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» animalspirit - Intuition vs evidence
In response to message posted by Kirk:First, his premise is wrong:
Peter Lindert thinks hard about just why it is that the high-tax high-benefit social-insurance states of the twentieth century appear to have managed to redistribute income and provide enormous amounts of social services and social insurance without suffering any measurable penalty in terms of their rates of economic growth.http://www.j-bradford-delong.net/movable...
What he misses is the cost to society that rewards folks for having children out of wedlock, encourages single family households by allowing divorce, forcing child support on men for women who can't keep their legs shut, allows men to run off with young chicks ready for action as long as they send money home to raise single parent kids, etc...
As the paper's beginning explains, there may be a bit more to it than that as demonstrated by the experience of European Welfare States:
It is well known that higher taxes and transfers reduce productivity. Well known -- but unsupported by statistics and history. This paper dramatizes a conflict between intuition and evidence. On the one hand, many people see strong intuitive reasons for believing that the rise of national tax-based social transfers should have reduced at least GDP, if not true well-being. On the other, the fairest statistical tests of this argument find no cost at all.
Multivariate analysis leaves us with the same warnings sounded by the raw historical numbers. A bigger tax bite to finance social spending does not correlate negatively with either the level or the growth of GDP per capita. How can that be true? Why haven’t countries that tax and transfer a third of national product grown any more slowly than countries that devote only a seventh of GDP to social transfers?1
This paper shows the width of the gap between intuition and evidence, and then tries to explain it. All our well-known demonstrations of the large deadweight losses from social
programs overuse imagination and assumption. There are good reasons why statistical tests keep coming up with near-zero estimates of the net damage from social programs on
economic growth. It’s not just that the tales of deadweight losses describe bad policies that real-world welfare states do not practice. It’s also that the real-world welfare states reap
offsetting benefits from a style of taxing and spending that is pro-growth.
The keys to the free lunch puzzle are:
(1) For a given share of social budgets in Gross Domestic Product, the high-budget welfare states choose a mix of taxes that is more pro-growth than the mix chosen in the United States and other relatively private-market OECD countries.
(2) On the recipient side, as opposed to the tax side, welfare states have adopted several devices for minimizing young adults’ incentives to avoid work and training.
(3) Government subsidies to early retirement bring only a tiny reduction in GDP, partly because the more expensive early retirement systems are designed to take the least
productive employees out of work, thereby raising labor productivity.
(4) Similarly, the larger unemployment compensation programs have little effect on GDP. They lower employment, but they raise the average productivity of those remaining at work.
(5) Social spending often has a positive effect on GDP, even after weighing the effects of the taxes that financed the spending. Not only public education spending, but even many social transfer programs raise GDP per person.
(6) The design of these five keys suggests an underlying logic to the pro-growth side of the welfare state. The higher the social budget as a share of GDP, the higher and more visible is the cost of a bad choice. In democracies where any incumbent can be voted out of office, the welfare states seem to pay closer attention to the productivity consequences of program design. In the process, those countries whose political tastes have led to high social budgets have drifted toward a system that delivers its tax bills to the less elastic factors of
production, in the Ramsey tradition.
I. The Familiar Cautionary Tales Miss the Mark
The intuition that taxing and giving hurts economic progress is centuries old. Since the 1970s a host of analytical supports have seemed to reinforce this intuition. This section surveys the new ramparts defending the old beliefs, noting their limitations.
A. Disincentives on the Blackboard
It is easy for anybody with undergraduate training in economics to believe that taxing some people to pay others who earn little will reduce national output, and cause “deadweight” losses of net national well-being. The effects could be drawn on the blackboard, with two labor market diagrams, one diagram showing the labor market for those productive persons who pay taxes and the other showing the labor market of those low-skill persons who are poor enough to qualify for benefits.
