Piketty Tax Battle: Round Two

The Economist has posted rebuttals to first-round arguments in my tax debate with French economist Thomas Piketty. Piketty seems to think that everyone with a high income has a “grabbing hand” that comes at someone else’s expense.

The debate over tax rates on the rich is important, but Piketty is important in himself because he is widely cited in the media and elsewhere as if he were a neutral authority. For example, President Obama’s budget featured a chart showing that the top 1 percent of earners have greatly increased their share of national income over the decades, using Piketty’s numbers.

But Alan Reynolds has found serious flaws in Piketty’s calculations. Piketty bases his calculations on tax return data, but reported income under the federal income tax has changed greatly over time. 

The bottom line is to be suspicious when you see a chart on income trends that is sourced to this advocate of 80 percent tax rates.

Health Policy Death Match: Klein vs. Ponnuru

I count both Ramesh Ponnuru and Ezra Klein as friends.  (I’m so post-partisan.)  Why, oh why must they force me to choose between them??

Ponnuru had an op-ed in yesterday’s New York Times where he reaffirmed his membership in the Anti-Universal Coverage Club.  Klein responded in a way that’s sure to satisfy his base, but I think he left the reality-based community wanting.  Are you ready for the fisk?

Klein suggests that if “80+ percent of Americans … think the system needs fundamental changes or a complete rebuild,” then 80+ percent of Americans must support universal coverage.  Hmmm, bit of a stretch.  In fact, I can recall one poll where nearly one-third of likely Democratic primary voters rejected universal coverage.

Klein suggests that giving consumers the freedom to avoid unwanted state health insurance regulations would mean that Arizonans wouldn’t get coverage for colorectal cancer screening, and that there would be no mammogram coverage in Idaho.  Mmm, that’s good crazy.  I refer my right honorable friend to the episode where The New Republic’s Jonathan Cohn made a similar claim about mandates for prostate and cervical cancer screening.  I looked up the services covered by the plans made available to the Cohn family by the University of Michigan.  It turned out that six out of the seven available plans cover both prostate and cervical cancer screening — even though Michigan requires insurers to cover neither.  (I offered to wager Cohn a fancy dinner that his family has coverage for both, but I never heard back from him.  Foolish, really, to let me know where he gets his insurance. Klein would never give me such an opening … or would he?) What Ponnuru proposes is to let Arizonans and Idahoans and everyone else choose what their health plan covers.   Imagine that: people rationing medical care according to their preferences, rather than the preferences of employers, interest groups, bureaucrats, health policy wonks…  Why Klein clings to such regulations despite zero evidence that they actually increase access to the targeted services is beyond me.

Klein criticizes Ponnuru for proposing to replace the current tax preference for job-based coverage with a tax credit available to everyone, much like John McCain proposed during his (latest) presidential campaign.  Ponnuru cites a study estimating that tax credits would reduce the number of uninsured by 20 million.  Klein counter-cites one study estimating that tax credits would have zero net effect on the number of uninsured, and a second study estimating that those who transition from job-based coverage to the “individual” or “non-group” market would pay an additional $2,000 per year for an identical policy.   Klein’s criticisms sound persuasive – provided you know precious little about the topic.  For one thing, the two studies Klein cites are actually the same study.  Pity, really.  Had Klein found a second study to support his position, perhaps it would not have been quite so flawed as the one he did find.  Here’s what I wrote back in September about that study’s flaws:

Thomas Buchmueller et al. estimate that replacing the tax exclusion for employer-sponsored insurance (ESI) with Sen. John McCain’s proposed health insurance tax credit would have zero effect on the uninsured. Yet their estimates neither incorporate nor even acknowledge factors that would tend to increase coverage. First, workers who lose ESI would see their wages rise significantly as labor markets force employers to “cash out” those workers.

That effect would help all workers afford health insurance — but particularly older and sicker workers, because they would get cashed-out more.

Second, the authors estimate that non-group enrollment would double, yet they ignore that administrative costs would fall in a thicker non-group market.

