood, because this 'identity' of being Muslim can be cast off at any time. 


Conversely, attacking someone for their race is clearly immoral. Race is an unchanging biological reality (although the dividing lines are societal constructs), meaning that attacking someone's racial identity is a form of attacking them personally.


Furthermore, there is no logical reason to denigrate a specific race. There are no 'good' or 'bad' races.


However, there are good and bad ideas, which brings us back to Islam. As I previously established, attacking Islam is not equivalent to attacking Muslims, since Islam is not intrinsic to human identity. Furthermore, it may be a sensible enterprise: there are many bad ideas propagated in Islam that are worthy of critique.


For one thing, the truth of the Quran as the word of God is dubious. Muhammad dictated the Quran to a scribe, purporting that everything he was relaying was spoken by God himself. At one point, a skeptical local stole his manuscript and demanded that he reproduce what he had previously written. If he were truly a mediator between God and man, he could conceivably ask God to repeat his message. However, Muhammad was unable to fulfill this challenge.


The Quran also does not read like the words of an omniscient creator. It is scientifically illiterate and full of contradictions. For example, the Quran says that Muhammad was the first Muslim. However, the Quran also says that Abraham (who lived and died hundreds of years before Muhammad) was a Muslim.


Criticizing the Quran as a fraud is an argument all Muslims must face, no matter how moderate. However, specific ideas from within the Quran held by more conservative Muslims are also worth scrutinizing.


For example, both the Quran and most Muslim scholars says that the punishment for leaving Islam is death. While many moderate Muslims reject this belief, large percentages in the Muslim world do not: 86% of Egyptians, 66% of Palestinians, and 79% of Afghans support the death penalty for apostasy (leaving Islam). Even in 'moderate' countries such as Turkey, support reaches 17%.


The Quran's problematic verses deserve scrutiny when they espouse such illiberal, regressive ideas. However, the West's treatment of Muslims as a besieged minority shields these beliefs from critique. If we seek to uphold Enlightenment ideals of truth and reason, we must confront bad ideas head-on, regardless of those that hold them. However, while dissecting shoddy beliefs and destructive ideas, we must simultaneously protect Muslims from discrimination. It's a difficult task to protect victims of discrimination while criticizing some of the very beliefs that make them targets in the first place. However, it is a necessary one given the destructive influence of theocracy in much of the world, and given the vaunted position with which we hold truth in our society.

Saturday, June 24, 2017

Is Taxation Theft? Philosophy of the Senate Health Care Bill

This week, the Senate released their secretly-drafted health care bill to repeal-and-replace the ACA. The bill has many components, expertly explained in this Vox piece by Sarah Kliff, but the main provisions are as follows:


  • The bill phases out enhanced federal payments for Medicaid expansion enrollees by 2024. The ACA expanded Medicaid to anyone under 138% of the poverty line in the states that participated. In order to encourage expansion and ease states' budget concerns, the federal government would initially pick up the tab for these new enrollees, and pay 90% of their costs by 2020. The Senate bill would revoke these enhanced payments and return to the normal payment rate, where states and the federal government split the costs.
  • The bill would make further changes to Medicaid, converting it from an open-ended entitlement program to a per-capita funding system. Right now, the government pays whatever costs the program incurs. In contrast, the Senate bill would allocate a fixed lump-sum grant for each enrollee, with different funding levels for different groups (e.g. higher funding for the disabled, and lower funding for children). Furthermore, starting in 2025, this per-capita grant would grow based on the urban CPI, an inflationary index that typically grows slower than the rate of Medicaid spending.
  • The Senate bill would also shrink tax credits for enrollees in the individual market. Right now, individuals below 400% of the poverty line that purchase their own health insurance are eligible for federal subsidies. The Senate bill would lower the eligibility threshold to 350% of the federal poverty line, and make the subsidies less generous.
  • The Senate bill eliminates the individual mandate, meaning that healthy individuals may opt out of buying insurance, raising the likelihood of higher premiums for the remaining, sicker population.
  • The Senate bill overhauls ACA waivers. Right now, states can apply for waivers that allow them to experiment with different health care systems, so long as they “provide coverage that is at least as comprehensive as the coverage” defined under the ACA” and “cover at least a comparable number of residents.” The Senate bill drastically expands the availability of these waivers by only requiring that health care changes to be deficit-neutral. As a result, states could opt out of covering the ACA's "essential health benefits", which requires health plans to cover certain key services.
All in all, the Senate health care bill cuts Medicaid, makes federal subsidies less generous, and allows for insurance to be less comprehensive. Why are the Republicans doing this? For the same reason they do almost everything: tax cuts for the rich. The Senate bill repeals a long list of Obamacare tax hikes: 
  • 3.8% surcharge on investment income for families earning above $250,000 ($200,000 for individuals).
  • Medicare payroll tax hike for families earning above $250,000 ($200,000 for individuals).
  • Taxes on tanning salons, the health care industry, and the medical device industry.
This bill hardly seems to be a health care bill at all. If Republicans truly wanted to improve the American health care system, they would institute measures to shore up the individual marketplace, increase competition, improve access, and cut costs. This bill makes all these problems worse. It would likely destabilize the individual markets by eliminating the individual mandate, worsen access to health care by gutting Medicaid and insurance subsidies, and do nothing to enhance competition in the system. The bill might slightly cut health care costs by making consumers more price-sensitive due to higher co-pays and deductibles, but it still wouldn't address the supply-side problem of extraordinarily high prices.