The key insight in such a pair of diagrams is that there are costs on both sides of the tax-transfer system. In the market for productive effort, having to pay a higher tax will lower the after-tax wage rate for those supplying effort or raise what their employers must pay, tax included, or do both. Either the suppliers feel a disincentive to produce as much, or their employers (or customers) feel a disincentive to pay for as much of their now-more-expensive services. There will be what economists call a “deadweight cost,” here meaning the loss of something that was really worth more than it cost society to produce. The size of that cost depends on how much their production is cut, and we return to this. But clearly a new tax, to pay for transfers to somebody else, can give productive people a disincentive to produce so much.
On the recipients’ side, there is also a disincentive to produce. For each extra dollar a low-skilled person earns with extra work, part or all of that dollar will be taken away from them because they have less “need” for income support. Surely that too presents a disincentive to be productive. One can fiddle with the system, promising to let the recipients keep their first $x of labor earnings before starting to deduct benefits.
But sooner or later the benefits must be withdrawn if the person keeps earning more and becoming more self-sufficient. And the higher the earnings threshold at which the benefits are withdrawn, the more the program drains the government budget. There are disincentives on both sides, and both must be quantified to judge the damage done by taxing the productive and supporting the poor.
The logic is persuasive, but so far the story is fiction. The deadweight costs are something we imagine, not something we derived from facts and tests.
B. Harold and Phyllis
The recipient side of this imagined double disincentive was persuasively dramatized in 1984 by Charles Murray’s book Losing Ground. Murray told us a parable of a young poor couple, and then added citations to economists’ empirical studies that seemed to back up his case.
The parable concerns Harold and Phyllis, a fictitious poor unmarried couple who have just finished high school and lack either the family resources or the inclination to go to college. Phyllis is pregnant. Now what?
Murray offers one script for 1960 and another for 1970, after American welfare policy had become more lenient. In both scripts, Harold and Phyllis and in danger of choosing an unmarried life, with low earnings for Harold and with welfare dependency for Phyllis and the child.
These first two kinds of arguments, the economist’s theory on the blackboard and the parable of disincentives for the Harolds and Phyllises of the world, share the further obvious limitation that they are fiction. Educated and plausible fiction, perhaps, but still not evidence from the real history of any country that tried generous social transfers. Granted, Charles Murray did choose his example with the help of historical wisdom. Writing in the early 1980s, he did seize on a historical moment when the marginal disincentive to work and to marry hit its peak, because American welfare benefits were strictly means-tested. Later we shall note how this setting discouraged work more than in later years or in the true welfare states.2
-- posted by animalspirit
» animalspirit - Work incentives
.Lindert's paper gives a brief summary of subsidized work programs such as EITC and its overseas equivalents of work incentives/effective marginal taxation:
V. Recipients’ Work Incentives
On the recipients’ side, as well as on the taxpayers’ side, real-world welfare states seem to avoid huge disincentives. In a few policy dimensions, recipients of transfers in high-budget countries may have more incentive to work than their American counterparts. In other policy dimensions, the higher-budget welfare states do indeed discourage more work, but with little effect on GDP.
A. The Poor May Face Lower Work Disincentives in the Welfare State
Just as the high-budget countries often have lower marginal tax rates at the top of the income spectrum, so too they can have lower marginal tax rates at the bottom, with high marginal tax rates only across the broad middle range of incomes. If that is true, then the debate over work incentives needs to be redirected. The net effect on labor supply and GDP may depend on something never researched, namely whether work and productivity respond more sensitively to marginal tax rates in the middle range or at the ends. If the response is greater in the middle range, then the welfare state indeed reduces work and GDP. But if conservative fears are correct in emphasizing that the supply of effort is most fragile at the two ends of the income spectrum, then it is possible that the pattern of marginal tax rates in the high-budget welfare states discourage work less than the pattern prevailing in low-budget countries.
Fortunately, we have the benefit of a long policy debate and careful research that has penetrated the jungle of marginal incentives faced by those at the bottom of the income spectrum, most of it relating to the United States and the United Kingdom. The policy under investigation is the policy toward poor lone parents -- or unmarried “welfare mothers” in the American parlance -- a pair of studies has grappled with the whole complexity of the tax and transfer system that people face in that situation.