So that $2,000 mark-up really wouldn’t be $2,000.  Even if some mark-up remained, workers could reduce their premiums by purchasing less coverage.  Not all that crazy a concept, considering that the tax treatment of job-based insurance encourages people to buy too much coverage.

Then there’s this effect, which would further reduce premiums for healthy workers:

Third, the authors acknowledge that employment-based insurance forces the healthy to subsidize the sick, yet they ignore that the non-group market would reduce premiums for a majority of workers by allowing them to avoid that hidden tax.

The study’s authors also ignored the premium-lowering effects of McCain’s proposal to allow people to avoid unwanted regulatory costs (e.g., mandated benefits):

Fourth, though the Congressional Budget Office estimates that state health insurance regulations increase premiums an average of 13 percent, the authors ignore that McCain’s proposal to let consumers shop nationwide for insurance would further reduce premiums by allowing consumers to avoid that hidden tax as well.

A few random clarifications.  Klein fears living “in a space where insurers could still discriminate based on pre-existing conditions.”  That’s Church-of-Universal-Coverage-speak for, “I want price controls on health insurance.”  Government can outlaw the practice of charging higher premiums to the sick, but it cannot outlaw the reasons behind those higher premiums.  So when government prohibits insurers from competing on price, insurers respond to those underlying reasons by competing to avoid the sick.  Yes, yes, it’s that pious preference for price-controlled premiums that unleashes the beast of adverse selection — and prevents the market from developing innovative insurance products that help sick people pay those higher premiums. Klein fears a world “where millions of Americans will still lack access to health insurance,” because to the devout, access to insurance matters more than access to health care.  Klein fears that when people move from ESI to the individual market, risk pools will get smaller and insurers will get stronger.  Yet risk pools would get bigger, and insurers weaker relative to consumers.  Klein believes we can “ensure that all Americans have health coverage, [and] that their coverage is comprehensive,” and that we can do all that without rationing “access to health services.”  How?  Just “bring down costs in the system.”  Riiiight.

To cap things off, Klein claims that Ponnuru and I think the U.S. health care sector as it exists is “fine.”  I really can’t blame him for arguing with straw men.

In the end, Klein’s case against Ponnuru boils down to the same absurdity I found in Buchmueller and colleagues’ case against McCain:

The McCain plan would eliminate forced subsidies: of the sick by the healthy (via ESI and community rating) and of particular providers by unwilling consumers (mandates for chiropractic coverage, etc.). Buchmueller et al. would have us believe that if we stop robbing Peter to pay Paul, not even Peter would benefit. A more balanced critique might have been more persuasive.

Klein spends a lot more time thinking about health policy than Ponnuru does. But you’d never know it.

Who’s Blogging about Cato

Are you blogging about Cato? Let us know. Send a link our way @catoinstitute or email cmoody [at] cato.org (subject: blogging%20about%20Cato)

Stop Spending Our Future

That’s the title of an alarming, but informative, video over at Reason TV.  The video contains lots of eye-popping comparisons between amounts being spent on bailouts/”stimulus” and previous big-ticket government expenditures like the World War II and the New Deal.

And if you haven’t done so already, check out my colleague Dan Mitchell’s videos on the fallacies of Keynesian economics and the folly of so-called fiscal “stimulus” packages.

Seasteading and Other Technologies for Liberty

I’ve been following Patri Friedman’s work on seasteading for a number of years, so I was excited to see him contribute the lead essay in this month’s Cato Unbound. I think he makes some good points about the difficulty of achieving a free society through ordinary electoral politics. As he points out, libertarians are a minority of the electorate and the political game is stacked against politicians who aren’t willing to use their power to reward special interests. So smart libertarians should be looking at options outside of campaigns and elections to make the world a freer place.

