Saturday, June 9, 2018

Could We Afford Universal Catastrophic Health Care Coverage?

Universal catastrophic coverage (UCC) is a health care plan that aims to protect all Americans against financially ruinous medical expenses, while preserving the principle that those who can afford it should contribute toward the cost of their own care. It offers a potentially attractive compromise between the current system, which leaves millions of people uninsured or underinsured, and more expensive, “first dollar” proposals that would cover all health care costs for everyone.

Skeptics often ask whether such a plan is affordable. The short answer is “Yes,” but I would prefer to frame the question differently. Rather than asking how much any given health care plan would cost, it is more useful to ask, “What is the best plan we could design for what we are politically willing to spend?” If we set that amount somewhere close to what the government now spends on health care, universal catastrophic coverage looks rather good. This post explains why.

The parameters of universal catastrophic coverage

First, we need to review the basic parameters that define any UCC plan. The simplest version of UCC would have just two parameters, a low-income threshold and, for those above the threshold, a deductible that varies with household income.

Saturday, June 2, 2018

Inflation Increasingly Erodes Wage Gains Even as Unemployment Falls

According to the latest Employment Situation Summary from the Bureau of Labor Statistics, average nominal hourly earnings for all employees on private nonfarm payrolls rose at a compound annual rate of 3.6 percent in May, 2016. That rate is well above the 2.6 percent average for the preceding 12 months, and also above the average CPI inflation rate of 2.5 percent for the same period. Monthly observations are shown by the dotted lines in the chart, while the solid lines show 12-month moving averages.

Monthly data include a lot of statistical noise and are subject to revisions, so policymakers will be paying more attention to trends than to individual data points. The trend lines show that over the past three years, CPI inflation has accelerated more rapidly than has the rate of nominal wage gains. CPI data for May will not be released until June 12, but by April, the last month for which full data are available, the 12-month moving average for wages exceeded that for inflation by just 0.1 percent (2.6 percent vs. 2.5 percent).

The trends of the moving averages contain both not-so-good news and better news. For workers, the news is not so good, inasmuch as the wage gains for May, which are hopeful taken in isolation, may turn out to be a statistical fluke. From a macroeconomic point of view, however, the news is better. With CPI and wage trends still holding at or close to 2.5 percent, there is little sign of overheating yet.

Reposted from Niskanen Notes

Friday, June 1, 2018

How Framing Affects Attitudes Toward the Social Safety Net

An article by Caitlin Dewey in the Washington Post led me to an interesting new piece of research by Rachel Wetts of U.C. Berkeley and Rob Willer of Stanford (unrestricted draft version here). The research, which is relevant for anyone in the area of public policy advocacy, shows how strongly framing—and the framing of charts, in particular—can affect attitudes toward pubic policies.

The specific issue that the authors investigate is the influence of information related to race on attitudes toward pubic assistance. As they put it in their abstract,
We argue that when whites perceive threats to their relative advantage in the racial status hierarchy, their resentment of minorities increases. This increased resentment in turn leads whites to withdraw support for welfare programs when they perceive these programs to primarily benefit minorities.
In one of several experiments, Wetts and Willer presented a questionnaire to a sample of participants recruited from Amazon Mechanical Turk. Before answering questions about welfare policy, participants were shown one of two variants of a chart depicting U.S population trends by race and ethnicity. Both charts were based on the same data from the Census Bureau, but Chart A shows a short time period, over which the trends appear relatively weak, while Chart B shows a longer time period, over which the trends appear stronger. Chart B also adds a line for “all nonwhite” which more dramatically shows that the white population is trending toward minority status.


After viewing the information, participants were presented with scenarios designed to reveal attitudes toward welfare. In one scenario,
participants were told to imagine that they were on a Congressional committee charged with cutting $500 million from the federal budget.  They were given a list of nine spending areas including “Temporary Assistance for Needy Families (Welfare)” and asked to indicate how much they would cut from each area.
White participants said they would cut TANF by 28 percent if they had viewed Chart A and cut by 51 percent if they had viewed Chart B—a statistically significant difference.

Although there were too few minority participants to produce a statistically significant results, their answers provide some food for thought. The nonwhites who had viewed Chart A said they would cut TANF by 53 percent, while those who had viewed Chart B said they would cut by 57 percent. About three-quarters of the recipients of cash assistance programs are nonwhite. Does TANF look better from a distance than from up close, or is this a statistical fluke?

