Tag: safety net

How Your Government Deceives You, ‘Social Insurance’ Edition

From my former Cato colleague, Will Wilkinson:

The trick to weaving an effective and politically-robust safety net for those who most need one is designing it to appear to benefit everyone, especially those who don’t need it. The whole thing turns on maintaining the illusion that payroll taxes are “premiums” or “insurance contributions” and that subsequent transfers from the government are “benefits” one has paid for through a lifetime of payroll deductions. The insurance schema protects the main redistributive work of the programme by obscuring it. As a matter of legal fact, payroll taxes are just taxes; they create no legal entitlement to benefits. The government can and does spend your Social Security and Medicare taxes on killer drones. But the architects of America’s big social-insurance schemes, such as Frances Perkins and Wilbur Cohen, thought it very important that it doesn’t look that way. That’s why you you see specific deductions for Social Security and Medicare on your paycheck. And that’s why the government maintains these shell “trust funds” where you are meant to believe your “insurance contributions” are kept.

Alas, like Social Security and Medicare themselves, the deceptions that protect these entitlement programs cannot go on forever.

Generally, liberals are profoundly conservative about the classic Perkins-Cohen architecture of America’s big entitlement programmes, which they credit for their remarkable popularity and stability. Yet that architecture offers very few degrees of freedom for significant reform. Crunch time is coming, though, and sooner or later something’s got to give.

If Wilkinson’s overlords at The Economist demand that he misspell program, they should be consistent and allow him to abandon the American convention of mislabeling leftists as liberals.

Budget Plans: Gang of Six and Senator Coburn

The “Gang of Six” senators has released an outline of budget reforms that would supposedly reduce deficits by $3.7 trillion over 10 years. Revenues would rise by at least $1 trillion, while spending would be theoretically trimmed by various procedural mechanisms. The plan promises to “strengthen the safety net,” “maintain investments,” and “maintain the basic structure” of Medicare and Medicaid, which doesn’t sound very reform-minded to me.

The Gang of Six plan is a grander version of Sen. Mitch McConnell’s recent debt-limit proposal, which was aimed at putting off any spending cuts. The Gang outline has a few specific cuts, but the document mainly consists of promises to restrain spending and raise taxes in the future.

I’m surprised that Sen. Tom Coburn supports the Gang plan because his office has just released a massive study chock-full of specific spending-cut ideas. The Gang plan is all about avoiding specifics, while Coburn’s plan has 621 pages of details.

Coburn’s “Back in Black” plan would reduce deficits by $9 trillion over the next decade. The plan includes some tax increases, but the core of the document is a line-by-line analysis of every department’s budget, with lists of programs to cut and terminate. The plan includes a wealth of useful information that will aid policymakers interested in cutting spending for years to come.

So congratulations to Roland, Joelle, and the whole Coburn team for their late nights spent pouring through the budget, and for their great job documenting their findings with more than 3,000 endnotes.

Every Senate and House office should perform a similar exercise of proposing specific cuts. The government faces a debt crisis, yet only Coburn, Sen. Rand Paul, and perhaps a few others in Congress have put any effort into identifying unneeded programs.

Look on the official websites of most members of Congress and you will see discussions in support of spending on education, seniors, energy, research, highways and many other activities. When members are in front of TV cameras, they sound like they take the debt crisis seriously, but most congressional websites reveal a different mindset where federal spending is always wonderful and helpful to society.

Coburn’s staff tells me that about a dozen staffers chipped in on its Back in Black effort in recent months. If other House and Senate offices went through such an exercise, it would help members clarify their positions about the role of government and help them think about spending trade-offs.

My summer homework assignment for every congressional office is to go through a Coburn/Paul-style budget downsizing exercise. That could lead to more serious spending debates and more concrete proposals than the generally meaningless bullets points issued by the Gang of Six.

Exit Interview with Sheila Bair

Sunday’s New York Times Magazine has an interesting exit interview with Sheila Bair, who until this past Friday served as Chair of Federal Deposit Insurance Commission (FDIC). While I haven’t always been her biggest fan, I did find it refreshing to hear a bank regulator state the obvious:  we should have let Bear Stearns fail. As she puts it:

Bear Stearns was a second-tier investment bank, with — what? — around $400 billion in assets? I’m a traditionalist. Banks and bank-holding companies are in the safety net. That’s why they have deposit insurance. Investment banks take higher risks, and they are supposed to be outside the safety net. If they make enough mistakes, they are supposed to fail.

