AEI Economic Perspectives is a policy paper series published by the Economic Policy Studies department of the American Enterprise Institute. Papers in the series analyze public policy, examine current economic conditions, present insights within and across economics subject areas, and feature original research.
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- 2017-04b (April) Toward a More Efficient Housing Safety Net | Kevin C. Corinth
Citing a housing affordability crisis, some have called for a federal entitlement to housing assistance by expanding the housing voucher program. I argue that this would be an inefficient way to help low-income Americans. Aside from their administrative costs, vouchers distort housing decisions and fail to serve as a platform for increasing opportunity. I argue for a more efficient housing safety net based on three objectives: preventing housing loss whenever possible, quickly rehousing people when literal homelessness occurs, and providing supportive housing for the most vulnerable. Additional resources freed up by generally phasing out other major low-income housing programs should be transferred as cash to low-income households, diverted to other programs that more effectively build human capital, or used in some combination of these two approaches.
- 2017-04a (April) CBO’s Forecast Shows Long-Term Deficit Reduction Should Be the Top Budget Priority | James C. Capretta
Achieving the Trump administration’s goal of eliminating annual federal budget deficits within 10 years will be difficult unless the administration adjusts some key commitments that President Donald Trump made during the campaign. The US economy does not need stimulus at this point. The US is already rushing toward a fiscal reckoning, driven by rising spending on entitlement programs. The administration should propose a major fiscal course correction, focused on long-term entitlement reform.
- 2017-02b (February) The Reach of the Cash-Based Safety Net for Poor Families with Children in America | Angela Rachidi and Shijie Jin
Even 20 years after major reforms to the social safety net in America, varying perspectives exist on how well the federal government provides for poor families with children. This paper explores the existing reach of government programs that provide cash income to poor families with children and how it has changed over time. Contrary to what some might think, the vast majority of poor families with children receive cash-based assistance, although today it is in a form very different than it was before the reforms of the late 1990s. Nonetheless, a small but notable share of poor families receive no cash assistance and no employment programming from the government, suggesting a need for further reforms aimed at increasing employment and reducing severe hardship.
- 2017-02a (February) Border Adjustment and the Dollar | Alan J. Auerbach
A key element of the destination-based cash-flow tax included in the House Blueprint is a border adjustment, which would relieve tax on exports and impose tax on imports and thereby shift the locus of US business taxation from where products are made to where they are consumed. There are strong tax policy arguments for a shift to destination-based taxation, but an important issue, especially during a transition to this new tax system, is the response of the dollar exchange rate to border adjustment. This paper explains the prediction that the dollar will rise significantly in reaction to border adjustment and reviews criticisms of this prediction.
- 2017-01 (January) Eight Market-Oriented Proposals That Reduce Income Inequality | Dean Baker
Debates over economic policy are often framed as conservatives supporting market-oriented policies, while progressives support government interventions. However, there are many market-oriented policies that can lead to more equality, an important goal for most progressives. This paper outlines eight policies that are likely to lead to greater equality through an increased reliance on the market.
- 2016-10b (October) Tax reform: Ryan-Brady plan is a better way | Alex Brill
Earlier this year, Speaker of the House Paul Ryan and House Ways and Means Committee Chairman Kevin Brady released a tax reform framework titled, “A Better Way: A Pro-Growth Tax Plan for All Americans.” The new plan is a clear departure from the budget-busting proposals advanced by Republican presidential candidates over the past year and reflects a coherent approach to lowering statutory tax rates; maintaining a progressive income tax; and dramatically reducing the marginal tax rate on new investment, a reform likely to spur a substantial increase in new investment.
- 2016-10a (October) CBO on drugs: Will the Part B drug demonstration save money? | Joseph Antos
The administration’s controversial proposal to change the way drugs are paid for under Medicare Part B will save $1.145 billion, according to the Congressional Budget Office. But CBO assumes that such demonstration projects inevitably lead to program savings, even though the projects have not yet been clearly defined. Changes in CBO’s scoring procedure would provide a fairer basis for judging these projects.