And while we are on the subject of framing—would the results have been significantly different if the parenthetical word "Welfare," which is perceived pejoratively by many people, had not been inserted after "Temporary Assistance for Needy Families," which implies that the people who get it actually need it?

A previous version of this post appeared on Niskanen Notes

Monday, May 21, 2018

Why We Should be Skeptical About Guaranteed Jobs

The idea of a national job guarantee (JG) is about to go mainstream. The concept is far from new, but for the first time in decades, it is being endorsed by politicians with national stature. Sen. Bernie Sanders has promised to submit a legislative proposal. Other Democratic presidential hopefuls are showing interest. Academics, including Levy Economic Institute’s L. Randall Wray and Pavlina Tcherneva, have provided detailed blueprints for a national JG program.

No one denies that it would be nice if everyone who wanted to work could find a job, but before we start to beat the drum for a full-bore national job guarantee, we need a reality check. In a recent post, my  Niskanen Center colleague  Samuel Hammond outlined three reasons to be skeptical:
  1.     The private sector is better at allocating labor than public bureaucracies.
  2.     A JG program would be too easily politicized.
  3.     Other active labor-market policies, including wage subsidies, would work better than a JG.
These are valid points. Let me add three more reasons to be cautious about a national job guarantee.

4. Don’t exaggerate the pool of eligible candidates

As of April 2018, some 6 million people were officially unemployed, that is, counted as not working but actively looking for work. However, not all of those would be candidates for public-service jobs. Both in good times and bad, many of the unemployed are merely on temporary layoff or engaged in short spells of unemployment between jobs. At present, 33 percent of unemployed workers have been out of work for 5 weeks or less and another 31 percent for 5 to 14 weeks. Even in a bad year like 2010, nearly 40 percent of the unemployed were out of work for 14 weeks or less. Providing short-term in-and-out jobs for the temporarily unemployed is not the purpose of a JG. Even if offered such jobs, most of the short-term unemployed would probably prefer to keep looking for something more suited to their skills and interests.

Friday, May 18, 2018

Crop Insurance Should Die, Yet It Lives On

As I post this, Congress is debating the farm bill renewal. In a rational world, it would eliminate or greatly scale back our absurd system of crop insurance, but it appears that once again, the program will live on.

Insurance plays an essential role in any market economy. By spreading losses among members of a group with similar exposure, insurance encourages people to take prudent risks while protecting them from financial ruin in case they are the unlucky ones. But not all insurance is equal. Sometimes, rather than representing the public interest, a public insurance program can come to represent a special interest subsidy in disguise. Crop insurance, the multi-billion-dollar government subsidy that lies at the heart of the farm bill that is now working its way through Congress, is a case in point.

Let’s take a look at the strange economics of crop insurance, and what can be done to fix it.

Crop losses are not an insurable risk

The problems of crop “insurance” begin with the fact that crop losses are not really an insurable risk. Crop insurance violates three of the most important rules that economists have developed to identify which risks are insurable and which are not.

Sunday, May 6, 2018

The Role of Preventive Care in Healthcare Reform


“Remember the old saying that ‘an ounce of prevention is worth a pound of cure’?” asks United Healthcare. “Maintaining or improving your health is important – and a focus on regular preventive care, along with following the advice of your doctor, can help you stay healthy … Routine checkups and screenings can help you avoid serious health problems, allowing you and your doctor to work as a team to manage your overall health, and help you reach your personal health and wellness goals.”

You would think that a private insurer, on the hook for big claims down the road if preventive measures did not catch health problems early, would know, if anyone did. Popular opinion seems to agree. Readers of some of my own earlier healthcare posts have often offered opinions such as, “A couple hundred dollars of preventive medicine will prevent tens to hundreds of thousands of dollars being spent,” and, “Anyone who has ever visited a physician knows that preventive care is cheaper in the long run.”

But there is more to the story. Yes, healthcare reform needs to get preventive care right, but preventive care by itself will not make us healthier and cut national healthcare spending. Here are some of the issues.

Thursday, April 12, 2018

Why a Balanced Budget Amendment Would Be Profoundly Destabilizing

This week the House is expected to vote on a balanced budget amendment (BBA), introduced by Bob Goodlatte (R-VA), chairman of the Judiciary Committee. The amendment would require federal budget outlays to equal receipts each year.