Instead, this bill is a tax cut for the rich dressed up as health care reform.

Now, I understand conservatives' revulsion to taxes. Most ideological conservatives and libertarians think taxes are theft, and thus want the lowest possible level of taxation. They also think that government infringes on the free market through burdensome regulations, counterproductive programs, and crony capitalism, all funded through taxation. Thus, lowering taxes curbs theft and starves the government, causing it to shrink. However, conservatives' push for tax cuts in the Senate "health care" bill has two fundamental flaws.

The first is pragmatic: why take aim at Medicaid for budget reductions when there is so much low-hanging fruit? For example, Republicans could save $125 billion by cutting administrative waste at the Pentagon, according to an internal report. Senators could also target corporate welfare. According to the Cato Institute, corporate handouts in the federal budget cost taxpayers almost $100 billion a year. Farm subsidies are also expensive, costing about $20 billion annually. Why target the poorest and neediest Americans by curbing access to health insurance, when there are many other viable targets for budget reduction that don't incur the same human costs?

The deeper problem with the Senate tax cuts is its incoherent ideological basis. Libertarians' notion of taxation as theft seems based on a framework of categorical imperatives, where certain actions and behaviors are immoral no matter what. Under this Kantian view of morals, lying is wrong under any circumstances. To many Libertarians, taxation is wrong because it is theft, and theft is wrong... because it is wrong. However, a Utilitarian view holds that taxation can be moral even if it is theft. Utilitarians view theft as moral if the benefits adequately outweigh the costs. While some critics contend that this can lead to some unsavory outcomes, such as stealing deadbeats' organs to provide for transplants, 'rule' Utilitarianism holds that the rules under which society is governed are the topic of moral analysis. Individual actions that may produce a net societal benefit, such as in the above example, are not the important focus. Rather, the rules allowing such actions should be scrutinized. For example, a rule allowing for organ harvesting would be immoral, because it would create societal chaos that would outweigh the benefits to injured patients.

Both a Kantian view and a Utilitarian view of taxation fail to justify the taxation-as-theft Libertarian approach. Under a Kantian framework, all taxation should be outlawed. However, most Libertarians advocate for low levels of taxation to fund basic public goods, such as defense and police. Why is such taxation permitted? The answer can't hinge on the costs of not procuring these public good, because that logic slips into Utilitarian thinking.

However, the Utilitarian view of taxation-as-theft also doesn't support Libertarians' tax-cutting dreams. For starters, many programs that Libertarians want to cut easily pass cost-benefit analysis. For example, most Libertarians oppose universal pre-K education. Utilitarian Libertarians would probably argue that government provision of pre-K education would crowd out private pre-K programs, infringe on parental choice, result in higher taxes, and provide meager benefits inadequate to justify the aforementioned costs. However, there don't seem to be many private schools to crowd out: only 50% of 4-year-olds from families in the lowest income quintile are enrolled in preschool, with many using the federal Head Start program. While the numbers are higher for affluent families, the free market seems to be undersupplying preschool for those that most need it. Furthermore, many Libertarians underestimate the benefits of pre-K education. According to the Department of Education, "expanding early learning... provides society with a return on investment of $8.60 for every $1 spent." I have a hard time imagining that these gains don't outweigh the costs of higher taxes on the rich and middle-class.

