Category Archives: Entitlements

What is the Bottom Line on Obamacare?

Isn’t it strange that the Affordable Care Act was advertised as “shrinking the deficit” back in 2010 because its fiscal outlays were so efficient, but now proponents are complaining that it’s not their fault the bill doesn’t have enough funds for implementation? How can you launch a project under the banner of cost efficiency and neglect an entire component of its cost structure?  Imagine an ad touting a sports car with the world’s cheapest, most powerful engine, neglecting to mention that it’s a gas guzzler.

Here’s an excellent summary of the status of Obamacare in the latest Commentary magazine by my Hudson colleague, Tevi Troy:

Meanwhile, the cost of the bill, initially estimated to be around $898 billion, has doubled, to about $1.85 trillion. A minority report from the Senate Budget Committee has the figure at $2.7 trillion. All kinds of regulatory deadlines in the bill have been missed. Confusion reigns among plans, patients, and administrators alike.

… As the Affordable Care Act continues to come apart at nearly every seam, Republicans will probably hold firm on their principles and refuse to bail Democrats out of the fix they have put themselves into, until and unless the Democrats are willing to make real and substantive reforms. These reforms should include, at a minimum, reducing insurance subsidies, empowering Health Savings Accounts, repealing the anti-innovation medical-device tax, loosening up the rules regarding insurer participation in exchanges, and giving states more flexibility in the design of their exchanges.

The CBO still says the ACA will create a net surplus, for the record.  But Troy and others such as Philip Klein note that the 10-year sticker price has indeed doubled per CBO itself. Stay tuned.

Immigration Errors

A new Special Report from the Heritage Foundation has come to my attention, and I am disappointed in its poor quality. asserts on its main page in the biggest font I have ever seen (and I worked there for years) “The COST of Amnesty TO YOU > $6.3 Trillion.”  Here we go.

It must be remembered that the same analysis was done by the same author in 2007, then warning the cost of amnesty was $2.6 Trillion (HT Andrew Stiles). But the current report indicates that the status quo cost of unlawful immigrant households is roughly half of the amnesty cost, which means YOU are already paying $3.15 Trillion. By this logic, the status quo (thanks to inaction six years ago) is more expensive than if reform had passed in 2007, to the tune of half a trillion dollars. The pileup of outlandish Heritage estimates presents a credibility hurdle.

The report’s authors may sincerely believe that unlawful immigrants are costly, but their study clearly makes assumptions to prove that point, while ignoring research to the contrary. Here are just a few observations:

  1. The most glaring error is the weak alternatives comparison. This paper asserts a cost of “amnesty” as if migrants are only costly if a new piece of legislation passes. What is the cost of the status quo?  Table 8 (p 24) purports to make this comparison but it is confusing (calling it a phase) and sketchy — avoiding a direct comparison of the bottom line cost.  The 3.15 T number is my own estimate … it really is incumbent on the authors to provide this themselves, and not offering such a number raises questions. The details are no better: no Obamacare costs for the status quo? A tripling of direct welfare costs after legislation passes yet tax revenues hardly budge?

  2. There is no dynamic analysis. The authors estimate fiscal benefits only (and weakly), but ignore economic benefits entirely. This fails the longtime Heritage claim to support dynamic analysis in tax and security policy. Charts 5 and 6 on page 16 show a net UIHH (unlawful immigrant household) fiscal deficit of $14,387.  Note that this is based on annual UIHH earnings of $38,988.  Unless they expect readers to believe all this household income (a) generates no productive work (e.g., makes product, mows lawns, nurses the sick, and starts businesses that hire other Americans) and (b) is 100% remitted abroad, consuming nothing in the U.S. macro economy, then the report is misleading. Millions of migrants cannot help but add to the GDP, and more importantly to specialization and growth. Dynamically, there are at least two huge channels of positive feedback into the productive side of U.S. economy – think of less expensive farm produce and greater demand for housing.  

At best, the authors make a compelling case that the U.S. welfare system is dysfunctional. That is true with or without a guest worker program, or with green cards for STEM, or with much of anything to do with immigration.

The net effect of this Special Report does real damage to the cause of dynamic analysis. For more than a decade, Heritage has called on CBO to add dynamic analysis to its tax reform studies. I could not agree more. And now, ironically, I can only hope CBO does an analysis of immigration reform that will show how skewed the Heritage immigration work has become.  Will it be a plus or minus for reform?  I don’t know, but I trust it will be honest even if undynamic.

UPDATE: A friend from Heritage kindly pointed out to me some pages in the study that address my objection #1. I stand corrected. Unfortunately, the fact that the report’s authors actually did a status quo comparison does not help the credibility of the report. It demolishes it.  The key material is all on page 30. Let me quote two sections:

As noted, there currently are few unlawful immigrants over age 50. … If one assumes that under current law, most unlawful immigrants will return to their country of origin around age 55, the lifetime fiscal costs of unlawful immigrants under current law are comparatively low: only around $1 trillion.