America’s national policy has traditionally faced poor lone parents with high marginal tax rates, cutting off aid as soon as the recipient earns even a low wage income.24 The Social Security Act of 1935 set up AFDC (Aid to Families in Dependent Children) this way. The then-small population of single mothers, mainly young widows who were expected to stay at home with the children, faced a 100-percent marginal tax rate on any earnings. Such strict “means testing” of benefits had become controversial by the 1960s, when the share of women who sought work outside the home had risen considerably. Economists Milton Friedman and James Tobin, among others, called for a change in policy that would let the poor keep much of their benefits while still earning modest amounts outside the home. In 1967 such concerns helped to shape new legislation lowering the marginal tax rate to two-thirds, but in 1981 Congress and the Reagan Administration reverted to stricter means testing and raised the marginal tax rate back to 100 percent. Meanwhile, related welfare programs expanded and became more complex, so that an accurate measure of the true marginal tax rate would require an in-depth study of the combination of AFDC, Food Stamps, medical care for the poor, subsidized housing, child care subsidies, and Supplemental Security Income for groups with particular needs.
Yet the concern about heavily taxing work by the poor continued to push both America and Britain toward a system that lowered the marginal tax rate for those getting a low-paying job. In both countries this took the form of a tax credit for low-earning households, beginning in the 1970s but becoming a major factor only in the 1990s. In the United States, this tax credit is the Earned Income Tax Credit (WFTC) started in 1975 and greatly expanded in 1993. The British counterpart is the Working Family Tax Credit, started as the Family Income Supplement in 1971, and fully implemented in 2000. Similar employment-conditioned benefits now exist in Australia, Ireland, Canada, Finland, France, and New Zealand, most of them countries with relatively low social transfer budgets.
The 1990s drift toward EITC and WFTC lowered marginal tax rates at the bottom of the income spectrum, raising them in the “phase-out range” further up the ranks. The upper panel of Table 4, even though it is based on conditions in the year 2000, aptly shows the state of play before the 1990s, such as the 1970s world of Charles Murray’s fictitious Harold and Phyllis. When the poor didn’t get any tax credits for low-pay work, they faced very high marginal tax rates in both countries. By taking on low-paying work, a single mother could lose more than half of her earnings in withdrawn benefits, a higher marginal tax rate than is faced by most people.
-- posted by animalspirit
» animalspirit - American incentives
.But even though in the USA such marginal rates are no longer at 100%, they are still extremely high. Former Clinton administration economist Brad DeLong describes his frustration at the failure of the Clinton Administration to further allay this:
The 2001 tax cut... Let me give you some marginal tax rates... a mother with two kids earning $24000: 68% (she loses the last of her food stamps, and her earned income tax credit phases out)... a doctor making $200,000: 36.4%... an executive making $1,000,000: 40%... Any decent supply-sider would say that the real place where marginal tax rates needed to be cut in 2001 was around the $25000 a year zone: the place where the phase out of the earned income credit makes marginal rates astronomical. We economist types were never able to interest Clinton and company in such a proposal--at a gut level, Clinton simply didn't get the importance of lower marginal rates so that people don't get hit in the nose by a 2 x 4 when they work more hours and the IRS snarfs most of it. Larry Lindsey is supposed to have led a charge to get a proposal to "deal with the EITC phaseout problem" into the 2001 tax bill, but he got absolutely nowhere. Bush, Cheney, and their personal staffs don't resonate with the problems of mothers of two making $12 an hour... mothers of two making $12 an hour don't give big to Republican presidential candidates, or show up at the $1000 a plate dinners that are what presidential candidates do day after day these days. So we got a tax cut that gives 40% of its notional dollars to those making more than $300,000 a year whose marginal tax rates are much lower than those of the mother of two earning $12 an hour. (Larry Lindsey keeps saying that they'll come back to it and fix it; but the word is that he's about to get "invited" to "spend more time with his family.")
-- posted by animalspirit
» La_la - Re: Intuition vs evidence
In response to message posted by RussHicks:You need professional help. I've never seen anyone go to such extents to justify the most horrible aspects of American liberalism.