Subjecting fiscal policy to rules, rather than allowing it to be driven purely by political impulse, would be a good idea, but not if the rules are the ones envisioned by this amendment. Far from stabilizing the economy, this kind of BBA would radically destabilize it, leading to dizzier booms and deeper recessions. Here is why.

How the budget affects the business cycle, and vice versa

To see why a balanced budget amendment would undermine stability, we need to understand how the budget affects the business cycle, and how the business cycle affects the budget. When we look at the pattern of federal receipts and outlays over time, as shown in the following chart, we see a lot of ups and downs. Where do they come from?

Wednesday, April 11, 2018

Trump Signs Executive Order on Work Requirements. Why Such Requirements Have Failed in the Past

On Tuesday, President Donald Trump signed an executive order directing all federal agencies to review and strengthen work requirements for all federal poverty programs, including Medicaid, food stamps, housing, and others. The preface to the order invokes familiar rhetoric:
The United States and its Constitution were founded on the principles of freedom and equal opportunity for all.  To ensure that all Americans would be able to realize the benefits of those principles, especially during hard times, the Government established programs to help families with basic unmet needs. Unfortunately, many of the programs designed to help families have instead delayed economic independence, perpetuated poverty, and weakened family bonds.  While bipartisan welfare reform enacted in 1996 was a step toward eliminating the economic stagnation and social harm that can result from long-term Government dependence, the welfare system still traps many recipients, especially children, in poverty and is in need of further reform and modernization in order to increase self-sufficiency, well-being, and economic mobility.
Conservatives have hoped for years that shouting “Get a job!” loudly enough will induce people now on public assistance either to enter the workforce, or if not, to quietly fade from view. Although work requirements have proved ineffective time and again, hope dies last.

There are better ways to address the problems of our broken social safety net. Here are some points I have made in previous posts:
  • The new executive order invokes the 1996 welfare-to-work reforms as a success story, but a careful review of the results shows that the effects of those reforms were disappointingly small.
  • The main reason that work requirements have small effect on actual work behavior is that a majority of low-income people who can work already do work. Most of those who do not have paid jobs are working as unpaid caregivers, in school, or hampered by physical and mental health problems.
  • Where requirements are introduced simply as a stick to drive people to work, they fail. To the extent they are successful, they must be backed up by substantial investment in training, job placement, and one-on-one counseling to cajole people into overcoming personal problems that may make them unattractive to employers. If state and federal governments are unwilling to invest in the administrative infrastructure needed to run work requirement programs well, they will do more harm than good.
  • Often the biggest barriers to self-sufficiency are the punitive benefit reduction rates and other implicit and explicit marginal taxes on low-income workers. This earlier post provides details and explains how programs could be redesigned to reduce work disincentives.
The continuing conservative hope is that shouting “Get a job!” loudly enough will induce people now on public assistance either to the workforce, or if not, to quietly fade from view. Hope dies last.

Reposted from NiskanenCenter.com

Guaranteed Jobs, Hungarian Style

In a recent blog post, Niskanen Center’s Samuel Hammond expressed skepticism about the idea of job guarantees. In his view, such policies do not attack the real problem, they are easily politicized, and, as active labor market policy, are inferior to wage subsidies for private sector jobs.

To see how guaranteed jobs work out in practice, we need look no farther than Hungary, where Prime Minister Viktor Orban has made the replacement of welfare by workfare a centerpiece of the claimed Hungarian economic miracle that helped him win re-election in last Sunday's election.

Writing recently for The New York Times, Patrick Kingsley and Benjamin Novak provide an overview of job guarantees, Hungarian style. Their article, which focuses on a small village in which 73 of 472 residents participate in the program, makes an effort to show both the positive and negative side of workfare. They note that although the guaranteed jobs pay only about half the minimum wage, that is twice what participants previously received in unemployment benefits. Participants told them that the pay, although minimal, was enough to make a difference. The program has also brought some small but welcome improvements in the town’s infrastructure.
“This little bit of money goes a long way in this village,” said Eva Petrovics, 60 who helps to clean the village nursery school. “The fridge is full now.”
The program has also helped to spruce up the village. Since 2012, workfare participants have built a small bridge, added a drainage system, and renovated the town hall and sports fields.
However, there are downsides to workfare, too. Hammond’s concerns about politicization seem to have been borne out. Kingsley and Novak note that the program have made participants more dependent on Orban’s Fidezs party, which is expected to retain power in this weekend’s election, and on the town’s mayor, who determines job assignments.

