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In The New York Times today, John Harwood asks the following of Hillary Clinton:
Harwood: Paul Ryan’s out with a plan today proposing that states be allowed to take all of the programs for those in need in one revenue stream as a way of finding better ways to make them work. Is that a good idea?
Clinton: No, not in the current atmosphere. It is not a good idea. All one has to look at is that nearly half the states refuse to expand Medicaid to realize why it’s a bad idea. If states won’t even take what are very generous terms from the federal government to give working people and poor people access to health care, how can we turn over all of the resources that are meant to assist those in need?
A key part of the Paul Ryan and Marco Rubio anti-poverty plans is combining federal anti-poverty programs into a single “funding stream,” and letting states experiment on the best ways to deliver benefits. Ryan calls his version an “Opportunity Grant,” Rubio terms his a “Flex Fund.” While the plans aren’t identical, they both are based on the theory that to get effective reform, the same people implementing the poverty program plan should be the same ones with accountability and funding authority.
Now this is the sort of thing left-liberals generally hate, so Clinton’s response was predictable. I would expect it to morph into a DNC talking point. Progressives don’t trust the states, and see themselves as having more influence and power at the federal level to create new programs and spend more money.
Here is the reaction of Oren Cass, a key wonk behind the Rubio/Ryan plans:
Of course states want to help those in need, they just don’t all agree on the right way to do it. The whole point of a Flex Fund is to remove the political, our-way-or-the-highway approach to funding that the federal government employs today and instead empower states to go in different directions and learn what works. Someone who believes that all the best ideas and all the best people are in Washington will be uncomfortable with such an approach, but that is the attitude that produced our tangled and ineffective safety net in the first place.
Let me expand on those thoughts concerning the Clinton Critique:
1.) Medicaid is a wrongheaded analogy. The Ryan/Rubio Opportunity Grant/Flex Fund plans are about flexibility, accountability, experimentation, and local knowledge. Medicaid is an example of Washington developing a rule-heavy program and and then insisting that the states implement it as is. Also, just because a state would reject Medicaid expansion doesn’t mean it would be a bad steward of anti-poverty funding that it is already receiving and that Washington already relies on it to deploy.
2.) Neither the Flex Fund nor the Opportunity Grant offer flexibility in the amount of money states must spend. Both plans also require states to spend it on anti-poverty measures. They can’t, like, build football stadiums with the dough.
Under the Rubio Flex Fund approach, all states would adopt the new model but by default they would continue their current spending approaches until they wanted to take the initiative to change them. And the Ryan OG proposal disrupts the status quo only where a state comes forward with a concrete proposal to use the funding in an innovative way with tight oversight.
3.) Does Hillary really think state governments, particularly those led by GOP governors, hate their poor people? Is that where the political debate is? Another, more constructive way of looking at it: the Rubio/Ryan approach is a perfect antidote to the “rejection of Medicaid funds” mindset because it strips the federalism politics out of it and invites/empowers states to innovate rather than feeling like they either have to (a) do what President Obama or President Hillary Clinton wants or (b) reject the whole shebang.
Bottom line: these 20th century anti-poverty programs desperately need reform, and the Ryan/Rubio plans give state and local government room to devise and implement innovative plans to better deliver services. (And demand accountability in return.) That seems pretty reasonable — unless, of course, you think only liberal Washington politicians and bureaucrats care about the neediest among us.
Here is President Obama in a chat yesterday with CNBC’s Steve Liesman:
STEVE LIESMAN: Mr. President, I just want to pivot back one more time to domestic issues. You’ve said a bunch of times that getting the wealthy to pay a little bit more, and you’ve succeeded in raising that top tax rate to 39% or rolling back the tax cuts. Is there a limit there? Is there a limit to how much you believe the government should take from an individual in terms of a top tax rate?
PRESIDENT OBAMA: You know, I don’t have a particular number in mind, but if you look at our history we are still well below what, you know, the marginal tax rates were under Dwight Eisenhower or, you know, all the way up even through Ronald Reagan. Tax rates are still lower on average for most folks. And what that means is that we probably can make some more headway in closing loopholes that folks take advantage of. As opposed to necessarily raising marginal rates.
Obama’s response raises an interesting question: how high does he think tax rates could go without really damaging the economy? As my pal Liesman asked, what is the limit?
