Dylan Matthews’ critique of my UBI view is mistaken, but here’s a better one

July 24th, 2017 at 8:49 am

In pushing back on an argument against Universal Basic Income (UBI) plans, Dylan Matthews engages in a curious non-sequitur. Let me point out where he’s wrong but offer him a more salient contradiction in my position.

Matthews, in defending the idea that “every American gets a basic stipend from the government,” quotes me as follows: “If we instead choose to use our resources on people who don’t need them, we won’t be able to build on the progress we’ve made.”

He then argues, based on a paper by Wiederspan et al, that UBI’s aren’t as expensive as I suggest. The problem, however, is the paper he cites isn’t about UBI. It’s about a means-tested, non-universal program that phases out at (in Matthews’ favored version) twice the poverty threshold, which excludes the majority of American families (68 percent; i.e., 32 percent are below twice poverty).

By shifting from UBI to this targeted approach, Matthews is implicitly agreeing with me. One of my major objections to UBI ideas that don’t cost a lot more than the current system of taxes and transfers, like the one proposed by Charles Murray, is that by consolidating all our social welfare spending and then essentially giving those resources to everyone as a per-capita UBI, poverty will go up. The anti-poverty impact of the current system will be diluted by spreading the same money over millions more people.

In fact, Wiederstan et al clearly recognize this cost constraint, suggesting that if the phase-out threshold is set too high, “the program will be exorbitantly expensive.”

These authors, and Matthews, are thus arguing for something other than a UBI. By dropping the U, they raise a different, albeit still interesting, question. They’re no longer asking if we should have what Matthews describes as a “basic stipend from the government” for every American. They’re instead suggesting that the poor and near poor might be better served if instead of the existing collection of anti-poverty programs, we consolidated them all and just gave them the cash.

This obviates the concern raised in my quote above: turning anti-poverty programs into a cash grant to poor and near-poor people doesn’t squander resources on those who don’t need them. In fact, as Matthews points out, the cost of the Wiederstan et al version he prefers (~$220 billion) amounts to about what we spend on non-health, anti-poverty programs.

This idea, however, raises other concerns. While I like the consumer sovereignty (I very much like that part), simplicity, and scope of the idea, I worry that a sole, stand-alone, anti-poverty fund would be a lot more open to attack than the many existing programs that meet specific needs. My strong sense is that it’s easier for conservatives to reduce cash support than in-kind support. EG, I’ll bet one thing that tanked the Republican health care replacement plans was taking away poor and moderate-income people’s health coverage to pay for tax cuts for the rich.

This, however, is really a political call, and I could be wrong. The idea Matthews touts here, though not a UBI, is an NIT—a negative income tax—which oldsters like myself remember being introduced by conservative icon Milton Friedman and embraced by President Nixon, of all people.

Getting back to actual UBIs, however, I do think there’s a coherent critique of my beef about the U in UBI. If I were debating me on this point, I’d hit me with this: “So, I guess you’re also against Social Security, which is very much a universal cash income program.”

Of course, I’m not (against Soc Sec), but I can maybe wiggle out by pointing out that while Social Security has UBI characteristics, it’s targeted at elderly retirees (I’m just talking about the retirement program, not the disability one, which is quite different in this context). In this sense, it addresses a market failure of sorts, which is the risk of poverty in retirement. In fact, Social Security reduces elderly poverty from about 40 to about 10 percent!

But while its benefit structure (pay ins relative to pay outs) is progressive, why does it have to be universal? The answer has always been: to stave of political attack. And there’s something to that. But I also like the intergenerational contract inherent in the program. Today’s retirees bequeathed today’s economy to today’s workforce. In return, we’re going to shave some of the productivity gains off the top for those past their working years. It’s kind of a “circle of life” thing; cue the music, Disney!

But UBI’ers might say I’m being too narrow in where I see market failures. They often argue, against the evidence, I’d say, that the UBI is necessary as technological unemployment is or will be rampant. So, if my criterion for universality is a pervasive market failure, like aging out of your working years, then the lack of jobs certainly qualifies. (FTR, I have argued for a guaranteed jobs program.)

But it may be the case that this whole sort of thinking—we intervene where the market fails—is not shared by UBIers and may demarcate older from younger people in this space. My approach is pretty “neo-classical” (though to be clear, I see market failures around many more corners than the median economist of my generation) and I think many younger people, to their credit, are looking at economics’ track record in recent years and concluding that we need a whole new paradigm.

