Monthly Archives: April 2013

Serving the Poor (It’s a Cookbook!!)

Motivation: even the Danes realize when the welfare state has gone too far.

It turned out, however, that life on welfare was not so hard. The 36-year-old single mother, given the pseudonym “Carina” in the news media, had more money to spend than many of the country’s full-time workers. All told, she was getting about $2,700 a month, and she had been on welfare since she was 16.

… Carina was not the only welfare recipient to fuel the sense that Denmark’s system has somehow gotten out of kilter. Robert Nielsen, 45, made headlines last September when he was interviewed on television, admitting that he had basically been on welfare since 2001.

Mr. Nielsen said he was able-bodied but had no intention of taking a demeaning job, like working at a fast-food restaurant. He made do quite well on welfare, he said. He even owns his own co-op apartment.

Does it really make sense to serve the poor by giving them social benefits that are taken away once they get a job? The policy name for this is “means testing” and it is one of the worst aspects of the war on poverty. Indeed, it’s fair to say that after half a century of the LBJ inspired war on poverty in the U.S., poverty is winning. Curtailing benefits as recipients get jobs is a big reason why. It punishes work, and effectively makes low-income workers face the highest marginal tax rates. High marginal tax rates approaching or exceeding 100%!  Where is the Republican outrage?  The Democratic shame?

My friend Bryan Caplan disagrees.  In fact, he laid down a very good challenge in a March 1 blog post that I have been unable to fully meet. Sorry, Bryan.  This is a  great debate, and I’ll leave it for others to color in the lines.  All I can do for now is respond with a sketch.  First, here’s Bryan:

 “So should we extend all currently means-tested programs to the entire population?”  Listeners often admit that it’s a persuasive challenge.  At our last lunch, however, Tim Kane, one of my favorite libertarian economists, bit the bullet.  In his view, any program that we make available to the poor should be available to everyone.

If I understand Tim correctly, his main argument is that means-testing is a high implicit tax rate, with all the standard effects.  As a behavioral economist, I suspect this a serious overstatement.  Framing and transparency matter.

Even if Tim is right, though, we face a choice of evils.  With means-testing, we’ll have a high implicit marginal tax rate on everyone who might plausibly collect benefits.  Without means-testing, however, we’ll have a high implicit marginal tax rate on everyone.  Why the difference?  Because means-testing saves a ton of money, allowing lower average tax rates.

Or so it seems to me.  My challenge for Tim and anyone who agrees with him: Offer a plausible estimate for the total cost of expanding all means-tested programs to the entire population – year in, year out.  Start with Medicaid, then add unemployment insurance, TANF, and everything else.  Even ignoring disincentive effects, can you really come up with a figure under 10% of GDP?

I think Bryan is right that making a universal welfare grant — perhaps a baseline amount of a few hundred dollars per month per person (regardless of marital status, gender, family structure, etc.) — will be expensive. For each $100/month, the annual national outlay would equal roughly $100 x 12 months x 300 million people = $360 billion.  That’s $3 per day, right, which is what economists say was the typical daily income for most of human history. Americans would probably want to do better than that, so let’s say triple, which is $1 trillion per year.

Yes, in a $15 T economy, the cost of a guaranteed income would be hefty. But what would it replace?  I don’t know, but it would be interesting to consider ending TANF, job training, UI, disability. And then, dynamically, what would the boost be to labor force participation, private income generation, and overall GDP?  I’d bet it would be a one-time $1T GDP level adjustment upwards.  But I would support the program even if there were neutral GDP level effects, out of dedication to simple human dignity.  A safety net, yes, a poverty trap, no.

Hive Mind by Garett Jones

Dr. Garett Jones, professor at GMU and guest blogger at the always fascinating EconLog, is the author of the one book I will be guaranteed to read, more than once, in 2014:

My big project over the next year is finishing my book Hive Mind: How Your Nation’s IQ Matters So Much More Than Your Own. It’s under contract with Stanford University Press with tentative plans for release in Fall 2014; I discuss some of the big ideas behind the book in this article (PDF).

Congratulations, Dr. Jones.  As for the cover, here is the neatest image I found on a google search:

This image is by Simon Fowler.

Krugman, Unstimulated

In this NYT op-ed, Paul Krugman recites some powerful facts about the unemployed in America. I could not agree more: joblessness is appalling, the policy response is pathetic. But then he points the Nobelist finger at a complete phantom:

The main reason our economic recovery has been so weak is that, spooked by fear-mongering over debt, we’ve been doing exactly what basic macroeconomics says you shouldn’t do — cutting government spending in the face of a depressed economy.

Welcome to the Macro Reality Distortion Field!  Are we really “cutting government spending” over the last five years? No. Historical U.S. budget data is here at the Congressional Budget Office, available for any modern human to access in about 2 clicks:

Discretionary outlays were $1,041.6 billion in FY2007, $1,134.9 b in 2008, and  1,285.2 b in FY2012.  That’s $240 b per year higher spending, but it pales next to mandatory spending. Again, CBO records this in $billions as:

2007 1,627.8
2008 1,780.3
2009 2,282.7
2010 2,096.7
2011 2,214.3
2012 2,239.9

Counting all outlays, CBO says that federal spending in 2012 was eight hundred billion dollars higher than five years prior.

So was he counting expenditure in some other way, perhaps outlays as a percentage of GDP?  No.  According to CBO, federal outlays as a percentage of GDP rose from 19.7 to 22.8 during this time, of which the discretionary piece went from 7.5 to 8.3.

Sports rules: NBA flop edition

It’s showtime!  NBA playoffs began this weekend, and our beloved Spurs won, so BofE is happy.