But I think it’s a huge and unwarranted leap to go from this observation about the limits of electoral politics to claim that “the advocacy approach which many libertarian individuals, groups, and think tanks follow (including me sometimes, sadly) is an utter waste of time” and that “academic research has enlarged our understanding but they have gotten us no closer to an actual libertarian state.” It’s not difficult to find examples of academic research that changed the world. One of the most important trends toward liberty in the United States during the last century, the deregulation of transportation and communication markets in the 1970s, came about because a small group of academics persuaded Washington policymakers that deregulation would benefit consumers (and, in the process, their own political prospects). It surely mattered that Margaret Thatcher was a devotee of Friedrich Hayek. And if Friedman will forgive me for personalizing the debate a little bit, he must be familiar with the role his own grandfather had in ending the draft, achieving (relatively) stable money, and inspiring the modern school choice movement.

Now, Friedman says he’s interested in living in an “actual free society.” He probably regards the above examples as merely “small incremental gains in freedom.” But if that’s his critique, he bears the burden of showing that his preferred approach, seasteading, will itself achieve an “actual free society” rather then mere “incremental gains.” I’m not so sure.

Friedman makes much of the distinction between “technology” on the one hand and “advocacy” on the other. He thinks technological approaches are better because they provide superior leverage: a group as small as a few hundred people may be able to permanently lower the barrier to entry to statehood and fundamentally transform the nation-state game.

It’s an appealing vision, but I don’t think the distinction between technology and advocacy is so stark. As my colleague Will Wilkinson has pointed out, ideology is a kind of infrastructure. The tools of persuasion — magazine columns and television specials, for example — are means of improving this infrastructure by spreading new and better ideas. Modern communications technologies offer a kind of leverage not so dissimilar to the leverage Friedman hopes to achieve through seasteading. A small group of talented people can permanently change public attitudes, thereby shifting the Overton Window and changing the constraints politicians face.

Indeed, it’s obvious that Friedman himself understands this on some level. You’ll notice that right now, he’s not spending his time at a dry dock constructing an actual seastead. Instead, he’s using the same technologies he derides in other contexts — giving talks, writing essays, giving media interviews — to spread a set of ideas that he thinks will change the world. Getting seasteading to actually happen is a collective action problem. The tools he needs to overcome that collective action problem are precisely the “folk activism” tactics that he derides in other contexts. I think he’s largely right that national elections are not an arena in which “folk activism” has much impact, but there are clearly circumstances in which those tactics do work, and blanket dismissal of those tactics is therefore misguided.

I think Friedman overestimates the extent to which successful seasteads would achieve revolutionary, rather than merely incremental, changes in the amount of freedom in the world. Friedman’s vision for the future is a floating Hong Kong surrounded by a billion-dollar breakwater. He’s not going to be satisfied with a bunch of glorified houseboats. So the society he hopes to build would be a complex system with many of the anti-libertarian tendencies that afflict today’s cities. He’s right, of course, that the power of that city’s leaders will be limited by the greater ease of exit. But a large fraction of the inhabitants of a floating Hong Kong would still be tied down by professional, family, and social ties. And as a consequence, the political leaders of such a society would still have considerable political power.

Therefore, large, permanent floating cities will only remain free if they’re built with good ideological infrastructure: with institutions and public attitudes conducive to liberty. That means that the efforts of libertarian public policy scholars is complementary to Friedman’s own organizational and engineering efforts. Their efforts can help in two ways. First, they can help to guide the founders of new seastead cities in making institutional design decisions that will maximize the likelihood that the society will remain free over the long run. Second and more importantly, the continued growth of the libertarian movement provides the seasteading movement with its most important input: “customers” who will instinctively understand the appeal of the seasteading project. Self-identified libertarians are likely to not only be the first people willing to join seasteads, but also the strongest advocates of preserving liberty within floating cities once they become firmly established.

It seems counterproductive for Friedman to spend his intellectual energies denigrating the efforts of those of us who have chosen to use communications technologies, rather than maritime technologies, to advance liberty. I predict that the technologies of persuasion we use at the Cato Institute will prove to be more important for the long-run success of liberty than the maritime technologies Friedman hopes to develop. But I’m glad that Friedman is experimenting with a different approach, and I would be thrilled to be proven wrong. If the seasteading movement does prove successful, I think it’s success will have been greatly accelerated by the existence of a large and enthusiastic audience that has been created and nurtured by the “folk activism” of the broader libertarian movement.

