The Real News for Republicans in 2014 is in the Youth Vote

Republicans took the Senate and increased their majority in the House. Overall, excellent night for the Republicans. But, in the long term, the real news in the exit poll data, courtesy of the WaPo.

The real important numbers are in voting trends, not the absolute numbers. Midterms and presidential elections aren't anything close to apples to apples. To get a better idea of voting trends, you need to compare midterms to midterms. Luckily, we have something that is pretty close to a natural experiment.

Both 2010 and 2014 saw Republican midterm victories. In 2010, Republicans won by a 7% margin nationally. In 2014, that margin shrunk slightly to 5%. The composition of the 2014 Republican vote was similar but not identical to 2010. These differences are important.

First, Republicans made dramatic inroads among Asians, voting 17 points more Republican than in 2010. Asians are true "Natural Republicans". With high incomes, traditional values, and a strong work ethic, it should be a relief that Asians are finally coming back to Republicans.

Hispanics, on the other hand, are not natural Republicans. And, 2014 provides more evidence for that. While the nation voted 2 point less Republican in 2014 than in 2010, Hispanics voted 6 points less Republican. Hispanics are becoming less Republican.

The other good news for Democrats is that women, like Hispanics, voted 6 points more Republican in 2010 than in 2014 while there was no change in men. So, women and Hispanics are trending Republican.

Most other groups didn't show any significant change. The exception there might be the young. The young voted 2 points more Republican in 2014 while the nation as a whole voted 2 points less Republican. So, young people, as we discussed last time, are slowly moving back towards the center.

My hunch is that young white men are driving this shift. As the Pew chart in my last post showed, Mitt Romney did 19 points better among young white men than John Mccain. Nationally, Romney only improved 3 points on Mccain.

The Youth Vote

On the eve of the 2014 midterm election, I'd like to talk about the 2012 presidential election. In particular, I'd like to talk about voters who, largely, won't be voting in tonight's election: young voters. To the extent that young voters vote, they tend to vote in the more publicized presidential elections.

I was inspired to write this post after looking at some exit poll data. Pew research made this chart comparing the shift among young voters from the 2008 presidential election to the 2012 presidential election.


Overall, Obama fell from 66% of the young vote in 2008 to 60% in 2012, a 6% decline. Part of this is cyclical: Obama fell from 53% in 2008 among all voters to 51% in 2012. Still, there was a disproportionate fall among young voters. There are two more factors that probably play a role here:

1.) Young voters are probably more "elastic". That means that the youth vote is more subject to shift when national conditions change. So, if there is a national swing of 2%, one may expect a larger swing among young voters and a smaller swing among older voters because they are more "set in their ways".

2.) Obama won a disproportionately large number of young voters in 2008 because of unpopular Republican incumbents and his own personal charisma. The incumbent Republicans may have been especially off putting to younger voters while Obama's qualities resonated more with them and older voters.

One could also add Obama's turnout operation, but I'm not sure it was really that much stronger in 2008 than in 2012. In 2008, voters of the ages 18-29 made up 18% of all voters. In 2012, this group's share of the vote plummeted to... 19%. Turnout was lower overall, but, proportionally, the youth vote was not any worse than in 2008. The entire electorate, on the other hand, was.

Yet another factor that could play a role in the large shift in the youth vote would be the cohort that was 25 to 29 in 2008 was unusually liberal in 2008 but was no longer "youth" in 2012 since they entered their thirties. Part of this story fits. People in their 30s was the only age group that Obama in 2012 outperformed Obama in 2008. The reason for this isn't that Obama did a great job appealing to people in their 30s. Instead, the people in their late 20s in 2008 who Obama did appeal to simply turned 30 and didn't change their mind.

This explains the strong relative performance of Barack Obama among people in their 30s in 2012. But, that does not necessarily explain the change in the youth vote. If this was a major factor in Republican gains among the young, we would expect Republicans to do much better among the 18-24 group within the youth relative to the 25-29 group in 2012 relative to 2008. In fact, in both elections, both groups voted about the same. Obama won 66% of both groups in 2008 and 60% of both groups in 2012.

So, it doesn't seem that that explanation plays a large role in the vote shift. Perhaps more important is how different groups within the 18-29 cohort shifted. A topic I'll address next time.

Are Doctors or Lawyers Richer?

Careers in medicine and law are known for high levels of educational credentials and high levels of income. But, which pays more?

The answer, as most people know, is doctors. Doctors, according to CNBC, are paid about $160,000 to $200,000 on average (depending on speciality) compared to to about $130,000 for lawyers. Stark difference indeed.

Not surprisingly, going into the medical field is more likely to get you rich than going into the legal field. 21% of doctors make the top "1%" of earners compared to 12% of lawyers.  Both fields are pretty wealthy, but doctors far outpace lawyers.

So, to answer the question posed in the title, doctors are clearly richer than lawyers. That truth, however, may mask a more complex reality.

Being a doctor may be a better path to being rich, but it may not be a better path to being super rich. That is to say, doctors are richer than lawyers, but rich doctors may not be richer than rich lawyers.

Luckily, we have data that can help shed some light on the differences between the rich doctors and rich lawyers. Bradley Heim, Adam Cole, and Jon Bakija did a study on the occupations of the "1%". Unfortunately, the data only reaches up to 2005, but, for the purposes of this analysis, that shouldn't be a major problem.

What does the data show?