Moreover, despite better drainage and tidier soccer fields, workfare participants do not really put in all that much time doing useful work. Often, they report to work for an hour or so and then go home. There is especially little to do in winter.

Popular though it may be in the Hungarian countryside, Orban’s workfare policy has many critics, both in Hungary and in Western Europe. Annamária Artner is a Senior Research Fellow at the Centre for Economic and Regional Studies of the Hungarian Academy of Sciences. Writing for the progressive website Social Europe, headquartered in London, Artner maintains that
The implied threat of the punitive workfare regime is effectively sweeping the unemployed under the carpet. The unemployment insurance system in Hungary, introduced in the early 1990s following the transition to a market economy, effectively no longer exists.
Reposted from NiskanenCenter.com.


Wednesday, April 4, 2018

Why the "Sound Money" Components of Popular Economic Freedom Indexes Should Be Used with Caution

Institutions matter. Economists of the classical period knew that well. In recent years, economists have increasingly included institutional variables in their empirical work. The economic freedom indexes from the Fraser Institute and the Heritage Foundation have been among the most widely used institutional indicators.

The purpose of an economic freedom index, according to Heritage, is to “document the positive relationship between economic freedom and a variety of positive social and economic goals.” Many studies support that claim, finding that countries with high economic freedom scores are, in fact, more prosperous and dynamic than those that are less free. However, not all aspects of economic freedom turn out to be equally important. In earlier posts, I have been critical of the components of the economic freedom indexes that focus on the size of government and regulation. Here, I take on those that focus on price stability—the Fraser “Sound Money” component and the Heritage “Monetary Freedom” component.

I find that these price stability components add little to our understanding of economic freedom. Furthermore, because they incorporate an exaggerated fear of even moderate inflation, an attempt to achieve maximum price stability, as defined by these indicators, would be less likely to bring prosperity than to undermine it.

Is price stability an institution or a policy outcome?

The first problem with the Fraser and Heritage price stability indicators is that they do not really measure economic freedom in the sense that it underlies other components of the indexes. Robert Lawson, a senior member of the team that publishes Fraser’s Economic Freedom of the World reports, once wrote that an economic freedom index is, or should be, only that—“not an index of economic growth policies, efficient government provision of public goods, macroeconomic stabilization policies, or ideal income distribution policies.” If so, then the sound money indicators, as indexes of the success of monetary policy, are just what an economic freedom index should not be.

Tuesday, April 3, 2018

The Chickens Come Home to Roost: EPA Seeks to Weaken Fuel Economy Standards as New Car Prices Soar

On Monday, the EPA announced that it is is getting ready to  relax the ambitious automotive fuel economy standards (CAFE standards) that were set during the Obama administration. Those standards would have required new cars sold in 2025 to average more than 50 miles per gallon. EPA administrator Scott Pruitt said that the Obama administration had set the standards "too high" and "made assumptions about the standards that didn't comport with reality."

CAFE standards are coming under fire, in part, because of the rising cost of new cars, which reached a record high of $36,000 at the end of 2017. The extra costs of building fuel-efficient cars might be worth it if CAFE standards were really an effective way to cut greenhouse gas emissions, but they are not. Instead, they are among the most notoriously inefficient of federal regulations.

The fundamental problem is that CAFE standards attack emissions only indirectly. Buying an efficient hybrid instead of a gas-guzzling SUV is just one of many ways you can cut back on fuel use. You can, instead, consolidate errands or make your next trip to the supermarket in your Honda, instead of your Ford F-250, if you have one of each. Given more time to adjust, you can switch to public transportation, move closer to work and shopping, or work at home.

CAFE standards encourage fuel saving only when choosing what car to buy. Once you upgrade to a low-mileage vehicle, though, the cost of driving an extra mile goes down, reducing your incentive to take other fuel-saving measures. As a result, the cost of cutting fuel use via CAFE standards is higher than achieving the same result more directly through a carbon tax or higher gasoline taxes—six to fourteen times higher, according to a study by a team of researchers at MIT.