In other words, there are many interesting currents swirling around right now. But as we try to make sense of them, we should, for clarity’s sake, be disciplined in our analysis and not conflate UBIs with NITs.

How R’s on the House Finance Committee want to go after the Fed’s independence, and why that’s a terrible idea.

July 20th, 2017 at 4:31 pm

I testified this AM at the House Finance subcommittee on monetary and fiscal policy. Three R witnesses and yours truly, so I didn’t get to say all I wanted—after all, monetary and fiscal covers a lot of ground! So, why else have a blog if I can’t use it to post the stuff I didn’t have time to get into?

Here’s my testimony, which elaborates on these three points:

–Contrary to some of the claims made at the hearing, the Fed’s interventions were highly effective in reducing the damage from the Great Recession, reflating credit markets, and pulling the recovery forward. The Fed’s not perfect, for sure, but a lot of people and businesses would be a lot worse off today if the Fed had sat on the sidelines.

–Under certain conditions, particularly recessions or weak, demand-constrained recoveries, monetary and fiscal policy are critical complements. In this regard, the pivot to austerity budgets by both us (starting in around 2010) and European economies was a lasting economic mistake.  Ben Bernanke made this very point to this very committee back in 2013:

“Although monetary policy is working to promote a more robust recovery, it cannot carry the entire burden of ensuring a speedier return to economic health. The economy’s performance both over the near term and in the longer run will depend importantly on the course of fiscal policy.”

–Title X of the CHOICE Act, the brainchild of the R’s on this committee, proposes to micromanage the Federal Reserve in ways that would be hugely detrimental to its independence and its ability to carry out its mandates. As a side point, perhaps interesting to monetary wonks here at OTE, the title’s insistence on the 1993 vintage of the Taylor rule is out of step with much research on the variables, values, and coefficients that would go into such a rule today.

I didn’t get to push back on an issue that conservatives on the committee were, IMHO, way too overheated about: the Fed’s payments of interest on excess reserves, or IOER. This was cast as a big, distortionary intrusion into private lending markets (see George Seglin’s testimony). I don’t see that at all.

Like Bernanke and Kohn, I view IOER as a necessary part of the hydraulics of monetary policy when the Fed’s balance sheet is large. Since bank reserves held at the Fed are far above their historical levels, marginally raising or lowering reserves—which is how the Fed hits its funds rate target (ffr)—don’t move the ffr the way they used to. Now, the Fed must wiggle the IOER—the interest rate it pays to banks on their reserves—around to move the funds rate. Right now, for example, the IOER is 1.25%, the upper end of the ffr target.

The Finance Committee Rs argue that this distorts credit markets and crowds out private lending. Why would a bank undertake the risk of lending to any old borrower when the Fed will give you a better, risk-free rate?

That’s not a crazy concern, but one thing we didn’t see from the panel was any evidence that it was occurring. For one, banks get zero interest on required reserves—the assets they must keep on hand to meet depository obligations—so no issue there. As far as excess reserves are concerned, B&K argued back in 2016 (when the IOER was a mere 0.25%), “the only potential loans that would have been affected by the Fed’s payment of interest are those with risk-adjusted short-term returns between precisely zero and one-quarter percent—surely a tiny fraction of the total.”

What about now, amidst a considerably higher rate? Still nothing much to see, folks. According to the NFIB survey on credit access by small businesses, “four percent of owners reported that all their borrowing needs were not satisfied, up 1 point and historically very low…only 1 percent reported that financing was their top business problem.” Flow of funds loan data on bank lending show a bit of a dip since the IOER has gone up, so maybe there’s something there, but there’s simply no correlation between these variables (the IOER rate and credit flows) since the IOER program began in 2008. Credit market indexes (eg, GS’s FCI, below, or the Chicago Fed’s version) show relatively loose credit conditions.

Then there’s what I see as a major conceptual flaw in the opposing arguments I heard today: Fed policy is presented as all costs, no benefits. Suppose, instead of the result I just described, you could prove the IOER is crowding out private borrowing. Checkmate, right?! Wrong. The alleged allocative cost of this crowd-out (because the market so flawlessly allocates credit, right?—there’s also a strong case of amnesia in a lot of this work) must be weighed against the growth and jobs impact of monetary stimulus.

I try to bring that sensibility to my testimony. You can see if it works for you. OTE’ers know that I’m far from uncritical of Fed policy, especially lately, what with their normalization campaign occurring as inflation is drifting down and wage growth is kinda stalled out at around 2.5%. And btw, if I were going to ding IOER, it would be for subsidizing banks for doing nothing (Bernanke and Kohn point out that such subsidies are typically but a few basis points, i.e., the IOER – the effective FFR, or 1.25 – 1.16 today; okay, but still…).