- 2016-09 (September) Smoking out illicit trade: How some policies intended to limit smoking drive illegal trade | Roger Bate
The World Health Organization (WHO) states that smoking cigarettes is the largest cause of preventable premature death globally and as therefore enacted various protocols in attempts to lower the death toll. However, in many cases the attempts to lower smoking, such as raising taxes and introducing or expanding regulation on tobacco products, has resulted in the rise of illicit tobacco, whether counterfeits or legally produced smuggled products. Bate argues that free trade zones, rogue nations and attempts by governments to stop illicit trade are the main drivers of illicit tobacco.
- 2016-04b (April) The candidates in their own words: A textual analysis of 2016 president primary debates | Weifeng Zhong
In the 2016 election cycle, the two major parties held 20 primary debates, and the candidates spoke hundreds of thousands of words. In this paper, I turn them into “word data” and examine three characteristics of the candidates: (1) Where do the candidates stand on a spectrum of policy positions? (2) How negative are the candidates’ political sentiments? (3) How effectively do the candidates’ speeches deliver content? This word-data approach makes possible observations that are difficult to discover with conventional methods. For example, I find the political speeches of both Hillary Clinton and Donald Trump appear moderate in policy positions, positive in political sentiments, and effective in delivering content.
- 2016-04a (April) Understanding middle-class tax cuts | Alex Brill
Middle-class tax relief has widespread support across the political spectrum, but the consequences of different strategies for achieving this goal are not well understood. Using a new modeling suite incubated by AEI’s Open Source Policy Center, this paper evaluates stylized versions of middle-class tax relief options with respect to the average effective marginal tax rate (EMTR) on labor income, the number of taxpayers claiming the standard deduction, the number of taxpayers receiving tax relief, and the macroeconomic effects. The analysis finds that either doubling the standard deduction or expanding the brackets for the 10 or 15 percent tax rates results in lower EMTRs for taxpayers in the middle class, but that these policies have quite different effects both within the middle class and across the aggregate economy.
- 2015-12 (December) Isn’t it ironic? The outlook for Federal Reserve policy | Vincent R. Reinhart
Fed Chair Janet Yellen is widely viewed as a dovish central banker, but she is about to lead her institution into a prolonged campaign of raising the policy interest rate. Starting now is a tactical decision on Yellen’s part to achieve her longer-run strategic aim. Hiking the funds rate, even as economic growth disappoints and inflation remains subdued, buys Yellen the credibility with her colleagues and market participants to subsequently tighten slowly. Thus, US monetary policy will remain accommodative for a considerable period.
- 2015-09b (September) America’s transportation challenges: Proposals for reform | R. Richard Geddes
Politicians and civil engineers alike often refer to America’s immense surface transportation system as “our nation’s crumbling infrastructure.” Major segments of the system are in need of renovation, and its problems are exacerbated by deferred maintenance and unstable, inadequate revenue sources. New approaches to funding, financing, operating, and maintaining the US transportation system are necessary. Policymakers should adhere to three main principles: infrastructure should be paid for by those who use it, ideally through user fees; public-private partnerships should be used to streamline financing, operations, and maintenance; and public policy should complement emerging transportation technologies, especially those related to vehicle autonomy.
- 2015-09a (September) The state of public pension funding: Are government employee plans back on track? | Andrew G. Biggs
The public-sector pension industry is claiming a comeback from losses suffered during the Great Recession. But this recovery is greatly exaggerated: even years past the end of the recession, most pension sponsors are unable to make their full annual contributions, and pensions are taking as much investment risk as ever. The first step to effective pension reforms is an honest, accurate view of the costs and risks that public plans impose on government budgets and taxpayers.
- 2015-08 (August) What should we do about homeless families? Comments on the Family Options Study | Kevin C. Corinth
The recently released Family Options Study offers new, groundbreaking evidence about what works best for homeless families. In this paper, I review the study’s design and findings and evaluate the policy conclusions drawn in the report. I propose alternative policy responses, including (1) broadening the goals of the homeless system beyond ending homelessness—to not only provide a housing safety net but also provide effective avenues for self-sufficiency; (2) supplementing rapid re-housing with customized case management, work incentives, and flexible assistance for home-sharing arrangements; and (3) identifying and expanding transitional housing programs that effectively build self-sufficiency. Additional resources needed to fund these policies should be diverted from other federal rental-assistance programs.