Okay … but who would seriously assume that?  No evidence suggests illegal immigrants have their 55th birthday party and, like it’s Logan’s Run or something, head across to Tijuana or Toronto. This is the equivalent of “if we just assume Syrians and Israelis wake up tomorrow and realize they’re just one big happy family, we can disband the U.S. Navy and all its costs.” Later, the text says:

However, there is a loophole in existing law that may allow many or most current unlawful immigrants to achieve lawful status … the open-ended provision of green cards to the foreign-born parents of U.S. citizens. A majority of adult unlawful immigrants have children who were born in the U.S.

So, the report admits it is making a flawed assumption and its $1T status quo cost estimate is baloney. What exists is de facto amnesty, exactly what Senator Marco Rubio said was the justification for a comprehensive reform, with triggers, with e-verify, etc. Make realistic assumptions and Poof! there are no net costs to comprehensive reform.

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.

Uncompromising: Obama’s 2nd Inaugural

President Obama’s second inaugural address was inspiring, the messages of inclusiveness most sweet, but I have to add my voice to the chorus of disappointment. I had a dream the day prior that some truly nonpartisan commitments would pass his lips along the lines of “Let us bind up the nation’s wounds.” With history offering this young president a second chance to carve some immortal words, to take a stand apart from partisans totems, he retreated to the easy path of slogans that sees the world divided into his allies and his small-minded opponents.

In a word, the President was uncompromising. That is the unmistakable subtext of his attitude since last year, which made sense during an election, but Obama has now affirmed that not compromising will be the essence of his second term in the White House. Key cabinet appointments confirm the uncompromising approach he intends on economic and defense matters.  Some might call it principled, but his weighty speech only poured more concrete into the extremist economic positions of the Democratic party: affirming a view of rich-versus-poor, claiming the economy has recovered (!), calling for more public goods as the thing-to-be-done with mere rhetorical gestures toward entrepreneurship and individual responsibility. The worst line, and one that will haunt the next four years, is his hard line against recognizing the fiscal imbalance of entitlements. I was shocked to hear it:

“The commitments we make to each other through Medicare and Medicaid and Social Security, these things do not sap our initiative, they strengthen us.”

The word deficit was mentioned only once, briefly, but not debt, not the scope of the problem, not the dark shadow that fiscal issues cast over America’s future. Obama is long overdue on his past promises to make hard choices, but he makes the same empty promise again, then proceeds to offer strawman choices:

“But we reject the belief that America must choose between caring for the generation that built this country and investing in the generation that will build its future.”

Who doesn’t reject that? What’s the point, then?

But that line was like so many others in the speech: logically impaired. I tend to read the text with a critical mind, but some lines make no sense. A sampling, just from the first section:

Together, we determined that a modern economy requires railroads and highways to speed travel and commerce, schools and colleges to train our workers.

Why this empty marker “modern economy?” Did ancient economies not enhance their productivity with roads? Did higher levels of human capital have no benefit in previous times or in non-democratic societies? No and no. But the implication is that government has a provisioning role–one that “we determined”–which is not logically coherent. If anything, there is an emerging recognition that centrally managing transportation and education through the government, insulated from market forces, is inefficient. In the two months that this speech was being drafted, the world famous beltway around DC was introducing new, dynamic toll lanes. The coincidence is almost funny. Meanwhile, public schools are transforming from command-oriented to market-oriented through the relentless expansion of charters and vouchers. Yet in DC, the Obama administration chose to let a very popular voucher program expire, leaving countless poor kids trapped in bad schools. A visionary president would have described the forces in play. We can imagine individualized learning and credentialing that displace industrial-era diploma factories. But no.

Together, we discovered that a free market only thrives when there are rules to ensure competition and fair play.

What does this sentence mean? Rules exist to define what ‘fair play’ is. Ensuring fair play is about enforcement of rules, not rules themselves. What the President seems to want to say is that the liberal orthodoxy of regulation is better than anarchy or what the left calls market fundamentalism. So? Again, who disagrees with that? As a statement here, he is asserting bluntly that more rules mean more fairness. That fails logically, and is disappointingly shallow. Why not a whisper about regulations that choke entrepreneurial dreams of the poorest Americans? Why is risk-taking the privy of well-connected venture capitalists with money for tax and regulatory compliance? His ideas here fail as badly as his words.

Together, we resolved that a great nation must care for the vulnerable, and protect its people from life’s worst hazards and misfortune.

The President trying to establish a marker that there was (and naturally is) a consensus that the government is the insurer of last resort. Because, we all know, private insurance fails, right? So what will Americans say when death (one of ‘life’s worst hazards’) keeps happening, and at more expense to the dying, in the wake of the federal government’s expansive new role as the health insurer of last resort? As a principle, insurance in this worldview is a blank check. It holds: the damage from any misfortune, especially in this era of man-made climate change, is surely not to be the responsibility of the individual who builds a home on a sandbar, but on his fellow citizens.

I appreciate the sleight of hand, to assert that these principles are fundamental liberties, to be found in the best intentions of the Framers. But they not. Liberty means freedom TO do things, not freedom FROM things.

I have to admit that Glenn and I were worried that our book would lose almost all of its relevance if the political climate in DC improved. Our prediction is that political compromise is becoming less possible. Woe to book sales if Obama overcame the baser pressures of our times. Well, not to worry for the book’s message — it is more valid today than when we first proposed it. But even more to worry for the country, as we embark on four years of an uncompromising White House.