So, if CAFE standards are such a bad idea, why do we have them? As I explained in an earlier post,
If you are an economist, choosing higher fuel taxes over CAFE standards looks like a no-brainer, but if you are a politician, fuel taxes have an obvious drawback. Fuel taxes make the cost of reducing consumption highly visible. You see the big dollars-per-gallon number right there in front of you every time you drive up to the pump. CAFE standards, in contrast, hide the cost. You pay the price of a higher-mileage car only when you buy a new one, and even then, the part of the price attributable to the mileage-enhancing features is not broken out as a separate item on the sticker. You may notice that your new car costs more than your old one did, but there are lots of other reasons for that besides fuel economy.
But that logic only goes so far. As new car prices push into the stratosphere, the chickens are coming home to roost. The administration is sure to get a lot of political mileage out of making cars more affordable, climate be damned.

Reposted from NiskanenCenter.com

Tuesday, March 27, 2018

Is There Any Real Political Appetite for Healthcare Reform?

Healthcare reformers spend a lot of time thinking about what a better healthcare system might look like, but they also need to pay attention to what kinds of reform, if any, people really want. The latest polling data from the Kaiser Family Foundation suggest that there is still a real appetite for reform, provided it is framed properly. Here are three key take-aways:

First, eighty percent of those who responded to the KFF poll think drug prices are unreasonable. Even though prescription drugs account for just 10 percent of U.S. healthcare spending, well behind hospitals, nursing homes, and doctors’ fees, doing something about drug prices beat out several other legislative priorities among those polled:


 Second, views on drug pricing are less divided along party lines than are those on many other issues. For example, although Democrats and Republicans were widely split as to whether the NRA or labor unions had too much influence in Washington, their views on the influence of the drug companies were much closer. Three-quarters of Democrats and two-thirds of Republicans agreed that Big Pharma has too much clout in the nation’s capital.


Third, views on drug pricing were not the only aspect of healthcare reform where there substantial cross-party agreement. Majorities of both parties—seven out of every eight Democrats and two out of every three Republicans—supported a national Medicare for All plan for people who wanted it, if those with other coverage could keep what they have. A different phrasing of the question, which implied an immediate switch to a single government-run plan for everyone, was much more divisive, drawing two-thirds support among Democrats but just one-third support among Republicans.

The implications for reformers are clear:
  • Prescription drug prices are a more salient issue for the public than the share of drug costs in total healthcare spending would suggest.
  • Prescription drug prices are a politically unifying issue.
  • Not everyone is unhappy with the healthcare system as it is. Politically viable reform will require attention to the wishes of those who do not want change as well as those who do.
Reposted from NiskanenCenter.org

Monday, March 19, 2018

“Medicare Extra” Shows the Convergence of Progressive and Conservative Healthcare Thinking


In public debate, progressives and conservatives often seem poles apart. Yet, behind the scenes, when pragmatic reformers take on a problem, their conclusions often converge, regardless of their political starting points. The Medicare Extra proposal recently released by the Center for American Progress (CAP) is a case in point. Filtering out any ideological language, Medicare Extra bears a strong resemblance to universal catastrophic coverage (UCC), an approach to healthcare reform that originated in conservative circles, but is now attracting wider attention. This post compares the two side by side.

Similarities of Medicare Extra and universal catastrophic coverage

The CAP bills Medicare Extra as an enhancement of traditional Medicare that would ensure that all Americans have healthcare coverage they can rely on at all times. It would cover a broad spectrum of healthcare needs, including dental, vision, and hearing care. Newborns, the currently uninsured, and people turning 65 would be enrolled automatically, while those who now have public or private coverage would have the option of enrolling.

In those respects, as well as in its name, Medicare Extra bears a strong resemblance to Senator Bernie Sanders’ Medicare for All. However, whereas Sanders’ plan would provide first-dollar coverage of healthcare spending for everyone, Medicare Extra builds in a substantial amount of cost sharing. Individuals and families with incomes below 150 percent of the federal poverty level (FPL) still get first-dollar coverage, but those with higher incomes would pay premiums according to a sliding scale that reached 10 percent of income for households at 500 percent of the FPL. Middle- and upper-income families would, in addition, face deductibles and copays. Those would be structured to give Medicare Extra policies an “actuarial value” sufficient to cover 80 percent or more of a household’s expected healthcare costs—the same standard of coverage as a gold plan purchased on today’s ACA exchanges.