- 2015-06c (June) Street homelessness: A disappearing act? | Kevin C. Corinth
The number of homeless individuals sleeping on the streets in the United States has been declining rapidly, according to annual counts conducted since 2007. This has caused some to celebrate that policies geared toward ending homelessness are working. However, this paper shows that drastic changes in street counts in particular communities account for the majority of the national reduction, suggesting that miscounting may be playing a major role. An alternative explanation for large count changes is that increasing homeless criminalization measures are leading more of the homeless to stay out of sight. Another red flag is that sheltered homeless counts, which are much more reliable than street counts, have been remaining steady. This is true not just among families—who rarely sleep on the streets—but also among individuals—who are more likely to transition between the streets and shelters. Meanwhile, substantial expansion of permanent supportive housing appears to play only a minor role in the national street count reduction, although the possibility that altered homeless migration patterns are partially masking its effect cannot be ruled out. Ultimately, the evidence suggests that it is too soon to declare that we know what works in ending homelessness.
- 2015-06b (June) A contingency plan for King v. Burwell and related cases | Joseph Antos et al.
If the Supreme Court sides with the plaintiffs in King v. Burwell and related cases, and thus invalidates the payment of premium subsidies in states that have relied on the federal government to build and run the Affordable Care Act (ACA) insurance exchange, Congress will come under great pressure to enact a remedy to stabilize insurance markets and coverage. Congress should enact such a remedy, including a temporary extension of the existing subsidy program. But it should also allow states to opt into an alternative reform structure, with a simplified tax credit plan and elimination of the ACA’s federal insurance rules. In this alternative, there would be no individual or employer mandate, but individuals who stayed continuously insured would be protected from higher premiums or restricted coverage based on their health status.
- 2015-06a (June) On the Wells report | Kevin A. Hassett, Stan Veuger, and Joseph W. Sullivan
In the current “Deflategate” controversy, the New England Patriots have been accused of illicitly deflating footballs before the start of their 2015 American Football Conference championship game against the Indianapolis Colts. The National Football League and the lawyers it hired have produced a report — commonly known as the “Wells report” — that has been used to justify penalties against the Patriots and quarterback Tom Brady. Although the Wells report finds that the Patriots footballs declined in pressure significantly more than the Colts balls in the first half of the game, our replication of the report’s analysis finds that it relies on an unorthodox statistical procedure at odds with the methodology the report describes. It also fails to investigate all relevant scenarios. In addition, it focuses only on the difference between the Colts and Patriots pressure drops. Such a difference, however, can be caused either by the pressure in the Patriots balls dropping below their expected value or by the pressure in the Colts balls rising above their expected value. The second of these two scenarios seems more likely based on the absolute pressure measurements. Logistically, the greater change in pressure in the Patriots footballs can be explained by the fact that sufficient time may have passed between halftime testing of the two teams’ balls for the Colts balls to warm significantly, effectively inflating them.
- 2015-05c (May) Rational rollout of new medicines for diseases of poverty | Roger Bate
Increasing access to medicines for diseases that primarily affect the poor, such as malaria and tuberculosis (TB), involves a complex interplay of private- and public-sector efforts—some of which are often ignored in public debates over how to best improve access. Producing new medicines is a necessary first step, and companies can be given incentives to do so through a variety of mechanisms. But production is only part of the story. Government policies largely determine how or whether effective new medicines are provided to the people most in need, and government requirements for local clinical trials, filing dossiers, and registering new drugs can create high costs and sometimes barriers to access. Governments with high disease burdens must optimize their policies to ensure safe and timely access to new medicines. Western nations could encourage such action at the 2015 World Health Assembly; this is the humanitarian thing to do, but Western self-interest should also drive such an effort. Escalating drug resistance does not respect national boundaries, and extremely drug-resistant variations of some diseases of poverty ultimately threaten the poor and the wealthy alike.