The president’s answer certainly suggests, at least to me, that he believes the US is nowhere close to the danger zone. If so, he is merely in sync with top left-leaning economists — such as Peter Diamond, Thomas Piketty, Emmanuel Saez — who argue for top rates in the 70% to 80% range, if not higher. Oh, and at the same time the high-tax crowd would close tax loopholes and increase tax enforcement to limit avoidance.
Interestingly, Obama wrote in “The Audacity of Hope“ that the real problem with the 70% tax rate that existed when Ronald Reagan was president was not that it “curbed incentives to work or invest” but that it led “to a wasteful industry of setting up tax shelters.” So maybe Obama thinks a 70% rate with little to avoid it would be just fine. Also keep in mind Obama’s blasé attitude about the US tax burden when Democrats fail to specify how the US will avoid a debt catastrophe in coming decades.
And here are some links to posts on why the US shouldn’t return to the day of confiscatory taxation:
If you want America to become Scandinavia, then you won’t like Paul Ryan’s new anti-poverty plan. The House Budget chairman didn’t call for a universal basic income or universal preschool. And if you want Republicans to hush up and just accept the Obama minimum-wage agenda, you won’t like the Ryan plan. Before it was released, the progressive think-tank Center for American Progress opined, “If past is prologue, Rep. Paul Ryan’s latest poverty proposals will exacerbate poverty and inequality.” Now after seeing the plan, CAP wonders if the plan is really “the Ryan Budget in sheep’s clothing?” And so it goes.
But there is good reason why Brookings poverty scholar Ron Haskins calls the Ryan plan “sweeping, bipartisan, reasonable.” See, Ryan wants to raise the ceiling, not lower the floor. The goal: encourage work, self-sufficiency and upward mobility. One Ryan idea, presented at the American Enterprise Institute, would increase the gap between what work pays and what welfare provides by doubling the maximum Earned Income Tax Credit for childless workers to $1000 and lower the minimum eligibility age to 21 from 25. The EITC has been shown to draw low-income Americans into the labor force. Ryan would increase that incentive for a group that has seen a steady decline in the wages for low-skill jobs.
Now there is a whole lot more to the Ryan plan, which he prefers to a call a “discussion draft.” But the EITC expansion shows an endorsement of the safety net – with pro-work reforms, of course — that is currently lacking in some parts of the center-right community. A big part of a healthy American economy, Ryan said, “is having a strong safety net—both for those who can’t help themselves and for those who just need a helping hand.” Thomas Aquinas 1, Ayn Rand 0.
Now the part likely to get the most media intention is Ryan’s “Opportunity Grant” proposal. For states volunteering to participate, 11 existing federal anti-programs – including food stamps, cash welfare, and housing assistance – would be smooshed into a single funding stream for states and include work requirements. Receiving the same amount of federal dough as before, states could then experiment with different ways of providing aid such as partnering with nongovernmental organizations. Ryan: “So if the public and private sector work together, we can offer a more personalized, customized form of aid—one that recognizes both a person’s needs and their strengths—both the problem and the potential.”
Results would be thoroughly tracked and tested by a third party. “In short, more flexibility in exchange for more accountability,” Ryan said. Indeed, that bit about “accountability” is key, even more than the experimentation. To get effective reform, the same people implementing the plan – the “vanguard” Ryan calls them — should be the same ones with accountability and funding authority.
Now some, like CAP, worry that Opportunity Grants would just be block grants meant to cut spending over time and wouldn’t get bigger during recessions. But Ryan stresses this is not a budget-cutting proposal. And if the program moves beyond the experimentation stage, it would “benefit from increasing assistance during recessions.” And certainly there are other questions. Can nonprofits scale up? Will the next House budget reflect the Ryan’s new emphasis on poverty fighting?
But wait, there is even more to the Ryan plan, including expanding access to education through accreditation reform, and giving low-risk, non-violent offenders a second chance to contribute through prison reform. Yes, this is a severely conservative Republican talking: “Here’s the point: non-violent, low-risk offenders—don’t lock them up and throw away the key. Get them in counseling; get them in job training; help them rejoin and contribute to our society.”
At its heart, the Ryan plan rejects the view that the poor are an underserving burden on society. Instead, it sees low-income Americans as underutilized assets who need to be reintegrated into the work economy so they and America can reach full potential.