New Advances in Genetic Testing Further Undermine the Insurability of Healthcare Risks

 To be insurable, a risk must meet certain criteria. One is that the loss must not be catastrophic. Another is that the loss must be unexpected or accidental.

Genetic testing renders many health risks uninsurable. For example, about 30,000 people in the United States have two copies of the gene that causes cystic fibrosis (CF). Treatment for CF is improving. The average lifespan for people with CF is now 37 years, but for an insurer, those are 37 years of costly treatment. New advances in gene therapy are likely to extend life further, but at even greater cost. Losses from CF are catastrophic, and, since genetic testing can diagnose CF even before birth, the loss is not unexpected or accidental. CF is thus uninsurable by traditional standards.

Single-gene genetic disorders like CF are fortunately rare, but new research by a team led by Lisa Bastarache of Vanderbilt University, published last week in Science, has the potential to greatly enlarge the number of people with uninsurable genetic risks. The authors used a large data base to identify cases in which the interaction of multiple genes produces diseases that are not as easy to spot as CF. They found 807 people with potentially dangerous genetic patterns among 21,701 that they screened. Only 8 of them had been previously diagnosed as being at risk of genetic disease.

A 100-fold increase in the number of people with potentially dangerous genetic patterns would be bad enough, but things might get even worse. Dr. Joshua Denny, one of the co-authors of the study, told the New York Times,
“I’m kind of surprised we found anything. The fact that we did means there’s maybe a lot out there that we don’t know.”
As improvements in genetic testing make the health risks of more people uninsurable in the commercial market, the case for guaranteeing access to health care by way of universal catastrophic coverage or something similar grows ever stronger.

Reposted from NiskanenCenter.com

Friday, March 9, 2018

Study of Urban vs. Suburban Emissions Strengthens Case for a Carbon Tax

Environmentalists have long been critical of “suburban sprawl.” A study of carbon emissions in Salt Lake City and surrounding areas, published recently in the Proceedings of the National Academy of Sciences, provides new reasons to question excessive suburban growth. Although the study itself does not make policy recommendations, its findings bolster the case for a carbon tax.

The study was authored by Logan Mitchell of the University of Utah, together with twelve colleagues from various institutions. The authors note that although urban areas account for some 70 percent of global carbon emissions, gaps remain in the understanding of the spatial distribution of those emissions, in part because many monitoring stations are located far from cities. In this case, however, long-term observations were available from five urban and suburban sites in the Salt Lake Valley, plus a reference site in the nearby Wasatch Mountains.

The study found that population growth in rural areas that experienced suburban development was associated with increasing emissions while population growth in the developed urban core was associated with stable emissions. The study, which controlled for natural emissions, atmospheric mixing, and seasonal effects, identified fossil fuel use as the main driver of increased emissions.

These findings have clear implications for the choice between a market-based approach to carbon abatement vs. a command-and-control approach.

A carbon tax could incentivize greater urban population growth and less suburban expansion in two ways. First, it would increase the cost per mile of driving, thereby raising the cost of living farther from the urban core. Second, since urban residential buildings are more energy efficient than those in the suburbs, a carbon tax would increase the relative cost of heating and air conditioning in less densely populated areas.

In contrast, command-and-control environmental regulations would have less effect, or even perverse effects, on locational choices. For example, performance standards for furnaces and air conditioners raise the cost of building suburban homes but lower the cost of occupying in them. Their purpose is to nudge people to choose heating and cooling equipment that have lower long-run costs, but to the extent that they do so, they can reduce the long-run cost of suburban living not just in relative terms, but in absolute terms. Similarly, CAFE standards for automobiles increase the cost of new cars, but lower the marginal cost of driving an extra mile. Once a fuel-efficient car is in the driveway, they decrease the opportunity cost of a longer commute.

A shorter version of this post appeared on NiskanenCenter.org

Wednesday, February 28, 2018

Latest Richmond Fed Non-Employment Index Shows US GDP at or Close to Potential


The Richmond Fed has released the latest reading of its Hornstein-Kudlyak-Lange Non-Employment Index (NEI). At 7.93 percent, the NEI has now fallen below its pre-recession minimum of 7.99 percent, reached in March, 2007, and it is fast approaching the value of 7.70 percent reached in October 2000, just before the 2001 recession. Data for the NEI are not available before 1994.