- 2015-05b (May) Tax and spending reform for fiscal stability and economic growth | Joseph Antos, Andrew G. Biggs, Alex Brill, and Alan D. Viard
Recognizing the unsustainable fiscal outlook facing the United States, the authors present a plan to constrain the growth of federal spending and reform the tax system to promote economic growth. The plan replaces the income tax system with a progressive consumption tax, eliminating the bias against savings and investment. The plan revamps Social Security to provide a flat, universal benefit that would virtually eliminate poverty in old age, making the program more effective in protecting low earners, more conducive to saving and longer work lives, and better aligned with the work and retirement conditions that will prevail in the coming decades. Additionally, the plan adopts health reforms that are intended to slow the growth of spending while maintaining access to high-quality health services, by shifting away from the defined-benefit approach that characterizes Medicare and Medicaid today to a defined-contribution philosophy. The plan also brings federal spending and revenue into closer alignment, sparing future generations from the explosive growth of federal debt.
- 2015-05a (May) US biofuels policy, global food prices, and international trade obligations | Colin A. Carter and K. Aleks Schaefer
The Renewable Fuels Standard created under the 2007 Energy Independence and Security Act establishes minimum biofuels blending mandates in the United States. The regulation raises world food prices by diverting a substantial portion of US corn and soybeans away from global markets and into the production of ethanol and biodiesel. Despite these distortionary effects and opposition to the policy worldwide, the global community likely has no recourse to challenge this policy under existing international agreements. To make any meaningful reductions in government intervention in agriculture, trade negotiations must expand beyond trimming farm payments to curtail broader policy instruments that affect food prices.
- 2015-03 (March) Why Americans don’t face a retirement crisis | Andrew G. Biggs and Sylvester J. Schieber
There is no question that many Americans face challenges in preparing for retirement. Social Security is substantially underfunded, its long-term shortfalls are increasing, and policymakers have not made reform a priority. Nonetheless, analysts’ claims that Americans face a “retirement crisis” overstate what households will need in retirement, fail to account for how the presence of children in a household affects the need to save, and incorrectly point to households’ declining wealth-to-income ratios as a sign of deteriorating retirement saving. A careful review of data and retirement studies reveals that the state of retirement preparedness is in fact a more modest, manageable issue. A false sense of crisis risks enacting policies that could have significant costs for government budgets and ordinary Americans’ retirement security. In particular, government-run pension programs are the most poorly funded element of overall retirement saving. Policies that would make American more dependent on these programs could put their retirement income security at risk.
- 2014-07 (July) Measuring inequality: One size doesn’t fit all | Sita Nataraj Slavov and Benjamin Ho
Statistics focusing on annual household-level income indicate that inequality has increased in the United States in recent decades. Are these measures accurate? Inequality has traditionally been calculated in the United States in terms of annual cash income alone, but other, more comprehensive points of measurement should be considered. For maximum accuracy, income should include the value of in-kind benefits and be measured over a lifetime rather than a year. But even this adjusted number is inadequate to assess fairness, which requires looking at a broader picture of overall well-being that includes income mobility, access to education, consumption, leisure, and health. Additionally, we must develop better measures of opportunity, which is a more accurate indicator of well-being than income distribution. Broadening the definition of and approach to inequality would help build more opportunity and result in more useful policy.
- 2014-03 (March) Not so modest: Pension benefits for full-career state government employees | Andrew G. Biggs
City and state governments around the country are pursuing reforms to address the rising costs of public employee pension plans. In response, public employee unions and pension plans themselves often portray these benefits as “modest.” In reality, public pension plans offer long-term government workers benefits that make them among the best-off retirees in the country. Indeed, the average full-career government worker in eight states retires as a “pension millionaire,” with 23 states paying $750,000 or more in lifetime retirement benefits. Drastic benefit reductions for current retirees would be unfair, but reforms that make public- and private-sector pensions more comparable should be on the table.