Just as indicated earlier, doctors are more common than lawyers in the "1%". In 2005, doctors made up 15.7% of the richest 1% compared to only 8.4% for lawyers. But, the question I am asking here is whether or not doctors or lawyers that are already in this 1% make more.

The answer is: Lawyers. Rich lawyers make more than rich doctors. Some simple calculations show that both lawyers and doctors in the top 1% make less than the average income in the top 1% (because CEOs and Financiers make up a big portion of this group). But, doctors in the 1% make 78% of the average while lawyers in the 1% make 85% of the average. This means that rich doctors only make 92 cents on the dollar of what rich lawyers make. Not a huge difference, but quite significant.

The difference is even greater among the super rich: the top 0.1%. Doctors in the 0.1% make about 60% of the average income in 0.1% while lawyers in this group make about 73% of the average income. This means that, in the top 0.1%, doctors make 82 cents on the dollar of what lawyers make.

The conclusion?

Doctors are richer than lawyers, but rich lawyers are richer than rich doctors. If you're goal is a high 6 figure salary, medicine is a better choice for you. If you are obsessed with great riches, however, law might be a better choice than medicine. Of course, this is all relative. Both medicine and law are far less likely to bring great wealth than finance and corporate management.

Things to Come

I have been posting a bit more lightly as of late. I will, however, be picking up again in the coming months with some heavy topics and some topics the CC has historically stayed away from. Just a heads up.

ACA and the Uninsured Rate

There's a lot of to do about the evidence that ACA has reduced the uninsured rate. They're right. I'm not fan of the law, but, from the beginning, I have believed that the ACA would be able to do one specific thing: reduce the share of people in the category "uninsured".

I also think there will be more uninsured than most ACA supporters claimed would be, but there should still be a significant reduction. Indeed, there already has been according to a number of measures.

Is this not a vindication of the ACA?

In my view, the answer is no. For one, being "insured" is not the same as having access to quality health care. I wrote a post a while back noting how public health coverage often doesn't offer the same quality as private health coverage.

Given that the Medicaid expansion is a big part of the fall in the uninsured and given that Medicaid patients receive worse access and lower quality than patients with private care, the fall in the uninsured may not mean as large an increase in health care access as one might believe. Given the changing nature of private insurance, it's possible that even the private coverage purchased on the exchange may offer worse access than pre ACA private insurance.

As I've said before, the major problems in the health care system are overregulation on the supply side and third party (and employer) dominance in the way we pay for it. ACA doesn't do anything to deregulate the supply side and actually worsens the third party dominance in payment.

The high uninsured rate was merely a symptom of these problems. Covering up the symptom by changing people's insurance status may make our system look statistically better, but it may not offer any real improvements in our health care system.

College Majors, IQ, and Income

New post by Randy Olson on college majors, IQ, and gender. I encourage all readers to read the whole post, which is quite informative. I did leave a comment on his post to note what seems to be a mistake in the SAT to IQ conversions on the part of one of his sources. This mistake led to a systematic overestimation of average IQs in the various majors. Here is my comment:


"SAT to IQ conversion seems to be off. Here is a good site for SAT to IQ conversions:

http://www.iqcomparisonsite.com/SATIQ.aspx

The smartest major, physics and astronomy, have an average SAT score of 1270. This seems plausible. However, your source converts that 1270 to an IQ of 133.

As the source I provided above shows, the actual conversion of a 1270 SAT score to IQ should be 128-130 depending on the IQ test you use.

Because this post is about the relative IQs of majors, this doesn’t actually have any impact on your argument. But, it is important to note that it seems there was an error on the part of the source when converting SAT to IQ.

My suspicion is that it has something to do with how they handled selection bias. Of course, I could be wrong.

Overall, though, good post."

I'm interested in how this all relates to the expected income of the various majors. Luckily, Bryan Caplan has already provided some numbers on the wage premium of the various majors. I like Caplan's data because it controls for an important factor: pre existing ability bias. After this control, Caplan finds the wage premium by major to be:

Earnings Compared to H.S. Grads

Major	Males	Females
Electrical engineering	+63%	+72%
Computer Science	+61%	+63%
Mechanical engineering	+61%	+72%
Finance	+61%	+55%
Economics	+60%	+59%
Accounting	+53%	+53%
Mathematics	+53%	+50%
Nursing	+52%	+59%
Chemistry	+48%	+47%
General business	+46%	+46%
Political science/gov't	+46%	+47%
Biology	+44%	+43%
Communications	+37%	+45%
History	+35%	+37%
Sociology	+35%	+36%
Liberal arts	+34%	+36%
English language/lit.	+34%	+37%
Anthro./archaeology	+32%	+36%
Fine Arts	+25%	+29%
General Education	+24%	+30%

Note that this is not a comparison of the average expected income by major. Instead, this is a comparison of how much benefit (in terms of income) is derived from a given major.

Not surprisingly, engineering and computer science have the largest wage premiums. This is followed by economics, finance, and accounting. At the bottom of the list, we see english, fine arts, and general education. 

For once, the data seems to confirm conventional wisdom. STEM and business type degrees really do payoff a lot more than traditional liberal arts degrees.

Another piece of conventional wisdom is that the traditional liberals arts majors are just as smart or smarter than the STEM and business type majors despite the income differences. Here is the link to the SAT scores by major data. As noted above, the SAT to IQ conversion seems to be off, but that applies for all majors, so the relative order and differences between majors in terms of IQ should be correct. Of course, the SAT data should be correct too.