But for years now, the Fed’s been about the only thoughtful, deliberative public institution working to improve the US economy. The idea of turning their keys over to today’s Congressional conservatives seems an act of willful economic destruction.

How big a deal is this political moment?

July 18th, 2017 at 5:12 pm

Over the past few days, I’ve published a couple of posts wherein I’ve tried to noodle over how we got to this moment in health care reform.

Here, I’d like to add a few observations from that and other debates and ask whether there’s something important and potentially positive going on in the current political moment. One wants to be careful not to over-interpret, to lean against confirmation bias, and to recognize how quickly the political winds can shift. But let my throw a few noodles on the wall and see if they stick.

Here are some facts:

–The Senate health care bill is almost certainly dead. The House bill is highly unlikely to go anywhere, either. As I discuss in the links above, it died because of the inability of Republicans to craft and pass a plan would accomplish the following: meet Trump’s promise to provide more comprehensive, yet cheaper care; provide large tax cuts for wealthy households; repeal Obamacare but not unwind its coverage gains; cover pre-existing conditions and do so while keeping private insurers on board by avoiding bifurcated risk pools. (To be clear, none of this means Obamacare is out of the woods. Trump is already talking about further ACA sabotage.)

–In trying to deal with some of these contradictions, the last version of the Senate plan retained two high-end taxes that the House and the earlier Senate plan had initially cut. Some Republicans–that’s “Republicans,” with an R–argued that it didn’t make sense to cut taxes for rich people while cutting health coverage for poor people.

–As OTE’ers know, Republicans in the Kansas legislature recently overrode their governor’s veto and ended the trickle-down tax cut “experiment” that was undermining their ability to maintain public services, including education.

–In that same spirit, some Republican governors, motivated by their perceived need to protect the ACA Medicaid expansion in their states, played key roles in defeating the Senate health bill.

–As they craft their tax cut plan, some R’s are making noises about learning some lessons from the unfairness problems with their health care approach: “Benefits like the mortgage interest deduction should be more targeted to help lower and middle income people as opposed to wealthier Americans,” said Rep. Carlos Curbelo (R., Fla.). “I think you’re going to see a balance in our tax reform package.”

All of this led my pal Jimmy P to claim, in the WSJ, that we’re seeing “the waning power of the supply side, pro-growth antitax wing of the Republican Party…a moving away from the more extreme tax-cut positions.”

Is it possible that enough conservatives to make a difference could be at the front edge of recognizing that dysfunction, fact-denial, claims that you’re helping people when you’re really hurting them, cutting programs which people depend on to give tax cuts to the wealthy–that all of that is both bad policy and bad politics?

Certainly, the House budget 2018 resolution out today suggests the answer to that question is decidedly “NO!” From CBPP’s Bob Greenstein:

House Budget Committee Chair Diane Black’s new proposed House budget resolution, which provides both a framework for budget and tax legislation to follow this year and a broader fiscal policy blueprint for the next ten years, lays out an exceedingly harsh vision for the nation.  It would cause pain to tens of millions of Americans, especially struggling families and others who have fallen on hard times, and would cut deeply into areas important to future economic growth, from education to basic scientific research.  It would do so while opening the door for tax cuts geared toward those who already are the most well off.

The plan proposes to cut “$4.4 trillion over ten years from entitlement programs, including cuts to Medicaid and Medicare, income assistance for working-poor and other struggling families, basic food assistance, and assistance for students to go to college.” It cuts $1.3 trillion from programs like “job training and education, scientific and medical research, environmental protection, basic operations of the Social Security system, and efforts to protect public health.  Overall funding for this part of the budget has already fallen significantly since 2010…but this budget would slash it much further.  By 2027, [such] funding would be 44 percent below its 2010 level, after adjusting for inflation, and — measured as a share of the economy — spending on this area of the budget would fall to its lowest level since before the Great Depression.”

So the enlightened path clearly still eludes many of these policymakers.

Still, has there been a disturbance in the force? A chink in some of their armor that heretofore has precluded any cognitive dissonance from breaking through?

Maybe; maybe not. Too soon to tell. But this would be a good time for those of us who recognize a role for government in insuring against risk (including health risks), providing opportunities for the poor, offsetting market failures, ensuring retirement security, protecting the environment, maintaining productive public goods, pushing for racial justice, and promoting full employment to press our advantage. There’s a vacuum out there, folks, and whomever fills it deserves our support.