Week in Review: Successful Voucher Programs, Immigration Debates and a New Path for Africa

Federal Study Supports School Vouchers

arne_duncanLast week, a U.S. Department of Education study revealed that students participating in a Washington D.C. voucher pilot program outperformed peers attending public schools.

According to The Washington Post, the study found that “students who used the vouchers received reading scores that placed them nearly four months ahead of peers who remained in public school.” In a statement, education secretary Arne Duncan said that the Obama administration “does not want to pull participating students out of the program but does not support its continuation.”

Why then did the Obama administration “let Congress slash the jugular of DC’s school voucher program despite almost certainly having an evaluation in hand showing that students in the program did better than those who tried to get vouchers and failed?”

The answer, says Cato scholar Neal McCluskey, lies in special interests and an unwillingness to embrace change after decades of maintaining the status quo:

It is not just the awesome political power of special interests, however, that keeps the monopoly in place. As Terry Moe has found, many Americans have a deep, emotional attachment to public schooling, one likely rooted in a conviction that public schooling is essential to American unity and success. It is an inaccurate conviction — public schooling is all-too-often divisive where homogeneity does not already exist, and Americans successfully educated themselves long before “public schooling” became widespread or mandatory — but the conviction nonetheless is there. Indeed, most people acknowledge that public schooling is broken, but feel they still must love it.

Susan L. Aud and Leon Michos found the program saved the city nearly $8 million in education costs in a 2006 Cato study that examined the fiscal impact of the voucher program.

To learn more about the positive effect of school choice on poor communities around the world, join the Cato Institute on April 15 to discuss James Tooley’s new book, The Beautiful Tree: A Personal Journey Into How the World’s Poorest People Are Educating Themselves.

Obama Announces New Direction on Immigration

The New York Times reports, “President Obama plans to begin addressing the country’s immigration system this year, including looking for a path for illegal immigrants to become legal, a senior administration official said on Wednesday.”

In the immigration chapter of the Cato Handbook for Policymakers, Cato trade analyst Daniel T. Griswold offered suggestions on immigration policy, which include:

  • Expanding current legal immigration quotas, especially for employment-based visas.
  • Creating a temporary worker program for lower-skilled workers to meet long-term labor demand and reduce incentives for illegal immigration.
  • Refocusing border-control resources to keep criminals and terrorists out of the country.

In a 2002 Cato Policy Analysis, Griswold made the case for allowing Mexican laborers into the United States to work.

For more on the argument for open borders, watch Jason L. Riley of The Wall Street Journal editorial board speak about his book, Let Them In: The Case for Open Borders.

In Case You Couldn’t Join Us
Cato hosted a number of fascinating guests recently to speak about new books, reports and projects.

  • Salon writer Glenn Greenwald discussed a new Cato study that exadead-aidmines the successful drug decriminalization program in Portugal.
  • Patri Friedman of the Seasteading Institute explained his project to build self-sufficient deep-sea platforms that would empower individuals to break free of national governments and start their own societies on the ocean.
  • Dambisa Moyo, author of the book Dead Aid, spoke about her research that shows how government-to-government aid fails. She proposed an “aid-free solution” to development, based on the experience of successful African countries.

Find full-length videos to all Cato events on Cato’s events archive page.

Also, don’t miss Friday’s Cato Daily Podcast with legal policy analyst David Rittgers on Obama’s surge strategy in Afghanistan.

Speaking of Broken Promises …

… or at least implied promises, candidate Obama lamented the Bush administration’s overuse of the “state secrets” privilege.

But last week, the Obama Justice Department filed a motion that embraces Bush administration arguments and even seeks to extend them. Glenn Greenwald has the details of the Obama administration’s “new and worse” approach to “state secrets.”