My reading of the chart is that, once again, conventional wisdom is confirmed. Liberal arts students are just as smart as STEM and business type majors. They just would rather study philosophy or english in college and make less money later on in life. At least, that is my theory.

This post was pretty off the cuff and written at 5 AM, so it is by no means organized or well written. But, if anything, I hope I at least exposed some readers to good data on majors, income, and IQ.

On the New Commonwealth Fund Report

The new Commonwealth Fund analysis of international health care systems is out and, not surprisingly, the USA ranks dead last out of 11 nations. Despite my contrarian nature, I'm not a defender of the USA health care system, but I do think that, relatively speaking, the USA gets a worse rap than it deserves. "Relatively speaking" is an important word. In an absolute sense, the system really is as bad as commonly believed. But, in a relative sense, other systems are vastly overestimated due to bad reasoning and, yes, zombies. It is also true that, as bad as the USA system is, even our system deserves a bit more credit than it gets at times. A few thoughts on the actual report:

1.) The study ranks the UK as being the best health care system of the 11 countries. This should be an immediate red flag that this analysis is more driven by an ideological preconceptions than a quest for an objective comparison. I could be wrong. But, the emphasis on "health care equity" certainly isn't helping their case. Neither is the fact that data on how long people in the UK have to wait for elective surgery (a measure that they probably wouldn't do all that well on) is missing from the study.

2.) Progressives are claiming this study as a slam dunk for their health care policy views. After all, the socialized UK system is on top and the USA system is at the bottom. But, a look at the in between rankings muddies up the picture. Switzerland, with a heavy reliance on private medicine and cost sharing (neither of which progressives are very big on), comes in at second place. Canada, with a single payer system, comes in at second to last, right above the USA.

3.) One of the biggest problems with these international health care system comparisons that supposedly "show" how bad the USA system is that they don't measure the best thing about the USA system: innovation. Yes, we spend a lot more money (more than we need to), and we don't get a ton of value. But, our decentralized system also offers more room for experimentation than the tighter models of Europe. The problem here is that the benefits from this innovation benefit the whole globe, so it doesn't show up in international comparisons of health care systems. Indeed, in some ways, these other health care systems that are supposedly so much better than ours "free ride" off of our innovation, and then brag about how they do so well with less money. Excellent (old) article on this by Tyler Cowen here.



I also plan on responding to TIE and Krugman about the idea of zombie arguments in the very near future. Stay tuned.

Some Quick Things

1.) Thomas Picketty seems to have made some data errors in his popular book (not too different from Rogoff and Reinhart). Also, the long term trends in wealth inequality seem to be much more complicated than is often suggested.

2.) The VHA, as it turns out, has had a "secret list" to make it's long waiting times not seem so long. Interestingly, many advocates of single payer saw the VHA as a good model for the entire national health care system. Although, it is important to note that the VHA's problems are hardly new. Yet another reason not to support nationalized health care.

3.) A recent meta analysis of studies on the link between saturated fat and heart disease found: 

"Current evidence does not clearly support cardiovascular guidelines that encourage high consumption of polyunsaturated fatty acids and low consumption of total saturated fats."

I've long suspected that saturated fat is not as bad as most people believe. This seems to support that view. This is also a good reason to be skeptical of bans and taxes on food deemed to be "unhealthy", as it is often unclear.

4.) I often speak favorably on the concept of cost sharing in health care on this blog. Aaron Carroll provides a different point of view. I'll be the first to admit that cost sharing has its downsides, and that there are times when more cost sharing is not desirable. Still, overall, I think there is too little cost sharing in our system instead of too much.

5.) Textbook example of regulatory capture with Pepsico lobbying for a crackdown on "counterfeit hummus". (HT to Mark Perry)

Paul Krugman on Free Market Health Care (Again)

I understand that Paul Krugman is a great economist. He has won a Nobel Prize. But, when he talks about issues like health care, he is surprisingly inept. Recently, he made a post about market based health care.

As usual, Krugman makes out Kenneth Arrow's work as having ended the discussion on the ability for markets to work in health care. I don't know why. There are a lot of markets with asymmetric information where markets still work just fine. There are lots of markets where people "need" the product (like food) where markets work fine too.

Still, my biggest problem with Krugman's post is his assertion that markets have a record of failure in health care. Reader's may recall this post from a while back where I explained this wasn't so:

"I can think of a few real world examples of more or less free market (or consumer based) health care:

1.) In the USA, cosmetic type surgeries like Lasik Eye Surgery (look here). Results seem to be fairly positive.

2.) Abroad, Singapore and, to a lesser extent, Switzerland use significant amounts of cost sharing. These systems aren't exactly "market oriented", but consumers have a lot of "skin in the game" compared to other systems (including our own system). The results (here and here). On the whole, results here seem to be fairly positive as well."

I'll be the first to admit that, in the modern world, the experience with market based health care is limited. But, this experience has been unambiguously positive. One more thing from Krugman:

"

That’s us in the upper right-hand corner: our uniquely privatized system is uniquely expensive, while overall indicators of the quality of care don’t point to any US superiority. So on the face of it, the evidence strongly suggests that the proposition that health is an area where private markets work badly is borne out by experience."