And thus we come full circle: the same dynamic is at play in the Senate health care bill. Utilitarian Libertarians that oppose Medicaid might argue that the free market would provide better healthcare, and that the current state of affairs results from too much government meddling. However, they offer scant evidence for this view, and can't point to a single health care system in the world that is truly free. Instead, they overlook the massive return on investment from Medicaid, and dismiss the benefits to health outcomes. Again, I have a hard time thinking that the pain of slightly higher taxes on high-income households outweighs these enormous benefits.

So there we are. From both a pragmatic viewpoint (there are better areas to cut spending) and an ideological one (Utilitarian Libertarians can't plausibly argue that the costs of Medicaid outweigh its benefits), the Republicans' tax cutting crusade makes no sense. Republicans either need to own up to their intellectual errors and rectify them, or change course by reversing their views.

Tuesday, June 20, 2017

The Ship of Theseus and American Aristocracy

Malcolm Gladwell recently made a podcast discussing the wealthy's addiction to golf, and the philosophical import of golf in our society. I highly recommend that you go listen to it. Some highlights:


  • CEO's play a lot of golf. Some of the most prolific golf aficionados of the nation's top companies play roughly 160 hours of golf per year.
  • Many golf courses should not exist from an economic standpoint. Property taxes are calculated based on the best use of the land within the local zoning restrictions. As such, many golf courses in urban areas have extremely high calculations of "best use" given their massive size, and would be taxed into oblivion were property taxes applied.
  • To get around this, Californian golfers lobbied their Assembly to amend the state Constitution to exclude golf courses from regular property taxation. Their favored amendment would tax properties on the price at which they were bought, meaning that property taxes would only change if the property was sold or changed ownership. As a result, golf courses would be able to keep paying low taxes so long as their owners stayed the same.
  • This presents a problem: who owns these golf courses? Equity is held by the club's members, meaning that as members die or drop their membership and new individuals join, ownership changes hands. However, California tax assessors ruled that ownership doesn't actually change through this gradual process.
  • In essence, California tax assessors adopted the spatial temporal continuity theory of identity, wherein the identity of an object stays the same so long as its basic essence and spatial integrity remains the same.
  • Unbeknownst to the California tax authorities, they were wading into a contentious philosophical debate spurred by Plutarch's story of the ship of Theseus:
"The ship wherein Theseus and the youth of Athens returned from Crete had thirty oars, and was preserved by the Athenians down even to the time of Demetrius Phalereus, for they took away the old planks as they decayed, putting in new and stronger timber in their places, in so much that this ship became a standing example among the philosophers, for the logical question of things that grow; one side holding that the ship remained the same, and the other contending that it was not the same."
  • By the tax assessors' logic, the ship of Theseus stays the same no matter how many boards the crew members replace. This theory contrasts with the mereological theory of identity, wherein the identity of an object is determined by the sum of its parts. By this theory, the ship of Theseus becomes a new ship as its parts are replaced.
  • Malcolm Gladwell contends that the spatial temporal theory of identity is ominous for egalitarianism, because it can be used to perpetuate an aristocracy. By this theory, if a political class is thought of as a unit, that unit's identity stays the same so long as its membership changes slowly and smoothly. As such, an aristocracy could be thought of as static and unaltered so long as it changed gradually.
I think Gladwell's worries are well founded, and I would actually take them a step further.

The idea of inheritances essentially applies the spatial temporal theory of identity to property law. By extending the identity of wealth's ownership to lawful beneficiaries of wills and contracts, wealth is allowed to be transferred seamlessly across generations without its ownership being fundamentally altered.

As such, the unit of identity under property law is considered to be the web of legal ties laid out in wills and contracts.