The NEI gives important insight into the question of whether or not the U.S. economy is now approaching, or has passed, its potential level of GDP. The standard unemployment rate (U-3) is often criticized as misleading because it does not count people who are out of the labor force. Experience suggests that such people represent a “hidden” labor reserve, since some of them can be drawn back to the labor force when the job market tightens.
The NEI deals with this problem in two ways:
  1. It counts not only the unemployed, but also those out of the labor force. The latter is a diverse group that includes individuals who want a job (such as the marginally attached who are willing and able to work and sought employment in the past, but have stopped searching) and those who do not want a job (such as retirees, the disabled, students, and those who are neither retired, nor disabled, nor in school).
  2. It weights the different groups of non-employed (that is, both the unemployed and people out of the labor force) according to their labor market attachment, or the likelihood that a non-employed person will transition back into the job market. Specifically, each group is weighted by its historical transition rate to employment relative to the highest transition rate among all groups (the transition rate of the short-term unemployed).
The latest reading, shown in this chart, suggests that the hidden labor reserve is fast disappearing.


Reposted from NiskanenCenter.com

Tuesday, February 27, 2018

From the Nixon Era, a Pioneering Proposal for Universal Catastrophic Health Insurance

 People today remember the Nixon era mainly for the fiasco of Watergate, but there were positive moments, as well. Those included the first moon landing, passage of the Clean Air Act, and a dramatic diplomatic opening to China. There were also some bold policy initiatives that did not immediately bear fruit. This post takes a look at one of them, a proposal for universal catastrophic health insurance from Elliot Richardson’s Department of Health, Education and Welfare. It went nowhere then, but its time may now have come.

Elliot Richardson and the Mega Proposal

The child of a wealthy Boston family, Richardson was seemingly destined for public service. By the time he came to Washington, he had graduated from Harvard, landed at Utah Beach on D-Day, returned to Harvard for a law degree, and served as both Lieutenant Governor and Attorney General of Massachusetts.

Richardson was seen by those who worked under him as a rare combination of policy analyst and practical-minded politician. He had big ideas that went far beyond the clutter of overlapping programs he found when he arrived at HEW in June of 1970. Over the next two years, he put his staff to work on a sweeping plan for reform, known as the Mega Proposal, which covered all of the major areas for which HEW was responsible. The plan for healthcare reform was part of it.
The rationale of the Mega Proposal was explained in its preface:

Thursday, February 22, 2018

How Universal Catastrophic Care Could Ease Class Tensions



I have written frequently about universal catastrophic coverage (UCC) as a possible healthcare reform compromise. Under such a program, the government would provide health insurance with a deductible scaled to household income. [1] [2] [3]  The UCC policy would protect people against financial ruin caused by healthcare costs. At the same time, they would be responsible for financing their own routine care through by cash, health savings accounts, or private supplemental insurance. 

My early posts provide hypothetical examples, but how would real people fare? An article by Abby Goodnough in this week’s New York Times provides two real world examples. We can see how they would fare under UCC compared to their present situation.


One is the middle-class Hurd family, who struggle to afford coverage on the ACA exchange. Both Gwen and Matt Hurd workwork but neither gets healthcare benefits. They earn about $82,000, more than four times the poverty level for their family of three, too much for ACA subsidies. Their healthcare premium is $928 a month with a $6,000 deductible per person, plus copays. The NYT article does not give full details, but based on averages, their maximum out-of-pocket healthcare costs would be about $25,800, or 32 percent of their total income.

Compare this with two possible UCC formulas. Under Formula 1, which might set the deductible at 10 percent of the amount by which income exceeds the Medicare threshold (138 percent of the federal poverty level), with a family maximum of 20 percent, the Hurds would pay at most $10,000 even if two or more of them were seriously ill in one year, or about 12 percent of their total income. Formula 2, less generous, might set the maximum at 15 percent of the amount by which income exceeds the federal poverty level. The Hurds would pay a maximum of about $17,500, ir about 21 percent of their total income. In either case, they would pay less under UCC than on the ACA exchange.