This is frustrating on two counts. First, this actually illustrates a point that defenders of private medicine often make: the only evidence that private medicine leads to higher costs is the USA. Indeed, if you take out the USA (an outlier), there is no correlation between private share of health spending and overall cost.

What else is annoying?

If you included Singapore in this chart, you would see another outlier. After all, Singapore has something like 60% of health care spending private. That would be far higher than every other country on this chart, USA included. Furthermore, their health care only takes up about 3% of GDP, far lower than every other country on the chart.

Overall, we should expect more of Krugman than a post that ignores so much contrary evidence and engages in cherry picking in data. But, unfortunately, this is the kind of thing I have come to expect from Krugman.

UPDATE: For those people who argue that Singapore's system is not market oriented, I direct you here.

Take Two Minutes to Become an Expert in Single Payer

So claims a two minute video posted on Vox. Wouldn't it be nice to learn about an issue as complex as single payer in just two minutes?

Ya. But, this video doesn't cut it. Indeed, this video is best described as a blatantly pro single payer commercial thinly disguised as an "objective", educational video. A couple of the classic fallacies and falsehoods that are common among supporters of single payer are there:

1.) Single payer is popular, therefore it is good. A very bad argument that I responded to here.

2.) Low administrative costs mean single payer is efficient. Another bad argument that I responded to here.

Also no mention of some of the major problems with single payer being implemented in the USA:

1.) How differing cultures may make single payer much harder implement and more inefficient here in the USA than, say, Sweden.

2.) How the federal government has a tough time finding top tier managerial talent despite the need for it. I talked about this here.


To be fair, there was a brief mention that some single payer systems may struggle with waiting times, but, according to the video, this was only because those governments wouldn't raise taxes enough. Of course.

Single payer is a complex issue. To me, the arguments against implementing single payer in the USA are much, much stronger than the arguments in favor. But, I would suggest that anyone do lots of research (including cases for and against) before forming an opinion. One two minute video is hardly sufficient.

The Real War on the Poor

There is a war being waged on the poor in America. Here are some key attacks:

1.) Create high implicit marginal tax rates through means tested programs that were, ironically, created to reduce poverty.

2.) Create barriers to low wage, entry level employment like high minimum wages and employer health benefit mandates.

3.) Create barriers to business creation by implementing draconian occupational licensing laws that create a huge barrier to entry for poor people.

4.) Wage a war on drugs that unfairly targets poor people. The same poor people who have an extremely difficult time navigating the court system if they are a victim of this war.

5.) Instead of using anti poverty public dollars to give direct cash transfers to the poor on the condition that they are either working or seeking employment, direct the dollars towards "feel good", paternalistic programs for things like health care and education that require nothing in terms of work and are proven to do nothing to actually improve health or educational outcomes in the long term (Head Start and Medicaid).

These policies, not modest reductions in the growth rate of anti poverty programs that actually don't do much to help the poor, are the real public policies that are hurting the poor. Remember that next time you hear a politician talking about anti poverty policy.

Update: In case my implication wasn't clear, President Obama is guilty of hurting the poor by worsening #1 (expanding Medicaid and creating means tested subsidies through Obamacare), #2 (mandating health insraunce with employment and proposing raising the minimum wage), and #5 (expanding Medicaid, SCHIP, and trying to create new education programs).

President Obama has also been similar to previous administrations in doing nothing to change #4. I'll give him a break on #3 where state and local governments deserve most of the blame.

Required Reading on Oregon Medicaid Study

Megan McCardle offers the best explanation of the study: here.

I will remind readers that I did a series of post on the Oregon Medicaid study last October and November. McCardle says everything I tried to say (except she says it more eloquently).

The Federal Government Overpays Most and Underpays Management

On the whole, federal workers are overpaid. A common response to this is that the only reason that federal workers are paid more, on average, is because they are better educated and thus higher pay is justified. That is feasible, but it isn't true. Even after taking such differences into account, a significant compensation gap remains (here).

However, there could be a larger problem in public sector compensation. Not only is the public sector, as a whole, overpaid. It is also too compressed. Bryan Caplan reports on this dynamic here. A chart is provided as well:




Overall, the public sector is overcompensated by 16% relative to the private sector. However, this gap varies widely by education level. For workers with high school diplomas or less, the federal government pays an incredible 36% more. However, for workers with professional degrees or doctorates get paid 18% less in the federal government than the private sector.

To put it simply, a worker with a professional degree or doctorate can expect to get paid about 87% more than a worker with a high school diploma or less in the federal government compared to 210% more in the private sector.

There are two key forces at work here: public sector unions and public opinion. Public sector unions create a huge pressure to overpay low skilled workers. These would be workers with some college or no college. These workers are paid 30 to 40% more in the federal government than the private sector.

Then there's medium skilled workers who tend to have a college degree. These workers are also overpaid in the federal government, but to a lesser degree. Something more to the tune of 5 to 15%. Here there is some pressure from public sector unions as well.

At the top, workers with professional degrees get paid about 20% less in the federal government than the private sector. This is where public opinion plays a big role. I don't know this for fact, but I would think that the private sector tends to pay much better for upper management. The higher the level of management, the better the private sector pays both overall and relative to the public sector.

Case in point is the president of the united states. The pay is "only" $400,000. That may sound like a lot, and it is a lot. But, for the most powerful position in the entire world, it is actually astonishingly low. CEOs of any major company are paid millions, if not tens of millions, every year. By comparison, the commander and chief is very underpaid.