Rules in sports are helpful metaphors for institutions in economics. How does a government – the referee in Chief Justice John Roberts’ description – make sure the playing field is level, victory is based on talent instead of chance, and nobody gets hurt? The sports metaphor lever is being pulled to justify sharing this hilarious video of flopping in the NBA (HT Slate):

Boston Terrorism and Immigration Reform

I listened to news of the Boston lockdown this morning, a consequence of the successful intelligence and police work in identifying and killing at least one of the Marathon terrorists.  Early reports are that two of the suspects are recent immigrants to the U.S. From a Boston Globe summary report:

Authorities are searching for suspect Dzhokhar A. Tsarnaev, 19, a government official said this morning. The dead suspect is his brother, a source said. At 8:45 a.m., a SWAT team and armored car had been summoned and police were surrounding a home and a car near an intersection in Watertown, the community that officials said is the focus of their search for Tsarnaev.

As a former military intelligence officer, I couldn’t be more proud of the quickness in finding the terrorists. To my brothers and sisters in the silent service, thank you. And my heart goes out to the police officers injured and killed today.

As our readers know, I now work as an economic, not intelligence, analyst. In fact, I first learned about the Marathon bombings while researching immigration reform, particularly the dysfunctional politics in the Senate and House that corrupt common sense ideas that most Americans support. That leaves the nation with a de facto amnesty that gives terrorists and drug gangs cover to enter America, hide, overstay, and more. Inaction on immigration reform means that our nation will be more vulnerable than it should be to the kind of terrorists that struck in Boston. Some of you may recall that I warned of exactly this danger in a 2006 report published by the Heritage Foundation:

Even though they pose no direct security threat, the presence of millions of undocumented migrants distorts the law, distracts resources, and effectively creates a cover for terrorists and criminals. In other words, the real problem presented by illegal immigration is security, not the supposed threat to the economy. Indeed, efforts to curtail the economic influx of migrants actually worsen the security dilemma by driving many migrant workers underground, thereby encouraging the culture of illegality. A non-citizen guest worker program is an essential component of securing the border

Despite good faith efforts of President Bush, Senator McCain, and Senator Kennedy in 2007, too many politicians preferred to keep the issue unresolved.  So for the last six years, thanks to the foot-draggers in Washington, our nation’s security has been compromised. And it seems that slow-rolling attitude remains in play today (see Kim Strassel’s insightful comment in the WSJ this morning):

Senior adviser Dan Pfeiffer recently dodged a question about whether his boss would sign a bill with a trigger. White House officials have been equally evasive on whether the president supports a guest-worker program.

I am also frustrated with conservatives who claim, falsely, that immigrants hurt the U.S. economy. They can only make that case by ignoring the benefits side of the ledger, not to mention ignoring dynamic analysis. See this recent Daily Caller Q&A with Doug Holtz-Eakin or my own Heritage study from 2006. Do you really think deporting 10 million people from our housing markets is going to help real estate vales? Immigrants that are high-skill AND low-skill add more to the economy than they take — good for consumers, good for tax revenue, and neutral for wages. But any reading of the economic growth literature confirms that greater scale and specialization enhances GDP and personal income growth in the long run.

But I am frustrated with Democrats, particularly the AFL-CIO types, that quietly try to strangle reform while pretending to love immigrants. Why won’t the president support a humble guest worker program, lightly regulated, so long as guest workers are sponsored by U.S. employers? The sad fact is that too many Democrats want to avoid any signing ceremonies on immigration, because inaction can be blamed on the other side.

Holding out on immigration reform is a trifecta of cynical politics, anti-growth economics, and weakened national security.

Charlie Cook’s stunning chart of polarized congressional districts


That’s from Charlie Cook’s column in the National Journal. He writes:

In 1998, we found 164 swing seats—districts within 5 points of the national partisan average, with scores between R+5 and D+5 (a score of R+5 means the district’s vote for the Republican presidential nominees was 5 percentage points above the national average). The data 15 years ago showed just 148 solidly Republican districts and 123 solidly Democratic seats. Today, only 90 swing seats remain—a 45 percent decline—while the number of solidly Republican districts has risen to 186 and the count of solidly Democratic districts is up to 159.

In 1998, the median Democratic-held district had a PVI score of D+7, and the median Republican-held district had a PVI score of R+7—pretty partisan, but far from monolithic. Today, those median numbers are D+12 and R+10, and that 22-point gulf is the main structural driver of the political paralysis we lament today.

KAL book! Daggers Drawn

KAL, the editorial cartoonist whose work you have probably seen at the Economist, has a new book “Daggers Drawn” coming out in a few days that you should buy. He self-produced the book with funding from Kickstarter, which is a neat story in its own right.  There is no link to any online retailer yet, but you  a link to Kal’s website is here. Also, here is Kal speaking at a recent TED conference.


When setting up the blog, KAL responded to our urgent request to sketch the masthead you see above. Simon and Schuster liked it, too, so they layered the imagine into the printed book as highlight for many sections. A few  days before the final approval of what they call the “second pass,” I asked our assistant editor if they had confirmed permissions for the image with Kal.  What?!  I should have anticipated this, but nobody had negotiated with Kal for rights to the artwork. I gave him a sheepish call and offered to pay for the rights, and HE REFUSED to take any money. Instead, he gave full rights, even completing the paperwork and faxing back “zero” under royalties. We are literally in Kal’s debt.  He’s a gentleman as well as an insightful artist.

Please buy a copy of Daggers Drawn or ask for it at your library.  The good guys and gals of the world deserve all the support you can give them.