The other NYT example is Emilia DiCola, a single woman working part-time while trying to establish a career in opera. She now earns $15,000 from occasional singing gigs plus part-time driving for Uber. Her earnings are just low enough to qualify for Medicaid. Even if her state introduces work requirements for Medicaid, she will qualify because of her part-time jobs.

Under UCC she would still get for full coverage, given her $15,000 income, but she would face substantially different incentives to increase her earnings. At present,  she must carefully limit her hours of work to stay under the Medicare threshold. If, say, she worked enough hours to double her income, she would need to purchase insurance on the ACA exchanges. Even with subsidies, her premiums and out of pocket costs would rise substantially compared with Medicare. 

Under UCC, her out-of-pocket costs would remain lower than under the ACA even if she doubled her earnings. She would have a far greater incentive to seek additional work.

In her NYT article, Goodnough notes that the current system is a source of social tension between the working middle class and the poor. Middle class families like the Hurds are sometimes resentful of those like DiCola, who from their perspective, do not enough effort to support themselves but get everything paid for by the government. UCC could ease the tension, both by leveling the playing field in terms of heathcare costs and by providing the poor with greater work incentives.

Based on a shorter version posted earlier on NiskanenCenter.org.

Tuesday, February 20, 2018

Smart Reforms of the Social Safety Net Could Make the Economy More Growth-Friendly

 A rising tide lifts all boats, does it not? That cliché of economic policy is meant to highlight the ways in which economic growth, as a substitute for targeted social policies, can make life better not just for the privileged, but for the disadvantaged, as well. However, the cliché is misleading in that the causation is not all one way. A better social safety net can contribute to a stronger economy and faster growth of both actual and potential GDP.

A new report from the Congressional Budget Office provides some insights into one of the mechanisms linking social policy to growth, namely, labor force participation (LFP). Recent LFP trends in the United States have not been favorable to growth, but a close examination of the data suggests that better social policy, especially in the areas of income support, healthcare, and disability, could significantly improve participation. Increased LFP, in turn, would boost both actual and potential GDP, making room for additional monetary and fiscal stimulus.

Recent trends in Labor Force Participation

Let’s look at some of the key findings of the CBO report. First, we find that labor force participation as a whole has declined since its peak in the early 1990s. As the following chart shows, LFP rates are expected to stabilize for men and increase slightly for women over the next decade, but not to return to their former peak values. (Gray bars denote recessions.)

Thursday, February 8, 2018

Pending Budget Deal Would Make Fiscal Policy the Most Procyclical in Forty-Five Years


In December, I wrote that the GOP tax bill could end up backfiring, not because of its effects on the structure of taxes, many of which were constructive, but because of bad timing. The fact that the bill cut total tax revenue just as the economy was approaching full employment made it highly procyclical. Standard principles of countercyclical fiscal policy call for tax cuts or spending increases as the economy moves into recession and tax increases or spending cuts as it moves toward full employment—a pattern that largely prevailed from the 1990s through 2014.

Fiscal policy since 2014 has been procyclical, and the spending deal now before Congress will make it even more so. The following chart updates one I posted in December. Its projections for 2018 are modified in two ways.

First, the CBO has revised its projection of the output gap for 2018 from -0.2 percent to +0.1 percent. The output gap measures the amount by which GDP exceeds or falls short of the level that the economy is able to sustain in the long run without excessive inflation.

Second, to reflect the impact of the new budget deal, I have changed the 2018 estimate for the structural deficit of the federal budget from -2.5 percent to -3.7 percent. The structural balance is the surplus or deficit that would prevail if the output gap were zero. When the economy slips into recession, the actual balance moves toward deficit because tax revenues automatically tend to fall and spending on unemployment benefits and other items tends to increase. The structural balance removes the effects of these “automatic stabilizers.”



If the budget deal becomes law, the degree of fiscal stimulus, as measured by the difference between the output gap and the structural balance, will be the greatest since 1973, when the rate of inflation was 6.25 percent, rising to 11 percent in 1974 and followed by a recession. Optimists say there is less risk in “running the economy hot” now than in the 1970s because of hidden labor reserves that don’t show up in the official unemployment numbers and a productivity boom they expect because of cuts to taxes and regulations. Let’s hope they are right.

Reposted from NiskanenCenter.org