In the private sector, a job like that would pay an incredible amount. Luckily, most people who run for president do it for public recognition, prestige, and (hopefully) to improve the world. However, any large corporation has an entire group of upper management who are paid well above six figures. Indeed, this is necessary for the success of any large organization. Management cannot be undervalued. Most people with that sort of high level managerial experience go to the private sector rather than the federal government simply because of the pay differential as well as mobility.

This is, by the way, why you should ignore people who argue for single payer health care because "administrative costs are lower". Low administrative costs aren't necessarily a good thing. This is especially true if they represent underinvestment in management, which is the case with our federal government and most nationalized health care systems.

How does public opinion lead to underinvestment in management in the public sector?

It's simply because the public would go nuts if there were a large group of federal government employees making six figure incomes. The public won't be too upset if someone who's market wage would be something like $20,000 gets paid $25,000, but there would be outrage if there were a group of people getting paid $200,000 or more in the federal government even if they could command a higher wage in the private sector. The medium skilled workers have both of these pressures on them (public unions and public opinion) which is why they have a smaller (but still significant) wage premium in the federal government.

One could argue that it is the private sector underpays low and medium skilled workers and overpays highly skilled management. Indeed, this is basically the argument that advocates of caps on CEO pay and large hikes in the minimum wage make. I just don't find this very plausible. Individual private sector companies may overpay upper management, but it is hard to imagine that the entire private sector is radically overpaying upper management. It is much more plausible that upper management really is a scarce skill that commands a lot of pay because it is so difficult and important.

Indeed, some evidence suggests that CEOs are underpaid. They get paid a lot, but they may add even more to their firms in value. Even if CEOs are overpaid, pay caps are a bad idea for a lot of traditional economic reasons and practical policy reasons, but that is for a different post.

The point here is that management is really important and the public sector really underpays management relative to other public workers and the private sector. This is one reason that contracting out is necessary for so many projects: the private sector has the managerial talent necessary to run big operations that the public sector just doesn't have.

It is also yet another reason that nationalizing industries like health care or banking are bad ideas. These industries require a lot of managerial talent to run and the public sector can't deliver here.

A History of Behavioral Responses to Tax and Transfer Policies

The most fundamental insight required to understand tax and transfer policy is simple: financial incentives affect behavior. That is a point on which basically all thinking people can and do agree, but the agreement stops there. The way and degree to which tax and transfer programs affect behavior is hotly debated and highly relevant given the current debate on the future direction of policy.

It's important to note how important it is that we get an accurate picture of how powerful these effects are. Back in the 1960s and 1970s, our tax and transfer system reflected an academic consensus that vastly underestimated behavioral responses to taxation. Indeed, prior to 1980, we had a tax system with a top tax rate of 70% and welfare system (prior to reform in the 1990s) embedded with truly awful incentives. Since incentives were thought to be small, the effects of these perverse incentives were thought to be small and thus did not play a large enough role in the policy discussion

This underestimation of incentives was not a matter of bad research or baseless assumptions. Instead, it was a matter of incomplete research that was simply not able to capture anywhere near the full behavioral responses to taxation. For instance, the literature looked for relationships between changes in tax rates and hours worked and found none.

By the time the late 1970s came around, new researchers that weren't as ideologically committed to defending the welfare state and progressive tax system were upending previously held assumptions. Eventually, these intellectuals would be proven right and would gain in influence. The late 1970s saw both economic stagnation and a degree of cultural decay. For instance, the share of children born out of wedlock had been rising since 1960. By the late 1970s, this was having real cultural consequences. Welfare rolls were exploding at the same time as dependency was on the rise for a large share of the population. Behavioral responses to government policy were not entirely to blame for these trends of the era, but they certainly played a large role.

The increased recognition of these realities led to significant anger among the middle and working class. These were families that, in an increasingly weak economy with high inflation, were paying ever higher tax rates. Instead of paying for programs that may benefit these workers, tax dollars were flowing, at least in part, to an increasing group of dependents who no longer saw reason to work due to incentives (as well as bureaucrats). These middle and working class families were right to be angry. But, they were wrong to direct their anger at the welfare recipients, who were merely responding rationally to incentives. Instead, the anger should have been directed at a government that overtaxed productive behavior and traditional families while subsidizing non employment and irresponsible behavior.

Charles Murray, in Losing Ground, found that bad incentives made many anti poverty programs self defeating. Martin Feldstein looked at responses to taxes and noted that there are many ways that people might respond to taxes. He created a new measure known as elasticity of taxable income. Instead of trying to find relationships between tax rates and potential areas that behavioral responses might be found, Feldstein looked at total taxable income which would capture all behavioral responses. He found much larger responses than previous research (especially among upper income taxpayers). Arthur Laffer even began arguing that tax rates had become so high that it was possible that some taxes could actually be reduced and still increase revenue (due to behavioral responses).

For a number of reasons, policy began taking incentives into account more. In the 1980s, the top marginal tax rate on business income and certain kinds of capital income fell dramatically from 70% to 28%. There were reductions in taxes on other types on income that were smaller but still quite significant. In the 1990s, in order to tackle the problem of perverse incentives in the welfare system, welfare reform was ultimately passed and signed.