However, this logic runs counter to basic meritocratic norms. If we think of wealth as legitimized by hard work and just compensation, then these bequests are obviously wrong: beneficiaries did nothing to "earn" their inheritances.

If these bequests are deemed appropriate, then the conversation stops there. However, many observers are troubled by inherited wealth. If these individuals think bequests are unjust, their logic extends to some really interesting places.

For example, what counts as a bequest? Are natural talent, propensity for hard work, intrinsic motivation, and intelligence considered biological bequests? Didn't your parents simply give you these abilities? At a minimum, IQ is extremely heritable. This is significant, because IQ is the an extremely important metric for predicting future financial and social outcomes. While hard work is important, an individual with an IQ of 90 simply cannot become an astrophysicist no matter how hard they work.

Furthermore, many other factors that determine success are not derived internally. A positive childhood environment and good schooling are largely determined by parents, giving an advantage to affluent families that live in more stable neighborhoods with better schools.

In essence, pure meritocracy is unattainable, because most of the factors that determine success are beyond an individual's control. Nonetheless, the myth persists, resulting in large swaths of poor and middle-class Americans that blame themselves for their poor and mediocre outcomes. As a society, we must begin to shift towards a more enlightened understanding of bequests, and recognize the power of genetics in determining success. While it may be unwise to change the spacial temporal theory of identity in property law due to legal and economic ramifications, there are other measures we could take to reduce wealth inequality. We could improve schools in low-income neighborhoods, institute universal pre-K schooling, boost welfare spending, boost the EITC, raise taxes, etc. We must consider these policy changes if we are to live up to our professed moral convictions shunning sliver-spooned rearing and inherited wealth.

Monday, June 19, 2017

The Perils of the Fight for 15 in Minneapolis

Right now in Minneapolis, the City Council is considering a proposal to increase the minimum wage to $15 an hour. Per the Star Tribune:
"The proposed ordinance, which still needs a public hearing and a final council vote, gives employers five years to increase workers’ pay to $15 an hour. It includes a “training wage” exception for younger workers starting jobs, but does not allow employers to count tips as wages. Businesses that don’t comply could face thousands of dollars in fines."
The central argument of those that oppose a minimum wage increase rests on basic microeconomic theory. The argument goes as such: setting a minimum wage above the market equilibrium increases the quantity of labor supplied and decreases the quantity of labor demanded. As a result, unemployment increases.




However, economists vary widely as to whether they think a minimum wage hike actually increases unemployment. Indeed, meta-analyses of the research have come to differing conclusions, indicating that the jury is still out. Nonetheless, it's worth considering the economic arguments proffered by minimum wage advocates, and assessing whether a $15 minimum wage is the right direction for Minneapolis and other cities.


Academics and politicians wield a slew of arguments to explain why microeconomic models are not predictive of real-world results in the case of the minimum wage. These advocates argue that in the real world, unemployment doesn't increase to the extent that introductory economics suggests it would for a variety of reasons. Economics writer and law professor James Kwak offers a helpful summary of these arguments in a piece he wrote for the Atlantic. Kwak first argues that many employers simply can't decrease employment due to practical constraints:

"Although the standard model predicts that employers will replace workers with machines if wages increase, additional labor-saving technologies are not available to every company at a reasonable cost. Small employers in particular have limited flexibility; at their scale, they may not be able to maintain their operations with fewer workers.  Therefore, some companies can’t lay off employees if the minimum wage is increased."
Kwak goes on to argue that a higher minimum wage transfers wealth from the rich to the poor, and that many companies need not cut employment due to higher worker productivity:
"...many companies can recoup cost increases in the form of higher prices; because most of their customers are not poor, the net effect is to transfer money from higher-income to lower-income families. In addition, companies that pay more often benefit from higher employee productivity, offsetting the growth in labor costs."
Indeed, some studies have supported this productivity argument, and the intuition behind it makes sense: when workers are paid more, they value their jobs more and work harder. Kwak offers several other points, arguing that a minimum wage hike decreases worker turnover, and can stimulate local economies by increasing poor peoples' disposable income (the argument resting on the idea that the poor spend a larger share of their income). He also points to a CBO study suggesting that any job losses induced by a wage hike are outweighed by income gains for the poor:
"A study by the Congressional Budget Office (CBO) estimated that a $10.10 minimum would reduce employment by 500,000 jobs but would increase incomes for most poor families, moving 900,000 people above the poverty line."
These arguments are compelling, especially in light of the mixed and often favorable empirical research. However, they misconstrue a few issues, and are inadequate to justify the Minneapolis City Council's proposal.