But a question in one of those tortured articles asked..The parable concerns Harold and Phyllis, a fictitious poor unmarried couple who have just finished high school and lack either the family resources or the inclination to go to college. Phyllis is pregnant. Now what
Your grandmother knew..the girl's parents convince the whorish girl to give up the baby for adoption, and forbid her to see the boy again. If she sees him again, she is out on her ear!
The problem in this situation is not that it happens..it will always happen somewhere. The real problem is what has happened to society that they give equal credibility and moral standing to any and all behaviors.
In other words, the problem here is not so much the young "couple," it's people like YOU and the idiot who wrote these articles, and where they look and what comes to mind in a situation like this.
-- posted by La_la
» La_la - Re: Re: Re: Intuition vs evidence
In response to message posted by serena31:What you Liberals call "kind hearted" does society an awful lot of harm.
When "kind hearted" becomes "low standards"..we're not being kind, we're being destructive, for the most selfish of reasons...to FEEL good.
-- posted by La_la
» Fred2000 - Re: Re: More uniting
In response to message posted by Steven_Russell:"I really lost the gist of your argument about why we should feel bad about not being sweetly diplomatic with that rogue monster, so maybe you can explain it to me."
Steven... Perhaps you're right. We are about to go into negotiations with the N. Koreans and after declaring them a part of the "Axis of Evil", the best way to get started on the right foot may be to label Kim a "tyrannical rogue", although a real cowboy would probably call him a "rattle snake".
-- posted by Fred2000
» Steven_Russell - Re: Re: Re: More uniting
In response to message posted by mitelo:Thanks for the warm welcome mitelo!
I never quite left, just needed to immerse myself in real life.
But it's been a pleasure to check in here and there and see the regulars like you, Lawhawk and Jen, etc., still making good discussion.
As for negotiations with the North Korean mass murderers in charge, it basically just comes down to confronting their extortion attempts, on top of their blatant lies and hostile aggression.
The news media conveniently ignores these millions of Korean deaths, because of the distaste of communist-bashing, or something.
Meanwhile, just today, I read in the paper another AP rehash of the 1994 Rwanda civil war crimes, in which a half million Tutsi and some Hutu moderates died. A tribunal convicted 100 people of the crimes, ending last Friday.
So why the continuing mass media silence on North Korean attrocities? When will there ever be a call for tribunals there? And why the callous stance that we should yet again give in to North Korean extortion, and pretend to "negotiate" our way out of it?
And why instead all the hand-wringing over a civil war in Liberia, of all insignificant places, by such fake "anti-war" activists as Oakland's Congresswoman Barbara Lee? In terms of lives lost, and brutal attrocities, it just don't compare.
So we should unilaterally send in American troops to be lost, instead of simply "negotiate" with warlord President Charles Taylor? Besides, it seems to me that the 3,250 west African peacekeepers, starting with 200 from Nigeria today, are handling their own regional peacekeeping matters in Liberia quite well. So I just don't get the inconsistent liberal thinking.
-- posted by Steven_Russell
» Lawhawk - Re: Re: Re: Re: More uniting
In response to message posted by Steven_Russell:I'm not in total agreement with you Steven, as far as Liberia is concerned. Yes, the West African countries finally appear to be handling the matter, but there is still a question over their intentions as they were involved in the violence themselves (supporting Taylor or the rebels, or both). There is a US interest at stake, making sure that Liberia doesn't play host to terrorist organizations who love cesspools like failed states. If the regional nations can stabilize the situation, then putting Marines ashore wont be necessary. However, if they're unable to do so, then we'll have to do the job (it always seems that the US is the only nation capable of doing anything militarily these days).
As far as the death tolls in various countries are concerned, it appears that any deaths caused by Israel far outweigh any other conflict around the world. Hundreds of thousands killed in Iraq or Rwanda, tens of thousands in Bosnia (where they just dug up what they think is the largest mass grave to date), or the North Koreans who may have killed or starved millions don't compare to going after terrorists in the disputed territories of Israel that has killed maybe a few thousand in the past few years.
-- posted by Lawhawk
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