View related content: Pethokoukis
The current US (publicly held) federal debt-to-GDP ratio is about 75%. As the above chart shows, under the “best case” fiscal scenario — including continued low interest rates, higher productivity, reduced healthcare cost growth — that ratio stabilizes between now and 2040. (Keep in mind, of course, that at 75%, the debt-GDP-ratio is twice what it was before the Great Recession.)
And if everything doesn’t go so well? The the debt more than doubles to 159% of GDP. From the Committee for a Responsible Federal Budget:
While long-term projections are inherently very uncertain, uncertainty is not a reason to disregard them. It is reasonable to anticipate a significant rise in debt over the long term considering the demographic and health care pressures facing the budget. Even if lawmakers adhered to PAYGO and economic and technical assumptions turned out better than CBO anticipates in its baseline, debt would only stabilize at twice its historical share of GDP; it could very well could be worse.
In the new Minneapolis Fed paper, “Too Correlated to Fail,” V.V. Chari and Christopher Phelan argue attacking “Too Big To Fail” and moral hazard by limiting bank size won’t by itself end the moral hazard problem caused by financial institution anticipating government bailouts:
In this paper, we argue that the anticipation of bailouts creates incentives for banks to herd in the sense of making similar investments. This herding behavior makes bailouts more likely and potential crises more severe. Analyses of bailouts and moral hazard problems that focus exclusively on bank size are therefore misguided in our view, and the policy conclusion that limits on bank size can effectively solve moral hazard problems is unwarranted.
It is an intuitive conclusion. What good is many smaller banks and fewer big banks if herding results in the risk profile of the broader financial system remaining unchanged? Banks of whatever size will be encouraged to take the sort of macroeconomic risks (mortgages rather than small business) that would result in bailout if they went bad. Indeed, Chari and Phelan highlight how the securitization process “ensures that all banks end up holding very similar portfolios and thus have highly correlated risk.”
All this very much syncs with what Ashwin Parameswaran has written on how the “Greenspan Put” and its emphasis on supporting asset prices and thus the banking system — think Long-Term Capital Management — negatively affected the financial system by encouraging herding and the real economy by encouraging financialization:
If you protect a system from the effects of any particular risk, actors within the system will take on more of the protected risk assuming rationally that the system manager (in this case the Fed) will protect them. The Greenspan Put regime drove down the risk of being exposed to broad macroeconomic market risk. Market participants rationally took on more macroeconomic asset-price risk and substituted for the risk they had been relieved of by the Fed with more leverage. …
And this is exactly what the financial sector proceeded to do. Far from being a neutral channel of monetary policy from the Fed to the real economy, the deregulated yet too-big-to-fail financial sector that was also protected from new entrants realigned itself to take on macroeconomic risk by lending to housing and large established firms. The attractiveness of this strategy meant that banks shunned lending exposed to non-macroeconomic idiosyncratic risks such as lending to small businesses or new firms. … The doctrine also encouraged firms in the real economy to become as bank-like as possible. No firm took advantage of the new regime like General Electric(GE) did. GE under Jack Welch transformed itself into an industrial firm whose profits came largely due to its financial arm, GE Capital which lent to its industrial customers (amongst others). So successful was this transformation that by the time the 2008 crisis hit, GE had also become too-big-to-fail thanks to GE Capital and was found to be eligible for a bailout.
In “Room to Grow,” I mention a couple of policy approaches including forcing banks to hold vastly more capital and increase financial industry startups.
Some people really don’t like “big box” retailers. The openings of new stores, particularly in cities, are frequently accompanied by protests. Recall that Occupy Wall Street targeted retailers, including Wal-Mart, Target, and Best Buy. Critics knock these companies for a variety of reason, including low wages, meager benefits, and their effect on local “mom and pop” stores.
But a new study suggests the big boxes are good for wages and upward mobility. From the new NBER working paper “Do Large Modern Retailers Pay Premium Wages?” by Brianna Cardiff-Hicks, Francine Lafontaine, and Kathryn Shaw:
Over the last forty years, modern retail firms, those with the modern products and processes that support large chains, have become a large segment of the retail sector. Using worker-level panel data on wage rates, we show that the spread of these chains has been accompanied by higher wages. Large chains and large establishments pay considerably more than small mom-and-pop establishments. Moreover, large firms and large establishments give access to managerial ranks and hierarchy, and managers, most of whom are first-line supervisors, are a large fraction of the retail labor force, and earn about 20 percent more than other workers. A good part of these wage gains are returns to ability – large firms and large establishments hire and promote the more able.