For one thing, Kwak discounts the possibility that small employers unable to decrease their workforce would simply close shop or move. This is especially a problem for restaurants and retailers that operate on small profit margins. Business closures seems an especially pressing concern for Minneapolis given its large restaurant industry, and given its proximity to St. Paul (where the minimum wage is lower).


Furthermore, City Council's proposal lacks a tip credit (wherein business can pay lower wages to account for tipping), meaning that restaurants will have even higher labor costs. Forgoing a tip credit makes little sense. If the goal is to ensure that servers earn at least $15 an hour, this provision is unnecessary. According to one survey, servers in Minneapolis already make an average of $28.56 an hour counting tips. Furthermore, the absence of a tip carve-out gives preferential treatment to servers over cooks and kitchen staff.


To return to Kwak's argument, his assertions that a minimum wage would transfer wealth, increase productivity, and reduce turnover may indeed be correct. However, if the motivation of a minimum wage increase is to improve conditions for the working poor, why don't we just boost the Earned Income Tax Credit (EITC) or implement state-level wage subsidies? Nearly all the arguments for a minimum wage apply to wage subsidies. If laborers work harder and quit less often due to higher wages, then a higher EITC/wage subsidies would have the same effect. If the goal is to transfer wealth from the rich to the poor, wage subsidies funded by tax hikes on the rich would accomplish just that.


Furthermore, wage subsidies would not have the same detrimental impact on small businesses and restaurants. Rather than imposing an unfunded wage mandate on businesses with little room for higher costs, why not impose these costs on wealthier Americans with a greater ability to pay?


That's the fundamental problem with the minimum wage discussion: it lacks policy intelligence and clear thinking. Rather than assessing the goals of a minimum wage increase and realizing that wage subsidies would be adequate, Fight for 15 advocates and others offer simplistic solutions that low information voters can understand. I think this is a dangerous route. Advocates should trust the intelligence of the American people and explain to them the merits of the more sensible wage subsidy approach, rather than insult them with ill-informed, easy answers.

Sunday, June 18, 2017

Charting a Future for Welfare and Taxation

One of the biggest problems with the state of policy discussion in America right now is the lack of appetite for fundamental reform. I think there are a lot of reasons for this, but one important factor is the Trump administration's policy ignorance and disdain for evidence-based analysis. Rather than considering fundamental tax reform and welfare overhaul, the Trump administration has chosen instead to indulge in simplistic tax cuts under the banner of "reform." These Bush/Reagan-esque tax cuts that have been shown time and again to be fiscally irresponsible and negligible for economic growth. In addition, they don't rectify the underlying problems with the complexity of the tax code. Instead, they just lower rates for their wealthy constituents. While some manifestations of these "reforms" scrap deductions and change exemptions, these measures are typically milquetose and incremental, and still work within a broken system. While Paul Ryan and Kevin Brady still support corporate tax reform through the destination-based cash flow tax, opposition from retailers, automakers, and the Chamber of Commerce seem destined to kill the idea. The proposal itself seems wrongheaded in many respects. Namely, it's unclear that the dollar would strengthen adequately to stave off higher consumer prices. Stranegly, the proposal was also given priority over more sensible and studied reform proposals, such as a VAT or partnership model for corporate taxation.

As such, it seems unlikely that the complexities of the corporate and personal income taxes will be ameliorated any time soon. Nonetheless, Democrats would do well to consider fundamental reform as a counter to the Trump administration's half-measures, namely through a simplified tax code and welfare system that would jointly cohere to boost revenue, lower complexity, and increase transparency.