- 2013-12 (December) The multiplying risks of public employee pensions to state and local government budgets | Andrew G. Biggs
State and local government pensions tout their ability to couple generous, guaranteed benefits for public employees with low and stable contributions from taxpayers. In reality, the risks that public pensions pose to taxpayers and government budgets have multiplied by a factor of 10 over the past four decades. While elected officials—including a number of Democratic mayors—are pushing for reforms, even they may not be aware of how much pension risk government budgets are truly bearing.
- 2013-11 (November) Global effects of unorthodox monetary policies | Desmond Lachman
In the aftermath of the Great Recession, major central banks have scrambled to support economic recovery and to avoid deflation through highly accommodative and unorthodox monetary policy stances. Although relatively successful in the short term, these policies have given rise to incipient asset- and credit-market bubbles and to spillover effects on the emerging-market economies, which could threaten the longer-run world economic outlook. Going forward, these central banks need to be very much more mindful than they have been to date of the longer-term unintended consequences of their policy actions.
- 2013-07 (July) Capital income taxation: Reframing the debate | Alan D. Viard
Although capital income taxes penalize saving and slow long-run growth, the federal tax system imposes multiple such taxes. Seven increases in capital income taxes took effect at the beginning of 2013, and President Obama’s 2014 budget plan proposes further increases. In upcoming decades, rising revenue needs fueled by entitlement growth will create pressure to further expand capital income taxation despite its negative economic effects. Opponents of capital income taxation must reframe the policy debate by explaining the economic disadvantages of capital income taxes and proposing alternative budgetary measures that maintain tax fairness.
- 2013-06 (June) Israeli corporate tax policy: A pro-growth system at risk | Alex Brill
Globally, corporate tax rates have been declining for over two decades (except in the United States), and one consequence has been an increase in investment, a boost in workers’ wages, and little or no loss of tax revenue. But a troubling tax policy trend is emerging in Israel, where once-aggressive efforts toward a competitive corporate tax are being reversed. Proposals to raise the headline Israeli corporate tax rate for a second year and, in particular, to raise taxes on highly mobile, export-oriented production represent the wrong approach and will harm economic prosperity. The consequences of this reversal in a small and open economy like Israel’s are potentially dire and could extend to investors in the Israeli economy from the United States and other foreign countries.
- 2013-05 (May) The tax treatment of the family | Aspen Gorry and Sita Nataraj Slavov
In two recent cases, the US Supreme Court considered constitutional challenges to the federal Defense of Marriage Act—which denies federal recognition of same-sex marriage—and to California’s Proposition 8, a constitutional amendment banning same-sex marriage. Regardless of the outcomes of these two cases, the controversy over same-sex marriage highlights an important tax policy question: should the US tax code treat people as families, as it currently does, or as individuals? This paper considers the costs and benefits of switching to a tax system based on individual, rather than family, income.
- 2012-12 (December) Financing entitlements and promoting work: Does policy encourage early retirement? | Aspen Gorry and Sita Nataraj Slavov
Entitlement spending is projected to put a great deal of strain on the federal budget in coming years. A key factor underlying the growth of entitlement spending is the deteriorating ratio of workers to retirees. This problem is exacerbated by various policies that create disincentives for work at older ages. One way to reduce the fiscal burden of entitlement programs is to encourage longer working lives by minimizing these disincentives. This paper documents the recent trends in employment among older workers, summarizes the evidence on how policies influence retirement decisions, and describes several reforms that have the potential to increase employment among older workers.
- 2012-11 (November) Lessons from the euro crisis for the United States | Desmond Lachman
As the European economy slides ever deeper into recession, it is time for the United States to draw cautionary lessons from Europe’s painful budget adjustment experience, especially as the dismal state of America’s public finances now bears an uncomfortably striking resemblance to that of some of Europe’s more troubled economies. Among the more important lessons is that the United States should not be lulled into a false sense of budget complacency by the very-low interest rates at which its government can presently fund itself. Rather, the United States should embark upon a serious program of medium-term budget adjustment if it is to avoid going further down the path to fiscal ruin. The European experience also suggests that medium-term fiscal consolidation is best effected through public spending cuts rather than tax increases, and that such an adjustment effort should be supported by accommodative monetary policy action.