Of course, these policies were part of a larger neoliberal policy revolution that included rollbacks in the regulatory state, a increasingly stable monetary policy, public spending restraint, and free trade. Academic research and practical experience was increasingly suggest the superiority of markets to statism in general. The fact that incentives were found to be much more powerful in many more ways than originally thought was part of this research and experience.

For the most part, these reforms were successful. Welfare rolls were reduced while a booming economy offered increased jobs and opportunities. Resources that had been used on tax avoidance in the past were redirected to more productive uses because lower tax rates made tax avoidance less profitable. Due to behavioral responses, the revenue losses for some of the tax rates cuts were small if there was a reduction in revenue at all.

Later research on ETI would later find that the behavioral responses found in previous literature were almost entirely due to wealthy individuals taking more pains to avoid taxes when tax rates are higher and that income derived from capital and business is much more sensitive to taxation than wage income. The implication here was that the most economically efficient tax reductions were also the least politically popular: reduction in tax rates on wealthy investors and business owners.

Indeed, the political realities surrounding policy have been the biggest constraint on policy that would do a significant amount to correct bad incentives inherent to our tax and transfer system. Welfare reform was only possible when regular, working people saw their own tax bills rise at the same time that dependency on welfare was rising. That stoked the anger necessary to reform the system. Again, some of the anger that should have been aimed entirely at bad government policy was aimed at the recipients of public aid, but there was still a push for reform that ultimately succeeded.

The increasing awareness of behavioral responses in public policy didn't just result in lower taxes and a smaller state. There were also policies that attempted to replace parts of the welfare state with programs that did not create the same bad incentives. The earned income tax credit (EITC) was created in the 1970s and has been expanded numerous times. This is basically an anti poverty program that encourages employment instead of discouraging employment, proving that fighting material poverty and encouraging employment do not necessarily need to be conflicting goals.

The EITC should be seen as a model for the type of program that should be replacing the current programs in the welfare state, as it both fights poverty by both offering material cash benefits to the impoverished and encouraging the kind of behavior required to truly escape poverty.

The early 2000s saw new research that upended previous assumptions about the behavioral responses to public policy. Nobel prize winner Edward Prescott challenged the idea that taxes had little impact on labor supply. Basically, he theorized that previous work looking at the relationship did not take into account all the channels that taxes could effect labor supply.

Prescott compared hours worked in the G-7 countries in the 1970s and 1990s. He found that, in the 1970s, when tax rates were similar in these countries, hours worked were also similar. In the 1990s, when tax rates diverged, countries with lower tax rates also had higher hours worked. This was later backed up by further research (look here).

Public policy in the 2000s showed some awareness of these realities. George W Bush successfully pushed through two major tax reductions. These tax reductions were not ideal if the goal was to encourage productive behavior (or reduce discouragement of productive behavior) because the tax rate cuts were small (although the total cost of the tax cuts were large due to tax cuts that did not cut rates) and not permanent. Still, there were some reductions in marginal tax rates.

Bush also tried to move towards private accounts is social security which would have helped mitigate the work disincentives inherent to entirely government run retirement systems, but that effort proved to be politically futile. Despite some positive efforts, the Bush administration did not do much to incorporate realities about behavioral responses into public policy.

If the Bush administrations efforts were weak, the Obama administration has been flat out counter productive. The ACA does a lot to discourage employment by creating huge implicit marginal tax rates. Indeed, the effects of the means tested subsidies and Medicaid expansion on incentives basically undo much of the good welfare reform did. At the same time, the ACA raises tax rates on investment income and business income at the top which also further discourages productive behavior.

Despite the fact that there has been no evidence that incentive effects are smaller than previous thought, it seems that many of the new policy makers in the post Bush world believe this nonetheless. It took 30 years of gradual policy changes to even make a small dent in the perverse incentives that were created by 50 years of bad policy.

It's only taken the current administration a few years to undo a good deal of the positive reforms. Even worse, there is no empirical basis for the return of high tax rates and bad incentives in anti poverty programs.

There is a way forward, which I'll cover in a follow up post in the near future.

Response to Michael Lind on Libertarianism

Michael Lind wrote a piece last year critical of libertarianism (here). I respond in full here:

"Why are there no libertarian countries? If libertarians are correct in claiming that they understand how best to organize a modern society, how is it that not a single country in the world in the early twenty-first century is organized along libertarian lines?

Lind starts out with a seemingly reasonable premise. However, it is not a correct premise. I can think of a number of countries that are basically "libertarian". Hong Kong is perhaps the most libertarian country. Singapore is fairly libertarian economically (thought not in other respects). 

It also strikes me as incorrect to assume that an absence of countries pursuing a certain policy regime discredits said policy regime. Entrenched interests, for example, could be a blockade to popular libertarian reforms that are obviously good for the population as a whole. Occupational licensing reform strikes me as a fairly obvious libertarian reform that is hard to achieve because of such interests.

Does the fact that occupational licensing is fairly widespread discredit arguments for weakening occupational licensing or speak to the power of special interests?

To me, it seems fairly obvious that it is the latter. Lind's logic suggests he may disagree.

It’s not as though there were a shortage of countries to experiment with libertarianism. There are 193 sovereign state members of the United Nations—195, if you count the Vatican and Palestine, which have been granted observer status by the world organization. If libertarianism was a good idea, wouldn’t at least one country have tried it? Wouldn’t there be at least one country, out of nearly two hundred, with minimal government, free trade, open borders, decriminalized drugs, no welfare state and no public education system?