I’d be hard-pressed to say it better. Assisting the sale of Bear to JP Morgan created the expectation that anyone larger, like Lehman, would be assisted as well. Perhaps the most interesting part of the interview is that Bair gets right to the heart of the matter: the treatment of bondholders. ”Why did we do the bailouts?” Bair states “It was all about the bondholders.” Again she couldn’t be more correct. If there was anything Dodd-Frank should have fixed it was this, ending the rescue of bondholders and injecting market discipline back into bank.  It is also refreshing to hear her admit: ”I don’t think regulators can adequately regulate these big banks, we need market discipline. And if we don’t have that, they’re going to get us in trouble again.”

Where I disagree, besides her misguided take on mortgage re-sets, is whether Dodd-Frank will actually impose losses on bondholders. Bair expresses some optimism that such is the case, but there are just too many holes in Dodd-Frank to make that believable. Plus you pretty much have the same set of rules in place for Fannie Mae and Freddie Mac, yet the last time I checked the bondholders are still being protected at the expense of the taxpayer. If we don’t impose losses on Fannie creditors, even now after the panic, what makes anyone think we will do so to Citibank. Section 204 of Dodd-Frank is quite clear that the FDIC indeed retains the power to rescue creditors. Something that Bair was willing to do during the crisis, even if pushed to do so by Tim Geithner. Despite some errors, the interview is really a worthwhile read and has some real lessons for avoiding the next financial crisis.

Should the U.S. Restrict Immigration?

Recent debates about Arizona’s new immigration law have taken as self-evident that immigration restrictions are good policy, with the only question being which level of government should enforce the law, and how. Yet the case for immigration restrictions is far from convincing.

Advocates of these restrictions rely on four possible arguments. First, that immigration dilutes existing languages, religions, family values, cultural norms, and so on. Second, that immigrants flock to countries with generous social welfare programs, leading to urban slums and inundated social networks. Third, that immigration can harm the sending country if the departing immigrants are high-skilled labor. Fourth, that immigration lowers the income of native, low-skill workers.

All of these arguments are wrong, overstated, or misguided. Immigration may change cultural values or norms, but nothing suggests this is a negative. Many societies flourish because they have incorporated new businesses, cultures, foods, and so on. More important, immigrants normally assimilate to the pre-existing culture provided government policy does not segregate them from the rest of society. In the past rich countries have incorporated large immigration flows with modest adjustment costs. Many of these immigrants lived in difficult conditions at first, but within a generation they achieved middle class status or better.

The possibility that immigration puts pressure on the welfare state is a reasonable concern, although existing evidence does not suggest this is a major problem. In any case, the possibility that a generous social safety net might encourage immigration is a reason to moderate this safety net, rather than a reason to restrict immigration. Indeed, expanded immigration might create pressure to keep the welfare state modest.

The risk that immigration drains high-skilled labor from poor countries is real, but this kind of immigration has positive impacts on the sending country that mitigate against any negatives. The possibility of migration to a high-wage country generates an incentive to acquire education, and only some of those educated actually leave. The threat of a brain drain nudges poor countries away from bad policies-such as excessive tax rates-that generate the brain drain in the first place. Many immigrants send remittances to friends or relatives in their country of origin. Plus, if borders were really open, many immigrants would seek education abroad but return to their home country, knowing they could leave if economic factors so dictated. Similarly, with open borders many immigrants would pursue temporary stays in higher wage countries. Temporary migration is common in many countries now, and was common in the U.S. before the tightening of immigration rules in the 1910s and 1920s. Temporary migration raises fewer of the standard concerns than permanent migration, while still helping many people in low-wage countries.

Concern for the poor, assuming this includes the poor in other countries, argues for vastly expanded immigration since many potential immigrants are much poorer than the natives whose wages they might depress. Only a bizarre view of equity favors people earning the minimum wage in rich countries over people near starvation in developing countries.

The conclusion that open borders is the best immigration policy is all the stronger because attempts to restrict immigration have their own negatives. These include the direct costs of border controls, the creation of a violent black market for immigration, and incentives for corruption. Further, immigration may have beneficial effects on productivity by fostering competition and introducing new ideas, approaches, business models, products, and so on. At the same time, many people in receiving countries enjoy the influence of new cultures. Immigrants also work at jobs for which the native supply is small.

Reasonable people can argue that immigration should increase gradually to moderate the transition costs. But any reasonable balancing implies vastly expanded immigration relative to current levels. This would improve the welfare of poor people in other countries far more than foreign aid.

C/P at psychologytoday.com