True, the retail sector pays less than manufacturing. But employment in that sector has declined because of offshoring and automation. That means more workers have flowed into retailing. And thanks to the growth of modern big box chains, retail wages and promotion opportunities have increased.
The authors also suggest an alternative to the current obsession with boosting manufacturing employment (either by bringing back outsourced factory jobs to the US or by improving worker training for modern manufacturing jobs).
First of all, advances in automation will make it hard to counter the long-term and global decline in manufacturing employment. Second, as the authors note, retail managers actually make more than manufacturing workers:
Managers in retail are more highly skilled than operatives in manufacturing: managers have some college education and likely have unobserved personal skills, such as people management skills or organizational skills. But expending resources on education to increase preparation for managerial jobs in the retail sector could be a viable alternative to expending resources on education for manufacturing work, because wages are higher for managers in retail than they are for non-managers in manufacturing … retail firms employ a larger proportion of managers than manufacturing firms do. Also, large firms, who need managers, have been growing fast in the retail sector.
View related content: Pethokoukis
Neil Irwin in The New York Times: “Five years into the economic recovery, businesses still aren’t plowing much money into big-ticket investments for the future.” One possible culprit is the weak job market. When labor is cheap, why should CEOs spend money on productivity-enhancing machines? In a recent Harvard Business Review article, Clayton Christensen and Derek van Bever offer a similar query as Irwin:
One phenomenon we’ve observed is that, despite historically low interest rates, corporations are sitting on massive amounts of cash and failing to invest in innovations that might foster growth. That got us thinking: What is causing that behavior? Are great opportunities in short supply, or are executives failing to recognize them? And how is this behavior pattern linked to overall economic sluggishness? What is holding growth back?
One reason, Christensen and van Bever write, is pervasive short-term thinking in Corporate America driven by shareholders:
Many managers yearn to focus on the long term but don’t think it’s an option. Because investors’ median holding period for shares is now about 10 months, executives feel pressure to maximize short-term returns. Many worry that if they don’t meet the numbers, they will be replaced by someone who will. The job of a manager is thus reduced to sourcing, assembling, and shipping the numbers that deliver short-term gains.
And it is not just external pressure to think quarter to quarter. Executive pay plays a role, according to Andrew Smithers in the FT:
If we wish to improve the UK and the US economies by encouraging investment and the consequent growth of productivity, we must recognise that management remuneration systems need to be revised. This is a necessary part of making capitalism work well and is therefore very similar to the need to ensure that we have a competitive rather than a rent-gouging economy. The key is not the size of management’s pay, but the incentives that come from bonuses, options and other additions to basic salaries. Things would be greatly improved if chief executives’ incomes were limited to their basic salaries. Suggesting this would produce such a howl of rage that even putting the idea into the public domain would be a useful ploy. Faced with the threat, it may be possible to introduce a code of best practice in which bonuses were dependent on things other than profits. For example, minimum levels of growth in output and investment could be required before bonuses based on profit achievements would be payable.
Skilled immigrants are more important to the United States than ever, because it is on the verge of a major reinvention. Its scientists and entrepreneurs are setting the wheels in motion to solve humanity’s grand challenges—in areas such as health, energy, food, education and water. Advances in fields such as computing, sensors, medicine, artificial intelligence, 3D printing and robotics are making this possible. Foreign-born engineers, scientists and entrepreneurs are helping lead the charge in all of these areas.
The cost of these technologies has, however, dropped exponentially, and anyone anywhere can build a world-changing innovation. And, as returnees to other countries are learning, it doesn’t have to occur in the United States. They can achieve the same success back home where they are with their friends and family and are not made to feel unwelcome. America is losing its near- monopoly on technological innovation.
Interesting piece by WaPo reporter Todd Frankel on US fertility rates and the bad economy. Here is the hed: “They want a baby. The economy won’t play along: America’s birth rates are still near a historic low. One couple’s lesson in the new economics of having a child.” And here is the gist:
Last year, the nation’s fertility rate hit a historic low — 62.9 births per 1,000 women ages 15 to 44, according to the Centers for Disease Control and Prevention. Some of that decline comes from a long-term shift toward smaller families. But finances also play a pivotal role. A Gallup poll last year found the main reason Americans were delaying parenthood was worries about money and the economy — even as the stock market rallied and broad indicators pointed to a brighter future, highlighting a disconnect felt by many Americans. A report by Pew Research Center showed birth rates in many states rise and fall in tune with personal income.