All of these "libertarian" policies can be found in numerous countries. However, there are not any countries that pursue all of these policies. That, it seems Lind is arguing, discredits libertarianism.

This is simply Lind setting a bar too high and too arbitrary for libertarianism. We do have examples of virtually all libertarian policies being tried to some degree somewhere. Instead of looking at the success or failure of those policy experiments, Lind suggests that the fact that libertarianism isn't more common automatically discredits it. No other ideology has ever been measured by that standard.

When you ask libertarians if they can point to a libertarian country, you are likely to get a baffled look, followed, in a few moments, by something like this reply: While there is no purely libertarian country, there are countries which have pursued policies of which libertarians would approve: Chile, with its experiment in privatized Social Security, for example, and Sweden, a big-government nation which, however, gives a role to vouchers in schooling.

I don't know any well informed libertarians who would give a "baffled" look to a fairly easy question. It is true that most libertarians would explain that, like all modern ideologies, there is no purely "libertarian" country. On the same note, there is no "purely" centre left country.

However, there are countries that are more libertarian than others, and there are countries that are very libertarian in certain respects. The success of these countries and policies are the basis for how libertarianism should be evaluated.

But this isn’t an adequate response. Libertarian theorists have the luxury of mixing and matching policies to create an imaginary utopia. A real country must function simultaneously in different realms—defense and the economy, law enforcement and some kind of system of support for the poor. Being able to point to one truly libertarian country would provide at least some evidence that libertarianism can work in the real world.

This is just Lind setting the bar unusually high for libertarians. There are no purely "anything" countries.

There is something close to a spectrum that countries are on politically. No country is 100% libertarian or 100% social democratic. Lind is essentially saying that the absence of a 100% libertarian country is a huge blow to libertarianism. That just strikes me as a silly excuse for Lind to write off libertarianism.

Some political philosophies pass this test. For much of the global center-left, the ideal for several generations has been Nordic social democracy—what the late liberal economist Robert Heilbroner described as “a slightly idealized Sweden.” Other political philosophies pass the test, even if their exemplars flunk other tests. Until a few decades ago, supporters of communism in the West could point to the Soviet Union and other Marxist-Leninist dictatorships as examples of “really-existing socialism.” They argued that, while communist regimes fell short in the areas of democracy and civil rights, they proved that socialism can succeed in a large-scale modern industrial society.

We had experiments in communism and socialism that failed quite miserably. Lind also fails to mention that socialism and communism ultimately proved unworkable economically. It was not just a matter of civil rights and democracy. Communism and socialism impoverished the people of the nations they were tried in. Not mentioning this in any discussion of these topics does a disservice to all of those who lived in poverty under these systems.

So, we have the failure of these economic systems and the relative success of market based economic systems. It seems that, in this case, the closer a society came to the libertarian ideal economically, the better.

While the liberal welfare-state left, with its Scandinavian role models, remains a vital force in world politics, the pro-communist left has been discredited by the failure of the Marxist-Leninist countries it held up as imperfect but genuine models. Libertarians have often proclaimed that the economic failure of Marxism-Leninism discredits not only all forms of socialism but also moderate social-democratic liberalism.

What if I told you that I know of a country that has no death tax, no wealth tax, a partially privatized social security system, high amounts of free trade, a falling government share of the economy, increasing presence of markets in the health care sector, and universal school vouchers. This sounds pretty close to the libertarian country that Lind says doesn't exist.

Actually, there is a real country like that: Sweden. That's right, Lind's example of the purely "liberal welfare-state left" country has all of the policies I mentioned above in place. 

I don't know what kind of liberals Lind knows, but the liberals I have met would go nuts if Republicans proposed doing some of the things Sweden has already done. To be fair, Sweden is also much less libertarian than the USA in some ways.

But, Lind literally just said that, in order for an ideology to be successful, there has to be examples of it being practiced "purely".

But think about this for a moment. If socialism is discredited by the failure of communist regimes in the real world, why isn’t libertarianism discredited by the absence of any libertarian regimes in the real world? Communism was tried and failed. Libertarianism has never even been tried on the scale of a modern nation-state, even a small one, anywhere in the world.

I wonder if Lind realizes that, at some point in history, all ideologies have not been tried yet. It is absurd to say that an ideology doesn't work because it hasn't been tried yet.

Still, libertarianism has been tried. Hong Kong and Singapore have libertarian economic policies. Netherlands has libertarian social policies. Numerous countries have free trade. From where I stand, libertarianism seems to be doing pretty well from a practical point of view.

Lacking any really-existing libertarian countries to which they can point, the free-market right is reduced to ranking countries according to “economic freedom.” Somewhat different lists are provided by the Fraser Institute in Canada and the Heritage Foundation in Washington, D.C.

Lind is just getting frustrated at this point. Ranking countries based on how free their economy is not an act of frustration. Economic freedom is a vital component of economic development. Measuring it is a good thing.

According to their similar global maps of economic freedom, the economically-free countries of the world are by and large the mature, well-established industrial democracies: the U.S. and Canada, the nations of western Europe and Japan. But none of these countries, including the U.S., is anywhere near a libertarian paradise. Indeed, the government share of GDP in these and similar OECD countries is around forty percent—nearly half the economy.

Just like there is no purely progressive country, there is no purely libertarian country. But, the more libertarian a country is economically, the higher they are on these lists. 