Links to start the week: “That horse ain’t real,” Reeves v. Samuelson, Why R’s don’t understand insurance.

July 17th, 2017 at 8:53 am

First, an excellent video-metaphor for the R’s health-care replacement ideas thus far. I particularly like the way the real horse shakes its head in a kinda equine WTF moment after it checks out the other “horse.”

Second, given that Ben S and I featured Richard Reeves talking about his new book “Dream Hoarders” in our last episode of the On the Economy podcast, I wanted to take on a few points Robert Samuelson makes today in his critique of Reeves thesis. While Bob makes some important points, I think he gets some stuff wrong.

In response to Reeves’ fundamental point that relative mobility in the US income distribution is too sticky–too many kids end up in adulthood near where they start–Bob S points out, and he’s right, that there is, in fact, some degree of downward mobility (“roughly two-thirds dropped out of the top fifth”).

But check out this figure (not the one from the book but one to which I can link with very similar results) which shows that close to two-thirds of kids who start out in the top fifth end up in the top 40% (39%+23%=62%). And even more importantly, look how relative downward mobility declines–gets stickier–as you go up the income scale. Or, inversely, how too many poor kids are stuck at the bottom.

Bob asks the fair question, “how many is too many?” That is, what, ideally, should that mobility matrix look like? No one expects 20%’s across the figure (meaning total upward and downward mobility across the quintiles–where you’re born has no impact of where you end up) but I suspect Reeves has an answer to this query, which I’d like to hear, and will post here.

The second thing I think Bob gets wrong is his intimation that Reeves’ work contradicts this goal: “As a society, we should try not to restrict the upper middle class, but to expand it.” Since we’re talking relative mobility here, you can’t really expand the upper class (it will always be 20%) but what I think Bob is getting at is we want people to make good choices that improve or maintain the economic life chances of themselves and their kids.

That’s surely what Richard wants too, but he believes, and I agree, that there’s far too little by way of opportunity for poor and low-income kids to climb that ladder (which again, given relativity conditions, means some richies have to climb down to make room for others to climb up). And this is a policy problem that Richard sees clearly, as we discuss in the podcast. The tax code, for example, is fraught with upside-down subsidies that serve as the glue behind the stickiness in the income distribution (see figure), a fact that I suspect both Richard and Bob would agree is problematic.

Third, see my new WaPo piece about how today’s conservatives clearly and willfully do not understand the critical role of government as an insurer, in no small part because they’re paid not to understand it.

The deficits generated by Trump’s budget are much bigger than CBO’s estimates

July 13th, 2017 at 5:12 pm

The figure below, from Senate Budget Committee staffer Bobby Kogan, shows four different estimates of projected budget deficits as shares of GDP:

–The lowest line is the administration’s own estimate, showing how if you buy their numbers–and if you do, I’ve got a bridge to sell you–the budget balances by 2027.

–The next line up is from today’s CBO release of their analysis of President’s budget. Note that CBO must adhere to claims that tax cuts will be paid for, even if there’s no credible plan to do so.

–The next line is CBO’s baseline, or the path they believe the deficit will follow if we stick to current law.

–The top line is the most important. It’s the deficit as a share of GDP under the far more credible assumption that team Trump fails to pay for their tax cuts (using Tax Policy Center static estimates of the cost of their tax cuts, with interest costs added; ftr, TPC’s dynamic score line looks the same).

Sources: OMB, CBO, TPC, Bobby Kogan

The administration gets to balance in part by assuming economic growth rates about 50% higher than CBO’s (~3 vs. ~2 percent), which spins off  over $3 trillion in revenue that the budget agency wisely does not count (the admin also cuts trillions in spending on programs like Medicaid, nutritional assistance, education, and income security). As mentioned, the CBO must follow the administration’s “set of principles to guide deficit-neutral reform of the tax system,” or what budget wonks call “the magic asterisk.” The claim is that they’ll figure out some way to offset the costs of their tax cuts, so no need to add those pesky costs to projected deficits.

If you share my “yeah, right” response to that claim, then the yellow line’s the one for you.

To be clear, I’m the least hawkish budget guy you’ll meet, and I don’t fault them or anyone else for failing to balance their budget. But deficits growing to 7% of GDP due to wasteful, regressive tax cuts are completely unwarranted and squander valuable resources that could and should be put to much better use offsetting the negative impacts of poverty, inequality, climate change, and the deterioration of our public goods.