Births have slowed so sharply that researchers note that future economic growth could be stunted by a smaller labor pool. Immigration is often seen as a fix. But the downturn crimped supply lines for both babies and new foreign faces. The change was so dramatic that the Census Bureau in 2012 was forced to revise the 2050 U.S. population projection it made just four years earlier, dropping it by 9 percent, to just under 400 million.
The languishing economy has caused people to doubt if they can afford to be parents.
Frankel goes on to tell the story of a mid-30s Missouri couple who has a fertility problem. IVF treatments — at $15 grand a pop — seem the best option, but their finances are uncertain. While she has a steady gig at a prison health-care company, he is a union electrician with an unpredictable paycheck. As the economy slowly — ever so slowly — recovers, time for them is quickly slipping by. Would, say, a $4000 child tax credit to be applied against their income and payroll taxes changes their minds? Perhaps it would be just enough of a nudge. But certainly a generally stronger economy and labor market would also help. I guess what I really take from this is that the impacts of the Great Recession and Not-So-Great Recovery may affect American life in unexpected ways for decades to come.
Some folks on the right, such as Ben Domenech and Sean Davis of The Federalist, seem oddly desperate to make the case that inflation is dangerously high, and the Federal Reserve is to blame. Now it is certainly a neat political argument, one that combines the “end the Fed” meme with the “Barack Obama is Jimmy Carter” meme. Some proponents are so desperate to make this case, in fact, that they will even cite questionable data sources to prove their point.
So what is the reality of inflation right now? Over the past 12 months through June, the headline Consumer Price Index has increased by 2.1%. The core CPI, excluding food and energy, has increased by even less, just 1.9%.
But wait, say the inflation alarmists, what really matters for middle-class America is food inflation. Well, food prices have increased a lot this year, as the above chart shows. Maybe not last month, but certainly in the months before. They rose just 0.1% in June, after rising at least 0.4% in each of the previous four months. As IHS Global Insight puts it today: “Food at home prices were flat, offering relief to many lower and middle income households; meat price increases were the weakest so far this year.”
So what explains the food price surge that abated last month? Here is Goldman Sachs:
The rise in food prices has been driven by a combination of weather and politics. Severe droughts in Brazil, Mexico, and West Africa have had large impacts on coffee, fruits and vegetables, and cocoa production. In addition, California–which produces a large share of the US’s fruit and vegetables and about 1/6 of its farm output–is currently experiencing a record drought. Finally, tensions in Ukraine have raised concern about its major export crops: corn, wheat, and sunflower oil.
Food prices have been on the rise across America in recent months as a deluge of detrimental factors has descended on key sectors of the agricultural industry.
The pig-farming industry was hit hard by deadly disease. Oranges, limes, peppers and other produce experienced price spikes as the West Coast suffered through epic drought. And a surge in the prices of beef, cheese pork and avocado made headlines last week when the Chipotle burrito and taco chain announced that it would hike its menu prices for the first time in three years.
“It has been nearly three years since our last company-wide price increase, and while we want to remain accessible to our customers, we are at a point where we need to pass along these rapidly rising food costs,” said the company’s chief financial officer, Jack Hartung, Reuters reported.
The Fed hasn’t caused a sudden surge in food prices — just like monetary policy isn’t responsible for rising college costs. Now this sort of inflation is painful for many Americans, especially when wages have been going nowhere. But the financial state of middle-class America would be even worse off if the US had followed the deflationary, hard money policies that the inflationistas would apparently prefer. The European Central Bank hasn’t engaged in the sort of monetary easing that the Fed has and that many on the right detest. The result has been a eurozone unemployment rate near 12%, and a recovery (including a double-dip recession) that makes America’s look like the Reagan boom. It is also worth noting that Americans “budget less of their spending on food prepared at home last year than consumers in any other country in the world,” according to my AEI colleague Mark Perry.
The Federalist’s Davis says America needs a “gas and groceries” agenda. (Let’s put aside for the moment the the average US gas price is 25 cents lower today than four years ago.) Actually, what it needs is a modern economic agenda capable of producing plentiful high-wage jobs, as well as one that reduces government distortion in areas such as healthcare and education. But devising such policies should begin with a fair appraisal of the data as they are, not as we might wish them be.