The first measures Democrats should endorse are a VAT in place of corporate taxation, and a personal income tax with no deductions or exemptions. Implementing a VAT in place of the corporate income tax would solve three problems: the global disadvantage of U.S. companies, tax avoidance, and complexity. Right now, U.S. companies are required to pay the 35% corporate income tax on foreign profits. While they receive a tax credit for foreign taxes paid, they must still pay any remaining U.S. taxes owed after the credit is applied. Almost no other countries require this of their corporations, and the result is that U.S. multinationals are at a competitive disadvantage. Implementing a VAT would also make taxation almost entirely unavoidable. By taxing the final products themselves instead of profits, corporations would not be able to engage in transfer pricing to claim hefty tax deductions. They would also be unable to claim inflated depreciation allowances for capital goods that have sneaked into the tax code due to lobbying or administrative error. This is a real problem: between 2008 and 2012, 288 of the 500 biggest companies in the U.S paid $0 in corporate income taxes at least one year, and the effective tax rate is substantially lower than the statutory rate of 35%.


Changing to a VAT would also get rid of distortions in corporate decision-making: corporations would buy profitable capital, rather than whatever allows them to claim lucrative depreciation allowances. Finally, switching to a VAT would be extremely simple, in that one simple rate would be applied to all goods and services. The current corporate income tax's complexity arises from considering what counts as costs or investment that can be deducted. However, costs under a VAT are only considered to be the goods and services purchased for the sellable product. For example, if Walmart pays $30 dollars to buy a pair of shoes, and sells those shoes for $60, it only pays taxes on the $30 in excess of the original $30 in costs. Now, there are complexities that arise from investment under a VAT, but the general consensus is that a VAT is simpler than the current corporate income tax system.

The problems under the personal income tax arise chiefly from the distortionary impact of deductions, and the general complexity of the system. While certain deductions may be beneficial, such as the deductions for charitable giving, many deductions and credits cause people to over-purchase certain goods and services, distorting economic decision-making. For example, the mortgage-interest deduction likely contributes to excessive home-buying and borrowing. Removing these deductions would simplify the tax code and remove distortions.


Now, there are two main problems raised by these reforms. The first is the regressive nature of a VAT, as well as the regressive impact of removing exemptions and deductions. A VAT would raise consumer prices, which would disproportionately hurt the poor. Exemptions and deductions also phase out at higher incomes, and thus removing these would have an outsize impact on the poor and middle class.


As such, I will offer a few welfare reform proposals that address these issues. First, I would propose a universal basic income in place of the current welfare system. Guaranteeing a decent level of income would alleviate some of the stresses of higher consumer prices from a VAT, and replace the income assistance of exemptions and deductions.


A universal basic income would also address more fundamental problems with welfare in America. Welfare in the United States takes the form of many different programs, many given in-kind and tied to work requirements. From TANF to SNAP to Section 8 vouchers, welfare in the U.S. is incredibly convoluted, resulting in administrative costs, lower utilization, and inefficiencies. A universal basic income would be administratively simpler, and would get rid of inefficiencies resulting from in-kind transfers. UBI would also be more broadly utilized given its universal nature, resulting in welfare gains for the many Americans that slip through the cracks in our current system.


In order to pay for such a system, the personal income tax could be increased and new brackets added, resulting in a de facto phase out for the UBI. In addition, worries over work disincentives could be addressed by making the UBI adequately low in order to discourage free-loading. The Earned Income Tax Credit or wage subsidies could then be applied to encourage work. Furthermore, concerns over work disincentives from a UBI seem to be exaggerated.


Finally, concerns over lower charitable contributions could be addressed through a separate subsidy code to reward certain activities, such as having children, giving to charity, or saving for retirement. Certain important deductions and credits, such as for healthcare savings and the child care tax credit could be converted to subsidies. While this may seem to be a superfluous change, a subsidy code would be more transparent, resulting in broader usage. Increased transparency would also make the subsidies more salient, increasing their power to incentivize positive behavior.

Now, I'm obviously simplifying many of these issues. My broader point in outlining some reform options is to illustrate the vast potential for improvements in our tax and welfare systems. Instead, the political discussion has ossified thanks to Trumpian demagoguery and general complacency in our political system. I would encourage those on both sides of the aisle to expand their ambitions for fiscal reform given the desperate need. Our tax code and welfare system are wickedly complex, inefficient, and distortionary, and we need politicians that are willing to engage in  visionary reform that addresses these problems.