Even worse, the economic-freedom country rankings are biased toward city-states and small countries. For example, in the latest ranking of economic liberty by the Heritage Foundation, the top five nations are Hong Kong (a city, not a country), Singapore (a city-state), Australia, New Zealand and Switzerland (small-population countries).

Just because these countries happen to be relatively small does not mean there is a bias. Also note that all of these countries are fairly prosperous. 

With the exception of Switzerland, four out of the top five were small British overseas colonies which played interstitial roles in the larger British empire. Even though they are formally sovereign today, these places remain fragments of larger defense systems and larger markets. They are able to engage in free riding on the provision of public goods, like security and huge consumer populations, by other, bigger states.

Without saying it, Lind seems to be conceding that the small, relatively libertarian countries are fairly prosperous. But, he argues, this is only because they free ride.

This is silly. All of these countries were relatively poor (except Switzerland) until they moved to pro market, libertarian economic policies. It was not until after these reforms that these countries became wealthy. 

At the same time, most countries in the developed world, including northern Europe, free ride off of defense and innovation from the USA. For whatever that is worth.

Australia and New Zealand depended for protection first on the British empire and now on the United States. Its fabled militias to the contrary, Switzerland might not have maintained its independence for long if Nazi Germany had won World War II.

All of this is entirely beside the point. Australia, for example, was in economic stagnation until it moved towards a more neoliberal economic model with lower taxes and more private sector involvement.

It is now basically an economic success story as a result. The fact that they didn't need a strong military didn't change over time. The fact that they switched from an unsustainable, statist economic model to a freer economic model made all of the difference.

These countries play specialized roles in much larger regional and global markets, rather as cities or regions do in a large nation-state like the U.S. Hong Kong and Singapore remain essentially entrepots for international trade. Switzerland is an international banking and tax haven. What works for them would not work for a giant nation-state like the U.S. (number 10 on the Heritage list of economic freedom) or even medium-sized countries like Germany (number 19) or Japan (number 24).

Again, excepting Switzerland, all of these countries went from poor, statist economies to rich, free market economies. The switch from statism to free market came first in all of these cases.

This is a point that Lind needs to deal with, but he seems to ignore.

Furthermore, if anything, larger nations would need even less government. This is because it is harder to run a large state in a big nation like the USA than a small, homogeneous nation like Singapore.

And then there is Mauritius.

According to the Heritage Foundation, the U.S. has less economic freedom than Mauritius, another small island country, this one off the southeast coast of Africa. At number 8, Mauritius is two rungs above the U.S., at number 10 in the global index of economic liberty.

This is probably the main reason that Mauritius is wealthier than many other African nations.

The Heritage Foundation is free to define economic freedom however it likes, by its own formula weighting government size, freedom of trade, absence of regulation and so on. What about factors other than economic freedom that shape the quality of life of citizens?

The key thing to remember here is that economic freedom is necessary for a high quality of life but not sufficient. That is to say that all countries with high standards of living, with very few exceptions, have economic freedom. But, they also have open cultures and institutions that are conducive to a high living standard.

How about education? According to the CIA World Fact book, the U.S. spends more than Mauritius—5.4 percent of GDP in 2009 compared to only 3.7 percent in Mauritius in 2010. For the price of that extra expenditure, which is chiefly public, the U.S. has a literacy rate of 99 percent, compared to only 88.5 percent in economically-freer Mauritius.

The USA has a much longer history of economic freedom than Mauritius as well as a very different culture. Economic freedom has been good for Mauritius, but it cannot fix all of the problems. 

Infant mortality? In economically-more-free Mauritius there are about 11 deaths per 1,000 live births—compared to 5.9 in the economically-less-free U.S. Maternal mortality in Mauritius is at 60 deaths per 100,000 live births, compared to 21 in the U.S. Economic liberty comes at a price in human survival, it would seem. Oh, well—at least Mauritius is economically free!

Again, absent economic freedom, Mauritius would be a good deal poorer and almost certainly have even higher mortality rates for infants.

Even to admit such trade-offs—like higher infant mortality, in return for less government—would undermine the claim of libertarians that Americans and other citizens of advanced countries could enjoy the same quality of life, but at less cost, if most government agencies and programs were replaced by markets and for-profit firms. Libertarians seem to have persuaded themselves that there is no significant trade-off between less government and more national insecurity, more crime, more illiteracy and more infant and maternal mortality, among other things.

This is where Lind really goes wrong. He gets the tradeoff wrong. The best, and only way, to improve the standard of living is to increase wealth.

The only system conducive to building wealth is a free enterprise system that is, at its core, libertarian. 

There is a tradeoff between government and the things Lind mentions, but, contrary to what Lind says, it is smaller government that leads to better outcomes in these areas. That is because it is smaller government that leads to the wealth creation that makes improvements possible.

It’s a seductive vision—enjoying the same quality of life that today’s heavily-governed rich nations enjoy, with lower taxes and less regulation. The vision is so seductive, in fact, that we are forced to return to the question with which we began: if libertarianism is not only appealing but plausible, why hasn’t any country anywhere in the world ever tried it?"

In fact, the experience of the past few centuries have been an overwhelming rejection of socialism, state meddling, social engineering, and all forms of statism. Libertarianism has been the victor.

Libertarianism isn't a seductive vision, but a practical policy regime that actually has a proven record of success.